SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-13092
SPECTRASCIENCE, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1448837
(State of incorporation) (I.R.S.Employer Identification No.)
3650 ANNAPOLIS LANE, SUITE 101, MINNEAPOLIS, MINNESOTA 55447-5434
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (612)509-9999
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.25 PAR VALUE
(Title of Class)
--------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for its fiscal year ended December 31, 1996, were: $0
As of February 28, 1997, the number of outstanding shares of the Registrant's
Common Stock, par value $.25, was 4,480,379. The aggregate market value of the
voting stock held by non-affiliates of the registrant was approximately
$19,041,611 based on the last reported closing price of $4.25 on February 28,
1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or prior
to April 15, 1997 are incorporated herein by reference in Part III, as
specified.
Transitional Small Business Disclosure Format (Check one): Yes No X
SPECTRASCIENCE, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Page
----
PART I
Item 1. Description of Business............................................3
Item 2. Description of Properties.........................................11
Item 3. Legal Proceedings.................................................11
Item 4. Submission of Matters to a Vote of Security Holders...............11
PART II
Item 5. Market for Common Equity and Related Shareholder Matters..........12
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................14
Item 7. Financial Statements and Supplemental Data........................16
Item 8. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure..............................................16
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..................17
Item 10. Executive Compensation.............................................17
Item 11. Security Ownership of Certain Beneficial Owners and Management.....17
Item 12. Certain Relationships and Related Transactions.....................17
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K....17
Signatures..................................................................20
SPECTRASCIENCE, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WORDS OR
PHRASES SUCH AS "MAY," "EXPECTS," "WILL CONTINUE," "IS ANTICIPATED," "MANAGEMENT
BELIEVES," "ESTIMATE," "PROJECTS," "HOPE" OR EXPRESSIONS OF A SIMILAR NATURE ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE ACT.
THE COMPANY WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON
FORWARD-LOOKING STATEMENTS. PLEASE REFER TO EXHIBIT 99 OF THE COMPANY'S
QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 1996, FOR CERTAIN
IMPORTANT CAUTIONARY FACTORS, RISKS AND UNCERTAINTIES RELATED TO FORWARD-LOOKING
STATEMENTS.
- --------------------------------------------------------------------------------
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT
GENERAL
SPECTRASCIENCE, Inc. (the "Company" or "SPECTRASCIENCE") utilizes its
expertise in spectroscopy, fiber optics, computer software and hardware, and
minimally-invasive medical delivery systems to design, develop, manufacture and
market medical products that are used to diagnose and facilitate the treatment
of a broad range of human diseases.
The Company was incorporated in the state of Minnesota on May 4, 1983
as GV Medical, Inc. Subsequently, the Company changed its name to
SPECTRASCIENCE, Inc. on October 16, 1992. The name change was approved by
shareholders on May 13, 1993.
The number of authorized shares of common stock of the Company of the
par value $.25 (the "Common Stock"), was increased to 10,000,000 shares at the
Annual Meeting of Shareholders on March 28, 1996.
The Company's Common Stock began trading on the NASDAQ Small-Cap Market
under the symbol SPSI on May 15, 1996. Prior to that, the Common Stock was
traded on the OTC Bulletin Board, under the same symbol.
The Company moved its corporate offices on November 1, 1996 and is now
located at 3650 Annapolis Lane, Suite 101, Minneapolis, Minnesota 55447-5434.
The Company's telephone number is 612/509-9999, its fax number is 612/509-9805,
and its e-mail address is [email protected].
(b) BUSINESS OF THE COMPANY
The Company initially pursued the development, manufacture and sale
of laser-enhanced angioplasty catheter systems for the treatment of heart and
blood vessel disease by focusing on its LASTAC(R) system. Subsequently, the
Company developed a new laser angioplasty system, known as the Laser
Angiosurgery System, in conjunction with the Massachusetts Institute of
Technology and the Cleveland Clinic Foundation, which utilized laser-induced
fluorescence spectroscopy for the diagnosis of the nature of tissue, and a
unique catheter which allowed selective removal of only diseased tissue. The
Company changed its name to SPECTRASCIENCE, Inc. in 1992 to reflect the new
focus of its development efforts on diagnostic products utilizing spectroscopic
techniques. Two products currently under development are the Optical Biopsy(TM)
System and the Spectroscopic Guidewire(TM) System.
PRODUCTS AND MARKETS
OPTICAL BIOPSY(TM) SYSTEM
The Optical Biopsy(TM) System ("OBS") is composed of three components:
a spectro-photometric console ("Console"), a biopsy forceps incorporating an
optical probe ("Optical Biopsy Forceps" or "Forceps") and proprietary tissue
recognition algorithm software ("Software"). The Forceps can be disposable or
reusable. The reusable Forceps incorporates a disposable optical probe.
The OBS is currently targeted for the detection and differentiation of
cancerous, pre-cancerous and healthy tissues. The Company will initially focus
on the detection and differentiation of cancer in the gastro-intestinal tract
using minimally-invasive endoscopic techniques. There are approximately 165,000
new cases of gastro-intestinal cancer detected annually. The current method of
detection is through biopsies, which entails the insertion of an endoscope with
a biopsy forceps to harvest tissue samples for analysis in the pathology
laboratory. The waiting period for the results of the biopsies can be up to two
weeks. The OBS, on the other hand, could offer immediate feedback to the
physician, thereby reducing the number and cost of biopsies and eliminating
waiting time. In the United States, it is estimated that about 10 million
procedures (or a market size of more than $60,000,000) are currently performed.
These procedures are growing at a rate of approximately 15-20% per year. Outside
of the United States, the number of procedures currently performed is estimated
to be about 18.5 million, and is also growing at about 15-20% per year.
In addition, the Company believes that the best strategy for the
Company is to focus greater development efforts on the OBS, as compared to the
Spestroscopic Guidewire(TM) System which is targeted for cardiovascular
applications. The reasons are: (a) the potential market for the OBS is larger
but less competitive, (b) the OBS incorporates pioneering technology, (c) the
regulatory approval pathway for the OBS is shorter and simpler since it is
initially targeted for the gastro-intestinal tract, which poses less risk to the
patient than products that are used in the heart, (d) the OBS provides real
clinical utility, (e) the OBS reduces the costs of procedures, and (f) it
improves quality of life by reducing waiting time for pathology results.
The Company believes that once the OBS has been commercialized, the OBS
could be expanded into other medical applications, including the detection of
cancer in the lungs, bladder, prostate and cervix. These could potentially
represent large market opportunities for the Company. However, there can be no
assurance that the OBS will be commercialized or that the Company will be
successful in adapting the OBS for other medical specialities.
SPECTROSCOPIC GUIDEWIRE(TM) SYSTEM
Like the OBS, the Spectroscopic Guidewire(TM) System ("SGS") is also
comprised of three components: the spectrophotometric console ("Console"), a
disposable optical core spectroscopic guidewire ("Guidewire") and proprietary
tissue recognition algorithm software ("Software"). The Console in this case is
virtually identical to the console in the OBS. The Guidewire functions both
mechanically as a conventional coronary guidewire and optically in the
transmission and collection of light energy when connected to the Console.
The SGS is targeted for the detection of intra-coronary thrombus and
differentiation of atherosclerotic plaque.
The primary market for the SGS is hospitals with cardiovascular
programs, both in the United States and overseas. Currently there are different
methods to treat blockages of the arteries of the heart, including surgery,
drugs and angioplasty. There are different modalities of angioplasty, including
ballon angioplasty or percutaneous transluminal coronary angioplasty ("PTCA"),
laser angioplasty, and atherectomy using shaving or drilling devices.
The market size for all PTCA procedures alone worldwide is estimated to
be about 1.1 million procedures, or $1.5 billion. Slightly more than half of
these procedures are performed at about 1,000 centers in the United States, 200
of which perform about 65% of the total procedures in the United States. The
number of PTCA procedures is growing rapidly with the introduction of
intra-coronary stents that have been found to reduce the rate of restenosis
(i.e. re-establishment of blockage) in PTCA procedures.
However, due to the current competitive environment of cost reduction
and cost containment, it is becoming increasingly difficult to compete in
cardiovascular applications, since the cost containment measures are capping
reimbursement for angioplasty procedures. Also, stents have revolutionized the
entire angioplasty procedure in that regardless of the types of blockages in the
arteries, stents are deployed about 60% of the time, and this is projected to
increase to close to 100% within the next two years. As such, other modalities
and new procedures, including atherectomy and intra-vascular ultra-sound, have
rapidly decreased in popularity. This trend has obviously affected the Company's
strategy of positioning the SGS as a diagnostic modality to assist in PTCA
procedures.
DISTRIBUTION, MARKETING AND CUSTOMERS
The Company intends to build an in-house marketing department to
commercialize the Company's products worldwide and to provide clinical education
to physicians, nurses, and laboratory technicians. This department will consist
of marketing and clinical education personnel.
For cancer detection applications in the United States, the Company's
strategy is to develop strategic alliances with partners that have strong
distribution networks already in place. On-going negotiations are taking place
in this area. Internationally, the Company will likely use distributors in
various countries or regions.
For cardiovascular applications in international markets, marketing and
distribution will be serviced by a strong strategic partner. To this end, in
August 1994, the Company and SCIMED Life Systems, Inc. ("SCIMED"), a
wholly-owned subsidiary of Boston Scientific Corporation (NYSE:BSX), signed a
three-year exclusive international distribution agreement to distribute the SGS.
SCIMED and Boston Scientific Corporation ("BSC") are world leaders in the field
of angioplasty and have a strong subsidiary network throughout the world. There
is no assurance that SCIMED will be able to perform its role successfully. The
Company's product is one of many products that SCIMED or BSC sells worldwide.
On August 14, 1995, the Company received the European Community
Certificate of Conformity, which allows the Company to put the Conformite
Europeane ("CE") mark on the Console, indicating that it was in compliance with
the electromagnetic compatibility (EMC) standard EN 60601-1-2(1993). The CE mark
is recognized worldwide as an assurance of product quality, and the Company
believes that the CE mark will enhance market penetration in the European
markets.
COMPETITION
The Company believes it is one of the pioneers in cancer detection
utilizing spectroscopy. Several prominent universities and medical institutions
have basic research projects involving "in-vivo" spectroscopic diagnostics.
There is a growing interest in the application of spectroscopic diagnostics for
other medical specialties, though few products have been commercialized.
Xillix Technologies (Richmond, British Columbia, Canada), recently
obtained marketing clearance from the Food and Drug Administration ("FDA") of
the United States for its system that utilizes light-based spectroscopy for
cancer detection. However, its system is large and expensive (more than $200,000
per system) and therefore, does not lend itself to easy commercialization,
especially in endoscopic suites which are already crowded with equipment and in
the current environment of tight cost control. Nevertheless, it is successful in
forging a powerful strategic alliance with Olympus (Japan). Olympus is the
premier company supplying endoscopic equipment to endoscopists throughout the
world, having an estimated 70% of the market. The second largest endoscopic
equipment supplier to endoscopists is Pentax (Japan) with about 25% of the
market.
Mediscience (New Jersey) and Lifespex (Texas) are development stage
companies utilizing spectroscopic diagnostic techniques for the identification
of cancerous tissues.
For standard (non-light transmitting) biopsy forceps, the market is
divided into disposable and re-usable segments. In the disposable segment,
representing 25% of the market, the leader is Microvasive (a division of BSC)
which has 70% of the market segment, followed by CR Bard (Murray Hill, New
Jersey) and Wilson-Cook (Winston-Salem, North Carolina). In the re-usable
segment, representing 75% of the market, the leader is Olympus, followed by
Wilson-Cook and CR Bard. The current trend in the market is moving towards
re-usables.
In cardiovascular applications, the Company has no direct competitors
using spectroscopy for the detection and diagnosis of atherosclerotic plaque.
While there are no similar products, the competing technologies presently in the
cardiovascular market are intravascular ultrasound imaging ("IVUS") and
angioscopy. Companies currently marketing products utilizing IVUS technology are
Cardiovascular Imaging Systems/CVIS (Sunnyvale, California), a wholly-owned
subsidiary of BSC, Endosonics (Pleasanton, California) and Hewlett-Packard
(Milpitas, California). Companies marketing products based on angioscopy
technology are Baxter-Edwards (Irvine, California), Olympus (Japan) and A.D.
Krauth (Germany).
Many of these competitors are better capitalized and have greater
access to financial, technical and other resources than the Company.
MANUFACTURING AND SOURCES OF SUPPLY
The basic assembly of the Console is completed by an outside
contractor. The Software is developed in-house in conjunction with outside
consultants. The Guidewire and Forceps are produced by other contract
manufacturers that are experienced and specialized in the manufacture of medical
guidewires or forceps. The Company then assembles certain proprietary
components, inspects and tests the completed systems at the Company's
facilities.
There are risks involved in having sole sources of supply for the basic
assembly of the Console, and also the manufacturing of the Guidewire and
Forceps. While the performance of these manufacturers has been satisfactory
to-date, there can be no assurance that they will continue to perform up to the
Company's high standards, meet government regulations and handle labor unrest,
if any. Any shortfalls in the ability of these contract manufacturers to meet
standards and regulations could severely impact the Company's ability to test
and sell its products.
The Company purchases many components from various suppliers that are
either standard components or are built to the Company's proprietary
specifications. In addition, the Company contracts with third parties to perform
certain manufacturing processes. Most of the purchased components and processes
are available from more than one vendor. Although the Company is in the process
of identifying alternative vendors, the qualification of additional or
replacement vendors for certain components or services is a lengthy process,
especially in the heavily regulated medical device industry, and any supply
interruption would have a material adverse effect on the Company's business,
financial condition and results of operations.
PATENTS
In October 1996, the Company was notified by the United States Patent
Office that all claims have been allowed for its patent application entitled
"System for Diagnosing Tissue with Guidewire." This patent was subsequently
issued on February 11, 1997 (Patent No. 5,601,087). In addition, the Company
filed two other patent applications in the United States in 1996, which are
currently pending approval.
In 1995, the Company was issued two new patents in the United States,
entitled "Guidewire Catheter and Apparatus for Diagnostic Imaging" (Patent No.
5,383,467) and "Method of Diagnosing Tissue with Guidewire" (Patent No.
5,439,000). The Company was issued eight United States and sixteen foreign
patents in 1994.
The Company expects to file additional patent applications in 1997.
There can be no assurance whether any additional patents will be issued, or if
issued, that such patents will afford the Company any competitive advantage.
In addition to the above, the Company also has an exclusive licensing
agreement with Massachusetts Institute of Technology for thirty-one issued
patents and pending applications, relative to the use of spectroscopy for the
diagnosis of atherosclerotic cardiovascular disease. This licensing agreement
runs for the life of the patents and includes technology developed under
National Institute of Health funding.
The Company also has a licensing arrangement with the Massachusetts
General Hospital's Wellman Laboratories of Photomedicine ("Wellman Lab"). Any
patents that result from the Wellman Lab's research on cancer detection will be
licensed exclusively to the Company. There are currently two pending patent
applications in this area.
The Company believes its patent position to be strong which will assist
the Company in its research and development and marketing efforts.
INDUSTRY ECONOMICS
In the United States, the market for the Company's products is
primarily medical institutions. The health care services that they provide to
their patients are paid by various third-party payers, such as Medicare,
Medicaid, other government programs and private insurance plans. Medicare and
Medicaid determine whether a particular procedure should be covered. Hospitals
are reimbursed for medical procedures at a fixed rate according to Diagnosis
Related Groups ("DRG's") established by the Health Care Financing Administration
("HCFA"). The fixed rate of reimbursement is based on the procedure performed
and is typically unrelated to the specific devices used in that procedure. If a
procedure is not covered by a DRG, payers may deny reimbursement. In addition,
payers may deny reimbursement if they determine that the device used in a
treatment was unnecessary, inappropriate, experimental, used for a non-approved
indication, or not cost-effective.
Currently, there are no established DRG's covering spectroscopic
diagnostic procedures for either cardiovascular or cancer detection
applications. As such, reimbursement for procedures using the Company's products
is not available at this point.
However, DRG reimbursement for endoscopic procedures, such as flexible
sigmoidoscopy, colonoscopy and polypectomy, are already established, including
fees for biopsies. Since the OBS should provide clinical utility, reduces cost
and time, the Company anticipates that once FDA clearance is obtained,
reimbursement for procedures utilizing the OBS would be available. However,
there can be no certainty that this will happen in the future or within a
time-frame that would benefit the Company in the short-term.
Although reimbursement for PTCA procedures is covered under a DRG, the
amount of reimbursement is fixed. Therefore, the profit relating to the entire
PTCA procedure would be reduced to the extent the physician performs additional
procedures such as spectroscopic diagnostics. Nevertheless, the additional
information provided by the SGS may help physicians select the appropriate
treatment method, potentially reducing the number of therapeutic catheters used
during a PTCA procedure which would produce a more effective result.
Accordingly, physicians must determine that the clinical benefits of the SGS
justify the additional cost.
Governmental prospective reimbursement programs, which provide fixed
reimbursement based on DRG's, provide economic incentives for health care
institutions to reduce operating costs by being more efficient and productive.
For every illness to be treated or procedure to be performed, only an average
rate will be reimbursed. Therefore, the more cases that can be treated below the
designated rate with less major surgery and shorter hospital stays, the higher
the level of profitability.
Capital costs for medical equipment purchased by hospitals are
reimbursed separately from DRG payments. Therefore, the market for the Company's
products could be adversely affected by changes in governmental and private
third-party payers' policies or by federal legislation that reduces
reimbursements under the capital cost pass through systems for capital
equipment.
In the past few years, certain trends continue to emerge in the medical
device industry. These are outlined below:
(a) EMPHASIS ON COST OF MEDICAL PROCEDURES.
The increased emphasis of cost has led to increasing use of capitation
pricing (i.e. fixed price for one procedure, rather than the number of
disposable products or hospital supplies used), and consignment sales from many
hospital suppliers. It is possible that this trend could accelerate and thereby
affect the Company's selling strategies.
(b) LIMITS ON THIRD-PARTY REIMBURSEMENTS.
Limits on third-party reimbursements could lead to cuts in
reimbursements for new procedures or experimental procedures, which would affect
the ability of smaller companies with new technologies, like SPECTRASCIENCE, to
compete with larger established firms. The emphasis on cost containment and cost
reduction has led to an increase in participants in managed care environments
when companies seek to reduce their cost of providing health care benefits to
employees.
(c) FOOD AND DRUG ADMINISTRATION ("FDA") EMPHASIS ON CLINICAL SAFETY AS WELL AS
ECONOMIC UTILITY.
The FDA, in recent years, has placed a heavier emphasis towards
economic utility in addition to being a watchdog for clinical utility and safety
of products. Companies will need to prove economic advantages up-front, which
places a greater burden on companies, especially if they are in the start-up or
development stages. This could potentially lead to less advances in innovative
technologies. Also, it is very unlikely for HCFA to approve a new technology
unless it has prior clearance from the FDA.
(d) EMERGENCE OF DOMINANT VENDORS TO HOSPITALS.
There is a trend towards consolidation in the medical device industry.
It appears that the ability of vendors to offer a range of products is important
to gain entry to hospitals, whether it be competition for shelf space or on the
basis of price.
(e) FOREIGN GOVERNMENTAL ISSUES.
The trends in foreign countries are similar to the United States in
that there is a greater emphasis on cost containment, cost reduction, reduced
reimbursement levels, greater clinical safety and utility. Other regulations,
such as ISO certification, import tariffs, duties and taxes, could severely
impact the Company's ability to compete and enter those foreign markets.
GOVERNMENT REGULATIONS
The Company's development, manufacturing and marketing activities are
subject to regulation by numerous governmental authorities in the United States
and other countries, particularly regarding product safety and effectiveness. In
the United States, medical devices are subject to review and clearance by the
Food and Drug Administration ("FDA"). The Food, Drug and Cosmetic Act, as
amended, the Public Health Service Act, the Safe Medical Devices Act of 1990
(the "SMDA") and other federal statutes and regulations, govern or influence the
testing, manufacture, safety, labeling, storage, record keeping, clearance,
advertising and promotion of such products.
FDA permission to distribute a new device can be obtained in one of two
ways. If a new or significantly modified device is "substantially equivalent" to
an existing legally marketed device, the new device can be commercially
introduced after filing a 510(k) pre-market notification with the FDA and the
subsequent issuance by the FDA of an order permitting commercial distribution.
Changes to existing devices that do not significantly affect safety or
effectiveness may be made without an additional 510(k) notification.
A second, more comprehensive approval process applies to a new device
that is not substantially equivalent to an existing product. First, the
applicant must conduct clinical trials in compliance with testing protocols
approved by the Institutional Review Board ("IRB") for the participating
research institution. The IRB is an internal board in each institution that
oversees and approves all clinical studies. Second, a Pre-market Approval
("PMA") application must be submitted to the FDA that describes the results of
the clinical trials, the device and its components, the methods, facilities and
controls used for its manufacture, proposed labeling and the demonstration that
the product is safe and effective. Finally, the manufacturing site for the
product subject to the PMA must pass an FDA pre-approval inspection. The Company
is currently seeking expert advice as to whether its planned products will
require PMA approval. As such, there can be no assurance that such an approval
will not be required. The PMA review and approval process generally takes more
than a year to complete from the date of filing, and there is no assurance if or
when the PMA would be approved. Furthermore, there can be no assurance that FDA
clearance for these products, any future products, or any modification of an
existing product will be granted, or the process will not be unduly lengthy.
Obtaining a PMA approval will therefore result in significant delays in and
could prevent the introduction of the Company's products.
In connection with either a 510(k) notification or a PMA, clinical
testing of a "significant risk" device requires the submission of an
investigational device exemption ("IDE") application to the FDA. An IDE
application is not required for a "non-significant risk" ("NSR") device. The
Company believes that the proposed Optical Biopsy(TM) System ("OBS")is an NSR
device and therefore does not require an IDE application. However, in the event
that the FDA should require the Company to submit an IDE application, the
Company may be required to repeat all or part of the clinical testing conducted
prior to obtaining an IDE, which may delay approval of the OBS.
As a medical device manufacturer, the Company and/or its contract
manufacturers are required to register with the FDA and submit to periodic
inspections for compliance with the FDA's Good Manufacturing Practices ("GMP"),
Quality Systems regulations and various FDA requirements for labeling. These
regulations require the Company to manufacture its products and maintain its
documents for manufacturing, testing and control activities in a prescribed
manner. Failure to comply with these requirements could adversely affect the
results of operations, as well as the Company's business and financial
condition.
The Company believes that it complies in all material respects with
such applicable regulations. However, failure to comply could subject the
Company to fines and other enforcement actions.
The Company is also subject to other federal, state and local
regulations regarding environmental protection and hazardous substance controls.
To-date, the costs or effects of compliance with federal, state and local
environmental laws are routine and customary for a developing medical device
company.
REGULATORY STRATEGY FOR THE OPTICAL BIOPSY(TM) SYSTEM
The Company believes that it can significantly shorten the timeline it
will take to obtain approval for the OBS. The Company intends to submit
approvals for each of the components of the Optical Biopsy(TM) System
separately. For the Forceps, the Company has already received 510(k) clearance
from the FDA on December 2, 1996. The Console is considered a general laboratory
instrument and is generally classified as a Class I device by the Clinical
Chemistry Device Panel of the FDA. In Europe, the Company was issued a CE mark
on August 14, 1995, indicating that the Console was in compliance with the
electromagnetic compatibility (EMC) standard EN 60601-1-2(1993). The Company is
conducting clinical studies to determine the clinical utility of the Software
which will begin under IRB approval in each clinical site in the first quarter
of 1997. These clinical studies are considered NSR.
Clinical studies are expected to continue at least until the beginning
of the third quarter of 1997 to collect a statistically significant set of data
as well as establish clinical utility. After successful completion of the
clinical studies, the Company will then file a submission with the FDA for
marketing clearance of the entire Optical Biopsy(TM) System. There is no
assurance that such a strategy in the United States would be acceptable to the
FDA or if it was acceptable that the Company would receive clearance from the
FDA in a timely manner.
A new Medical Device Directive will be in force beginning July 1998 in
the countries of the European Union (the "EU"). In order to sell in the EU
starting July 1998, companies must have ISO certification, and all products must
have the CE mark. Towards that end, the Company will be seeking ISO 9001
certification for the Company, and CE marks for all the components of the
Optical Biopsy(TM) System before that date. There can be no assurance that the
Company would receive ISO certification or the CE marks for any of its products
or product components in a timely manner.
PRODUCT RESEARCH AND DEVELOPMENT
During the years ended December 31, 1996, 1995 and 1994, the Company's
research and development expenditures were $998,137, $660,504 and $869,670,
respectively.
The Company's research and development efforts are focused on the
Company's two main products, the Optical Biopsy(TM) System ("OBS") and the
Spectroscopic Guidewire(TM) System ("SGS").
For the OBS, the focus will be to further develop the Forceps and
proprietary tissue recognition algorithm software ("Software"). The Company has
already received 510(k) clearance from the FDA on the Forceps. Current efforts
are focused on developing a new reusable forceps incorporating a disposable
optical probe. Clinical studies are also taking place concurrently to prove the
clinical utility of the Software. It is anticipated that these efforts will be
complete within a twelve month period. However, there can be no assurance that
the Company will be successful in its efforts or that clinical studies will
yield favorable results for the Company.
The Company is also focusing design engineering effort on the Console,
in an attempt to reduce its size and cost without sacrificing accuracy and
speed. Such efforts include off-the-shelf computer boards instead of custom
boards, creating more efficient circuit design, and incorporating the Company's
technology with other readily available endoscopic technologies. In addition,
the intense competition in computer and software technologies has resulted in
rapidly declining costs while off-the-shelf components are becoming more readily
available. The Company believes that it will be successful in reducing the cost
of the Console significantly, although there can be no assurance that this will
happen or that it will happen in a timely manner.
EMPLOYEES
In 1996, the Company hired a Vice President of Development and a
Director of Regulatory Affairs and Quality Assurance. As of December 31, 1996,
the Company's full-time work force consisted of nine employees; five of whom
were engaged in product design and development, manufacturing, quality assurance
and regulatory affairs, and the remaining four were engaged in management and
general administration.
The Company also relies on external consultants in the regulatory,
software development and design engineering areas. The Company has been
successful in attracting and retaining qualified technical personnel. There can
be no assurance, however, that the Company will be able to continue to attract
or retain the skilled employees it requires for profitable operations. The
Company is not subject to any collective bargaining agreement and believes that
its employee relations are generally satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company moved its offices to another leased facility located at
3650 Annapolis Lane, Suite 101, Minneapolis, Minnesota 55447-5434 on November 1,
1996. This facility consists of approximately 5,530 square feet of office,
laboratory, quality testing, and warehouse space. The five-year lease provides
for monthly rental payments of $4,434 for the first 36 months, and $4,561for the
next 24 months. The current rent including a PRO RATA share of operating
expenses and real estate taxes is approximately $6,265 per month. The lease
expires at the end of October 2001. The Company maintains levels of standard
property and casualty insurance coverage on its property that management deems
appropriate.
ITEM 3. LEGAL PROCEEDINGS.
There are no material on-going or pending legal proceedings which
involve the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the security holders since
the 1996 annual meeting.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) MARKET INFORMATION
The Common Stock had been traded in the over-the-counter ("OTC") market
and quoted on the National Association of Security Dealers Automated Quotation
System ("NASDAQ") Small-Cap Market since November 13, 1984 under the symbol
GVMI. In September 1992, the stock symbol was changed from GVMI to SPSC. The
stock symbol was subsequently changed to SPSI in June 1994 when it was listed on
the OTC.
The Common Stock was re-listed on the NASDAQ Small-Cap Market on May
15, 1996, where it is currently traded, under the symbol SPSI.
The following table sets forth, for the periods indicated, high and low
closing prices as reported by NASDAQ and OTC Bulletin Board and also prices that
the Company obtained from third party sources, such as MetroData Services and
the Wall Street Journal. To the best of its knowledge, the Company believes that
the information obtained from these sources to be accurate.
<TABLE>
<CAPTION>
STOCK PRICES(1) 1996 1995
---------------------------------------------------------------
(in $ per share) High Low High Low
Quarter Ended Close Close Close Close
-------------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31 9.125 6.75 3.3125 2.00
June 30 10.625 6.375 5.125 2.9375
September 30 7.75 4.25 6.625 4.05
December 31 6.00 4.375 7.875 5.125
-------------------------- ---------------------------------------------------------------
</TABLE>
(1) The prices of the Company's stock reflect inter-dealer prices and do
not necessarily reflect the prices of actual transactions. The closing
prices reflect prices without retail mark-up, mark-down or commission
and may not represent actual transactions.
On February 28, 1997, the closing price quoted for the Common Stock was
$4.25.
(b) HOLDERS
On February 28, 1997, there were 1,049 registered shareholders of
record of 4,480,379 shares of the Common Stock, excluding shareholders that are
registered in "street-names". The Company estimates that there were a total of
approximately 5,000 beneficial shareholders.
(c) DIVIDENDS
Since its incorporation, the Company has not paid any dividends, and no
dividend payments are contemplated in the foreseeable future. The Company will
retain any earnings it may generate to provide for the operation and expansion
of its business.
(d) OTHER SECURITIES
BRIDGE LOANS
On September 30, 1994, the Company raised a total of $300,000 in bridge
loans. Lenders were given five-year warrants to purchase 100,000 shares of
Common Stock exercisable at $3.00 per share. In the first fiscal quarter of
1995, the Company raised $225,000 in additional bridge loans with the same
terms. This group of lenders was given five-year warrants to purchase 74,998
shares of Common Stock exercisable at $3.00 per share. All of the bridge loans
were converted to preferred stock in the private placement which closed on June
29, 1995. The total number of warrants issued to lenders were 174,998, which if
exercised would raise an additional $524,994 for the Company.
PRIVATE PLACEMENTS OF PREFERRED STOCK
Two private placements of convertible preferred stock with attached
warrants were completed in 1995. Neither the shares of preferred stock nor the
warrants are intended for trading in any official exchanges.
The first private placement, which closed on June 29, 1995, involved
the placement with qualified investors of 674,998 shares of Series A Preferred
Stock ("Preferred A"), par value $1.00, at $3.00 per share. A net amount of
$1,965,000 was raised. Of this amount, $525,000 was from the conversion of
bridge loans on March 31, 1995. Preferred A shares are non-voting, do not yield
dividends or interest, and are convertible to an equivalent number of shares of
Common Stock, after March 31, 1996, but generally one year from the date of
receipt of funds. Each Preferred A share was issued with a three-year warrant to
buy one-third share of Common Stock at a price of $5.00 per share. Warrants to
purchase a total of 225,000 shares of Common Stock were issued to investors in
this private placement, which if exercised would raise an additional $1,125,000
for the Company. Warrants for 33,333 shares of Common Stock at $5.00 were
exercised in the third quarter of 1996, raising $166,665 for the Company.
The second private placement, which closed on December 28, 1995,
involved the placement with qualified investors of 792,500 shares of Series B
Preferred Stock ("Preferred B"), par value $1.00, at $5.00 per share. A net
amount of $3,526,625 was raised. Preferred B shares are non-voting, do not yield
dividends, unless the holders of Common Stock fail to authorize sufficient
additional shares of Common Stock for the conversion of the Preferred B, and are
convertible to an equivalent number of shares of Common Stock on or after
December 28, 1996. Each Preferred B share was issued with a three-year warrant
to buy one-third share of Common Stock at a price of $9.50 per share. Warrants
to purchase a total of 264,175 shares of Common Stock were issued to investors
in this private placement, which if exercised would raise an additional
$2,509,663 for the Company.
In addition, the selling agents for Preferred A and Preferred B received
warrants to purchase a total of 132,335 shares of Common Stock, at prices
ranging from $3.00 to $9.50, and having terms ranging from three to five years.
If all the warrants issued to the selling agents were exercised, it would raise
another $740,556 for the Company.
The total amount raised by the Company was therefore $5,491,625,
including the conversion of $525,000 bridge loans.
