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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO. 0-12850
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 13-3152648
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
200 N. WESTLAKE BOULEVARD, SUITE 202
WESTLAKE VILLAGE, CALIFORNIA 91362
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 381-2700
SECURITIES REGISTERED PURSUANT TO SECTION
12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION
12(G) OF THE EXCHANGE ACT:
REDEEMABLE COMMON STOCK PURCHASE WARRANTS, AND
COMMON STOCK, $0.01 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 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 disclosure of delinquent filers in response to Item 405 of
regulation S-B is not 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. [ ]
The issuer's revenues for the fiscal year ended December 31, 1998 were
$19,227,798.
At March 18, 1999, the issuer had 5,405,694 shares of Common Stock, $0.01
par value, issued and outstanding.
The aggregate market value of the outstanding voting and non-voting common
equity held by non-affiliates of the issuer computed by reference to the average
bid and asked price of such common equity as of December 23, 1998 was
$22,068,118.
DOCUMENTS INCORPORATED BY REFERENCE
Items 9-12 of Part III of this Report incorporate by reference portions of
the Registrant's definitive Proxy Statement with respect to its 1999 Annual
Meeting of Stockholders.
Transitional Small Business Disclosure format: Yes [ ] No [X]
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This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Exchange Act and Section
27A of the Securities Act. The words "expect", "estimate", "anticipate",
"predict", "believe" and similar expressions and variations thereof are intended
to identify forward-looking statements. Such statements appear in a number of
places in this filing and include statements regarding the intent, belief or
current expectations of Dental/Medical Diagnostic Systems, its directors or
officers with respect to, among other things (a) trends affecting the financial
condition or results of operations of Dental/Medical Diagnostic Systems and (b)
the business and growth strategies of Dental/Medical Diagnostic Systems. The
stockholders of Dental/Medical Diagnostic Systems are cautioned not to put undue
reliance on such forward looking statements. Such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in this Report,
for the reasons, among others, discussed in the Sections - "Management's
Discussion and Analysis of Financial Condition and Results of Operations", and
"Risk Factors". Dental/Medical Diagnostic Systems undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
PART I
Item 1. Description of Business
- - -------------------------------
GENERAL
Dental/Medical Diagnostic Systems, Inc. ("Company") designs, develops,
assembles and markets high technology dental equipment and related consumables.
The Company's best selling product during 1998 was the tooth curing and
whitening device known as the "Apollo 95E." The Company also markets and sells a
line of whitening gels known as "Apollo Secret" for use with the Apollo 95E, and
in the second quarter of 1999 intends to introduce a line of composite resin
materials known as "ASAP - Accelerated Solutions for Aesthetic Procedures," also
for use with the Apollo 95E. In addition, the Company manufactures and sells
intraoral camera systems, known as the "TeliCam II System," and "TeliCam Elite,"
and a multi-operatory intraoral camera system, known as the "InTELInet," for use
in connection with the TeliCam II System and TeliCam Elite.
The Company's customers are dentists in the domestic and international
marketplace. In the domestic market, the United Kingdom and Germany, the Company
sells directly to dentists. In the international market, with the exception of
the United Kingdom and Germany, the Company sells its products through
independent dealers and distributors. The Company's products are not available
through traditional retail channels.
The Company was organized in New York in 1981 under the name Edudata
Corporation and reincorporated in Delaware in 1983. On February 2, 1998, the
Company formed "DMDS, Ltd.," a wholly owned subsidiary created under the laws of
the United Kingdom. The Company markets its products internationally through
DMDS, Ltd.
BUSINESS STRATEGY
The Company's goal is to be a leading manufacturer and distributor of both
high technology dental devices and related consumables. The Company believes
that its focus on the following business strategies will help it to achieve this
goal:
DELIVERY OF INNOVATIVE, VALUE-ORIENTED PRODUCTS. The Company seeks to
provide innovative products that offer a strong price-value relationship to
its customers. The Company endeavors to deliver products that offer, or will
offer, greater or differentiated operating features, such as the Company's
Apollo 95E (described below) which can cure composite materials in just
three seconds, as compared with the 10-60 seconds it takes other competing
brands of curing lamps, and is able to whiten teeth in under 40 minutes. The
Company also plans on introducing new products incorporating innovative
digital x-ray technology into the worldwide marketplace during the third
quarter of 1999. See "Risk Factors - In order to maintain our exclusive
rights to the digital x-ray technology developed by Suni we must make
certain minimum royalty payments to Suni" and "Risk Factors - The Government
extensively regulates our products."
COMMITMENT TO PRODUCT DEVELOPMENT. The Company is continually seeking
out innovative technology to incorporate into its dental products. From
inception (October 23, 1995) through December 31, 1998, the Company has
devoted approximately $2.65 million to product development activities,
including approximately $549,000 in fiscal 1998. The dental market is highly
competitive and the Company believes that its focus on new and improved
technologies is essential if the Company is to continue to grow and to
maintain a competitive position in the marketplace.
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GROWTH THROUGH ACQUISITIONS AND LICENSING AGREEMENTS. The Company
anticipates that it will complement its internal growth, both in number of
products and sales, through acquisitions and licensing agreements and a
focus on developing and marketing new technologies for the dental practice.
The Company believes that acquisitions and licensing agreements present an
effective means of obtaining technical personnel and obtaining or expanding
technologies, products and markets. The Company continually evaluates
opportunities for acquisitions and licensing agreements.
EXPANSION OF DOMESTIC AND INTERNATIONAL SALES. Although both the
domestic and international dental supply markets are highly competitive, the
Company believes that the size of these markets provides an opportunity for
growth. The Company increased its sales in the current year through the
introduction of new products, namely the composite curing and tooth
whitening device (Apollo 95E) and the related whitening consumable, Apollo
Secret. See "Current Products." The Company plans on introducing a composite
curing consumable for use with the Apollo 95E during the second quarter of
1999 and new products incorporating digital x-ray technology into the
worldwide marketplace during the third quarter of 1999. Also, in an effort
to expand international sales of its current and future products, the
Company has altered its marketing strategy in the two biggest markets in
Europe, Germany and the United Kingdom, by acquiring the assets of the third
party distributorships the Company had agreements with to distribute the
Company's products in those respective countries. The Company believes that
by duplicating its domestic marketing strategy in Germany and the United
Kingdom of selling directly to dentists, the Company has increased its
opportunity for growth because of the increased direct access to customers.
The Company intends to capitalize on its experienced management and sales
team to increase its domestic and international sales. See "Risk Factors -
In order to maintain our exclusive rights to the digital x-ray technology
developed by Suni we must make certain minimum royalty payments to Suni."
CURRENT PRODUCTS
The Apollo 95E (Tm)
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On October 2, 1997, the Company purchased the assets of S.E.D. Gerant
("S.E.D."), a company organized under the laws of France. Among the acquired
assets was a patent for S.E.D.'s "Biotron" curing and whitening device products.
From this technology, the Company developed the "Apollo 95E" a unique,
visible-light curing instrument which is designed for two different
applications: the hardening of tooth-colored dental composite materials in three
seconds or less and for single appointment, in-office tooth whitening in less
than forty minutes. This safe plasma-arc lamp uses a high-frequency electrical
field to generate plasma energy, which is ideal for the fast-curing (hardening)
of photosensitive composites. The Apollo 95E also produces light and heat which,
when used in conjunction with the Apollo Secret whitening materials, activates
the whitening chemicals in the Apollo Secret. The result of this activation is
dramatic whitening of stained teeth. The rapid performance of the Apollo 95E in
both hardening composite materials and whitening teeth enables an average dental
practice to save about 5 to 8 hours per month of a dentists time.
CURING COMPOSITES: Tooth-colored composite materials are one of the
most requested methods of tooth restoration (bonding) in use today.
They are delivered to the tooth in syringe-shaped tubes and then
shaped into the proper tooth contours with dental instruments. In
order to cure (harden) these paste-like materials, a visible light
curing lamp (Apollo 95E) is used to initiate the proper chemical
reaction. The hand-piece to the Apollo 95E, which delivers the actual
lightsouce to the mouth, is a cylindrical shaped instrument
approximately the size of a large pen with a curved end designed to
make it easy for a dentist to be able to restore or whiten hard to
reach surface areas of teeth. The lamp is located at the tip of the
instrument.
The Apollo 95E cures these filling materials in just three seconds or
less compared with the 10-60 seconds it takes other competing brands of
curing lamps. Most restorations require the dentist to place multiple
layers of composite material into/onto a tooth, curing each layer
separately. With the curing lamps that are still used in most dental
offices today, total curing time per tooth averages 2 to 4 minutes. The
Apollo 95E shortens the curing time to under 3 seconds with the same
results. Composite curing is an essential aspect for the practice of
dentistry in all countries, making curing lamps a practical device for
all dental offices.
WHITENING: "Power bleaching" or "Light-assissted Bleaching" is fast
becoming a sought-after dental protocol which allows the patient to
leave the dental office, in under 40 minutes, with a dramatically
whitened smile. The only alternative tooth-whitening method to the
Apollo 95E currently available requires the patient to wear an
uncomfortable custom-fitted tray filled with unpleasant tasting
whitening gels. In order to achieve dramatic whitening results, the
trays would have to be worn overnight or for several hours a day for
two to three weeks. In addition, patients often find themselves in
pain from soft-tissue contact with the caustic gel.
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With the Apollo 95E, the process is much quicker. The Apollo Secret gel
is simply applied to the patient's teeth without any tissue protection,
as the gel's special neutralizing component virtually eliminates any
tooth or tissue sensitivity. The dentist or dental assistant holds the
Apollo 95E against the gel and then applies the light to each tooth for
only 3 seconds. Several passes are made around all of the teeth being
bleached and 40 minutes later the patient leaves the office with
whitened teeth.
Because the Apollo 95E is not a laser device, in-office tooth whitening
in less than forty minutes can be done by a dental assistant in a
majority of states in the United States. This allows the dentist to
concentrate on more complex procedures, while offering dentists an
additional source of revenue that can be generated by a dental
hygienist/assistant.
In March 1998, the Company introduced this proprietary, non-laser technology
to markets outside of the US and Canada. After receiving FDA 510(k) approval in
August 1998, the Company began shipping the Apollo 95E in the U.S. and Canada.
The Company's facility in Irvine, CA handles the manufacturing and shipping of
this product line for North America, South America, Australia, New Zealand and
for the Pacific Rim countries. For the overseas markets, including Europe and
the Middle East, the Apollo 95E is manufactured and shipped from the Company's
facility in France.
The Apollo 95E has received acceptance in both domestic and international
dental markets, and sales have increased every quarter since its introduction.
The Company believes that the Apollo 95E non-laser lamp produces faster
composite curing and in-office tooth whitening results than any other known
like-product available today, including dental lasers designed for curing.
On October 2, 1998, the Company entered into an agreement with Chrysalis
Dental, Inc. ("CDI") which grants to the Company the exclusive worldwide license
to make or have made, use, or sell patent pending tooth whitening products
created by CDI. Under this license, the Company has begun marketing its own line
of tooth whitening gels (Apollo Secret), intended for use with the Apollo 95E
and competing lamps. See "Risk Factors -- As a result of the decline in sales of
the TeliCam, our future depends on our ability to develop and introduce new
products."
In the second quarter of 1999, the Company plans to introduce a new line of
restorative composite materials (ASAP), as with Apollo Secret, ASAP is intended
for use with the Apollo 95E and competing lamps. See "Risk Factors -- As a
result of the decline in sales of the TeliCam, our future depends on our ability
to develop and introduce new products."
Since the introduction of the Apollo 95E in March 1998, and through December
31, 1998, the Company has sold 2,907 units internationally, accounting for
approximately $6.6 million in revenues, and 1,479 units domestically, accounting
for approximately $5.5 million in revenues.
The TeliCam, Intraoral Cameras
------------------------------
The Company's best selling product from 1996 through mid-1998 was its line
of intraoral cameras beginning with the "TeliCam I," which was introduced into
the market in February 1996. In the second quarter of 1997, the Company began
marketing the "TeliCam II System," which was developed to allow the video
interfacing of multiple examination rooms via the Company's networking system
known as "InTELInet" (described below). Currently, the Company's primary
intraoral camera is the "TeliCam Elite," which was introduced into the market
during the second quarter of 1998. The distinguishing feature that sets the
TeliCam apart from competing intraoral dental cameras is the proprietary "Teli"
CCU processor. This "frame grabber computer chip" allows the camera to capture
and "freeze" multiple video images and display them simultaneously without an
additional external capture device such as a computer, video recorder, or video
color printer. In addition, the Teli CCU processor incorporates an automatic
light intensity control which substantially eliminates reflection and glare from
the intraoral illumination providing clearer video images. The Company has
exclusive worldwide rights to market the Teli CCU processor to the dental
market. DMD cameras also have the capability to focus as closely as two (2)
millimeters and have magnification capabilities of up to 120 times the actual
image without requiring a lens change. These TeliCam images assist dentists in
displaying dental health and hygiene problems to patients and, as a result, can
assist to promote patient acceptance of treatment plans. Through December 31,
1998, the Company had sold an aggregate of 6,039 TeliCam I, TeliCam II and
TeliCam Elite Systems to dentists throughout the United States, as well as to
several dental schools, and an aggregate of 2,842 TeliCam I, TeliCam II and
TeliCam Elite Systems internationally.
As a result of price erosion and decreasing margins caused by increased
competition from new manufacturers entering the marketplace, the Company
believes that the market for intraoral cameras has become both saturated and
less profitable, resulting in a decline in revenues from the Company's intraoral
camera products. The Company is currently researching new technological
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advancements and clinical uses for its line of intraoral cameras. See "Risk
Factors -- One of our primary products has had a significant decline in sales."
InTELInet
---------
In November 1996, the Company introduced its InTELInet Video Monitoring
System ("InTELInet") which creates a video-electronic information link between
the different examination rooms within the same dental office. The System
includes a minimum of two intraoral video cameras, a video monitor with built-in
VCR, cable installation and a single video printer. The InTELInet System allows
dentists and their auxiliaries the ability to conduct multiple patient video
examinations at the same time because the "TeliCam" has its own built-in video
microprocessor capture device. This proprietary design allows for the use of
just one central video printer to interface with multiple operatories using
cameras simultaneously. This creates a cost savings and functional benefit when
compared to competing dental inter-operatory video networking systems that
require expensive computers, video printers, or capture devices for each
operatory.
Due to the general absence of multiple operatory practices outside of the
United States, the InTELInet is only being marketed domestically by the Company.
The InTELInet network is only compatible with DMD intraoral dental cameras. In
addition, the Company has designed the InTELInet system to be compatible with
the digital x-ray technology the Company is currently developing with Suni
Imaging Microsystems, Inc. See "Product Development." From the time of its first
introduction in late November 1996, through December 31, 1998, an aggregate of
599 InTELInet multiple operatory networking systems have been sold by the
Company.
PRODUCT DEVELOPMENT.
The Company intends to pursue growth through new product development and
introduction and by improving and updating its current products to respond to
competitive pressures.
The Company has entered into an agreement with Suni Imaging Microsystems,
Inc. ("Suni") to develop digital x-ray technology for incorporation into a
digital x-ray system for the dental market. The Company has obtained exclusive
rights to market products to the dental market incorporating certain digital
x-ray technology developed by Suni. Suni will retain the rights to developed
microchip technology underlying the x-ray system it develops for the Company.
Digital x-ray systems, including those currently on the market, reduce radiation
exposure compared to conventional x-ray systems and allow dentists to view x-ray
images in real-time without the time-consuming process of film development while
eliminating the need to use and dispose of chemicals required to develop
conventional x-ray film. The Company believes that this technology will provide
improved image quality and a more comfortable sensor for the patient at a lower
price point than competitive systems. This technology also is designed to allow
database storage and recall of images for comparison purposes. The development
of the technology has been, and will continue to be, performed by Suni and
funded by the Company. No assurance can be given that the Company will be able
to commercially exploit the digital x-ray technology. Additionally, the Company
filed for 510(k) notification on January 5, 1999 and is currently waiting for
such notification, and therefore, the timing of the domestic introduction of the
product is uncertain. See "Description of Business -- Government Regulation" and
"Risk Factors -- The government extensively regulates our products."
The Company expended approximately $549,000, $1.2 million and $322,000 for
research and development of its products for the fiscal years ended December 31,
1998 and 1997, and for the ten month period ended December 31, 1996,
respectively.
MANUFACTURING AND COMPONENT PARTS
The Company assembles and tests the Apollo 95E curing and whitening lamps,
the TeliCam Elite video camera system and the TeliCam II video camera system
sold to North America, South America, Australia, New Zealand and the Pacific Rim
countries, at its facility located in Irvine, California. For the overseas
markets, including Europe and the Middle East, the TeliCam products are
assembled and tested at the Company's facility in Irvine, while the Apollo 95E
is assembled and tested at its facility in France. With the exception of the
TeliCam's CCU processor, the Company believes that there are multiple sources
from which it may purchase the components for the Apollo 95E and the TeliCam
Systems. The Company anticipates that the single source that it obtains the CCU
processor component of the TeliCam System from is capable of meeting projected
demand for the foreseeable future. Although the Company believes that, if
necessary, it will be able to negotiate satisfactory alternative supply
arrangements, failure to do so may have a material adverse effect on the
Company. Furthermore, there can be no assurance that suppliers will dedicate
sufficient production capacity to satisfy the Company's requirements within
scheduled delivery times or at all. Failure or delay by the Company's suppliers
in fulfilling its anticipated needs may adversely affect the Company's ability
to market the Apollo 95E and the TeliCam Systems.
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Effective October 1, 1996, the Company amended its distribution agreement
("BMC Distribution Agreement") with Boston Marketing, a licensed distributor of
the Teli manufactured CCD chip which includes the Teli CCU processor. Pursuant
to the BMC Distribution Agreement, the Company has the exclusive right (i) to
market certain Teli manufactured CCD chip assemblies with CCU processors (model
numbers CS6110 S/B with Frame Grabber, CS6110 P S/B with Frame Grabber and the
CS6110 S/B without Frame Grabber (each a "Teli Unit" and collectively the "Teli
Units")) to the dental market, and (ii) to use the "TeliCam" trademark. The Teli
Units are key components of the Company's intraoral digital cameras. The BMC
Distribution Agreement has a five-year initial term. The Company has agreed to
purchase a minimum of 2,500 Teli Units per year for each of the five years, at
an initial price of $750 per Teli Unit. The Boston Marketing Distribution
Agreement is terminable by Boston Marketing if the Company fails to meet its
annual minimum purchase obligation. While the term of the BMC Distribution
Agreement expires on December 31, 2000, it may be extended by mutual agreement
of the Company and Boston Marketing for an additional five-year term. As of the
date hereof, the Company has not made a determination as to whether it will
attempt to renew this agreement. Management believes that, if necessary, other
CCD chips, CCU processors and frame grabbers could be obtained from third-party
suppliers on comparable terms, although a disruption in supplies of components
could extend for up to six months, which would materially adversely affect the
Company's operating results.
On March 17, 1999, the Company entered into a manufacturing agreement with
Suni under which Suni will assemble, test and package the Company's digital
x-ray system incorporating the digital x-ray technology developed by Suni for
the Company. The Company is currently working with Suni to produce a digital
x-ray system that meets the Company's specifications. While the Company believes
that an acceptable device will be manufactured, no assurance can be given that
Suni will be able to produce a product which will meet the Company's
specifications. Under the agreement, which has a three year term, the Company
has guaranteed payment in full for at least 3,000 units per year and has agreed
to place orders for at least 750 units per quarter. The Company has also agreed
to fulfill all of its requirements for the x-ray product from Suni during the
term of the agreement. The Company cannot begin shipping products under this
agreement to the market until it receives 510(k) notification. If, and when,
510(k) notification is received, the Company intends to begin introducing the
digital x-ray system for sale worldwide. See "Risk Factors - We substantially
depend upon third parties for several critical elements of our business,
including the development and licensing for distribution of our products - The
government extensively regulates our products."
BACKLOG
The Company generally does not operate with significant order backlog and a
substantial portion of its revenues in any quarter is derived from orders booked
in that quarter.
MARKETING AND SALES
US SALES AND DISTRIBUTION. The Company's domestic sales are made by eight
full-time employees who are based at corporate headquarters, and a national
field force of fourteen independent sales representatives under the supervision
of twenty independent Regional Managers. The Company's full time sales employees
are generally experienced in the business of marketing and distribution of
dental products, inclusive of the TeliCam II, the TeliCam Elite intraoral
cameras, the Apollo 95E high intensity composite curing and in-office whitening
system and related consumables. The Company markets its products through direct
mail solicitations, professional publications advertising, and attendance at
dental conferences. Since March 1996 the Company has run advertisements in
various publications for the dental industry on a monthly basis, and has
attended in excess of 127, 75, and 70 dental conferences and trade shows during
1998, 1997 and 1996, respectively. In addition to an increase in the number of
dental conferences and trade shows attended, during fiscal 1998 the Company
expanded its marketing efforts by engaging in a more comprehensive mailing
campaign and increasing publications advertising. The Company has also sold
equipment and consumables to a number of dental schools including the University
of Chicago, Tufts University and the University of Louisville. The Company
believes that these and anticipated future dental school sales will generate
additional interest in, as well as familiarity with, the Company's products at
the initial stages of a dental professional's career.
INTERNATIONAL SALES AND DISTRIBUTION. In the international market, with the
exception of the United Kingdom and Germany, the Company sells the Apollo 95E
and the TeliCam System through independent dealers and distributors, pursuant to
oral distribution agreements. Presently, the Company has approximately fifty
independent distributors and dealers, which cover key international markets
including, the Middle East, the Far East, Europe, Australia and Canada. On
September 17, 1997 the Company repurchased distribution rights for its products
in the European market from an independent distributor for 50,000 shares of its
Common Stock. The Company's international distributors provide important
support, including customer support and product service, to customers in each of
their respective countries. The Company had an agreement with Hiroki Umezaki, a
former officer, director and principal stockholder of the Company, pursuant to
which he was to receive a 15% commission on all sales made by the Company in
Asia,
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except Japan, in which his commission was to be 12%. This agreement has
been amended to provide that Mr. Umezaki shall receive a 12% commission on sales
made in Japan only. The Company markets the Apollo 95E through its wholly owned
subsidiary, DMDS, Ltd. and through its existing network of international
distributors with all products being shipped from the Company's facility in
France.
On March 1, 1999, DMDS, Ltd. purchased the assets of DMD Germany, an
independent company organized under the laws of Germany, for a purchase price
consisting of 100,000 shares of the Common Stock of the Company. DMD Germany's
sole business was the sale and distribution of the Company's products in
Germany. The assets that DMDS, Ltd. purchased include the business (as a going
concern), customer lists, goodwill, the benefit of the lease and other contracts
with third parties and all other items of whatever nature owned by DMD Germany
and used in the conduct of the business of DMD Germany. The Company also entered
into an employment agreement with Ralf Muller, the General Manager of DMD
Germany. The Company intends to continue the business of DMD Germany as
currently operated. The Company purchased the assets of DMD Germany for the
purpose of increasing its revenues and the margins on products sold in Germany.
On March 1, 1999, DMDS, Ltd. purchased the assets of Midas, Ltd., an
independent company organized under the laws of the United Kingdom, for a
purchase price consisting of 50,000 shares of the Common Stock of the Company.
Midas, Ltd.'s primary business was the sale and distribution of the Company's
products in the United Kingdom. The assets that DMDS, Ltd. purchased include the
business (as a going concern), customer lists, goodwill, the benefit of the
lease and other contracts with third parties and all other items of whatever
nature owned by Midas, Ltd. and used in the conduct of the business of Midas,
Ltd. The Company also entered into a non-compete agreement with Sostre NV, the
entity that has distributed the Company's products for Midas, Ltd. The Company
intends to continue the business of Midas, Ltd. substantially as currently
operated. The Company purchased the assets of Midas, Ltd. for the purpose of
increasing its revenues and the margins on products sold in the UK.
TRAINING, CUSTOMER SUPPORT AND PRODUCT SERVICE
Management believes that operating the Company's Products requires very
little training. As part of the Company's customer service program, the sales
representative or international distributor responsible for the sale of the
TeliCam, the Telicam Elite and the Apollo 95E schedules an installation and
training appointment when the system is delivered. In addition, the Company
provides a systems operating manual to its customers which provides answers to
frequently asked questions about the product's operations. The Company's
technical support personnel, and internationally, the support personnel of the
Company's distributors, are also available to answer customers telephone
inquiries during normal business hours. All DMD Systems come with a one-year
complete parts and labor warranty and extended warranties are also available.
InTELInet installation and maintenance is provided through independent
installers retained by the Company. The Company is currently developing a
program for training, customer support and service for the products it plans to
introduce in 1999.
PATENTS AND PROPRIETARY RIGHTS
The Company's subsidiary, DMDS, Ltd., holds a patent in France and is
currently seeking worldwide patent protection for the Apollo 95E system. There
can be no assurance (i) that patents outside of France will be granted for the
Apollo 95E system, and (ii) if granted, the patents will provide adequate
protection for the Company's technologies. Protection is being sought in all of
the countries of the world in which this technology can be marketed. The Company
has an exclusive worldwide license to distribute the whitening system technology
used in Apollo Secret, which is the subject of a pending application for patent
in the US. The Company has established rights in the trademarks under which it
sells its lamps and consumable products and has sought to register these
trademarks with the United States Patent and Trademark Office.
The intellectual property rights to the TeliCam System are owned by third
parties. Pursuant to an agreement with Boston Marketing Company, Ltd. ("Boston
Marketing") the Company has the exclusive right to market TeliCam's CCD
processor unit ("Teli Units") to the dental market ("Boston Marketing
Distribution Agreement"). Also pursuant to this agreement, the Company has the
rights to use the "TeliCam" trademark.
The Company's success and ability to compete is dependent in part upon its
proprietary technology for which domestic and international patent protection is
pending. The Company's proprietary technology for the TeliCam is not protected
by any patents. Consequently, the Company relies primarily on trademark, trade
secret and copyright laws to protect this technology. Also, the Company has
implemented a policy that all employees and third-party developers sign
nondisclosure agreements. However, there can be no assurance that such
precautions will provide meaningful protection from competition or that
competitors will not be able to develop similar or superior technology
independently. Also, the Company has no license agreements with the end users of
its products
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so it may be possible for unauthorized third parties to copy the Company's
products or to reverse engineer or otherwise obtain and use information that the
Company regards as proprietary. If litigation is necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets or to determine the validity and scope of the proprietary rights
of others, such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results and financial condition. Ultimately, the Company may be
unable, for financial or other reasons, to enforce its rights under intellectual
property laws. In addition, the laws of certain countries in which the Company's
products are or may be distributed may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. See "Risk Factors -- None of our products are protected by patents."
The Company believes that its products do not infringe upon any valid
existing proprietary rights of third parties. There can be no assurance that
third parties will not assert infringement claims in the future. Any such third
party claims, whether or not meritorious, may be covered by present insurance
policies but could, nevertheless, result in costly litigation or require the
Company to enter into royalty or licensing agreements. There can be no assurance
that the Company would prevail in any such litigation or that any such licenses
would be available on acceptable terms, if at all. If the Company were found to
have infringed upon the proprietary rights of third parties, it could be
required to pay damages, cease sales of the infringing products and redesign or
discontinue such products, any of which alternatives, individually or
collectively could have a material adverse effect on the Company's business,
operating results and financial condition.
GOVERNMENT REGULATION
The Company sells products which are legally defined to be medical devices,
therefore, the Company is considered to be a medical device manufacturer and as
such is subject to the regulations of, among other governmental entities, the
United States Food and Drug Administration and the corresponding agencies of the
states and foreign countries in which the Company sells its products. These
regulations govern the introduction of new medical devices, the observance of
certain standards with respect to the manufacture and labeling of medical
devices, the maintenance of certain records and the reporting of potential
product problems and other matters. A failure to comply with such regulations
could have material adverse effects on the Company.
The Federal Food, Drug and Cosmetic Act ("FDC Act") regulates medical
devices in the United States by classifying them into one of three classes based
on the extent of regulation believed necessary to ensure safety and
effectiveness. Class I devices are those devices for which safety and
effectiveness can reasonably be ensured through general controls, such as device
listing, adequate labeling, premarket notification and adherence to the Quality
System Regulation ("QSR") as well as medical device reporting ("MDR"), labeling
and other regulatory requirements. Some Class I medical devices are exempt from
the requirement of pre-market approval or clearance. Class II devices are those
devices for which safety and effectiveness can reasonably be ensured through the
use of special controls, such as performance standards, post-market surveillance
and patient registries, as well as adherence to the general controls provisions
applicable to Class I devices. Class III devices are devices that generally must
receive premarket approval by the FDA pursuant to a premarket approval ("PMA")
application to ensure their safety and effectiveness. Generally, Class III
devices are limited to life sustaining, life supporting or implantable devices;
however, this classification can also apply to novel technology or new intended
uses or applications for existing devices.
Before they can be marketed, most medical devices introduced to the United
States market are required by the FDA to secure either clearance of a pre-market
notification pursuant to Section 510(k) of the FDC Act (a "510(k) Clearance") or
approval of a PMA. Obtaining approval of a PMA application can take several
years. In contrast, the process of obtaining 510(k) Clearance generally requires
a submission of substantially less data and generally involves a shorter review
period. Most Class I and Class II devices enter the market via the 510(k)
Clearance procedure, while new Class III devices ordinarily enter the market via
the more rigorous PMA procedure. In general, approval of a 510(k) Clearance may
be obtained if a manufacturer or seller of medical devices can establish that a
new device is "substantially equivalent" to a predicate device other than one
that has an approved PMA. The claim for substantial equivalence may have to be
supported by various types of information, including clinical data, indicating
that the device is as safe and effective for its intended use as its legally
marketed equivalent device. The 510(k) Clearance is required to be filed and
cleared by the FDA prior to introducing a device into commercial distribution.
Market clearance for a 510(k) Notification submission may take 3 to 12 months or
longer. If the FDA finds that the device is not substantially equivalent to a
predicate device, the device is deemed a Class III device, and a manufacturer or
seller is required to file a PMA application. Approval of a PMA application for
a new medical device usually requires, among other things, extensive clinical
data on the safety and effectiveness of the device. PMA applications may take
years to be approved after they are filed. In addition to requiring clearance or
approval for new medical devices, FDA rules also require a new 510(k) filing and
review period, prior to marketing a changed or modified version of an existing
legally marketed device, if such changes or modifications could significantly
affect the safety or effectiveness of that device. FDA prohibits the
advertisement or promotion of any approved or cleared device for uses other than
those that are stated in the device's approved or cleared application.
Page 8
<PAGE>
The Company has already received FDA 510(k) notification allowing marketing
of the Telicam Intraoral Camera and the Apollo 95E. In addition, in preparation
for the anticipated third quarter 1999 introduction of its Digital X-ray medical
device, the Company has submitted an application for premarket notification
("510(k)") to the FDA. There can be no assurance that 510(k) Clearance for the
digital x-ray device will be received.
Pursuant to FDC Act requirements, the Company has registered its
manufacturing facility with the FDA as a medical device manufacturer, and listed
the medical devices it manufactures. The Company also is subject to inspection
on a routine basis for compliance with FDA regulations. These regulations
include those covering the QSR, which, unless the device is a Class I exempt
device, require that the Company manufacture its products and maintain its
documents in a prescribed manner with respect to issues such as design controls,
manufacturing, testing and validation activities. Further, the Company is
required to comply with other FDA requirements with respect to labeling, and the
MDR regulations which require that the Company provide information to the FDA on
deaths or serious injuries alleged to have been associated with the use of its
products, as well as product malfunctions that are likely to cause or contribute
to death or serious injury if the malfunction were to recur. The Company
believes that it is currently in material compliance with all relevant QSR and
MDR requirements.
In addition, the Company's facility is required to have a California
Medical Device Manufacturing License. The license is not transferable and must
be renewed annually. Approval of the license requires that the Company be in
compliance with the FDA's QSR, labeling and MDR regulations. The Company filed a
timely application for a license to cover its manufacturing activities, and in
early March 1999 the California Department of Health Services (DHS) conducted an
inspection of the Company's facilities and found no "reportable observations."
The Company received a list of adjustments and clarifications recommended by the
DHS. The Company filed a response to this list on March 19, 1999 and expects to
receive the license from the California DHS in early April. The Company can not
guarantee that the California DHS will grant or renew the Company's license. See
"Risk Factors - We do not have California licensing."
Generally, if the Company is in compliance with FDA and California
regulations, it may market its medical devices throughout the United States.
International sales of medical devices are also subject to the regulatory
requirements of each country. In Europe, the regulations of the European Union
require that a device have a CE mark before it can be sold in that market. The
Company has obtained a CE mark for its Apollo 95E device and is seeking approval
from the European Union to market the new digital x-ray product. The regulatory
international review process varies from country to country. The Company, in
general, will rely upon its distributors and sales representatives in the
foreign countries in which it markets its products to ensure that the Company
compiles with the regulatory laws of such countries. The Company believes that
its international sales to date have been in compliance with the laws of the
foreign countries in which it has made sales. Failure to comply with the laws of
such country could have a material adverse effect on the Company's operations
and, at the very least, could prevent the Company from continuing to sell
products in such countries. Exports of most medical devices are also subject to
certain limited FDA regulatory controls.
PRODUCT LIABILITY AND INSURANCE
The nature of the Company's present and planned products may expose the
Company to product liability risks. As of March 31, 1999, no product liability
claims have been brought against the Company. The Company maintains product
liability insurance with coverage limits of $1,000,000 per occurrence and
$11,000,000 per year. While the Company believes that it maintains adequate
insurance coverage, there can be no assurance that the amount of such insurance
will be adequate to satisfy claims made against the Company in the future or
that the Company will be able to obtain insurance in the future at satisfactory
rates or in adequate amounts. Product liability claims or product recalls could
have a material adverse effect on the business and financial condition of the
Company. In addition, the Company is required under certain of its licensing
agreements to indemnify its licensors against certain product liability claims
by third parties.
COMPETITION
The distribution and manufacture of dental supplies and equipment is
intensely competitive. For example, there are at least twelve companies offering
intraoral camera systems that are competitive with the TeliCam System. The
Company's dental curing and whitening device products face competition from
existing curing and whitening systems, including laser systems. Many of the
Company's competitors have greater financial and other resources than the
Company, and, consequently, such entities may be able to develop, manufacture,
market and/or distribute systems that are functionally similar or superior to
the Company's products. Moreover, significant price reductions by the Company's
competitors could result in a similar reduction in the Company's prices.
Any of these competitive pressures may have a material adverse effect on
operating results.
Page 9
<PAGE>
In the United States, the Company competes with other companies that sell
dental products, distributors and several major manufacturers of dental
products, primarily on the basis of price, customer service and value-added
services and products. The Company's principal domestic competitors for the
TeliCam System are Patterson Dental Co., Henry Schein, Inc., Dentsply and
Ultrak. The Company's principal domestic competitors for the Apollo 95E are Air
Techniques, Kreativ Products, American Dental Technologies and Argon Laser. The
Company's principal domestic competitors for the Apollo Secret whitening product
are Kreativ Products, Ultradent Products, Discus Dental, DenMat, Shofu Dental
Corporation and American Dental Hygienics/Premier Dental. The Company's
principal domestic competitors for the ASAP composite materials are Bisco,
Jeneric/Pentron, Kerr, 3M, Dentsply/Caulk, Ultradent Products and
Heraeus/Kulzer.