As of February 28, 1997, all of the issued and outstanding 1,467,498
shares of Preferred A and Preferred B have been converted to an equivalent
number of shares of issued and outstanding Common Stock and warrants for 33,333
shares of Common Stock were exercised. As such, as of February 28, 1997 there
were no preferred shares outstanding and there were warrants to purchase 763,175
shares of Common Stock outstanding.
STOCK OPTIONS
As of February 28, 1997, there were 871,579 stock options outstanding,
82.4% of which were held by employees.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This discussion
should be read in conjunction with the financial statements and footnotes which
follow.
PLAN OF OPERATION
In 1995, the Company raised a net total of $5,491,625 through the
completion of two private placements, including the conversion of bridge loans
outstanding. Proceeds from these private placements will be applied to
accelerate product development, conduct clinical trials, conduct studies on
alternative medical applications, expand the scope of the Company's
international and future domestic sales and marketing activities and for general
corporate purposes, including working capital.
The Company's cash position on December 31, 1996 was $3,047,182. The
Company believes that this cash will last more than twelve months, and thus does
not believe it will have to raise additional funds during this period.
Due to acceleration of clinical studies and product development, the
Company moved its corporate offices into a 5,530 square feet space, which is
approximately 2,500 square feet larger than the Company's previous offices. The
Company also engaged in some corporate reorganization in 1996 eliminating the
Purchasing/Maintenance Manager and the Drafter positions and hiring two
technical managers. In 1997, the Company anticipates hiring an additional three
to four individuals, primarily in the areas of marketing and software and
systems development.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUE
Gross revenue for the year ended December 31, 1996 was $0 compared to
$134,652 in 1995. Revenue was unfavorable for the year ended 1996 primarily due
to the more intense competitive factors facing the healthcare environment, and
in particular, the cardiovascular business. As discussed previously, the rapid
acceptance of stents in the treatment of cardiovascular diseases, limited
reimbursements for such procedures plus the emphasis on cost reduction have put
intense pressures on other modalities of diagnosis and treatments.
In addition, expectations of international sales through SCIMED did not
materialize. The Company believes that this was primarily due to the fact that
BSC went through an acquisition spree in the last two years which took up a lot
of management time and resulted in many management changes. This adversely
affected the Company's sales.
RESEARCH AND DEVELOPMENT
Research and development expenses for the year ended December 31, 1996
totaled $998,137 compared to $660,504 in 1995. This represented an increase of
$337,633 or 51.1% and was primarily due to (a) increased expenses related to
engineering development costs, specialty equipment purchased for the development
of the Company's products, and higher depreciation expenses associated with
other equipment; (b) expenses related to ongoing research and development
agreement with Wellman Lab which amounted to approximately $200,000 per year
including travel expenses; (c) increased expenses associated with the hiring of
the Vice President of Development and the Director of Regulatory Affairs and
Quality Assurance, plus associated recruitment expenses; (d) increased legal
fees associated with intellectual property protection and filing; and (e) higher
allocated costs associated with the department.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SGA") expenses for the year ended
December 31, 1996 totaled $723,825, compared with $711,753 in 1995. This
represented an increase of $12,072 or 1.7%. Increases in SGA expenses included
(a) additional expenses associated with the filing of additional registration
statements and NASDAQ application in 1996; (b) insurance expense, (c) expenses
related to the moving of the Corporate offices, and (d) the full impact of
hiring of the Chief Financial Officer who joined the Company on August 30, 1995.
The increases were offset by decreases in (a) travel expenses, (b) shareholder
expenses, (c) human resource consulting expense, and (d) the elimination of the
Purchasing/Maintenance manager position in September 1996.
INTEREST AND OTHER INCOME
Interest and other income was $176,043 for the year ended December 31,
1996 compared to $16,608 in 1995. This represented an increase of $159,435 and
was the result of increased interest income from higher average cash balances
during 1996 compared with 1995. The higher average cash balance in 1996 was the
result of the two private placements in 1995.
NET LOSSES
As a result of the above factors, the Company reported a net loss of
$1,545,919 for the year ended December 31, 1996 compared to $1,345,910 in 1995.
This represented an increase of $200,009 or 14.9%. Even though the net loss was
higher in 1996, the net loss per share was similar in both 1996 and 1995 at $.47
due to higher average shares outstanding in 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUE
Gross revenue for the year ended December 31, 1995 was $134,652,
compared to $0 in 1994. The revenue in 1994 dropped significantly due to the
Company's decision to discontinue the production and sales support for its
LASTAC systems and its re-focus on the development of the SGS. The revenue in
1995 reflected the sale of two SGSs and disposable products to SCIMED. However,
sales through SCIMED were below expectations.
RESEARCH AND DEVELOPMENT
Research and development expenses the year ended December 31, 1995
totaled $660,504 compared to $869,670 in 1994. The reduction in research and
development expenses primarily resulted from reductions in the design
engineering expenses and materials used in the development of the SGS and cost
control, offset by an increase in expenses due to the research and development
agreement with Wellman Lab. The primary reason for the decrease in design
engineering expenses was the high initial up-front costs associated with the
design, development and testing of the products which were previously expensed
in 1994.
In 1995, the Company signed a two-year research and development
agreement with Wellman Lab to commence research on the detection and
differentiation of cancerous, pre-cancerous and healthy tissues. This agreement
called for payments of approximately $50,000 per quarter to Wellman Lab. A total
of approximately $150,000 was expensed in 1995. The agreement expires in 1997.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses the year ended December
31, 1995 totaled $711,753, compared with $701,278 in 1994. This represented an
increase of $10,475 or 1.5%. This slight increase was primarily due to the
hiring of the Chief Financial Officer in the latter part of the third quarter.
INTEREST AND OTHER INCOME
Interest and other income was $16,608 the year ended December 31, 1995
compared to $66,468 in 1994. This represented a decrease of $49,860 or 75.0% and
was principally due to a reduction in interest income resulting from a decrease
in cash balances coupled with a lower interest rate environment. This was
partially offset by a gain on the sale of unneeded assets.
NET LOSSES
As a result of the above factors, the Company reported a net loss for
the year ended December 31, 1995 of $1,345,910 compared to $1,504,480 in 1994.
This represented a decrease of $158,570 or 10.5%. The net loss per share was
$.47 in 1995 compared to $.55 in 1994.
LIQUIDITY AND SOURCES OF CAPITAL
On December 31, 1996, the working capital of the Company was $2,950,452
compared to $4,231,371 on December 31, 1995 and $280,271 on December 31, 1994.
The decrease in working capital from 1995 to 1996 was the result of the use of
cash to fund normal on-going operations of the Company. The increase in working
capital from 1994 to 1995 resulted primarily from the private placements in 1995
and the conversion of bridge loans outstanding.
Net cash used in operating activities was $1,379,498 in 1996, compared
with $1,399,518 in 1995 and $1,593,130 in 1994. The relatively stable net cash
used in operating activities from 1995 to 1996 was primarily the result of a
decrease in accounts payable and accrued but unpaid clinical research fees. The
research fees were accrued pursuant to the clinical research agreement with
Wellman Lab which expires in the first quarter of 1997.
Net cash provided by financing activities was $314,290 in 1996 compared
to $5,571,625 in 1995 and $375,000 in 1994. The net cash provided by financing
activities in 1996 was primarily due to the exercise of warrants and stock
options. The increase in 1995 was provided primarily by private placements and
the exercise of stock options. The 1995 amount only included $225,000 of the
$525,000 bridge loans converted to Preferred A, since $300,000 of the bridge
loans were provided in 1994.
The Company has cash and cash equivalents on December 31, 1996 of
$3,047,182 compared to $4,123,326 in 1995. The Company estimates that this
amount of cash and cash equivalents will be sufficient to last at least twelve
months; therefore, the Company does not foresee that additional funding will be
necessary during this period.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Reference is made to the Report of Independent Auditors and Financial
Statements included in the Index to Financial Statements at Page F-1 of this
Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this item is incorporated by reference to
the information set forth under the similarly titled caption contained in the
Proxy Statement to be used by the Company in connection with its 1997 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange Commission
on or prior to April 15, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to
the information set forth under the similarly titled caption contained in the
Proxy Statement to be used by the Company in connection with its 1997 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange Commission
on or prior to April 15, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to
the information set forth under the similarly titled caption contained in the
Proxy Statement to be used by the Company in connection with its 1997 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange Commission
on or prior to April 15, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to
the information set forth under the similarly titled caption contained in the
Proxy Statement to be used by the Company in connection with its 1997 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange Commission
on or prior to April 15, 1997.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Form 10-KSB:
(1) FINANCIAL STATEMENTS.
Audited financial statements for each of the three years ended December
31, 1996, 1995 and 1994 are filed as part of this Form 10-KSB. See Index to
financial Statements on Page F-1.
(2) REPORTS ON FORM 8-K.
The Company filed a report on Form 8-K on December 16, 1996 in
conjunction with its press release on the same day, announcing that it received
510(k) pre-market notification clearance from the FDA for its fiber-optic biopsy
forceps.
(3) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B:
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation, As Amended (filed herein)
3.2 Bylaws, As Amended (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995.)
10.1 Incentive Stock Option Plan adopted by the Company's Board of Directors
and shareholders on August 1, 1983, as amended March 5, 1987, and May 5,
1987. (Incorporated by reference to the Company's Registration Statement
on Form S-8, Commission File No. 2-93693-C, as filed on March 28, 1986,
effective April 17, 1986, as amended on June 2, 1987 and March 21, 1988.)
10.2 Incentive Stock Option Plan As Amended as adopted by the Company's Board
of Directors and shareholders on March 10, 1988 (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1988.)
10.3 1988 Stock Option Plan adopted by the Company's Board of Directors on
March 10, 1988 and shareholders on May 5, 1988 (Incorporated by reference
to the Company's Registration Statement on Form S-8, Commission File No.
33-22052, as filed on May 25, 1988, effective June 14, 1988.)
10.4 1990 Restricted Stock Plan adopted by the Company's Board of Directors on
March 15, 1990 and shareholders on May 17, 1990 (Incorporated by
reference to the Company's Registration Statement on Form S-8, Commission
File No. 33-36385, as filed on August 15, 1990, effective August 15,
1990.)
10.5 1991 Stock Plan adopted by the Company's Board of Directors on July 11,
1991 and shareholders on January 30, 1992. (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended December 31,
1991.)
10.6 Amendment to 1991 Stock Plan adopted by the Company's Board of Directors
on July 11, 1991 and shareholders on January 30, 1992. (Incorporated by
reference to the Company's Form 8-K Report filed with the Securities and
Exchange Commission on or about February 3, 1992.)
10.7 Amendment to 1991 Stock Plan adopted by the Company's shareholders on
June 28, 1995 (Incorporated by reference to the Company's Registration
Statement on Form S-8, Commission File No. 033-63047, as filed on
September 28, 1995)
10.8 Amendment to 1991 Stock Plan adopted by the Company's Board of Directors
on October 4, 1995 (Incorporated by reference to the Company's definitive
Proxy Statement for its 1996 Annual Meeting of Shareholders).
10.9 Amendment to 1991 Stock Plan adopted by the Company's shareholders on
March 28, 1996 (Incorporated by reference to the Company's Registration
Statement on Form S-8, Commission File No. 333-.4393, as filed on May 23,
1996)
10.10 Amendment to 1991 Stock Plan as it pertains to Section 5(k) of the Plan
regarding Directors options, adopted by the Company's Board of Directors
on October 9, 1996, filed herein.
10.11 Self-Insurance Trust Agreement between the Company and Richfield Bank and
Trust Co., as trustee dated March 5, 1987 (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended December 31,
1986).
10.12 Form of Indemnification Agreement that the Company has provided to all
officers and directors. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1986.)
10.13 Yurek Employment Agreement dated February 3, 1992 by and between the
Company and Mr. Daryl F. Yurek. (Incorporated by reference to the
Company's Form 8-K report filed with the Securities and Exchange
Commission on or about February 17, 1992.)
10.14 Employment Agreement and Severance Agreement between the Company and
Brian T. McMahon dated September 30, 1992 (Incorporated by reference to
the Company's Annual Report on Form 10-KSB for the year ended December
31, 1992.)
10.15 Severance (Change in Control) Agreement between the Company and Brian T.
McMahon dated November 26, 1996, filed herein.
10.16 Severance (Change in Control) Agreement between the Company and
Ching-Meng Chew dated November 26, 1996, filed herein.
10.17 Five-Year Lease Agreement between the Company and St. Paul Properties,
Inc. dated October 10, 1996, filed herein.
10.18 Distribution Agreement between SCIMED Life Systems, Inc. and the Company
dated August 19, 1994 (Incorporated by reference to Annual Report on Form
10-KSB, Exhibit 10.29, for the year ended December 31, 1994).
10.19 Clinical Research Agreement between The General Hospital Corporation,
doing business as Massachusetts General Hospital, and the Company dated
June 1, 1995 (Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.)
10.20 Cautionary Statement Identifying Important Factors that Could Cause the
Company's Actual Results to Differ from Those Projected in
Forward-Looking Statements (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996)
10.21 Bridge Loan Agreement, including form of Promissory Note and form of
Warrant by and between the Company and Qualified Lenders, dated September
30, 1994 (Incorporated by reference to the Company's Annual Report on
Form 10-KSB, Exhibit 10.28, for the year ended December 31, 1994)
10.22 Form of Promissory Note that was issued in conjunction with the Bridge
Loan Agreement by and between the Company and Qualified Lenders, dated
September 30, 1994 (Incorporated by reference to the Company's Annual
Report on Form 10-KSB, Exhibit 10.28, page 45, for the year ended
December 31, 1994)
10.23 Form of Promissory Note that was issued in conjunction with the Bridge
Loan Agreement by and between the Company and Qualified Lenders, dated
September 30, 1994 (Incorporated by reference to the Company's Annual
Report on Form 10-KSB, Exhibit 10.28, page 45, for the year ended
December 31, 1994)
10.24 Form of Warrant (Incorporated by reference to the Company's Annual Report
on Form 10-KSB, Exhibit 10.28, for the year ended December 31, 1994.)
10.25 List of Lenders in the Bridge Loans, and Investors in the Company's
Preferred Stock (Incorporated by reference to the Company's Form S-3
Registration Statement under The Securities Act of 1933 as filed with the
Securities and Exchange Commission and declared effective on June 7,
1996, Commission File No. 333-1149)
10.26 Form of Subscription Agreement that was used in conjunction with the
private placements of the Company's Preferred Stock (Incorporated by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995.)
23.1 Consent of Independent Auditors, filed herein.
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Sections 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SPECTRASCIENCE, INC.
(Registrant)
Date: March 25, 1997 By: /S/ BRIAN T. MCMAHON
---------------------
BRIAN T. MCMAHON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/ BRIAN T. MCMAHON President, Chief Executive Officer March 25, 1997
- ------------------------ and Director
Brian T. McMahon (Principal Executive Officer)
/S/ CHING-MENG CHEW Vice President Finance and March 25, 1997
- ------------------------ Administration, Chief Financial
Ching-Meng Chew Officer, Treasurer, Secretary
(Principal Financial and Accounting
Officer)
/S/ HENRY M. HOLTERMAN Director March 25, 1997
- -------------------------
Henry Holterman
/S/ NATHANIEL S. THAYER Director March 25, 1997
- -------------------------
Nathaniel S. Thayer
ITEM 13. (a)(1) FINANCIAL STATEMENTS.
The following financial statements of SPECTRASCIENCE, Inc. are included
in Item 7.
SPECTRASCIENCE, INC.
Audited Financial Statements
December 31, 1996
CONTENTS
Page Reference
--------------
Report of Independent Auditors .......................................... F-2
Balance Sheets -- December 31, 1996 and 1995 ............................ F-3
Statements of Operations -- Years Ended ................................. F-4
December 31, 1996, 1995 and 1994
Statement of Changes in Shareholders' Equity ............................ F-5
-- Years Ended December 31, 1996, 1995 and 1994
Statements of Cash Flows -- Years Ended ................................. F-6
December 31, 1996, 1995 and 1994
Notes to Financial Statements -- December 31, 1996 ...................... F-7
Report of Independent Auditors
Board of Directors
SPECTRASCIENCE, Inc.
We have audited the accompanying balance sheets of SPECTRASCIENCE, Inc.
as of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of SPECTRASCIENCE, Inc.
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
February 14, 1997
SPECTRASCIENCE, INC.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
--------------------------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $3,047,182 $ 4,123,326
Accounts receivable (net of allowance of $50,000 in 1995) - 100,641
Inventory 192,151 181,871
Other current assets 103,736 80,197
--------------------------------------
Total current assets 3,343,069 4,486,035
Fixed assets:
Office furniture and equipment 239,915 232,492
Machinery and equipment 558,029 447,645
--------------------------------------
797,944 680,137
Less accumulated depreciation (590,424) (521,907)
--------------------------------------
207,520 158,230
--------------------------------------
Total assets $3,550,589 $ 4,644,265
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 107,866 $ 150,278
Accrued compensation and taxes 97,735 74,328
Accrued expenses 37,216 30,058
Accrued clinical research fees 149,800 -
--------------------------------------
Total current liabilities 392,617 254,664
Commitments
Stockholders' equity:
Convertible preferred stock, Series A, par value $1.00 per share:
Authorized shares--5,000,000
Issued and outstanding shares--66,667 in 1996; 674,998 in
1995 66,667 674,998
Convertible preferred stock, Series B, par value
$1.00 per share:
Authorized shares--1,000,000
Issued and outstanding shares--792,500 in 1996
and 1995 792,500 792,500
Common stock, $.25 par value:
Authorized shares--10,000,000
Issued and outstanding shares-- 3,621,212 in 1996 and
2,933,348 in 1995 905,303 733,337
Additional paid-in capital 43,886,939 43,136,284
Accumulated deficit (42,493,437) (40,947,518)
--------------------------------------
Total stockholders' equity 3,157,972 4,389,601
--------------------------------------
Total liabilities and stockholders' equity $ 3,550,589 $ 4,644,265
======================================
</TABLE>
SEE ACCOMPANYING NOTES.
SPECTRASCIENCE, INC.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
NET REVENUES
Product revenues $ - $ 134,652 $ -
Cost of products sold - 124,913 -
-----------------------------------------------------
- 9,739 -
EXPENSES
Research and development 998,137 660,504 869,670
Selling, general and administrative 723,825 711,753 701,278
Interest and other income (176,043) (16,608) (66,468)
-----------------------------------------------------
Total expenses 1,545,919 1,355,649 1,504,480
-----------------------------------------------------
Net loss $(1,545,919) $ (1,345,910) $(1,504,480)
=====================================================
Net loss per share $ (.47) $ (.47) $ (.55)
Weighted average common shares outstanding 3,276,193 2,857,738 2,753,128
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
<CAPTION>
SPECTRASCIENCE, INC.
Statement of Changes in Stockholders' Equity
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
--------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance December 31, 1993 2,750,348 $687,587 - $ - - $ -
Exercise of stock options 30,000 7,500 - - - -
Issuance of non-interest bearing notes - - - - - -
Issuance of common stock for services 5,000 1,250 - - - -
Stock options granted at below market
value - - - - - -
Net loss - - - - - -
----------------------------------------------------------------------------------
Balance December 31, 1994 2,785,348 696,337 - - - -
Exercise of stock options 148,000 37,000 - - - -
Issuance of non-interest bearing notes - - - - - -
Issuance of Series A convertible
preferred stock upon debt conversion - - 174,998 174,998 - -
Proceeds from issuance of Series A
convertible preferred stock, net of
expenses of $60,000 - - 500,000 500,000 - -
Proceeds from issuance of Series B
convertible preferred stock, net of
expenses of $435,875 - - - - 792,500 792,500
Net loss - - - - - -
----------------------------------------------------------------------------------
Balance December 31, 1995 2,933,348 733,337 674,998 674,998 792,500 792,500
Conversion of Series A preferred stock
into common shares 608,331 152,083 (608,331) (608,331) - -
Exercise of Series A preferred stock
detachable warrants into common
shares 33,333 8,333 - - - -
Exercise of stock options 46,200 11,550 - - - -
Net loss - - - - - -
----------------------------------------------------------------------------------
Balance December 31, 1996 3,621,212 $905,303 66,667 $ 66,667 792,500 $792,500
==================================================================================
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
----------------------------------------------
<S> <C> <C> <C>
Balance December 31, 1993 $38,670,897 $(38,097,128) $1,261,356
Exercise of stock options 67,500 - 75,000
Issuance of non-interest bearing notes 15,000 - 15,000
Issuance of common stock for services - - 1,250
Stock options granted at below market
value 12,500 - 12,500
Net loss - (1,504,480) (1,504,480)
----------------------------------------------
Balance December 31, 1994 38,765,897 (39,601,608) (139,374)
Exercise of stock options 343,000 - 380,000
Issuance of non-interest bearing notes 3,260 - 3,260
Issuance of Series A convertible
preferred stock upon debt conversion 350,002 - 525,000
Proceeds from issuance of Series A
convertible preferred stock, net of
expenses of $60,000 940,000 - 1,440,000
Proceeds from issuance of Series B
convertible preferred stock, net of
expenses of $435,875 2,734,125 - 3,526,625
Net loss - (1,345,910) (1,345,910)
----------------------------------------------
Balance December 31, 1995 43,136,284 (40,947,518) 4,389,601
Conversion of Series A preferred stock
into common shares 456,248 - -
Exercise of Series A preferred stock
detachable warrants into common
shares 158,332 - 166,665
Exercise of stock options 136,075 - 147,625
Net loss - (1,545,919) (1,545,919)
----------------------------------------------
Balance December 31, 1996 $43,886,939 $(42,493,437) $3,157,972
==============================================
</TABLE>
SEE ACCOMPANYING NOTES.
<TABLE>
<CAPTION>
SPECTRASCIENCE, INC.
Statements of Cash Flows
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,545,919) $(1,345,910) $(1,504,480)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 72,418 52,302 53,192
Compensation expense recognized in connection with
granting of stock options - - 12,500
Non-cash interest expense - 3,260 15,000
Stock issued for services - - 1,250
Gain on sale of fixed assets (387) - (28,335)
Changes in operating assets and liabilities:
Accounts receivable 100,641 (99,860) 35,986
Inventory (120,665) 18,597 (200,468)
Other current assets (23,539) 35,492 15,015
Accounts payable and accrued expenses 137,953 (63,399) 7,210
-----------------------------------------------------
Net cash used in operating activities (1,379,498) (1,399,518) (1,593,130)
INVESTING ACTIVITIES
Purchases of fixed assets (13,418) (107,379) (30,798)
Proceeds from sale of fixed assets 2,482 300 56,540
-----------------------------------------------------
Net cash (used in) provided by investing activities (10,936) (107,079) 25,742
FINANCING ACTIVITIES
Proceeds from issuance of notes payable - 225,000 300,000
Proceeds from issuance of common stock 314,290 380,000 75,000
Proceeds from issuance of preferred stock - 4,966,625 -
-----------------------------------------------------
Net cash provided by financing activities 314,290 5,571,625 375,000
-----------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,076,144) 4,065,028 (1,192,388)
Cash and cash equivalents at beginning of year 4,123,326 58,298 1,250,686
-----------------------------------------------------
Cash and cash equivalents at end of year $ 3,047,182 $4,123,326 $ 58,298
=====================================================
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Notes payable converted into preferred stock $ - $ 525,000 $ -
Series A Preferred stock converted into common stock 608,331 - -
Transfer of inventory to equipment 110,385 - -
</TABLE>
SEE ACCOMPANYING NOTES.
SPECTRASCIENCE, INC.
Notes to Financial Statements
December 31, 1996
1. BUSINESS
The Company was incorporated on May 4, 1983 as GV Medical, Inc. and was
engaged in the development of laser angioplasty catheter systems. Subsequently,
the Company changed its name to SpectraScience, Inc. on October 16, 1992, which
was approved by the shareholders on May 13, 1993. The Company is now focused
primarily on the design, development, manufacturing and marketing of medical
products for the diagnosis and facilitation of treatment of a broad range of
human diseases.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
FIXED ASSETS
Fixed assets are stated at cost. The Company depreciates the cost of
the property over its estimated useful life of five years using the straight
line method.
INVENTORY
Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations
in accounting for its stock options. Under APB 25, when the exercise price of
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("Statement 123"). The Company adopted the disclosure only
provisions of Statement 123. Accordingly, the Company has made pro forma
disclosures of what net loss and loss per share would have been had the
provisions of Statement 123 been applied to the Company's stock options.
INCOME TAXES
The Company accounts for income taxes under the liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amount of assets and liabilities and their respective tax
bases.
NET LOSS PER SHARE
Net loss per share is computed by dividing the net loss for the period
by the weighted average number of common shares outstanding during the period.
Common equivalent shares from stock options, warrants and convertible preferred
stock are excluded from the computation as their effect is antidilutive.
3. NOTES PAYABLE
During 1994, the Company received $300,000 of convertible bridge
financing from an investor group. The promissory notes were non-interest bearing
and were due on March 31, 1995. In connection with the notes payable, the
Company granted warrants to the participants in the bridge financing to purchase
100,000 shares of the Company's common stock at $3.00 per share. The warrants
are exercisable for five years from the date of grant.
During 1995, the Company received $225,000 of convertible bridge
financing from an investor group. The promissory notes were non-interest bearing
and were due on March 31, 1995. In connection with the notes payable, the
Company granted warrants to the participants in the bridge financing to purchase
74,998 shares of the Company's common stock at $3.00 per share. The warrants are
exercisable for five years from the date of grant.
Upon completion of the sale of convertible preferred stock, Series A in
1995 (see Note 4), bridge loans of $525,000 were converted into 174,998 shares
of convertible preferred stock at a price of $3.00 per share. In addition, the
Company issued warrants to the investors to purchase 58,335 shares of the
Company's common stock at $5.00 per share. The warrants are exercisable for
three years from the date of grant. During 1996, warrants to purchase 33,333
shares of common stock were exercised at $5.00 per share.
4. CAPITAL STOCK
From March 1995 to June 1995, the Company sold 500,000 shares of
convertible preferred stock, Series A at $3.00 per share in a private placement
for $1,500,000 less related costs of $60,000. The nondividend yielding shares of
convertible preferred stock are convertible into an equivalent number of shares
of common stock on March 31, 1996. Holders of shares of the convertible
preferred stock also received warrants to purchase 166,665 shares of the
Company's common stock at $5.00 per share. The warrants are exercisable for
three years from the date of grant. During 1996, warrants to purchase 33,333
shares of common stock were exercised at $5.00 per share. In addition, the
Company issued warrants to the underwriter to purchase 20,000 shares of the
Company's common stock at $3.00 per share. The warrants are exercisable for five
years from the date of grant. The Company issued additional warrants to the
underwriter to purchase 6,667 shares of the Company's common stock at $5.00 per
share. The warrants are exercisable for three years from the date of grant.
In December 1995, the Company sold 792,500 shares of convertible
preferred stock, Series B at $5.00 per share in a private placement for
$3,962,500 less related costs of $435,875. Holders of shares of the convertible
preferred stock also received warrants to purchase 264,175 shares of the
Company's common stock at $9.50 per share. The warrants are exercisable for
three years from the date of grant. In addition, the Company issued warrants to
the underwriter to purchase 79,250 shares of the Company's common stock at $5.00
per share. The warrants are exercisable for five years from the date of grant.
The Company issued additional warrants to the underwriter to purchase 26,418
shares of the Company's common stock at $9.50 per share, conditional upon
exercise of the previous warrant issued to the underwriter. The warrants are
exercisable for five years from the date of grant.
5. STOCK OPTIONS
The Company has one stock option plan under which selected employees
and non-employees may be granted incentive and non-qualified options to purchase
common stock of the Company. The options granted are exercisable over a period
of no longer than ten years and are granted at not less than 85% of the market
price on the date of the grant.
The following table summarizes the stock option activity for the plan:
<TABLE>
<CAPTION>
SHARES STOCK OPTIONS WEIGHTED AVERAGE
AVAILABLE FOR OUTSTANDING UNDER EXERCISE
GRANT THE PLANS PRICE PER SHARE
--------------------------------------------------------
<S> <C> <C> <C>
Balance December 31, 1993 89,518 401,572 $4.49
Options granted (459,000) 459,000 2.89
Options exercised - (30,000) 2.50
Options forfeited 140,700 (140,700) 4.53
Options canceled 89,600 (89,600) 2.65
-----------------------------------
Balance December 31, 1994 (139,182) 600,272 3.49
Amendment to plan 540,000
Options granted (320,000) 320,000 3.17
Options exercised - (148,000) 2.57
Options forfeited 5,000 (5,000) 3.00
Options canceled 5,000 (5,000) 2.50
Option plans terminated (30,890) -
-----------------------------------
Balance December 31, 1995 59,928 762,272 3.37
Amendment to plan 500,000
Options exercised - (46,200) 3.20
Options forfeited 35,493 (35,493) 5.00
Options granted (145,000) 145,000 6.73
-----------------------------------
Balance December 31, 1996 450,421 825,579 $3.95
===================================
</TABLE>
The weighted average fair value of options granted in 1996 and 1995 was
$4.93 and $3.12, respectively. The exercise price of options outstanding at
December 31, 1996 ranged from $2.50 to $11.25 per share, as summarized in the
following table:
<TABLE>
<CAPTION>
Shares Outstanding Weighted Average Weighted Average
Range of at December 31, Remaining Number of Exercise Price
Exercise Price 1996 Contractual Life Shares Exercisable Per Share
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2.50 to $ 5.00 676,000 2.41 years 555,736 $ 3.04
5.01 to 8.00 117,079 9.14 7,079 6.36
8.01 to 11.25 32,500 5.87 27,500 10.36
-------------------------------------------------------------------------------------
Total 825,579 3.50 years 590,315 $ 3.38
=====================================================================================
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of Statement 123. The
fair value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates ranging
from 5.9% to 6.3%; volatility factor of the expected market price of the
Company's common stock of .904 and a weighted-average expected life of the
option of five to seven years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which vest by one-third each year
from the date of the grant and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
1996 1995
----------------- -----------------
Pro forma net loss $1,846,282 $1,453,448
Pro forma net loss per share $.56 $.51
These pro forma amounts may not be indicative of future years' amounts
since the Statement provides for a phase-in of option values beginning with
those granted in 1995.
6. COMMITMENTS
The Company had an operating lease agreement for certain premises
within a building in Minneapolis, Minnesota that had a term which expired in
October 1996. The Company moved to a new location in Minneapolis during 1996 and
entered into a new building lease agreement that has a term extending through
October 2001. The new lease requires annual base rent of approximately $53,000
plus a sharing of certain expenses. Various other equipment operating leases
were also entered into during 1996 expiring during future years.
Future lease commitments are as follows:
1997 $ 65,000
1998 65,000
1999 62,000
2000 58,000
2001 49,000
-----------------
Total $299,000
=================
The Company incurred total lease and rental expenses of $45,000,
$36,000 and $37,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
In 1995, the Company entered into a clinical research agreement for up
to two years with a hospital. Under the terms of the agreement, the Company has
agreed to pay approximately $400,000 for the study, of which $200,000 and
$150,000 was charged to expense in 1996 and 1995, respectively.
The Company entered into a license agreement with Massachusetts
Institute of Technology (MIT) for the use of certain patents. Under terms of the
agreement, the Company has agreed to pay $50,000 a year through October 2003 and
$30,000 a year thereafter until the expiration of the patent rights. The
agreement can be terminated by MIT if the monthly payments are not made within
thirty days.
7. INCOME TAXES
The tax effect of the Company's deferred tax assets is as follows:
DECEMBER 31
1996 1995
--------------------------------------
Net operating loss carryforward $15,345,000 $14,616,000
Accounts receivable allowance - 18,000
Accrued liabilities 93,000 40,000
Inventory reserve 28,000 -
Tax credits 770,000 740,000
--------------------------------------
16,236,000 15,414,000
Valuation allowance (16,236,000) (15,414,000)
--------------------------------------
$ - $ -
======================================
At December 31, 1996, the Company had net operating loss carryforwards
of approximately $42,625,000 that expire at various times through the year 2011.
In addition, the Company has research and development tax credits that expire at
various times through 2011. As a result of previous stock transactions, the
Company is limited as to the amount of net operating loss and tax credit
carryforwards which may be utilized in any one year. The annual limitation is
approximately $1,000,000.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit sharing and savings plan covering
substantially all employees. The plan allows employees to defer up to 15% of
their annual earnings. The Company will match 50% of the first 6% of the
employee contributions. The contributions by the Company totaled approximately
$5,000, $4,000 and $4,000 for 1996, 1995 and 1994, respectively.
EXHIBIT 3.1 TO ANNUAL REPORT OF SPECTRASCIENCE, INC. ON
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996
ARTICLES OF INCORPORATION OF SPECTRASCIENCE, INC
INCLUDING AMENDMENTS
ARTICLES OF INCORPORATION
OF
SPECTRASCIENCE, INC.
The undersigned incorporator, a natural person 18 years of age or
older, in order to form a corporation under Minnesota Statutes, Section 302A,
hereby adopts the following Articles of Incorpration:
ARTICLE I
The name of this corporation is G V Medical, Inc.
ARTICLE I - AMENDED
The name of this corporation is SpectraScience, Inc.
ARTICLE II
The registered office of this corporation is located at 4200 IDS
Center, 80 South Eighth Street, Minneapolis, Minnesota 55402
ARTICLE II - AMENDED (a)
The registered office of this corporation is located at 3750 Annapolis
Lane, Minneapolis, Minnesota 55441
ARTICLE II - AMENDED (b)
The registered office of this corporation is located at 3750 Annapolis
Lane, Minneapolis, Minnesota 55447
ARTICLE II - AMENDED (c)
The registered office of this corporation is located at 5909 Baker
Road, Suite 580, Minnetonka, Minnesota 55345
ARTICLE III
The corporation is authorized to issue an aggregate total of 2,000,000
shares, par value of $.05 per share. All shares shall be of one class and one
series.
ARTICLE III - AMENDED (a)
The corporation is authorized to issue an aggregate total of 5,000,000
shares, par value of $.05 per share. All shares shall be of one class and one
series.
ARTICLE III - AMENDED (b)
CAPITAL STOCK
The authorized capital stock of this corporation shall be Twenty
Million (20,000,000) shares of common stock with a stated par value of twenty
five cents ($.05) per share (the "Common Stock") and Twenty Million (20,000,000)
shares of preferred stock with a stated par value of one dollar ($1.00) per
share (the "Preferred Stock"). The designation and the powers, preferences and
rights, and the qualifications, limitations or restrictions of the shares of
each class of stock shall be as follows:
SECTION 1. COMMON STOCK. Subject to all of the rights of the Preferred Stock,
and except as may be expressly provided with respect to the Preferred Stock
herein, by law or by the Board of Directors pursuant to this Article III:
(a) dividends may be declared and paid or set apart for payment upon
the Common Stock out of any assets or funds of the corporation legally
available for the payment of dividends;
(b) the holders of the Common Stock shall have the exclusive right to
vote for the election of directors and on all other matters requiring
stockholder action, each share being entitled to one vote; and
(c) upon the voluntary or involuntary liquidation, dissolution or
winding up of the corporation, the net assets of the corporation shall
be distributed pro rata to the holders of the Common Stock in
accordance with their respective share ownership.
SECTION 2. PREFERRED STOCK. The Preferred Stock may be issued from time to time
by the Board of Directors as shares of one or more series. Subject to the
provisions hereof and the limitations prescribed by law, the Board of Directors
is expressly authorized by adopting resolutions providing for the issuance of
shares of any particular series and, if and to the extent from time to time
required by law, by filing with the Minnesota Secretary of State a statement
with respect to the adoption of the resolutions pursuant to the Minnesota
Business Corporation Act (or other law hereafter in effect relating to the same
or substantially similar subject matter), to establish the number of shares to
be included in each such series and to fix the designation and relative powers,
preferences and rights and the qualifications and limitations or restrictions
thereof relating to the shares of each such series. The authority of the Board
of Directors with respect to each series shall include, but not be limited to,
determination of the following:
(a) the distinctive serial designation of such series and the number of
shares constituting such series, provided that the aggregate number of
shares constituting all series of Preferred Stock shall not exceed
Twenty Million (20,000,000);
(b) the annual dividend rate on shares of such series, if any, whether
dividends shall be cumulative and, if so, from which date or dates;
(c) whether the shares of such series shall be redeemable and, if so,
the terms and conditions of such redemption, including the date or
dates upon and after which such shares shall be redeemable, and the
amount per share payable in case of redemption, which amount may vary
under different conditions and at different redemption dates;
(d) the obligation, if any, of the corporation to retire shares of such
series pursuant to a sinking fund;
(e) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes and, if
so, the terms and conditions of such conversion or exchange, including
the price or prices or the rate or rates of conversion or exchange and
the terms of adjustment, if any;
(f) whether the shares of such series shall have voting rights provided
by law, and, if so, the terms of such voting rights;
(g) the rights of the shares of such series in the event of the
voluntary or involuntary liquidation, dissolution or winding up of the
corporation; and
(h) any other rights, powers, preferences, qualifications, limitations
or restrictions thereof relating to such series.
The shares of Preferred Stock of any one series shall be identical with
each other in all respects except as to the dates from and after which dividends
thereon shall cumulate, if cumulative.
ARTICLE III - AMENDED (c)
CAPITAL STOCK
The following text hereby replaces the first paragraph of Article III - Amended
(b):
The authorized capital stock of this corporation shall be Twenty
Million (20,000,000) shares of common stock with a stated par value of twenty
five cents ($.05) per share (the "Common Stock") and Twenty Million (20,000,000)
shares of preferred stock with a stated par value of one dollar ($1.00) per
share (the "Preferred Stock").
Effective as of 11:59 p.m. CDT on June 30, 1994, a one-for-five reverse
split of shares of Common Stock of the Corporation issued and outstanding
immediately prior to that time and date shall be and hereby is enacted, with
each holder of Common Stock of the Corporation of record as of 11:59 p.m. CDT on
June 30, 1994, to be deemed the owner of one share of Common Stock for every
three shares of Common Stock owned by such holder as of 11:59 p.m. CDT on June
30, 1994. Fractional shares of Common Stock shall not be issued and no payment
in lieu of fractional shares of Common Stock shall be made, but each fractional
share of Common Stock interest of .5 or more held by any one holder of Common
Stock shall be rounded up to the next higher full share, and each fractional
share of Common Stock interest of less than .5 held by any one holder of Common
Stock shall be rounded down to zero. Effective as of June 30, 1994, the stated
par value of the Common Stock shall be twenty-five cents ($.25) per share and
the number of authorized shares of Common Stock shall be reduced to four million
(4,000,000). The changes stated herein shall not adversely effect the rights or
preferences of the holders of outstanding shares of any class or series and
shall not result in the percentage of authorized shares that remains unissued
after the combination of shares of Common Stock exceeding the percentage of
authorized shares that were unissued before the combination. The designation and
the powers, preferences and rights, and the qualifications, limitations or
restrictions of the shares of each class of stock shall be as follows:
ARTICLE III AMENDED (d)
CAPITAL STOCK
The authorized capital stock of this corporation shall be Four Million
(4,000,000) shares of common stock with a stated par value of twenty five cents
($.25) per share (the "Common Stock") and Twenty Million (20,000,000) shares of
preferred stock with a stated par value of one dollar ($1.00) per share (the
"Preferred Stock"). The designation and the powers, preferences and rights, and
the qualifications, limitations or restrictions of the shares of each class of
stock shall be as follows:
SECTION 1. COMMON STOCK. Subject to all of the rights of the Preferred Stock,
and except as may be expressly provided with respect to the Preferred Stock
herein, by law or by the Board of Directors pursuant to this Article III:
(a) dividends may be declared and paid or set apart for payment upon
the Common Stock out of any assets or funds of the corporation legally
available for the payment of dividends;
(b) the holders of the Common Stock shall have the exclusive right to
vote for the election of directors and on all matters requiring
shareholder action, each share being entitled to one vote; and
(c) upon the voluntary or involuntary liquidation, dissolution or
winding up of the corporation, the net assets of the corporation shall
be distributed pro rata to the holders of the Common Stock in
accordance with their respective share ownership.
SECTION 2. PREFERRED STOCK. The Preferred Stock may be issued from time to time
by the Board of Directors as shares of one or more series. Subject to the
provisions hereof and the limitations prescribed by law, the Board of Directors
is expressly authorized by adopting resolutions providing for the issuance of
shares of any particular series and, if and to the extent from time to time
required by law, by filing with the Minnesota Secretary of State a statement
with respect to the adoption of the resolutions pursuant to the Minnesota
Business Corporation Act (or other law hereafter in effect relating to the same
or substantially similar subject matter), to establish the number of shares to
be included in each such series and to fix the designation and relative powers,
preferences and rights and the qualifications and limitations or restrictions
thereof relating to the shares of each such series. The authority of the Board
of Directors with respect to each series shall include, but not be limited to,
determination of the following:
(a) the distinctive serial designation of such series and the number of
shares constituting such series, provided that the aggregate number of
shares constituting all series of Preferred Stock shall not exceed
Twenty Million (20,000,000);
(b) the annual dividend rate on shares of such series, if any, whether
dividends shall be cumulative and, if so, from which date or
dates;
(c) whether the shares of such series shall be redeemable and, if so,
the terms and conditions of such redemption, including the date or
dates upon and after which such shares shall be redeemable, and the
amount per share payable in case of redemption, which amount may vary
under different conditions and at different redemption dates;
(d) the obligation, if any, of the corporation to retire shares of such
series pursuant to a sinking fund;
(e) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes and, if
so, the terms and conditions of such conversion or exchange, including
the price or prices or the rate or rates of conversion or exchange and
the terms of adjustment, if any;
(f) whether the shares of such series shall have voting rights provided
by law, and, if so, the terms of such voting rights;
(g) the rights of the shares of such series in the event of the
voluntary or involuntary liquidation, dissolution or winding up of the
corporation; and
(h) any other rights, powers, preferences, qualifications, limitations
or restrictions thereof relating to such series.
The shares of Preferred Stock of any one series shall be identical with
each other in all respects except as to the dates from and after which dividends
thereon shall cumulate, if cumulative. Although the Board of Directors may fix
and determine the relative rights and preferences among the various series of
Preferred Stock in accordance with the authority set forth above, in all other
respects, the shares of all series shall be of equal rank with each other,
regardless of series.
2.1 REDEMPTION AND CONVERSION. Any share of any series of Preferred Stock which
has been redeemed or converted shall have the status of an authorized and
unissued share of Preferred Stock and may be reissued as a part of the series of
which it was originally a part or may be reissued as part of another series of
Preferred Stock established by the Board of Directors.
2.2 PREFERENTIAL DISTRIBUTION IN LIQUIDATION. Upon the liquidation, dissolution
or winding up of the corporation, the holders of the Preferred Stock then
outstanding shall be entitled to receive the amount per share fixed for the
various series before any of the assets of the corporation are distributed to
the holders of the Common Stock. If the assets of the corporation distributable
to the holders of the Preferred Stock have a value which is less that the full
amount so fixed for the various series, such assets shall be distributed among
the holders of the various series of Preferred Stock in accordance with any
preferences among the series that may have been established or, to the extent
that no such preferences shall have been established, pro rata among the holders
of all of the series of Preferred Stock. After distribution of the preferential
amounts required to be distributed to the holders of the Preferred Stock then
outstanding, the holders of the Common Stock shall be entitled, to the exclusion
of the holders of the Preferred Stock unless otherwise provided, to share in all
the remaining assets of the corporation.
SERIES A CONVERTIBLE STOCK
There is hereby established and created an initial series of Preferred Stock in
the number of shares and having the designation, relative rights, preferences
and limitations as follows:
2.3 DESIGNATION AND NUMBER OF SHARES. The distinctive designation of the series
shall be "Series A Convertible Preferred Stock" (par value $ 1.00 per share)
herein sometimes referred to as the "Series A Preferred Stock") and the number
of shares initially constituting the series shall be 5,000,000.
2.4 DIVIDENDS. The Series A Preferred Stock shall bear no dividends.
2.5 PREFERENCES IN LIQUIDATION.
(a) PREFERENTIAL PAYMENT. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation, the holders
of shares of the Series A Preferred Stock then outstanding shall be
entitled to be paid according to their relationship with other holders
of Preferred Stock, out of the assets of the corporation available for
distribution to shareholders, whether from capital, surplus or
earnings, before any payment shall be made in respect of the
corporation's Common Stock, an amount equal to $1.00 per share. After
setting apart or paying in full the preferential amounts due the
holders of the Series A Preferred Stock and any other holders of
Preferred Stock, the remaining assets of the corporation available for
distribution to shareholders, if any, shall be distributed to the
holders of Common Stock unless otherwise provided. If upon liquidation,
dissolution or winding up of the corporation, the assets of the
corporation available for distribution to its shareholders shall be
insufficient to pay the holders of the Series A Preferred Stock the
full preferential distribution of $1 per share, the holders of the
Series A Preferred Stock shall share ratably in the distribution of
such assets.
(b) NOTICE. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the corporation, the corporation shall,
within 10 days after the date the Board of Directors approves such
action, or within 20 days prior to any shareholders' meeting called to
approve such action, or within 20 days after the commencement of any
involuntary proceeding, whichever is earlier, give each holder of
shares of Series A Preferred Stock initial written notice of the
proposed action. Such initial written notice shall describe the
material terms and conditions of the proposed action, including a
description of the stock, cash and property to be received by the
holders of shares of Series A Preferred Stock upon consummation of the
proposed action and the date of delivery thereof. If any material
change in the facts set forth in the initial notice shall occur, the
corporations shall promptly give written notice to each holder of
shares of Series A Preferred Stock of such material change.
2.6 VOTING RIGHTS. Except as otherwise provided by law or as expressly provided
herein, the Common Stock shall have exclusive voting rights and powers,
including the exclusive right to notice of shareholders' meetings.
2.7 CONVERSION RIGHTS.
(a) OPTIONAL CONVERSION. Shares of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after
March 31, 1996, (the "Conversion Period"), into fully paid and
nonassessable shares of Common Stock of the corporation.
(b) CONVERSION RATIO. Each share of Series A Preferred Stock shall be
converted into one share of the Common Stock of the corporation,
subject to adjustment as provided in paragraph 2.8 below.
(c) PROCEDURE FOR CONVERSION. The holder of any shares of Series A
Preferred Stock may exercise the conversion rights during the
Conversion Period as to such shares or any part thereof by delivering
to the corporation during regular business hours, at the office of any
transfer agent of the corporation for the Series A Preferred Stock, or
at the principal office of the corporation, the certificate or
certificates for the shares to be converted, duly endorsed for transfer
to the corporation, accompanied by written notice stating that the
holder elects to convert such shares or a part thereof. Conversion
shall be deemed to have been effected on the date when such delivery is
made, and such date is referred to herein as the "Conversion Date". As
promptly as practicable thereafter the corporation shall issue and
deliver to or upon the written order of such holder, at such office or
other place designated by the corporation, a certificate or
certificates for the number of full shares of Common Stock to which
such holder is entitled and a check for cash with respect to any
fractional interest in a share of Common Stock as provided in paragraph
2.7(d). The holder shall be deemed to have become a shareholder of
record on the applicable Conversion Date unless the transfer books of
the corporation are closed on such date, in which event he shall be
deemed to have become a shareholder of record on the next succeeding
date on which the transfer books are open, but the Conversion Ratio
shall be that in effect on the Conversion Date. Upon conversion of only
a portion of the number of shares of Series A Preferred Stock
represented by a certificate surrendered for conversion, the
corporation shall issue and deliver to or upon the written order of the
holder of the certificate so surrendered for conversion, at the expense
of the corporation, a new certificate covering the number of shares of
Series A Preferred Stock representing the unconverted portion of the
certificate so surrendered.
(d) FRACTIONAL SHARES. No fractional shares of Common Stock or scrip
shall be issued upon conversion of shares of Series A Preferred Stock.
If more than one share of Series A Preferred Stock shall be surrendered
for conversion at any one time by the same holder, the number of full
shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series A
Preferred Stock so surrendered. Instead of any fractional shares of
Common Stock which would otherwise be issuable upon conversion of any
shares of Series A Preferred Stock, the corporation shall pay a cash
adjustment in respect of such fractional interest equal to the fair
market value of such fractional interest as determined by the Board of
Directors.
(e) RESERVED SHARES. The corporation shall reserve and keep available,
out of its authorized but unissued Common Stock, solely for the purpose
of effecting the conversion of the Series A Preferred Stock, the full
number of shares of Common Stock deliverable upon the conversion of all
Series A Preferred Stock from time to time outstanding. The corporation
shall from time to time (subject to obtaining necessary director and
shareholder action) increase the authorized amount of its Common Stock
if at any time the authorized number of shares of its Common Stock
remaining unissued shall not be sufficient to permit the conversion of
all of the shares of Series A Preferred Stock at the time outstanding.
(f) REGISTRATION. If any shares of Common Stock to be reserved for the
purpose of shares of Series A Preferred Stock require registration or
listing with, or approval of, any governmental authority, stock
exchange, or other regulatory body under any federal or state law or
regulation or otherwise, before such shares may be validly issued or
delivered upon conversion, the corporation will in good faith and as
expeditiously as reasonable endeavor to secure such registration,
listing or approval, as the case may be.
(g) VALIDLY ISSUED. All shares of Common Stock which may be issued upon
conversion of the shares of Series A Preferred Stock will, upon
issuance by the corporation, be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect
to the issuance thereof.
(h) NEGATIVE COVENANTS. This corporation will not, by amendment of its
articles of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed thereunder, but will at all times in good faith assist in the
carrying out of all the provisions hereof and in the taking of such
action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series A Preferred Stock
against impairment. In addition, the corporation shall at no time issue
or sell any shares of its Common Stock or Preferred Stock, options or
warrants for a consideration less than fair market value, as reasonably
determined by the Board of Directors, except for grants or awards of
Common Stock or options to acquire Common Stock made to the
corporation's employees, officers, and directors and to consultants and
other participants in the corporation's stock option, stock award,
stock purchase and other benefit plans, provided such grants and awards
made after the date of the first issuance of the corporation's Series A
Preferred Stock shall not represent more than 10% of the then
outstanding shares of Common Stock of the corporation.
2.8 ANTIDILUTION. The Conversion Ratio (referred to in paragraph 2.7 (b)) shall
be subject to adjustment from time to time, and the number of shares of Common
Stock issuable on conversion of any shares of Series A Preferred Stock shall be
subject to a resultant increase or decrease (calculated to the nearest 1/100th
of a share) by reason of such adjustment, as hereafter stated, except that no
adjustment shall be made, unless by reason of the occurrence of one or more of
the events hereinafter specified, the Conversion Ratio theretofore in effect
shall be changed by an amount equal to at least 5% thereof, but in the event
that an adjustment would be required except of insufficiency of amount, such
amount shall be carried forward and added to and shall be made at the time of
and together with any subsequent adjustment which, together with any adjustment
or adjustments so carried forward, amount to at least 5% of the Conversion Ratio
at such later time:
(a) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In the event the
corporation shall declare a stock dividend with respect to its Common
Stock or shall effect a subdivision or combination of its Common Stock
into a greater or lesser number of shares without a proportionate and
corresponding stock dividend, subdivision or combination with respect
to its outstanding Series A Preferred Stock, then the existing
Conversion Ratio for the Series A Preferred Stock shall be increased or
decreased proportionately.
(b) CLASSIFICATION, RECLASSIFICATION, CAPITAL REORGANIZATION, ETC. In
the case of any classification, reclassification, capital
reorganization or other change of outstanding shares of Common Stock
(other than a change in par value, or from without par value to par
value, or from par value to without par value, or as a result of an
issuance of Common Stock by way of dividend or other distribution or of
a subdivision or combination), or in case of any consolidation or
merger of the corporation with or into another corporation (other than
a merger with a subsidiary in which the corporation is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of the Common
Stock issuable upon conversion of the shares of the Series A Preferred
Stock) or in case of any sale or conveyance to another corporation of
the property of the corporation as an entirety or substantially as an
entirety, the corporation shall cause the holders of the Series A
Preferred Stock to have the right, by exercising their conversion
rights thereunder, to purchase the kind and amount of shares of stock
and other securities and property receivable upon such
reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance, if any, which the holders of
the Series A Preferred Stock would have received had the conversion
taken place immediately prior to such event.
2.9 CHANGES AFFECTING SERIES A PREFERRED STOCK. So long as any shares of Series
A Preferred Stock are outstanding, the corporation shall not, without first
obtaining the approval by vote or written consent, in the manner provided by
law, of the holders of at least a majority of the total number of shares of
Series A Preferred Stock outstanding, voting separately as a class, (i) alter or
change any of the powers, preferences, privileges, or rights of the Series A
Preferred Stock; or (ii) amend the provisions of this paragraph 2.9; or (iii)
create any new class or series of shares having preferences prior to the Series
A Preferred Stock or reclassifying any class or series of any Common Stock or
any other shares of stock hereafter created junior to the Class A Preferred
Stock into shares having any preference or priority over the Series A Preferred
Stock.
ARTICLE III AMENDED (e)
CAPITAL STOCK
The authorized capital stock of this corporation shall be Four Million
(4,000,000) shares of common stock with a stated par value of twenty five cents
($.25) per share (the "Common Stock") and Twenty Million (20,000,000) shares of
preferred stock with a stated par value of one dollar ($1.00) per share (the
"Preferred Stock"). The designation and the powers, preferences and rights, and
the qualifications, limitations or restrictions of the shares of each class of
stock shall be as follows:
SECTION 1. COMMON STOCK. Subject to all of the rights of the Preferred Stock,
and except as may be expressly provided with respect to the Preferred Stock
herein, by law or by the Board of Directors pursuant to this Article III:
(a) dividends may be declared and paid or set apart for payment upon
the Common Stock out of any assets or funds of the corporation legally
available for the payment of dividends;
(b) the holders of the Common Stock shall have the exclusive right to
vote for the election of directors and on all matters requiring
shareholder action, each share being entitled to one vote; and
(c) upon the voluntary or involuntary liquidation, dissolution or
winding up of the corporation, the net assets of the corporation shall
be distributed pro rata to the holders of the Common Stock in
accordance with their respective share ownership.
SECTION 2. PREFERRED STOCK. The Preferred Stock may be issued from time to time
by the Board of Directors as shares of one or more series. Subject to the
provisions hereof and the limitations prescribed by law, the Board of Directors
is expressly authorized by adopting resolutions providing for the issuance of
shares of any particular series and, if and to the extent from time to time
required by law, by filing with the Minnesota Secretary of State a statement
with respect to the adoption of the resolutions pursuant to the Minnesota
Business Corporation Act (or other law hereafter in effect relating to the same
or substantially similar subject matter), to establish the number of shares to
be included in each such series and to fix the designation and relative powers,
preferences and rights and the qualifications and limitations or restrictions
thereof relating to the shares of each such series. The authority of the Board
of Directors with respect to each series shall include, but not be limited to,
determination of the following:
(a) the distinctive serial designation of such series and the number of
shares constituting such series, provided that the aggregate number of
shares constituting all series of Preferred Stock shall not exceed
Twenty Million (20,000,000);
(b) the annual dividend rate on shares of such series, if any, whether
dividends shall be cumulative and, if so, from which date or dates;
(c) whether the shares of such series shall be redeemable and, if so,
the terms and conditions of such redemption, including the date or
dates upon and after which such shares shall be redeemable, and the
amount per share payable in case of redemption, which amount may vary
under different conditions and at different redemption dates;
(d) the obligation, if any, of the corporation to retire shares of such
series pursuant to a sinking fund;
(e) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes and, if
so, the terms and conditions of such conversion or exchange, including
the price or prices or the rate or rates of conversion or exchange and
the terms of adjustment, if any;
(f) whether the shares of such series shall have voting rights provided
by law, and, if so, the terms of such voting rights;
(g) the rights of the shares of such series in the event of the
voluntary or involuntary liquidation, dissolution or winding up of the
corporation; and
(h) any other rights, powers, preferences, qualifications, limitations
or restrictions thereof relating to such series.
The shares of Preferred Stock of any one series shall be identical with
each other in all respects except as to the dates from and after which dividends
thereon shall cumulate, if cumulative. Although the Board of Directors may fix
and determine the relative rights and preferences among the various series of
Preferred Stock in accordance with the authority set forth above, in all other
respects, the shares of all series shall be of equal rank with each other,
regardless of series.
2.1 REDEMPTION AND CONVERSION. Any share of any series of Preferred Stock which
has been redeemed or converted shall have the status of an authorized and
unissued share of Preferred Stock and may be reissued as a part of the series of
which it was originally a part or may be reissued as part of another series of
Preferred Stock established by the Board of Directors.
2.2 PREFERENTIAL DISTRIBUTION IN LIQUIDATION. Upon the liquidation, dissolution
or winding up of the corporation, the holders of the Preferred Stock then
outstanding shall be entitled to receive the amount per share fixed for the
various series before any of the assets of the corporation are distributed to
the holders of the Common Stock. If the assets of the corporation distributable
to the holders of the Preferred Stock have a value which is less that the full
amount so fixed for the various series, such assets shall be distributed among
the holders of the various series of Preferred Stock in accordance with any
preferences among the series that may have been established or, to the extent
that no such preferences shall have been established, pro rata among the holders
of all of the series of Preferred Stock. After distribution of the preferential
amounts required to be distributed to the holders of the Preferred Stock then
outstanding, the holders of the Common Stock shall be entitled, to the exclusion
of the holders of the Preferred Stock unless otherwise provided, to share in all
the remaining assets of the corporation.
SERIES A CONVERTIBLE STOCK
There is hereby established and created an initial series of Preferred Stock in
the number of shares and having the designation, relative rights, preferences
and limitations as follows:
2.3 DESIGNATION AND NUMBER OF SHARES. The distinctive designation of the series
shall be "Series A Convertible Preferred Stock" (par value $ 1.00 per share)
herein sometimes referred to as the "Series A Preferred Stock") and the number
of shares initially constituting the series shall be 5,000,000.
2.4 DIVIDENDS. The Series A Preferred Stock shall bear no dividends.
2.5 PREFERENCES IN LIQUIDATION.
(a) PREFERENTIAL PAYMENT. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation, the holders
of shares of the Series A Preferred Stock then outstanding shall be
entitled to be paid according to their relationship with other holders
of Preferred Stock, out of the assets of the corporation available for
distribution to shareholders, whether from capital, surplus or
earnings, before any payment shall be made in respect of the
corporation's Common Stock, an amount equal to $1.00 per share. After
setting apart or paying in full the preferential amounts due the
holders of the Series A Preferred Stock and any other holders of
Preferred Stock, the remaining assets of the corporation available for
distribution to shareholders, if any, shall be distributed to the
holders of Common Stock unless otherwise provided. If upon liquidation,
dissolution or winding up of the corporation, the assets of the
corporation available for distribution to its shareholders shall be
insufficient to pay the holders of the Series A Preferred Stock the
full preferential distribution of $1 per share, the holders of the
Series A Preferred Stock shall share ratably in the distribution of
such assets.
(b) NOTICE. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the corporation, the corporation shall,
within 10 days after the date the Board of Directors approves such
action, or within 20 days prior to any shareholders' meeting called to
approve such action, or within 20 days after the commencement of any
involuntary proceeding, whichever is earlier, give each holder of
shares of Series A Preferred Stock initial written notice of the
proposed action. Such initial written notice shall describe the
material terms and conditions of the proposed action, including a
description of the stock, cash and property to be received by the
holders of shares of Series A Preferred Stock upon consummation of the
proposed action and the date of delivery thereof. If any material
change in the facts set forth in the initial notice shall occur, the
corporations shall promptly give written notice to each holder of
shares of Series A Preferred Stock of such material change.
2.6 VOTING RIGHTS. Except as otherwise provided by law or as expressly provided
herein, the Common Stock shall have exclusive voting rights and powers,
including the exclusive right to notice of shareholders' meetings.
2.7 CONVERSION RIGHTS.
(a) OPTIONAL CONVERSION. Shares of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after
March 31, 1996, (the "Conversion Period"), into fully paid and
nonassessable shares of Common Stock of the corporation.
(b) CONVERSION RATIO. Each share of Series A Preferred Stock shall be
converted into one share of the Common Stock of the corporation,
subject to adjustment as provided in paragraph 2.8 below.
(c) PROCEDURE FOR CONVERSION. The holder of any shares of Series A
Preferred Stock may exercise the conversion rights during the
Conversion Period as to such shares or any part thereof by delivering
to the corporation during regular business hours, at the office of any
transfer agent of the corporation for the Series A Preferred Stock, or
at the principal office of the corporation, the certificate or
certificates for the shares to be converted, duly endorsed for transfer
to the corporation, accompanied by written notice stating that the
holder elects to convert such shares or a part thereof. Conversion
shall be deemed to have been effected on the date when such delivery is
made, and such date is referred to herein as the "Conversion Date". As
promptly as practicable thereafter the corporation shall issue and
deliver to or upon the written order of such holder, at such office or
other place designated by the corporation, a certificate or
certificates for the number of full shares of Common Stock to which
such holder is entitled and a check for cash with respect to any
fractional interest in a share of Common Stock as provided in paragraph
2.7(d). The holder shall be deemed to have become a shareholder of
record on the applicable Conversion Date unless the transfer books of
the corporation are closed on such date, in which event he shall be
deemed to have become a shareholder of record on the next succeeding
date on which the transfer books are open, but the Conversion Ratio
shall be that in effect on the Conversion Date. Upon conversion of only
a portion of the number of shares of Series A Preferred Stock
represented by a certificate surrendered for conversion, the
corporation shall issue and deliver to or upon the written order of the
holder of the certificate so surrendered for conversion, at the expense
of the corporation, a new certificate covering the number of shares of
Series A Preferred Stock representing the unconverted portion of the
certificate so surrendered.
(d) FRACTIONAL SHARES. No fractional shares of Common Stock or scrip
shall be issued upon conversion of shares of Series A Preferred Stock.
If more than one share of Series A Preferred Stock shall be surrendered
for conversion at any one time by the same holder, the number of full
shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series A
Preferred Stock so surrendered. Instead of any fractional shares of
Common Stock which would otherwise be issuable upon conversion of any
shares of Series A Preferred Stock, the corporation shall pay a cash
adjustment in respect of such fractional interest equal to the fair
market value of such fractional interest as determined by the Board of
Directors.
(e) RESERVED SHARES. The corporation shall reserve and keep available,
out of its authorized but unissued Common Stock, solely for the purpose
of effecting the conversion of the Series A Preferred Stock, the full
number of shares of Common Stock deliverable upon the conversion of all
Series A Preferred Stock from time to time outstanding. The corporation
shall from time to time (subject to obtaining necessary director and
shareholder action) increase the authorized amount of its Common Stock
if at any time the authorized number of shares of its Common Stock
remaining unissued shall not be sufficient to permit the conversion of
all of the shares of Series A Preferred Stock at the time outstanding.
(f) REGISTRATION. If any shares of Common Stock to be reserved for the
purpose of shares of Series A Preferred Stock require registration or
listing with, or approval of, any governmental authority, stock
exchange, or other regulatory body under any federal or state law or
regulation or otherwise, before such shares may be validly issued or
delivered upon conversion, the corporation will in good faith and as
expeditiously as reasonable endeavor to secure such registration,
listing or approval, as the case may be.
(g) VALIDLY ISSUED. All shares of Common Stock which may be issued upon
conversion of the shares of Series A Preferred Stock will, upon
issuance by the corporation, be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect
to the issuance thereof.
(h) NEGATIVE COVENANTS. This corporation will not, by amendment of its
articles of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed thereunder, but will at all times in good faith assist in the
carrying out of all the provisions hereof and in the taking of such
action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series A Preferred Stock
against impairment. In addition, the corporation shall at no time issue
or sell any shares of its Common Stock or Preferred Stock, options or
warrants for a consideration less than fair market value, as reasonably
determined by the Board of Directors, except for grants or awards of
Common Stock or options to acquire Common Stock made to the
corporation's employees, officers, and directors and to consultants and
other participants in the corporation's stock option, stock award,
stock purchase and other benefit plans, provided such grants and awards
made after the date of the first issuance of the corporation's Series A
Preferred Stock shall not represent more than 10% of the then
outstanding shares of Common Stock of the corporation.