The Company also faces competition in its international markets, where the
Company competes on the basis of price and product quality against the same
dental product distributors and manufacturers.
EMPLOYEES
At February 23, 1999, the Company had 79 full-time employees, 57 in the
United States, 7 in the UK and 15 in France. Of the U.S. employees, 27 were
involved in production, 5 were in customer service, 14 were in administration, 8
were engaged in sales and marketing, and 3 were involved in engineering and
research and development. Of the UK employees, 5 were in administration and 2
were engaged in sales and marketing, and of the employees in France, 9 were
involved in production, 2 were involved in engineering and research and
development, and 4 were in administration. The Company believes it has a good
relationship with its employees and none of its employees are represented by a
collective bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTIES
- - ---------------------------------
The corporate headquarters and principal offices of the Company are located
in Westlake Village, California, consisting of approximately 3,900 square feet
of space under a lease that expires on November 14, 2000 ("Office Lease"). The
Office Lease provides for aggregate minimum monthly rental payments of
approximately $6,200. On January 15, 1999, the Company entered into a sublease
for approximately 1,300 square feet of space adjacent to the principal offices
("Office Sublease"). The Office Sublease expires on June 30, 2000, and provides
for aggregate minimum monthly rental payments of approximately $2,500. Further,
under a lease that expired on October 31, 1998, the Company had approximately
5,700 square feet of space in a building in Irvine, California, where it
previously manufactured and distributed the TeliCam System and conducted
research and development activities. The rental payment under this plant lease
was approximately $5,310 per month. The Company sub-leased this facility from
March 15, 1998 through October 31, 1998 at a rate of $5,049 per month. The
Company now leases a larger facility in Irvine of approximately 12,000 square
feet, under a lease that expires October 31, 1999 at a rental payment of $6,750
per month to perform these functions. All leases require the Company to pay
taxes, maintenance fees, insurance, and periodic rent increases based on a
published price index. The Company does not presently own, or have any current
plans to invest in, any interests in real property other than through its
leases.
ITEM 3. LEGAL PROCEEDINGS
- - -------------------------
The Company is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - -----------------------------------------------------------
None.
Page 10
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- - ----------------------------------------------------------------
The Common Stock and Redeemable Common Stock Purchase Warrants are currently
traded on the NASDAQ SmallCap Market under the symbols "DMDS" and "DMDSW,"
respectively, and on the Boston Stock Exchange under the symbols "DMD" and
"DMDW," respectively. Prior to May 9, 1997 the Common Stock was quoted on the
OTC Bulletin Board. The following table sets forth the range of the high and low
closing prices of the Common Stock on the OTC Bulletin Board and the NASDAQ
SmallCap Market as reported by NASDAQ Trading and Market Services. These
quotations reflect inter-dealer prices, without mark-up, mark-down or
commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
REDEEMABLE
COMMON STOCK
PURCHASE
COMMON STOCK WARRANTS
PERIOD ENDED HIGH LOW HIGH LOW
------------ -------- -------- -------- ------
<S> <C> <C> <C> <C>
March 31, 1997....................... $4.80 $3.10 $ -- $ --
June 30, 1997........................ 7.10 4.10 3.90 3.70
September 30, 1997................... 6.60 5.40 2.70 2.50
December 31, 1997.................... 9.50 5.90 4.00 3.80
March 31, 1998....................... 8.00 5.88 4.00 2.69
June 30, 1998........................ 7.50 4.00 3.50 1.50
September 30, 1998................... 5.50 3.63 2.13 1.13
December 31, 1998.................... 6.75 4.00 2.88 1.38
</TABLE>
On March 9, 1999, the high bid and low ask prices were $8.4375 and $7.875,
respectively for the Common Stock and $4.1875 and $3.9375, respectively, for the
Redeemable Common Stock Purchase Warrants.
RECENT SALES OF UNREGISTERED SECURITIES
On October 2, 1998, the Company issued 100,000 shares of its Common Stock,
valued at $462,500, to Chrysalis Dental, Inc. ("CDI") as a portion of the
purchase price for an exclusive worldwide license to make or have made, use, or
sell patent pending tooth whitening products created by CDI. The Company relied
on section 4(2) of the Securities Act of 1933 as an exemption from registration
of these shares.
On March 1, 1999, DMDS, Ltd. purchased the assets of DMD Germany, an
independent company organized under the laws of Germany. The Company issued
100,000 shares of its Common Stock, valued at $762,500, as the consideration for
the purchase of the assets. The assets that DMDS, Ltd. purchased include the
business (as a going concern), customer lists, goodwill, the benefit of the
lease and other contracts with third parties and all other items of whatever
nature owned by DMD Germany and used in the conduct of the business of DMD
Germany.
On March 1, 1999, DMDS, Ltd. purchased the assets of Midas, Ltd., an
independent company organized under the laws of the United Kingdom. The Company
issued 50,000 shares of its Common Stock, valued at $381,250, as the
consideration for the purchase of the assets. The assets that DMDS, Ltd.
purchased include the business (as a going concern), customer lists, goodwill,
the benefit of the lease and other contracts with third parties and all other
items of whatever nature owned by Midas, Ltd. and used in the conduct of the
business of Midas, Ltd.
DIVIDEND POLICY
The Company has not paid any cash dividends on the Common Stock since its
inception and does not intend to pay any dividends on the Common Stock in the
foreseeable future. The payment of any dividends in the future will depend on
the evaluation by the Company's Board of Directors of such factors as it deems
relevant at the time and restrictions imposed by the terms of the Company's debt
obligations. The Company bank financing agreements impose restrictions on any
payment of dividends. The Board of Directors believes that all the Company's
earnings, if any, should be retained for the development of the Company's
business.
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<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ---------------------------------------------
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND NOTES THERETO INCORPORATED
ELSEWHERE IN THIS FORM 10KSB.
INTRODUCTION
Dental/Medical Diagnostic Systems, Inc. designs, develops, manufactures and
sells high technology dental equipment and related consumables. The Company's
highest grossing product for the 1998 fiscal year was the tooth curing and
whitening device known as the "Apollo 95E." The Company also markets and sells a
line of whitening products known as "Apollo Secret" for use in conjunction with
the Apollo 95E, and in the second quarter of 1999 intends to introduce a line of
composite resin materials known as "ASAP Accelerated Solutions for Aesthetic
Procedures," also for use in conjunction with the Apollo 95E. In addition, the
Company continues to manufacture and sell intraoral camera systems, known as the
"TeliCam II System," and "TeliCam Elite," and a multi-operatory intraoral camera
system, known as the InTELInet, for use in connection with the TeliCam II System
and TeliCam Elite.
From early 1996 to mid 1998, the Company was primarily involved in
designing, developing, manufacturing, and marketing intra-oral camera systems
referred to as "TeliCam Systems". The first shipments to customers of the
TeliCam System commenced in early February 1996.
On October 2, 1997, the Company purchased the assets of S.E.D. Gerant
("S.E.D."), a company organized under the laws of France. Among the acquired
assets was a patent for S.E.D.'s "Biotron" curing and whitening device products.
From this technology, the Company developed the "Apollo 95E" a unique,
visible-light curing instrument which is designed for two different
applications: the hardening of tooth-colored dental composite materials in three
seconds or less and for single appointment, in-office tooth whitening in less
than forty minutes. This safe plasma-arc lamp uses a high-frequency electrical
field to generate plasma energy, which is ideal for the fast-curing (hardening)
of photosensitive composites. The Apollo 95E also produces light and heat which,
when used in conjunction with the Apollo Secret whitening materials, activates
the whitening chemicals in the Apollo Secret. The result of this activation is
dramatic whitening of stained teeth. The rapid performance of the Apollo 95E in
both hardening composite materials and whitening teeth enables an average dental
practice to save about 5 to 8 hours per month of a dentists time.
The Apollo 95E, which wasn't introduced into markets outside of the US
and Canada until March 1998 and in the US and Canada until August 1998,
accounted for over $11 million in revenues in 1998, however, revenues attributed
to the TeliCam intraoral cameras declined significantly for the fiscal year 1998
as compared to 1997 and therefore the Company's net sales were limited to an
increase of 19% from 1997 to 1998. While the Company expects that the trend of
increasing revenues each fiscal quarter attributable to the Apollo 95E to
continue for the near future, the Company also expects the trend in the decline
in sales of its TeliCam intraoral cameras to continue and therefore to at least
partially offset the increased revenues realized on the Apollo 95E.
RESULTS OF OPERATIONS
The Company derives its revenues primarily from the sale of three product
lines: TeliCam intra-oral camera systems, Apollo 95E curing and whitening
devices, and Apollo Secret tooth whitening chemicals for use in conjunction with
the Apollo 95E, which began shipping in the fourth quarter of 1998. Through
December 31, 1998, revenues from Apollo Secret have been immaterial.
Revenues by product line, for the fiscal years ended December 31, 1998 and
1997, and for the ten-month period ended December 31, 1996 are reflected in the
following table:
<TABLE>
<CAPTION>
Ten-Months Ended
December 31, For the Year Ended December 31,
------------ -------------------------------
1996 % 1997 % 1998 %
---- - ---- - ---- -
<S> <C> <C> <C> <C>
Apollo 95E $ -- -- $ -- -- $11,125,629 58%
TeliCam 10,689,179 92% 15,367,806 96% 6,555,540 34%
Other 983,923 8% 719,402 4% 1,546,629 8%
----------- ---- ----------- --- ------------ ----
$11,673,102 100% $16,087,208 100% $19,227,798 100%
=========== ==== =========== ==== =========== ====
</TABLE>
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<PAGE>
NET SALES. Net sales for the fiscal years ended December 31, 1998 and 1997,
and for the ten-month period ended December 31, 1996, were $19,227,798,
$16,087,208 and $11,673,102, respectively.
Net sales for the fiscal year ended December 31, 1998 increased
approximately 19% from the prior year, and increased 38% for the fiscal year
ended December 31, 1997 as compared with the ten-month period ended December 31,
1996. Sales are comprised primarily of the Apollo 95E and TeliCam Systems. The
increase in sales for the fiscal year ended December 31, 1998 was primarily due
to the introduction of the Apollo 95E, which began shipping in Europe during the
first quarter of 1998 and in the United States during the third quarter of 1998,
offset by reduced TeliCam sales both domestically and internationally resulting
from weaker demand and increased competition as the market for intraoral cameras
matured. The increase from 1996 to 1997 can be attributed to the two month
longer period, increased international sales volume and increased sales volume
of the InTELIinet video systems. The Company expects the decline in TeliCam
sales to continue into the future. No assurance can be given that the Apollo 95E
sales will ultimately offset the reduced TeliCam sales in the future. See -
"Risk Factors -- As a result of the decline in sales of the TeliCam, our future
depends on our ability to increase demand for our Apollo 95E and related
products as well as our ability to develop and introduce new products."
COST OF SALES. Cost of sales for the fiscal years ended December 31, 1998
and December 31, 1997, and for the ten-month period ended December 31, 1996,
were $9,820,882, or 51% of net sales, and $10,234,206, or 64% of net sales, and
$6,685,464 or 57% of net sales, respectively. Cost of sales, both on an absolute
dollar basis and as a percentage of net sales, decreased from 1997 to 1998
primarily due to more favorable margins on the Apollo 95E, which represented 58%
of net sales for the year. Cost of sales as a percentage of net sales increased
from 1996 to 1997, as the Company reduced the selling price of its TeliCams
during the year in response to the pressure of competition in the marketplace.
While the more favorable margins on the Apollo 95E have helped to decrease the
cost of sales as a percentage of net sales, the Company expects that the margins
on the sale of the TeliCams will continue to shrink, and thus the cost of sales
of the TeliCams as a percentage of TeliCam net sales will increase in the
future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $8,764,910, or 46% of net sales, $6,031,066, or
37% of net sales, and $4,360,736 or 37% of net sales, for the fiscal years ended
December 31, 1998 and 1997, and for the ten-month period ended December 31,
1996, respectively. The absolute dollar increases in this expense category from
year to year are primarily attributed to a combination of increased sales
commissions resulting from increased sales volumes, increased salaries and legal
expenses associated with the Company's growth, and increased marketing costs
resulting from enhanced marketing efforts. The increase in selling, general and
administrative expenses as a percentage of net sales from 1997 to 1998 can be
attributed to the cost of expanding the Company's work force in anticipation of
future growth. These expenses are expected to continue to increase on an
absolute dollar basis as sales volumes increase and additional marketing costs
are incurred for the introduction of the new products.
RESEARCH AND DEVELOPMENT. Research and development expenses totaled
$549,304, or 3% of net sales, $1,213,766, or 8% of net sales, and $322,467, or
3% of net sales, for the fiscal years ended December 31, 1998 and 1997, and for
the ten-month period ended December 31, 1996, respectively. Both the decrease in
research and development expenses for fiscal 1998, and the increase in this
expense category from 1996 to 1997, both on an absolute dollar basis and as a
percentage of net sales, is primarily attributed to $875,000 of fees paid to
Suni Imaging Microsystems, Inc. to fund the development of the digital x-ray
technology for incorporation into systems for the dental market during the
fiscal year ended December 31, 1997. The Company expects research and
development expenses to increase in future periods, as it continues to pursue
the development of new technologies. See "Risk Factors - As a result of the
decline in sales of the TeliCam, our future depends on our ability to develop
and introduce new products."
INTEREST INCOME. Interest income totaled $195,532 and $205,818 for the
fiscal years ended December 31, 1998 and December 31, 1997. The Company had no
interest income for the ten-month period ended December 31, 1996. This income is
attributed to the interest earned by investing the net proceeds of both the May
1997 secondary offering and the March 1998 debt placement in a short-term
management account through Comerica Securities. These funds were not available
in the ten-month period ended December 31, 1996.
INTEREST EXPENSE. Interest expense totaled $1,739,693, $138,576 and $57,166
for the fiscal years ended December 31, 1998 and 1997, and for the ten-month
period ended December 31, 1996, respectively. This expense category includes
interest paid on capital lease obligations, on bridge notes, on notes payable to
related parties, and on the Senior Subordinated Notes. The substantial increase
in fiscal 1998 is primarily due to the accrued interest and the amortization of
the debt discount on the $4.5 million of Senior Subordinated Notes, which was
repaid in January 1999 with proceeds from the new credit facility with Imperial
Bank.
Page 13
<PAGE>
Amortization of debt issuance cost totaled $235,484, $76,431 and $31,548 for
the fiscal years ended December 31, 1998 and 1997, and for the ten-month period
ended December 31, 1996, respectively. This represents the amortization of the
issuance costs incurred in connection with the Bridge Notes issued in November
1996 and the 12% Senior Subordinated Notes issued in March 1998. These costs
were amortized over the term of the Notes. The Company repaid the Bridge Notes
out of the proceeds of the May 1997 secondary offering. In addition, the Senior
Subordinated Notes were repaid in January 1999 out of the proceeds of the
Company's new credit facility with Imperial Bank.
NET LOSS. Net loss for the fiscal year ended December 31, 1998 totaled
$1,816,702, or $0.35 per share. Net loss for the fiscal year ended December 31,
1997 totaled $2,044,729, or $0.47 per share, and net income for the ten-month
period ended December 31, 1996 totaled $137,151, or $0.05 per share.
CAPITAL RESOURCES AND LIQUIDITY
For the fiscal year ended December 31, 1998, the Company used net cash of
$3,781,610 in operations. Accounts receivable increased from $1,967,614 at
December 31, 1997 to $3,757,865 at December 31, 1998, primarily as a result of
the increase in sales of the Apollo 95E in the fourth quarter. See "Risk Factors
- - - Fluctuation in quarterly results may result in declines in our stock price."
Accounts payable and accrued liabilities totaling $3,653,831 at December 31,
1998 increased from $2,539,585 at the prior year-end period primarily due to
increased inventory purchases. Inventory levels increased approximately $2.7
million to accommodate the increased sales volume generated by the Apollo 95E.
Capital expenditures for the fiscal year ended December 31, 1998 were
approximately $722,000, with approximately $170,000 spent for the purchase of an
exhibit booth used at dental trade shows, approximately $171,000 spent for a new
computer network system, and approximately $131,000 spent for molds. Cash and
cash equivalents on hand at the end of the period were $3,941,305. The Debt
Placement in March 1998 provided approximately $4,200,000 in cash to the Company
after expenses.
In July 1997, the Company finalized a credit agreement with Comerica Bank
("Comerica") extending up to a $2,000,000 line of credit to the Company, secured
by a first priority security interest in the Company's assets and by an
assignment of the Company's rights under the Boston Marketing Distribution
Agreement. The credit facility bears interest at the rate of prime plus .25% per
annum (8.0% at December 31, 1998). All borrowings under the facility are subject
to a formula based, generally, on accounts receivable and inventory. The Company
intends to use the credit facility, when needed, for working capital and general
corporate purposes. No amounts were outstanding at December 31, 1998.
In December 1997, the Company finalized a second credit agreement with
Comerica extending up to a $500,000 line of credit to the Company for capital
expenditures, secured by a first priority interest in the Company's assets. The
credit facility bears interest at a rate of prime plus .5% per annum (8.25% at
December 31, 1998). The line expired on December 10, 1998, at which time the
principal balance began to amortize over a thirty-six (36) month period.
Borrowings are at 80% of the capital expenditure.
At December 31, 1998, $343,890 was outstanding.
On January 4, 1999, the Company replaced its credit agreements with Comerica
with a $6,950,000 facility with Imperial Bank ("Imperial"). The Imperial
facility comprises a $2,500,000 fixed rate non-revolving line of credit due May
31, 2000; a $4,000,000 variable rate revolving line of credit due May 31, 2000;
and a $450,000 variable interest rate loan repayable in 16 monthly installments.
The facilities are collateralized by the assets of the Company. The Company
intends to use the credit facilities, when needed, for working capital, capital
expenditures and general corporate purposes. On January 21, 1999, the Company
borrowed against the Imperial facility to repay the balance owing on the
Comerica capital credit line of $343,890 plus accrued interest of $1,120. On
January 25, 1999, the Company borrowed against the Imperial facility to repay
the $4,500,000 12% Senior Subordinated Notes plus accrued interest of $189,000.
As of the end of March 1999, the expenditures for continued research and
development for products incorporating digital x-ray technology (including the
additional development fee due to Suni upon acceptance by the Company of the
final prototype subsystem and minimum royalty obligations), the minimum purchase
obligations under the BMC Agreement and the purchase obligations under the Suni
Manufacturing Agreement, are the only significant future commitments which will
be financed by cash from continuing operations and the remaining proceeds of the
$4.5 million debt placement. Based on its current operating plan, the Company
anticipates that unless a substantial portion of the Company's outstanding
redeemable warrants are exercised, cash on hand, cash generated from operations,
and borrowings available under the Imperial credit facility may not be
sufficient to satisfy the Company's expected increased working capital and
research and development requirements for new products during the next twelve
months, in which case further capital may be required. Exercise of the Company's
redeemable warrants in the near future, by the holders thereof,
Page 14
<PAGE>
is only likely if the market price of the Company's common stock meets the
requirements necessary to allow the Company to redeem the warrants and,
consequently, there can be no assurance that a significant portion of the
Company's outstanding redeemable warrants will be exercised. If the market price
of the Company's common stock reaches the requisite level for the requisite
amount of days, the Company may choose to redeem the warrants, in which case,
some of the Company's requirements for additional capital may be satisfied by
the exercise of the redeemable warrants. In addition, the Company is currently
exploring alternatives to fulfill these financing requirements. No assurance can
be given that additional financing will be available when needed or that, if
available, it will be on terms favorable to the Company or its stockholders. If
needed funds are not available, the Company may be required to curtail its
operations, which could have a material adverse effect on the Company's
business, operating results and financial condition. There can be no assurance
that the Company's working capital requirements during this period will not
exceed its available resources or that these funds will be sufficient to meet
the Company's longer-term cash requirements for operations. See "Risk Factors -
We will need additional capital to finance research and development of our new
products."
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's business is subject to certain quarterly influences. As
reflected in the chart below, net sales and operating profit are generally
higher in the fourth quarter due to the purchasing patterns of dentists in the
United States and are generally lower in the first quarter due primarily to the
effect upon demand or increased purchases in the prior quarter. It is also
expected that the Company's business will experience lower sales in the summer
months as a consequence of holiday vacations and a lesser number of trade shows.
The following table sets forth unaudited data regarding operations for each
quarter of fiscal 1998. This quarterly information has been prepared on the same
basis as the annual consolidated financial statements and, in management's
opinion, contains all adjustments necessary to fairly state the information set
forth herein. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
Fiscal 1998
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales $2,110,531 $2,618,513 $6,157,358 $8,341,396
Cost of sales 1,550,089 1,946,906 2,866,104 3,457,783
--------- --------- --------- ---------
Gross profit 560,442 671,607 3,291,254 4,883,613
Selling, general and administrative
expense 1,729,619 2,134,639 1,845,232 3,055,420
Research and development expense 142,387 182,302 197,283 27,332
---------- ---------- --------- ---------
Operating income (loss) (1,311,564) (1,645,334) 1,248,739 1,800,861
Interest income (44,273) (64,057) (47,103) (40,099)
Interest expense 83,793 549,497 551,416 554,987
Amortization of debt issuance costs 10,484 75,000 75,000 75,000
---------- --------- --------- ---------
Income (loss) before income taxes (1,361,568) (2,205,774) 669,426 1,210,973
Provision for income taxes -- -- -- 129,759
---------- ---------- --------- ---------
Net income (loss) $(1,361,568) $(2,205,774) $669,426 $1,081,214
=========== =========== ======== ==========
</TABLE>
Quarterly results may be adversely affected in the future by a variety of
other factors, including the possible costs of obtaining capital, as well as the
release of new products and promotions taking place within the quarter. The
Company plans to continue to fund research and development and to increase
working capital requirements for the new products. Also, the expenses of the
Company are to a large extent fixed and not susceptible to rapid reduction. To
the extent that such expenses precede or are not subsequently followed by
increased revenues, the Company's business, operating results and financial
condition will be adversely affected.
YEAR 2000 ISSUE
The Year 2000 readiness issue, which is common to most businesses, arises
from the inability of information systems, and other time and date sensitive
products and systems, to properly recognize and process date-sensitive
information or system failures. Estimates of the potential cost and effects of
Year 2000 issues vary significantly among businesses, and it is extremely
difficult to predict the actual impact. Recognizing this uncertainty, management
is continuing to actively analyze, assess and plan for various Year 2000 issues
across its businesses.
Page 15
<PAGE>
The Year 2000 issue has an impact on both information technology systems and
non-information technology systems, such as its manufacturing systems and
physical facilities including, but not limited to, security systems and
utilities. Although our management believes that a majority of our information
technology systems are Year 2000 ready, such systems still have to be tested for
Year 2000 readiness. We are replacing or upgrading those systems that are
identified as non-Year 2000 compliant. Certain information technology systems
previously identified as non-Year 2000 compliant are being upgraded or replaced
which should be complete by June 30, 1999. Non-information technology system
issues are more difficult to identify and resolve. We are actively identifying
non-information technology Year 2000 issues concerning our products and
services, as well as our physical facility locations. As non-information
technology areas are identified, our management formulates the necessary actions
to ensure minimal disruption to our business processes. Although our management
believes that its efforts will be successful and the costs will be immaterial to
our consolidated financial position and results of operations, it also
recognizes that any failure or delay could cause a potential impact.
We have initiated efforts to ensure Year 2000 readiness of our products and
services. We have moved to a Year 2000 compliant network operating system, and
our key financial, manufacturing and other in-house systems are already
materially compliant.
The Year 2000 readiness of our customers varies. We are not investigating
whether or not our customers are evaluating and/or preparing their own systems.
These efforts by customers to address Year 2000 issues may affect the demand for
certain products and services; however, the impact on our revenue is highly
uncertain. We have also begun efforts to assess the Year 2000 readiness of our
key suppliers and business partners. Our direction of this effort is to ensure
the adequacy of resources and supplies to minimize any potential business
interruptions.
The Year 2000 issue presents a number of other risks and uncertainties that
could impact us, such as public utilities failures, potential claims against us
for damages arising from products and services that are not Year 2000 compliant,
and the response ability of certain government commissions of the various
geographic areas where Dental/Medical conducts business. While we continue to
believe the Year 2000 issues described above will not materially affect our
financial position, it remains uncertain as to what extent, if any, we may be
impacted.
If we, our customers or vendors are unable to resolve any Year 2000
compliance problems in a timely manner, we could face business interruptions or
shutdown, financial loss, regulatory actions, reputational harm and/or legal
liability. Contingency plans that address a reasonably likely worst case
scenario have not yet been developed. We intend to determine whether any such
plans will be necessary in the coming months.
RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO EVALUATE OUR LIKELIHOOD OF
SUCCESS.
We have only manufactured and distributed our TeliCam systems since October
1995 and manufactured and distributed our Apollo 95E since March 1998.
Therefore, we have a limited relevant operating history upon which to evaluate
the likelihood of our success. Factors such as the risks, expenses and
difficulties frequently encountered in the operation and expansion of a
relatively new business and the development and marketing of new products must
be considered in evaluating the likelihood of success of our company.
WE HAVE A HISTORY OF LOSSES AND ACCUMULATED DEFICIT.
For the period from October 23, 1995 to March 2, 1996, we incurred a net
loss of $1,625,213. For the fiscal year ended December 31, 1997 we had a net
loss of $2,044,729 and for the fiscal year ended December 31, 1998 we had a net
loss of $1,816,702. At December 31, 1998, our accumulated deficit was
$5,349,493. Our ability to obtain and sustain profitability will depend, in
part, upon the successful marketing of our existing products and the successful
and timely introduction of new products. Although the Company was profitable in
the quarter ended December 31, 1998, there can be no assurance that the Company
will continue to be profitable.
FLUCTUATION IN QUARTERLY RESULTS MAY RESULT IN DECLINES IN OUR STOCK PRICE.
Certain quarterly influences may affect our business. Sales are generally
higher in the fourth quarter due to the purchasing patterns of dentists in the
United States and are generally lower in the first quarter due primarily to the
effect upon demand of increased purchases in the prior quarter. It is also
expected that our business will experience lower sales in the summer months as a
consequence of holiday vacations and a lesser number of trade shows. These
fluctuations could result in significant fluctuations, including significant
declines in our stock price.
Page 16
<PAGE>
ONE OF OUR PRIMARY PRODUCTS HAS HAD A SIGNIFICANT DECLINE IN SALES.
The TeliCam systems, together with related products such as the InTELInet
system, and the Apollo 95E have been our primary products and during the last
fiscal year have made up a substantial portion of our revenue. We believe that
the market for intraoral cameras, such as the TeliCam systems, is a market that
has declined. TeliCam systems sales have recently been below levels of prior
comparable periods, a trend that we expect to continue.
AS A RESULT OF THE DECLINE IN SALES OF THE TELICAM, OUR FUTURE DEPENDS ON OUR
ABILITY TO INCREASE DEMAND FOR OUR APOLLO 95e AND RELATED PRODUCTS AS WELL
AS OUR ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS.
As a result of the decline in the intraoral camera market, our future
depends upon our ability to increase demand for our related products and our
ability to develop and successfully introduce new products to make up for the
diminished sales of the Telicam systems. Development of new product lines is
risk intensive and often requires:
o long-term forecasting of market trends;
o the development and implementation of new designs;
o compliance with extensive governmental regulatory requirements; and
o a substantial capital commitment.
Also, the medical and dental device industry is characterized by rapid
technological change. As technological changes occur in the marketplace, we may
have to modify our products in order to become or remain competitive or ensure
that our products do not become obsolete. If we fail to anticipate or respond in
a cost-effective and timely manner to government requirements, market trends or
customer requirements, or if there are any significant delays in product
development or introduction, this could have a material adverse effect on our
business.
WE WILL NEED ADDITIONAL MONEY FOR BOTH GENERAL WORKING CAPITAL AND TO FINANCE
RESEARCH AND DEVELOPMENT OF OUR NEW PRODUCTS.
We anticipate that we will need additional money during fiscal 1999 to
satisfy our expected increased working capital and research and development
requirements for our planned new products. We are currently exploring
alternatives to fulfill these requirements, but cannot assure you that
additional financing will be available when needed or that, if available, it
will be on terms favorable to us. If needed funds are not available, we may be
required to limit or forego the development of new products or even limit
current operations, which could have a material adverse effect on our business,
operating results and financial condition.
WE SUBSTANTIALLY DEPEND UPON THIRD PARTY DEVELOPMENT AGREEMENTS AND LICENSING
AGREEMENTS FOR THE DEVELOPMENT OF MANY OF OUR PRODUCTS AND THE LICENSING OF
TECHNOLOGY OWNED BY OTHERS FOR USE IN OUR PRODUCTS.
We are dependent upon third party developers and suppliers for the
development and manufacture of all of the components used in our dental
equipment and for the development and manufacture of our consumable products.
Outside of updating our current products, we do not develop any of our own
technology, rather we continually seek out third parties that own new and
innovative technology that they may be willing to license to us or develop into
new dental products under a development agreement. We have had problems in the
past obtaining a marketable product from companies with whom we had entered into
a licensing arrangement. We entered into a licensing arrangement with Ion Laser
Technology under which ILT was unable to develop a product in accordance with
the delivery schedule established by our agreement that met our specifications;
as a result, we were forced to find an alternative product to that which we had
contracted for with ILT.
Under licensing and development arrangements we have obtained exclusive
marketing rights to products for the dental market incorporating certain digital
x-ray technology developed by Suni. We have paid significant non-refundable
advances to, and are dependent upon Suni to successfully develop the digital
x-ray technology and to commercialize the digital x-ray technology. We do not
guarantee that Suni will be successful in this endeavor. If Suni should not
develop a digital x-ray product which is accepted in the marketplace, and has
sufficient sales to achieve profits, this could have a material adverse effect
on our future prospects.
IN ORDER TO MAINTAIN OUR EXCLUSIVE RIGHTS TO THE DIGITAL X-RAY TECHNOLOGY
DEVELOPED BY SUNI WE MUST MAKE CERTAIN MINIMUM ROYALTY PAYMENTS TO SUNI.
In order to maintain our rights to be the exclusive dental licensee of the
digital x-ray technology developed by Suni, our agreement with Suni requires us
to make minimum royalty payments. The royalty payments begin coming due when
products incorporating the
Page 17
<PAGE>
developed technology are introduced to the market. We cannot guarantee that we
will be able to make the minimum royalty payments required to maintain our
rights to be the exclusive distributor. If we do not make the required royalty
payments, Suni will be able to license the developed technology to our
competitors, or grant an exclusive license to a competitor, which could have a
material adverse effect on our future prospects.
THE GOVERNMENT EXTENSIVELY REGULATES OUR PRODUCTS.
The United States Food and Drug Administration, as well as state and foreign
agencies, regulate almost all aspects of our medical devices including:
o entry into the marketplace;
o design;
o testing;
o manufacturing procedures;
o reporting of complaints;
o labeling; and
o promotional activities.
Under the Federal Food, Drug, and Cosmetic Act, FDA has the authority to
control the introduction of new products into the marketplace. Unless
specifically exempted by the agency, medical devices enter the marketplace
through either FDA approval of premarket approval application or FDA approval of
an application for 510k clearance. FDA conducts periodic inspections to assure
compliance with that agency's regulations.
Unless specifically exempted by FDA's regulations, we will need to file a
510k submission or PMA application for any new products developed in the future
including any using digital x-ray technology. The process of obtaining a
clearance or approval can be time-consuming and expensive. Compliance with FDA's
regulatory requirements can be burdensome. We don't guarantee that the required
regulatory approvals or clearances will be obtained. Any approval or clearance
obtained from FDA may include significant limitations on the use of the medical
device which is the subject of the approval or clearnace. We cannot market a
medical device if needed FDA approval or clearance is not granted. Inability to
obtain such approval or clearance could result in a delay or suspension of the
manufacture and sale of affected medical devices. Any such delay or suspension
would have a material adverse effect on our business. In addition, changes in
existing regulations or the adoption of new regulations could make regulatory
compliance by us more difficult in the future. The failure to obtain the
required regulatory clearances or to comply with applicable regulations could
result in one or more of the following:
o fines;
o delays or suspensions of device clearances;
o seizure actions;
o mandatory needs;
o Injunctive Action; and
o Criminal Prosecution.
WE DO NOT HAVE CALIFORNIA LICENSING.
The State of California requires that each facility manufacturing a medical
device apply for and obtain from the State's Department of Health Services a
Medical Device Manufacturing License. To qualify for the license, a facility
must be in compliance with FDA's regulatory requirements. We filed a timely
application for this license and in early March of 1999 the DHS conducted an
inspection of our manufacturing facility in Irvine, California and found no
"reportable observations". We received a list of adjustments and clarifications
recommended by the DHS. We filed a response to this list on March 19, 1999 and
we expect to receive a California Medical Device Manufacturing License in early
April, 1999. We cannot guarantee that DHS will grant our license. We cannot
manufacture devices at our facility if the license is not granted. Inability to
obtain this license could result in a delay or suspension of the manufacture and
sale of our medical devices. Any such delay or suspension would have a material
adverse effect on our business.
THE LOSS OF OUR CHIEF EXECUTIVE OFFICER WOULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS.
Our success is highly dependent upon our Chairman of the Board and Chief
Executive Officer, Robert H. Gurevitch. Unlike larger companies, we rely heavily
on a small number of officers to conduct a large portion of our business. The
loss of service of Robert H. Gurevitch along with the loss of his numerous
contacts and relationships in the industry would have a material adverse effect
on our business. We have entered into an Employment Agreement with Robert H.
Gurevitch under which he has agreed to render services to us until October 1,
1999. We have obtained "key person" life insurance on Mr. Gurevitch in the
amount of $2,000,000, of which we are the sole beneficiary, but there can be no
assurance that the proceeds of such insurance will be sufficient to offset the
loss to us in the event of his death.
OUR PRODUCTS HAVE VERY LIMITED PATENT PROTECTION.
Our future success and ability to compete is dependent in part upon our
proprietary technology used in the Apollo 95E. The Apollo 95E is currently only
protected by a patent in France. Patent protection is being sought in all of the
countries of the world in which this technology can be marketed. There can be no
assurance (i) that patents outside of France will be granted for the Apollo 95E
system, and (ii) if granted, the patents will provide adequate protection for
the Company's technologies. Consequently, we rely primarily on trademark, trade
secret and copyright laws to protect our technology. However, there can be no
assurance that third
Page 18
<PAGE>
parties will not try to copy our products. In addition, many foreign countries'
laws may not protect us from improper use of our proprietary technology
overseas. We may not have adequate remedies if our proprietary rights are
breached and therefore a breach of our proprietary rights could have a material
adverse effect on our financial condition.
ISSUANCE OF PREFERRED STOCK MAY HAVE THE EFFECT OF PREVENTING A CHANGE OF
CONTROL.
We have authorized 1,000,000 shares of preferred stock, which may be issued
by the Board of Directors with certain rights not granted to the holders of
common stock. Issuance of such preferred stock, depending upon the terms and the
rights thereof, may have the effect of delaying, deterring or preventing a
change in control.
WE ARE SUSCEPTIBLE TO PRODUCT LIABILITY SUITS.