2.8 ANTIDILUTION. The Conversion Ratio (referred to in paragraph 2.7 (b) shall
be subject to adjustment from time to time, and the number of shares of Common
Stock issuable on conversion of any shares of Series A Preferred Stock shall be
subject to a resultant increase or decrease (calculated to the nearest 1/100th
of a share) by reason of such adjustment, as hereafter stated, except that no
adjustment shall be made, unless by reason of the occurrence of one or more of
the events hereinafter specified, the Conversion Ratio theretofore in effect
shall be changed by an amount equal to at least 5% thereof, but in the event
that an adjustment would be required except of insufficiency of amount, such
amount shall be carried forward and added to and shall be made at the time of
and together with any subsequent adjustment which, together with any adjustment
or adjustments so carried forward, amount to at least 5% of the Conversion Ratio
at such later time:
(a) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In the event the
corporation shall declare a stock dividend with respect to its Common
Stock or shall effect a subdivision or combination of its Common Stock
into a greater or lesser number of shares without a proportionate and
corresponding stock dividend, subdivision or combination with respect
to its outstanding Series A Preferred Stock, then the existing
Conversion Ratio for the Series A Preferred Stock shall be increased or
decreased proportionately.
(b) CLASSIFICATION, RECLASSIFICATION, CAPITAL REORGANIZATION, ETC. In
the case of any classification, reclassification, capital
reorganization or other change of outstanding shares of Common Stock
(other than a change in par value, or from without par value to par
value, or from par value to without par value, or as a result of an
issuance of Common Stock by way of dividend or other distribution or of
a subdivision or combination), or in case of any consolidation or
merger of the corporation with or into another corporation (other than
a merger with a subsidiary in which the corporation is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of the Common
Stock issuable upon conversion of the shares of the Series A Preferred
Stock) or in case of any sale or conveyance to another corporation of
the property of the corporation as an entirety or substantially as an
entirety, the corporation shall cause the holders of the Series A
Preferred Stock to have the right, by exercising their conversion
rights thereunder, to purchase the kind and amount of shares of stock
and other securities and property receivable upon such
reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance, if any, which the holders of
the Series A Preferred Stock would have received had the conversion
taken place immediately prior to such event.
2.9 CHANGES AFFECTING SERIES A PREFERRED STOCK. So long as any shares of Series
A Preferred Stock are outstanding, the corporation shall not, without first
obtaining the approval by vote or written consent, in the manner provided by
law, of the holders of at least a majority of the total number of shares of
Series A Preferred Stock outstanding, voting separately as a class, (i) alter or
change any of the powers, preferences, privileges, or rights of the Series A
Preferred Stock; or (ii) amend the provisions of this paragraph 2.9; or (iii)
create any new class or series of shares having preferences prior to the Series
A Preferred Stock or reclassifying any class or series of any Common Stock or
any other shares of stock hereafter created junior to the Class A Preferred
Stock into shares having any preference or priority over the Series A Preferred
Stock.
SERIES B CONVERTIBLE STOCK
There is hereby established and created a second series of Preferred Stock in
the number of shares and having the designation, relative rights, preferences
and limitations as follows:
2.10 DESIGNATION AND NUMBER OF SHARES. The distinctive designation of the series
shall be "Series B Convertible Preferred Stock" (par value $ 1.00 per share)
herein sometimes referred to as the "Series B Preferred Stock") and the number
of shares initially constituting the series shall be 1,000,000.
2.11 DIVIDENDS. Except as provided below, the Series B Preferred Stock shall
bear no dividends. In the event that the corporation has not increased the
number of authorized shares of its Common Stock to the extent sufficient to
enable the corporation to reserve a number of shares of Common Stock sufficient
to cover the conversion of the shares of Series B Preferred Stock and the
exercise of all Warrants issued in connection with the offering of the Series B
Preferred Stock by December 15, 1996, the Series B Preferred Stock shall bear an
8% cumulative annual dividend, payable quarterly, commencing upon the
corporation's failure to satisfy such condition and terminating on the date
compliance with such condition is satisfied.
2.12 PREFERENCES IN LIQUIDATION.
(a) PREFERENTIAL PAYMENT. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation, the holders
of shares of the Series B Preferred Stock then outstanding shall be
entitled to be paid according to their relationship with other holders
of Preferred Stock, out of the assets of the corporation available for
distribution to shareholders, PARI PASSU, whether from capital, surplus
or earnings, before any payment shall be made in respect of the
corporation's Common Stock, an amount equal to $1.00 per share. After
setting apart or paying in full the preferential amounts due the
holders of the Series B Preferred Stock and any other holders of
Preferred Stock, the remaining assets of the corporation available for
distribution to shareholders, if any, shall be distributed to the
holders of Common Stock unless otherwise provided. If upon liquidation,
dissolution or winding up of the corporation, the assets of the
corporation available for distribution to its shareholders shall be
insufficient to pay the holders of the Series B Preferred Stock the
full preferential distribution of $1 per share, the holders of the
Series B Preferred Stock shall share ratably in the distribution of
such assets.
(b) NOTICE. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the corporation, the corporation shall,
within 10 days after the date the Board of Directors approves such
action, or within 20 days prior to any shareholders' meeting called to
approve such action, or within 20 days after the commencement of any
involuntary proceeding, whichever is earlier, give each holder of
shares of Series B Preferred Stock initial written notice of the
proposed action. Such initial written notice shall describe the
material terms and conditions of the proposed action, including a
description of the stock, cash and property to be received by the
holders of shares of Series B Preferred Stock upon consummation of the
proposed action and the date of delivery thereof. If any material
change in the facts set forth in the initial notice shall occur, the
corporations shall promptly give written notice to each holder of
shares of Series B Preferred Stock of such material change.
2.13 VOTING RIGHTS. Except as otherwise provided by law or as expressly provided
herein, the Common Stock shall have exclusive voting rights and powers,
including the exclusive right to notice shareholders' meetings.
2.14 CONVERSION RIGHTS.
(a) OPTIONAL CONVERSION. Shares of Series B Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after
December 28, 1996 (the "Conversion Period"), into fully paid and
nonassessable shares of Common Stock of the corporation.
(b) CONVERSION RATIO. Each share of Series B Preferred Stock shall be
converted into one share of the Common Stock of the corporation,
subject to adjustment as provided in paragraph 2.15 below.
(c) PROCEDURE FOR CONVERSION. The holder of any shares of Series B
Preferred Stock may exercise the conversion rights during the
Conversion Period as to such shares or any part thereof by delivering
to the corporation during regular business hours, at the office of any
transfer agent of the corporation for the Series B Preferred Stock, or
at the principal office of the corporation, the certificate or
certificates for the shares to be converted, duly endorsed for transfer
to the corporation, accompanied by written notice stating that the
holder elects to convert such shares or a part thereof. Conversion
shall be deemed to have been effected on the date when such delivery is
made, and such date is referred to herein as the "Conversion Date". As
promptly as practicable thereafter the corporation shall issue and
deliver to or upon the written order of such holder, at such office or
other place designated by the corporation, a certificate or
certificates for the number of full shares of Common Stock to which
such holder is entitled and a check for cash with respect to any
fractional interest in a share of Common Stock as provided in paragraph
2.14(d). The holder shall be deemed to have become a shareholder of
record on the applicable Conversion Date unless the transfer books of
the corporation are closed on such date, in which event he shall be
deemed to have become a shareholder of record on the next succeeding
date on which the transfer books are open, but the Conversion Ratio
shall be that in effect on the Conversion Date. Upon conversion of only
a portion of the number of shares of Series B Preferred Stock
represented by a certificate surrendered for conversion, the
corporation shall issue and deliver to or upon the written order of the
holder of the certificate so surrendered for conversion, at the expense
of the corporation, a new certificate covering the number of shares of
Series B Preferred Stock representing the unconverted portion of the
certificate so surrendered.
(d) FRACTIONAL SHARES. No fractional shares of Common Stock or scrip
shall be issued upon conversion of shares of Series B Preferred Stock.
If more than one share of Series B Preferred Stock shall be surrendered
for conversion at any one time by the same holder, the number of full
shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series B
Preferred Stock so surrendered. Instead of any fractional shares of
Common Stock which would otherwise be issuable upon conversion of any
shares of Series B Preferred Stock, the corporation shall pay a cash
adjustment in respect of such fractional interest equal to the fair
market value of such fractional interest as determined by the Board of
Directors.
(e) RESERVED SHARES. The corporation shall reserve and keep available,
out of its authorized but unissued Common Stock, solely for the purpose
of effecting the conversion of the Series B Preferred Stock, the full
number of shares of Common Stock deliverable upon the conversion of all
Series B Preferred Stock from time to time outstanding. The corporation
shall from time to time (subject to obtaining necessary director and
shareholder action) increase the authorized amount of its Common Stock
if at any time the authorized number of shares of its Common Stock
remaining unissued shall not be sufficient to permit the conversion of
all of the shares of Series B Preferred Stock at the time outstanding.
(f) REGISTRATION. If any shares of Common Stock to be reserved for the
purpose of shares of Series B Preferred Stock require registration or
listing with, or approval of, any governmental authority, stock
exchange, or other regulatory body under any federal or state law or
regulation or otherwise, before such shares may be validly issued or
delivered upon conversion, the corporation will in good faith and as
expeditiously as reasonable endeavor to secure such registration,
listing or approval, as the case may be.
(g) VALIDLY ISSUED. All shares of Common Stock which may be issued upon
conversion of the shares of Series B Preferred Stock will, upon
issuance by the corporation, be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect
to the issuance thereof.
(h) NEGATIVE COVENANTS. This corporation will not, by amendment of its
articles of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed thereunder, but will at all times in good faith assist in the
carrying out of all the provisions hereof and in the taking of such
action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series B Preferred Stock
against impairment.
2.15 ANTIDILUTION. The Conversion Ratio (referred to in paragraph 2.14 (b))
shall be subject to adjustment from time to time, and the number of shares of
Common Stock issuable on conversion of any shares of Series B Preferred Stock
shall be subject to a resultant increase or decrease (calculated to the nearest
1/100th of a share) by reason of such adjustment, as hereafter stated, except
that no adjustment shall be made, unless by reason of the occurrence of one or
more of the events hereinafter specified, the Conversion Ratio theretofore in
effect shall be changed by an amount equal to at least 5% thereof, but in the
event that an adjustment would be required except of insufficiency of amount,
such amount shall be carried forward and added to and shall be made at the time
of and together with any subsequent adjustment which, together with any
adjustment or adjustments so carried forward, amount to at least 5% of the
Conversion Ratio at such later time.
(a) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In the event the
corporation shall declare a stock dividend with respect to its Common
Stock or shall effect a subdivision or combination of its Common Stock
into a greater or lesser number of shares without a proportionate and
corresponding stock dividend, subdivision or combination with respect
to its outstanding Series B Preferred Stock, then the existing
Conversion Ratio for the Series B Preferred Stock shall be increased or
decreased proportionately.
(b) CLASSIFICATION, RECLASSIFICATION, CAPITAL REORGANIZATION, ETC. In
the case of any classification, reclassification, capital
reorganization or other change of outstanding shares of Common Stock
(other than a change in par value, or from without par value to par
value, or from par value to without par value, or as a result of an
issuance of Common Stock by way of dividend or other distribution or of
a subdivision or combination), or in case of any consolidation or
merger of the corporation with or into another corporation (other than
a merger with a subsidiary in which the corporation is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of the Common
Stock issuable upon conversion of the shares of the Series B Preferred
Stock) or in case of any sale or conveyance to another corporation of
the property of the corporation as an entirety or substantially as an
entirety, the corporation shall cause the holders of the Series B
Preferred Stock to have the right, by exercising their conversion
rights thereunder, to purchase the kind and amount of shares of stock
and other securities and property receivable upon such
reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance, if any, which the holders of
the Series B Preferred Stock would have received had the conversion
taken place immediately prior to such event.
2.16 CHANGES AFFECTING SERIES B PREFERRED STOCK So long as any shares of Series
B Preferred Stock are outstanding, the corporation shall not, without first
obtaining the approval by vote or written consent, in the manner provided by
law, of the holders of at least a majority of the total number of shares of
Series B Preferred Stock outstanding, voting separately as a class, (i) alter or
change any of the powers, preferences, privileges, or rights of the Series B
Preferred Stock; or (ii) amend the provisions of this paragraph 2.16; or (iii)
create any new class or series of shares having preferences prior to the Series
B Preferred Stock or reclassifying any class or series of any Common Stock or
any other shares of stock hereafter created junior to the Class B Preferred
Stock into shares having any preference or priority over the Series B Preferred
Stock.
ARTICLE III AMENDED (e)
AMENDED ON MARCH 28, 1996
CAPITAL STOCK
The authorized capital stock of this corporation shall be Ten Million
(10,000,000) shares of common stock with a stated par value of twenty five cents
$ (.25) per share (the "Common Stock") and Twenty Million (20,000,000) shares of
preferred stock with a stated par value of one dollar $ (1.00) per share (the
"Preferred Stock"). The designation and the powers, preferences and rights, and
the qualifications, limitations or restrictions of the shares of each class of
stock shall be as follows:
SECTION 1. COMMON STOCK. Subject to all of the rights of the Preferred Stock,
and except as may be expressly provided with respect to the Preferred Stock
herein, by law or by the Board of Directors pursuant to this Article III:
(a) dividends may be declared and paid or set apart for payment upon
the Common Stock out of any assets or funds of the corporation legally
available for the payment of dividends;
(b) the holders of the Common Stock shall have the exclusive right to
vote for the election of directors and on all matters requiring
stockholder action, each share being entitled to one vote; and
(c) upon the voluntary or involuntary liquidation, dissolution or
winding up of the corporation, the net assets of the corporation shall
be distributed pro rata to the holders of the Common Stock in
accordance with their respective share ownership.
SECTION 2. PREFERRED STOCK. The Preferred Stock may be issued from time to time
by the Board of Directors as shares of one or more series. Subject to the
provisions hereof and the limitations prescribed by law, the Board of Directors
is expressly authorized by adopting resolutions providing for the issuance of
shares of any particular series and, if and to the extent from time to time
required by law, by filing with the Minnesota Secretary of State a statement
with respect to the adoption of the resolutions pursuant to the Minnesota
Business Corporation Act (or other law hereafter in effect relating to the same
or substantially similar subject matter), to establish the number of shares to
be included in each such series and to fix the designation and relative powers,
preferences and rights and the qualifications and limitations or restrictions
thereof relating to the shares of each such series. The authority of the Board
of Directors with respect to each series shall include, but not be limited to,
determination of the following:
(a) the distinctive serial designation of such series and the number of
shares constituting such series, provided that the aggregate number of
shares constituting all series of Preferred Stock shall not exceed
Twenty Million (20,000,000);
(b) the annual dividend rate on shares of such series, if any, whether
dividends shall be cumulative and, if so, from which date or dates;
(c) whether the shares of such series shall be redeemable and, if so,
the terms and conditions of such redemption, including the date or
dates upon and after which such shares shall be redeemable, and the
amount per share payable in case of redemption, which amount may vary
under different conditions and at different redemption dates;
(d) the obligation, if any, of the corporation to retire shares of such
series pursuant to a sinking fund;
(e) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes and, if
so, the terms and conditions of such conversion or exchange, including
the price or prices or the rate or rates of conversion or exchange and
the terms of adjustment, if any;
(f) whether the shares of such series shall have voting rights provided
by law, and, if so, the terms of such voting rights;
(g) the rights of the shares of such series in the event of the
voluntary or involuntary liquidation, dissolution or winding up of the
corporation; and
(h) any other rights, powers, preferences, qualifications, limitations
or restrictions thereof relating to such series.
The shares of Preferred Stock of any one series shall be identical with
each other in all respects except as to the dates from and after which dividends
thereon shall cumulate, if cumulative. Although the Board of Directors may fix
and determine the relative rights and preferences among the various series of
Preferred Stock in accordance with the authority set forth above, in all other
respects, the shares of all series shall be of equal rank with each other,
regardless of series.
2.1 REDEMPTION AND CONVERSION. Any share of any series of Preferred Stock which
has been redeemed or converted shall have the status of an authorized and
unissued share of Preferred Stock and may be reissued as a part of the series of
which it was originally a part or may be reissued as part of another series of
Preferred Stock established by the Board of Directors.
2.2 PREFERENTIAL DISTRIBUTION IN LIQUIDATION. Upon the liquidation, dissolution
or winding up of the corporation, the holders of the Preferred Stock then
outstanding shall be entitled to receive the amount per share fixed for the
various series before any of the assets of the corporation are distributed to
the holders of the Common Stock. If the assets of the corporation distributable
to the holders of the Preferred Stock have a value which is less that the full
amount so fixed for the various series, such assets shall be distributed among
the holders of the various series of Preferred Stock in accordance with any
preferences among the series that may have been established or, to the extent
that no such preferences shall have been established, pro rata among the holders
of all of the series of Preferred Stock. After distribution of the preferential
amounts required to be distributed to the holders of the Preferred Stock then
outstanding, the holders of the Common Stock shall be entitled, to the exclusion
of the holders of the Preferred Stock unless otherwise provided, to share in all
the remaining assets of the corporation.
SERIES A CONVERTIBLE STOCK
There is hereby established and created an initial series of Preferred Stock in
the number of shares and having the designation, relative rights, preferences
and limitations as follows:
2.3 DESIGNATION AND NUMBER OF SHARES. The distinctive designation of the series
shall be "Series A Convertible Preferred Stock" (par value $ 1.00 per share)
herein sometimes referred to as the "Series A Preferred Stock") and the number
of shares initially constituting the series shall be 5,000,000.
2.4 DIVIDENDS. The Series A Preferred Stock shall bear no dividends.
2.5 PREFERENCES IN LIQUIDATION.
(a) PREFERENTIAL PAYMENT. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation, the holders
of shares of the Series A Preferred Stock then outstanding shall be
entitled to be paid according to their relationship with other holders
of Preferred Stock, out of the assets of the corporation available for
distribution to shareholders, whether from capital, surplus or
earnings, before any payment shall be made in respect of the
corporation's Common Stock, an amount equal to $1.00 per share. After
setting apart or paying in full the preferential amounts due the
holders of the Series A Preferred Stock and any other holders of
Preferred Stock, the remaining assets of the corporation available for
distribution to shareholders, if any, shall be distributed to the
holders of Common Stock unless otherwise provided. If upon liquidation,
dissolution or winding up of the corporation, the assets of the
corporation available for distribution to its shareholders shall be
insufficient to pay the holders of the Series A Preferred Stock the
full preferential distribution of $1 per share, the holders of the
Series A Preferred Stock shall share ratably in the distribution of
such assets.
(b) NOTICE. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the corporation, the corporation shall,
within 10 days after the date the Board of Directors approves such
action, or within 20 days prior to any shareholders' meeting called to
approve such action, or within 20 days after the commencement of any
involuntary proceeding, whichever is earlier, give each holder of
shares of Series A Preferred Stock initial written notice of the
proposed action. Such initial written notice shall describe the
material terms and conditions of the proposed action, including a
description of the stock, cash and property to be received by the
holders of shares of Series A Preferred Stock upon consummation of the
proposed action and the date of delivery thereof. If any material
change in the facts set forth in the initial notice shall occur, the
corporations shall promptly give written notice to each holder of
shares of Series A Preferred Stock of such material change.
2.6 VOTING RIGHTS. Except as otherwise provided by law or as expressly provided
herein, the Common Stock shall have exclusive voting rights and powers,
including the exclusive right to notice of shareholders' meetings.
2.7 CONVERSION RIGHTS.
(a) OPTIONAL CONVERSION. Shares of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after
March 31, 1996, (the "Conversion Period"), into fully paid and
nonassessable shares of Common Stock of the corporation.
(b) CONVERSION RATIO. Each share of Series A Preferred Stock shall be
converted into one share of the Common Stock of the corporation,
subject to adjustment as provided in paragraph 2.8 below.
(c) PROCEDURE FOR CONVERSION. The holder of any shares of Series A
Preferred Stock may exercise the conversion rights during the
Conversion Period as to such shares or any part thereof by delivering
to the corporation during regular business hours, at the office of any
transfer agent of the corporation for the Series A Preferred Stock, or
at the principal office of the corporation, the certificate or
certificates for the shares to be converted, duly endorsed for transfer
to the corporation, accompanied by written notice stating that the
holder elects to convert such shares or a part thereof. Conversion
shall be deemed to have been effected on the date when such delivery is
made, and such date is referred to herein as the "Conversion Date". As
promptly as practicable thereafter the corporation shall issue and
deliver to or upon the written order of such holder, at such office or
other place designated by the corporation, a certificate or
certificates for the number of full shares of Common Stock to which
such holder is entitled and a check for cash with respect to any
fractional interest in a share of Common Stock as provided in paragraph
2.7(d). The holder shall be deemed to have become a shareholder of
record on the applicable Conversion Date unless the transfer books of
the corporation are closed on such date, in which event he shall be
deemed to have become a shareholder of record on the next succeeding
date on which the transfer books are open, but the Conversion Ratio
shall be that in effect on the Conversion Date. Upon conversion of only
a portion of the number of shares of Series A Preferred Stock
represented by a certificate surrendered for conversion, the
corporation shall issue and deliver to or upon the written order of the
holder of the certificate so surrendered for conversion, at the expense
of the corporation, a new certificate covering the number of shares of
Series A Preferred Stock representing the unconverted portion of the
certificate so surrendered.
(d) FRACTIONAL SHARES. No fractional shares of Common Stock or scrip
shall be issued upon conversion of shares of Series A Preferred Stock.
If more than one share of Series A Preferred Stock shall be surrendered
for conversion at any one time by the same holder, the number of full
shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series A
Preferred Stock so surrendered. Instead of any fractional shares of
Common Stock which would otherwise be issuable upon conversion of any
shares of Series A Preferred Stock, the corporation shall pay a cash
adjustment in respect of such fractional interest equal to the fair
market value of such fractional interest as determined by the Board of
Directors.
(e) RESERVED SHARES. The corporation shall reserve and keep available,
out of its authorized but unissued Common Stock, solely for the purpose
of effecting the conversion of the Series A Preferred Stock, the full
number of shares of Common Stock deliverable upon the conversion of all
Series A Preferred Stock from time to time outstanding. The corporation
shall from time to time (subject to obtaining necessary director and
shareholder action) increase the authorized amount of its Common Stock
if at any time the authorized number of shares of its Common Stock
remaining unissued shall not be sufficient to permit the conversion of
all of the shares of Series A Preferred Stock at the time outstanding.
(f) REGISTRATION. If any shares of Common Stock to be reserved for the
purpose of shares of Series A Preferred Stock require registration or
listing with, or approval of, any governmental authority, stock
exchange, or other regulatory body under any federal or state law or
regulation or otherwise, before such shares may be validly issued or
delivered upon conversion, the corporation will in good faith and as
expeditiously as reasonable endeavor to secure such registration,
listing or approval, as the case may be.
(g) VALIDLY ISSUED. All shares of Common Stock which may be issued upon
conversion of the shares of Series A Preferred Stock will, upon
issuance by the corporation, be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect
to the issuance thereof.
(h) NEGATIVE COVENANTS. This corporation will not, by amendment of its
articles of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed thereunder, but will at all times in good faith assist in the
carrying out of all the provisions hereof and in the taking of such
action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series A Preferred Stock
against impairment. In addition, the corporation shall at no time issue
or sell any shares of its Common Stock or Preferred Stock, options or
warrants for a consideration less than fair market value, as reasonably
determined by the Board of Directors, except for grants or awards of
Common Stock or options to acquire Common Stock made to the
corporation's employees, officers, and directors and to consultants and
other participants in the corporation's stock option, stock award,
stock purchase and other benefit plans, provided such grants and awards
made after the date of the first issuance of the corporation's Series A
Preferred Stock shall not represent more than 10% of the then
outstanding shares of Common Stock of the corporation.
2.8 ANTIDILUTION. The Conversion Ratio (referred to in paragraph 2.7 (b)) shall
be subject to adjustment from time to time, and the number of shares of Common
Stock issuable on conversion of any shares of Series A Preferred Stock shall be
subject to a resultant increase or decrease (calculated to the nearest 1/100th
of a share) by reason of such adjustment, as hereafter stated, except that no
adjustment shall be made, unless by reason of the occurrence of one or more of
the events hereinafter specified, the Conversion Ratio theretofore in effect
shall be changed by an amount equal to at least 5% thereof, but in the event
that an adjustment would be required except of insufficiency of amount, such
amount shall be carried forward and added to and shall be made at the time of
and together with any subsequent adjustment which, together with any adjustment
or adjustments so carried forward, amount to at least 5% of the Conversion Ratio
at such later time:
(a) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In the event the
corporation shall declare a stock dividend with respect to its Common
Stock or shall effect a subdivision or combination of its Common Stock
into a greater or lesser number of shares without a proportionate and
corresponding stock dividend, subdivision or combination with respect
to its outstanding Series A Preferred Stock, then the existing
Conversion Ratio for the Series A Preferred Stock shall be increased or
decreased proportionately.
(b) CLASSIFICATION, RECLASSIFICATION, CAPITAL REORGANIZATION, ETC. In
the case of any classification, reclassification, capital
reorganization or other change of outstanding shares of Common Stock
(other than a change in par value, or from without par value to par
value, or from par value to without par value, or as a result of an
issuance of Common Stock by way of dividend or other distribution or of
a subdivision or combination), or in case of any consolidation or
merger of the corporation with or into another corporation (other than
a merger with a subsidiary in which the corporation is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of the Common
Stock issuable upon conversion of the shares of the Series A Preferred
Stock) or in case of any sale or conveyance to another corporation of
the property of the corporation as an entirety or substantially as an
entirety, the corporation shall cause the holders of the Series A
Preferred Stock to have the right, by exercising their conversion
rights thereunder, to purchase the kind and amount of shares of stock
and other securities and property receivable upon such
reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance, if any, which the holders of
the Series A Preferred Stock would have received had the conversion
taken place immediately prior to such event.
2.9 CHANGES AFFECTING SERIES A PREFERRED STOCK. So long as any shares of Series
A Preferred Stock are outstanding, the corporation shall not, without first
obtaining the approval by vote or written consent, in the manner provided by
law, of the holders of at least a majority of the total number of shares of
Series A Preferred Stock outstanding, voting separately as a class, (i) alter or
change any of the powers, preferences, privileges, or rights of the Series A
Preferred Stock; or (ii) amend the provisions of this paragraph 2.9; or (iii)
create any new class or series of shares having preferences prior to the Series
A Preferred Stock or reclassifying any class or series of any Common Stock or
any other shares of stock hereafter created junior to the Class A Preferred
Stock into shares having any preference or priority over the Series A Preferred
Stock.
SERIES B CONVERTIBLE STOCK
There is hereby established and created a second series of Preferred Stock in
the number of shares and having the designation, relative rights, preferences
and limitations as follows:
2.10 DESIGNATION AND NUMBER OF SHARES. The distinctive designation of the series
shall be "Series B Convertible Preferred Stock" (par value $ 1.00 per share)
herein sometimes referred to as the "Series B Preferred Stock") and the number
of shares initially constituting the series shall be 1,000,000.
2.11 DIVIDENDS. Except as provided below, the Series B Preferred Stock shall
bear no dividends. In the event that the corporation has not increased the
number of authorized shares of its Common Stock to the extent sufficient to
enable the corporation to reserve a number of shares of Common Stock sufficient
to cover the conversion of the shares of Series B Preferred Stock and the
exercise of all Warrants issued in connection with the offering of the Series B
Preferred Stock by December 15, 1996, the Series B Preferred Stock shall bear an
8% cumulative annual dividend, payable quarterly, commencing upon the
corporation's failure to satisfy such condition and terminating on the date
compliance with such condition is satisfied.
2.12 PREFERENCES IN LIQUIDATION.
(a) PREFERENTIAL PAYMENT. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation, the holders
of shares of the Series B Preferred Stock then outstanding shall be
entitled to be paid according to their relationship with other holders
of Preferred Stock, out of the assets of the corporation available for
distribution to shareholders, PARI PASSU, whether from capital, surplus
or earnings, before any payment shall be made in respect of the
corporation's Common Stock, an amount equal to $1.00 per share. After
setting apart or paying in full the preferential amounts due the
holders of the Series B Preferred Stock and any other holders of
Preferred Stock, the remaining assets of the corporation available for
distribution to shareholders, if any, shall be distributed to the
holders of Common Stock unless otherwise provided. If upon liquidation,
dissolution or winding up of the corporation, the assets of the
corporation available for distribution to its shareholders shall be
insufficient to pay the holders of the Series B Preferred Stock the
full preferential distribution of $1 per share, the holders of the
Series B Preferred Stock shall share ratably in the distribution of
such assets.
(b) NOTICE. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the corporation, the corporation shall,
within 10 days after the date the Board of Directors approves such
action, or within 20 days prior to any shareholders' meeting called to
approve such action, or within 20 days after the commencement of any
involuntary proceeding, whichever is earlier, give each holder of
shares of Series B Preferred Stock initial written notice of the
proposed action. Such initial written notice shall describe the
material terms and conditions of the proposed action, including a
description of the stock, cash and property to be received by the
holders of shares of Series B Preferred Stock upon consummation of the
proposed action and the date of delivery thereof. If any material
change in the facts set forth in the initial notice shall occur, the
corporations shall promptly give written notice to each holder of
shares of Series B Preferred Stock of such material change.
2.13 VOTING RIGHTS. Except as otherwise provided by law or as expressly provided
herein, the Common Stock shall have exclusive voting rights and powers,
including the exclusive right to notice shareholders' meetings.
2.14 CONVERSION RIGHTS.
(a) OPTIONAL CONVERSION. Shares of Series B Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after
December 28, 1996 (the "Conversion Period"), into fully paid and
nonassessable shares of Common Stock of the corporation.
(b) CONVERSION RATIO. Each share of Series B Preferred Stock shall be
converted into one share of the Common Stock of the corporation,
subject to adjustment as provided in paragraph 2.15 below.
(c) PROCEDURE FOR CONVERSION. The holder of any shares of Series B
Preferred Stock may exercise the conversion rights during the
Conversion Period as to such shares or any part thereof by delivering
to the corporation during regular business hours, at the office of any
transfer agent of the corporation for the Series B Preferred Stock, or
at the principal office of the corporation, the certificate or
certificates for the shares to be converted, duly endorsed for transfer
to the corporation, accompanied by written notice stating that the
holder elects to convert such shares or a part thereof. Conversion
shall be deemed to have been effected on the date when such delivery is
made, and such date is referred to herein as the "Conversion Date". As
promptly as practicable thereafter the corporation shall issue and
deliver to or upon the written order of such holder, at such office or
other place designated by the corporation, a certificate or
certificates for the number of full shares of Common Stock to which
such holder is entitled and a check for cash with respect to any
fractional interest in a share of Common Stock as provided in paragraph
2.14(d). The holder shall be deemed to have become a shareholder of
record on the applicable Conversion Date unless the transfer books of
the corporation are closed on such date, in which event he shall be
deemed to have become a shareholder of record on the next succeeding
date on which the transfer books are open, but the Conversion Ratio
shall be that in effect on the Conversion Date. Upon conversion of only
a portion of the number of shares of Series B Preferred Stock
represented by a certificate surrendered for conversion, the
corporation shall issue and deliver to or upon the written order of the
holder of the certificate so surrendered for conversion, at the expense
of the corporation, a new certificate covering the number of shares of
Series B Preferred Stock representing the unconverted portion of the
certificate so surrendered.
(d) FRACTIONAL SHARES. No fractional shares of Common Stock or scrip
shall be issued upon conversion of shares of Series B Preferred Stock.
If more than one share of Series B Preferred Stock shall be surrendered
for conversion at any one time by the same holder, the number of full
shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series B
Preferred Stock so surrendered. Instead of any fractional shares of
Common Stock which would otherwise be issuable upon conversion of any
shares of Series B Preferred Stock, the corporation shall pay a cash
adjustment in respect of such fractional interest equal to the fair
market value of such fractional interest as determined by the Board of
Directors.
(e) RESERVED SHARES. The corporation shall reserve and keep available,
out of its authorized but unissued Common Stock, solely for the purpose
of effecting the conversion of the Series B Preferred Stock, the full
number of shares of Common Stock deliverable upon the conversion of all
Series B Preferred Stock from time to time outstanding. The corporation
shall from time to time (subject to obtaining necessary director and
shareholder action) increase the authorized amount of its Common Stock
if at any time the authorized number of shares of its Common Stock
remaining unissued shall not be sufficient to permit the conversion of
all of the shares of Series B Preferred Stock at the time outstanding.
(f) REGISTRATION. If any shares of Common Stock to be reserved for the
purpose of shares of Series B Preferred Stock require registration or
listing with, or approval of, any governmental authority, stock
exchange, or other regulatory body under any federal or state law or
regulation or otherwise, before such shares may be validly issued or
delivered upon conversion, the corporation will in good faith and as
expeditiously as reasonable endeavor to secure such registration,
listing or approval, as the case may be.
(g) VALIDLY ISSUED. All shares of Common Stock which may be issued upon
conversion of the shares of Series B Preferred Stock will, upon
issuance by the corporation, be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect
to the issuance thereof.
(h) NEGATIVE COVENANTS. This corporation will not, by amendment of its
articles of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed thereunder, but will at all times in good faith assist in the
carrying out of all the provisions hereof and in the taking of such
action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series B Preferred Stock
against impairment.
2.15 ANTIDILUTION. The Conversion Ratio (referred to in paragraph 2.14 (b))
shall be subject to adjustment from time to time, and the number of shares of
Common Stock issuable on conversion of any shares of Series B Preferred Stock
shall be subject to a resultant increase or decrease (calculated to the nearest
1/100th of a share) by reason of such adjustment, as hereafter stated, except
that no adjustment shall be made, unless by reason of the occurrence of one or
more of the events hereinafter specified, the Conversion Ratio theretofore in
effect shall be changed by an amount equal to at least 5% thereof, but in the
event that an adjustment would be required except of insufficiency of amount,
such amount shall be carried forward and added to and shall be made at the time
of and together with any subsequent adjustment which, together with any
adjustment or adjustments so carried forward, amount to at least 5% of the
Conversion Ratio at such later time.
(a) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In the event the
corporation shall declare a stock dividend with respect to its Common
Stock or shall effect a subdivision or combination of its Common Stock
into a greater or lesser number of shares without a proportionate and
corresponding stock dividend, subdivision or combination with respect
to its outstanding Series B Preferred Stock, then the existing
Conversion Ratio for the Series B Preferred Stock shall be increased or
decreased proportionately.
(b) CLASSIFICATION, RECLASSIFICATION, CAPITAL REORGANIZATION, ETC. In
the case of any classification, reclassification, capital
reorganization or other change of outstanding shares of Common Stock
(other than a change in par value, or from without par value to par
value, or from par value to without par value, or as a result of an
issuance of Common Stock by way of dividend or other distribution or of
a subdivision or combination), or in case of any consolidation or
merger of the corporation with or into another corporation (other than
a merger with a subsidiary in which the corporation is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of the Common
Stock issuable upon conversion of the shares of the Series B Preferred
Stock) or in case of any sale or conveyance to another corporation of
the property of the corporation as an entirety or substantially as an
entirety, the corporation shall cause the holders of the Series B
Preferred Stock to have the right, by exercising their conversion
rights thereunder, to purchase the kind and amount of shares of stock
and other securities and property receivable upon such
reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance, if any, which the holders of
the Series B Preferred Stock would have received had the conversion
taken place immediately prior to such event.
2.16 CHANGES AFFECTING SERIES B PREFERRED STOCK So long as any shares of Series
B Preferred Stock are outstanding, the corporation shall not, without first
obtaining the approval by vote or written consent, in the manner provided by
law, of the holders of at least a majority of the total number of shares of
Series B Preferred Stock outstanding, voting separately as a class, (i) alter or
change any of the powers, preferences, privileges, or rights of the Series B
Preferred Stock; or (ii) amend the provisions of this paragraph 2.16; or (iii)
create any new class or series of shares having preferences prior to the Series
B Preferred Stock or reclassifying any class or series of any Common Stock or
any other shares of stock hereafter created junior to the Class B Preferred
Stock into shares having any preference or priority over the Series B Preferred
Stock.
ARTICLE IV
The name and address of the incorporator is Thomas H. Garrett III, 4200
IDS Center, 80 South Eighth Street Minneapolis, Minneosta 55402.
ARTICLE V
No shareholder of this corporation shall have any cumulative voting
rights.
ARTICLE VI
No shareholder of this corporation shall have any preemptive rights to
subscribe for, purchase, or acquire any shares of the corporation of any class,
whether unissued or now or hereafter authorized, or any obligations or other
securities convertible into or exchangeable for any such shares.
ARTICLE VII
The affirmative note of the holders of a majority of the voting power
of the shares represented and voting at a duly held meeting of the shareholders
of this corporation is required for an action of the shareholders, except where
Minnesota Statutes, Section 302A requires the affirmative vote of a majority of
the voting power of all voting shares.
ARTICLE VIII
The number of directors of this corporation shall be fixed in the
manner provided in the bylaws.
ARTICLE IX
Any action required or permitted to be taken at a meeting of the board
of directors of this corporation not needing approval by the shareholders under
Minnesota Statutes, Section 302A, may be taken by written action signed by the
number of directors that would be required to take such action at a meeting of
the board of directors at which all directors were present.
ARTICLE X
DIRECTOR LIABILITY
No director of this corporation shall be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its shareholders; (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law; (iii) under Sections 302A.559 or 80A.23 of the Minnesota
Statutes; (iv) for any transaction from which the director derived any improper
personal benefit; (v) for any act or omission occurring prior to the date when
this provision becomes effective.
The provisions of this Article X shall not be deemed to limit or
preclude indemnification of a director by the corporation for any liability of a
director which has not been eliminated by the provisions of this Article.
If the Minnesota Statues hereafter are amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the corporation shall be eliminated or limited to the fullest extent
permitted by the Minnesota Statutes, as so amended.
EXHIBIT 10.10 TO ANNUAL REPORT OF SPECTRASCIENCE, INC. ON
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996
SPECTRASCIENCE, INC.
1991 STOCK PLAN
(AS AMENDED OCTOBER 9, 1996)
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS
The name of this plan is the SPECTRAScience, Inc. 1991 Stock Plan (the
"Plan"). The purpose of the Plan is to enable SPECTRAScience, Inc. (the
"Company") and its Subsidiaries to retain and attract executives, key employees
(whether full or part-time), consultants and non-employee directors who
contribute to the Company's success by their ability, ingenuity and industry,
and to enable such individuals to participate in the long-term success and
growth of the Company by giving them a proprietary interest in the Company.
For purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "BOARD" means the Board of Directors of the Company.
(b) "CAUSE" means a felony conviction of a participant or the failure of a
participant to contest prosecution for a felony, or a participant's
willful misconduct or dishonesty, any of which is directly and
materially harmful to the business or reputation of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means the Committee referred to in Section 2 of the Plan.
If at any time no Committee shall be in office, then the functions of
the Committee specified in the Plan shall be exercised by the Board.
(e) "COMPANY" means, SPECTRAScience, Inc., a corporation organized under
the laws of the State of Minnesota (or any successor corporation).
(f) "DISABILITY" means permanent and total disability as determined by the
Committee.
(g) "DISINTERESTED PERSON" shall have the meaning set forth in Rule 16b-3
as promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, or any successor definition adopted by
the Commission.
(h) "EARLY RETIREMENT" means retirement, with consent of the Committee at
the time of retirement, from active employment with the Company and any
Subsidiary or Parent Corporation of the Company.
(i) "FAIR MARKET VALUE" means the value of the Stock on a given date as
determined by the Committee in accordance with the applicable Treasury
Department regulations under Section 422A of the Code with respect to
"incentive stock options."
(j) "INCENTIVE STOCK OPTION" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section
422A of the Code.
(k) "NON-QUALIFIED STOCK OPTION" means any Stock Option that is not an
Incentive Stock Option, and is intended to be and is designated as a
"Non-Qualified Stock Option."
(1) "NON-EMPLOYEE DIRECTOR" means any member of the Board who is not an
employee of the Company, any Parent Corporation or Subsidiary.
(m) "NORMAL RETIREMENT" means retirement from active employment with the
Company, any Subsidiary or Parent Corporation of the Company on or
after age 65.
(n) "PARENT CORPORATION" means any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company if each of
the corporations (other than the Company) owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one
of the other corporations in the chain.
(o) "RETIREMENT" means Normal Retirement or Early Retirement.
(p) "STOCK" means the Common Stock, $.25 par value per share, of the
Company.
(q) "STOCK APPRECIATION RIGHT" means the right pursuant to an award granted
under Section 6 below to surrender to the Company all or a portion of a
Stock Option in exchange for an amount equal to the difference between
(i) the Fair Market Value, as of the date such Stock Option or such
portion thereof is surrendered, of the shares of Stock covered by such
Stock Option or such portion thereof, and (ii) the aggregate exercise
price of such Stock Option or such portion thereof.
(r) "STOCK OPTION" means any option to purchase shares of Stock granted
pursuant to Section 5 below.
(s) "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of
the corporations (other than the last corporation in the unbroken
chain) owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in the
chain.
SECTION 2. ADMINISTRATION
The Plan shall be administered by the Board of Directors or by a
Committee of not less than two directors, all of whom are Disinterested Persons,
who shall be appointed by the Board of Directors of the Company and who shall
serve at the pleasure of the Board.
The Committee shall have the power and authority to grant to eligible
persons, pursuant to the terms of the Plan: (A) Stock Options or (B) Stock
Appreciation Rights.
In particular, the Committee shall have the authority:
(i) to select the officers and other key employees of the Company or its
Subsidiaries, and consultants and other persons having a contractual
relationship with the Company or its Subsidiaries, to whom Stock Options and/or
Stock Appreciation Rights may from time to time be granted hereunder;
(ii) to determine whether and to what extent Incentive Stock Options,
Non-Qualified Stock Options or Stock Appreciation Rights, or a combination of
the foregoing, are to be granted hereunder;
(iii) to determine the number of shares to be covered by each such award granted
hereunder;
(iv) to determine the terms and conditions, not inconsistent with the terms of
the Plan, of any award granted hereunder (including, but not limited to, any
restriction on any Stock Option or other award and/or the shares of Stock
relating thereto) and to amend such terms and conditions (including, but not
limited to, any amendment which accelerates the vesting of any award); and
(v) to determine whether, to what extent, and under what circumstances, Stock
Options may be exercised following termination of employment.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan. The Committee may
delegate its authority to the President and/or the Chief Executive Officer of
the Company for the purpose of selecting employees who are not officers of the
Company for purposes of (A) above.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be final and binding on all persons, including the Company and Plan
participants.
SECTION 3. STOCK SUBJECT TO PLAN
The total number of shares of Stock reserved and available for
distribution under the Plan shall be 1,500,000 shares, subject to increase or
decrease in the event of any adjustment required in the paragraph below. Such
shares may consist, in whole or in part, of authorized and unissued shares.
Subject to paragraph (b)(iv) of Section 6 below, if any shares that have been
optioned cease to be subject to Options, are forfeited or such award otherwise
terminates without a payment being made to the participant, such shares shall
again be available for distribution in connection with future awards under the
Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split (reverse or other), other change
in corporate structure affecting the Stock, or spin-off or other distribution of
assets to shareholders, such substitution or adjustment shall be made in the
aggregate number of shares reserved for issuance under the Plan and in the
number and option price of shares subject to outstanding options granted under
the Plan as may be determined to be appropriate by the Committee, in its sole
discretion, provided that the number of shares subject to any award shall always
be a whole number. Such adjusted option price shall also be used to determine
the amount payable by the Company upon the exercise of any Stock Appreciation
Right associated with any Option.
SECTION 4. ELIGIBILITY
Officers, other key employees of the Company or its subsidiaries,
Non-Employee Directors and consultants and other persons having a contractual
relationship with the Company or its Subsidiaries who are responsible for or
contribute to the management, growth and/or profitability of the business of the
Company and its Subsidiaries are eligible to be granted Stock Option or Stock
Appreciation Right awards under the Plan. Except for Non-Employee Directors,
whose participation in the Plan shall be limited as provided in paragraph (k) of
Section 5, the optionees and participants under the Plan shall be selected from
time to time by the Committee, in its sole discretion, from among those
eligible, and the Committee shall determine, in its sole discretion, the number
of shares covered by each award.
SECTION 5. STOCK OPTIONS
Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve.
The Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock
Options shall be granted under the Plan after July 10, 2001.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, Non-Qualified Stock options, or both types of options (in each
case with or without Stock Appreciation Rights). To the extent that any option
does not qualify as an Incentive Stock Option, it shall constitute a separate
Non-Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, no term of this
Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify either the Plan or any Incentive Stock Option
under Section 422A of the Code. The preceding sentence shall not preclude any
modification or amendment to an outstanding Incentive Stock Option, whether or
not such modification or amendment results in disqualification of such option as
an Incentive Stock Option, provided the optionee consents in writing to the
modification or amendment.
Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
(a) OPTION PRICE. The option price per share of Stock purchasable under
a Stock Option shall be determined by the Committee at the time of grant and may
not, except as provided in this paragraph or in paragraph (1) below, be less
than 85% of the Fair Market Value of the Stock on the date of the grant of the
Option unless the Option itself or such lower option price per share is approved
by the shareholders. In no event shall the option price per share of Stock
purchasable under an Incentive Stock Option be less than 100% of the Fair Market
Value of the Stock on the date of the grant of the option. If an employee owns
or is deemed to own (by reason of the attribution rules applicable under Section
425(d) of the Code) more than 10% of the combined voting power of all classes of
stock of the Company or any Parent Corporation or subsidiary and an Incentive
Stock Option is granted to such employee, the option price shall be no less than
110% of the Fair Market Value of the Stock on the date the option is granted.
(b) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the option is granted. If an employee owns or is deemed to
own (by reason of the attribution rules of Section 425(d) of the Code) more than
10% of the combined voting power of all classes of stock of the Company or any
Parent Corporation or Subsidiary and an Incentive Stock Option is granted to
such employee, the term of such option shall be no more than five years from the
date of grant.
(c) EXERCISABILITY. Stock Options shall be exercisable at such time or
times as determined by the Committee at or after grant. If the Committee
provides, in its discretion, that any option is exercisable only in
installments, the Committee may waive such installment exercise provisions at
any time. Installment exercise restrictions may be based upon the lapse of time,
the attainment of specified performance goals, or a combination of each.
Notwithstanding the foregoing, unless the Stock Option Agreement provides
otherwise, any Stock Option granted under this Plan shall be exercisable in
full, without regard to any installment exercise provisions, upon the occurrence
of any of the following events: (i) dissolution or liquidation of the Company
other than in conjunction with a bankruptcy of the company or any similar
occurrence, (ii) any merger, consolidation, acquisition, separation,
reorganization, or similar occurrence, where the Company will not be the
surviving entity or (iii) the transfer of substantially all of the assets of the
Company or 75% or more of the outstanding Stock of the Company. In the event of
a transaction within (ii), the surviving entity shall issue comparable options
(i.e. having an equivalent spread between exercise price and stock fair market
value) to the holders of the Stock Options.
(d) METHOD OF EXERCISE. Stock Options may be exercised in whole or in
part at any time during the option period by giving written notice of exercise
to the Company specifying the number of shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price, either by
certified or bank check, or by any other form of legal consideration deemed
sufficient by the Committee and consistent with the Plan's purpose and
applicable law, including promissory notes or a properly executed exercise
notice together with irrevocable instructions to a broker acceptable to the
Company to promptly deliver to the Company the amount of sale or loan proceeds
to pay the exercise price. As determined by the Committee, in its sole
discretion, payment in full or in part may also be made in the form of
unrestricted Stock already owned by the optionee (based on the Fair Market Value
of the Stock on the date the option is exercised, as determined by the
Committee); provided, however, that, in the case of an Incentive Stock Option,
the right to make a payment in the form of already owned shares may be
authorized only at the time the option is granted. If the terms of an option so
permit, or the Committee so provides, an optionee may elect to pay all or part
of the option exercise price by having the Company withhold from the shares of
Stock that would otherwise be issued upon exercise that number of shares of
Stock having a Fair Market Value equal to the aggregate option exercise price
for the shares with respect to which such election is made. No shares of Stock
shall be issued until full payment therefor has been made. An optionee shall
generally have the rights to dividends and other rights of a shareholder with
respect to shares subject to the option when the optionee has given written
notice of exercise, has paid in full for such shares, and, if requested, has
given the representation described in paragraph (a) of Section 10.
(e) NON-TRANSFERABILITY OF OPTIONS. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution, and all Stock Options shall be exercisable, during the
optionees lifetime, only by the optionee.
(f) TERMINATION BY DEATH. If an optionees employment by the Company and
any Subsidiary or Parent Corporation terminates by reason of death, the Stock
Option may thereafter be immediately exercised, to the extent then exercisable
(or on such accelerated basis as the Committee shall determine at or after
grant), by the legal representative of the estate or by the legatee of the
optionee under the will of the optionee, for a period of two years (or such
shorter period as the committee shall specify at grant) from the date of such
death or until the expiration of the stated term of the option, whichever period
is shorter.
(g) TERMINATION BY REASON OF DISABILITY. If an optionees employment by
the Company and any Subsidiary or Parent Corporation terminates by reason of
Disability, any Stock Option held by such optionee may thereafter be exercised,
to the extent it was exercisable at the time of termination due to Disability
(or on such accelerated basis as the Committee shall determine at or after
grant), but may not be exercised after two years (or such shorter period as the
Committee shall specify at grant) from the date of such termination of
employment or the expiration of the stated term of the option, whichever period
is the shorter. In the event of termination of employment by reason of
Disability, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422A of the Code, the
option will thereafter be treated as a Non-Qualified Stock Option.
(h) TERMINATION BY REASON OF RETIREMENT. If an optionees employment by
the Company and any Subsidiary or Parent Corporation terminates by reason of
Retirement, any Stock Option held by such optionee may thereafter be exercised
to the extent it was exercisable at the time of such Retirement, but may not be
exercised after two years (or such shorter period as Committee shall specify at
grant) from the date of such termination of employment or the expiration of the
stated term of the option, whichever period is the shorter. In the event of
termination of employment by reason of Retirement, if an Incentive Stock Option
is exercised after the expiration of the exercise periods that apply for
purposes of Section 422A of the Code, the option will thereafter be treated as a
Non-Qualified Stock Option.
(i) OTHER TERMINATION. Unless otherwise determined by the Committee or
as set forth in paragraph (1) below, if an optionees employment by the Company,
any Subsidiary or Parent Corporation terminates for any reason other than death,
Disability or Retirement, any Stock option held by such optionee may thereafter
be exercised to the extent it was exercisable at such termination, but may not
be exercised after two years (or such shorter period as the Committee shall
specify at grant) from the date of such termination of employment or the
expiration of the stated term of the option, whichever period is the shorter;
provided, however, that if the optionees employment is terminated for Cause, all
rights under the Stock Option shall terminate and expire upon such termination.
(j) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. The aggregate Fair Market
Value (determined as of the time the Option is granted) of the Common Stock with
respect to which an Incentive Stock Option under this Plan or any other plan of
the Company, any subsidiary or Parent Corporation is exercisable for the first
time by an optionee during any calendar year shall not exceed $100,000.
(k) NON-EMPLOYEE DIRECTORS. Each Non-Employee Director serving as a
director on October 1, 1994 shall, on or before October 15, 1994, surrender for
cancellations all options held by such person to purchase shares of the
Company's Common Stock (pre-split) and shall be granted options to purchase the
same number of shares of the Company's Common Stock (post-split). Each
Non-Employee Director not serving as a director on October 1, 1994 elected as
director (whether by vote of shareholders or directors) shall, upon such
election, be granted an option to purchase 10,000 shares of the Company's Common
Stock (subject to adjustment pursuant to Section 3 above).
Each Non-Employee Director serving as a director on October 1, 1994
shall, on or before October 15, 1995, be granted an option to purchase an
additional 5,000 shares of the Company's Common Stock in lieu of any 1995 annual
grant to which such director would otherwise be entitled.
Each Non-Employee Director shall automatically be granted an option to
purchase 5,000 shares of the Company's Common Stock (subject to adjustment
pursuant to Section 3 above) annually during the period such director serves on
the Board and the Plan is in effect. The date of the automatic grant shall be
January 1 if the Non-Employee Director is serving on the Board on such date, and
the date on which the Non-Employee Director commences services on the Board if
the director is elected after January 1. If a Non-Employee Director commences
service on the Board after June 30 in any year in which the Plan is in effect
then, for such year, such director shall be granted an option to purchase 2,500
shares of the Company's Common Stock (subject to adjustment pursuant to Section
3 above).
All Non-Employee Director Stock Options shall be granted at a price per
share equal to 100% of the Fair Market Value of the Company's Common Stock on
the date of grant. The term of each Non-Employee Director Stock Option shall be
ten years from the date of grant.
All such Stock Options shall be designated as Non-Qualified Stock
options and shall be subject to the same terms and provisions as are then in
effect with respect to the grant of Non-Qualified Stock Options to salaried
officers and key employees of the Company, except that (i) the term of each such
Stock Option shall be equal to ten years; (ii) each Stock Option shall become
exercisable as to all or any part of the shares subject to the Stock Option
beginning one year after the date the Stock Option is granted; and (iii) no
Stock Appreciation Rights may be granted to Non-Employee Directors in
conjunction with any Stock Options granted under this paragraph (k) or in any
other manner under this Plan. Subject to the foregoing, all provisions of this
Plan not inconsistent with the foregoing shall apply to Stock Options granted to
Non-Employee Directors. There is no maximum in the number of shares as to which
Stock Options may be granted to any individuals/Non-Employee Director under this
Plan. The maximum aggregate number of shares as to which Stock Options may be
granted to Non-Employee Directors under this Plan shall be 200,000 shares. The
number of shares reflects the June 30, 1994, 1-for-5 reverse stock split of the
Company's Common Stock and shall be further subject to adjustment pursuant to
Section 3 above.
(l) YUREK AND SEILER OPTIONS. The options to be granted to Daryl F.
Yurek (1,000,000 shares) and James L. Seiler (50,000 shares) at $.50 per share
are issued pursuant to that certain financing transaction to be approved by
shareholders on or about January 30, 1992. At the time of issue, Mr. Yurek was
an employee of the Company and Mr. Seiler was a consultant to the Company.
Paragraph (i) above notwithstanding, if the Company terminates Mr. Yurek's
employment other than for cause, disability or death, then all of the Option
shares shall vest for both Yurek and Seiler and the two optionees shall continue
to have the right to exercise the Options pursuant to the terms thereof as if
Mr. Yurek's employment had continued.
SECTION 6. STOCK APPRECIATION RIGHTS
(a) GRANT AND EXERCISE. Except as set forth in paragraph (k) of Section
5, Stock Appreciation Rights may be granted in conjunction with all or part of
any Stock option granted under the Plan. In the case of a Non-Qualified Stock
Option, such rights may be granted either at or after the time of the grant of
such Option. In the case of an Incentive Stock Option, such rights may be
granted only at the time of the grant of the option.
A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock option, except that a
Stock Appreciation Right granted with respect to less than the full number of
shares covered by a related Stock Option shall not be reduced until the exercise
or termination of the related Stock Option exceeds the number of shares not
covered by the Stock Appreciation Right.
A Stock Appreciation Right may be exercised by an optionee, in
accordance with paragraph (b) of this Section 6, by surrendering the applicable
portion of the related Stock Option. Upon such exercise and surrender, the
optionee shall be entitled to receive an amount determined in the manner
prescribed in paragraph (b) of this Section 6. Stock Options which have been so
surrendered, in whole or in part, shall no longer be exercisable to the extent
the related Stock Appreciation Rights have been exercised.
(b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to
applicable regulations relating to the exercise of Stock Appreciation Rights by
optionees subject to reporting responsibilities under Section 16 of the
Securities and Exchange Act of 1934, and to such terms and conditions, not
inconsistent with the provisions of the Plan, as shall be determined from time
to time by the Committee, including the following:
(i) Stock Appreciation Rights shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate shall be
exercisable in accordance with the provisions of Section 5 and this Section 6 of
the Plan.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee shall
be entitled to receive up to, but not more than, an amount in cash or shares of
Stock equal in value to the excess of the Fair Market Value of one share of
Stock over the option price per share specified in the related option multiplied
by the number of shares in respect of which the Stock Appreciation Right shall
have been exercised, with the Committee having the right to determine the form
of payment.
(iii) Stock Appreciation Rights shall be transferable only when and to
the extent that the underlying Stock Option would be transferable under Section
5 of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option
or part thereof to which such Stock Appreciation Right is related shall be
deemed to have been exercised for the purpose of the limitation set forth in
Section 3 of the Plan on the number of shares of Stock to be issued under the
Plan, but only to the extent of the number of shares issued or issuable under
the Stock Appreciation Right at the time of exercise based on the value of the
Stock Appreciation Right at such time.
(v) A Stock Appreciation Right granted in connection with an Incentive
Stock Option may be exercised only if and when the market price of the Stock
subject to the Incentive Stock Option exceeds the exercise price of such Option.
SECTION 7. TRANSFER, LEAVE OF ABSENCE, ETC
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer of an employee from the Company to a Parent Corporation
or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or
from one Subsidiary to another;
(b) a leave of absence, approved in writing by the Committee, for
military service or sickness, or for any other purpose approved by the Company
if the period of such leave does not exceed ninety (90) days (or such longer
period as the Committee may approve, in its sole discretion); and
(c) a leave of absence in excess of ninety (90) days, approved in
writing by the Committee, but only if the employee's right to re-employment is
guaranteed either by a statute or by contract, and provided that, in the case of
any leave of absence, the employee returns to work within 30 days after the end
of such leave.
SECTION 8. AMENDMENTS AND TERMINATION
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made (i) which would impair the rights
of an optionee or participant under a Stock Option or Stock Appreciation Right
or other Stock-based award theretofore granted, without the optionees or
participant's consent, or (ii) which without the approval of the shareholders of
the Company would cause the Plan to no longer comply with rules promulgated by
the Securities and Exchange Commission under authority granted in Section 16 of
the Securities Exchange Act of 1934, as amended, Section 422A of the Code or any
other regulatory requirements.
The Committee may amend the terms of any award or option theretofore
granted, prospectively or retroactively, but, subject to Section 3 above, no
such amendment shall impair the rights of any holder without his consent. The
Committee may also substitute new Stock Options for previously granted options,
including previously granted options having higher option prices.
SECTION 9. UNFUNDED STATUS OF PLAN
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder, provided, however, that the existence of such trusts or other
arrangements is consistent with the unfunded status of the Plan.
SECTION 10. GENERAL PROVISIONS
(a) The Committee may require each person purchasing shares pursuant to
a Stock Option under the Plan to represent to and agree with the Company in
writing that the optionee is acquiring the shares without a view to distribution
thereof. The certificates for such shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan pursuant
to any Stock-based awards shall be subject to such stock transfer orders and
other restrictions as the Committee may deem advisable under the rules,
regulations, and other requirements of the securities and Exchange commission,
any stock exchange upon which the Stock is then listed, and any applicable
Federal or state securities laws, and the Committee may cause a legend or
legends to be put on any such certificates to make appropriate reference to such
restrictions.
(b) Subject to paragraph (d) below, recipients of Stock-based awards
under the Plan (other than Stock Options) are not required to make any payment
or provide consideration other than the rendering of services.
(c) Nothing contained in this Plan shall prevent the Board of Directors
from adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases. The adoption
of the Plan shall not confer upon any employee of the Company or any subsidiary
any right to continued employment with the Company or a Subsidiary, as the case
may be, nor shall it interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of any of its employees at any time.
(d) Each participant shall, no later than the date as of which any part
of the value of an award first becomes includible as compensation in the gross
income of the participant for Federal income tax purposes, pay to the Company,
or make arrangements satisfactory to the Committee regarding payment of, any
Federal, state, or local taxes of any kind required by law to be withheld with
respect to the award. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements and the Company and Subsidiaries
shall, to the extent permitted by law, have the right to deduct any such taxes
from any payment of any kind otherwise due to the participant. With respect to
any award under the Plan, if the written terms of such award so permit, a
participant may elect by written notice to the Company to satisfy part or all of
the withholding tax requirements associated with the award by (i) authorizing
the Company to retain from the number of shares of Stock that would otherwise be
deliverable to the participant, or (ii) delivering to the Company from shares of
Stock already owned by the participant, that number of shares having an
aggregate Fair Market Value equal to part or all of the tax payable by the
participant under this Section 10(d). Any such election shall be in accordance
with, and subject to, applicable tax and securities laws, regulations and
rulings.
(e) At the time of grant, the Committee may provide in connection with
any grant made under this Plan that the shares of Stock received as a result of
such grant shall be subject to a repurchase right in favor of the Company,
pursuant to which the participant shall be required to offer to the Company upon
termination of employment for any reason any shares that the participant
acquired under the Plan, with the price being the then Fair Market Value of the
Stock or, in the case of a termination for Cause, an amount equal to the cash
consideration paid for the Stock, subject to such other terms and conditions as
the Committee may specify at the time of grant. The Committee may, at the time
of the grant of an award under the Plan, provide the Company with the right to
repurchase shares of Stock acquired pursuant to the Plan by any participant who,
at any time within two years after termination of employment with the Company,
directly or indirectly competes with, or is employed by a competitor of the
Company.
SECTION 11. EFFECTIVE DATE OF PLAN
The Plan shall be effective on July 11, 1991 (the date of approval by
the Board of Directors), subject to approval by a vote of the holders of a
majority of the Stock present and entitled to vote at the next Annual or Special
Meeting of the Company's shareholders and shall expire (unless terminated
earlier) as of July 10, 2001. Awards may be granted under the Plan prior to
shareholder approval, provided such awards are made subject to shareholder
approval.
EXHIBIT 10.15 TO ANNUAL REPORT OF SPECTRASCIENCE, INC. ON
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996
SEVERANCE AGREEMENT
THIS AGREEMENT made as of the 26th day of November, 1996, by and
between SpectraScience, Inc., a Minnesota corporation with its principal offices
at 3650 Annapolis Lane, Suite 101, Minneapolis, MN 55447-5434 (the "Company")
and Brian T. McMahon, residing at 2210 Plymouth Road South, #305, Minnetonka, MN
55305 (the "Executive").
WHEREAS, the Company considers the establishment and maintenance of a
sound and vital management to be essential to protecting and enhancing the best
interests of the Company and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to
Executive's intimate knowledge of the business and affairs of the Company, its
policies, methods, personnel and problems, a significant contribution to the
profitability, growth and financial strength of the Company; and
WHEREAS, the Company, as a publicly held corporation, recognizes that
the possibility of a Change in Control may exist and that such possibility, and
the uncertainty and questions which it may raise among management, may result in
the departure or distraction of the Executive in the performance of the
Executive's duties to the detriment of the Company and its shareholders; and
WHEREAS, Executive is willing to remain in the employ of the Company
upon the understanding that the Company will provide income security if the
Executive's employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of the Company and its
shareholders to reinforce and encourage the continued attention and dedication
of management personnel, including Executive, to their assigned duties without
distraction and to ensure the continued availability to the Company of the
Executive in the event of a Change in Control.
NOW, THEREFORE, in consideration of the foregoing and other respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof
and shall continue in effect until such time as the Company notifies the
Executive of termination of the Agreement. Notwithstanding the preceding
sentence, if a Change in Control occurs, this Agreement shall continue in effect
for a period of 36 months from the date of the occurrence of a Change in
Control.