Although we have not yet had any product liability claims, because of the
nature of the medical/dental device industry, there can be no assurance that we
will not be subject to such claims in the future. Our products come into contact
with more vulnerable areas of the human body, such as the mouth, tongue, teeth
and gums, and, therefore, the sale and support of dental products makes us
susceptible to the risk of such claims. A successful product liability claim or
claim arising as a result of use of our products brought against us, or the
negative publicity brought up by such claim, could have a material adverse
effect upon our business. We maintain product liability insurance with coverage
limits of $1,000,000 per occurrence and $11,000,000 per year. While we believe
that we maintain adequate insurance coverage, we do not guarantee that the
amount of insurance will be adequate to satisfy claims made against us in the
future, or that we will be able to obtain insurance in the future at
satisfactory rates or in adequate amounts.
THE YEAR 2000 ISSUE COULD HAVE AN IMPACT ON OUR INFORMATION TECHNOLOGY AND
NON-INFORMATION TECHNOLOGY SYSTEMS AS WELL AS THOSE OF OUR SUPPLIERS,
DISTRIBUTORS AND/OR CUSTOMERS, ANY OF WHICH COULD NEGATIVELY AFFECT SALES OF OUR
PRODUCTS.
The Year 2000 readiness issue, which is common to most businesses, arises
from the inability of information systems, and other time and date sensitive
products and systems, to properly recognize and process date-sensitive
information or system failures. Estimates of the potential cost and effects of
Year 2000 issues vary significantly among businesses, and it is extremely
difficult to predict the actual impact. Recognizing this uncertainty, management
is continuing to actively analyze, assess and plan for various Year 2000 issues
across its businesses.
The Year 2000 issue has an impact on both information technology systems and
non-information technology systems, such as its manufacturing systems and
physical facilities including, but not limited to, security systems and
utilities. Although our management believes that a majority of our information
technology systems are Year 2000 ready, such systems still have to be tested for
Year 2000 readiness. We are replacing or upgrading those systems that are
identified as non-Year 2000 compliant. Certain information technology systems
previously identified as non-Year 2000 compliant are being upgraded or replaced
which should be complete by June 30, 1999. Non-information technology system
issues are more difficult to identify and resolve. We are actively identifying
non-information technology Year 2000 issues concerning our products and
services, as well as our physical facility locations. As non-information
technology areas are identified, our management formulates the necessary actions
to ensure minimal disruption to our business processes. Although our management
believes that its efforts will be successful and the costs will be immaterial to
our consolidated financial position and results of operations, it also
recognizes that any failure or delay could cause a potential impact.
We have initiated efforts to ensure Year 2000 readiness of our products and
services. We have moved to a Year 2000 compliant network operating system, and
our key financial, manufacturing and other in-house systems are already
materially compliant.
The Year 2000 readiness of our customers varies. We are not investigating
whether or not our customers are evaluating and/or preparing their own systems.
These efforts by customers to address Year 2000 issues may affect the demand for
certain products and services; however, the impact on our revenue is highly
uncertain. We have also begun efforts to assess the Year 2000 readiness of our
key suppliers and business partners. Our direction of this effort is to ensure
the adequacy of resources and supplies to minimize any potential business
interruptions.
The Year 2000 issue presents a number of other risks and uncertainties that
could impact us, such as public utilities failures, potential claims against us
for damages arising from products and services that are not Year 2000 compliant,
and the response ability of certain government commissions of the various
geographic areas where Dental/Medical conducts business. While we continue to
believe the Year 2000 issues described above will not materially affect our
financial position, it remains uncertain as to what extent, if any, we may be
impacted.
Page 19
<PAGE>
If we, our customers or vendors are unable to resolve any Year 2000
compliance problems in a timely manner, we could face business interruptions or
shutdown, financial loss, regulatory actions, reputational harm and/or legal
liability. Contingency plans that address a reasonably likely worst case
scenario have not yet been developed. We intend to determine whether any such
plans will be necessary in the coming months.
Page 20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants...................................... 22
Consolidated Balance Sheets as of December 31, 1998
and December 31, 1997................................................ 23
Consolidated Statements of Operations for the Fiscal Years
ended December 31, 1998 and 1997 and for the Ten-Month Period
ended December 31, 1996.............................................. 24
Consolidated Statements of Stockholders' Equity for the Fiscal Years
ended December 31, 1998 and 1997 and for the Ten-Month Period
ended December 31, 1996.............................................. 25
Consolidated Statements of Cash Flows for the Fiscal Years
ended December 31, 1998 and 1997 and for the Ten-Month Period
ended December 31, 1996.............................................. 26
Consolidated Statements of Comprehensive Income for the Fiscal Years
ended December 31, 1998 and 1997 and for the Ten-Month Period
ended December 31, 1996.............................................. 27
Notes to Consolidated Financial Statements............................ 28
Page 21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Dental/Medical Diagnostic Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and
cash flows present fairly, in all material respects, the financial position
of Dental/Medical Diagnostic Systems, Inc. and its subsidiaries (the
"Company") at December 31, 1998 and 1997, and the results of their
operations and their cash flows for the fiscal years ended December 31,
1998 and 1997 and for the ten month period ended December 31, 1996, in
conformity with generally accepted accounting principles. 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 of these statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, CA
February 5, 1999, except for subsequent events
described in Note 19, as which the date is
March 18, 1999.
Page 22
<PAGE>
<TABLE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
ASSETS
<CAPTION>
1998 1997
------------ -----------
Current assets
<S> <C> <C>
Cash and cash equivalents..................................... $ 3,941,305 $ 3,981,062
Accounts receivable, less allowance for returns and doubtful
accounts of $20,975 at both December 31, 1998 and 1997........ 3,757,865 1,967,614
Inventories................................................... 5,559,751 2,896,270
Prepaid expenses and other current assets..................... 1,332,427 389,061
Debt issuance costs, net of accumulated amortization.......... 64,516 --
------------ -----------
Total current assets.................................. 14,655,864 9,234,007
Property and equipment, net of accumulated depreciation....... 996,940 553,119
Intangible assets, net of accumulated amortization............ 798,437 86,950
Loans to related parties...................................... 70,000 126,000
Other assets.................................................. 49,119 491,950
------------ -----------
Total assets.......................................... $ 16,570,360 $10,492,026
============ ===========
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
Current liabilities:
<S> <C> <C>
Current portion of capital lease obligations.................. $ 22,440 $ 23,356
Notes payable ................................................ 4,277,505 --
Notes payable to related parties.............................. -- 45,030
Borrowings under line of credit .............................. 114,630 --
Accounts payable.............................................. 2,413,767 1,522,412
Accrued liabilities........................................... 1,240,064 1,017,173
Customer deposits............................................. 60,833 42,995
------------ -----------
Total current liabilities............................. 8,129,239 2,650,966
Borrowings under line of credit .............................. 229,260 --
Capital lease obligations..................................... 22,935 39,858
Other long term liabilities................................... 15,061 11,052
------------ -----------
Total liabilities..................................... 8,396,495 2,701,876
------------ -----------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, par value $.01 per share; 1,000,000 shares
authorized; none issued and outstanding....................... -- --
Common stock, par value $.01 per share; 20,000,000 shares
authorized; 5,255,694 and 5,115,777 shares issued and
outstanding at December 31, 1998 and 1997..................... 52,556 51,157
Additional paid in capital.................................... 13,469,597 11,271,784
Accumulated translation adjustment............................ 1,205 --
Accumulated deficit........................................... (5,349,493) (3,532,791)
------------ -----------
Total stockholders' equity............................ 8,173,865 7,790,150
------------ -----------
Total liabilities and stockholders' equity............ $ 16,570,360 $10,492,026
============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 23
<PAGE>
<TABLE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
<CAPTION>
FOR THE YEAR ENDED TEN MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales........................................ $ 19,227,798 $ 16,087,208 $ 11,673,102
Cost of sales.................................... 9,820,882 10,234,206 6,685,464
----------- ------------ ------------
Gross profit................................... 9,406,916 5,853,002 4,987,638
Selling, general and administrative expense...... 8,764,910 6,031,066 4,360,736
Research and development expense................. 549,304 1,213,766 322,467
Non-recurring charge............................. -- 256,250 --
---------- ------------ ------------
Operating income (loss)........................ 92,702 (1,648,080) 304,435
Interest and other income....................... (195,532) (205,818) --
Interest expense................................. 1,739,693 138,576 57,166
Amortization of debt issuance costs.............. 235,484 76,431 31,548
--------- --------- -----------
Income (loss) before income taxes and
extraordinary item............................. (1,686,943) (1,657,269) 215,721
Provision for income taxes....................... 129,759 153,311 78,570
---------- --------- -------
Income (loss) before extraordinary item........ (1,816,702) (1,810,580) 137,151
Extraordinary loss on early extinguishment of debt
(net of tax benefit of $143,511)............... -- (234,149) --
----------------- ------------ ------------
Net income (loss)...................... $ (1,816,702) $ (2,044,729) $ 137,151
============= ============ ============
Earnings (loss) per share before extraordinary
item:
Basic.......................................... $ (.35) $ (.42) $ .05
Diluted........................................ (.35) (.42) .05
Earnings (loss) per share after extraordinary
item:
Basic.......................................... $ (.35) $ (.47) $ .05
Diluted........................................ (.35) (.47) .05
Weighted average number of shares:
Basic.......................................... 5,151,614 4,341,498 2,893,298
Diluted........................................ 5,151,614 4,341,498 3,019,213
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 24
<PAGE>
<TABLE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
<CAPTION>
ADDITIONAL ACCUMULATED
COMMON STOCK PAID IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
------ ------ --------- ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, March 2, 1996............................. 2,563,318 $ 25,633 $ 1,339,248 $(1,625,213) $ -- $ (260,332)
Issuance of common stock for cash,
net of issuance costs........................... 422,219 4,222 1,050,281 -- -- 1,054,503
Issuance of warrants for cash.................... -- -- 259,103 -- -- 259,103
Issuance of stock options to nonemployees........ -- -- 47,200 -- -- 47,200
Net income....................................... -- -- -- 137,151 -- 137,151
-------- ---------- ----------- ---------- ------------ ------------
Balance, December 31, 1996......................... 2,985,537 29,855 2,695,832 (1,488,062) -- 1,237,625
Issuance of common stock for cash, net of
net of issuance costs........................... 2,120,000 21,200 8,509,192 -- -- 8,530,392
Exercise of stock options........................ 10,240 102 8,910 -- -- 9,012
Amortization of deferred compensation............ -- -- 57,850 -- -- 57,850
Net loss......................................... -- -- -- (2,044,729) -- (2,044,729)
-------- ------- ----------- ---------- ------------ ----------
Balance, December 31, 1997......................... 5,115,777 51,157 11,271,784 (3,532,791) -- 7,790,150
Issuance of common stock for
distribution rights............................ 100,000 1,000 461,500 -- -- 462,500
Issuance of warrants with
Senior Subordinated Notes...................... -- -- 1,619,755 -- -- 1,619,755
Exercise of stock options........................ 39,917 399 116,558 -- -- 116,957
Net loss......................................... -- -- -- (1,816,702) -- (1,816,702)
Translation adjustment........................... -- -- -- -- 1,205 1,205
--------- ------- ----------- ----------- ----------- -----------
Balance, December 31, 1998......................... 5,255,694 $52,556 $13,469,597 $(5,349,493) $ 1,205 $ 8,173,865
========= ======= =========== =========== ========= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 25
<PAGE>
<TABLE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
<CAPTION>
FOR THE YEAR ENDED TEN MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................. $(1,816,702) $(2,044,729) $ 137,151
Adjustments to reconcile net income (loss) to
net cash used by operating activities;
Depreciation and amortization .................... 338,462 92,993 108,047
Amortization of debt issue costs ................. 235,484 -- --
Amortization of debt discount .................... 1,271,790 -- --
Allowance for returns and doubtful accounts ...... -- (86,428) 79,123
Inventory write down ............................. 156,620 29,205 20,822
Extraordinary item ............................... -- 377,660 --
Amortization of deferred compensation ............ -- 57,850 --
Deferred taxes ................................... -- 90,000 (90,000)
Deferred rent .................................... 4,009 (3,046) 1,469
Common stock and stock options issued for
services......................................... -- -- 47,200
Changes in operating assets and liabilities:
Accounts receivable ........................... (1,782,471) (722,742) (1,188,544)
Inventories ................................... (2,818,298) (1,412,400) (461,812)
Prepaid expenses and other current assets ..... (941,706) (180,509) (55,567)
Other assets .................................. 442,831 (449,680) (6,230)
Accounts payable .............................. 889,808 433,080 (448,316)
Accrued liabilities and income taxes payable .. 220,725 538,430 441,052
Customer deposits ............................. 17,838 9,388 (215,738)
----------- ----------- -----------
Net cash used by operating activities ...... (3,781,610) (3,270,928) (1,631,343)
----------- ----------- -----------
Cash flows from investing activities:
Loans to related parties ......................... 56,000 (126,000) --
Purchase of intangible assets .................... (304,494) (86,950) --
Purchase of property and equipment ............... (722,056) (284,082) (200,686)
----------- ----------- -----------
Net cash used in investing activities ...... (970,550) (497,032) (200,686)
----------- ----------- -----------
Cash flows from financing activities:
(Decrease) increase in book overdraft ............ -- -- (49,906)
Accounts payable to related party in excess of
terms .......................................... -- -- (79,218)
Issuance of common stock, net of offering costs .. -- 8,530,392 1,054,503
Proceeds from exercise of stock options .......... 116,957 9,012 --
Repayment of bridge loan ......................... -- (1,600,000) --
Proceeds from issuance of notes payable .......... 4,625,509 -- 1,314,766
Debt issuance costs .............................. (300,000) -- --
Proceeds from line of credit ..................... 343,890 -- --
Proceeds from borrowings from related parties .... -- -- 25,000
Payments on borrowings from related parties ...... (45,030) (227,936) (29,049)
Principal payments on capital lease obligations .. (17,839) (21,282) (11,842)
----------- ----------- -----------
Net cash provided by financing activities.. 4,723,487 6,690,186 2,224,254
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents ....................... (28,673) 2,922,226 392,225
Effect of exchange rate changes on cash and cash
equivalents ...................................... (11,084) -- --
Cash and cash equivalents, beginning of period ..... 3,981,062 1,058,836 666,611
----------- ----------- -----------
Cash and cash equivalents, end of period ........... $ 3,941,305 $ 3,981,062 $ 1,058,836
=========== =========== ===========
Supplemental cash flow information:
Interest paid .................................... $ 310,615 $ 281,693 $ 8,219
Income taxes paid ................................ 17,553 50,279 --
Supplemental schedule of non-cash investing and
financing activities:
Issuance of common stock for purchase of
intangible asset ............................... $ 462,500 $ -- $ --
Capital lease obligations incurred ............... -- -- 5,997
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 26
<PAGE>
<TABLE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
<CAPTION>
For the Year Ended Ten Months
December 31, Ended
------------------------------ December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $(1,816,702) $(2,044,729) $ 137,151
Other comprehensive income:
Foreign currency translation
adjustment 1,205 -- --
---------- ----------- ----------- -----------
Comprehensive income (loss) $(1,815,497) $(2,044,729) $ 137,151
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 27
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The Company designs, develops, manufactures and sells high technology dental
equipment. The Company's primary existing product emphasis is on the manufacture
and sale of a tooth curing and whitening device known as the "Apollo 95E." The
Company also markets and sells a line of whitening products known as "Apollo
Secret" for use in conjunction with the Apollo 95E, and in Q2 of 1999 intends to
introduce a line of composite resin materials known as "ASAP - Accelerated
Solutions for Aesthetic Procedures." In addition, the Company continues to
manufacture and sell intraoral camera systems, known as the "TeliCam II System,"
and "TeliCam Elite," and a multi-operatory intraoral camera system, known as the
InTELInet, for use in connection with the TeliCam II System and TeliCam Elite."
On February 2, 1998 the Company formed "DMDS, Ltd." a wholly owned
subsidiary created under the laws of the United Kingdom. DMDS, Ltd. holds the
assets acquired in 1997 from S.E.D. Gerant, a company organized under the laws
of France. In addition, the Company is marketing certain of its new products
internationally through DMDS, Ltd.
2. BASIS OF PRESENTATION
On February 5, 1997, the Company changed its fiscal year-end from a fiscal
year ending on the nearest Saturday to February 28th to a December 31 fiscal
year-end. The accompanying consolidated financial statements reflect the
operating results of the Company for the fiscal years ended December 31, 1998
and 1997 and for the ten-month period from March 3, 1996 through December 31,
1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of DMDS and its
wholly owned subsidiaries. All intercompany balances and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made in the preparation of the
consolidated financial statements relate to the assessment of the carrying value
of accounts receivable, inventories, and estimated provision for warranty costs.
Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES
The Company buys certain key components from one supplier or from a limited
number of suppliers. Although there are a limited number of suppliers of the key
components, management believes that other suppliers could provide similar
components on comparable terms. Changes in key suppliers could cause delays in
manufacturing and distribution of products and a possible loss in sales, which
could adversely affect operating results.
The Company has derived substantially all of its revenues from the sale of
two product families. The Company believes that the inability to attract new
customers, the loss of one or more of its major customers, a significant
reduction in business from such customers, or the uncollectibility of amounts
due from any of its larger customers, could have a material adverse affect on
the Company.
REVENUE RECOGNITION
The Company recognizes revenue from the sales of systems and supplies at
the time of shipment, net of an allowance for estimated sales returns. The
Company generally warranties its systems for one year. A provision for estimated
future costs relating to warranty is recorded when systems are shipped.
Page 28
<PAGE>
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
INVENTORIES
Inventories are carried at standard costs which approximate the lower of
actual cost (first-in; first-out) or market. Such amounts include the cost of
materials and, when applicable, labor and overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Capitalized leases are recorded at the lower of fair market value or the present
value of future minimum lease payments, less accumulated amortization.
Maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation and amortization of property and equipment sold or
retired are removed from the accounts and the resulting gains or losses are
included in current operations. Depreciation and amortization are provided on a
straight line basis over the estimated useful lives of the related asset, or
with respect to leasehold improvements and capital leases over the primary term
of the lease, whichever is less, as follows:
Equipment and software, including capitalized leases........... 5 years
Furniture and fixtures......................................... 7 years
Leasehold improvements and tooling............................. 3 years
PATENTS, TRADEMARKS AND OTHER INTANGIBLES
Patents, trademarks and other intangibles are carried at cost less
accumulated amortization which is calculated on a straight-line basis over the
estimated useful lives of the assets, not exceeding 15 years. Accumulated
amortization was $59,968 and $0 as of December 31, 1998 and 1997, respectively.
LONG-LIVED ASSETS
The carrying value of long-lived assets is periodically reviewed by
management, and impairment losses, if any, are recognized when the expected
nondiscounted future operating cash flows derived from such assets are less than
their carrying values.
ADVERTISING AND PROMOTION COSTS
Production costs of future media advertising and costs of dental industry
trade shows are deferred until the advertising or trade show occurs. All other
advertising and promotion costs are expensed as incurred. Total advertising and
promotion expenses incurred for the fiscal years ended December 31, 1998 and
1997, and for the ten-month period ended December 31, 1996, were $2,256,179,
$1,528,203, and $1,008,879, respectively. Prepaid advertising and promotion
costs at December 31, 1998 and 1997 were $376,316 and $214,667, respectively.
RESEARCH AND DEVELOPMENT COSTS
Costs related to research and development are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax currently payable for the period and the change
during the period in deferred tax assets and liabilities.
Page 29
<PAGE>
STOCK-BASED EMPLOYEE COMPENSATION AWARDS
Statement of Financial Accounting Standards No. 123, "Accounting for the
Awards of Stock-Based Compensation to Employees" ("SFAS No. 123") encourages,
but does not require companies to record compensation cost for stock-based
compensation plans at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123, which involves proforma disclosure of net income
under SFAS No. 123, detailed descriptions of plan terms and assumptions used in
valuing stock option grants. The Company has chosen to continue to account for
stock-based employee compensation awards in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
Also, at various times throughout the year, cash balances are maintained in
excess of Federally insured deposit limits.
For the fiscal years ended December 31, 1998 and 1997, and for the ten-month
period ended December 31, 1996, international customers accounted for 40%, 24%
and 19% of sales, respectively. At December 31, 1998 and 1997, international
customers accounted for approximately 78% and 57% of accounts receivable,
respectively. No customer accounted for more than 10% of revenues in any of the
periods presented. Five customers accounted for 54% of the Company's accounts
receivable at December 31, 1998.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Estimated credit losses and
returns have been provided for in the financial statements.
The majority of the Company's current customers consist of dental
professionals and independent distributors. Certain of the dental professionals
lease the Company's products through third party leasing companies. Under the
terms of the sales, the leasing companies have no recourse against the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments," requires disclosure of fair value information
about all financial instruments held by a company except for certain excluded
instruments and instruments for which it is not practical to estimate fair
value. The carrying value of the Company's financial instruments approximates
their fair value.
COMPUTATION OF EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128; "Earnings Per Share" for the year ended December 31, 1997, and has reported
earnings per common share for all periods presented in accordance with the new
standard. Net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Net income (loss) per common share assuming dilution is
computed by dividing net income (loss) by the weighted average number of shares
of common stock outstanding plus the number of additional common shares that
would have been outstanding if all dilutive potential common shares had been
issued, using the treasury stock method. Potential common shares related to
stock options and stock warrants are excluded from the computation when their
effect is antidilutive.
COMPREHENSIVE INCOME
In January 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in financial
statements. SFAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements.
No tax effect has been allocated to the foreign currency translation
adjustment for the periods presented.
Page 30
<PAGE>
The following is a reconciliation of accumulated other comprehensive income
balance for the year ended December 31, 1998.
Beginning balance $ --
Current period change 1,205
------
Ending balance $1,205
======
FOREIGN CURRENCY
Financial statements of foreign subsidiaries are translated to US dollars
using the exchange rate at the balance sheet date for assets and liabilities and
a weighted average exchange rate for each period for revenues, expenses, gains
and losses. The effect of unrealized exchange rate fluctuations on translating
foreign currency assets and liabilities into US dollars are accumulated as a
separate component of shareholders' equity. Gains (losses) resulting from
foreign currency transactions are included in the statement of operations and
amounted to ($69,726) and $0 for the years ended December 31, 1998 and 1997,
respectively, and $0 for the ten months ended December 31, 1996.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with current
year presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Company adopted SFAS No. 131. " Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 supercedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS No. 131 did not affect the results of operations or financial position but
did affect the disclosure of segment information (see "Segment Information").
4. RELATED PARTY TRANSACTIONS
From December 1995 through February 1996, Robert H. Gurevitch, Chairman of
the Board and Chief Executive Officer of the Company, and Boston Marketing
Company, Ltd. ("Boston Marketing"), an affiliate of Hiroki Umezaki, a former
Director of the Company, loaned the Company an aggregate of $377,015. The
Promissory Notes evidencing such loans bear interest at 6% per annum and were
originally payable within six months. On February 26, 1996, the Company repaid
$50,000 to each of Mr. Gurevitch and Boston Marketing. In November 1996, Mr.
Gurevitch and Boston Marketing each agreed to extend the term of their
respective notes. On May 23, 1997, Boston Marketing was paid the remaining
principal balance of $150,000 of its loan plus the accrued interest of $3,526.
Mr. Gurevitch was paid $25,000 on July 10, 1997; $26,850 on October 22, 1997;
$5,000 on October 30, 1997; $13,787 on November 1, 1997; and $3,447 on December
1, 1997; $3,447 on January 1, 1998; $5,319 on February 1, 1998; $12,806 on
February 19, 1998; $3,447 on April 1, 1998; $1,341 on May 1, 1998; $3,512 on May
18, 1998; $3,976 on June 3, 1998; $81 on June 17, 1998; and the balance was paid
during the third quarter of 1998.
On May 27, 1997, the Company loaned Dewey Perrigo, Vice President of Sales
of the Company, and Andrea Niemiec-Perrigo, an employee of the Company, $126,000
for the purpose of buying a home. The Promissory Notes evidencing such loans
bear interest at prime plus .25% (8.0% at December 31, 1998), and are due and
payable on May 27, 1999. On August 19, 1998, a principal payment of $56,000 and
an interest payment of $6,152 were made leaving a loan balance of $70,000.
Page 31
<PAGE>
5. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Raw materials................... $2,313,810 $1,387,695
Work in process................. 874,002 555,049
Finished goods.................. 2,371,939 953,526
---------- ----------
$5,559,751 $2,896,270
</TABLE>
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Prepaid advertising and industry trade show fees .. $376,316 $214,667
Prepaid inventory ................................. 220,219 --
VAT recoverable ................................... 321,254 --
Other ............................................. 414,638 174,394
---------- ---------
$1,332,427 $ 389,061
========== =========
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Equipment and software, including $112,853
of capitalized leases at both
December 31, 1998 and 1997......................... $1,128,919 $ 569,729
Furniture and fixtures.............................. 295,360 135,034
Leasehold improvements.............................. 47,251 44,222
---------- ---------
1,471,530 748,985
Less accumulated depreciation and amortization,
including $45,142 and $22,571 relating to
capitalized leases at December 31, 1998 and
1997.............................................. (474,590) (195,866)
--------- ---------
$996,940 $ 553,119
======== =========
</TABLE>
8. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Patents and trademarks.......................... $395,905 $86,950
License agreements.............................. 462,500 --
-------- -------
858,405 86,950
Less accumulated amortization................... (59,968) --
-------- -------
$798,437 $86,950
======== =======
</TABLE>
On October 2, 1998, the Company acquired the exclusive worldwide license
agreement for certain tooth whitening products from Chrysalis Dental, Inc.
through the issuance of 100,000 shares of common stock.
Page 32
<PAGE>
9. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C>
Accrued commissions.................. $362,019 $223,750
Accrued warranty..................... 85,000 84,730
Accrued salaries and wages........... 84,661 82,112
Accrued interest..................... 161,488 5,965
Income taxes payable................. 124,452 --
Deferred revenue..................... 32,866 1,200
Accrued advertising.................. 78,983 --
Accrued vacation..................... 64,225 66,911
Accrued development payments......... -- 350,000
Other................................ 246,370 202,505
---------- ----------
$1,240,064 $1,017,173
---------- ----------
</TABLE>
10. BORROWINGS UNDER LINE OF CREDIT
On July 1, 1997, the Company finalized a credit agreement with Comerica Bank
("Comerica") extending up to a $2,000,000 line of credit to the Company,
collateralized by a first priority security interest in the Company's assets and
by an assignment of the Company's rights under the Boston Marketing Distribution
Agreement. The credit facility bears interest at the rate of prime plus .25% per
annum (8.00% at December 31, 1998). All borrowings under the facility are
subject to a formula based, generally, on accounts receivable and inventory. No
amounts were outstanding under this line of credit at December 31, 1998.
On December 10, 1997, the Company finalized a second agreement with Comerica
Bank ("Comerica") extending up to a $500,000 line of credit to the Company for
capital expenditures, collateralized by a first priority interest in the
Company's assets. The credit facility bears interest at a rate of prime plus .5%
per annum (8.25% at December 31, 1998). The line expired on December 10, 1998,
at which time the principal balance began to amortize over a thirty-six (36)
month period. Borrowings are at 80% of the capital expenditure. At December 31,
1998, $343,890 was outstanding under this line of credit.
On January 4, 1999, the Company replaced its credit agreements with Comerica
with a $6,950,000 facility with Imperial Bank ("Imperial"). The Imperial
facility comprises of a $2,500,000 fixed rate non-revolving line of credit due
May 31, 2000; a $4,000,000 variable rate revolving line of credit loan due May
31, 2000; and a $450,000 variable interest rate loan repayable in 16 monthly
installments. The facilities are collateralized by the assets of the Company.
The Company intends to use the credit facilities, when needed, for working
capital, capital expenditures and general corporate purposes. On January 21,
1999, the Company borrowed against the Imperial facility to repay the balance
owing on to Comerica capital credit line of $343,890 plus accrued interest of
$1,120. On January 25, 1999, the Company borrowed against the Imperial facility
to repay the $4,500,000 12% Senior Subordinated Notes plus accrued interest of
$189,000.
11. NOTES PAYABLE:
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
$4,500,000 12% Senior Subordinated Notes
due March 19, 1999, net of unamortized
discount of $348,435 $4,151,565
Notes payable to certain individuals bearing
interest at 12% at December 31, 1998.
Due on demand prior to December 2000 125,940
-----------
$4,277,505
===========
</TABLE>
Page 33
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases two facilities under operating leases that expire in 1999
and 2000. The leases require the Company to pay taxes, maintenance fees, and
insurance and provide for periodic fixed rent increases based on a published
price index. The Company also leases certain equipment under capital leases
which expire in 2000 and has the right to purchase the underlying equipment at
the termination of the leases for its fair market value. Rent expense for all
operating leases was approximately $189,000, $132,000 and $102,000 for the
fiscal years ended December 31, 1998 and 1997 and for the ten-month period ended
December 31, 1996, respectively. The two non-cancelable leases are guaranteed by
Robert H. Gurevitch, Chief Executive Officer and Chairman of the Board of the
Company.
The aggregate liability for future rentals under lease agreements with
noncancelable lease terms in excess of one year as of December 31, 1998, is
summarized as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED DECEMBER 31 LEASES LEASES
---------------------- ------- ---------
<S> <C> <C>
1999............................................ $25,672 $76,308
2000............................................ 22,539 69,949
------- --------
48,211 $146,257
========
Less amounts representing:
Interest...................................... 2,836
Current portion............................... 22,440
-------
Long term portion............................... $22,935
=======
</TABLE>
DISTRIBUTION AGREEMENTS
Effective October 1, 1996, the Company amended its distribution agreement
("BMC Distribution Agreement") with Boston Marketing, a licensed distributor of
the Teli manufactured CCD chip which includes the Teli CCU processor. Pursuant
to the BMC Distribution Agreement, the Company has the exclusive right (i) to
market certain Teli manufactured CCD chip assemblies with CCU processors (model
numbers CS6110 S/B with Frame Grabber, CS6110 P S/B with Frame Grabber and the
CS6110 S/B without Frame Grabber (each a "Teli Unit" and collectively the "Teli
Units")) to the dental market, and (ii) to use the "TeliCam" trademark. The Teli
Units are key components of the Company's intraoral digital cameras. The BMC
Distribution Agreement has a five-year initial term. The Company has agreed to
purchase a minimum of 2,500 Teli Units per year for each of the five years, at
an initial price of $750 per Teli Unit. The Boston Marketing Distribution
Agreement is terminable by Boston Marketing if the Company fails to meet its
annual minimum purchase obligation. The term of the BMC Distribution Agreement
may be extended by mutual agreement of the Company and Boston Marketing for an
additional five year term.
On October 10, 1997, the Company entered into an agreement with Suni Imaging
Microsystems, Inc. ("Suni") to develop digital x-ray technology for
incorporation into systems for the dental market. The Company has obtained
exclusive rights to market products to the dental market incorporating certain
digital x-ray technology developed by Suni. Suni will retain the rights to
developed microchip technology underlying the x-ray system it develops for the
Company. The Company will determine whether or not to proceed with the marketing
of such products based upon the results of the development.
Under the agreement with Suni, the Company was required to pay a non
refundable fee of $875,000 to Suni to develop technology for a digital x-ray
system for the dental market. This non-refundable fee was charged to research
and development expense during the year ended December 31, 1997. If the initial
prototype developed subsystem is not accepted by the Company, the fee is not
refundable to the Company and the Company is under no obligation to pay any
additional development fees or financial penalties to Suni. If the initial
prototype subsystem is accepted by the Company, upon acceptance of the final
prototype subsystem, the Company is obligated to pay an additional development
fee xf $375,000. Through December 31, 1998, only the initial portion of the fee
($875,000) has been paid to Suni. The remaining $375,000 is expected to be paid
in the first quarter of 1999 upon acceptance of the final prototype developed
subsystem. Under the terms of the agreement, the Company will also be required
to pay a per unit royalty on each licensed product sold.
On October 2, 1998, the Company entered into an agreement with Chrysalis
Dental, Inc. to acquire the exclusive worldwide license agreement for certain
new tooth whitening products ("New Products"). Pursuant to the terms of the
agreement the Company is
Page 34
<PAGE>
required to pay minimum annual royalties of $150,000 during the term of the
agreement. Should the Company fail to make the minimum annual royalty payments
after December 31, 2000, the Company shall have the option to convert the
exclusive agreement to a non-exclusive agreement and thereafter forego payment
of the minimum annual royalties. The Company is also required to pay an earned
royalty of 7% on the net sales of the New Products by the Company in excess of
the minimum payments, unless within five years of the date of agreement no
patents have been filed covering the New Products, then the royalty rate will be
reduced to 4%.
13. CAPITAL TRANSACTIONS
On May 30, 1996, the Company completed the sale of a total of 422,219 shares
of its common stock to six foreign investors. Each share was sold at a price of
$2.58 per share and, consequently, the Company raised approximately $1,055,000
from the sale, net of related expenses of approximately $34,000.
On November 27, 1996, the Company raised approximately $1,314,000, net of
issuance costs of $285,000, through a private placement of 32 Units to certain
accredited investors. Each Unit consisted of a secured promissory note in the
principal amount of $50,000 ("Bridge Note") and a warrant to purchase 18,750
shares of Common Stock ("Bridge Warrant") at a purchase price of $2.67 per
share. The Notes bore interest at a rate of 10% per annum and the principal and
all accrued interest were payable upon the earliest to occur of: (a) May 27,
1998; (b) certain change in control events effecting the Company; (c) a public
offering of the Company's securities; or (d) the sale by the Company's Chief
Executive Officer of all or substantially all of his holdings of the Common
Stock. Upon the happening of certain events the holders of the Notes had the
right to convert the outstanding balances of their Notes into shares of the
Common Stock at a rate of $2.67 per share. The Warrants were first exercisable
on November 27, 1997 and expire on November 27, 2002. As a result of the
warrants, these notes were discounted by $259,104, which amount was being
amortized over the term of the notes. The Bridge Warrants were converted into
1,600,000 Redeemable Common Stock Purchase Warrants upon closing of the
Company's Offering on May 14, 1997.
On May 14, 1997, the Company closed a secondary offering of 2,070,000 shares
of common stock. Each share of common stock included one redeemable warrant to
purchase one share of common stock at a purchase price of $5.00. This offering
resulted in gross proceeds of $10,350,000 less expenses of approximately
$2,075,858 for net proceeds of approximately $8,274,142. In addition, the
underwriter to the secondary offering received an option to purchase 180,000
shares of common stock and/or 180,000 warrants at a purchase price of $4.95 per
share and $0.55 per warrant. Further, approximately $1,600,000 of the net
proceeds were used to repay the principal on the Bridge Notes plus an additional
$100,000 was used to pay off accrued interest. The Bridge Notes consisted of
secured convertible promissory notes in the aggregate principal amount of
$1,600,000 bearing interest at 10% per annum and were payable the earlier of May
27, 1998 or consummation of the offering. The Bridge Warrants were automatically
converted at the date of the secondary offering. Approximately $224,000 was used
to repay loans from related parties. The remaining net proceeds have or will be
used for product development, acquisition, and to repay the remaining loans from
related parties, and working capital and general corporate purposes.
On September 17, 1997, the Company issued 50,000 shares of Common Stock to
DMD NV, the Company's licensed exclusive distributor of the TeliCam system in
Europe, in exchange for termination of DMD NV's exclusive distribution rights in
Europe. The market value of the Common Stock issued was $256,250.