2. Change in Control. No benefits shall be payable hereunder unless
there shall have been a Change in Control. For purposes of this Agreement, a
"Change in Control" of the Company shall mean a change in control which would be
required to be reported in response to Item 5(f) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), whether or not the Company is then subject to such reporting
requirement including, without limitation, if:
(a) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) becomes a "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 40% or more of the combined
voting power of the Company's then outstanding securities; provided
however, that a certain merger with a company, cMore Inc., discussions
of which is in progress, is specifically excluded from this Agreement,
provided the Company is the surviving entity of the resultant merger;
(b) There ceases to be a majority of the Board of Directors
comprised of individuals described in (c) below:
(c) For purposes of this Section 2 "Board of Directors" shall
mean: (A) individuals who on the date hereof constituted the Board of
the Company, and (B) any new director who subsequently was elected or
nominated for election by a majority of the directors who held such
office immediately prior to a Change in Control.
(d) Approval by shareholders of the Company if required, or if
not required, the approval by the Board of Directors, of:
(i) a merger, consolidation, or reorganization
involving the Company where the company is not the surviving
company;
(ii) a complete liquidation or dissolution of the
Company;
(iii) an Agreement for the sale or other disposition
of all or substantially all of the assets of the Company to
any other party (other than a transfer to a subsidiary of the
Company);
in any such cases, which transaction is actually consummated.
(e) Notwithstanding anything contained in this Agreement to
the contrary, if the Executive's employment is terminated prior to a
Change in Control and the Executive reasonably demonstrates that such
termination (i) was at the request of a third party who has indicated
an intention or taken steps reasonably calculated to effect a Change in
Control and who effectuates a Change in Control (a "Third Party") or
(ii) otherwise occurred in connection with, or in anticipation of, a
Change in Control, a Change in Control with respect to the Executive
shall mean the date immediately prior to the date of such termination
of the Executive's employment.
3. Termination Following Change in Control. If a Change in Control
shall have occurred during the term of this Agreement, Executive shall be
entitled to the benefits provided in subsection 4(d) unless such termination is
(A) because of Executive's death or Retirement; (B) by the Company for Cause or
Disability; or (C) by Executive other than for Good Reason.
(a) Disability; Retirement. If, as a result of incapacity due
to physical or mental illness, the Executive shall have been absent
from the full-time performance of Executive's duties with the Company
for six consecutive months, and within 30 days after written Notice of
Termination is given the Executive shall not have returned to the
full-time performance of the Executive's duties, the Company may
terminate Executive's employment for "Disability". Any question as to
the existence of Executive's Disability upon which Executive and the
Company cannot agree shall be determined by a qualified independent
physician selected by Executive (or, if the Executive is unable to make
such selection, it shall be made by any adult member of the Executive's
immediate family), and approved by the Company. The determination of
such physician made in writing to the Company and to Executive shall be
final and conclusive for all purposes of this Agreement. Termination by
the Company or Executive of Executive's employment based on
"Retirement" shall mean termination with a normal retirement pension in
accordance with the SpectraScience, Inc. Savings and Retirement Plan.
(b) Cause. Termination by the Company of Executive's
employment for "Cause" shall mean termination upon the conviction of
the Executive by a court of competent jurisdiction for felony criminal
conduct.
(c) Good Reason. Executive shall be entitled to terminate his
employment for Good Reason. For purposes of this Agreement, "Good
Reason" shall mean, without Executive's express written consent, any of
the following:
(i) the assignment to Executive of any duties
inconsistent with Executive's status or position with the
Company, or a substantial alteration in the nature or status
of Executive's responsibilities from those in effect at any
time within 6 months preceding the Change in Control or at
anytime thereafter;
(ii) a reduction by the Company in Executive's annual
compensation in effect at any time within 6 months preceding a
Change in Control or at anytime thereafter;
(iii) the relocation of the Company's principal
executive offices to a location more than fifty miles from
Minneapolis, Minnesota or the Company requiring Executive to
be based anywhere other than the Company's principal executive
offices except for required travel on the Company's business
to an extent substantially consistent with Executive's prior
business travel obligation;
(iv) the failure by the Company to continue to
provide Executive with benefits at least as favorable to those
enjoyed by Executive under any of the Company's pension, life
insurance, medical, health and accident, disability, deferred
compensation, incentive awards, stock options, or savings
plans in which Executive was participating at any time within
6 months preceding the Change in Control, the taking of any
action by the Company which would directly or indirectly
materially reduce any of such benefits or deprive Executive of
any material fringe benefit enjoyed at the time of the Change
in Control, or the failure by the Company to provide Executive
with the number of paid vacation days to which Executive is
entitled at the time of the Change in Control; provided,
however, that the Company may amend any such plan or programs
as long as such amendments do not reduce any benefits to which
Executive would be entitled upon termination;
(v) the failure of the Company to obtain a
satisfactory agreement from any successor to assume and agree
to perform this Agreement, as contemplated in Section 6;
(vi) any purported termination of Executive's
employment which is not made pursuant to Notice of Termination
satisfying the requirements of subsection (e) below; for
purposes of this Agreement, no such purported termination
shall be effective;
(vii) any material breach by the Company of any
provision of this Agreement;
(viii) the insolvency or the filing (by any party
including the Company) of a petition for bankruptcy of the
Company, which petition is not dismissed within 60 days;
(ix) any event or condition described in this Section
3(c)(i) through (viii) that occurs prior to a Change in
Control but which the Executive reasonably demonstrates either
was at the request of a Third Party or otherwise arose in
connection with, or in anticipation of, a Change in Control
that actually occurs, shall constitute Good Reason for
purposes of this Agreement notwithstanding that it occurred
prior to the Change in Control.
(d) Voluntary Termination Deemed Good Reason. Not withstanding
anything herein to the contrary, if the Change in Control arises from a
transaction or series of transactions which are not authorized,
recommended or approved by formal action taken by the Board of
Directors as defined in Section 2(c) of this Agreement, Executive may
voluntarily terminate his employment for any reason following a Change
in Control, and such termination shall be deemed "Good Reason" for all
purposes of this Agreement.
(e) Notice of Termination. Any purported termination of
Executive's employment by the Company or by Executive shall be
communicated by written Notice of Termination to the other party hereto
in accordance with Section 8. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth
the facts and circumstances claimed to provide a basis for termination
of Executive's employment.
(f) Date of Termination. For purposes of this Agreement, "Date
of Termination" shall mean:
(i) if Executive's employment is terminated for
Disability, 30 days after Notice of Termination is given
(provided that the Executive shall not have returned to the
full-time performance of the Executive's duties during such 30
day period); and
(ii) if Executive's employment is terminated pursuant
to subsections (b), (c) or (d) above or for any other reason
(other than Disability), the date specified in the Notice of
Termination (which, in the case of a termination pursuant to
subsection (b) above shall not be less than 10 days, and in
the case of a termination pursuant to subsection (c) or (d)
above shall not be less than 10 nor more than 30 days,
respectively, from the date such Notice of Termination is
given).
(g) Dispute of Termination. If, within 10 days after any
Notice of Termination is given, the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning
the termination, the Date of Termination shall be the date on which the
dispute is finally determined, either by mutual written agreement of
the parties, or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time for appeal
therefrom having expired and no appeal having been perfected);
provided, that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving
such notice pursues the resolution of such dispute with reasonable
diligence.
4. Compensation Upon Termination or During Disability. Following a
Change in Control of the Company, as defined in subsection 2(a), upon
termination of Executive's employment or during a period of Disability,
Executive shall be entitled to the following benefits:
(a) During any period that Executive fails to perform
full-time duties with the Company as a result of a Disability, the
Company shall pay Executive the full compensation of the Executive in
effect at the commencement of any such period, until such time as the
Executive is determined to be eligible for long term disability
benefits in accordance with the Company's insurance programs then in
effect.
(b) If Executive's employment shall be terminated by the
Company for Cause or by Executive other than for Good Reason,
Disability or Retirement, the Company shall pay to Executive his full
base salary through the Date of Termination at the Rate in effect at
the time Notice of Termination is given and the Company shall have no
further obligation to Executive under this Agreement.
(c) If Executive's employment shall be terminated by the
Company or by Executive for Disability or Retirement, or by reason of
death, the Company shall immediately commence payment to the Executive
(or Executive's designated beneficiaries or estate, if no beneficiary
is designated) of any and all benefits to which the Executive is
entitled under the Company's retirement and insurance programs then in
effect.
(d) If Executive's employment shall be terminated (A) by the
Company other than for Cause, Retirement, or Disability; or (B) by
Executive for Good Reason; then Executive shall be entitled to the
benefits provided below:
(i) The Company shall pay Executive the Executive's
full compensation through the Date of Termination at the rate
in effect at the time the Notice of Termination is given.
(ii) In lieu of any further salary payments for
periods subsequent to the Date of Termination, the Company
shall pay a severance payment (the "Severance Payment") equal
to two years of the Executive's full compensation as defined
below. For purposes of this Section 4, compensation shall mean
and include (A) every type and form of compensation paid to
Executive by the Company (or any corporation ("Affiliate")
affiliated with the Company within the meaning of section 1504
of the Internal Revenue Code of 1986, as may be amended from
time to time (the "Code")); (B) such compensation is
includible in Executive's gross income for federal income tax
purposes, but excluding compensation income recognized as a
result of the grant of restricted stock or other share grants,
or the exercise of stock options or sale of the stock so
acquired and (C) the highest rate of compensation in effect at
any time within six months prior to the Change in Control or
within six months prior to the Date of Termination. The
Severance Payment shall be made in a single lump sum within 30
days after the Date of Termination.
(iii) For a period of 18 months after the Date of
Termination, the Company shall arrange to provide at its sole
expense Executive with life, accident and health and dental
insurance benefits substantially similar to those which the
Executive is receiving or entitled to receive immediately
prior to the Notice of Termination. The cost of providing such
benefits shall be in addition to (and shall not reduce) the
Severance Payment. Benefits otherwise receivable by Executive
pursuant to this paragraph (iii) shall be reduced to the
extent comparable benefits are actually received by Executive
during such period, and any such benefits actually received by
Executive shall be reported to the Company.
(iv) For a period ending on the earlier of twelve
months from the Executive's Date of Termination and the date
on which the Executive obtains subsequent full time
employment, the Company shall make available to the Executive
such outplacement services that are generally consistent with
the Executive's status or position.
(v) The Company shall ensure that the Executive
continues to have complete coverage for fiduciary, liability
insurance, and directors and officers insurance for a period
of six years after a Change in Control; and will indemnify the
Executive of any losses that might result from actions taken
in good faith before the Date of Termination.
(vi) Except to the extent such payment would
constitute a "parachute payment" within the meaning of Section
280G(b) (2) of the Code as determined under paragraph (v)
below, the Company shall also pay to Executive all legal fees
and expenses incurred by Executive as a result of such
termination (including all such fees and expenses, if any,
incurred in contesting or disputing any such termination or in
seeking to obtain or enforce any right or benefit provided by
this Agreement).
(vii) The Severance Payment shall be reduced and
offset by the amount of any payment received or to be received
by Executive in connection with the termination of employment
pursuant to the provisions of any Company policy on severance
or any successor to such policy. If, in the opinion of tax
counsel selected by the Company and acceptable to Executive,
the Severance Payment (in its full amount or as partially
reduced, as the case may be) plus all other payments or
benefits which constitute "parachute payments" within the
meaning of Section 280G(b) (2) of the Code exceeds the amount
that is deductible by the Company by reason of Section 280G,
and in the opinion of such tax counsel, the Severance Payment
(in its full amount or as partially reduced, as the case may
be) plus all other payments or benefits which constitute
"parachute payments" within the meaning of Section 280G(b) (3)
of the Code are not reasonable compensation for services
actually rendered or to be rendered, within the meaning of
Section 280G(b) (4) of the Code, the Severance Payment shall
be reduced by the excess of the aggregate "parachute payments"
to be paid to or for the Executive over the aggregate
"parachute payments" that would be paid to or for the
Executive without any portion of such "parachute payments" not
being deductible by reason of Section 280G of the Code. The
value of any non-cash benefit or any deferred cash payment
shall be determined by the Company in accordance with the
principles of Sections 280G(d) (3) and (4) of the Code.
(viii) If it is established pursuant to a final
determination of a court or an Internal Revenue Service
proceeding that, notwithstanding the good faith of Executive
and the Company in applying the terms of this subsection (d),
the aggregate "parachute payments" paid to or for Executive's
benefit are in an amount that would result in any portion of
such "parachute payments" not being deductible by the Company
or its Affiliates by reason of Section 280G of the Code, then
Executive shall have an obligation to pay the Company upon
demand an amount equal to the sum of (A) the excess of the
aggregate "parachute payments" paid to or for the Executive's
benefit over the aggregate "parachute payments" that would
have been paid to or for the Executive's benefit without any
portion of such "parachute payments" not being deductible by
reason of Section 280G of the Code; and (B) interest on the
amount set forth in clause (A) of this sentence at the
applicable federal rate (as defined in Section 1274(d) of the
Code) from the date of Executive's receipt of such excess
until the date of such payment.
(e) Executive shall not be required to mitigate the amount of
any payment provided for in this Section 4 by seeking other employment
or otherwise, nor shall the amount of any payment or benefit provided
for in this Section 4 be reduced by any compensation earned by
Executive as the result of employment by another employer or by
retirement benefits after the Date of Termination, or otherwise except
as specifically provided in this Section 4.
(f) Executive shall be entitled to receive all benefits
payable to the Executive under the SpectraScience, Inc. Savings and
Retirement Plan, or any successor of such Plan and any other plan or
agreement relating to retirement benefits, which shall be in addition
to, and not reduced by, any other amounts payable to Executive under
this Section 4.
(g) Executive shall be entitled to exercise all rights and to
receive all benefits accruing to Executive under any and all Company
stock purchase, restricted stock grant and stock option plans or
programs, or any successor to any such plans or programs, which shall
be in addition to, and not reduced by, any other amounts payable to
Executive under this Section 4. In addition, all of Executive's
outstanding but unvested options shall vest immediately prior to a
Change in Control.
5. Funding of Payments. In order to assure the performance of the
Company or its successor of its obligations under this Agreement, the Company
may deposit in trust an amount equal to the maximum payment that will be due the
Executive under the terms hereof. Under a written trust instrument, the Trustee
shall be instructed to pay to the Executive (or the Executive's legal
representative, as the case may be) the amount to which the Executive shall be
entitled under the terms hereof, and the balance, if any, of the trust not so
paid or reserved for payment shall be repaid to the Company. If the Company
deposits funds in trust, payment shall be made no later than the occurrence of a
Change in Control. If and to the extent there are not amounts in trust
sufficient to pay Executive under this Agreement, the Company shall remain
liable for any and all payments due to Executive. In accordance with the terms
of such trust, at all times during the term of this Agreement, Executive shall
have no rights, other than as an unsecured general creditor of the Company, to
any amounts held in trust and all trust assets shall be general assets of the
Company and subject to the claims of creditors of the Company. Failure of the
Company to establish or fully fund such trust shall not be deemed a revocation
or termination of this Agreement by the Company.
6. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform it
if no such succession had taken place. Failure of the Company to obtain
such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on
the same terms as he would be entitled hereunder if he terminated his
employment for Good Reason following a Change in Control, except that
for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement shall inure to the benefit of and be
enforceable by Executive's personal or legal representative,
successors, heirs, and designated beneficiaries. If Executive should
die while any amount would still be payable to Executive hereunder if
the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this
Agreement to the Executive's designated beneficiaries, or, if there is
no such designated beneficiary, to the Executive's estate.
7. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage pre-paid,
addressed to the last known residence address of the Executive or in the case of
the Company, to its principal office to the attention of each of the then
directors of the Company with a copy to its Secretary, or to such other address
as either party may have furnished the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the parties. No waiver by either party hereto at any
time of any breach by the other party to this Agreement of, or compliance with,
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or similar time. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
The validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of Minnesota.
9. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
SPECTRASCIENCE, Inc. AGREED TO AND ACCEPTED:
_________________________________ ___________________________
Henry Holterman, Director Brian T. McMahon
President and CEO
_________________________________
Nathaniel Thayer, Director
EXHIBIT 10.16 TO ANNUAL REPORT OF SPECTRASCIENCE, INC. ON
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996
SEVERANCE AGREEMENT
THIS AGREEMENT made as of the 26th day of November, 1996, by and
between SpectraScience, Inc., a Minnesota corporation with its principal offices
at 3650 Annapolis Lane, Suite 101, Minneapolis, MN 55447-5434 (the "Company")
and Ching-Meng Chew, residing at 18555 North 37th Avenue, Plymouth, MN 55446
(the "Executive").
WHEREAS, the Company considers the establishment and maintenance of a
sound and vital management to be essential to protecting and enhancing the best
interests of the Company and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to
Executive's intimate knowledge of the business and affairs of the Company, its
policies, methods, personnel and problems, a significant contribution to the
profitability, growth and financial strength of the Company; and
WHEREAS, the Company, as a publicly held corporation, recognizes that
the possibility of a Change in Control may exist and that such possibility, and
the uncertainty and questions which it may raise among management, may result in
the departure or distraction of the Executive in the performance of the
Executive's duties to the detriment of the Company and its shareholders; and
WHEREAS, Executive is willing to remain in the employ of the Company
upon the understanding that the Company will provide income security if the
Executive's employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of the Company and its
shareholders to reinforce and encourage the continued attention and dedication
of management personnel, including Executive, to their assigned duties without
distraction and to ensure the continued availability to the Company of the
Executive in the event of a Change in Control.
NOW, THEREFORE, in consideration of the foregoing and other respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof
and shall continue in effect until such time as the Company notifies the
Executive of termination of the Agreement. Notwithstanding the preceding
sentence, if a Change in Control occurs, this Agreement shall continue in effect
for a period of 36 months from the date of the occurrence of a Change in
Control.
2. Change in Control. No benefits shall be payable hereunder unless
there shall have been a Change in Control. For purposes of this Agreement, a
"Change in Control" of the Company shall mean a change in control which would be
required to be reported in response to Item 5(f) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), whether or not the Company is then subject to such reporting
requirement including, without limitation, if:
(a) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) becomes a "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 40% or more of the combined
voting power of the Company's then outstanding securities; provided
however, that a certain merger with a company, cMore Inc., discussions
of which is in progress, is specifically excluded from this Agreement,
provided the Company is the surviving entity of the resultant merger;
(b) There ceases to be a majority of the Board of Directors
comprised of individuals described in (c) below:
(c) For purposes of this Section 2 "Board of Directors" shall
mean: (A) individuals who on the date hereof constituted the Board of
the Company, and (B) any new director who subsequently was elected or
nominated for election by a majority of the directors who held such
office immediately prior to a Change in Control.
(d) Approval by shareholders of the Company if required, or if
not required, the approval by the Board of Directors, of:
(i) a merger, consolidation, or reorganization
involving the Company where the company is not the surviving
company;
(ii) a complete liquidation or dissolution of the
Company;
(iii) an Agreement for the sale or other disposition
of all or substantially all of the assets of the Company to
any other party (other than a transfer to a subsidiary of the
Company);
in any such cases, which transaction is actually consummated.
(e) Notwithstanding anything contained in this Agreement to
the contrary, if the Executive's employment is terminated prior to a
Change in Control and the Executive reasonably demonstrates that such
termination (i) was at the request of a third party who has indicated
an intention or taken steps reasonably calculated to effect a Change in
Control and who effectuates a Change in Control (a "Third Party") or
(ii) otherwise occurred in connection with, or in anticipation of, a
Change in Control, a Change in Control with respect to the Executive
shall mean the date immediately prior to the date of such termination
of the Executive's employment.
3. Termination Following Change in Control. If a Change in Control
shall have occurred during the term of this Agreement, Executive shall be
entitled to the benefits provided in subsection 4(d) unless such termination is
(A) because of Executive's death or Retirement; (B) by the Company for Cause or
Disability; or (C) by Executive other than for Good Reason.
(a) Disability; Retirement. If, as a result of incapacity due
to physical or mental illness, the Executive shall have been absent
from the full-time performance of Executive's duties with the Company
for six consecutive months, and within 30 days after written Notice of
Termination is given the Executive shall not have returned to the
full-time performance of the Executive's duties, the Company may
terminate Executive's employment for "Disability". Any question as to
the existence of Executive's Disability upon which Executive and the
Company cannot agree shall be determined by a qualified independent
physician selected by Executive (or, if the Executive is unable to make
such selection, it shall be made by any adult member of the Executive's
immediate family), and approved by the Company. The determination of
such physician made in writing to the Company and to Executive shall be
final and conclusive for all purposes of this Agreement. Termination by
the Company or Executive of Executive's employment based on
"Retirement" shall mean termination with a normal retirement pension in
accordance with the SpectraScience, Inc. Savings and Retirement Plan.
(b) Cause. Termination by the Company of Executive's
employment for "Cause" shall mean termination upon the conviction of
the Executive by a court of competent jurisdiction for felony criminal
conduct.
(c) Good Reason. Executive shall be entitled to terminate his
employment for Good Reason. For purposes of this Agreement, "Good
Reason" shall mean, without Executive's express written consent, any of
the following:
(i) the assignment to Executive of any duties
inconsistent with Executive's status or position with the
Company, or a substantial alteration in the nature or status
of Executive's responsibilities from those in effect at any
time within 6 months preceding the Change in Control or at
anytime thereafter;
(ii) a reduction by the Company in Executive's annual
compensation in effect at any time within 6 months preceding a
Change in Control or at anytime thereafter;
(iii) the relocation of the Company's principal
executive offices to a location more than fifty miles from
Minneapolis, Minnesota or the Company requiring Executive to
be based anywhere other than the Company's principal executive
offices except for required travel on the Company's business
to an extent substantially consistent with Executive's prior
business travel obligation;
(iv) the failure by the Company to continue to
provide Executive with benefits at least as favorable to those
enjoyed by Executive under any of the Company's pension, life
insurance, medical, health and accident, disability, deferred
compensation, incentive awards, stock options, or savings
plans in which Executive was participating at any time within
6 months preceding the Change in Control, the taking of any
action by the Company which would directly or indirectly
materially reduce any of such benefits or deprive Executive of
any material fringe benefit enjoyed at the time of the Change
in Control, or the failure by the Company to provide Executive
with the number of paid vacation days to which Executive is
entitled at the time of the Change in Control; provided,
however, that the Company may amend any such plan or programs
as long as such amendments do not reduce any benefits to which
Executive would be entitled upon termination;
(v) the failure of the Company to obtain a
satisfactory agreement from any successor to assume and agree
to perform this Agreement, as contemplated in Section 6;
(vi) any purported termination of Executive's
employment which is not made pursuant to Notice of Termination
satisfying the requirements of subsection (e) below; for
purposes of this Agreement, no such purported termination
shall be effective;
(vii) any material breach by the Company of any
provision of this Agreement;
(viii) the insolvency or the filing (by any party
including the Company) of a petition for bankruptcy of the
Company, which petition is not dismissed within 60 days;
(ix) any event or condition described in this Section
3(c)(i) through (viii) that occurs prior to a Change in
Control but which the Executive reasonably demonstrates either
was at the request of a Third Party or otherwise arose in
connection with, or in anticipation of, a Change in Control
that actually occurs, shall constitute Good Reason for
purposes of this Agreement notwithstanding that it occurred
prior to the Change in Control.
(d) Voluntary Termination Deemed Good Reason. Not withstanding
anything herein to the contrary, if the Change in Control arises from a
transaction or series of transactions which are not authorized,
recommended or approved by formal action taken by the Board of
Directors as defined in Section 2(c) of this Agreement, Executive may
voluntarily terminate his employment for any reason following a Change
in Control, and such termination shall be deemed "Good Reason" for all
purposes of this Agreement.
(e) Notice of Termination. Any purported termination of
Executive's employment by the Company or by Executive shall be
communicated by written Notice of Termination to the other party hereto
in accordance with Section 8. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth
the facts and circumstances claimed to provide a basis for termination
of Executive's employment.
(f) Date of Termination. For purposes of this Agreement, "Date
of Termination" shall mean:
(i) if Executive's employment is terminated for
Disability, 30 days after Notice of Termination is given
(provided that the Executive shall not have returned to the
full-time performance of the Executive's duties during such 30
day period); and
(ii) if Executive's employment is terminated pursuant
to subsections (b), (c) or (d) above or for any other reason
(other than Disability), the date specified in the Notice of
Termination (which, in the case of a termination pursuant to
subsection (b) above shall not be less than 10 days, and in
the case of a termination pursuant to subsection (c) or (d)
above shall not be less than 10 nor more than 30 days,
respectively, from the date such Notice of Termination is
given).
(g) Dispute of Termination. If, within 10 days after any
Notice of Termination is given, the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning
the termination, the Date of Termination shall be the date on which the
dispute is finally determined, either by mutual written agreement of
the parties, or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time for appeal
therefrom having expired and no appeal having been perfected);
provided, that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving
such notice pursues the resolution of such dispute with reasonable
diligence.
4. Compensation Upon Termination or During Disability. Following a
Change in Control of the Company, as defined in subsection 2(a), upon
termination of Executive's employment or during a period of Disability,
Executive shall be entitled to the following benefits:
(a) During any period that Executive fails to perform
full-time duties with the Company as a result of a Disability, the
Company shall pay Executive the full compensation of the Executive in
effect at the commencement of any such period, until such time as the
Executive is determined to be eligible for long term disability
benefits in accordance with the Company's insurance programs then in
effect.
(b) If Executive's employment shall be terminated by the
Company for Cause or by Executive other than for Good Reason,
Disability or Retirement, the Company shall pay to Executive his full
base salary through the Date of Termination at the Rate in effect at
the time Notice of Termination is given and the Company shall have no
further obligation to Executive under this Agreement.
(c) If Executive's employment shall be terminated by the
Company or by Executive for Disability or Retirement, or by reason of
death, the Company shall immediately commence payment to the Executive
(or Executive's designated beneficiaries or estate, if no beneficiary
is designated) of any and all benefits to which the Executive is
entitled under the Company's retirement and insurance programs then in
effect.
(d) If Executive's employment shall be terminated (A) by the
Company other than for Cause, Retirement, or Disability; or (B) by
Executive for Good Reason; then Executive shall be entitled to the
benefits provided below:
(i) The Company shall pay Executive the Executive's
full compensation through the Date of Termination at the rate
in effect at the time the Notice of Termination is given.
(ii) In lieu of any further salary payments for
periods subsequent to the Date of Termination, the Company
shall pay a severance payment (the "Severance Payment") equal
to one year of the Executive's full compensation as defined
below. For purposes of this Section 4, compensation shall mean
and include (A) every type and form of compensation paid to
Executive by the Company (or any corporation ("Affiliate")
affiliated with the Company within the meaning of section 1504
of the Internal Revenue Code of 1986, as may be amended from
time to time (the "Code")); (B) such compensation is
includible in Executive's gross income for federal income tax
purposes, but excluding compensation income recognized as a
result of the grant of restricted stock or other share grants,
or the exercise of stock options or sale of the stock so
acquired and (C) the highest rate of compensation in effect at
any time within six months prior to the Change in Control or
within six months prior to the Date of Termination. The
Severance Payment shall be made in a single lump sum within 30
days after the Date of Termination.
(iii) For a period of 18 months after the Date of
Termination, the Company shall arrange to provide at its sole
expense Executive with life, accident and health and dental
insurance benefits substantially similar to those which the
Executive is receiving or entitled to receive immediately
prior to the Notice of Termination. The cost of providing such
benefits shall be in addition to (and shall not reduce) the
Severance Payment. Benefits otherwise receivable by Executive
pursuant to this paragraph (iii) shall be reduced to the
extent comparable benefits are actually received by Executive
during such period, and any such benefits actually received by
Executive shall be reported to the Company.
(iv) For a period ending on the earlier of twelve
months from the Executive's Date of Termination and the date
on which the Executive obtains subsequent full time
employment, the Company shall make available to the Executive
such outplacement services that are generally consistent with
the Executive's status or position.
(v) The Company shall ensure that the Executive
continues to have complete coverage for fiduciary, liability
insurance, and directors and officers insurance for a period
of six years after a Change in Control; and will indemnify the
Executive of any losses that might result from actions taken
in good faith before the Date of Termination.
(vi) Except to the extent such payment would
constitute a "parachute payment" within the meaning of Section
280G(b) (2) of the Code as determined under paragraph (v)
below, the Company shall also pay to Executive all legal fees
and expenses incurred by Executive as a result of such
termination (including all such fees and expenses, if any,
incurred in contesting or disputing any such termination or in
seeking to obtain or enforce any right or benefit provided by
this Agreement).
(vii) The Severance Payment shall be reduced and
offset by the amount of any payment received or to be received
by Executive in connection with the termination of employment
pursuant to the provisions of any Company policy on severance
or any successor to such policy. If, in the opinion of tax
counsel selected by the Company and acceptable to Executive,
the Severance Payment (in its full amount or as partially
reduced, as the case may be) plus all other payments or
benefits which constitute "parachute payments" within the
meaning of Section 280G(b) (2) of the Code exceeds the amount
that is deductible by the Company by reason of Section 280G,
and in the opinion of such tax counsel, the Severance Payment
(in its full amount or as partially reduced, as the case may
be) plus all other payments or benefits which constitute
"parachute payments" within the meaning of Section 280G(b) (3)
of the Code are not reasonable compensation for services
actually rendered or to be rendered, within the meaning of
Section 280G(b) (4) of the Code, the Severance Payment shall
be reduced by the excess of the aggregate "parachute payments"
to be paid to or for the Executive over the aggregate
"parachute payments" that would be paid to or for the
Executive without any portion of such "parachute payments" not
being deductible by reason of Section 280G of the Code. The
value of any non-cash benefit or any deferred cash payment
shall be determined by the Company in accordance with the
principles of Sections 280G(d) (3) and (4) of the Code.
(viii) If it is established pursuant to a final
determination of a court or an Internal Revenue Service
proceeding that, notwithstanding the good faith of Executive
and the Company in applying the terms of this subsection (d),
the aggregate "parachute payments" paid to or for Executive's
benefit are in an amount that would result in any portion of
such "parachute payments" not being deductible by the Company
or its Affiliates by reason of Section 280G of the Code, then
Executive shall have an obligation to pay the Company upon
demand an amount equal to the sum of (A) the excess of the
aggregate "parachute payments" paid to or for the Executive's
benefit over the aggregate "parachute payments" that would
have been paid to or for the Executive's benefit without any
portion of such "parachute payments" not being deductible by
reason of Section 280G of the Code; and (B) interest on the
amount set forth in clause (A) of this sentence at the
applicable federal rate (as defined in Section 1274(d) of the
Code) from the date of Executive's receipt of such excess
until the date of such payment.
(e) Executive shall not be required to mitigate the amount of
any payment provided for in this Section 4 by seeking other employment
or otherwise, nor shall the amount of any payment or benefit provided
for in this Section 4 be reduced by any compensation earned by
Executive as the result of employment by another employer or by
retirement benefits after the Date of Termination, or otherwise except
as specifically provided in this Section 4.
(f) Executive shall be entitled to receive all benefits
payable to the Executive under the SpectraScience, Inc. Savings and
Retirement Plan, or any successor of such Plan and any other plan or
agreement relating to retirement benefits, which shall be in addition
to, and not reduced by, any other amounts payable to Executive under
this Section 4.
(g) Executive shall be entitled to exercise all rights and to
receive all benefits accruing to Executive under any and all Company
stock purchase, restricted stock grant and stock option plans or
programs, or any successor to any such plans or programs, which shall
be in addition to, and not reduced by, any other amounts payable to
Executive under this Section 4. In addition, all of Executive's
outstanding but unvested options shall vest immediately prior to a
Change in Control.
5. Funding of Payments. In order to assure the performance of the
Company or its successor of its obligations under this Agreement, the Company
may deposit in trust an amount equal to the maximum payment that will be due the
Executive under the terms hereof. Under a written trust instrument, the Trustee
shall be instructed to pay to the Executive (or the Executive's legal
representative, as the case may be) the amount to which the Executive shall be
entitled under the terms hereof, and the balance, if any, of the trust not so
paid or reserved for payment shall be repaid to the Company. If the Company
deposits funds in trust, payment shall be made no later than the occurrence of a
Change in Control. If and to the extent there are not amounts in trust
sufficient to pay Executive under this Agreement, the Company shall remain
liable for any and all payments due to Executive. In accordance with the terms
of such trust, at all times during the term of this Agreement, Executive shall
have no rights, other than as an unsecured general creditor of the Company, to
any amounts held in trust and all trust assets shall be general assets of the
Company and subject to the claims of creditors of the Company. Failure of the
Company to establish or fully fund such trust shall not be deemed a revocation
or termination of this Agreement by the Company.
6. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform it
if no such succession had taken place. Failure of the Company to obtain
such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on
the same terms as he would be entitled hereunder if he terminated his
employment for Good Reason following a Change in Control, except that
for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement shall inure to the benefit of and be
enforceable by Executive's personal or legal representative,
successors, heirs, and designated beneficiaries. If Executive should
die while any amount would still be payable to Executive hereunder if
the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this
Agreement to the Executive's designated beneficiaries, or, if there is
no such designated beneficiary, to the Executive's estate.
7. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage pre-paid,
addressed to the last known residence address of the Executive or in the case of
the Company, to its principal office to the attention of each of the then
directors of the Company with a copy to its Secretary, or to such other address
as either party may have furnished the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the parties. No waiver by either party hereto at any
time of any breach by the other party to this Agreement of, or compliance with,
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or similar time. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
The validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of Minnesota.
9. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
SPECTRASCIENCE, Inc. AGREED TO AND ACCEPTED:
__________________________________ ___________________________
Henry Holterman, Director Ching-Meng Chew
Vice President and CFO
__________________________________
Nathaniel Thayer, Director
EXHIBIT 10.17 TO ANNUAL REPORT OF SPECTRASCIENCE, INC. ON
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996
STANDARD COMMERCIAL LEASE AGREEMENT
(REV. - 6/85)
Plymouth Business Center, Phase III
---------------------------------------------
3650 Annapolis Lane
Plymouth, Minnesota
---------------------------------------------
5,880 square feet of office space
375 square feet of warehouse space
---------------------------------------------
6,255 square feet total
LEASE AGREEMENT
THIS LEASE AGREEMENT is between St. Paul Properties, Inc. (a Delaware
corporation) ("Landlord"), and SpectraScience, Inc. (a Minnesota corporation)
("Tenant").
WITNESSETH:
1. PREMISES AND TERM. In consideration of the obligation of Tenant to pay
rent as herein provided, and in consideration of the other terms, provisions and
covenants hereof, Landlord hereby leases to Tenant, and Tenant hereby takes from
Landlord certain premises situated within the County of Hennepin, State of
Minnesota, as shown outlined in red on the plan attached hereto as EXHIBIT A
(the "Premises"), which is located in a building or buildings (collectively, the
"Building") situated on the real property described on EXHIBIT B attached hereto
(the "Property") and incorporated herein by reference, together with all right,
privileges, easements, appurtenances, and Immunities belonging to or in any way
pertaining to the leased premises.
TO HAVE AND TO HOLD the same for a term commencing on the "commencement
date", as hereinafter defined, and ending 60 months thereafter, provided,
however, that in the event the "commencement date" is a date other than the
first day of a calendar month, said term shall extend for said number of months
in addition to the remainder of the calendar month following the "commencement
date".
The "commencement date" shall be the date upon which the Premises have been
substantially completed in accordance with the Plans and Specifications
described on EXHIBIT C or attached hereto. Landlord shall notify Tenant in
writing as soon as Landlord deems the Premises to be completed and ready for
occupancy. In the event that the Premises are not substantially completed in
accordance with such Plans and Specifications, Tenant shall notify Landlord in
writing of its objections within thirty (30) days after Tenant receives such
notice. Landlord shall have a reasonable time after delivery of Tenant's notice
in which to take such corrective action as may be necessary and shall notify
Tenant in writing as soon as it deems such corrective action has been completed
so that the Premises are completed and ready for occupancy. Taking of possession
by Tenant shall be deemed conclusively to establish that the Premises have been
completed in accordance with the Plans and Specifications and that the Premises
are in good and satisfactory condition, as of when possession was so taken,
except for those uncompleted items set forth in writing by Tenant prior to such
taking of possession. Tenant acknowledges that no representations as to the
condition of the Premises or the Building have been made by Landlord, unless
such are expressly set forth in this lease. On or before such "commencement
date" Tenant shall upon demand, execute and deliver to Landlord a letter of
acceptance of delivery of the Premises, on Landlord's standard form. In the
event of any dispute as to when or whether the work performed or required to be
performed by Landlord has been substantially completed, the certificate of
Landlord's architect or a certificate of occupancy issued by the local
governmental authority permitting occupancy of the Premises shall be conclusive
evidence of such completion, effective on the date of the delivery of any such
certificate to Tenant.
2. BASE RENT AND SECURITY DEPOSIT.
A. Tenant agrees to pay to Landlord base rent for the Premises, in advance,
without demand, deduction or set off, for the entire term hereof at the rate of
see Rider to Lease, Article 27 Dollars ($ see Rider, Article 27 ) per month, in
advance, except that the monthly installment which otherwise shall be due on the
commencement date shall be due and payable on the date hereof. Thereafter one
such monthly installment shall be due and payable without demand on or before
the first day of each calendar month succeeding the commencement date during the
term hereof, except that the rental payment of any fractional calendar month at
the commencement or end of the lease period shall be prorated.
B. In addition, Tenant agrees to deposit with Landlord on the date hereof
the sum of Five Thousand Nine Hundred Six and 00/100 Dollars ($5,906.00),
which sum shall be held by Landlord, without interest, as security for the
performance of Tenant's covenants and obligations under this lease, it being
expressly understood and agreed that such deposit is not an advance rental
deposit or a measure of Landlord's damages in case of Tenant's default. Upon the
occurrence of any event of default by Tenant, Landlord may, from time to time,
without prejudice to any other remedy provided herein or provided by law, apply
such fund to any arrears of rent or other payments due Landlord hereunder, and
any other damage, injury expense or liability caused by such event of default
without waiving such default; and Tenant shall pay to Landlord on demand the
amount so applied in order to restore the security deposit to its original
amount. Although the security deposit shall be deemed the property of Landlord,
any remaining balance of such deposit shall be returned by Landlord to Tenant at
such time after termination of this lease that all of Tenant's obligations under
this lease have been fulfilled. If the Property is conveyed by Landlord and
Landlord delivers said deposit to Landlord's grantee, landlord shall have no
further liability to Tenant with respect to said deposit and its application or
return.
3. USE. The premises shall be used only for the purposes of receiving,
storing, shipping and selling (other than retail) products, materials and
merchandise made and/or distributed by Tenant and for such other lawful purposes
as my be incidental thereto. Outside storage, including without limitation,
trucks and other vehicles, garbage containers and outdoor furniture are
prohibited without Landlord's prior written consent. Tenant shall at its own
cost and expense obtain any and all licenses and permits necessary for any such
use. Tenant shall comply with all governmental laws, ordinances and regulations
applicable to the use of the Premises, and shall promptly comply with all
governmental orders and directives for the correction, prevention and abatement
of nuisance in or upon, or connected with, the Premises, all at Tenant's sole
expense. Tenant shall not permit any objectionable or unpleasant odors, smoke,
dust, gas, noise or vibrations to emanate from the Premises, not take any other
action which would constitute a nuisance or would disturb or endanger any other
tenants of the building or unreasonable interfere with their use of their
premises. Without Landlord's prior written consent, Tenant shall not receive,
store or otherwise handle on the Premises any product, material or merchandise
which is explosive or highly flammable. Tenant will not permit the Premises to
be used for any purpose or in any manner (including without limitation any
method of storage) which would render the insurance on the Building or the
Property void or the insurance risk more hazardous or cause the State Board of
Insurance or other insurance authority to disallow any sprinkler credits. If any
increase in the fire and extended coverage insurance premiums paid by Landlord
for the Building is caused by Tenant's use and occupancy of the Premises, then
Tenant shall pay to Landlord as additional rent the amount of such increase.
4. OPERATING COSTS.
A. Upon Demand, Tenant shall pay to Landlord, as additional rent during the
term hereof, Tenant's proportionate share of Operating Costs, as hereinafter
defined, calculated on the basis of the ratio set forth in Paragraph 4E.
As used in this lease, the term "Operating Costs" shall mean any and all
expenses, costs and disbursements of any kind and nature whatsoever incurred by
Landlord in connection with the ownership, management, maintenance, operation
and repair of the Property or the Building which Landlord shall pay or become
obligated to pay in respect of a calendar year (regardless of when such
Operating Costs were incurred). Operating Costs shall include, without
limitation, the costs of maintenance, repairs, and replacements to the Building
including roof, walls, downspouts, gutters, painting, and sprinkler systems; the
costs of maintaining and repairing parking lots, parking structures and
easements; property management fees, salaries, fringe benefits and related costs
payable to employees of Landlord whose duties are connected with the Property;
insurance costs, all heating and air conditioning costs, electricity, sewer and
water and other utility costs not separately metered to tenants, landscape
maintenance, trash and snow removal, taxes, as defined in paragraph 4F, and
costs and expenses incurred by Landlord in protesting any assessments, levels or
the tax rate, provided, however, that Operating Costs shall not include the
following: (i) costs of alterations of any tenant's premises; (ii) costs of
curing construction defects; (iii) depreciation; (iv) interest and principal
payments on mortgages, and other debt costs; (v) real estate brokers' leasing
commissions or compensation; (vi) any cost or expenditure (or portion thereof)
for which Landlord is reimbursed, whether by insurance proceeds or otherwise;
and (vii) cost of any service furnished to any other occupant of the Building
which Landlord does not provide to Tenant hereunder. Notwithstanding anything
contained herein to the contrary, depreciation of any structural repairs or
replacements to the Building, or of any capital improvements made after the date
of this lease which are intended to reduce Operating Costs or of any capital
improvements which are required under any governmental laws, regulations, or
ordinances which were not applicable to the Building at the time it was
constructed, shall be included in Operating Costs. The useful life of any such
improvement, structural repair or replacement shall be reasonably determined by
Landlord. In addition, interest on the undepreciated cost of any such
improvement, structural repair or replacement (at the prevailing construction
loan rate available to Landlord on the date the cost of such improvement was
incurred) shall also be included in Operating Costs.
B. Promptly after the commencement of this lease and during December of
each year or as soon thereafter as practicable, Landlord shall give Tenant
written notice or its estimate of amounts payable under Paragraph 4A for the
ensuing calendar year. On or before the first day of each month thereafter,
Tenant shall pay to Landlord as additional rent one/twelfth (1/12th) of such
estimated amounts, provided that if such notice is not given in December, Tenant
shall continue to pay on the basis of the prior year's estimate until the first
day of the month after the month in which such notice is given. If at any time
it appears to Landlord that the amounts payable under Paragraph 4A for the then
current calendar year will vary from its estimate by more than five percent
(5%), Landlord may, by written notice to Tenant, revise its estimate for such
year, and subsequent payments by Tenant for such year shall be based upon such
revised estimate.
Within ninety (90) days after the close of each calendar year or as soon
thereafter as practicable, Landlord shall deliver to Tenant a summary of the
total Operating Costs for the previous calendar year and Tenant's proportionate
share thereof. If such summary shows an amount due from Tenant that is less than
the estimated payments previously paid by Tenant, it shall be accompanied by a
refund of the excess to Tenant. If such summary shows an amount due from Tenant
that is more than the estimated payments previously paid by Tenant, Tenant shall
pay the deficiency to Landlord, as additional rent, within thirty (30) days
after delivery of the summary.
C. Tenant or its representatives shall have the right to examine landlord's
books and records of Operating Costs during normal business hours within twenty
(20) days following the furnishing of the summary to Tenant. Unless Tenant takes
written exception to any item within thirty (30) days following the furnishing
of the summary to Tenant (which item shall be paid in any event), such summary
shall be considered as final and accepted by Tenant.
D. If landlord selects the accrual accounting method rather than the cash
accounting method for operating expense purposes, Operating Costs shall be
deemed to have been paid when such expenses have accrued.
E. For purposes hereof the Premises total 6,255 square feet. The Buildings
within Phase III totals 115,058 square feet. Tenant's "proportionate share" of
5.44% is arrived at by dividing 6,255 into 115,058.
F. Landlord agrees to pay before they become delinquent all taxes,
installments of special assessments and governmental charges of any kind and
nature whatsoever (herein collectively referred to as "taxes") lawfully due and
payable with respect to the Building and the Property.
G. If at any time during the term of this lease, the present method of
taxation shall be changed so that in lieu of the whole or any part of any taxes,
assessments or governmental charges levied, assessed or imposed on real estate
and the improvements thereon there shall be levied, assessed or imposed on
Landlord a capital levy or other tax directly on the rents received therefrom
and/or a franchise tax, assessment, levy or charge measured by or based, in
whole or in part, upon such rents for the present or any future building or
buildings on the Property, then all such taxes, assessments, levies or charges,
or the part thereof so measured or based, shall be deemed to be included within
the term "taxes" for the purposes hereof.
5. LANDLORD'S RESPONSIBILITIES. Landlord shall maintain in good repair,
reasonable wear and tear and any casualty covered by the Provisions of Paragraph
12A excepted, all parts of the Building, other than tenants' premises, making
all necessary repairs and replacements, whether ordinary or extraordinary,
structural or nonstructural, including roof, foundation, walls, downspouts,
gutters, sprinkler system; regularly mow any grass, remove weeds and perform
general landscape maintenance; and maintain and repair the parking lot and
driveway areas. Tenant shall immediately give Landlord written notice of any
defect or need for repairs after which Landlord shall have a reasonable
opportunity to repair the same or cure such defect. Landlord's liability with
respect to any defects, repairs or maintenance is responsible under any of the
previsions of this Lease hall be limited to the cost of such repairs or
maintenance or the curing of such defect. The term "walls" as used herein shall
not include windows, glass or plate glass, doors, special store fronts or office
entries.
6. TENANT'S RESPONSIBILITIES.
A. Tenant shall at its own cost and expense keep and maintain all parts of
the Premises (except as provided in Paragraph 50 in good condition, promptly
making all necessary repairs and replacements, including but not limited to,
windows, glass and plate glass, doors, and special entry, interior walls and
finish work, floors and floor coverings, heating and air conditioning systems,
dock boards, truck doors, dock bumpers, plumbing work and fixtures, termite and
pest extermination, regular removal of trash and debris and keeping the parking
areas, driveways, alleys and the whole of the Premises in a clean and sanitary
condition. Tenant shall not be obligated to repair any damage caused by fire,
tornado or other casualty covered by the insurance to be maintained by Landlord
pursuant to Paragraph 12A, except that Tenant shall be obligated to repair all
wind damage to glass unless caused by a tornado. See Rider, Article 28.
B. Tenant shall not damage any demising wall or disturb the integrity and
support provided by any demising wall and shall, at its sole cost and expense,
promptly repair any damage or injury to any demising wall caused by Tenant or
its employees, agents or invitees.
C. Tenant and its employees, customers and licensees shall have the
nonexclusive right to use, in common with the other parties occupying the
Building, common parking areas, if any (exclusive of any parking or work load
areas designated or to be designated by Landlord for the exclusive use of Tenant
or other tenants occupying or to be occupying other portions of the Building),
driveways and alleys adjacent tot he Building, subject to such reasonable rules
and regulations as Landlord may from time to time prescribe.
D. (ENTIRE PARAGRAPH DELETED)
E. Tenant shall, at its own cost and expense, enter into a regularly
scheduled preventive maintenance/service contract with a maintenance contractor
for servicing all hot water, heating and air conditioning systems and equipment
serving the Premises. The maintenance contractor and the contract must be
approved by Landlord. The service contract must include all services suggested
by the equipment manufacturer in the operation/maintenance manual and must
become effective (and a copy thereof delivered to Landlord) within thirty (30)
days of the date Tenant take possession of the Premises.
F. Tenant shall upon demand by Landlord, pay, as additional rent, the cost
and expense of repairing any damage to the Premises resulting from and/or caused
in whole or in part by the negligence or misconduct of Tenant, its agents,
servants, employees, patrons customers, or any other person entering upon the
property as a result of Tenant's business activities or caused by Tenant's
default hereunder to the extent the cost of repairing such damage is not
reimbursed by the insurance to be maintained by Landlord under Paragraph 12A.
7. ALTERATIONS. Tenant shall not make any alterations, additions or
improvements to the Premises (including but not limited to roof and wall
penetrations), without the prior written consent of Landlord. Tenant may,
without the consent of Landlord, but at its own cost and expense and in a good
workmanlike manner erect such shelves, bins, machinery and trade fixtures as it
may deem advisable, without altering the basic character of the Building and
without overloading or damaging such Building, and in each case complying with
all applicable governmental laws, ordinances, regulations and other
requirements. Prior to commencing any such alterations, additions or
improvements Tenant shall provide such assurances to Landlord, including but not
limited to waivers of lien, surety company performance and payment bonds and
personal guaranties of persons of substance, as Landlord shall require to assure
payment of the costs thereof and to protect Landlord against any loss from
mechanics', laborers', materialmen's or other liens. See Rider, Article 29.
8. SIGNS/WINDOW COVERINGS. Tenant shall not, without the prior written
consent of Landlord, install or affix any window coverings, blinds, draperies,
signs, window or door lettering or advertising media of any type on the
Property, the Building or in or on the Premises which are visible fro the
exterior of the Building. Any permitted signs shall be subject to any applicable
governmental laws, ordinances, regulations and other requirements. Tenant shall
remove any permitted signs and window coverings upon the termination of this
lease. Any such installations and removals shall be made in such manner as to
avoid injury or defacement of the Building and other improvements, and Tenant
shall repair any injury of defacement.
9. INSPECTION. Landlord and Landlord's agents and representatives shall
have the right to enter and inspect the premises at any reasonable time for the
purpose of ascertaining the condition of the Premises or in order to make such
repairs as may be required or permitted to be made by Landlord under the terms
of this lease. During the period that is six (6) months prior to the end of the
term hereof, Landlord and Landlord's agents and representatives shall have the
right to enter the Premises at any reasonable time for the purpose of showing
the Premises and shall have the right to erect on the Premises a suitable sign
indicating the Premises are available. Tenant shall give written notice to
Landlord at least thirty (30) days prior to vacating the Premises and shall
arrange to meet with Landlord for a joint inspection of the Premises prior to
vacating. In the event of Tenant's failure to give such notice or arrange such
joint inspection. Landlord's inspection at or after Tenant's vacating the
Premises shall be conclusively deemed correct for purposes of determining
Tenant's responsibility for repairs and restoration.
10. UTILITIES. Tenant shall pay for all water, gas, heat, light, power,
telephone, sewer and sprinkler charges and other utilities and services
separately metered for the Premises, together with any taxes, penalties,
surcharges or the like pertaining thereto and shall furnish and install all
replacement electric light bulbs and tubes. Landlord shall in no event be liable
for any interruption or failure of utility services on the premises. See Rider,
Article 30.
11. ASSIGNMENT AND SUBLETTING.
A. Tenant shall not have the right to assign or pledge this lease or to
sublet the whole or any part of the Premises, whether voluntarily or by
operation of law, or permit the use or occupancy of the Premises by anyone other
than Tenant, without the prior written consent of Landlord which in the event of
subleasing shall not be unreasonably withheld, and such restrictions shall be
binding upon any assignee or subtenant to which Landlord has consented. In the
event Tenant desires to sublet the Premises, or any portion thereof, or assign
this lease, Tenant shall give written notice thereof to Landlord within a
reasonable time prior to the proposed commencement date of such subletting or
assignment, which notice shall set forth the name of the proposed subtenant or
assignee, the revenant terms of any sublease and copies of financial reports and
other relevant financial information of the proposed subtenant or assignee.
Notwithstanding any permitted assignment or subletting, Tenant shall at all
times remain directly, primarily and fully responsible and liable for the
payment of the rent herein specified and for compliance with all of its other
obligations under the terms, provisions and covenants of this lease. Upon the
occurrence of an "event of default" (as hereinafter defined), if the Premises r
any part thereof are then assigned or sublet, Landlord, in addition to any other
remedies herein provided or provided by law, may, at its option, collect
directly form such assignee or subtenant all rents due and becoming due to
Tenant under such assignment of sublease and apply such rent against any sums
due to landlord from Tenant hereunder, and no such collection shall be construed
to constitute a novation or release of Tenant from the further performance of
Tenant's obligations hereunder.
If Landlord grants its consent to any sublease or assignment, Tenant shall
pay Landlord as additions base rent, one hundred percent (100%) of any rent
(together with escalation) payable to Tenant under the sublease or assignment,
over the base rent payable hereunder plus Tenant's share of Operating Costs. If
Landlord grants its consent to any sublease or assignment, Tenant shall pay
hereunder plus Tenant's share of Operating Costs. If Landlord grants its consent
to any sublease or assignment, Tenant shall pay all of the attorney's fees of
Landlord incurred with respect of such assignment or sublease. in addition, if
Tenant has any options to extend the term of this lease, such options shall not
be available to any subtenant or assignee, directly or indirectly.
Tenant shall, at Tenant's own cost and expense, discharge in full any
outstanding commission obligation on the part of Landlord with respect to this
lease, and any commissions which may be due and owing as a result of any
proposed assignment or subletting, whether or not the Premises are recaptured
pursuant hereto and rented by Landlord tot he proposed tenant or any other
tenant.
B. In addition, but not in limitation of Landlord's right to approve of any
subletting or assignment, to terminate this lease, or in the case of a proposed
subletting of less than the entire Premises, to recapture the portion of the
Premises to be sublet, as of the date the subletting or assignment is to be
effective. The option shall be exercised, if at all, by Landlord giving Tenant
written notice thereof within sixty (60) days following Landlord's receipt of
Tenant's written notice as required above. If this lease shall be terminated
with respect to the entire Premises pursuant to this subparagraph, the term of
this lease shall end on the date stated in Tenant's notice as the effective date
of the sublease or assignment as if that date been originally fixed in this
lease for the expiration of the term hereof. If landlord recaptures only a
portion of the Premises under this subparagraph, the runt during the unexpired
term shall abate proportionately based on the rent contained in this lease as of
the date immediately prior to such recapture.
12. FIRE AND CASUALTY DAMAGE.
A. Landlord agrees to maintained standard fire and extended coverage
insurance covering the Building in an amount not less than 80% (or such greater
percentage as my be necessary to comply with the provisions of any co-insurance
clauses of the policy) of the "replacement cost" thereof as such term is defined
in the Replacement Cost Endorsement to be attached thereto, insuring against the
perils of fire, lighting and extended coverage, such coverages and endorsements
to be defined, provided and limited in the standard bureau forms prescribed by
the insurance regulatory authority for the state in which the Building is
situated for use by insurance companies admitted in such state for the writing
of such insurance on risks located within such state. Subject to the provisions
of Paragraphs 12C, 12D and 12E, such insurance shall be for the sole benefit of
Landlord and under its sole control.
B. If the Building should be damaged or destroyed by fire, tornado or other
casualty, Tenant shall give immediate written notice thereof to Landlord.
C. If the Building should be totally destroyed by fire, tornado or other
casualty, or if it should be so damaged thereby that rebuilding or repairs
cannot in Landlord's estimation be completed within one hundred fifty (150) days
after the date upon which Landlord is notified by Tenant of such damage, this
lease shall terminate and the rent shall be abated during the unexpired portion
of this lease, effective upon the date of the occurrence of such damage.
D. If the Building should be damaged by any peril covered by the insurance
to be provided by Landlord under Paragraph 12A, but only to such extent that
rebuilding or repairs can in Landlord's estimation be completed within one
hundred fifty (150) days after the date upon which Landlord is notified by
Tenant of such damage (except that Landlord shall at its sole cost and expense
thereupon proceed with reasonable diligence to rebuild and repair the Building
to substantially the condition in which they existed prior to such damage,
except that landlord shall not be required to rebuild, repair or replace any
part of the partitions, fixtures, additions and other improvements which may
have been placed in, on or about the premises by Tenant. If the Premises are
untenantable in whole or in part following such damage, the rent payable
hereunder during the period in which they are untenantable shall be reduced to
such extent as may be fair and reasonable under all of the circumstances. In the
event that Landlord should fail to complete such repairs and rebuilding within
one hundred fifty (150) days after the date upon which Landlord is notified by
Tenant of such damage (unless any such delay is due to changes, deletions or
additions in construction requested by Tenant, strikes, lockouts, casualties
acts of God, war, material or labor shortages, governmental regulation or
control or other causes beyond the reasonable control of Landlord, in which
event such period shall be extended for the amount of time Landlord is so
delayed), Tenant may at its option upon thirty (30) days prior written notice,
terminate this lease as Tenant's exclusive remedy, whereupon all rights and
obligations hereunder shall cease and terminate.
E. Notwithstanding anything herein to the contrary, in the event the holder
of any indebtedness secured by a mortgage or deed of trust covering the Premises
or the Building requires that the insurance proceeds be applied to such
indebtedness, then Landlord shall have the right to terminate this lease by
delivering written notice of termination to Tenant within fifteen (15) days
after such requirement is made by any such holder. whereupon all right and
obligations hereunder shall cease and terminate. See Rider Article 31.
F. Anything in this lease to the contrary notwithstanding, Landlord and
Tenant hereby waive and release each other of and from any and all right of
recovery, claim, action or cause of action, against each other, their agents,
officers and employees, for any loss of damage that may occur tot he Premises,
improvements tot he Building or personal property (building contents) within the
Building, by reason of fire or the elements regardless of cause or origin,
including negligence of Landlord or Tenant and their agents, officer and
employees, but only to the extent of the insurance proceeds payable under the
policies of insurance covering of the Property.
13. LIABILITY. Landlord shall not be liable for and Tenant will indemnify
and hold Landlord harmless from any loss, liability, claims, suits, costs and
expenses, including attorney's fees, arising out of any claim of injury or
damage on or about the Premises caused by the negligence or misconduct or breach
of this lease by Tenant in or on the Premises or the Property. Landlord shall
not be liable to Tenant or Tenant's agents, employees or invitees for any damage
to persons or property due to any condition design, or defect in the Building or
its mechanical systems which may exist or occur except Landlord's willful acts
of gross negligence, or due to any leakage or of damages from gas, oil, water,
steam, smoke or electricity or due to any other cause whatsoever and Tenant
assumes all risks of damage to such persons or property. Landlord shall not be
liable or responsible for any loss or damage to any property or person
occasioned by theft, fire, act of God, public enemy, injunction, riot, strike,
insurrection, war, court order, requisition or order of governmental body or
authority, or other matter beyond control of Landlord, or any injury or damage
or inconvenience, which may arise through repair or alteration of any part of
the Building, or failure to make repairs, or from any cause whatever except
Landlord's willful acts of gross negligence.
14. INSURANCE. Tenant shall maintain throughout the term of this lease a
policy of Insurance, in form and substance satisfactory to Landlord, at Tenant's
sole cost and expense, insuring both Landlord and Tenant against all claims,
demands or actions arising out of or in connection with: (I) the Premises; (ii)
the condition of the Premises; (iii) Tenant's operations in and maintenance and
use of the Premises; and (iv) Tenant's liability assumed under this lease; with
a combined single limit of not less than $1,000,000 per occurrence in respect of
injury to persons (including death) and in the amount of not less than $250,000
per occurrence in respect of property damage or destruction, including loss of
use thereof. Such policy shall be procured by Tenant from responsible insurance
companies satisfactory to Landlord. Evidence of such polity, together with a
receipt evidencing payment of the premium, shall be delivered to Landlord prior
tot he commencement date. Not less than thirty 930) days prior tot he expiration
date of such policy, a certified copy of a renewal thereof (bearing notations
evidencing the payment of the renewal premium) shall be delivered to Landlord.
Such policy shall further provide that not less than thirty (30) days' written
notice shall be given to Landlord before such policy may be canceled or changed
to reduce the insurance coverage provided thereby.
15. CONDEMNATION.
A. If the whole or any substantial part of the Building is taken for any
public or quasi-public use under governmental law, ordinance or regulation, or
by right of eminent domain, or by private purchase in lieu thereof and the
taking would prevent or materially interfere with the use of the Premises or the
Building for the purpose of which they are being used, this lease shall
terminate and the rent shall be abated during the unexpired portion of this
lease effective when the physical taking of the Property shall occur.
B. If part of the Premises shall be taken for any public or quasi-public
use under any governmental law, ordinance or regulation, or by right of eminent
domain, or by private purchase in lieu thereof, and this lease is not terminated
as provided in the subparagraph above, this lease shall not terminate but the
rent payable hereunder during the unexpired portion of this lease shall be
reduced to such extent as may be fair and reasonable under all of the
circumstances.
C. In the event of any such taking or private purchase in lieu thereof,
Landlord and Tenant shall each be entitled to receive and retain such separate
awards and/or portion of lump sum awards as may be allocated to their respective
interests in any condemnation proceedings, provided that Tenant shall not be
entitled to receive any award for Tenant's loss of its leasehold interest or
other property which would have become the property of Landlord upon termination
of this Lease; the right to such award being hereby assigned to Landlord.
16. HOLDING OVER. Tenant will at the termination of this lease by lapse of
time or otherwise, yield up immediate possession to Landlord. If Tenant retains
possession of the lease premises or any part thereof after such termination,
then Landlord may, at its option, serve written notice upon Tenant that such
holding over constitutes many one of (I) renewal of this lease for one year, and
from year to year thereafter, or (ii) creation of a month to month tenancy, upon
the terms and conditions set forth in this lease, or (iii) creation of a tenancy
at sufferance, in any case upon the terms and conditions set forth in this
lease; provided, however, that the monthly rental (or daily rental under (iii))
shall, in addition to all other sums which are to be paid by Tenant hereunder,
whether or not as additional rent, be equal to one hundred fifty (150%) percent
the rental being paid monthly to Landlord under this lease immediately prior to
such termination (prorated in the case of (iii) on the basis of 365 day year for
each day Tenant remains in possession). If no such notice is served, then
tenancy at sufferance shall be deemed to be created at the rent in the preceding
sentence. Tenant shall also pay to Landlord all damages sustained by Landlord
resulting from retention of possession by Tenant, including the loss of any
proposed subsequent tenant for any portion of the lease premises. The provisions
of this paragraph shall not constitute a waiver by Landlord of any right of
re-entry as herein set forth; not shall receipt of any rent or any other act in
apparent affirmance of the tenancy operate as a waiver of the right to terminate
this lease for a breach of any of the terms, covenants, or obligations herein on
Tenant's part to be performed.
17. QUIET ENJOYMENT. Landlord covenants that it now has, or will acquire
before Tenant takes possession of the Premises, good title to the Premises, fee
and clear of all liens and encumbrances, exception only the lien for current
taxes not yet due, such mortgage or mortgages as are permitted by the terms of
this lease, zoning ordinances and other building and fire ordinances and
governmental regulations relating to the use of such property, and easements,
restrictions and other conditions of record. In the event this lease is a
sublease, then Tenant agrees to take the Premises subject to the provisions of
the prior leases. Landlord represents and warrants that it has full right and
authority to enter into this lease and that Tenant, upon paying the rental
herein set forth and performing its other covenants and agreements herein set
forth, shall peaceably and quietly have, hold and enjoy the Premises for the
term hereof without hindrance or molestation from Landlord, subject to the terms
and provisions of this lease.
18. EVENTS OF DEFAULT. The following events shall be deemed to be events of
default by Tenant under this lease:
(a) Tenant shall fail to pay any installment of the base rent, additional
rent, operating Costs, or any other payment or reimbursement to Landlord
required herein when due, and such failure shall continue for a period of
five (5) days from the date such payment was due.
(b) Tenant shall become insolvent, or shall make a transfer in fraud of
creditors, or shall make an assignment for the benefit of creditors.