On March 2, 1998, the Company entered into an agreement with accredited
investors and institutional purchasers for the private placement (the "Debt
Placement") of its 12% Senior Subordinated Notes due 1999, and 450,000 warrants
(the "1998 Warrants"). The Debt Placement was consummated on March 19, 1998. The
1998 Warrants are (i) exercisable commencing on May 15, 1998, and for five years
thereafter for the purchase of one share of Common Stock per Warrant; and (ii)
at an exercise price of $5.812 per share. The Senior Subordinated Notes (i) bear
interest payable semi-annually at a rate of 12% per annum; (ii) mature on the
first anniversary of the date of issuance; and (iii) may be repaid by the
Company prior to maturity at one hundred and two (102%) percent of the amount of
the unpaid principal plus interest due as of the date of repayment. As a result
of the warrant issuance, the Senior Subordinated Notes were discounted by
$1,620,225, which is being amortized over the term of the Notes. On September
16, 1998, accrued interest of $270,000 was paid to the Note holders in
accordance with the Debt Placement agreement. On January 27, 1999, the Company
repaid the Senior Subordinated Notes, in full, plus $189,000 of accrued
interest.
14. STOCK OPTIONS AND WARRANTS
In March 1997, the Company's Board of Directors approved the "1997 Stock
Incentive Plan." Under the plan, incentive stock options and non-statutory stock
options may be granted to employees, directors, and consultants to purchase a
specified number of shares of common stock at a price not less than the fair
market value on the date of grant and for a term not to exceed 10 years.
Page 35
<PAGE>
Options for employees generally vest over a period of 5 years. The maximum
number of shares authorized for grants of options under the 1997 Stock Incentive
Plan at December 31, 1998 is 700,000.
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but does
not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation expense
has been recognized for the Company's stock based compensation plans. Had
compensation costs for the Company's stock option plan (for options granted in
the years ended December 31, 1998 and 1997, and in the ten-month period ended
December 31, 1996, only) been determined based upon the methodology prescribed
under SFAS No. 123, the Company's net (loss) would approximate the pro forma
amounts below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998: AS REPORTED PRO FORMA
- - ----------------------------- ----------- ---------
<S> <C> <C>
Net income/(loss).................................. $(1,816,702) $(2,215,967)
Net income/(loss) per share (basic and diluted).... $ (.35) $ (.43)
YEAR ENDED DECEMBER 31, 1997: AS REPORTED PRO FORMA
- - ----------------------------- ----------- ---------
Net income/(loss).................................. $(2,044,729) $(2,180,726)
Net income/(loss) per share (basic and diluted).... $ (.47) $ (.50)
TEN-MONTH PERIOD ENDED DECEMBER 31, 1996: AS REPORTED PRO FORMA
- - ----------------------------------------- ----------- ---------
Net income/(loss)................................ $ 137,151 $ (158,129)
Net income/(loss) per share (basic and diluted).. $ .05 $ (.05)
</TABLE>
The fair value of options granted during 1998, 1997 and 1996 is estimated as
$970,215, $1,278,280 and $295,280, respectively, on the dates of grants using
the Black-Scholes option pricing model. The following assumptions were used for
1998, 1997 and 1996: (i) risk-free interest rate of 4.82%, 6.33% and 6.85%,
respectively (ii) expected option life of 5 years, (iii) forfeiture rate of 0,
(iv) expected volatility of 72.6%, 68.73% and 143%, respectively and (v) no
expected dividends.
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1996.
A summary of the status of the Company's stock options as of December 31,
1998, 1997 and 1996, and the changes during the years ended December 31, 1998
and 1997, and the ten-month period ended December 31, 1996, is presented below:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF OPTION GRANT DATE
SHARES EXERCISE PRICE FAIR VALUE
--------- -------------- ----------
<S> <C> <C> <C>
Outstanding at March 2, 1996............... -- $ --
Granted.................................. 139,943 2.63 $2.11
Exercised................................ -- --
------- ----
Options outstanding at December 31, 1996... 139,943 2.63
Granted.................................. 471,691 3.79 2.71
Canceled................................. (513) 2.95
Exercised................................ (10,240) .88
------- ----
Options outstanding at December 31, 1997... 600,881 3.63
Granted.................................. 362,950 4.20 2.67
Canceled................................. (32,108) 4.85
Exercised................................ (39,917) 2.93
------- ----
Options outstanding at December 31, 1998... 891,806 4.15
======= ====
Options exercisable at December 31, 1998. 279,367 $3.27
Options available for future grant....... 54,858
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE ----------------------------------------
RANGE OF NUMBER OUTSTANDING AT REMAINING WEIGHTED AVERAGE NUMBER OUTSTANDING WEIGHTED AVERAGE
EXERCISE PRICE DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE AT DECEMBER 31, 1998 EXERCISE PRICE
------------------ ---------------------- ------------------ ------------------ --------------------------------------
<S> <C> <C> <C> <C> <C>
$0.88 - 2.93 178,357 2.25 years $2.34 178,717 $2.34
$4.00 - 4.50 385,950 8.79 years $4.08 36,000 $4.50
$5.00 - 5.875 327,499 8.77 years $5.22 64,650 $5.15
------- -------
891,806 279,367
======= =======
</TABLE>
Page 36
<PAGE>
The following is a summary of warrants outstanding at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF COMMON
SHARES UNDER WARRANTS EXERCISE PRICE EXPIRATION DATE
--------------------- -------------- ---------------
<S> <C> <C>
450,000 $5.81 May 15, 2003
180,000 5.55 May 14, 2002
2,070,000 5.00 May 14, 2002
1,600,000 5.00 November 27, 2002
---------
4,300,000
=========
</TABLE>
15. INCOME TAXES
The income tax expense (benefit) for the fiscal years ended December 31,
1998 and 1997, and for the ten-month period ended December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.................... $ -- $113,299 $132,570
State...................... 1,600 40,012 36,000
Foreign.................... 128,159 -- --
------- -------- ----------
129,759 153,311 168,570
Deferred:
Federal.................... -- -- (67,000)
State...................... -- -- (23,000)
-------- -------- -------
Total................. $129,759 $153,311 $78,570
======== ======== =======
</TABLE>
The Company's effective tax rate for the fiscal years ended December 31,
1998 and 1997, and for the ten-month period ended December 31, 1996 differs from
the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax provision at the statutory rate.................... (34.0)% (34.0)% 34.0%
Nondeductible expenses................................. -- 2.0 10.0
State taxes, net of federal benefit.................... (7.1) (6.0) 14.0
Research & development credit.......................... -- (5.0) --
Establishment of valuation allowance................... -- 52.0 --
Increase (reduction) in deferred asset valuation
allowance.............................................. 43.2 -- (27.0)
Foreign taxes.......................................... 2.3 -- --
Other.................................................. 3.3 0.3 5.0
--- -- ---
7.7% 9.3% 36.0%
====== ====== =====
</TABLE>
The components of the net deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- ------------- ---------
<S> <C> <C> <C>
Deferred Tax Assets:
Inventory reserves........................... $ 64,600 $ 39,000 $28,300
Warranty accrual............................. 33,900 33,000 22,600
Allowance for returns and doubtful accounts.. 8,300 20,700 37,900
Net operating loss carry forwards............ 1,625,000 1,029,700 --
Research and development credits............. 171,800 100,000 --
Accrued vacation............................. 25,600 24,100 --
Fixed assets................................. (7,800) 31,400 --
Intangible assets............................ (127,000) -- --
State tax credits............................ (111,500) -- --
Other........................................ 81,500 17,100 1,200
Valuation allowance.......................... (1,764,400) (1,295,000) --
----------- ----------- -------
$ -- $ -- $90,000
=========== =========== =======
</TABLE>
Page 37
<PAGE>
As a result of the Company's recent loss history, a valuation allowance has
been recorded for the full amount of the Company's deferred tax asset at
December 31, 1998.
The Company has federal tax and state NOL carryforwards of $3,852,000 and
$3,742,000, respectively, which begin to expire in 2017 and 2002, respectively.
16. EARNINGS PER SHARE
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted per-share computations for the years ended
December 31, 1998 and 1997, and for the ten-month period ended December 31,
1996:
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
For the year ended December 31, 1998:
Basic earnings per share......................... $(1,816,702) 5,151,614 $(.35)
Effect of dilutive securities--stock options and
warrants........................................ -- -- --
----------- --------- -----
Diluted earnings per share....................... $(1,816,702) 5,151,614 $(.35)
=========== ========= =====
For the year ended December 31, 1997:
Basic earnings per share......................... $(2,044,729) 4,341,498 $(.47)
Effect of dilutive securities -- stock options
and warrants.................................... -- -- --
----------- --------- -----
Diluted earnings per share....................... $(2,044,729) 4,341,498 $(.47)
=========== ========= =====
For the ten months ended December 31, 1996:
Basic earnings per share......................... $137,151 2,893,298 $.05
Effect of dilutive securities -- stock options and
warrants........................................ -- 125,915 --
----------- --------- ----
Diluted earnings per share....................... $137,151 3,019,213 $.05
======== ========= ====
</TABLE>
The computation for diluted number of shares excludes unexercised stock
options and warrants that are anti-dilutive. The number of such shares for the
years ending December 31, 1998 and 1997, and for the ten-month period ended
December 31, 1996 were 5,372,806, 4,580,881 and 830,395, respectively.
17. EXTRAORDINARY ITEM
On May 14, 1997, the Company repaid the $1,600,000 principal amount Bridge
Notes in connection with the Company's Offering. An extraordinary charge of
$234,149 (net of tax benefit of $143,511) was incurred for the early
extinguishment of those notes.
18. NON-RECURRING CHARGE
On September 17, 1997, the Company repurchased the exclusive distribution
rights of its products into the European market from an independent distributor
for 50,000 shares of common stock. This resulted in a non-recurring charge of
$256,250.
19. SEGMENT INFORMATION
The Company operates in one segment - dental medical equipment which, at
December 31, 1998, comprised three main products: TeliCam Systems - an intraoral
camera and dental networking system; Apollo 95E tooth whitening and curing
system; and other accessories including the Apollo Secret whitening product.
Accordingly no separate segment information is provided other than Enterprise
Wide disclosures as required by SFAS No. 131.
Page 38
<PAGE>
The following are sales by product lines for the year ended December 31,
1998:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
TeliCam $6,555,540
Apollo 95E 11,125,629
Other 1,546,629
-----------
$19,227,798
===========
</TABLE>
Sales for the year ended December 31, 1997 and for the ten-month period
ended December 31, 1996 consisted primarily of TeliCam sales.
The Company ships products from its operations in the US and Europe. The
following are sales by its US and European locations for the years ended
December 31, 1998 and 1997 and the ten-month period ended December 31, 1996:
<TABLE>
<CAPTION>
TEN-MONTH PERIOD
FOR THE YEAR ENDED DECEMBER 31, ENDED
-------------------------------------- DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales by geography:
United States $13,182,354 $16,087,208 $11,673,102
Europe 6,045,444 -- --
----------- ----------- -----------
$19,227,798 $16,087,208 $11,673,102
=========== =========== ===========
</TABLE>
The following is long-lived asset information by geographic area as of
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997
---- ----
<S> <C> <C>
Long Lived assets:
United States $866,950 $553,119
Europe 129,990 --
-------- --------
$996,940 $553,119
</TABLE>
19. SUBSEQUENT EVENTS
On March 1, 1999, DMDS, Ltd. purchased the assets of DMD Germany, an
independent company organized under the laws of Germany, for a purchase price
consisting of 100,000 shares of the Common Stock of the Company. DMD Germany's
sole business was the sale and distribution of the Company's products in
Germany. The assets that DMDS, Ltd. purchased include the business (as a going
concern), customer lists, goodwill, the benefit of the lease and other contracts
with third parties and all other items of whatever nature owned by DMD Germany
and used in the conduct of the business of DMD Germany. Under the terms of the
agreement, if DMD Germany generates greater than (1) $4 million in revenues, or
(2) Apollo and/or TeleCam unit sales of at least 780 units during the first year
under the agreement, the Company shall pay contingent consideration equal to the
difference between $1.6 million and the market value of 100,000 shares of Common
Stock. The Company also entered into an employment agreement with Ralf Muller,
the General Manager of DMD Germany. The Company intends to continue the business
of DMD Germany as currently operated. The Company purchased the assets of DMD
Germany for the purpose of increasing its revenues and the margins on products
sold in Germany.
On March 1, 1999, DMDS, Ltd. purchased the assets of Midas, Ltd., an
independent company organized under the laws of the United Kingdom, for a
purchase price consisting of 50,000 shares of the Common Stock of the Company.
Midas, Ltd.'s primary business was the sale and distribution of the Company's
products in the United Kingdom. The assets that DMDS, Ltd. purchased include the
business (as a going concern), customer lists, goodwill, the benefit of the
lease and other contracts with third parties and all other items of whatever
nature owned by Midas, Ltd. and used in the conduct of the business of Midas,
Ltd. The Company also entered into a non-compete agreement with Sostre NV, the
entity that has distributed the Company's products for Midas, Ltd. The Company
intends to continue the business of Midas, Ltd. substantially as currently
operated. The Company purchased the assets of Midas, Ltd. for the purpose of
increasing its revenues and the margins on products sold in the UK.
Page 39
<PAGE>
On March 17, 1999, the Company entered into a manufacturing agreement with
Suni under which Suni will assemble, test and package the Company's digital
x-ray system incorporating the digital x-ray technology developed by Suni for
the Company. The Company is currently working with Suni to produce a digital
x-ray system that meets the Company's specifications. While the Company believes
that an acceptable device will be manufactured, no assurance can be given that
Suni will be able to produce a product which will meet the Company's
specifications. Under the agreement, which has a three year term, the Company
has guaranteed payment in full for at least 3,000 units per year and has agreed
to place orders for at least 750 units per quarter. The Company has also agreed
to fulfill all of its requirements for the x-ray product from Suni during the
term of the agreement. The Company cannot begin shipping products under this
agreement to the market until it receives 510(k) notification. If, and when,
510(k) notification is received, the Company intends to begin introducing the
digital x-ray system for sale worldwide.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
- - -----------------------------------------------------------------------
None.
Page 40
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
- - --------------------------------------------------------------------------------
The information required in Item 9, is hereby incorporated by reference to
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission for the 1999 Annual Meeting of its Stockholders ("Proxy
Statement").
ITEM 10. EXECUTIVE COMPENSATION
- - --------------------------------
The information required in Item 10 is hereby incorporated by reference to
the Registrant's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- - ------------------------------------------------------------------------
The information required in Item 11 is hereby incorporated by reference to
the Registrant's Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - -------------------------------------------------------
The information required in Item 12 is hereby incorporated by reference to
the Registrant's Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- - -----------------------------------------
(a) EXHIBITS.
EXHIBIT
NO. DOCUMENT DESCRIPTION
- - ------- ---------------------
1.1 Form of Underwriting Agreement.(1)
1.2 Form of Underwriter's Purchase Option granted to M.H. Meyerson & Co.,
Inc. (1)
2.1 Dental/Medical Diagnostic Systems, Inc. 1997 Stock Incentive Plan.(2)
3.1 Amended and Restated Certificate of Incorporation of the Registrant.(2)
3.2 Bylaws of the Registrant.(2)
4.1 Specimen Stock Certificate of the Registrant.(1)
4.2 Form of Warrant Agreement between American Stock Transfer & Trust
Company and the Registrant and form of Warrant Certificate.(3)
10.1 Agency Agreement dated as of October 23, 1996, by and between the
Registrant and M.H. Meyerson & Co., Inc.(4)
10.2 Form of Registration Rights Agreement Letter, dated January 31, 1997,
from Registrant to those certain purchasers of the Registrant's Common
Stock listed on the Schedule thereto.(2)
10.3 Commitment Letter, dated February 13, 1997, from Comerica Bank
confirming the existence of a secured line of credit for the
Registrant.(2)
10.4 Employment Agreement, dated as of October 1, 1996, entered into by the
Registrant and Robert H. Gurevitch.(4)
10.5 Employment Agreement, dated as of October 1, 1996, entered into by the
Registrant and Dewey Perrigo.(4)
10.6 Distribution Agreement, dated as of October 1, 1996, between the
Registrant and Boston Marketing Company, Ltd., as amended.(2)
10.7 Promissory Note, dated February 1, 1996, between the Registrant and
Robert H. Gurevitch.(2)
10.8 Promissory Note, dated February 15, 1996, made by the Registrant in
favor of Robert H. Gurevitch.(2)
10.9 Extension of Promissory Note, dated November 5, 1996, between the
Registrant and Robert H. Gurevitch.(4)
10.10 Form of Indemnification Agreement and Schedule of Indemnified
Parties.(3)
10.11 Standard Office Lease, dated October 30, 1995, between John Hancock
Mutual Life Insurance Company ("John Hancock") and the Registrant, for
Suite 202 at 200 North Westlake Boulevard Office; and Guaranty of Lease,
dated November 6, 1995, made by Robert H. Gurevitch in favor of John
Hancock.(2)
10.12 Agreement between the Registrant and DMD NV dated as of September 30,
1997.(6)
10.13 Agreement between the Registrant and Suni Imaging Microsystems, Inc.
dated October 10, 1997.(7)
10.14 Extension of automatic termination provisions of agreement between the
Registrant and Suni Imaging Microsystems, Inc., dated November 11,
1997.(7)
10.15 Purchase Agreement by and among the Registrant and the purchasers named
therein with respect to the sale and purchase of an aggregate of
$4,500,000 aggregate principal amount of the Registrant's 12% Senior
Subordinated Notes due 1999, and Warrants dated as of March 2, 1998. (7)
10.16 Form of 12% Senior Subordinated Note due 1999.(7)
10.17 Form of Common Stock Purchase Warrant.(7)
Page 41
<PAGE>
10.18 Revolving Credit Loan and Security Agreement between the Registrant and
Comerica Bank-California, dated as of December 10, 1997.(7)
10.19 Variable Rate-Single Payment Note of the Company in form of Comerica
Bank-California, dated as of December, 10, 1997.(7)
10.20 First modification to Variable Rate-Single Payment Note, between the
Company and Comerica Bank-California, dated as of December 24, 1997.(7)
10.21 Exclusive License Agreement, by and between the Registrant and Chrysalis
Dental, Inc., dated as of October 2, 1998.*
10.22 Agreement for the Sale of the Seller's Business and Assets, by and among
the Registrant, Fadi Nahab and DMDS Ltd., dated March 1, 1999.
10.23 Agreement for the Sale of the Seller's Business and Assets, by and among
DMD Gmbh, Ralf Muller and DMDS Ltd., dated March 1, 1999.
10.24 Credit Agreement between the Registrant and Imperial Bank, dated January
4, 1999.
10.25 Standard Office Lease, between the Company and Frank F. Parker (with
addendum), dated as of August 8, 1997, for 16722 Millikan Avenue,
Irvine, CA.
10.26 Second Addendum to Standard Office Lease, between the Company and Frank
F. Parker, dated July 29, 1998, for 16722 Millikan Avenue, Irvine, CA..
10.27 Suni-DMD Manufacturing, Assembly & Test Services Agreement, by and
between Registrant and Suni Imaging Microsystems, Inc., dated as of
March 17, 1999.*
21.1 Subsidiaries of the Registrant.
23.1 Consent of PriceWaterhouseCoopers LLP.
24.1 Power of Attorney (included in signature page attached to this Form
10-K/SB).
27.1 Financial Data Schedule.
- - ----------
* The Registrant has requested Confidential Treatment of portions of the
referenced exhibit.
(1) Incorporated by reference to exhibits to Pre-effective Amendment No. 1 to
the Registration Statement on Form SB-2 of the Registrant filed on April 7,
1997 (File No. 333-22507).
(2) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form SB-2 filed on February 28, 1997 (File No. 333-22507).
(3) Incorporated by reference to exhibits to Pre-effective Amendment No. 2 to
the Registrant's Registration Statement on Form SB- 2 filed on April 30
(File No. 333-22507).
(4) Incorporated by reference to exhibits to the Registrant's Report on Form
10-QSB, dated November 30, 1996.
(5) Incorporated by reference from the Registrant's Report on Form 8-K, dated
March 1,1996.
(6) Incorporated by referenced from exhibits to the Registrant's Report on Form
10-QSB dated September 30, 1997.
(7) Incorporated by reference to exhibits to Registrant's Report on Form 10-KSB
for the fiscal year ended December 31, 1997.
(b) REPORTS ON FORM 8-K.
In the fourth quarter, the Registrant filed no Reports on Form 8-K.
Page 42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10KSB
to be signed on its behalf by the undersigned thereunto duly authorized in the
City of Los Angeles and State of California on the 29th day of March, 1999.
DENTAL/MEDICAL DIAGNOSTIC
SYSTEMS, INC.
By: /S/ Robert Gurevitch
-------------------------------------------
Robert H. Gurevitch
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Each person whose signature appears below constitutes and appoints Robert H.
Gurevitch, and each of them, as his true and lawful attorneys-in-fact and agents
with full power of substitution and resubstitution, for him and his name, place
and stead, in any and all capacities, to sign any or all amendments to this
Annual Report on Form 10KSB and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the date indicated:
SIGNATURE TITLE DATE
/S/ Robert Gurevitch Chairman, Chief Executive
----------------------------- Officer, and Director March 29, 1999
Robert H. Gurevitch
/S/ Jack D. Preston Director March 29, 1999
- - ------------------------------
Jack D. Preston
/S/ Stephen Ross Chief Financial Officer,
- - ------------------------------ Principal Accounting Officer March 29, 1999
Stephen F. Ross
/S/ Marvin Kleinberg Director
- - --------------------------- March 29, 1999
Marvin H. Kleinberg
Page 43
EXCLUSIVE LICENSE AGREEMENT
THIS AGREEMENT is by and between DENTAL/MEDICAL DIAONOSTIC SYSTEMS, INC.,
("DMD") a corporation having a principal place of business in Westlake Village,
California, and CHRYSALIS DENTAL, INC., ("CDI") a corporation having a principal
place of business in Salt Lake City, Utah, and is effective as of the date first
written below.
WHEREAS CDI has created new and improved tooth whitening products which can be
utilized without a gingival dam for use in a dental office and a product for
home use, ("New Products");
WHEREAS DMD is desirous of acquiring the exclusive
worldwide rights to market, sell, distribute, make or have made said New
Products; and
WHEREAS CDI has represented to DMD that said New Products are secret and
proprietary to CDI and that patent protection is being sought for the inventions
embodied in said New Products;
WHEREAS, the parties hereto have entered into a Letter of Intent in which the
basic terms and conditions of this Agreement were decided upon and which
conditioned this Agreement upon the satisfactory completion of a due diligence
investigation;
THEREFORE the parties agree as follows:
I. GRANT OF LICENSE AND RIGHT OF FIRST REFUSAL
1.1 CDI hereby grants to DMD the exclusive worldwide license to make
or have made, use, or sell said New Products under any and all applications for
Letters Patent or Letters Patent maturing therefrom, including continuations,
continuations-in-part, divisionals
Page 1
<PAGE>
thereof, as well as any and all proprietary trade secret information, whether in
the United States of America or in countries foreign to the United States of
America.
1.2 Any improvements of New Products made independently by CDI shall
automatically be included in this Agreement and subject to the same royalty
schedule set forth herein. Any improvements sought or suggested by DMD shall be
funded by DMD. CDI shall not, without the express consent and approval of DMD,
develop new or related technology and market it competitive with the technology
licensed herein. CDI may, however, in its discretion, conduct ongoing research
and development. CDI hereby grants DMD a right of first refusal to license the
new or related technology. For any such competitive technology, DMD, in its
absolute discretion, may exercise such right of first refusal and determine not
to use, sell, make, market, or seek intellectual property protection for such
technology during the period that DMD enjoys the exclusive rights granted
herein.
1.3 In the event that CDI develops an Improvement and DMD determines
not to exploit the Improvement, although CDI shall be entitled to file for,
receive, and maintain Letters Patent covering such improvement.
1.4 In the event that CDI elects not to file any patent application
covering any of its Improvements in or outside the Licensed Territory, then CDI
shall in good time inform DMD to this effect and DMD shall be entitled to
receive the full and active cooperation of CDI and file for, receive, and
maintain, in its own name, Letters Patent covering such Improvement.
1.5 DMD shall be responsible to ensure that appropriate patent and
trademark notices, numbers and/or registrations be prominently placed on
appropriate product, product packaging, product literature and any other
materials associated with the products manufactured under this agreement.
II. COMPENSATION AND PAYMENT
2.1 As and for compensation for the license granted herein, DMD will
grant to CDI:
Page 2
<PAGE>
a. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION shares of the common stock
of DMD;
b. An advance against royalties of $CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION;
c. An annual minimum royalty of $CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION; and
d. An earned royalty of CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION%
on the net sales of the New Products; Subject to the terms and
conditions set forth below. If, however, five years from the
date of the Agreement have elapsed and no Letters Patent
have issued covering the New Products and no application for
Letters Patent is then pending, the royalty rate will drop
to CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION%.
2.2 DMD shall transmit the CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION shares to CDI in the form
of an unregistered certificate upon DMD's acceptance of this Agreement. DMD will
take all appropriate steps to register the shares with or at the time of DMD's
1998 Annual Statement.
2.3 DMD shall pay CDI $CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION a nonrefundable advance
at the time of execution of this Agreement and the balance of $CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION upon acceptance of the Agreement by DMD.
2.4 The minimum annual royalty for the first year shall extend over a
period of CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION (CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) months but not past
December 31, 1999, commencing on the date that DMD first ships New Products to a
non-affiliated purchaser and shall be paid CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION days after the
close of the first quarter following said first shipment. Thereafter, the
minimum royalty shall be payable in quarterly installments, due and payable
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION days after the close of each quarter.
2.5 Minimum royalties shall be credited against earned royalties and,
to the extent that earned royalties in any quarter fail to exceed the minimum,
any shortfall shall be carried over into succeeding quarter so that earned
royalties in any quarter shall be reduced by any carried forward shortfall.
Earned royalties in excess of the quarterly minimum shall be credited against
future minimums.
2.6 Earned royalties are due and payable within CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION (CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION) days after the close of each quarter after
the advance or minimum royalty of $CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION has been recouped.
2.7 "Net sales" for the purposes of computing earned royalties shall
be equal to gross sales less freight, taxes, discounts actually taken, returns
and credits.
Page 3
<PAGE>
2.8 Payment of royalties shall be in United States dollars.
III. EXPORTING
3.1 DMD shall be responsible for compliance with all export and import
regulation and payment of any related taxes of any government or governing body
related to DMD's manufacture, marketing, sales and distribution of product under
this Agreement. In order for CDI to comply with the export regulations of the US
Department of Commerce and to facilitate the exchange of know-how and other
information pursuant to this Agreement, DMD hereby gives its assurance to CDI
that DMD will not knowingly, unless prior authorization is obtained from CDI and
the US Office of Export Control, re-export directly or indirectly any technical
data received from CDI under this Agreement, and will not export directly the
product of such technical data to any countries as said countries may be listed,
from time to time, by the US Government and agencies thereof.
IV. TERM AND TERMINATION
4.1 This Agreement is conditioned upon the acceptance by DMD, after a
due diligence investigation of no more than seven working days (7) days from the
execution of this Agreement, of the adequacy of any pending applications for
Letters Patent and specific approval thereof as well as a review of the clinical
trial material and experimental data, if requested.
4.2 The initial term of this Agreement shall be twenty years. DMD,
upon ninety (90) days notice, shall have the option to renew this agreement for
an additional term.
4.3 After December 31, 2000, should DMD fail to pay any installment of
the minimum royalty when due, DMD shall have the option to convert the exclusive
license granted herein into a non-exclusive license to license to make or have
made, use, or sell said New Products for an earned royalty, only and shall be
excused of any further obligation of a minimum royalty.
Page 4
<PAGE>
V. CONSULTING OBLIGATIONS OF DR. ANDERSON
5.1 The principal investigator and primary inventor of the New
Products is Dr. Alan H. Anderson ("AHA"), who is also principal in CDI. 5.2 AHA
shall make himself available for consultation and promotion on reasonable
notice. DMD shall compensate AHA at his customary and usual rate and shall pay
all reasonable costs and expenses in connection therewith.
VI. RECORD KEEPING AND AUDITS
6.1 DMD shall maintain books and records adequate to verify royalties
earned hereunder. Within thirty days after the close of each quarter, (except
for the first quarter) DMD shall submit a report certified by an officer setting
forth the net sales for the quarter and the royalty due. Such report shall be
accompanied by a payment (if any) of earned royalties due and owing and a
payment of the minimum quarterly royalty for the following quarter.
6.2 CDI shall have the right to audit DMD's books and records to
verify the accuracy of the reports through a qualified representative at the
expense of CDI. Such audit may be conducted no more often than once yearly on
reasonable notice. In the event that the audit determines a discrepancy in favor
of CDI in an amount greater than 10% of the amount reported, the discrepancy
shall be paid within 30 days and the cost of the audit shall be borne by DMD.
VII. DISPUTES
7.1 All disputes shall be referred to a forum of alternative dispute
resolution including, but not limited to arbitration under the Code of Civil
Procedure of the State of California. The laws of the State of California shall
be applied and jurisdiction of shall be limited to the State of California.
7.2 In the event of an accusation of breach, the party accused of
breach shall be informed in writing of the circumstances considered to be a
breach and such accused party
Page 5
<PAGE>
shall have forty-five days within which to cure or propose an acceptable plan to
cure. No action to enforce this Agreement shall be taken until after such period
has elapsed.
7.3 In the event of breach of the terms of this Agreement, other than
the obligation to pay minimum royalties after December 31, 2000, or a failure to
cure or propose an acceptable plan after an accusation of breach, CDI may
terminate this license with sixty (60) days written notice.
VIII. NOTICE
8.1 All notices required to be given shall be sent by facsimile or
E-mail with a written confirmation by first class certified mail, return receipt
requested. Notice shall be deemed given when the transmission of the facsimile
or E-mail is confirmed. The notices shall be sent to:
CDI: Dr. Alan H. Anderson
CHRYSALIS DENTAL, INC.
11322 South O'Henry Road
Sandy, UT 84070 Facsimile: (801)
523-8967 E-mail: [email protected]
With a copy to:
Todd Zenger, Esq.
KIRTON & McCONKIE
60 East South
Temple Street, Ste. 1800
Salt Lake City, Utah 84111
Facsimile: (801) 321-4893
E-mail: [email protected]
DMD: Stephen F. Ross, CFO
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
200 N. Westlake Blvd., #202
Westlake Village, CA 91362
Facsimile: (805) 374-2137
E-mail: [email protected]
Page 6
<PAGE>
With a copy to:
MARVIN H. KLEINBERG
KLEINBERG & LERNER, LLP
2049 Century Park E. #1080
Los Angeles, CA 90067
Facsimile: (310) 557-1540
E-mail: [email protected]
IX. WARRANTIES AND REPRESENTATIONS
9.1 To the best of CDI's knowledge, the making, using or selling of
the New Products, if used in the manner taught by CDI's patent disclosure
documents, does not infringe the known intellectual property rights of any third
party. If DMD wishes to defend, CDI agrees to cooperate with DMD in the defense.
If a license is required to permit DMD to continue to make, use or sell the New
Products, any royalty that must be paid shall be deducted from the earned
royalty otherwise due CDI, but in no event shall the royalty earned by CDI fall
below CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION%. To the extent possible, DMD will seek insurance
coverage and will tender any defense to an insurer affording coverage.
9.2 To the best of CDI's knowledge, the making, using or selling of
the New Products, if used in the manner taught by CDI's patent disclosure
documents, is safe and effective and does not cause lasting pain or damage to
users. If DMD defends CDI, CDI agrees to cooperate with DMD in the defense. To
the extent possible, DMD will obtain product liability insurance coverage
including coverage of the New Products and will tender any defense to an insurer
affording coverage.
X. PATENT INFRINGEMENT BY OTHERS
10.1 DMD shall have the initial exclusive right and option, at its
expense, to institute infringement or other appropriate legal actions against
alleged prospective or actual infringers under the patent laws of the relevant
jurisdiction, and to retain all monetary recovery received therefrom. Any
recovery of lost profits or lost sales less costs and expenses of litigation
shall be deemed a part of Net Sales upon which an earned royalty is due and
payable. Such
Page 7
<PAGE>
earned royalty is to be paid to CDI within sixty (60) days of receipt of any
monetary judgment payment.
10.2 In the event DMD declines to institute infringement or other
appropriate legal action against alleged prospective or actual infringers within
ninety (90) days after receiving a written notice or request to do so from CDI,
CDI shall have the right and option to take whatever action it deems appropriate
and retain all recoveries, and DMD agrees to permit joinder of DMD in any legal
action at the request of CDI for purposes of jurisdiction or obtaining complete
relief, all at CDI's expense.
XI. GENERAL PROVISIONS
11.1 This Agreement represents the entire understanding of the
parties. No modification, amendment or waiver shall be binding without the
written consent of the parties.
11.2 If any provision of this Agreement shall for any reason be
adjudged by any tribunal to be invalid or unenforceable, such judgment shall not
affect, impair or invalidate the remainder of this Agreement but shall be
confined in its operation to the provision of this Agreement directly involved
in the controversy in which such judgment shall have been rendered.
11.3 This shall not be assigned by DMD without the express written
consent of CDI except in the case of a transaction under the terms of which,
substantially all of the assets of DMD are being transferred.
11.4 This Agreement may be executed in counterparts, each of which
shall be deemed to be an original but all of which shall constitute the same
Agreement.
Page 8
<PAGE>
Date: October 2, 1998
CHRYSALIS DENTAL, INC.
/S/ ALAN H. ANDERSON
--------------------------
ALAN H. ANDERSON, DDS
President
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
/S/ STEPHEN F. ROSS
---------------------------
STEPHEN F. ROSS
Chief Financial Officer
DATED 1 MARCH 1999
MIDAS (UNITED KINGDOM) LIMITED
AND
FADI NAHAB
AND
DMDS LIMITED
----------------------------------------------------------------------------
AGREEMENT FOR THE SALE OF THE SELLER'S BUSINESS AND ASSETS
- - -----------------------------------------------------------------------------
HARBOTTLE & LEWIS
HANOVER HOUSE
14 HANOVER SQUARE
LONDON W1R 0BE
h85/249321/18351v1
<PAGE>
INDEX
NO. PAGE
1. Definitions 1
2. Agreement For Sale and Purchase 5
3. Consideration 6
4. Completion 7
5. Value Added Tax 8
6. Liabilities 8
7. Employees 8
8. Insurance 9
9. Contracts and Third Party Consents 9
10. Apportionments 10
11. Post Completion 11
12. Warranties by Seller and Mr Nahab 11
13. Warranties by Purchaser 12
14. Purchaser's Remedies 12
15. Conduct of Warranty Claims 13
16. Notices 14
17. Successors and Assignability 14
18. Certificate of Value 14
19. Announcements 14
20. Survival of Certain Provisions 14
21. Entire Agreement 15
22. Governing Law and Jurisdiction 15
SCHEDULE 1 Employees 16
SCHEDULE 2 Excluded Assets 17
SCHEDULE 3 The Warranties 18
<PAGE>
THIS AGREEMENT is made 1 March 1999
BETWEEN:
(1) MIDAS (UNITED KINGDOM) LIMITED (registered number 3166228) which has its
registered office at 112 New Dover Road, Canterbury, Kent CT1 3EH ("THE
SELLER");
(2) FADI NAHAB also of 112 New Dover Road, Canterbury, Kent CT1 3EH ("MR
NAHAB"); and
(3) DMDS LIMITED (registered number 3505875) whose registered office is at
Plumtree Court, London, EC4A 1HT ("THE PURCHASER").
WHEREAS:
(A) The Seller carries on the Business.
(B) Mr Nahab is the majority shareholder of the Seller.
(C) The Purchaser has agreed with the Seller with effect from the Completion
Date to purchase as a going concern the Business including (without
limitation) the undertaking and the assets referred to below, upon the
following terms.
IT IS AGREED as follows:
1. DEFINITIONS
1.1. In this Agreement unless the context otherwise requires the following
expressions shall have the following respective meanings:-
"ACCOUNTS"
the balance sheet as at the Accounts Date and the profit and loss account for
the year ended on the Accounts Date of the Seller, including all documents
required by law to be annexed to them;
"ACCOUNTS DATE"
22 February 1999;
"ACCRUALS"
all amounts received by the Seller prior to the Completion Date but in respect
of a period after the Completion Date or in respect of goods and services to be
supplied by the Seller after the Completion Date and excluding any such amounts
relating to the Excluded Assets;
"BOOK DEBTS"
the debts and other amounts owing to the Seller at the Completion Date in
respect of the
<PAGE>
Business;
"BUSINESS"
the business carried on by the Seller at the Completion Date more particularly
described as the distribution of dental/medical products and all income derived
from the distribution of the products;
"BUSINESS INFORMATION"
all information, know-how and records (whether or not confidential and in
whatever form held) including (without limitation) all formulae, designs,
specifications, drawings, data, manuals and instructions and all customer lists,
supplier lists, sales information and all technical or other expertise and all
computer software and all accounting and VAT Records, correspondence, orders and
enquiries of the Business;
"BUSINESS RECORDS"
shall include, without limitation, all notes, correspondence, orders, inquiries,
drawings, plans, books of account and other documents and all computer disks or
tapes or other machine legible programmes or other records relating to the
Business;
"CASH FLOAT"
all cash of the Business held as petty cash and cash at the bank held in the
Seller's bank accounts as at the Completion Date relating to the Business;
"COMPLETION"
completion of the sale and purchase of the Business and Sale Assets in
accordance with the terms of this Agreement;
"COMPLETION DATE"
the date of this Agreement;
"CONSIDERATION"
the consideration described in Clause 3;
"CONSIDERATION SHARES"
5000 shares of common stock of DMD;
"CONTRACTS"
the contracts and other legally enforceable engagements or arrangements of the
Seller in relation to the Business in existence on the Completion Date;
"DMD"
Dental/Medical Diagnostic Systems, Inc.;
"EMPLOYEES"
the persons employed at the Completion Date in
<PAGE>
connection with the Business as listed in Schedule l (Employees);
"ENVIRONMENTAL LAWS"
all applicable laws, regulations, codes of practice, circulars, guidance notes
and the like whether of the United Kingdom or otherwise concerning protection of
the environment;
"EXCLUDED ASSETS"
those assets and rights of the Seller which are to be retained by the Seller
after Completion and listed in Schedule 2 (Excluded Assets);
"GOODWILL"
all the goodwill of the Seller in relation to the Business including all rights
of the Seller in and to the Intellectual Property Rights used in or for the
Business and the exclusive right for the Purchaser and its permitted assignees
to represent itself as carrying on the Business in succession to the Seller and
all trade names associated with the Business;
"INTELLECTUAL PROPERTY RIGHTS"
patents, trade marks, service marks, trade names, registered designs,
unregistered designs, copyrights (including copyright in any computer programs)
and other forms of intellectual or industrial property (whether or not
registered or registerable and for the full period thereof and all extensions
and renewals thereof and applications for registration of or otherwise in
connection with the foregoing), know-how, inventions, formulae, confidential or
secret processes and information (in each case in any part of the world), and
any other similar rights which may subsist anywhere in the world;
"LIABILITIES"
the claims, obligations, liabilities and debts of the Seller on the Completion
Date or arising prior to Completion or attributable to a period prior to
Completion which relate to the Business; "LOSSES" losses, claims, charges,
interest, fines, penalties, liabilities, costs, expenses (including legal
expenses on a solicitor and own-client basis) or damages of any nature
whatsoever and whether or not reasonably or otherwise foreseeable or avoidable;
"LOSSES"
losses, claims, charges, interest, fines, penalties, liabilities, costs,
expenses (including legal expenses on a solicitor and own-client basis) or
damages of any nature whatsoever and whether or not reasonably or otherwise
foreseeable or avoidable;
<PAGE>
"MOVABLE PLANT AND MACHINERY"
all moveable fittings, furniture, furnishings, plant, machinery, equipment and
vehicles, computer and communication hardware, loose tools, books, stationary,
and other goods (other than the Excluded Assets) owned by the Seller and used by
or in the Business at the Completion Date;
"PURCHASER'S SOLICITORS"
Harbottle & Lewis of Hanover House, 14 Hanover Square, W1R 0BE;
"SALE ASSETS"
the property, assets and rights of the Business to be purchased by
the Purchaser listed in sub-Clauses 2.1.1 to 2.1.7;
"SELLER'S PREPAYMENTS"
all prepayments as at the Completion Date made by or on behalf of the Seller in
Connection with the Business or the Sale Assets;
"SERVICE AGREEMENT"
a service agreement between the Purchaser and Mr Nahab dated the date of this
Agreement;
"STOCK"
whether or not held for the purpose of resale all stocks of goods and other
stocks in trade whether or not relating exclusively to the Business wherever
located and by whomsoever held including items which although subject to
reservation of title by the suppliers of those items are under the control of
the Seller;
"TAXATION"
all forms of taxation and statutory, governmental, supra-governmental, state,
provincial, local governmental or municipal impositions, duties, contributions
and levies (including withholdings and deductions), whether domestic or foreign,
whenever imposed and all penalties, fines, charges, costs and interest relating
to any such matters and "TAX" shall be construed accordingly;
"THIRD PARTY RIGHTS"
all of the Seller's rights in connection with warranties and representations
made and obligations and liabilities undertaken by third parties in connection
with the Business or the Sale Assets;
"WARRANTIES"
the warranties and representations set out in Clause 12 and Schedule 3 and
"WARRANTY"
<PAGE>
means any one of them;
"WARRANTY CLAIM"
a claim made by the Purchaser for breach of any one or more of the Warranties;
"VAT"
Value Added Tax;
"VATA"
the VAT Act 1994 and any order, regulation instrument or other subordinate
instrument under it;
"VAT RECORDS"
the records of the Business required to be kept by paragraph 6 of Schedule 11 to
VATA;
"1981 REGULATIONS"
the Transfer of Undertakings (Protection of Employment) Regulations 1981 (as
amended).
1.2. reference to Clauses, sub-Clauses, paragraphs, sub-paragraphs, parts and
Schedules are to clauses, sub-clauses, paragraphs, sub-paragraphs and
parts of, and schedules to, this Agreement;
1.3. headings to Clauses and Schedules are for convenience only and do not
affect the interpretation of this Agreement;
1.4. the Schedules to this Agreement form part of this Agreement and shall have
the same force and effect as if expressly set out in the body of this
Agreement, and any reference to this Agreement shall include the
Schedules;
1.5. words denoting the singular include the plural and vice versa;
1.6. any reference in this Agreement to the Purchaser shall include its
successors and permitted assigns.
2. AGREEMENT FOR SALE AND PURCHASE
2.1. The Seller shall sell with full title guarantee and the Purchaser shall
purchase with effect from the Completion Date, all its rights, title and
interest in free from all charges, restrictions, liens and other
encumbrances attaching to them:
2.1.1. the Business (as a going concern); and
2.1.2. the Goodwill;
2.1.3. the Moveable Plant and Machinery;
2.1.4. the Benefit of the Contracts and Third Party Rights;
<PAGE>
2.1.5. all rights and title of the Seller in or to Intellectual Property
Rights used in or for the purpose of the Business and the Business
Information and the Business Records required for or used in
connection with the Business;
2.1.6. the Seller's Prepayments;
2.1.7. all other items (if any) of whatever nature owned by the Seller and
used in the conduct of the Business as at the Completion Date
with the intention that the Business be sold to the Purchaser as a going
concern with effect from the Completion Date.
2.2. The Purchaser shall not be obliged to complete the purchase of the
Business or any of the Sale Assets unless the purchase of the Business and
all of the Sale Assets is duly completed at the same time.
2.3. The Excluded Assets and the Liabilities shall be specifically excluded
from the sale and purchase of the Business.
3. CONSIDERATION
3.1. The Consideration for the Sale Assets shall be US$37,500 to be satisfied
by the issue to the Seller of the Consideration Shares.
3.2. The issue of the Consideration Shares shall be made subject to the
restrictions contained in the US Securities and Exchange Commission's
Regulation S, as such regulation is in effect on the Completion Date, and
otherwise in compliance with applicable US and English law. The Seller
acknowledges that it has access to all filings made by DMD under the US
Securities Exchange Act of 1934, as amended, including its Annual Report
on Form 10-KSB for the year ended December 31, 1997 and each of its
Quarterly Reports on Form 10-QSB filed with the Securities and Exchange
Commission thereafter, and that it has had access to such financial and
other information concerning DMD and the Consideration Shares as it deemed
necessary in connection with its agreement to permit Buyer to cause
payment of the Consideration to be satisfied by the issue of the
Consideration Shares, including an opportunity to ask questions of and
request information from DMD and its management. Without limiting the
generality of the foregoing the Seller acknowledges that the Consideration
Shares which may be delivered to it pursuant to this Clause 3.2 shall be
restricted securities which have not been registered under the Securities
Act of 1933, as amended, and that until the expiration of the restricted
period provided under Regulation S, an offer or sale of the Consideration
Shares shall not be made by the Seller within the United States or to, or
for the account or benefit of, a US person within the meaning of Rule
902(k) of the US Securities Act of 1933, as amended.
3.3. The Consideration shall be inclusive of VAT (if applicable).
<PAGE>
4. COMPLETION
4.1. Completion shall take place on the Completion Date at the offices of the
Purchaser's Solicitors.
4.2. On Completion the Seller shall deliver to the Purchaser, at the principal
office of the Business, or (if so requested by the Purchaser) make
available to the Purchaser such of the Sale Assets as are capable of being
transferred by delivery, together with:
4.2.1. the Business Records;
4.2.2. all Business Information;
4.2.3. copies of all National Insurance and PAYE records completed and
up-to-date;
4.2.4. the original documents in the possession or control of the Seller
in respect of the Contracts; and
4.2.5. such documents as are reasonably required by the Purchaser to
complete the sale and purchase of the Sale Assets and vest title to
the Sale Assets in the Purchaser.
4.3. On Completion Mr Nahab shall deliver to the Purchaser's Solicitors the
Service Agreement duly executed by Mr Nahab.
4.4. If all or any of the transactions set out in Clauses 4.2 and 4..3 do not
take place as provided, the Purchaser may promptly rescind this Agreement
without prejudice to any other remedy it may have.
4.5. The Purchaser shall then deliver to Mr Nahab the Service Agreement duly
executed by it.
4.6. Rights in and title to the Sale Assets shall pass to the Purchaser on the
Completion Date.
4.7. Subject to Clause 9 (Contracts and Third Party Consents) the Seller shall
at Completion or as soon as practicable after Completion deliver to the
Purchaser all transfers, assignments and novations of those Sale Assets
which are not capable of being transferred by delivery, together with all
relevant documents of title.
4.8. The Seller shall (and shall use its reasonable endeavours to procure any
third party as is necessary to) after the date of this Agreement, upon
reasonable request by the Purchaser, execute and perform any further
deeds, documents and acts so requested to give full effect to the terms of
this Agreement including (without limitation) to vest in and assure to the
Purchaser whatever right, title and interest the Seller may have in the
Sale Assets and pending which shall hold such Sale Assets on trust for the
Purchaser absolutely and will dispose, transfer and deal with such Sale
Assets at such time and in such manner as the Purchaser directs.
<PAGE>
4.9. The parties shall upon reasonable request afford to each other and to
each party's representatives such access during normal business hours
to the statutory and accounting records and all other documents
relating to the Business as are in each party's control for the
purposes of inspecting and copying the same, and neither party shall
use any such records, documents or the information contained in them
for any purpose other than for accounting, audit and tax purposes. Each
party shall keep such records, documents and information in strict
confidence.
5. VAT
The Seller and the Purchaser are of the opinion that the sale of the Sale
Assets and the transfer of the Business constitutes a transfer of a
business as a going concern for the purposes of Section 49 VATA and
Article 5 of the VAT (Special Provisions) Order 1992, and accordingly the
sale of the Sale Assets and the transfer of the Business is neither a
supply of goods nor a supply of services for the purposes of VAT.
6. LIABILITIES
6.1. Notwithstanding Completion of the Purchase of the Business, the Seller
shall be solely responsible for all the Liabilities and shall duly and
punctually pay and discharge the Liabilities and shall indemnify the
Purchaser fully and effectively from and against the Liabilities and any
and all Losses arising or accruing in respect of or in connection with any
of them.
6.2. In addition to Clause 6.1 the Seller shall remain liable and be solely
responsible for and shall indemnify the Purchaser against any and all
Losses arising after the Completion Date in respect of any activities
of the Business, including goods manufactured by or service supplied by
the Seller or any act or omission of the Seller, its employees, agents
or sub-contractors prior to the Completion Date or arising from
defective products or parts of products even if the defective products
or parts or services were sold by or supplied to the Purchaser.
6.3. The liability of the Seller under Clause 6.2 shall extend to any
settlement of a claim (including costs) made with the approval of the
Seller (such approval not to be unreasonably withheld).
6.4. If the Purchaser considers that it is desirable to take preventative
action with a view to avoiding claims under Clause 6.2 the Seller shall
bear the cost of that action.
6.5. No Liability in respect of the Business or Sale Assets shall pass to, or
be assumed by, or be construed as accepted by, the Purchaser except as
expressly set out in this Agreement.
7. EMPLOYEES
7.1. The Purchaser hereby agrees and acknowledges that the provisions of the
1981 Regulations apply to the sale of the Business and that the contracts
of employment of all the Employees shall not be terminated but shall
continue to have effect as if
<PAGE>
originally made between each Employee and the Purchaser in accordance with the
1981 Regulations.
7.2. The Seller agrees to execute (and agrees to use reasonable endeavours to
procure that it and its directors, officers, employees and agents shall
execute promptly) such deeds, documents and agreements as the Purchaser
may reasonably require to, inter alia, change the principal employer or
trustees (or both) of any pension scheme, salary continuation, cash sum or
life assurance schemes of which any employees or directors of the Seller
may belong.
7.3. The Seller shall indemnify the Purchaser against any order to pay
compensation made pursuant to the 1981 Regulations or any other Loss it
may suffer in relation to any claim made by an Employee pursuant to the
1981 Regulations or otherwise in relation to the transfer of the Business
provided that the order is not made as a result of any act or omission of
the Purchaser after Completion (other than those deemed to have been done
by the Purchaser by reason of the 1981 Regulations).
8. INSURANCE
8.1. The Seller shall notify the Purchaser's interest to the relevant insurers
and keep in force its existing insurance policies in respect of the Sale
Assets for 30 days from Completion.
8.2. The Purchaser shall pay the relevant proportion of the insurance premiums
from Completion until the cancellation of the relevant policies or 30 days
from Completion, whichever is earlier.
9. CONTRACTS AND THIRD PARTY CONSENTS
9.1. From the Completion Date the Purchaser shall perform, fulfil and discharge
the obligations of the Seller pursuant to the Contracts (other than in
respect of any breach, act, omission or neglect by the Seller or to the
extent any liability under the Contracts had accrued due prior to the
Completion Date) and the Purchaser shall be entitled to the benefit of the
Contracts.
9.2. Subject to Clause 9.1, the Purchaser shall from the Completion Date
indemnify and keep indemnified the Seller against all actions,
proceedings, liabilities, claims, demands, losses, costs and expenses or
other liability whatsoever arising from the acts or omissions of the
Purchaser in relation to any of the Contracts on or after the Completion
Date.
9.3. All Contracts which are capable of assignment without the need for any
third party consent shall hereby be assigned.
9.4. To the extent that any of the Sale Assets are not assignable without the
consent of another party or without an agreement of novation, this
Agreement shall not constitute an assignment or an attempted assignment if
such assignment or attempted assignment would constitute a breach of that
agreement.
<PAGE>
9.5. In the event that such consent or novation is required, the Seller and the
Purchaser shall use all reasonable endeavours to obtain any required
consent or novation as soon as reasonably practicable.
9.6. Unless and until such consent shall be forthcoming and the relevant
agreement shall have been assigned or novated the Seller shall remain
liable under such agreement as a contracting party (and will enforce at
the Purchaser's request any and all rights of the Seller against the
other party to the contract) but the Purchaser shall indemnify the
Seller in respect of it and shall perform the obligations under such
agreement as agent for the Seller who shall account to the Purchaser
for all sums received from that agreement.
9.7. If such consent or novation is not obtained, the Seller will co-operate
with the Purchaser in any reasonable arrangements designed to provide for
the Purchaser all the benefits under any of the contracts, including
enforcement of any and all rights of the Seller against the other party to
the contract arising out of the cancellation by such other party or
otherwise.
10. APPORTIONMENTS
10.1. All periodical charges and outgoings attributable to the Business
(including, but not limited to, rents, rates, gas, water, electricity,
telephone charges, licences and fees) and all liabilities in relation to
salaries, wages, accrued holiday pay, national insurance, pension
contributions, PAYE and all other payments to and in respect of the
Employees up to the Completion Date or arising in respect of a period
prior to the Completion Date shall be borne by the Seller and as from the
Completion Date shall be borne by the Purchaser. All rents and other
periodical payments receivable in respect of the Business up to the
Completion Date shall belong to and be payable to the Seller and from the
Completion Date shall belong to and be payable to the Purchaser.
10.2. Accruals shall belong to the Purchaser.
10.3. Where any amounts fall to be apportioned under this Agreement the Seller
shall provide the Purchaser with full details of the apportionments
together with supporting vouchers or similar documentation within 14 days
after the Completion Date. In the absence of dispute the appropriate
payments shall be made within 10 business days of preparation of the list
of apportionments. If the amount of any apportionment is in dispute that
dispute shall be referred for final settlement to a firm of chartered
accountants nominated jointly by the Seller and the Purchaser or failing
such nomination within 14 days after request by either the Seller or the
Purchaser nominated at the request of either of them by the President for
the time being of the Institute of Chartered Accountants in England and
Wales. The accountants shall be entitled to call for and inspect the
working papers of the Seller's auditors and such other documents as they
may reasonably consider necessary. In making their determination the
accountants shall act as experts and not as arbitrators, their decision
shall be final and binding on the parties and their fees shall be borne
and paid by the
<PAGE>
Seller and the Purchaser in such proportions as the accountants determine.
The amount determined shall be paid within 14 days of the determination
together with interest calculated on a daily basis (as well after as
before judgment) from the Completion Date until the date of actual
payment at the rate of 4 per cent per annum above the base rate
from time to time of Barclays Bank Plc.
11. POST COMPLETION
11.1. Immediately after Completion the Seller shall wholly discontinue carrying
on the Business.
11.2. If after the Completion Date the Seller receives any enquiries or orders
from any past, present or potential client of the Business or any other
person, or any notices, correspondence or information which relate to the
Business it shall refer that person or information to the Purchaser as
soon as reasonably practicable.
11.3. The Seller shall preserve all books, documents and records relating to the
Business in respect of the period prior to the Completion Date which it
retains following Completion for a period of seven years, and shall permit
and allow, upon being given reasonable notice and during business hours,
the Purchaser and or its agents, accountants or other representatives
access to, and at its own expense, to take copies of, such books,
documents and records for any purpose in connection with or incidental to
the Business.
11.4. To the extent that any monies are received after Completion by one party
which belong to the other party, the recipient shall (subject to any
provision to the contrary contained in this Agreement) hold the same on
trust for that other party and account to that other party for the same
within five business days of receipt.
12. WARRANTIES
12.1. The Seller and Mr Nahab jointly and severally represent and warrant to the
Purchaser that each of the Warranties is true, accurate and complete in
all respects and not misleading.
12.2. The Seller and Mr Nahab acknowledge that the Warranties were given with
the intention of inducing the Purchaser to enter into this Agreement and
that the Purchaser does so in reliance on the Warranties.
12.3. Each of the Warranties is a separate and independent Warranty and shall
not be limited by reference to any other "Warranty or anything in this
Agreement.
12.4. The rights and remedies of the Purchaser in respect of any breach of the
Warranties shall not be affected by Completion; by any investigation made
(or which could have been made) by or on behalf of the Purchaser into the
affairs of the Seller; by the Purchaser failing to exercise or delaying
the exercise of any of its rights or remedies; or by any other event or
matter whatsoever except a specific and duly authorised written waiver or
release from the Purchaser.
<PAGE>
12.5. Where any Warranty refers to the knowledge, information or belief of the
Seller and Mr Nahab they each undertake that they have made full enquiry
into the subject matter of the Warranty.
12.6. The amount of any successful claim under the Warranties or indemnities in
Clauses 6.1, 6.2 and 7.3 or any other amount paid by the Seller to the
Purchaser pursuant to the provisions of this Agreement shall be deemed to
constitute a reduction in the consideration for the Sale Assets.
13. WARRANTIES BY PURCHASER
The Purchaser represents to the Seller that:
(i) it has the requisite power and authority to enter into and perform
this Agreement and perform its obligations under this Agreement. The
Agreement has been duly executed by the Purchaser and constitutes
valid and binding obligations of the Purchaser;
(ii) the Consideration Shares, when issued in accordance with the
provisions of this Agreement, will be duly authorised and validly
issued and fully paid and non assessable and, assuming the accuracy of
the Warranties, will be issued in compliance with Federal Securities
laws;
(iii) all of the reports filed by DMD in connection with its obligations
under the Securities Exchange Act of 1934 as of their respective dates
complied as to form in all material respects with requirements of that
Act and the roles and regulations promulgated by the Securities and
Exchange Commission thereunder and did not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements in light of
the circumstances under which they were made, not misleading.
14. PURCHASER'S REMEDIES
14.1. The Seller and Mr Nahab shall fully and effectively indemnify and keep
indemnified the Purchaser against all Losses suffered directly or
indirectly by the Purchaser as a result of or in connection with any
event, circumstance or state of affairs relating to the Business or Sale
Assets which is not (whether at or after Completion) in all respects as
represented and warranted to the Purchaser under this Agreement.
14.2. The Seller and Mr Nahab jointly and severally undertake to disclose in
writing to the Purchaser anything which is or may constitute a Warranty
Claim or which is or may give rise to a right to indemnification under
this Agreement as soon as it comes to their notice at any time.
14.3. If any amount payable to the Purchaser by the Seller or Mr Nahab is
subject to Taxation, the amount to be paid to the Purchaser by the Seller
or Mr Nahab shall be
<PAGE>
such so as to ensure that the net amount retained by the Purchaser after
such Taxation has been taken into account is equal to the full amount
which would be payable to the Purchaser had the amount not been subject
to Taxation.
14.4. If any Warranty Claim or indemnification claim is made, except in the case
of fraud or deliberate deception, each of the Seller and Mr Nahab agrees
to release any claim it may have against any director or employee of the
Business on whom it may have relied before agreeing to any terms of this
Agreement.
14.5. In the event of a Warranty Claim, without prejudice to the right of the
Purchaser to claim damages on any basis available to if (including under
Clause 14.1) or to any other right or remedy available to it, the Seller
and Mr Nahab (as appropriate) agree to pay on demand in cash to the
Purchaser a sum by way of damages as agreed between the Seller or Mr Nahab
and the Purchaser or, in default of such agreement, as determined by order
of a court of competent jurisdiction which is the higher of:
(a) an amount sufficient to put the Purchaser into the position which
would have existed if the relevant Warranties had been tree and
accurate or not misleading when given; and
(b) an amount equal to the resulting diminution in the value of the
Business and the Sale Assets.
15. CONDUCT OF WARRANTY CLAIMS
15.1. In any case where the Seller or Mr Nahab is or may be liable under this
Agreement to indemnify or compensate the Purchaser, the Purchaser shall
notify the Seller or Mr Nahab as soon as reasonably practicable in writing
of the claim or facts giving rise thereto or, in the reasonable opinion of
the Purchaser, likely to give rise to such liability.
15.2. The Purchaser shall at the request of the Seller or Mr Nahab take or
procure to be taken such action as the Seller may reasonably request to
avoid, dispute, resist appeal, compromise or defend any claim notified to
it by the Purchaser and any adjudication in respect thereof, and to pursue
on that Party's behalf, in the Purchaser's name, any claim that it wishes
to pursue against any third party in respect of the Business and the Sale
Assets and its right to them, including (without prejudice to the
generality of the foregoing) instructing such solicitors or other
professional advisers as that Party may nominate to act in the name of and
on behalf of the Purchaser but in accordance with the instructions of the
Seller or Mr Nahab (as appropriate) so that such action shall be delegated
entirely to the Seller or Mr Nahab but subject to the Purchaser being
indemnified by the Seller or Mr Nahab against all costs, damages and
expenses which may be thereby incurred.
15.3. Any sums recovered (including, without limitation, any damages or other
compensation awarded or obtained in settlement and any costs awarded) as a
result of the pursuit of any claim, whether by the Seller or Mr Nahab on
the Purchaser's behalf or by the Purchaser in the Seller's or Mr Nahab's
name, shall be for the benefit of the
<PAGE>
Purchaser and shall be paid to the Purchaser forthwith upon receipt. Until
such sums are paid to the Purchaser, they shall be held in trust for the
Purchaser.
16. NOTICES
16.1. A notice or other information required or authorised by this Agreement
shall be in writing, may be delivered personally or sent by first-class
prepaid post or facsimile transmission to the other party at its address
as given in this Agreement or such other address as may have been notified
and shall have been deemed to have been given:
16.1.1. if personally delivered, at the time of delivery;
16.1.2. if given by prepaid first class post, two business days after
posting;
16.1.3. if sent by facsimile transmission, on the day of transmission
provided that a confirming copy is sent by prepaid first class
post within 12 hours of transmission.
16.2. Any notice sent to the Purchaser shall simultaneously be sent to the
Purchaser's Solicitors.
17. SUCCESSORS AND ASSIGNABILITY
17.1. This Agreement shall be binding and shall ensure for the benefit of each
party's successors and assigns (as the case may be) but except as set out
in Clause 17.2 shall not be assignable by any party without the prior
written consent of the other.
17.2. The Purchaser may assign the benefit of this Agreement (including, without
limitation, the Warranties) to any successor or subsequent purchaser of
the Business or any of the Sale Assets.
18. CERTIFICATE OF VALUE
It is hereby certified that the transaction hereby effected does not form
part of a larger transaction or of a series of transactions in respect of
which the amount or value or the aggregate amount or value of the
stampable consideration exceeds (pound)60,000.
19. ANNOUNCEMENTS
No announcement of any kind shall be made by the Seller or Mr Nahab in
respect of the subject matter of this Agreement without the prior written
approval of the Purchaser.
20. SURVIVAL OF CERTAIN PROVISIONS
Insofar as any provision of this Agreement shall not have been performed
at Completion, it shall survive and remain in full force and effect
notwithstanding Completion.
<PAGE>
21. ENTIRE AGREEMENT
This Agreement, the Schedules and the documents referred to in this
Agreement shall constitute the entire agreement and understanding between
the parties in relation to its subject matter. It supersedes any previous
agreement between the parties in relation to that subject matter.
22. GOVERNING LAW AND JURISDICTION
This Agreement shall be governed by and construed in accordance with the
laws of England and Wales. The parties irrevocably submit to the exclusive
jurisdiction of the Courts of England and Wales in relation to any legal
action or proceedings arising out of or in connection with this Agreement.
AS WITNESS the hands of the parties or their duly authorised representatives on
the day first before written.
<PAGE>
SCHEDULE 1
EMPLOYEES
Fadi Nahab
Ros Nahab
Brian White
<PAGE>
SCHEDULE 2
EXCLUDED ASSETS
- - - the Stock;
- - - the Book Debts;
- - - the Cash Float.
<PAGE>
SCHEDULE 3
THE WARRANTIES
PART A - GENERAL
1. INFORMATION
INFORMATION PROVIDED BY SELLER
1.1 All information provided to the Purchaser or its advisers or
representatives in response to any request of the Purchaser was when given
and remains true, complete and accurate and is not misleading because of
any omission or ambiguity or for any other reason.
1.2 The Seller has fully and accurately disclosed to the Purchaser all
matters, information and documents which are necessary to qualify the
statements made in this Agreement in order for such statements to be fair,
accurate and not misleading.
1.3 So far as the Seller is aware, there are no facts or circumstances in
relation to the Business or Sale Assets which have not been clearly and
accurately disclosed to the Purchaser and which, if disclosed, might have
been expected to affect the decision of the Purchaser to enter into this
Agreement or the Consideration payable for the Sale Assets pursuant to
Clause 3.
2. CAPACITY
The Seller has the requisite power and authority to enter into and perform
this Agreement and perform its obligations under this Agreement. The
Agreement has been duly executed by the Seller and constitutes valid and
binding obligations of the Seller.
3. ACCOUNTS
3.1 The Accounts have been prepared in accordance with the requirements of all
relevant statutes and generally accepted accounting practices. The
Accounts are true and complete in all respects and present fairly the
financial position of the Company at the Accounts Date. They contain full
provision or reserve for all liabilities and for all capital and revenue
commitments of the Seller as at the Accounts Date. The profits and losses
of the Seller shown in the Accounts were not, save as disclosed in the
Accounts or in any note accompanying them, to any material extent,
affected by any extraordinary, exceptional, unusual or non recurring
income, capital gain or expenditure or by any other factor known to the
Seller rendering any such profit or loss for such period exceptionally
high or low.
<PAGE>
3.2 ACCOUNTING RECORDS
The accounting records of the Seller comply with the requirements of
Sections 221 and 222 of the Companies Act 1985, do not contain or reflect
any material inaccuracy or discrepancy and present and reflect in
accordance with generally accepted accounting principles and standards the
financial position of, and all transactions entered into by, the Seller or
to which it has been a party.
3.3 EVENTS SINCE THE ACCOUNTS DATE
Since the Accounts Date there has been no material change in:
(i) the financial or trading position or prospects of the Business;
(ii) the value or state of assets or amount or nature of liabilities as
compared with the position disclosed in the Accounts; or
(iii) in the turnover, direct or indirect expenses or the margin of
profitability of the Business as compared with the position disclosed
for the equivalent period of the last financial year.
The Seller has since the Accounts Date carried on the Business in the
ordinary course and without interruption, so as to maintain it as a going
concern and paid its creditors in the ordinary course and within the
credit periods agreed with such creditors.
Since the Accounts Date no supplier of the Business has ceased or
restricted supplies or threatened so to do, there has been no loss or
material curtailment of the Business with any customer which at any time
in the preceding financial year represented one percent or more of the
turnover of the Business and the Seller is not aware of any circumstances
likely to give rise to any of the above.
Since the Accounts Date, in relation to the Business the Seller has not:
(a) incurred or permitted to incur:
(i) material capital expenditure; or
(ii) any liability whether actual or contingent except for full value
or in the ordinary course of business;
(b) agreed or required to agree:
(i) any asset for a consideration higher than its market value at the
time of acquisition or otherwise than in the ordinary course of
business; or
(ii) any business or substantial part of it or any share or shares in
an body corporate; or
<PAGE>
(c) disposed of or agreed to dispose of, any of its assets except in the
ordinary course of business and for full value.
4. DEBT POSITION
4.1 DEBTS OWED TO THE BUSINESS
There are no debts owing to the Business other than trade debts incurred
in the normal and usual course of business.
4.2 DEBTS OWED BY THE BUSINESS
(a) The Business does not have outstanding any borrowing or indebtedness
in the nature of borrowing, forward sale or purchase agreement or
conditional sale agreement or other transactions having the commercial
effect of a borrowing;
(b) There has not been received by the Business any notice to repay under
any agreement relating to any borrowing or indebtedness which is
repayable on demand.
(c) There are no trade debts which have been incurred by the Business
including advance payments other than the Liabilities.
5. BUSINESS RELATIONS
There is no actual or threatened loss of any customer or supplier of the
Seller, the loss of which would have an adverse effect upon the Business.
6. REGULATORY MATTERS
6.1 LICENCES
All licences, permissions, authorisations and consents (collectively
"LICENCES") required or useful for carrying on the Business effectively in
the place and in the manner in which the Business is now carried on have
been obtained and the Licences are, and will following Completion, remain
in full force and effect and there is no reason why the Licences will not
be capable of being transferred to the Buyer without the necessity for any
special arrangement or expense.
7. ASSETS
7.1 OWNERSHIP
(a) All the rights and assets necessary to carry on the Business as
presently conducted are comprised in the Sale Assets and the Seller
docs not own any assets which form part of the Sale Assets which are
not used in connection with the Business.
<PAGE>
(b) All of the Sale Assets are the absolute property of the Seller and are
not the subject of any security interest or any assignment, charge,
lien, royalty, option, right of pre-emption, factoring agreement,
leasing agreement, hiring agreement, hire purchase agreement,
agreement for payment on deferred terms or any similar agreement or
arrangement and all the Sale Assets are in the possession or under the
control of the Seller.
(c) None of the Sale Assets are affected by any of the following matters:
(i) any dispute, notice, complaint, covenant, reservation or
restriction or condition which affects the use of such Sale
Asset;
(ii) any notice, order or demand issued by or on behalf of any public
authority requiring the discontinuance of use of any Sale Asset
or the carrying out of any works on any such Sale Asset;
and no act or omission has occurred or is likely to occur which will
or is likely to result in any Sale Asset becoming affected by any such
matter;
(d) All the Moveable Plant and Machinery:
(i) are in proper state of repair and satisfactory working order;
(ii) have been regularly and properly maintained in accordance with
standards generally followed in the industry and in accordance
with the requirements of any lease;
(iii)are adequate for the requirements of the Business as conducted
at the date of this Agreement and during the 12 months before;
(iv) would not be expected (if the sale of the Business did not take
place) to require replacement or additions at a cost in excess of
(pound)1,000 within a period of six months after the Completion
Date.
(e) All documents which in any way affect the right, title or interest of
the Seller in or to any of the Sale Assets and which attract Stamp
Duty have been fully stamped with the requisite period for stamping.
7.2 INSURANCES
(a) The Seller has made available to the Purchaser all details of the
insurances maintained by or on behalf of the Business and relating to
the Sale Assets. The insurances are in full force and effect and there
are no circumstances resulting from any act or omission of the Seller
which might lead to any liability under such insurance being avoided
by the insurers or the premiums being increased.
<PAGE>
(b) No claim is outstanding under any such policy of insurance and there
are no circumstances resulting from any act or omission of the Seller
likely to give rise to such a claim.
8. PRODUCT LIABILITY
In relation to the Business, the Seller has not manufactured, sold or
provided any product or service which does not in every respect comply
with all applicable laws, regulations or standards or which is defective
or dangerous or not in accordance with any representation or Warranty,
express or implied, given in respect of it.
9. CONTRACTUAL MATTERS
9.1 MATERIAL CONTRACTS
(a) The Contracts listed in Schedule 1 are all the current contracts and
engagements whether written or oral relating to the Business
(excluding contracts with employees).
(b) There is not outstanding any agreement or arrangement relating to the
Business:
(i) which, by virtue of the acquisition of the Business and Sale
Assets by the Purchaser or other performance of the terms of this
Agreement, will result in any party to that Contract being
relieved of any obligation or becoming entitled to exercise any
right (including any right of termination or any right of
pre-emption or other option) or being in default under any such
Contract or losing any benefit, right or licence which it
currently enjoys; or
(ii) which involves or is likely to involve obligations or
restrictions of an unusual or exceptional nature;
(iii) which is any other agreement or arrangement having or likely to
have a material effect on the financial or trading position or
prospects of the Business.
(c) None of the Contracts contain a notification of change of ownership
clause.
(d) Compliance with the terms of this Agreement does not and will not
materially conflict with, result in a material breach of or constitute
a material default under any of the terms, conditions or provisions of
any agreement or instrument to which the Seller is now a party
relating to the Business.
9.2 DEFAULTS
No party to any of the contracts is in default under it and there are no
circumstances which might give rise to such a default, there are no
circumstances (including, for the
<PAGE>
avoidance of doubt, acquisition of the Business and Sale Assets pursuant
to the terms of this Agreement) likely to give rise to such a default.
10. LITIGATION
(a) The Seller is not a plaintiff or defendant in or otherwise a party to
any litigation, arbitration or administrative proceedings which are in
progress or, so far as the Seller is aware, threatened or pending by
or against or concerning the Business or any of the Sale Assets.
(b) No governmental or official investigations or inquiry concerning the
Business is in progress or pending. There are no circumstances which
may give rise to any such proceeding, investigation or inquiry.
(c) The Seller has not nor any of the officers, agents or employees of the
Business (during the course of their duties in relation to the
Business) has committed or omitted to do any act or thing the
commission or omission of which is or could be in contravention of any
act, order, regulation or the like giving rise to any fine, penalty,
default proceedings or other liability in relation to the Business or
any of the Sale Assets.
11. CUSTOMERS
The Business Records contain a complete and accurate list of each of the
customers of the Business during the three years ending on the date of
this Agreement. The Seller has taken all commercially reasonable steps to
maintain the confidentiality of the customer list.
12. EMPLOYEES
12.1 A list of all Employees is set out in Schedule 1.
12.2 AGREEMENTS
There is not in existence any written or unwritten contact of employment
with any employee (or any contract for services with any person) providing
either for basic remuneration of more than (pound)20,000 per annum or for
a fixed term of service longer than one year.
12.3 COMPLIANCE
All statutes, regulations, codes of conduct, collective agreements, terms
and conditions of employment, orders and awards relevant to the conditions
of service of employees or relations with employees (or former employees,
as the case may be) or any recognised trade union have been complied with.
<PAGE>
12.4 INCENTIVE SCHEME
There is not any share incentive scheme, share option scheme or profit
sharing, bonus, commission or other such incentive scheme for all or any
of the employees.
12.5 PAYMENTS ON TERMINATION
Except to the extent (if any) to which provision or allowances has been
made in the Accounts since the Accounts Date:
(a) no outstanding liability has been incurred for breach of any contract
of employment or for services or redundancy payments, protective
awards, compensation for wrongful dismissal or unfair dismissal or for
failure to comply with any order for the reinstatement or
re-engagement of any employee of the Business or for any other
liability accruing from the termination of any contract of employment
or for services;
(b) no gratuitous payment has been made or benefit given (or promised to
be made or given) in connection with the actual or proposed
termination or suspension of employment or variation of any contract
of employment of any present or former employee relating to the
Business;
(c) the PAYE system has been properly operated by the Seller deducting
taxation as required by law and accounting to the Inland Revenue for
all tax so deducted;
(d) all payments made by the Seller to any person which ought to have been
made under deduction of taxation have been so made and the Seller has
(where required) accounted to the proper authority for the taxation so
deducted;
(e) the Seller has paid all national insurance and graduated pension
contributions for which it is liable and has kept proper books and
records relating to the same.
13. INTELLECTUAL PROPERTY RIGHTS
13.1 All Intellectual Property Rights and licences in respect of such
rights relating to or used in connection with the Business (the
"BUSINESS INTELLECTUAL PROPERTY") are legally and beneficially owned
by the Seller and no payments are required in connection with any such
licences.
13.2 There have been no material claims, proceedings or actions and there
are no proceedings or actions pending impugning the validity or
enforceability of the Business Intellectual Property and there is no
reason why the Business Intellectual Property cannot be fully
exploited.
13.3 There have been and there are no infringements of any of the Business
Intellectual Property and none is threatened.
<PAGE>
13.4 After Completion the Purchaser will be entitled to use all the
Intellectual Property Rights used by the Seller prior to Completion.
14. PENSIONS
There are no agreements or arrangements (whether legally enforceable or
not) for the payment of any pensions, allowances, lump sums or other like
benefits on retirement or on death or during periods of sickness or
disablement for the benefit of any of the Employees or any former
employees in the Business or for the benefit of dependants of such persons
in operation at the date of this Agreement.
15. BOOKS AND RECORDS
All the books and records of the Seller which will be delivered to the
Purchaser on Completion (including all records and invoices required for
VAT purposes):
(a) have been fully, properly and accurately kept and completed;
(b) do not contain any material inaccuracies;
(c) give a true and fair view of the financial, contractual and trading
position of the Business, its assets, liabilities, debtors, creditors
and stock in trade and all other matters which would normally be
expected to appear in them.
16. ENVIRONMENTAL MATTERS
16.1 The Business is being conducted and all assets owned or used by
or otherwise in possession of the Seller in accordance with all applicable
Environmental Laws and the Seller has never received any notification
under any Environmental Law requiring it to take or omit to take any
action.
16.2 The Seller has never been threatened with any investigation or enquiry by
any organisation, or received any compliant in connection with the
environment.
16.3 Neither the Seller nor Mr Nahab is aware of any circumstance which may
require expenditure, whether by the Purchaser or otherwise, on cleaning up
any land now or formerly owned or occupied by the Seller or used in
relation to the Business.
17. CONSIDERATION OF SHARES AND SECURITIES ACT ISSUES
17.1 Both the Seller and Mr Nahab were outside of the United States at both the
time the offer of the Consideration Shares was received and at the time
this Agreement was entered into.
17.2 Each of the Seller and Mr Nahab is acquiring the Consideration Shares for
investment purposes or for the purpose of selling and distributing the
Consideration Shares to
<PAGE>
exemption from registration of such shares under Section 5 of the
Securities Act pursuant to Regulation S under the Security Act. Neither
the Seller nor Mr Nahab is acquiring the Consideration Shares for the
purpose of sale or distribution of the Consideration Shares in the United
States or in a manner that does not comply with the requirements of
Regulation S. Each of the Seller and Mr Nahab acknowledges that the
Consideration Shares to be acquired by them pursuant to this Agreement are
not registered under the Securities Act and cannot be sold or otherwise
disposed of except in compliance with the Securities Act or in reliance
upon an exemption from the Securities Act. Each of the Seller and Mr Nahab
acknowledges that the certificate(s) representing the Consideration Shares
shall bear a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT
BE OFFERED, SOLD, TRANSFERRED, PLEDGED, ASSIGNED, HYPOTHECATED OR
OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT, REGULATIONS OR AN EXEMPTION FROM
REGISTRATION AND OTHERWISE IN ACCORDANCE WITH The TERMS OF AN
AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL UNDERSIGNED OF THE
SECURITIES, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE
OFFICE OF THE ISSUER."
<PAGE>
SCHEDULE 3
PART B--TAXATIOn
1. No taxation authority has agreed to operate any special arrangement (being
an arrangement which is not based on a strict and detailed application of
the relevant legislation or on generally published statements of practice
or generally published extra-statutory concessions) in relation to the
Sale Assets or the Business.
2. All documents relating to the Sale Assets or the Business in respect of
which stamp duty is chargeable have been duly and properly stamped.
3. None of the Sale Assets are such that they are, have been or could be
subject to the capital goods scheme under VATA.
4. The Seller is a registered and taxable person for the purposes of the
VATA. The terms of all legislation, regulations, orders, provisions,
directions, conditions and notices relating to VAT arising in respect of
the Business have been complied with and observed in all material
respects. All accounts, records, invoices and other documents (as the case
may be) appropriate or requisite for the purposes of VAT arising in
respect of the Business have been maintained and obtained and are
complete, correct and up-to-date.
5. No payments or returns or notifications under the legislation,
regulations, orders, provisions, directions, conditions or notices
relating to VAT in respect of the Business are, nor have in the two years
prior to Completion been in arrears and there is not, nor has there been
in the two years prior to Completion, any forfeiture or penalty or
interest or surcharge or the operation of any penalty, interest or
surcharge provisions contained in the same in respect of the Business.
6. The Seller has not elected to waive exemption for VAT purposes, and is not
aware of any election to waive exemption made by any other person, in
respect of any land or buildings comprised in the Business.
7. None of the Sale Assets agreed to be sold under this Agreement are the
subject of any security in favour of HM Customs & Excise under paragraph
of Schedule 11 VATA or section 157 of the Customs and Excise Management
Act 1979.
8. The PAYE system has been properly operated and all income tax and national
insurance contributions as required from all payments to or treated as
made to Employees and all Taxation has been punctually accounted for to
the Inland Revenue and the Department of Social Security for all Taxation
deducted. All returns required by section 203 ICTA 1988 (pay as you earn),
the Social Security Contributions and Benefits Act 1992, the Social
Security Administration Act 1992 and the Pension Schemes Act 1993
(national insurance contributions) and regulations made thereunder have
been made and are accurate and complete in all respects. All such books
and
<PAGE>
records relating to PAYE and to national insurance contributions as are
required to be maintained and retained have been maintained and retained.
9. No officer or employee of the Seller who is engaged in the Business
participates in any scheme approved under Schedule 9 ICTA 1988 (approved
share option and profit sharing schemes) or is a beneficiary of a
qualifying employee share ownership trust as defined in Schedule 5 Finance
Act 1989 (employee share ownership trusts).
10. All sums payable and benefits provided under the existing arrangements for
remunerating officers and employees and rewarding persons rendering
services to the Seller in respect of the Business are deductible for the
purposes of section 74 or 75 1CTA 1988 (deductions).
11. None of the Sale Assets agreed to be sold under this Agreement are subject
to any distraint, charge, power of sale or mortgage in favour of the
Inland Revenue for the purposes of inheritance tax nor are there any
circumstances which may give rise to the same.
<PAGE>
SIGNED by )
for and on behalf of MIDAS (UNITED )
KINGDOM) LIMITED ) /S/
in the presence of: )
SIGNED by )
FADI NAHAB ) /S/
in the presence of: )
SIGNED by )
for and on behalf of )
DMDS LIMITED ) /S/
in the presence of: )
DATED 28 FEBRUARY 1999
DMD GMBH
AND
RALF MULLER
AND
DMDS LIMITED
---------------------------------------
AGREEMENT FOR THE SALE OF
THE SELLER'S BUSINESS AND ASSETS
---------------------------------------
DRAFT: 24/2/99
HARBOTTLE & LEWIS
HANOVER HOUSE
14 HANOVER SQUARE
LONDON W1R 0BE
h85/249321/17277_1
<PAGE>
INDEX
1. Definitions............................................................1
2. Agreement For Sale and Purchase........................................6
3. Consideration..........................................................6
4. Completion.............................................................7
5. Value Added Tax........................................................8
6. Liabilities............................................................9
7. Employees..............................................................9
8. Insurance.............................................................10
9. Contracts and Third Party Consents....................................10
10. Apportionments........................................................11
11. Post Completion.......................................................11
12. Warranties by Seller..................................................12
13. Warranties by Purchaser...............................................12
14. Purchaser's Remedies..................................................13
15. Conduct of Warranty Claims............................................14
16. Notices...............................................................14
17. Successors and Assignability..........................................15
18. Certificate of Value..................................................15
19. Announcements.........................................................15
20. Survival of Certain Provisions........................................15
21. Entire Agreement......................................................15
22. Governing Law.........................................................15
SCHEDULE 1 Contracts........................................16
SCHEDULE 2 Employees........................................17
SCHEDULE 3 Excluded Assets..................................18
SCHEDULE 4 The Warranties...................................19
SCHEDULE 5 Apportionment of Consideration...................20
<PAGE>
THIS AGREEMENT is made on 28 February 1999
BETWEEN:
(1) DMD GMBH (registered number [ ]) which has its registered office at
Hannah Arendt Strasse No 3, 35037 Marburg, Germany,6 ("THE SELLER");
(2) RALF MULLER of [address] ("MR MULLER"); and
(3) DMDS LIMITED (registered number 3505875) whose registered office is
at Plumtree Court, London, EC4A 1HT ("THE PURCHASER").
WHEREAS:
(A) The Seller carries on the Business.
(B) Mr Muller and DMD N.V. hold all of the issued shares in the Seller.
(C) The Purchaser has agreed with the Seller with effect from the
Completion Date to purchase as a going concern the Business including
(without limitation) the undertaking and the assets referred to below,
upon the following terms.
IT IS AGREED as follows:
1. DEFINITIONS
1.1 In this Agreement unless the context otherwise requires the following
expressions shall have the following respective meanings:-
"ACCOUNTS"
the balance sheet as at the Accounts Date and the profit and loss account for
the year ended on the Accounts Date of the Seller, including all documents
required by law to be annexed to them;
"ACCOUNTS DATE"
28 February 1999;
"ACCRUALS"
all amounts received by the Seller prior to the Completion Date but in respect
of a period after the Completion Date or in respect of goods and services to be
supplied by the Seller after the Completion Date and excluding any such amounts
relating to the Excluded Assets;
"BOOK DEBTS"
the debts and other amounts owing to the Seller at the Completion Date in
respect of the Business;
"BUSINESS"
the business carried on by the Seller at the
<PAGE>
Completion Date more particularly described as the distribution of
dental/medical products and all income derived from the distribution of the
products;
"BUSINESS INFORMATION"
all information, know-how and records (whether or not confidential and in
whatever form held) including (without limitation) all formulae, designs,
specifications, drawings, data, manuals and instructions and all customer lists,
supplier lists, sales information and all technical or other expertise and all
computer software and all accounting and VAT Records, correspondence, orders and
inquiries of the Business;
"BUSINESS RECORDS"
shall include, without limitation, all notes, correspondence, orders, inquiries,
drawings, plans, books of account and other documents and all computer disks or
tapes or other machine legible programmes or other records relating to the
Business;
"CASH FLOAT"
all cash of the Business held as petty cash and cash at the bank held in the
Seller's bank accounts as at the Completion Date relating to the Business;
"COMPLETION"
completion of the sale and purchase of the Business and Sale Assets in
accordance with the terms of this Agreement;
"COMPLETION DATE"
the date of this Agreement;
"CONSIDERATION"
the consideration described in Clause 3;
"CONSIDERATION SHARES"
3500 shares of common stock of DMD-USA;
"CONTRACTS"
the contracts and other legally enforceable engagements or arrangements of the
Seller in relation to the Business in existence on the Completion Date,
including those contracts brief details of which are set out in Schedule One
(Contracts);
"DEBENTURE"
A debenture made by the Seller in favour of the Purchaser dated the date of this
Agreement;
"DMD"
Dental/Medical Diagnostic Systems, Inc.;
<PAGE>
"EMPLOYEES"
the persons employed at the Completion Date in connection with the Business as
listed in Schedule Two (Employees);
"ENVIRONMENTAL LAWS"
all applicable laws, regulations, codes of practice, circulars, guidance notes
and the like whether of the United Kingdom or otherwise concerning protection of
the environment;
"EXCLUDED ASSETS"
Those assets and rights of the Seller which are to be retained by the Seller
after Completion and listed in Schedule Three (Excluded Assets);
"GOODWILL"
all the goodwill of the Seller in relation to the Business including all rights
of the Seller in and to the Intellectual Property Rights used in or for the
Business and the exclusive right for the Purchaser and its permitted assignees
to represent itself as carrying on the Business in succession to the Seller and
all trade names associated with the Business;
"GUARANTEE"
a guarantee made by Mr Muller and DMD N.V. in favour of the Purchaser dated the
date of this Agreement;
"INTELLECTUAL PROPERTY RIGHTS"
patents, trade marks, service marks, trade names, registered designs,
unregistered designs, copyrights (including copyright in any computer
programs) and other forms of intellectual or industrial property (whether or
not registered or registerable and for the full period thereof and all
extensions and renewals thereof and applications for registration of or
otherwise in connection with the foregoing), know-how, inventions, formulae,
confidential or secret processes and information (in each case in any part of
the world), and any other similar rights which may subsist anywhere in the
world;
"LIABILITIES"
the claims, obligations, liabilities and debts of the Seller on the Completion
Date or arising prior to Completion or attributable to a period prior to
Completion which relate to the Business;
"LICENCE"
the licence of the property at Hannah Arendt Strasse No.3, 35037, Marburg,
Germany made between the Seller and SEG Stadt Entwecklungs Gesellschaft Marburg
MHB dated 1 March
<PAGE>
1997;
"LOSSES"
losses, claims, charges, interest, fines, penalties, liabilities, costs,
expenses (including legal expenses on a solicitor and own-client basis) or
damages of any nature whatsoever and whether or not reasonably or otherwise
foreseeable or avoidable;
"MOVEABLE PLANT AND MACHINERY"
all moveable fittings, furniture, furnishings, plant, machinery, equipment and
vehicles, computer and communication hardware, loose tools, books, stationary,
and other goods (other than the Excluded Assets) owned by the Seller and used by
or in the Business at the Completion Date;
"PROMISSORY NOTE"
a promissory note made by the Seller in favour of the Purchaser dated the date
of this Agreement;
"PURCHASER'S SOLICITORS"
Harbottle & Lewis of Hanover House, 14 Hanover Square, London W1R 0BE;
"SALE ASSETS"
the property, assets and rights of the Business to be purchased by the Purchaser
listed in subclauses 2.1.1 to 2.1.8;
"SELLER'S PREPAYMENTS"
all prepayments as at the Completion Date made by or on behalf of the Seller in
connection with the Business or the Sale Assets;
"SERVICE AGREEMENT"
a service agreement between the Purchaser and Mr Muller dated the date of this
Agreement;
"STOCK"
whether or not held for the purpose of resale all stocks of goods and other
stocks in trade whether or not relating exclusively to the Business wherever
located and by whomsoever held including items which although subject to
reservation of title by the suppliers of those items are under the control of
the Seller;
"TAXATION"
all forms of taxation and statutory, governmental, supra-governmental, state,
provincial, local governmental or municipal impositions, duties, contributions
and levies (including withholdings and deductions), whether domestic or foreign,
whenever imposed
<PAGE>
and all penalties, fines, charges, costs and interest relating to any such
matters and "TAX" shall be construed accordingly;
"THIRD PARTY RIGHTS"
all of the Seller's rights in connection with warranties and representations
made and obligations and liabilities undertaken by third parties in connection
with the Business or the Sale Assets;
"WARRANTIES"
the warranties and representations set out in Clause 12 and Schedule 4 and
"WARRANTY" means any one of them;
"WARRANTY CLAIM"
a claim made by the Purchaser for breach of any one or more of the Warranties;
"VAT"
Value Added Tax or any similar Tax;
"VATA"
the VAT Act 1994 and any order, regulation instrument or other subordinate
instrument under it or any other applicable laws relating to Tax;
"VAT RECORDS"
The records of the Business required to be kept by paragraph 6 of Schedule 11 to
VATA or any other relevant legislation;
"1981 REGULATIONS"
The Transfer of Undertakings (Protection of Employment) Regulations 1981 (as
amended) or any other applicable legislation relating to the transfer of
undertakings.
1.2 reference to Clauses, sub-Clauses, paragraphs, sub-paragraphs, parts
and Schedules are to clauses, sub-clauses, paragraphs, sub-paragraphs
and parts of, and schedules to, this Agreement;
1.3 headings to Clauses and Schedules are for convenience only and do not
affect the interpretation of this Agreement;
1.4 the Schedules to this Agreement form part of this Agreement and shall
have the same force and effect as if expressly set out in the body of
this Agreement, and any reference to this Agreement shall include the
Schedules;
1.5 words denoting the singular include the plural and vice versa;
1.6 any reference in this Agreement to the Purchaser shall include its
successors and permitted assigns.
<PAGE>
2. AGREEMENT FOR SALE AND PURCHASE
2.1 The Seller shall sell with full title guarantee and the Purchaser shall
purchase with effect from the Completion Date, all its rights, title
and interest in free from all charges, restrictions, liens and other
encumbrances attaching to them:
2.1.1 the Business (as a going concern); and
2.1.2 the Goodwill;
2.1.3 the Moveable Plant and Machinery;
2.1.4 the benefit of the Contracts and Third Party Rights;
2.1.5 all rights and title of the Seller in or to Intellectual
Property Rights used in or for the purpose of the Business and
the Business Information and the Business Records required for
or used in connection with the Business;
2.1.6 the Seller's Prepayments;
2.1.7 the Licence;
2.1.8 all other items (if any) of whatever nature owned by the
Seller and used in the conduct of the Business as at the
Completion Date
with the intention that the Business be sold to the Purchaser as a
going concern with effect from the Completion Date.
2.2 The Purchaser shall not be obliged to complete the purchase of the
Business or any of the Sale Assets unless the purchase of the Business
and all of the Sale Assets is duly completed at the same time.
2.3 The Excluded Assets and the Liabilities shall be specifically excluded
from the sale and purchase of the Business.
3. CONSIDERATION
3.1 The Consideration for the Sale Assets shall be [(pound)x] to be
satisfied by the issue to the Seller of the Consideration Shares. The
Consideration shall be apportioned between the Sale Assets as set out
in Schedule 6.
3.2 At Completion of the arrangements contemplated by this Agreement, the
amount of the Consideration shall become payable by the Purchaser but
will be held by it until all amounts owing under the Promissory Note
have been satisfied in full.
3.3 Without prejudice to Clause 3.2, the issue of the Consideration Shares
shall be made subject to the restrictions contained in the US
Securities and Exchange Commission's Regulation S, as such regulation
is in effect on the Completion Date, and otherwise in compliance with
applicable US and English law. The Seller acknowledges that it has
<PAGE>
access to all filings made by DMD under the US Securities Exchange Act
of 1934, as amended, including its Annual Report on Form 10-KSB for the
year ended December 31, 1997 and each of its Quarterly Reports on Form
10-QSB filed with the Securities and Exchange Commission thereafter,
and that it has had access to such financial and other information
concerning DMD and the Consideration Shares as it deemed necessary in
connection with its agreement to permit Buyer to cause payment of the
Consideration to be satisfied by the issue of the Consideration Shares,
including an opportunity to ask questions of and request information
from DMD and its management. Without limiting the generality of the
foregoing the Seller acknowledges that the Consideration Shares which
may be delivered to it pursuant to this Clause 3.3 shall be restricted
securities which have not been registered under the Securities Act of
1933, as amended, and that until the expiration of the restricted
period provided under Regulation S, an offer or sale of the
Consideration Shares shall not be made by the Seller within the United
States or to, or for the account or benefit of, a US person within the
meaning of Rule 902(k) of the US Securities Act of 1933, as amended.
3.4 The Consideration shall be inclusive of VAT (if applicable).
4. COMPLETION
4.1 Completion shall take place on the Completion Date at the offices of
the Purchaser's Solicitors.
4.2 On Completion the Seller shall deliver to the Purchaser, at the
principal office of the Business, or (if so requested by the Purchaser)
make available to the Purchaser such of the Sale Assets as are capable
of being transferred by delivery, together with:
4.2.1 the Promissory Note duly executed by the Seller;
4.2.2 the Debenture duly executed by the Seller;
4.2.3 the Business Records;
4.2.4 all Business Information;
4.2.5 copies of all National Insurance and PAYE records completed
and up-to-date;
4.2.6 the original documents in the possession or control of the
Seller in respect of the Contracts;
4.2.7 such documents as are reasonably required by the Purchaser to
complete the sale and purchase of the Sale Assets and vest
title to the Sale Assets in the Purchaser; and
4.3 On Completion Mr Muller shall deliver to the Purchaser's Solicitors:
4.3.1 the Service Agreement duly executed by Mr Muller; and
4.3.2 the Guarantee duly executed by Mr Muller and DMD N.V..
<PAGE>
4.4 If all or any of the transactions set out in Clauses 4.2 and 4.3 do not
take place as provided, the Purchaser may promptly rescind this
Agreement without prejudice to any other remedy it may have.
4.5 The Purchaser shall then deliver to Mr Muller the Service Agreement
duly executed by it.
4.6 Rights in and title to the Sale Assets shall pass to the Purchaser on
the Completion Date.
4.7 Subject to Clause 9 (Contracts and Third Party Consents) the Seller
shall at Completion or as soon as practicable after Completion deliver
to the Purchaser all transfers, assignments and novations of those Sale
Assets which are not capable of being transferred by delivery, together
with all relevant documents of title.
4.8 The Seller shall (and shall use its reasonable endeavours to procure
any third party as is necessary to) after the date of this Agreement,
upon reasonable request by the Purchaser, execute and perform any
further deeds, documents and acts so requested to give full effect to
the terms of this Agreement including (without limitation) to vest in
and assure to the Purchaser whatever right, title and interest the
Seller may have in the Sale Assets and pending which shall hold such
Sale Assets on trust for the Purchaser absolutely and will dispose,
transfer and deal with such Sale Assets at such time and in such manner
as the Purchaser directs.
4.9 The parties shall upon reasonable request afford to each other and to
each party's representatives such access during normal business hours
to the statutory and accounting records and all other documents
relating to the Business as are in each party's control for the
purposes of inspecting and copying the same, and neither party shall
use any such records, documents or the information contained in them
for any purpose other than for accounting, audit and tax purposes. Each
party shall keep such records, documents and information in strict
confidence.
5. VAT
The Seller and the Purchaser are of the opinion that the sale of the
Sale Assets and the transfer of the Business constitutes a transfer of
a business as a going concern and accordingly the sale of the Sale
Assets and the transfer of the Business is neither a supply of goods
nor a supply of services for the purposes of VAT.
6. LIABILITIES
6.1 Notwithstanding Completion of the purchase of the Business, the Seller
shall be solely responsible for all the Liabilities and shall duly and
punctually pay and discharge the Liabilities and shall indemnify the
Purchaser fully and effectively from and against the Liabilities and
any and all Losses arising or accruing in respect of or in connection
with any of them.
6.2 In addition to Clause 6.1 the Seller shall remain liable and be solely
responsible for and shall indemnify the Purchaser against any and all
Losses arising after the Completion
<PAGE>
Date in respect of any activities of the Business, including goods
manufactured by or service supplied by the Seller or any act or
omission of the Seller, its employees, agents or sub-contractors prior
to the Completion Date or arising from defective products or parts of
products even if the defective products or parts or services were sold
by or supplied to the Purchaser.
6.3 The liability of the Seller under Clause 6.2 shall extend to any
settlement of a claim (including costs) made with the approval of the
Seller (such approval not to be unreasonably withheld).
6.4 If the Purchaser considers that it is desirable to take preventative
action with a view to avoiding claims under Clause 6.2 the Seller shall
bear the cost of that action.
6.5 No Liability in respect of the Business or Sale Assets shall pass to,
or be assumed by, or be construed as accepted by, the Purchaser except
as expressly set out in this Agreement.
7. EMPLOYEES
7.1 The Purchaser hereby agrees and acknowledges that the provisions of the
1981 Regulations apply to the sale of the Business and that the
contracts of employment of all the Employees shall not be terminated
but shall continue to have effect as if originally made between each
Employee and the Purchaser in accordance with the 1981 Regulations, or
any other law applicable in Germany.
7.2 The Seller agrees to execute (and agrees to use reasonable endeavours
to procure that it and its directors, officers, employees and agents
shall execute promptly) such deeds, documents and agreements as the
Purchaser may reasonably require to, inter alia, change the principal
employer or trustees (or both) of any pension scheme, salary
continuation, cash sum or life assurance schemes of which any employees
or directors of the Seller may belong.
7.3 The Seller shall indemnify the Purchaser against any order to pay
compensation made pursuant to the 1981 Regulations or any other Loss it
may suffer in relation to any claim made by an Employee pursuant to the
1981 Regulations or otherwise in relation to the transfer of the
Business provided that the order is not made as a result of any act or
omission of the Purchaser after Completion (other than those deemed to
have been done by the Purchaser by reason of the 1981 Regulations).
8. INSURANCE
8.1 The Seller shall notify the Purchaser's interest to the relevant
insurers and keep in force its existing insurance policies in respect
of the Sale Assets for 30 days from Completion.
8.2 The Purchaser shall pay the relevant proportion of the insurance
premiums from Completion until the cancellation of the relevant
policies or 30 days from Completion, whichever is earlier.
<PAGE>
9. CONTRACTS AND THIRD PARTY CONSENTS
9.1 From the Completion Date the Purchaser shall perform, fulfil and
discharge the obligations of the Seller pursuant to the Contracts
(other than in respect of any breach, act, omission or neglect by the
Seller or to the extent any liability under the Contracts had accrued
due prior to the Completion Date) and the Purchaser shall be entitled
to the benefit of the Contracts.
9.2 Subject to Clause 10.1, the Purchaser shall from the Completion Date
indemnify and keep indemnified the Seller against all actions,
proceedings, liabilities, claims, demands, losses, costs and expenses
or other liability whatsoever arising from the acts or omissions of the
Purchaser in relation to any of the Contracts on or after the
Completion Date.
9.3 All Contracts which are capable of assignment without the need for any
third party consent shall hereby be assigned.
9.4 To the extent that any of the Sale Assets are not assignable without
the consent of another party or without an agreement of novation, this
Agreement shall not constitute an assignment or an attempted assignment
if such assignment or attempted assignment would constitute a breach of
that agreement.
9.5 In the event that such consent or novation is required, the Seller and
the Purchaser shall use all reasonable endeavours to obtain any
required consent or novation as soon as reasonably practicable.
9.6 Unless and until such consent shall be forthcoming and the relevant
agreement shall have been assigned or novated the Seller shall remain
liable under such agreement as a contracting party (and will enforce
at the Purchaser's request any and all rights of the Seller against
the other party to the contract) but the Purchaser shall indemnify the
Seller in respect of it and shall perform the obligations under such
agreement as agent for the Seller who shall account to the Purchaser
for all sums received from that agreement.
9.7 If such consent or novation is not obtained, the Seller will co-operate
with the Purchaser in any reasonable arrangements designed to provide
for the Purchaser all the benefits under any of the contracts,
including enforcement of any and all rights of the Seller against the
other party to the contract arising out of the cancellation by such
other party or otherwise.
10. APPORTIONMENTS
10.1 All periodical charges and outgoings attributable to the Business
(including, but not limited to, rents, rates, gas, water, electricity,
telephone charges, licences and fees) and all liabilities in relation
to salaries, wages, accrued holiday pay, national insurance, pension
contributions, PAYE and all other payments to and in respect of the
Employees up to the Completion Date or arising in respect of a period
prior to the Completion Date shall be borne by the Seller and as from
the Completion Date shall be borne by the Purchaser. All rents and
other periodical payments
<PAGE>
receivable in respect of the Business up to the Completion Date shall
belong to and be payable to the Seller and from the Completion Date
shall belong to and be payable to the Purchaser.
10.2 Accruals shall belong to the Purchaser.
10.3 Where any amounts fall to be apportioned under this Agreement the
Seller shall provide the Purchaser with full details of the
apportionments together with supporting vouchers or similar
documentation within 14 days after the Completion Date. In the absence
of dispute the appropriate payments shall be made within 10 business
days of preparation of the list of apportionments. If the amount of any
apportionment is in dispute that dispute shall be referred for final
settlement to a firm of chartered accountants nominated jointly by the
Seller and the Purchaser or failing such nomination within 14 days
after request by either the Seller or the Purchaser nominated at the
request of either of them by the President for the time being of the
Institute of Chartered Accountants in England and Wales. The
accountants shall be entitled to call for and inspect the working
papers of the Seller's auditors and such other documents as they may
reasonably consider necessary. In making their determination the
accountants shall act as experts and not as arbitrators, their decision
shall be final and binding on the parties and their fees shall be borne
and paid by the Seller and the Purchaser in such proportions as the
accountants determine. The amount determined shall be paid within 14
days of the determination together with interest calculated on a daily
basis (as well after as before judgment) from the Completion Date until
the date of actual payment at the rate of 4 per cent per annum above
the base rate from time to time of Barclays Bank Plc.
11. POST COMPLETION
11.1 Immediately after Completion the Seller shall wholly discontinue
carrying on the Business.
11.2 If after the Completion Date the Seller receives any inquiries or
orders from any past, present or potential client of the Business or
any other person, or any notices, correspondence or information which
relate to the Business it shall refer that person or information to the
Purchaser as soon as reasonably practicable.
11.3 The Seller shall preserve all books, documents and records relating to
the Business in respect of the period prior to the Completion Date
which it retains following Completion for a period of seven years, and
shall permit and allow, upon being given reasonable notice and during
business hours, the Purchaser and or its agents, accountants or other
representatives access to, and at its own expense, to take copies of,
such books, documents and records for any purpose in connection with or
incidental to the Business.
11.4 To the extent that any monies are received after Completion by one
party which belong to the other party, the recipient shall (subject to
any provision to the contrary contained in this Agreement) hold the
same on trust for that other party and account to that other party for
the same within five business days of receipt.
<PAGE>
12. WARRANTIES
12.1 The Seller represents and warrants to the Purchaser that each of the
Warranties is true, accurate and complete in all respects and not
misleading.
12.2 The Seller acknowledges that the Warranties were given with the
intention of inducing the Purchaser to enter into this Agreement and
that the Purchaser does so in reliance on the Warranties.
12.3 Each of the Warranties is a separate and independent Warranty and shall
not be limited by reference to any other Warranty or anything in this
Agreement.
12.4 The rights and remedies of the Purchaser in respect of any breach of
the Warranties shall not be affected by Completion; by any
investigation made (or which could have been made) by or on behalf of
the Purchaser into the affairs of the Seller; by the Purchaser failing
to exercise or delaying the exercise of any of its rights or remedies;
or by any other event or matter whatsoever except a specific and duly
authorised written waiver or release from the Purchaser.
12.5 Where any Warranty refers to the knowledge, information or belief of
the Seller it undertakes that it has made full enquiry into the subject
matter of the Warranty.
12.6 The amount of any successful claim under the Warranties or indemnities
in Clauses 6.1, 6.2 and 7.3 or any other amount paid by the Seller to
the Purchaser pursuant to the provisions of this Agreement shall be
deemed to constitute a reduction in the consideration for the Sale
Assets.
13. WARRANTIES BY PURCHASER
The Purchaser represents to the Seller that:
(i) it has the requisite power and authority to enter into and
perform this Agreement and perform its obligations under this
Agreement. The Agreement has been duly executed by the
Purchaser and constitutes valid and binding obligations of the
Purchaser.
(ii) the Consideration Shares, when issued in accordance with the
provisions of this Agreement, will be duly authorised and
validly issued and fully paid and non assessable and, assuming
the accuracy of the Warranties, will be issued in compliance
with Federal Securities laws.
(iii) all of the reports filed by DMD in connection with its
obligations under the Securities Exchange Act of 1934 as of
their respective dates complied as to form in all material
respects with requirements of that Act and the rules and
regulations promulgated by the Securities and Exchange
Commission thereunder and did not contain any untrue statement
of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements in
light of the circumstances under which they were made, not
misleading.
<PAGE>
14. PURCHASER'S REMEDIES
14.1 The Seller shall fully and effectively indemnify and keep indemnified
the Purchaser against all Losses suffered directly or indirectly by the
Purchaser as a result of or in connection with any event, circumstance
or state of affairs relating to the Business or Sale Assets which is
not (whether at or after Completion) in all respects as represented and
warranted to the Purchaser under this Agreement.
14.2 The Seller undertakes to disclose in writing to the Purchaser anything
which is or may constitute a Warranty Claim or which is or may give
rise to a right to indemnification under this Agreement as soon as it
comes to their notice at any time.
14.3 If any amount payable to the Purchaser by the Seller is subject to
Taxation, the amount to be paid to the Purchaser by the Seller shall be
such so as to ensure that the net amount retained by the Purchaser
after such Taxation has been taken into account is equal to the full
amount which would be payable to the Purchaser had the amount not been
subject to Taxation.
14.4 If any Warranty Claim or indemnification claim is made, except in the
case of fraud or deliberate deception, the Seller agrees to release any
claim it may have against any director or employee of the Business on
whom it may have relied before agreeing to any terms of this Agreement.
14.5 In the event of a Warranty Claim, without prejudice to the right
of the Purchaser to claim damages on any basis available to it
(including under Clause 15.1) or to any other right or remedy
available to it, the Seller agrees to pay on demand in cash to the
Purchaser a sum by way of damages as agreed between the Seller and the
Purchaser or, in default of such agreement, as determined by order of
a court of competent jurisdiction which is the higher of:
(a) an amount sufficient to put the Purchaser into the position
which would have existed if the relevant Warranties had been
true and accurate or not misleading when given; and
(b) an amount equal to the resulting diminution in the value of
the Business and the Sale Assets.
15. CONDUCT OF WARRANTY CLAIMS
15.1 In any case where the Seller is or may be liable under this Agreement
to indemnify or compensate the Purchaser, the Purchaser shall notify
the Seller as soon as reasonably practicable in writing of the claim or
facts giving rise thereto or, in the reasonable opinion of the
Purchaser, likely to give rise to such liability.
15.2 The Purchaser shall at the request of the Seller take or procure to be
taken such action as the Seller may reasonably request to avoid,
dispute, resist appeal, compromise or defend any claim notified to it
by the Purchaser and any adjudication in respect thereof,
___________________________________________________________________
<PAGE>
pursue against any third party in respect of the Business and the Sale
Assets and its right to them, including (without prejudice to the
generality of the foregoing) instructing such solicitors or other
professional advisers as that Party may nominate to act in the name of
and on behalf of the Purchaser but in accordance with the instructions
of the Seller so that such action shall be delegated entirely to the
Seller but subject to the Purchaser being indemnified by the Seller
against all costs, damages and expenses which may be thereby incurred.
15.3 Any sums recovered (including, without limitation, any damages or other
compensation awarded or obtained in settlement and any costs awarded)
as a result of the pursuit of any claim, whether by the Seller on the
Purchaser's behalf or by the Purchaser in the Seller's name, shall be
for the benefit of the Purchaser and shall be paid to the Purchaser
forthwith upon receipt. Until such sums are paid to the Purchaser, they
shall be held in trust for the Purchaser.
16. NOTICES
16.1 A notice or other information required or authorised by this Agreement
shall be in writing, may be delivered personally or sent by first-class
prepaid post or facsimile transmission to the other party at its
address as given in this Agreement or such other address as may have
been notified and shall have been deemed to have been given:
16.1.1 if personally delivered, at the time of delivery;
16.1.2 if given by prepaid first class post, two business days after
posting;
16.1.3 if sent by facsimile transmission, on the day of transmission
provided that a confirming copy is sent by prepaid first class
post within 12 hours of transmission.
16.2 Any notice sent to the Purchaser shall simultaneously be sent to the
Purchaser's Solicitors.
17. SUCCESSORS AND ASSIGNABILITY
17.1 This Agreement shall be binding and shall ensure for the benefit of
each party's successors and assigns (as the case may be) but except as
set out in Clause 17.2 shall not be assignable by any party without the
prior written consent of the other.
17.2 The Purchaser may assign the benefit of this Agreement (including,
without limitation, the Warranties) to any successor or subsequent
purchaser of the Business or any of the Sale Assets.
18. CERTIFICATE OF VALUE
It is hereby certified that the transaction hereby effected does not
form part of a larger transaction or of a series of transactions in
respect of which the amount or value or the aggregate amount or value
of the stampable consideration exceeds(pound) 60,000.
<PAGE>
19. ANNOUNCEMENTS
No announcement of any kind shall be made by the Seller or Mr Muller in
respect of the subject matter of this Agreement without the prior
written approval of the Purchaser.
20. SURVIVAL OF CERTAIN PROVISIONS
Insofar as any provision of this Agreement shall not have been
performed at Completion, it shall survive and remain in full force and
effect notwithstanding Completion.
21. ENTIRE AGREEMENT
This Agreement, the Schedules and the documents referred to in this
Agreement shall constitute the entire agreement and understanding
between the parties in relation to its subject matter. It supersedes
any previous agreement between the parties in relation to that subject
matter.
22. GOVERNING LAW AND JURISDICTION
This Agreement shall be governed by and construed in accordance with
the laws of England and Wales. The parties irrevocably submit to the
exclusive jurisdiction of the Courts of England in relation to any
legal action or proceedings arising out of or in connection with this
Agreement.
AS WITNESS the hands of the parties or their duly authorised representatives on
the day first before written.
<PAGE>
SCHEDULE 1
CONTRACTS
[DETAILS REQUIRED]
<PAGE>
SCHEDULE 2
EMPLOYEES
[DETAILS REQUIRED]
<PAGE>
SCHEDULE 3
EXCLUDED ASSETS
- - - the Stock;
- - - the Book Debts;
- - - the Cash Float.
<PAGE>
SCHEDULE 4
THE WARRANTIES
PART A - GENERAL
1. INFORMATION
INFORMATION PROVIDED BY SELLER
1.1 All information provided to the Purchaser or its advisers or
representatives in response to any request of the Purchaser was when
given and remains true, complete and accurate and is not misleading
because of any omission or ambiguity or for any other reason.
1.2 The Seller has fully and accurately disclosed to the Purchaser all
matters, information and documents which are necessary to qualify the
statements made in this Agreement in order for such statements to be
fair, accurate and not misleading.
1.3 So far as the Seller is aware, there are no facts or circumstances in
relation to the Business or Sale Assets which have not been clearly and
accurately disclosed to the Purchaser and which, if disclosed, might
have been expected to affect the decision of the Purchaser to enter
into this Agreement or the Consideration payable for the Sale Assets
pursuant to Clause 3.
2. CAPACITY
The Seller has the requisite power and authority to enter into and
perform this Agreement and perform its obligations under this
Agreement. The Agreement has been duly executed by the Seller and
constitutes valid and binding obligations of the Seller.
3. ACCOUNTS
3.1 The Accounts have been prepared in accordance with the requirements of
all relevant statutes and generally accepted accounting practices. The
Accounts are true and complete in all respects and present fairly the
financial position of the Company at the Accounts Date. They contain
full provision or reserve for all liabilities and for all capital and
revenue commitments of the Seller as at the Accounts Date. The profits
and losses of the Seller shown in the Accounts were not, save as
disclosed in the Accounts or in any note accompanying them, to any
material extent, affected by any extraordinary, exceptional, unusual or
non recurring income, capital gain or expenditure or by any other
factor known to the Seller rendering any such profit or loss for such
period exceptionally high or low.
<PAGE>
3.2 ACCOUNTING RECORDS
The accounting records of the Seller comply with all applicable
requirements, do not contain or reflect any material inaccuracy or
discrepancy and present and reflect in accordance with
generally accepted accounting principles and standards the financial
position of, and all transactions entered into by, the Seller or to
which it has been a party.
4. BUSINESS RELATIONS
There is no actual or threatened loss of any customer or supplier of
the Seller, the loss of which would have an adverse effect upon the
Business.
5. REGULATORY MATTERS
5.1 LICENCES
All licences, permissions, authorisations and consents (collectively
"LICENCES") required or useful for carrying on the Business effectively
in the place and in the manner in which the Business is now carried on
have been obtained and the Licences are, and will following Completion,
remain in full force and effect and there is no reason why the Licences
will not be capable of being transferred to the Buyer without the
necessity for any special arrangement or expense.
6. ASSETS
6.1 OWNERSHIP
(a) All the rights and assets necessary to carry on the Business
as presently conducted are comprised in the Sale Assets and
the Seller does not own any assets which form part of the Sale
Assets which are not used in connection with the Business.
(b) All of the Sale Assets are the absolute property of the Seller
and are not the subject of any security interest or any
assignment, charge, lien, royalty, option, right of
pre-emption, factoring agreement, leasing agreement, hiring
agreement, hire purchase agreement, agreement for payment on
deferred terms or any similar agreement or arrangement and all
the Sale Assets are in the possession or under the control of
the Seller.
(c) None of the Sale Assets are affected by any of the following
matters:
(i) any dispute, notice, complaint, covenant, reservation
or restriction or condition which affects the use of
such Sale Asset;
(ii) any notice, order or demand issued by or on behalf of
any public authority requiring the discontinuance of
use of any Sale Asset or the carrying out of any
works on any such Sale Asset;
<PAGE>
and no act or omission has occurred or is likely to occur
which will or is likely to result in any Sale Asset becoming
affected by any such matter;
(d) All the Moveable Plant and Machinery:
(i) are in proper state of repair and satisfactory
working order;
(ii) have been regularly and properly maintained in
accordance with standards generally followed in the
industry and in accordance with the requirements of
any lease;
(iii) are adequate for the requirements of the Business as
conducted at the date of this Agreement and during
the 12 months before;
(iv) would not be expected (if the sale of the Business
did not take place) to require replacement or
additions at a cost in excess of (pound)1,000 within
a period of six months after the Completion Date.
(e) All documents which in any way affect the right, title or
interest of the Seller in or to any of the Sale Assets and
which attract Stamp Duty or any other similar Tax have been
fully stamped with the requisite period for stamping.
6.2 INSURANCES
(a) The Seller has made available to the Purchaser all details of
the insurances maintained by or on behalf of the Business and
relating to the Sale Assets. The insurances are in full force
and effect and there are no circumstances resulting from any
act or omission of the Seller which might lead to any
liability under such insurance being avoided by the insurers
or the premiums being increased.
(b) No claim is outstanding under any such policy of insurance and
there are no circumstances resulting from any act or omission
of the Seller likely to give rise to such a claim.
7. PRODUCT LIABILITY
In relation to the Business, the Seller has not manufactured, sold or
provided any product or service which does not in every respect comply
with all applicable laws, regulations or standards or which is
defective or dangerous or not in accordance with any representation or
Warranty, express or implied, given in respect of it.
8. CONTRACTUAL MATTERS
8.1 MATERIAL CONTRACTS
(a) The Contracts listed in Schedule 1 are all the current
contracts and engagements whether written or oral relating to
the Business (excluding contracts with employees).
<PAGE>
(b) There is not outstanding any agreement or arrangement relating
to the Business:
(i) which, by virtue of the acquisition of the Business
and Sale Assets by the Purchaser or other performance
of the terms of this Agreement, will result in any
party to that Contract being relieved of any
obligation or becoming entitled to exercise any right
(including any right of termination or any right of
preemption or other option) or being in default under
any such Contract or losing any benefit, right or
licence which it currently enjoys; or
(ii) which involves or is likely to involve obligations or
restrictions of an unusual or exceptional nature;
(iii) which is any other agreement or arrangement having or
likely to have a material effect on the financial or
trading position or prospects of the Business.
(c) None of the Contracts contain a notification of change of
ownership clause.
(d) Compliance with the terms of this Agreement does not and will
not materially conflict with, result in a material breach of
or constitute a material default under any of the terms,
conditions or provisions of any agreement or instrument to
which the Seller is now a party relating to the Business.
8.2 DEFAULTS
No party to any of the contracts is in default under it and there are
no circumstances which might give rise to such a default, there are no
circumstances (including, for the avoidance of doubt, acquisition of
the Business and Sale Assets pursuant to the terms of this Agreement)
likely to give rise to such a default.
9. LITIGATION
(a) The Seller is not a plaintiff or defendant in or otherwise a
party to any litigation, arbitration or administrative
proceedings which are in progress or, so far as the Seller is
aware, threatened or pending by or against or concerning the
Business or any of the Sale Assets.
(b) No governmental or official investigations or inquiry
concerning the Business is in progress or pending. There are
no circumstances which may give rise to any such proceeding,
investigation or inquiry.
(c) The Seller has not nor any of the officers, agents or
employees of the Business (during the course of their duties
in relation to the Business) has committed or omitted to do
any act or thing the commission or omission of which is or
could be in contravention of any act, order, regulation or the
like giving rise to any fine, penalty, default proceedings or
other liability in relation to the Business or any of the Sale
Assets.
<PAGE>
10. CUSTOMERS
The Business Records contain a complete and accurate list of each of
the customers of the Business during the three years ending on the date
of this Agreement. The Seller has taken all commercially reasonable
steps to maintain the confidentiality of the customer list.
11. EMPLOYEES
11.1 A list of all Employees is set out in Schedule 2.
11.2 AGREEMENTS
There is not in existence any written or unwritten contact of
employment with any employee (or any contract for services with any
person) providing either for basic remuneration of more than
(pound)20,000 per annum or for a fixed term of service longer than one
year.
11.3 COMPLIANCE
All statutes, regulations, codes of conduct, collective agreements,
terms and conditions of employment, orders and awards relevant to the
conditions of service of employees or relations with employees (or
former employees, as the case may be) or any recognised trade union
have been complied with.
11.4 INCENTIVE SCHEME
There is not any share incentive scheme, share option scheme or profit
sharing, bonus, commission or other such incentive scheme for all or
any of the employees.
11.5 PAYMENTS ON TERMINATION
Except to the extent (if any) to which provision or allowances has been
made in the Accounts since the Accounts Date:
(a) no outstanding liability has been incurred for breach of any
contract of employment or for services or redundancy payments,
protective awards, compensation for wrongful dismissal or
unfair dismissal or for failure to comply with any order for
the reinstatement or re-engagement of any employee of the
Business or for any other liability accruing from the
termination of any contract of employment or for services;
(b) no gratuitous payment has been made or benefit given (or
promised to be made or given) in connection with the actual or
proposed termination or suspension of employment or variation
of any contract of employment of any present or former
employee relating to the Business;
<PAGE>
(c) the PAYE system or other applicable deduction system in
respect of employee Taxation has been properly operated by the
Seller deducting taxation as required by law and accounting to
the Inland Revenue for all tax so deducted;
(d) all payments made by the Seller to any person which ought to
have been made under deduction of taxation have been so made
and the Seller has (where required) accounted to the proper
authority for the taxation so deducted;
(e) the Seller has paid all national insurance and graduated
pension contributions for which it is liable and has kept
proper books and records relating to the same.
12. INTELLECTUAL PROPERTY RIGHTS
12.1 All Intellectual Property Rights and licences in respect of such rights
relating to or used in connection with the Business (the "BUSINESS
INTELLECTUAL PROPERTY") are legally and beneficially owned by the
Seller and no payments are required in connection with any such
licences.
12.2 There have been no material claims, proceedings or actions and there
are no proceedings or actions pending impugning the validity or
enforceability of the Business Intellectual Property and there is no
reason why the Business Intellectual Property cannot be fully
exploited.
12.3 There have been and there are no infringements of any of the Business
Intellectual Property and none is threatened.
12.4 After Completion the Purchaser will be entitled to use all the
Intellectual Property Rights used by the Seller prior to Completion.
13. PENSIONS
13.1 There are no agreements or arrangements (whether legally enforceable or
not) for the payment of any pensions, allowances, lump sums or other
like benefits on retirement or on death or during periods of sickness
or disablement for the benefit of any of the Employees or any former
employees in the Business or for the benefit of dependants of such
persons in operation at the date of this Agreement.
14. BOOKS AND RECORDS
All the books and records of the Seller which will be delivered to the
Purchaser on Completion (including all records and invoices required
for VAT purposes):
(a) have been fully, properly and accurately kept and completed;
(b) do not contain any material inaccuracies;
<PAGE>
(c) give a true and fair view of the financial, contractual and
trading position of the Business, its assets, liabilities,
debtors, creditors and stock in trade and all other matters
which would normally be expected to appear in them.
15. ENVIRONMENTAL MATTERS
15.1 The Business is being conducted and all assets owned or used by or
otherwise in possession of the Seller in accordance with all applicable
Environmental Laws and the Seller has never received any notification
under any Environmental Law requiring it to take or omit to take any
action.
15.2 The Seller has never been threatened with any investigation or enquiry
by any organisation, or received any compliant in connection with the
environment.
15.3 The Seller is not aware of any circumstance which may require
expenditure, whether by the Purchaser or otherwise, on cleaning up any
land now or formerly owned or occupied by the Seller or used in
relation to the Business.
16. THE LICENCE
[AWAIT COPY OF LICENCE]
17. CONSIDERATION SHARES AND SECURITIES ACT ISSUES
17.1 The Seller was outside of the United States at both the time the offer
of the Consideration Shares was received and at the time this Agreement
was entered into.
17.2 The Seller is acquiring the Consideration Shares for investment
purposes or for the purpose of selling and distributing the
Consideration Shares to third party purchasers outside of the United
States in a manner that qualifies for an exemption from registration of
such shares under Section 5 of the Securities Act pursuant to
Regulation S under the Security Act. The Seller is not acquiring the
Consideration Shares for the purpose of sale or distribution of the
Consideration Shares in the United Sates or in a manner that does not
comply with the requirements of Regulation S. The Seller acknowledges
that the Consideration Shares to be acquired by the Seller pursuant to
this Agreement are not registered under the Securities Act and cannot
be sold or otherwise disposed of except in compliance with the
Securities Act or in reliance upon an exemption from the Securities
Act. The Seller acknowledges that the certificate(s) representing the
Consideration Shares shall bear a legend in substantially the
following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, ASSIGNED,
HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, REGULATIONS OR
AN EXEMPTION FROM REGISTRATION AND OTHERWISE IN ACCORDANCE
WITH THE TERMS OF AN
<PAGE>
AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL UNDERSIGNED OF
THE SECURITIES, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
EXECUTIVE OFFICE OF THE ISSUER."
<PAGE>
SCHEDULE 4
PART B -- TAXATIOn
1. No Tax authority has agreed to operate any special arrangement (being
an arrangement which is not based on a strict and detailed application
of the relevant legislation or on generally published statements of
practice or generally published extra-statutory concessions) in
relation to the Sale Assets or the Business.
2. All documents relating to the Sale Assets or the Business in respect of
which stamp duty (or any Tax of a like nature) is chargeable have been
duly and properly stamped.
3. None of the Sale Assets are such that they are, have been or could be
subject to the capital goods scheme (or any scheme of a like nature)
under VATA.
4. The Seller is a registered and taxable person for the purposes of the
VATA. The terms of all legislation, regulations, orders, provisions,
directions, conditions and notices relating to VAT arising in respect
of the Business have been complied with and observed in all material
respects. All accounts, records, invoices and other documents (as the
case may be) appropriate or requisite for the purposes of VAT arising
in respect of the Business have been maintained and obtained and are
complete, correct and up-to-date.
5. No payments or returns or notifications under the legislation,
regulations, orders, provisions, directions, conditions or notices
relating to VAT in respect of the Business are, nor have in the two
years prior to Completion been in arrears and there is not, nor has
there been in the two years prior to Completion, any forfeiture or
penalty or interest or surcharge or the operation of any penalty,
interest or surcharge provisions contained in the same in respect of
the Business.
6. The Seller has not elected to waive exemption for VAT purposes, and is
not aware of any election to waive exemption made by any other person,
in respect of any land or buildings comprised in the Business.
7. None of the Sale Assets agreed to be sold under this Agreement are the
subject of any security in favour of any competent Tax authority
entitled to collect VAT.
8. [The PAYE system has been properly operated and all income tax and
national insurance contributions as required from all payments to or
treated as made to Employees and all Taxation has been punctually
accounted for to the Inland Revenue and the Department of Social
Security for all Taxation deducted. All returns required by section 203
ICTA 1988 (pay as you earn), the Social Security Contributions and
Benefits Act 1992, the Social Security Administration Act 1992 and the
Pension Schemes Act 1993 (national insurance contributions) and
regulations made thereunder have been made and are accurate and
complete in all respects. All such books and records relating to PAYE
and to national insurance contributions as are required to be
maintained and retained have been maintained and retained.]
<PAGE>
9. No officer or employee of the Seller who is engaged in the Business
participates in any share option or profit sharing schemes or is a
beneficiary of any qualifying employee share ownership trust.
10. All sums payable and benefits provided under the existing arrangements
for remunerating officers and employees and rewarding persons rendering
services to the Seller in respect of the Business are deductible for
Tax purposes.
11. None of the Sale Assets agreed to be sold under this Agreement are
subject to any distraint, charge, power of sale or mortgage in favour
of any competent Tax authority nor are there any circumstances which
may give rise to the same.
<PAGE>
SCHEDULE 5
APPORTIONMENT OF CONSIDERATION
[DETAILS TO BE INSERTED WHEN
LIST OF ASSETS TO BE TRANSFERRED HAS BEEN FINALISED]
<PAGE>
SIGNED by )
for and on behalf of DMD GMBH ) /S/
in the presence of: )
SIGNED by )
RALF MULLER ) /S/
in the presence of: )
SIGNED by )
for and on behalf of )
DMDS LIMITED ) /S/
in the presence of: )
CREDIT AGREEMENT
This Credit Agreement ("Agreement") is made and entered into on January 4, 1999
by and between DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. a corporation and
Imperial Bank, a California banking corporation, ("Bank").
Subject to the terms and conditions of this Agreement, any security agreement(s)
executed by Borrower in favor of Bank, any note(s) executed by Borrower in favor
of Bank, or any other agreements executed in conjunction therewith
(collectively, the "Loan Documents"), Bank shall make the loans and or advances
(individually a "Loan" and collectively "Loans") referred to below to Borrower.
In consideration of mutual covenants and conditions hereof, the parties hereto
agree as follows:
1. AMOUNT AND TERMS OF CREDIT
1.01 TERM LOAN COMMITMENT.
(a) TERM A LOAN. Subject to the terms and conditions of this Agreement, Bank
shall make available to Borrower a term loan (the "Term A Loan") in the amount
of $2,500,000, the proceeds of which shall be used only for the repayment of
debt outstanding under senior subordinated notes.
(b) TERM A LOAN NOTE. The interest rate, principal and interest payments,
maturity date and certain other terms of the Term Loan A will be contained in a
promissory note dated the date of this agreement, as such may be amended or
replaced from time to time.
1.02 TERM B LOAN COMMITMENT.
(a) TERM B LOAN. Subject to the terms and conditions of this Agreement, Bank
shall make available to Borrower a term loan (the "Term B Loan") in the amount
of $ 453,890, the proceeds of which shall be used for the repayment of principal
term debt owed to Comerica Bank- California and the balance of the proceeds to
be deposited to borrower's checking account #10-087228 and to be used for the
purchase of equipment.
(b) TERM B NOTE. The interest rate, principal and interest payments and certain
other terms of the Term B Loan will be contained in a promissory note dated the
date of this agreement, as such may be amended or replaced from time to time.
1.03 REVOLVING CREDIT COMMITMENT.
(a) REVOLVING LINE OF CREDIT. Subject to the terms and conditions of this
Agreement, provided that no event of default then has occurred and is
continuing, Bank shall, upon Borrower's request make advances ("Revolving
Loans") to Borrower, for working capital purposes and the paydown of $2,000,000
of senior subordinated notes and the interest on the senior subordinated notes
in an amount not to exceed $ 4,000,000 (the "Revolving Line of Credit") until
May 31, 2000 (the
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"Revolving Line of Credit Maturity Date"). Any advance
requested when the aggregate outstanding principal amount of all Revolving Loans
exceeds $2,500,000, or if the requested advance would result in the aggregate
principal amount of the Revolving Loans outstanding to be in excess of
$2,500,000 shall be made at Bank's sole discretion and only if approved in
writing by Bank. Revolving Loans may be repaid and reborrowed, subject to the
provisions of the LIBOR Addendum attached to the promissory note evidencing the
Revolving Line of Credit, provided that all outstanding principal and accrued
interest on the Revolving Loans shall be payable in full on the Revolving Credit
Maturity Date.
(b) REVOLVING NOTE. The interest rate, principal and interest payments, maturity
date and certain other terms of the Revolving Loan will be contained in a
promissory note dated the date of this agreement, as such may be amended or
replaced from time to time.
1.04 LATE CHARGE. If any installment payment, interest payment, principal
payment or principal balance due under the Loans is delinquent ten (10) or more
days, Borrower agrees to pay Bank a late charge in the amount of five percent
(5%) of the payment so due and unpaid, in addition to the payment; but nothing
in this paragraph is to be construed as any obligation on the part of the Bank
to accept payment of any payment past due or less than the total unpaid
principal balance after maturity. All payments, at Bank's sole discretion, shall
be applied first to any late charges owing, then to interest and the remainder,
if any, to principal.
1.05 DEFAULT RATE. If an Event of Default occurs hereunder, then during the
continuance thereof at the Bank's option, the interest rate shall be five
percent (5%) per year in excess of the rate otherwise applicable.
1.06 LOAN FEES. In addition to any other amounts due, or to become due,
concurrent with the execution hereof, in connection with: (a) the Revolving Line
of Credit, Borrower shall pay to Bank a loan fee of Ten Thousand Dollars
($10,000), (b) the Term A Loan Borrower shall pay to Bank a loan fee in the
amount of Twelve Thousand Five Hundred Dollars ($12,500),Borrower has paid, and
Bank hereby acknowledges receipt of (a) in respect of the Revolving Line of
Credit, a loan fee in the amount of Two Thousand Five Hundred Dollars ($2,500)
Borrower shall pay to Bank a fee on the unused portion of the Revolving Line of
Credit equal to one quarter of one percent( 1/4 %) per annum payable quarterly
in arrears.
1.07 COLLATERAL. Borrower shall grant or cause to be granted to Bank a first
priority lien on any and all personal property assets of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank now has
or hereafter acquires a security interest or pursuant to the terms of any
security agreement, an intellectual property security agreement or otherwise as
security for all of Borrower's obligations to Bank, all as may be subject to
Section 5.03 herein.Borrower has also assigned, or has caused to be assigned,
Bank a first priority security interest in a time certificate of deposit as
collateral for Borrower's obligations to Bank.
1.08 COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all interest,
fees, costs, and/or expenses due under this Agreement by charging Borrower's
demand deposit account number 10-087228 with Bank, or any other demand deposit
account maintained by Borrower with Bank, for the full amount thereof. Should
there be insufficient funds in any such demand deposit account to pay
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all such sums when due, the full amount of such deficiency shall be immediately
due and payable by Borrower.
2. REPRESENTATIONS OF BORROWER
Borrower represents and warrants that:
2.01 EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and existing
and in good standing under the laws of the state of Delaware, without limit as
to the duration of its existence and Borrower is authorized and in good standing
to do business in the state of its incorporation; Borrower has the appropriate
powers and adequate authority, rights and franchises to own its property and to
carry on its business as now conducted, and is duly qualified and in good
standing in each state in which the character of the properties owned by it
therein or the conduct of its business makes such qualification necessary; and
Borrower has the power and adequate authority to make and carry out this
Agreement. Borrower has no investment in any other business entity unless
specified in writing to Bank.
2.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement and the Loan Documents are duly authorized and do not require the
consent or approval of any governmental body or other regulatory authority; are
not in contravention of or in conflict with any law or regulation or any term or
provision of Borrower's articles of incorporation, or similar document as the
case may be, and this Agreement is the valid, binding and legally enforceable
obligation of Borrower in accordance with its terms; subject only to bankruptcy,
insolvency or similar laws affecting creditors rights generally.
2.03 NO CONFLICT. The execution, delivery and performance of this Agreement and
the Loan Documents are not in contravention of or in conflict with any
agreement, indenture or undertaking to which Borrower is a party or by which it
or any of its property may be bound or affected, and do not cause any lien,
charge or other encumbrance to be created or imposed upon any such property by
reason thereof.
2.04 LITIGATION. Except as disclosed in writing to bank by Borrower, there is no
litigation or other proceeding pending or threatened against or affecting
Borrower which if determined adversely to Borrower or its interest would have a
material adverse effect on the financial condition of Borrower, and Borrower is
not in default with respect to any order, writ, injunction, decree or demand of
any court or other governmental or regulatory authority.
2.05 FINANCIAL CONDITION. The consolidated balance sheet of Borrower as of
September 30, 1998, and the related profit and loss statement for the nine month
period ended as of that date, a copy of which has heretofore been delivered to
Bank by Borrower, and all other statements and data submitted in writing by
Borrower to Bank in connection with this request for credit are true and
correct, and said balance sheet truly presents the financial condition of
Borrower as of the date thereof, and has been prepared in accordance with
generally accepted accounting principles on a basis consistently maintained.
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<PAGE>
Since such date there have been no material adverse changes in the financial
condition or business of Borrower. Borrower has no knowledge of any liabilities,
contingent or otherwise, at such date not reflected in said balance sheet, and
Borrower has not entered into any special commitments or substantial contracts
which are not reflected in said balance sheet, other than in the ordinary and
normal course of its business, which may have a materially adverse effect upon
its financial condition, operations or business as now conducted.
2.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same are
not subject to any liens or encumbrances other than those permitted by Section
5.03 hereof.
2.07 TAX STATUS. Borrower has no liability for any delinquent state, local or
federal taxes, and, if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
2.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
2.09 REGULATION U. None of the proceeds of any Loan shall be used to purchase or
carry margin stock (as defined within Regulation U of the Board of Governors of
the Federal Reserve system).
2.10 ERISA. All defined benefit pension plans as defined in the Employees
Retirement Income Security Act of 1974, as amended ("ERISA"), of Borrower meet,
as of the date hereof, the minimum funding standards of Section 302 of ERISA,
and no Reportable Event or Prohibited Transaction as defined in ERISA has
occurred with respect to any such plan.
2.11 YEAR 2000 COMPLIANCE. Borrower and its subsidiaries, as applicable, have
reviewed the areas within their operations and business which could be adversely
affected by, and have developed or are developing a program to address on a
timely basis, the Year 2000 Problem and have made related appropriate inquiry of
material suppliers and vendors, and based on such review and program, the Year
2000 Problem will not have a material adverse effect upon its financial
condition, operations or business as now conducted. "Year 2000 Problem" means
the possibility that any computer applications or equipment used by Borrower may
be unable to recognize and properly perform date sensitive functions involving
certain dates prior to and any dates one or after December 31, 1999.
3. CONDITIONS PRECEDENT TO LOAN.
Prior to Bank being obligated to make any Loan pursuant to this
Agreement, Bank must receive all of the following, each of which must be in form
and substance satisfactory to Bank:
3.01 PROMISSORY NOTE(S). Original, executed promissory note(s).
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<PAGE>
3.02 SECURITY AGREEMENT. Original, executed security agreement(s) covering the
personal property collateral securing the Loan(s).
3.03 FINANCING STATEMENT. Financing statement(s) executed by Borrower and
each grantor of a security interest.
3.04 INSURANCE. Borrower shall have delivered to Bank evidence of insurance
coverage required pursuant to that Agreement to Provide Insurance executed by
Borrower, in form, substance, amounts, covering risks and issued by companies
satisfactory to Bank, and where required by Bank, with loss payable endorsements
in favor of Bank.
3.05 ORGANIZATIONAL DOCUMENTS. Copies of the articles of incorporation, or
similar document as the case may be, of the Borrower.
3.06 AUTHORIZATIONS. Certified copies of all action taken by the Borrower and
each grantor of a security interest to authorize the execution, delivery and
performance of the Loan Documents.
3.07 GOOD STANDING. Good standing certificates from the appropriate secretary of
state of the state in which the Borrower is organized and in each state in which
it is required to be qualified to do business.
3.08 ADDITIONAL DOCUMENTS. Such other documents as Bank may reasonably deem
necessary.
3.09 AGGREGATE REVOLVING LOANS IN EXCESS OF $2,500,000. Approval in writing by
Bank, at Bank's sole discretion, of any requested Revolving Loan when the
aggregate amount of such Revolving Loans outstanding exceeds $2,500,000 or if
the requested Revolving Loan would result in the aggregate of the Revolving
Loans exceeding $2,500,000.
4. AFFIRMATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, under borrowings, or
other indebtedness, or so long as Bank has any obligation to extend credit to
Borrower it will, unless Bank shall otherwise consent in writing:
4.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and
other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
4.02 USE OF PROCEEDS. Use the proceeds of the Loans only for purposes specified
in Section 1 of this Agreement.
4.03 INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses and/or in the exercise of good
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<PAGE>
business judgment, and as required by that Agreement to Provide Insurance
executed by Borrower, with the Bank to be shown as Lenders Loss Payee on such
policies.
4.04 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as:
(a) The same are being contested in good faith and by appropriate proceedings in
such manner as not to cause any materially adverse effect upon its financial
condition or the loss of any right of redemption from any sale thereunder; and
(b) It shall have set aside on its books reserves (segregated to the extent
required by generally accepted accounting practice) deemed by it to be adequate
with respect thereto.
4.05 RECORDS AND REPORTS. Maintain a standard and modern system of accounting in
accordance with generally accepted accounting principles on a basis consistently
maintained; permit Bank's representatives to have access to, and to examine its
properties, books and records at all reasonable times and upon reasonable notice
during normal business hours; and furnish Bank:
(a) QUARTERLY FINANCIAL STATEMENT. As soon as available, and in any event within
forty five (45) days after the close of each quarter, a consolidated balance
sheet, profit and loss statement and reconciliation of Borrower's capital
balance accounts as of the close of such period and covering operations for the
portion of Borrower's fiscal year ending on the last day of such period, all in
reasonable detail and reasonably acceptable to Bank, in accordance with
generally accepted accounting principles on a basis consistently maintained by
Borrower and certified by an appropriate officer of Borrower.
(b) ANNUAL FINANCIAL STATEMENT. As soon as available, and in any event within
one hundred twenty (120) days after and as of the close of each fiscal year of
Borrower, a consolidated report of audit of Company, all in reasonable detail,
audited by an independent certified public accountant selected by Borrower and
reasonably acceptable to Bank, in accordance with generally accepted accounting
principles on a basis consistently maintained by Borrower and certified by an
appropriate officer of Borrower;
(c) OFFICER'S CERTIFICATE. Within forty five (45) days after the end of each
quarter and fiscal year of Borrower, a certificate of the chief financial
officer of Borrower, stating that Borrower has performed and observed each and
every covenant contained in this Agreement to be performed by it and that no
event has occurred and no condition then exists which constitutes an event of
default hereunder or would constitute such an event of default upon the lapse of
time or upon the giving of notice and the lapse of time specified herein; or, if
any such event has occurred or any such condition exists, specifying the nature
thereof in the form of exhibit 4.05 (c) attached hereto;
(d) STOCKHOLDER, SECURITY AND EXCHANGE COMMISSION STATEMENTS AND REPORTS.
Promptly after the same are available, copies of all such proxy statements,
financial statements and reports as Borrower or any subsidiary shall send to its
members or stockholders as appropriate, if any,
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and copies of all reports which Borrower or any subsidiary may file with the
Securities and Exchange Commission.
(e) OTHER INFORMATION. Such other information relating to the affairs of
Borrower as the Bank reasonably may request from time to time.
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<PAGE>
4.06 WORKING CAPITAL. Maintain at all times working capital, meaning current
assets minus current assets (excluding all amounts due from stockholders,
officers and affiliates) minus total current liabilities (including all amounts
due to stockholders, officers and affiliates) of not less than Four Million
Dollars ($4,000,000).
4.07 QUICK RATIO. Maintain quick ratio of cash and accounts receivable to
current liabilities of at least 1.00:1.0.
4.08 TANGIBLE NET WORTH. Maintain at all times a consolidated Tangible Net Worth
(defined as stockholder's equity less any value for goodwill, trademarks,
patents, copyrights, leaseholds, organization expense and other similar
intangible items, and any amounts due from stockholders, officers and
affiliates) of not less than Six Million Seven Hundred Fifty Thousand Dollars
($6,750,000).
4.09 DEBT TO TANGIBLE NET WORTH. Maintain at all times a consolidated ratio of
total liabilities to Tangible Net Worth (defined as stockholder's equity less
any value for goodwill, trademarks, patents, copyrights, leaseholds,
organization expense and other similar intangible items, and any amounts due
from stockholders, officers and affiliates) of not greater than 1.50:1.0.
4.10 FIXED CHARGE COVERAGE RATIO. Maintain quarterly on a consolidated basis, a
consolidated Fixed Charge Coverage Ratio of not less than 1.5 to 1.00. Fixed
Charge Coverage Ratio is defined as the ratio of (EBITDA, less state and federal
income taxes actually paid, less permitted dividends paid, divided by (current
maturities of Long Term Debt, plus interest expense, plus rent expense). EBITDA
shall mean the sum of (a) net income after taxes, plus (b) interest expense,
plus(c) rent expense, plus (d) depreciation and amortization expense on an
annualized basis. Long Term Debt shall mean those debts or renewals or
extensions thereof whose original terms exceed one (1) year.
4.11 PROFITABILITY. Maintain on a consolidated basis, profitable operations
(meaning a net profit after taxes) of at least $1.00 on a quarterly basis
beginning with the quarter ending 12/31/98.
4.12 ERISA. Cause all defined benefit pension plans, as defined in ERISA, of
Borrower to, at all times, meet the minimum funding standards of Section 302 of
ERISA, and ensure that no Reportable Event or Prohibited Transaction, as defined
in ERISA, will occur with respect to any such plan.
4.13 LAWS. At all times comply with, or cause to be complied with, all laws,
statues, rules, regulations, orders and directions of any governmental
authority, having jurisdiction over Borrower or Borrower's business.
4.14 USE OF PROCEEDS. Use the proceeds of the Loans only for the purposes
specified in Section 1 herein.
4.15 GAAP. Compliance with all financial covenants shall be calculated based on
generally accepted accounting principles applied on a consistent basis as
maintained by Borrower.
4.16 YEAR 2000 COMPLIANT. Borrower shall perform all acts reasonably necessary
to ensure that (a) Borrower and any business in which Borrower holds a
substantial interest, and (b) all
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customers, suppliers and vendors whose compliance is likely to be material to
Borrower's business, become Year 2000 Compliant in a timely manner. Such acts
shall include, without limitation, performing a comprehensive review and
assessment of all Borrower's systems and adopting a detailed plan, with itemized
budget, for the remediation, monitoring and testing of such systems. As used in
this paragraph, "Year 2000 Compliant" shall mean, in regard to any entity, that
all software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such entity, will
properly perform date sensitive functions before, during and after the year
2000. Borrower shall, immediately upon request, provide to Agent such
certifications or other evidence of Borrower's compliance with the terms of this
paragraph as Bank may from time to time require.
4.17 OPERATING ACCOUNTS. Maintain all primary accounts and banking relationship
with the Bank. Maintain, or cause to be maintained, on deposit with Bank,
non-interest bearing demand deposit balances sufficient to compensate Bank for
all services provided by Bank. Balances shall be calculated after reduction for
the reserve requirement of the Federal Reserve Board and uncollected funds. Any
deficiencies shall be charged directly to the Borrower on a monthly basis.
4.18 NOTICES. Promptly notify Bank in writing of (i) the occurrence of any Event
of Default hereunder or any event which upon notice and lapse of time would be
an Event of Default; (ii) all litigation affecting Borrower where the amount is
$250,000or more; any substantial dispute which may exist between Borrower and
any governmental regulatory body or law enforcement authority; any change in
Borrower's name or principal place of business; or any other matter which has
resulted or might result in a material adverse change in Borrower's financial
condition or operations.
5. NEGATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, or so long as Bank has
any obligation to extend credit to Borrower, it will not, without Bank's written
consent:
5.01 TYPE OF BUSINESS; MANAGEMENT; CHANGE IN CONTROL. Make any substantial
change in the character of its business; make any change in its executive
management.
5.02 OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than Loans from the Bank except
obligations now existing as shown in the financial statement dated September 30,
1998, excluding those obligations being refinanced by Bank, and other than those
Permitted Indebtedness listed on Schedule 5.02 attached hereto or sell or
transfer, either with or without recourse, any accounts or notes receivable or
any moneys due or to become due.
5.03 LIENS AND ENCUMBRANCES. Create, incur, permit to exist, or assume any
mortgage, pledge, encumbrance, lien or charge of any kind upon any asset now
owned or hereafter acquired by it, other than liens for taxes not delinquent and
liens in Bank's favor and other than liens agreed to in writing by the Bank.
5.04 LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to
any person or other entity other than in the ordinary and normal course of its
business as now conducted or make any investment in the securities of any person
or other entity other than the United States
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Government; or guarantee or otherwise become liable upon the obligation of any
person or other entity, except by endorsement of negotiable instruments for
deposit or collection in the ordinary and normal course of its business.
5.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge or consolidate, or commence any proceedings therefor;
or sell any assets except in the ordinary and normal course of its business as
now conducted; or sell, lease, assign, or transfer any substantial part of its
business or fixed assets, or any property or other assets necessary for the
continuance of its business as now conducted, including without limitation the
selling of any property or other asset accompanied by the leasing back of the
same.
5.06 DIVIDENDS. Declare or pay any dividend or make any other distribution on
any of its capital stock now outstanding or hereafter issued or purchase, redeem
or retire any of such stock other than in dividends or distributions payable in
Borrower's capital stock, except for the repurchase of Borrower's capital stock
from officers, directors, employees or consultants of Borrower upon termination
of their employment with or rendering of service to Borrower.
6. EVENTS OF DEFAULT
The occurrence of any of the following events of default ("Events of Default")
shall, at Bank's option, terminate Bank's commitment to lend and make all sums
of principal and interest then remaining unpaid on all Borrower's indebtedness
to Bank immediately due and payable, all without demand, presentment or notice,
all of which are hereby expressly waived:
6.01 FAILURE TO PAY. Failure to pay any installment of principal or of interest
on any indebtedness of Borrower to Bank within, five (5) days of its due date.
6.02 BREACH OF COVENANT. Failure of Borrower to perform any other term or
condition of this Agreement or any Loan Document binding upon Borrower.
6.03 BREACH OF WARRANTY. Any of Borrower's representations or warranties, made
herein as of the date hereof or any statement or certificate at any time given
as of the date thereof in writing pursuant hereto or in connection herewith
shall be false or misleading in any respect.
6.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or admit
its inability to pay its debts as they mature; or make an assignment for the
benefit of creditors; or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business.
6.05 JUDGMENTS, ATTACHMENTS. Any money judgment in excess of $ 250,000 writ or
warrant of attachment, or similar process shall be entered or filed against
Borrower or any of its assets and shall remain unvacated, unbonded or unstayed
for a period often (10) days or in any event later than five (5) days prior to
the date of any proposed sale thereunder.
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6.06 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall not be dismissed within thirty (30) days
thereafter.
6.07 CESSATION OF BUSINESS. Borrower shall voluntarily suspend its business.
6.08 ADVERSE CHANGE. Any change which, in the reasonable opinion of Bank, is
materially adverse to the financial condition of Borrower or any Guarantor; or
should Bank, for any reason, reasonably believe that the prospect of Borrower's
payment or performance hereunder or under any other agreement or instrument with
Bank be impaired.
6.09 OTHER DEFAULTS. Borrower, or any Guarantor of Borrower's obligations to
Bank, shall commit or do or fail to commit or do any act or thing which would
constitute an event of default under any of the terms of any other agreement,
document or instrument executed or to be executed by it concerning the
obligation to pay money.
6.10 ADVANCES. Notwithstanding anything to the contrary contained herein, Bank
shall have no duty to make advances while any event of default exists
notwithstanding any cure period provided for herein.
7. MISCELLANEOUS PROVISIONS
7.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Bank
or any holder of notes issued hereunder, in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing under this Agreement or any note(s) issued in connection with
a Loan that Bank may make hereunder, are cumulative to, and not exclusive of,
any rights or remedies otherwise available.
7.02 COUNTERPARTS; ENTIRE AGREEMENT. This Agreement may be executed by the
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement. This Agreement, and the other Loan Documents constitute the entire
understanding among the parties hereto with respect to the subject matter hereof
and supersedes any prior agreements, written or oral, with respect thereto.
7.03 ATTORNEY'S FEES. Borrower will pay promptly to Bank without demand after
notice, with interest thereon from the date of expenditure at the rate
applicable to the Loan, reasonable attorneys' fees and all costs and expenses
paid or incurred by Bank in collecting or compromising the Loan after the
occurrence of an Event of Default, whether or not suit is filed. If suit is
brought to enforce any provision of this Agreement, the prevailing party shall
be entitled to recover its reasonable attorneys' fees and court costs in
addition to any other remedy or recovery awarded by the court.
7.04 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in addition to
all rights, powers and remedies given
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<PAGE>
to Bank by law against Borrower or any other person, including but not limited
to Bank's rights of setoff or banker's lien.
7.05 INUREMENT. The benefits of this Agreement shall inure to the successors and
assigns of Bank and the permitted successors and assigns of Borrower.
7.06 APPLICABLE LAW. This Agreement and all other agreements and instruments
required by Bank in connection therewith shall be governed by and construed
according to the laws of the state of California, to the jurisdiction of whose
courts the parties hereby agree to submit.
7.07 OFFSET. In addition to and not in limitation of all rights of offset that
Bank or other holder of the Loan may have under applicable law, Bank or other
holder of any note issued hereunder shall, upon the occurrence of any Event of
Default or any event which with the passage of time or notice would constitute
such an Event of Default, have the right to appropriate and apply to the payment
of the Loan any and all balances, credits, deposits, accounts or monies of
Borrower then or thereafter with Bank or other holder, within ten (10) days
after the Event of Default, and notice of the occurrence of any Event of Default
by Bank to Borrower.
7.08 SEVERABILITY. Should any one or more provisions of the Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
7.09 TIME OF THE ESSENCE. Time is hereby declared to be of the essence of this
Agreement and of every part hereof.
7.10 ACCOUNTING. All accounting terms shall have the meanings applied under
generally accepted accounting principles unless otherwise specified.
7.11 REFERENCE PROVISION.
(a) Other than (i) nonjudicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii) the
appointment of a receiver, or the exercise of other provisional remedies (any
and all of which may be initiated pursuant to applicable law), each controversy,
dispute or claim between the parties arising out of or relating to this Credit
Agreement, any security agreement executed by Borrower in favor of Bank or any
note executed by Borrower in favor of Bank or any other agreement or instrument
issued in favor of Bank by Borrower (collectively in this Section, the
"Agreement") which controversy, dispute or claim is not settled in writing
within thirty (30) days after the "CLAIM DATE" (defined as the date on which a
party subject to this Agreement gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 ET SEQ. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in the
County where the Real Property, if any, is located or Los Angeles County if none
(the "COURT"). The referee shall be a retired Judge of the Court selected by
mutual agreement of the parties, and if they cannot so agree within forty-five
(45) days after
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the Claim Date, the referee shall be promptly selected by the Presiding Judge of
the Court (or his representative). The referee shall be appointed to sit as a
temporary judge, with all of the powers for a temporary judge, as authorized by
law, and upon selection should take and subscribe to the oath of office as
provided for in Rule 244 of the California Rules of Court (or any subsequently
enacted Rule). Each party shall have one peremptory challenge pursuant to CCP
ss.170.6. The referee shall (a) be requested to set the matter for hearing
within sixty (60) days after the date of selection of the referee and (b) try
any and all issues of law or fact and report a statement of decision upon them,
if possible, within ninety (90) days of the Claim Date. Any decision rendered by
the referee will be final, binding and conclusive and judgment shall be entered
pursuant to CCP ss.644 in any court in the state of California having
jurisdiction. Any party may apply for a reference proceeding at any time after
thirty (30) days following notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or trial.
All discovery permitted by this Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by the referee. The
referee may extend such period in the event of a party's refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be responded
to within ten (10) days after service. All disputes relating to discovery which
cannot be resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending appointment of the
referee as provided herein, the Superior Court is empowered to issue temporary
and/or provisional remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the referee shall determine
the manner in which the reference proceeding is conducted including the time and
place of all hearings, the order of presentation of evidence, and all other
questions that arise with respect to the course of the reference proceeding. All
proceedings and hearings conducted before the referee, except for trial, shall
be conducted without a court reporter except that when any party so requests, a
court reporter will be used at any hearing conducted before the referee. The
party making such a request shall have the obligation to arrange for and pay for
the court reporter. The costs of the court reporter at the trial shall be borne
equally by the parties.
(c) The referee shall be required to determine all issues in accordance with
existing case law and the statutory laws of the state of California. The rules
of evidence applicable to proceedings at law in the state of California will be
applicable to the reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, to provide all temporary and/or provisional
remedies and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of laws, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
(d) In the event that the enabling legislation which provides for appointment of
a referee is repealed (and no successor statute is enacted), any dispute between
the parties that would otherwise be
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<PAGE>
determined by the reference procedure herein described will be resolved and
determined by arbitration. The arbitration will be conducted by a retired judge
of the Court, in accordance with the California Arbitration Act, ss.1280 through
ss.1294.2 of the CCP as amended from time to time. The limitations with respect
to discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
7.13 This Agreement may be modified only by a writing signed by all parties
hereto.
This Agreement is executed on behalf of the parties by duly authorized officers
as of the date first above written.
IMPERIAL BANK DENTAL/MEDICAL DIAGNOSTIC SYSTEMS,
INC.
("BANK") ("BORROWER")
By: /S/ By: /S/
------------------------ ----------------------------------
Its: Its:
------------------------- ----------------------------------
By:
-----------------------------------
Its:
----------------------------------
Page 14
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - GROSS
(DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only
AUGUST 8, 1997, is made by and between FRANK F. PARKER ("LESSOR") and DENTAL/
MEDICAL DIAGNOSTIC SYSTEMS, INC., A DELAWARE CORPORATION ("LESSEE"),
(collectively the "PARTIES," or individually a "PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 16722 MILLIKAN AVENUE, IRVINE located in the
County of ORANGE, State of CALIFORNIA, and generally described as (describe
briefly the nature of the property) A CONCRETE TILT UP INDUSTRIAL BUILDING OF
APPROXIMATELY 12,000 SQUARE FEET AS SHOWN DEPICTED ON THE SITE PLAN ATTACHED
HERETO AS EXHIBIT "A" ("PREMISES"). (See Paragraph 2 for further provisions.)
1.3 TERM: ONE (1) years and NO months ("ORIGINAL TERM") commencing
NOVEMBER 1, 1997 ("COMMENCEMENT DATE") and ending OCTOBER 31, 1998 ("EXPIRATION
DATE"). (See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: SEE ADDENDUM PARAGRAPH 49 ("EARLY POSSESSION
DATE").(See Paragraphs 3.2 and 3.3 for further provisions.)
1.5 BASE RENT: $ 6,750.00 per month ("BASE RENT"), payable on the
FIRST day of each month commencing NOVEMBER 1, 1997 (See Paragraph 4 for further
provisions.)
[ ] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $ 6,750.00 as Base Rent for the
period NOVEMBER 1, 1997 THROUGH NOVEMBER 30, 1997
1.7 SECURITY DEPOSIT: $ 7,560.00 ("SECURITY DEPOSIT"). (See also
Paragraph 5 for further provisions.)
1.8 PERMITTED USE: GENERAL OFFICE, WAREHOUSE AND ASSEMBLY OF DENTAL
CAMERAS AND EQUIPMENT AND RELATED USES. (See Paragraph 6 for further
provisions.)
1.9 INSURING PARTY: Lessor is the "INSURING PARTY." $____is the "BASE
PREMIUM." (See Paragraph 8 for further provisions.)
1.10 REAL ESTATE BROKERS: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes): THE
SEELEY COMPANY represents
|X| Lessor exclusively ("LESSOR'S BROKER"); [ ] both Lessor and Lessee, and
GRUBB & ELLIS COMPANY represents
|X| Lessee exclusively ("LESSEE'S BROKER"); or [ ] both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to
be guaranteed by NONE ("GUARANTOR"). (See Paragraph 37 for further provisions.)
1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 49 through 56 and Exhibits . "A" PREMISES AND "B" LESSEE'S WORK
all of which constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which the
Lessor and Lessee agree is reasonable and the rental based thereon is not
subject to revision whether or not the actual square footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within sixty
(60) days after the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to
be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it
has been advised by the Brokers to satisfy itself with respect to the condition
of the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
PAGE 1 Initials _______ ______
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3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease, however, shall be in effect during such period. Any such early possession
shall not affect nor advance the Expiration Date of the Original Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under terms of this Lease until
Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder; provided, however, that if
such written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease shall terminate and be of no further
force or effect. Except as may be otherwise provided, and regardless of when the
term actually commences, if possession is not tendered to Lessee when required
by this Lease and Lessee does not terminate this Lease, as aforesaid, the period
free of the obligation to pay Base Rent, if any, that Lessee would otherwise
have enjoyed shall run from the date of delivery of possession and continue for
a period equal to what Lessee would otherwise have enjoyed under the terms
hereof, but minus any days of delay caused by the acts, changes or omissions of
Lessee.
4. RENT.
4.1. BASE RENT. Lessee shall cause payment of Base Rent and other rent
or charges, as the same may be adjusted from time to time, to be received by
Lessor in lawful money of the United States, without offset or deduction, on or
before the day on which it is due under the terms of this Lease. Base Rent and
all other rent and charges for any period during the term hereof which is for
less than one (1) full calendar month shall be prorated based upon the actual
number of days of the calendar month involved. Payment of Base Rent and other
charges shall be made to Lessor at its address stated herein or to such other
persons or at such other addresses as Lessor may from time to time designate in
writing to Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of its obligations under this Lease. If Lessee fails to pay
Base Rent or other rent or charges due hereunder, or otherwise Defaults under
this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all
or any portion of said Security Deposit for the payment of any amount due Lessor
or to reimburse or compensate Lessor for any liability, cost, expense, loss or
damage (including attorneys' fees) which Lessor may suffer or incur by reason
thereof. If Lessor uses or applies all or any portion of said Security Deposit,
Lessee shall within ten (10) days after written request therefor deposit moneys
with Lessor sufficient to restore said Security Deposit to the full amount
required by this Lease. Any time the Base Rent increases during the term of this
Lease, Lessee shall, upon written request from Lessor, deposit additional moneys
with Lessor sufficient to maintain the same ratio between the Security Deposit
and the Base Rent as those amounts are specified in the Basic Provisions. Lessor
shall not be required to keep all or any part of the Security Deposit separate
from its general accounts. Lessor shall, at the expiration or earlier
termination of the term hereof and after Lessee has vacated the Premises, return
to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's
interest herein), that portion of the Security Deposit not used or applied by
Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the
Security Deposit shall be considered to be held in trust, to bear interest or
other increment for its use, or to be prepayment for any moneys to be paid by
Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the
purposes set forth in Paragraph 1.8, or any other use which is comparable
thereto, and for no other purpose. Lessee shall not use or permit the use of the
Premises in a manner that creates waste or a nuisance, or that disturbs owners
and/or occupants of, or causes damage to, neighboring premises or properties.
Lessor hereby agrees to not unreasonably withhold or delay its consent to any
written request by Lessee, Lessees assignees or subtenants, and by prospective
assignees and subtenants of the Lessee, its assignees and subtenants, for a
modification of said permitted purpose for which the premises may be used or
occupied, so long as the same will not impair the structural integrity of the
improvements on the Premises, the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to
withhold consent, Lessor shall within five (5) business days give a written
notification of same, which notice shall include an explanation of Lessor's
objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used In this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment or the Premises, (ii) regulated or monitored by any
governmental authority, or (iii) a basis for liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in, on or about the Premises
which constitutes a Reportable Use (as hereinafter defined) of Hazardous
Substances without the express prior written consent of Lessor and compliance in
a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as
defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or
use of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority.
Reportable Use shall also include Lessee's being responsible for the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Law requires that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may, without Lessor's prior consent, but in compliance with all Applicable Law,
use any ordinary and customary materials reasonably required to be used by
Lessee in the normal course of Lessee's business permitted on the Premises, so
long as such use is not a Reportable Use and does not expose the Premises or
neighboring properties to any meaningful risk of contamination or damage or
expose Lessor to any liability therefor. In addition, Lessor may (but without
any obligation to do so) condition its consent to the use or presence of any
Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving
Lessor such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefrom or therefor,
including, but not limited to, the installation (and removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance, or a condition involving or
resulting from same, has come to be located in, on, under or about the Premises,
other than as previously consented to by Lessor, Lessee shall immediately give
written notice of such fact to Lessor. Lessee shall also immediately give Lessor
a copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action or proceeding given to, or received from,
any governmental authority or private party, or persons entering or occupying
the Premises, concerning the presence, spill,
PAGE 2 Initials _______ ______
<PAGE>
release, discharge of, or exposure to, any Hazardous Substance or contamination
in, on, or about the Premises, including but not limited to all such documents
as may be involved in any Reportable Uses involving the Premises.
(c) LESSEE'S INDEMNIFICATION. Lessee shall indemnify protect,
defend and hold Lessor, its agents, employees, lenders and ground lessor, if
any, and the Premises, harmless from and against any and all loss of rents
and/or damages, liabilities, judgments, costs, claims, liens, expenses,
penalties, permits and attorney's and consultant's fees arising out of or
involving any Hazardous Substance or storage tank brought onto the Premises by
or for Lessee Lessee's obligations under this Paragraph 6 shall include, but not
be limited to, the effects of any contamination or injury to person, property or
the environment created by Lessee, and the cost of investigation (including
consultant's and attorney's fees and testing), removal, remediation, restoration
and/or abatement thereof, or of any contamination therein involved, and shall
survive the expiration or earlier termination of this Lease. No termination,
cancellation or release agreement entered into by Lessor and Lessee shall
release Lessee from its obligations under this Lease with respect to Hazardous
Substances or storage tanks, unless specifically so agreed by Lessor in writing
at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "APPLICABLE LAW," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee shall,
within five (5) days after receipt of Lessor's written request, provide Lessor
with copies of all documents and information, including, but not limited to,
permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined
in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in
the case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections. EXCEPT FOR SUCH CONDITIONS WHICH ARE SUBJECT TO LESSOR'S
INDEMNIFICATION AS PROVIDED IN PARAGRAPH 56 OF THE ADDENDUM TO
THIS LEASE.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty
as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.),
[MISSING P. 3]
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not contain
any intra-insured exclusions as between insured persons or organizations, but
shall include coverage for liability assumed under this Lease as an "insured
contract" for the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance required by this Lease or as carried by
Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of
any obligation hereunder. All insurance to be carried by Lessee shall be primary
to and not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party,
Lessor shall also maintain liability insurance described in Paragraph 8.2(a),
above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured
therein.
8.3. PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force during the term of this Lease a policy or policies in the name
of Lessor, with loss payable to Lessor and to the holders of any mortgages,
deeds of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or
damage to the Premises. The amount of such insurance shall be equal lo the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than full
replacement cost. Lessee Owned Alterations and Utility Installations shall be
insured by Lessee under Paragraph 8.4. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all risks
of direct physical loss or damage (except the perils of flood and/or earthquake
unless required by a Lender), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Premises required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss, but not including plate glass insurance.
Said policy or policies shall also contain an agreed valuation provision in lieu
of any coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall, in addition, obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and Lender(s), insuring the loss of the full rental and
other charges payable by Lessee to Lessor under this Lease for one (1) year
(including all real estate taxes, insurance costs, and any scheduled rental
increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period.
(c) ADJACENT PREMISES. If the Premises are part of a larger building,
or if the Premises are part of a group of buildings owned by Lessor which are
adjacent to the Premises, the Lessee shall pay for any increase in the premiums
for the property insurance of such building or buildings if said increase is
caused by Lessee's acts, omissions, use or occupancy of the Premises.
(d) TENANT'S IMPROVEMENTS. Since Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
PAGE 3 Initials _______ ______
<PAGE>
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Paragraph 8.4 and shall provide Lessor with
written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be required by a Lender having a
lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 8. Lessee shall
cause to be delivered to Lessor certified copies of, or certificates evidencing
the existence and amounts of, the insurance, and with the additional insureds,
required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or
subject to modification except after thirty (30) days prior written notice to
Lessor. Lessee shall at least thirty (30) days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall Indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. EXCEPT FOR LESSOR'S NEGLIGENCE
AND/OR BREACH OF EXPRESS WARRANTIES Lessor shall not be liable for injury or
damage to the person or goods, wares, merchandise or other property of Lessee,
Lessee's employees, contractors, invitees, customers, or any other person in or
about the Premises, whether such damage or injury is caused by or results from
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, fire sprinklers, wires, appliances,
plumbing, air conditioning or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. EXCEPT FOR Lessor's negligence or breach of this
Lease, Lessor shall under no circumstances be liable injury to Lessee's business
or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% of the then Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility Installations
the repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence
or discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE-INSURED LOSS. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect. Notwithstanding the foregoing, if the required insurance
was not in force or the insurance proceeds are not sufficient to effect such
repair, the Insuring Party shall promptly contribute the shortage in proceeds as
and when required to complete said repairs. In the event, however, the shortage
in proceeds was due to the fact that, by reason of the unique nature of the
improvements, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or adequate
assurance thereof, within ten (10) days following receipt of written notice of
such shortage and request therefor. If Lessor receives said funds or adequate
assurance thereof within said ten (10) day period, the party responsible for
making the repairs shall complete them as soon as reasonably possible and this
Lease shall remain in full force and effect. If Lessor does not receive such
funds or assurance within said period, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to make such restoration and
repair as is commercially reasonable with Lessor paying any shortage in
proceeds, in which case this Lease shall remain in full force and effect. If in
such case Lessor does not so elect, then this Lease shall terminate sixty (60)
days following the occurrence of the damage or destruction. Unless otherwise
agreed, Lessee shall in no event have any right to reimbursement from Lessor for
any funds contributed by Lessee to repair any such damage or destruction.
Premises Partial Damage due to flood or earthquake shall be subject to Paragraph
9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance
coverage, but the net proceeds of any such insurance shall be made available for
the repairs if made by either Party.
9.3 PARTIAL DAMAGE-UNINSURED LOSS. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon
PAGE 4 Initials _______ ______
<PAGE>
as reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage of Lessor's desire to terminate this Lease as of the date sixty (60) days
following the giving of such notice. In the event Lessor elects to give such
notice of Lessor's intention to terminate this Lease, Lessee shall have the
right within ten (10) days after the receipt of such notice to give written
notice to Lessor of Lessee's commitment to pay for the repair of such damage
totally at Lessee's expense and without reimbursement from Lessor. Lessee shall
provide Lessor with the required funds or satisfactory assurance thereof within
thirty (30) days following Lessee's said commitment. In such event this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
repairs as soon as reasonably possible and the required funds are available. If
Lessee does not give such notice and provide the funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
a Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option during
said Exercise Period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
expense repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during said Exercise Period, then Lessor may at
Lessor's option terminate this Lease as of the expiration of said sixty (60) day
period following the occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within ten (10) days after the expiration
of the Exercise Period, notwithstanding any term or provision in the grant of
option to the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage--Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the Premises under
the provisions of this Paragraph 9 and shall not commence, in a substantial and
meaningful way, the repair or restoration of the Premises within ninety (90)
days after such obligation shall accrue, Lessee may, at any time prior to the
commencement of such repair or restoration, give written notice to Lessor and to
any Lenders of which Lessee has actual notice of Lessee's election to terminate
this Lease on a date not less than sixty (60) days following the giving of such
notice. If Lessee gives such notice to Lessor and such Lenders and such repair
or restoration is not commenced within thirty (30) days after receipt of such
notice, this Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises within
thirty (30) days after receipt of such notice, this Lease shall continue in full
force and effect. "COMMENCE" as used in this Paragraph shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition of Lessor's desire to terminate this Lease as of
the date sixty (60) days following the giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible, there shall be abatement of
Lessee's obligations under this Lease to the same extent as provided in
Paragraph 9.6(a) for a period of not to exceed twelve (12) months.
9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 (a) PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises; provided, however, that
Lessee shall pay, in addition to rent, the amount, if any, by which Real
Property Taxes applicable to the Premises increase over the fiscal tax year
during which the Commencement Date occurs ("TAX INCREASE"). Subject to Paragraph
10.1 (b), payment of any such Tax Increase shall be made by Lessee within thirty
(30) days after receipt of Lessor's written statement setting forth the amount
due and the computation thereof. Lessee shall promptly furnish Lessor with
satisfactory evidence that such taxes have been paid. If any such taxes to be
paid by Lessee shall cover any period of time prior to or attar the expiration
or earlier termination of the term hereof, Lessee's share of such taxes shall be
equitably prorated to cover only the period of time within the tax fiscal year
this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment
after such proration.
(b) ADVANCE PAYMENT. In order to insure payment when due and
before delinquency of any or all Real Property Taxes, Lessor reserves the right,
at Lessor's option, to estimate the current Real Property Taxes applicable to
the Premises, and to require such current year's Tax Increase Io be paid in
advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
amount due,
PAGE 5 Initials _______ ______
<PAGE>
at least twenty (20) days prior to the applicable delinquency date, or (ii)
monthly in advance with the payment of the Base Rent. If Lessor elects to
require payment monthly in advance, the monthly payment shall be that equal
monthly amount which, over the number of months remaining before the month in
which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated Tax Increase to be paid. When the actual amount of the
applicable Tax Increase is known, the amount of such equal monthly advance
payment shall be adjusted as required to provide the fund needed to pay the
applicable Tax Increase before delinquency. If the amounts paid to Lessor by
Lessee under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Tax Increase as the same becomes due, Lessee
shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary
to pay such obligation. All moneys paid to Lessor under this Paragraph may be
intermingled with other moneys of Lessor and shall not bear interest. In the
event of a Breach by Lessee in the performance of the obligations of Lessee
under this Lease, then any balance of funds paid to Lessor under the provisions
of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at
the option of Lessor, be treated as an additional Security Deposit under
Paragraph 5.
(c) ADDITIONAL IMPROVEMENTS. Notwithstanding Paragraph 10.1(a)
hereof, Lessee shall pay to Lessor upon demand therefor the entirety of any
increase in Real Property Taxes assessed by reason of Alterations or Utility
Installations placed upon the Premises by Lessee or at Lessee's request.
10.2 "DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"REAL PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available.
Lessor's reasonable determination thereof, in good faith, shall be conclusive.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided In Paragraph 10.1 (b).
11. UTILITIES. Lessee shall pay for all water, gas, heat, light,
power, telephone, trash disposal and other utilities and services supplied to
the Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges Jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change In the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
Fifty Percent (50%) or more of the voting control of Lessee shall constitute a
change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than Fifty Percent (50%) of such Net
Worth of Lessee as it was represented to Lessor at the time of the execution by
Lessor of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to which Lessor may reasonably withhold its consent. "NET WORTH OF
LESSEE" for purposes of this Lease shall be the net worth of Lessee (excluding
any guarantors) established under generally accepted accounting principles
consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (il terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to
fair market rental value or one hundred ten percent (110%) of the Base Rent then
in effect, whichever is greater. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment Io the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation, or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any Index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (il be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for its Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
PAGE 6 Initials _______ ______
<PAGE>
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or sublease and without obtaining their consent,
and such action shall not relieve such persons front liability under this Lease
or sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 or ten percent (10%) of the current monthly
Base Rent, whichever is greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.1(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a condition to Lessor's
consent lo such transaction.
(h) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and adjustment structure
of the rent payable under this Lease be adjusted to what is then the market
value and/or adjustment structure for property similar to the Premises as then
constituted.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee, or, until the Breach has been cured, against Lessor, for any
such rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of
its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of such
sublease; provided, however, Lessor shall not be liable for any prepaid rents or
security deposit paid by such sublessee to such sublessor or for any other prior
Defaults or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any
part of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "DEFAULT" is defined as a
failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH"
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs
13.2 AND/OR 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with applicable law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure,
PAGE 7 Initials _______ ______
<PAGE>
then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the
making by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. ss. 101 or
any successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties
or obligations of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may, at
its option (but without obligation to do so), perform such duty or obligation on
Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be due
and payable by Lessee to Lessor upon invoice therefor. If any check given to
Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made under this
Lease by Lessee to be made only by cashier's check. In the event of a Breach of
Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or
demand, and without limiting Lessor in the exercise of any right or remedy which
Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default of Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraph 13.1(b), (c) or (d). In such
case, the applicable grace period required by subparagraphs 13.1(b), (c) or (d)
and under the unlawful detainer statute shall run concurrently after the one
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Lessor to the remedies provided for in this
Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's Breach
and abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interests under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of Rent and other sums hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within five (5) days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of
each such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of such late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with respect
to such overdue amount, nor prevent Lessor from exercising any of the other
rights and remedies granted hereunder. In the event that a late charge is
payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any provision
of this Lease to the contrary, Base Rent shall, at Lessor's option, become due
and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided however, that if the nature of the
obligation is such that more than thirty (30) days after such notice are
reasonably required for its performance, then Lessor shall not be in breach of
this Lease if performance is commenced within such thirty (30) day period and
thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "Condemnation"), this Lease shall terminate as
to the part taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises,
PAGE 8 Initials _______ ______
<PAGE>
or more than twenty-five percent (25%) of the land area not occupied by any
building, is taken by Condemnation, Lessee may, at Lessee's option, to be
exercised in writing within ten (10) days after Lessor shall have given Lessee
written notice of such taking (or in the absence of such notice, within ten (10)
days after the condemning authority shall have taken possession) terminate this
Lease as of the date the condemning authority takes such possession. If Lessee
does not terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the Base Rent shall be reduced in the same proportion as the
rentable floor area of the Premises taken is land on which there is no building.
Any award for the taking of all or any part of the Premises under the power of
eminent domain or any payment made under threat of the exercise of such power
shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold, or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is
not terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above the legal and other expenses
incurred by Lessor in the condemnation matter, repair any damage to the Premises
caused by such Condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
15. BROKERS' FEE.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of
this