(c) Tenant shall file a petition under any section or chapter of the
federal bankruptcy laws, or under any similar law or statute of the
United States or any State thereof, whether now or hereafter in effect;
or an order for relief shall be entered against Tenant in any such
bankruptcy or insolvency proceedings filed against Tenant thereunder or
Tenant shall be adjudged bankrupt or insolvent in proceedings filed
against Tenant thereunder.
(d) A receiver or trustee shall be appointed for all substantially all of
the assets of Tenant.
(e) (ENTIRE PARAGRAPH DELETED)
(f) Tenant shall vacate all or a substantial portion of the Premises,
whether or not Tenant is in default of the payments due under
this lease.
(g) Tenant shall fail to discharge any lien placed upon the premises in
violation of Paragraph 23 hereof within twenty (20) days after any such
lien or encumbrance is filed against the Premises.
(h) Tenant shall fail to comply with any term, provisions or covenant of
this lease (other than the foregoing in this paragraph 18), and shall not
cure such failure within twenty (20) days after written notice thereof to
Tenant. See Rider to Lease, Article 32.
19. REMEDIES. Upon the occurrence of any of such events of default
described in Paragraph 18 thereof, Landlord shall have the option to pursue any
one or more of the following remedies without any further notice or demand
whatsoever:
(a) Landlord may, at its election, terminate this lease or terminate
Tenant's right to possession only, without terminating the lease;
(b) Upon an termination of this lease, whether by lapse of time or
otherwise, or upon any termination of Tenant's right to possession
without termination of this lease, Tenant shall surrender possession and
vacate the Premises immediately and deliver possession thereof to
Landlord, and Tenant hereby grants to Landlord full and free license to
enter into and upon the Premises in such event with or without process of
law and to repossess landlord of the Premises as of Landlord's former
estate and to expel or remove Tenant arid and any other who may be
occupying or within the Premises and to alter all locks and other
security devices at the Premises and to remove any and all property
therefrom, without being deemed in any manner guilty of trespass,
eviction or forcible entry or detainer, and without incurring any
liability for any damage resulting therefrom, Tenant hereby waiving any
right to claim damage for such reentry and expulsion, and without
relinquishing Landlord's right to rent or any other right given to
Landlord hereunder or by operation of law;
(c) Upon any termination of this lease, whether by lapse of time or
otherwise, Landlord shall be entitled to recover as damages, all rent,
including any amounts treated as additional rent hereunder, and other
sums due and payable by Tenant on the date of termination, plus the sum
of (I) an amount equal to the then present value of the rent, including
any amounts treated as additional rent hereunder, and other sums provided
herein to be paid by Tenant for the residue of the term hereof, less the
fair rental value of the Premises for such residue (taking into account
the time and expense necessary to obtain a replacement tenant or tenants,
including expenses hereinafter described in subparagraph (d) relating to
recovery of the Premises, preparation fro reletting and for reletting and
for reletting itself), which the parties agree shall in no event exceed
60% of the then present value of the rent for the period and (ii) the
cost of performing any other covenants which would have otherwise been
performed by Tenant;
(d) (I) upon any termination of Tenant's right to possession only without
termination of the lease, Landlord may, at Landlord' option, enter into
the Premises, remove Tenant's signs and other evidences of tenancy, and
take and hold possession thereof as provided in subparagraph (b) above,
without such entry and possession terminating the lease or releasing
Tenant, in whole or in part, from any obligation, including Tenant's
obligation to pay the rent, including any amounts treated as additional
rent, hereunder for the full term. In any such case Tenant shall pay
forthwith to Landlord, if Landlord so elects, a sum equal to the entire
amount of the rent, including any amounts treated as additional rent
hereunder, for the residue of the stated term hereof plus any other sums
provided herein to be paid by Tenant for the remainder of the lease term;
(ii) Landlord may, but need not relet the Premises or any part thereof
for such rent and upon such terms as Landlord in its sole discretion
shall determine (including the right to relet the Premises as part of a
larger area and the right to change the character or use made of the
Premises) and Landlord shall not be required to accept any tenant
offered by Tenant or to observe any instructions given by Tenant about
such reletting. In any such case, Landlord may make repairs,
alterations and additions in or to the Premises, and redecorate the
same to the extent Landlord deems necessary or desirable, and Tenant
shall, upon demand, pay the cost thereof, together with Landlord's
expenses of reletting including, without limitation, any broker's
commission incurred by Landlord. If the consideration collected by
Landlord upon any such reletting plus any sums previously collected
from Tenant are not sufficient to pay the full amount of all rent,
including any amounts treated as additional rent hereunder and other
sums reserved in this lease for the remaining term hereof, together
with the costs of repairs, alterations, additions, redecorating, and
Landlord's expenses of reletting and the collection of the rent
accruing therefrom (including attorney's fees and broker's
commissions), Tenant shall pay to Landlord the amount of such
deficiency upon demand and Tenant agrees that Landlord may file suit to
recover any sums falling due under this subparagraph from time to time.
(e) In addition to Landlord's right under paragraph 9 above hereof
Landlord may, at Landlord's option, enter into and upon the Premises, if
Landlord determines in its sole discretion that Tenant is not acting
within a commercially reasonable time to maintain, repair or replace
anything for which Tenant is responsible hereunder and correct the same,
without being deemed in any manner guilty of trespass, eviction or
forcible entry and detainer and without incurring any liability for any
damage resulting therefrom and Tenant agrees to reimburse Landlord, on
demand, as additional rent, for any expenses which Landlord may incur in
thus effecting compliance with Tenant's obligation under this lease;
(f) Any and all property which may be removed from the Premises by
Landlord pursuant to the authority of the lease or of law, to which
Tenant is or my be entitled, may be handled, removed and stored, as the
case may be, by or at the direction of Landlord at the risk, cost and
expense of Tenant, and Landlord shall in no event be responsible for the
value, preservation or safekeeping thereof. Tenant shall pay to Landlord,
upon demand, any and all expenses incurred in such removal and all
storage charges against such property so long as the same shall be in
Landlord's possession or under Landlord's control. Any such property of
Tenant not retaken by Tenant from storage within thirty (30) days after
removal from the Premises shall, at Landlord's option, be deemed conveyed
by Tenant to Landlord under this lease as by a bill of sale without
further payment or credit by landlord to Tenant.
In the event Tenant fails to pay any installment of rent, including any
amount treated as additional rent hereunder, or other sums hereunder as and when
such installment or other charge is due, Tenant shall pay to Landlord on demand
a late charge in an amount equal to five percent (5%) of such installment or
other charge overdue in any month and five percent (5%) each month thereafter
until paid in full to help defray the additional cost to Landlord for processing
such late payments, and such late charge shall be additional rent hereunder the
failure to pay such late charge within ten (10) days after demand therefor shall
be an additional event of default hereunder. The provision for such late charge
shall be in addition to all of Landlord's other rights and remedies hereunder or
at law and shall not be construed as liquidated damages or as limiting
Landlord's remedies in any manner.
Pursuit of any of the foregoing remedies shall not preclude pursuit of any
of the other remedies herein provided or any other remedies provided by law, nor
shall pursuit of any remedy herein provided constitute a forfeiture or waiver of
any rent due to Landlord hereunder or of any damages accruing to Landlord by
reason of the violation of any of the terms, provisions and covenants herein
contained. No act or thing done by the Landlord or its agents during the term
hereby granted shall be deemed a termination of this lease or an acceptance of
the surrender of the Premises, and no agreement to terminate this lease or
accept a surrender of said premises shall be valid unless in writing signed by
Landlord. No waiver by Landlord of any violation or breach of any of the terms,
provisions and covenants herein contained. Landlord' acceptance of the payment
of rental or other payments hereunder after the occurrence of an event of
default shall not be construed as a waiver of such default or of Landlord's
right to enforce any such remedies with respect to such default or any
subsequent default. If, on account of any breach or default by Tenant in
Tenant's obligations under the terms and conditions of this lease, it shall
become necessary or appropriate for Landlord to employ or consult with an
attorney concerning or to enforce or defend any of Landlord's rights or remedies
hereunder, Tenant agrees to pay any reasonable attorney's fees so incurred.
20. (ENTIRE PARAGRAPH DELETED)
21. MORTGAGES. Tenant accepts this lease subject and subordinate to any
mortgage(s) now or at any time hereafter constituting a lien or charge upon the
Property or the Premises, provided however, that if the holder of any such
mortgage elects to have Tenant's interest in this lease superior to any such
instrument, then by notice to Tenant from such holder, this lease shall be
deemed superior to such lien, whether this lease was executed before or after
said mortgage. Tenant shall at any time hereafter on demand execute any
instruments, releases or other documents which may be required by any mortgagee
for the purpose of subjecting and subordinating this lease to the lien of any
such mortgage.
22. LANDLORD'S DEFAULT. In the event of any default by Landlord, Tenant's
exclusive remedy shall be an action for damages (Tenant hereby waiving the
benefit of any laws granting it a lien upon the Property of Landlord and/or upon
rent due Landlord), but prior to any such action Tenant will give Landlord
written notice specifying such default with particularity, and Landlord shall
thereupon have thirty (30) days in which to cure any such default. Unless and
until Landlord fails to so cure any default after such notice, Tenant shall not
have any remedy or cause of action by reason thereof. All obligations of
Landlord hereunder will be construed as covenants, not conditions; and all such
obligations will be binding upon Landlord only during the period of its
possession of the Premises and not thereafter.
23. MECHANIC'S LIENS AND PERSONAL PROPERTY TAXES.
A. Tenant shall have no authority, express or implied, to create or place
any lien or encumbrance of any kind or nature whatsoever upon, or in any manner
to bind, the interest of Landlord or Tenant in the Building or the Premises or
to charge the rentals payable hereunder for any claim in favor of any person
dealing with Tenant, including those who may furnish materials or perform labor
for any construction or repairs. Tenant covenants and agrees that it will pay or
cause to be paid all sums legally due and payable by it on account of any labor
performed or materials furnished in connection with any work performed on the
Premises on which any lien is or can be validly and legally asserted against its
leasehold interest in the Premises or the improvements thereon and that it will
save and hold Landlord harmless from any and all loss, cost or expense based on
or arising out of asserted claims or liens against the leasehold estate or
against the right, title and interest of the Landlord in the Building or the
Premises or under the terms of this lease. Tenant agrees to give Landlord
immediate written notice of the placing of any lien or encumbrance against the
Building or the Premises.
B. Tenant shall be liable for all taxes levied or assessed against personal
property, furniture or fixtures placed by Tenant in the Premises. If any such
taxes for which tenant is liable are levied or assessed against Landlord or
Landlord's property and if Landlord elects to pay the same or if the assessed
value of Landlord's property is increased by inclusion of personal property,
furniture or fixtures placed by Tenant in the Premises, and Landlord elects to
pay the taxes based on such increase, Tenant shall pay to Landlord upon demand
that par of such taxes.
24. NOTICES. Each provisions of this instrument or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivery of any notice or the making of any payment
by Landlord to Tenant or with reference to the sending, mailing or delivery of
any notice or the making of any payment by Tenant to Landlord shall be deemed to
be complied with when and if the following steps are taken:
(a) All rent and other payments required to be made by Tenant to Landlord
hereunder shall be payable to Landlord at the address for Landlord
hereinbelow set forth or at such other address as Landlord may specify
from time to time by written notice delivered in accordance herewith.
Tenant's obligation to pay rent and any other amounts to Landlord under
the terms of this lease shall not be deemed satisfied until such rent and
other amounts have been actually received by Landlord.
(b) All payments required to be made by Landlord to Tenant hereunder
shall be payable to Tenant at the address hereinbelow set forth, or at
such other address within the continental United States as Tenant may
specify from time to time by written notice delivered in accordance
herewith.
(c) Any notice or document required or permitted to be delivered
hereunder shall be deemed to be delivered whether actually received or
not when deposited in the United States Mail, postage prepaid, Certified
or Registered Mail, addressed to the parties hereto at the respective
addresses set out below, or at such other address as they have
theretofore specified by written notice delivered in accordance herewith:
<TABLE>
<CAPTION>
LANDLORD: TENANT:
<S> <C>
St. Paul Properties, Inc. SpectraScience, Inc.
---------------------------------------------------------- -----------------------------------------------
385 Washington Street 3650 Annapolis Lane
---------------------------------------------------------- -----------------------------------------------
St. Paul, MN 55102 Plymouth, MN 55447
---------------------------------------------------------- -----------------------------------------------
Atten: Mike Elnicky Atten: Ching-Meng Chew
---------------------------------------------------------- -----------------------------------------------
Chief Financial Officer
---------------------------------------------------------- -----------------------------------------------
WITH A COPY TO: WITH A COPY TO:
Welsh Companies, Inc.
---------------------------------------------------------- -----------------------------------------------
8200 Normandale Boulevard #200
---------------------------------------------------------- -----------------------------------------------
Minneapolis, MN 55437-1060
---------------------------------------------------------- -----------------------------------------------
Atten: Vice President, Property Management
---------------------------------------------------------- -----------------------------------------------
</TABLE>
If and when included within the term "Landlord", as used in this
instrument, there are more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of such a notice
specifying some individual at some specific address for the receipt of notices
and payments to Landlord; if and when included within the term "Tenant", as used
in this instrument, there are more than one person, firm or corporation, all
shall jointly arrange among themselves for their joint execution of such a
notice specifying some individual at some specific address with the continental
United States for the receipt of notices and payments to Tenant. All parties
included within the terms "Landlord" and "Tenant", respectively, shall be bound
by notices given in accordance with the provisions of this paragraph to the same
effect as if each had received such notice.
25. MISCELLANEOUS.
A. Words of any gender used in this lease shall be held and construed to
include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires.
B. The terms, provisions and covenants and conditions contained in this
lease shall apply to, inure to the benefit of, and be binding upon, the parties
hereto and upon their respective heirs, legal representatives, successors and
permitted assigns, except as otherwise herein expressly provided. Landlord shall
have the right to assign any of its rights obligations under this lease. the
term "Landlord" shall mean only the owner, at any time of the Premises, and in
the event of the transfer by such owner of its interest in the Premises,
Landlord's grantee or Landlord's successor shall upon such transfer become
"Landlord" hereunder; but such covenants and obligations and relieving the
grantor or assignor of all covenants and obligations of "landlord" hereunder;
but such covenants and obligations shall be binding during the lease term upon
each new owner for the duration of such owner's ownership, provided, however,
that no successor Landlord shall be responsible for the return of any security
deposit provided for pursuant to Paragraph 2B unless such successor receives the
deposit. Tenant agrees to furnish promptly upon demand, a corporate resolution,
proof of due authorization by partners, or other appropriate documentation
evidencing the due authorization of Tenant to enter into this lease. Nothing
herein contained shall give any other tenant in the Building any enforceable
rights either against Landlord or Tenant as a result of the covenants and
obligations of either party set forth herein.
C. The captions inserted in this lease are for convenience only and in no
way define, limit or otherwise describe the scope or intent of this lease, or
any provision hereof, or in any way affect the interpretation of this lease.
D. Tenant agrees from time to time within ten (10) days after request of
Landlord, to deliver to Landlord, or Landlord's designee an estoppel certificate
in a form designated by Landlord. it is understood and agreed that Tenant's
obligation to furnish such estoppel certificates in a timely fashion is a
material inducement for Landlord' execution of this lease.
E. This lease may not be altered, changed or amended except by an
instrument in writing signed by both parties hereto.
F. All obligations of Tenant hereunder not fully performed as of the
expiration or earlier termination of the term of this lease shall survive the
expiration or earlier termination of the term hereof, including without
limitation, all payment obligations with respect to Operating Costs and all
obligations concerning the condition of the Premises. Upon the expiration or
earlier termination of the term Operating Costs and all obligations concerning
the condition of the Premises. Upon the expiration or earlier termination of the
term hereof, Tenant shall pay to Landlord the amount as estimated by Landlord,
necessary (I) to repair and restore the Premises as provided herein; and (ii) to
discharge Tenant's obligation for Operating Costs or other amounts due Landlord.
All such amounts shall be used and held by Landlord for payment of such
obligations of Tenant, with Tenant being liable for any additional costs upon
demand by Landlord, or with any excess to be returned to Tenant after all such
obligations have been determined and satisfied. Any security deposit held by
Landlord shall be credited against the amount payable by Tenant under this
subparagraph.
G. If there be more than one Tenant, the obligations hereunder imposed upon
Tenant shall be joint and several.
H. Tenant represents and warrants that it has dealt with no broker, agent
or other person in connection with this transaction or that no broker, agent or
other person brought about this transaction, other than Art Brown, Garfield
Clark & Associates, and Tenant agrees to indemnify and hold Landlord harmless
from and against any claims by any other broker, agent or other person claiming
a commission or other from of compensation by virtue of having dealt with Tenant
with regard to this leasing transaction.
I. If any clause or provision of this lease is illegal, invalid or
unenforceable under present or future laws effective during the term of this
lease, then and in that event, it is the intention of the parties hereto that
the remainder of this lease shall not be affected thereby, and its is also the
intention of the parties to this lease that in lieu of each clause or provision
of this lease that is illegal, invalid or unenforceable, there be added as a
part of this lease contract a clause or provision as similar in terms to such
illegal, invalid or unenforceable clause or provision as may be possible and be
legal, valid and enforceable.
J. Because the Premises are on the open market and are presently being
shown, this lease shall be treated as an offer and shall not be valid or binding
unless and until accepted by Landlord in writing.
26. ADDITIONAL PROVISIONS. See the attached Rider for additional provisions
which are a part of this lease.
DATED: Oct 10, 1996
LANDLORD
ST. PAUL PROPERTIES, INC. a Delaware corporation
--------------------------------------------------
By /S/ BRIAN T. MCMAHON
------------------------------------------
Its Michael Elnicky, Asset Manager
------------------------------------------
TENANT:
SPECTRASCIENCE, INC., a Minnesota corporation
--------------------------------------------------
By /S/ CHING-MENG CHEW
------------------------------------------
Its Ching-Meng Chew, Chief Financial Officer
------------------------------------------
RIDER TO LEASE
DATED 10/10/96
BY AND BETWEEN
SPECTRASCIENCE, INC., A MINNESOTA CORPORATION, AS "TENANT"
AND
ST. PAUL PROPERTIES, INC., A DELAWARE CORPORATION, AS "LANDLORD"
ARTICLE 27. BASE RENT SCHEDULE
Monthly Total Period
Period Base Rent Base Rent
------ --------- ---------
November 1, 1996 through and
including October 31, 1999 $4,436.00 $159,696.00
November 1, 1999 through and
including October 31, 2001 $4,566.00 $109,584.00
ARTICLE 28. HVAC REPLACEMENT
The following is added at the end of Paragraph 6(a):
"Notwithstanding the foregoing, in the event any one of the
rooftop HVAC units shall require complete replacement during
the term of this Lease and any extensions, Landlord agrees to
replace said unit and Tenant agrees to compensate Landlord for
the cost thereof based on the following formula: The actual
cost of replacement amortized plus twelve (12%) percent
interest per annum amortized over a ten (10) year period
commencing on the date of replacement. The payment required by
the preceding sentence shall be made simultaneously with
Tenant's payment of Base Rent commencing on the month after
the month in which replacement occurred through the expiration
date of this Lease, as the same may be extended or renewed, or
for ten (10) years, whichever first occurs."
ARTICLE 29. ALTERATIONS
The following is added at the end of Paragraph 7 of the Lease:
"Notwithstanding anything in this Paragraph 7 to the contrary,
Tenant shall not be obligated to remove any of the Tenant
Improvements constructed in the Premises as of the
Commencement Date; provided, however, that Tenant shall not be
obligated to remove improvements placed or constructed in the
Premises by Tenant after the Commencement Date, unless, at the
time Landlord consents to the placement or construction of
such improvements, Landlord notifies Tenant that such
improvements must be removed upon the expiration of the term
or any extension thereof. Any improvements placed or
constructed in the Premises after the Commencement Date to
which Landlord has consented pursuant to this Paragraph 7
shall be constructed or placed and operated in the Premises in
accordance with all applicable laws."
ARTICLE 30. UTILITIES
The following is added at the end of Paragraph 10 of the
Lease:
"Landlord shall from time to time reasonably determine that
the use of any such utility or service in the Premises is
disproportionate to the use of the other tenants. Landlord may
adjust Tenant's share of the costs thereof from a date
reasonably determined by Landlord to take equitable account of
the disproportionate use."
ARTICLE 31. FIRE AND CASUALTY DAMAGE
The following is added at the end of Paragraph 12 of the
Lease:
"In the event the Premises are substantially damaged such that
Tenant cannot conduct its business therein, Landlord to use
all reasonable efforts to find a suitable replacement space
within Plymouth Business Center for Tenant's occupancy either
on a temporary basis or for a new lease term as agreed to by
both parties. Nothing in this Article 31 shall be deemed to
modify the rights and obligations of the parties as set forth
in Article 12.
ARTICLE 32. EVENTS OF DEFAULT
The following is added at the end of Paragraph 18(h) of the
Lease:
"...; provided, however, that Tenant shall not be deemed to
have committed an event of default hereunder if said event of
default is not, by its nature, susceptible of cure within said
twenty-day period, and Tenant has commenced to cure said event
of default within said twenty-day period and, subject to force
majeure, Tenant continues diligently to prosecute such cure to
completion within sixty (60) days after Tenant's receipt of
notice from Landlord notifying Tenant of such default.
ARTICLE 33. RIGHT OF FIRST OFFER
Provided Tenant is not then in default under this Lease,
Tenant shall have a right to lease approximately 4,298
rentable square feet of space in the Building which are
adjacent to the Premises and currently leased by another
tenant of the Building ("Offer Space"). For the purposes of
this Lease, "available for lease" shall mean that no other
tenant of Plymouth Business Center has any rights of first
offer or expansion as to such premises. Tenant shall give
Landlord notice of its intent to expand the Premises not later
than August 31, 1997 (the "Expansion Notice"), it being
understood and agreed that if Tenant does not deliver the
Expansion Notice on or before August 31, 1997 Tenant shall
have no right to do so and Landlord shall have no obligation
to lease the Offer Space to Tenant. If Tenant timely gives the
Expansion Notice, Landlord shall give written notice thereof
to Tenant, together with the terms and conditions upon which
Landlord desires to lease the same (the "Notice from
Landlord"). Tenant shall have fifteen (15) days after receipt
of the Notice from Landlord within which to deliver to
Landlord written notice of Tenant's exercise of this offer
(the "Notice of Exercise"); provided, it shall be a condition
precedent to the effectiveness of Tenant's delivery of a
Notice of Exercise that Tenant is not in default in the
performance of its obligations under the Lease as of the date
of Tenant's delivery of the Notice of Exercise. Except for the
terms and conditions specifically set forth in the Notice from
Landlord, all terms and conditions of Tenant's lease of all or
a portion of the Offer Space shall be as provided in this
Lease; provided, unless otherwise specified in the Notice From
Landlord, Offer Space shall be leased "AS-IS". The parties
agree that base rent for the Offer Space shall be the ten
market rent (as reasonably determined by Landlord) and the
term of the lease of the Offer Space shall be three (3) years.
The Notice of Exercise shall contain the same essential terms
as the terms set forth in the Notice From Landlord and shall
be in a form sufficient to serve as a commitment by Tenant to
enter into a lease amendment with Landlord contain such terms
with respect to the Offer Space as are identified in the
Notice from Landlord; provided, however, that the
effectiveness of the Notice of Exercise and Landlord's
obligations to lease the Offer Space to Tenant shall be
contingent upon Landlord's review and approval of Tenant's
financial condition. Within five (5) days after request
therefor from Landlord, Tenant shall deliver to Landlord such
financial information concerning Tenant as Landlord may
reasonably request. Promptly upon Tenant's delivery of the
Notice of Exercise, if Landlord has approved Tenant's
financial condition, the parties shall cooperate in the
execution of an agreement by modifying the terms hereof to
include the Offer Space as part of the Premises in accordance
with the terms contemplated in such Notice From Landlord, and
otherwise in accordance with the provision of this section.
Tenant shall have no right to rescind any Notice of Exercise
given as to any Offer Space. If Tenant fails to deliver the
Notice of Exercise within said fifteen (15) day time period,
Tenant shall be deemed to have waived its right to lease the
Offer Space either in writing or in accordance with the
preceding sentence, Landlord shall be free to lease the Offer
Space identified in such Notice From Landlord thereafter to
any party upon any terms. The right contemplated by this
Article 33 shall not survive the expiration or termination of
this Lease, and shall not be available to any assignee,
sublessee or successor to Tenant's interest hereunder.
ARTICLE 34. RIGHT TO RENEW
The following is added as a new Paragraph 34 to the Lease:
Landlord hereby grants to Tenant one options to extend the
term of this Lease as to the Premises, upon the terms and
conditions of this Paragraph 34, if:
a) Tenant is not in default under this Lease beyond any time
to cure at the time such option is exercised; and
b) Tenant gives Landlord written notice of the exercise of
the renewal of this Lease not earlier than the fourth
anniversary of the commencement date and not later than
nine months prior to the end of the term (the "Renewal
Notice of Exercise"), time being of the essence. Tenant's
failure to notify Landlord of its intent to exercise the
option to renew the Term granted herein on or before the
date specified in this subparagraph (b) for such renewal
shall be deemed a waiver of Tenant's right to exercise its
option to renew. Landlord and Tenant agree that if, prior
to the date Tenant delivers the Renewal Notice of
Exercise, Tenant has leased any Offer Space (as defined in
Paragraph 33 hereof), the Renewal Notice of Exercise and
the subsequent extension of the term of this Lease
pursuant to this Paragraph 34 shall include and be
applicable to such Offer Space.
If Tenant elects to extend the terms of this Lease under this
Paragraph 34, the following terms and conditions apply:
a) the extension term shall commence upon the expiration of
the initial term and continue thereafter for a period of
three (3) years;
b) base rent for the Premises for the extension term shall be
Market Rent (as defined in Paragraph 35 of this Lease);
and
c) all of the other terms and conditions contained in this
Lease, as it may have been amended from time to time,
shall be as set out in this Lease, it being understood
that there shall be no rights of renewal or extension
except as granted by this paragraph 34.
Within fifteen (15) days after request thereof from Landlord,
Tenant shall execute and deliver to Landlord those instruments
which Landlord may request to evidence the extension described
in this Paragraph 34. The rights of Tenant under this
Paragraph 34 shall not be severed from this Lease or
separately sod, assigned or otherwise transferred, and shall
expire on the expiration or earlier termination of this Lease.
Notwithstanding the foregoing, the extension option
contemplated by this Paragraph 34 shall automatically
terminate and shall become null and void and of no further
force and effect upon the earlier to occur of (i) the
expiration or termination of this Lease, (ii) the termination
of Tenant's right to possession of the Premises, or (iii)
failure of Tenant to timely or properly exercise the rights
granted by this Paragraph 34. The right contemplated by this
Paragraph 34 shall not survive the expiration or termination
of this Lease, and shall not be available to any assignee,
sublessee, or successor to Tenant's interest hereunder, except
a Permitted Assignee.
ARTICLE 35. MARKET RENT
The following shall be added as a new Paragraph 35 to the
Lease:
"Market Rent" means the amount of annual rent, which may or
may not include concessions, improvements or other matters
(exclusive of Operating Costs) which Landlord would receive by
then renting similar space (including similar square footage)
for premises in the project in which the Building is located,
and which Market Rent shall in no event exceed the
then-published rates for which Landlord is then leasing
similar premises in Plymouth Business Center. Within
forty-five (45) days after Tenant exercises its right to
extend the term pursuant to Paragraph 34, Landlord shall give
Tenant notice of Market Rent for the extension term (the
"Market Rent Notice"). If Tenant does not agree with
Landlord's determination of Market Rent as set forth in the
Market Rent Notice, Tenant shall so notify Landlord ("Tenant's
Notice"), which Tenant's notice shall be deemed a recission of
Tenant's Renewal Notice of Exercise and, in such case, the
term of the Lease shall end on the date set forth in Paragraph
1 of the Lease, in accordance with all other terms and
conditions of this Lease. Tenant's failure to give Tenant's
notice within forty-five (45) days after the date of the
Market Rent Notice shall be deemed an acceptance of Landlord's
determination of Market Rent, and the term shall be deemed
extended pursuant to the Renewal Notice of Exercise.
ARTICLE 36. HAZARDOUS WASTE
The term "Hazardous Substances", as used in this Lease shall
mean pollutants, contaminants, toxic or hazardous wastes, or
any other substances, the removal of which is required or the
use of which is restricted, prohibited or penalized by any
"Environmental Law", which term shall mean any federal state
or local law or ordinance relating to pollution or protection
of the environment. Tenant hereby agrees that (i) no activity
will be conducted on the Premises that will produce any
Hazardous Substance, except for such activities that are part
of the ordinary course of Tenant's business activities (the
"Permitted Activities") provided said Permitted Activities are
conducted in accordance with all Environmental Laws and have
been approved in advance in writing by Landlord; (ii) the
Premises will not be used in any manner for the storage of any
Hazardous Substances except for the temporary storage of such
materials that are used in the ordinary course of Tenant's
business (the "Permitted Material") provided such Permitted
Materials are properly stored in a manner and location meeting
all Environmental Laws and approved in advance in writing by
Landlord; (iii) no portion of the Premises will be used as a
landfill or a dump; (iv) Tenant will not install any
underground tanks of any type; (v) Tenant will not allow any
surface or subsurface conditions to exist or come into
existence that constitute, a public or private nuisance; (vi)
Tenant will not permit any Hazardous Substances to be brought
onto the Premises, except for the Permitted Materials
described above, and if so brought or found located thereon,
the same shall be immediately removed, with proper disposal,
and all required cleanup procedures shall be diligently
undertaken pursuant to all Environmental Laws. If, at any time
during or after the term of the lease, the Premises is found
to be so contaminated or subject to said conditions solely by
Tenant, it's agents, employees or invitees, Tenant agrees to
indemnify and hold Landlord harmless from all claims, demands,
actions, liabilities, costs and expenses, damages and
obligations of any nature arising from or as a result of the
use of the Premises by Tenant. The foregoing indemnification
shall survive the termination or expiration of this Lease.
ARTICLE 37 IMPROVEMENTS
Landlord to complete the improvements as described on Exhibit
C. Landlord's contribution to the improvements shall not
exceed $34,208.00.
Tenant: Landlord:
SPECTRASCIENCE, INC. ST. PAUL PROPERTIES, INC.
(A MINNESOTA CORPORATION) (A DELAWARE CORPORATION)
By:________________________________ By:________________________
Its:_______________________________ Its:_______________________
Date:______________________________ Date:______________________
EXHIBIT 23.1 TO ANNUAL REPORT OF SPECTRASCIENCE, INC. ON
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-1149) pertaining to 2,264,006 shares of common stock issuable
upon conversion of preferred stock and exercise of warrants, (Form S-3 No.
33-57116) pertaining to 1,083,333 shares of common stock and 50,000 shares of
common stock issuable upon exercise of warrants, (Form S-3 No. 33-45536)
pertaining to 1,810,000 shares of common stock, (Form S-8 No. 33-63047)
pertaining to the 1991 Stock Option Plan (Form S-8 No. 33-45523) pertaining to
the 1991 Stock Plan, (Form S-8 No. 33-36385) pertaining to the 1990 Restricted
Stock Plan, (Form S-8 No. 33-22052) pertaining to the 1988 Employee Incentive
Stock Plan and (Form S-8 No. 2-93693-C) pertaining to the 1983 Employee Stock
Option Plan of GV Medical, Inc., of our report dated February 14, 1997, with
respect to the financial statements of SpectraScience (formerly GV Medical,
Inc.) included in this Annual Report (Form 10-KSB) for the year ended December
31, 1996.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,047,182
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 295,887
<CURRENT-ASSETS> 3,343,069
<PP&E> 797,944
<DEPRECIATION> 590,424
<TOTAL-ASSETS> 3,550,589
<CURRENT-LIABILITIES> 392,617
<BONDS> 0
0
859,167
<COMMON> 905,303
<OTHER-SE> 1,393,502
<TOTAL-LIABILITY-AND-EQUITY> 3,550,589
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,721,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (176,043)
<INCOME-PRETAX> (1,545,919)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,545,919)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> 0
</TABLE>
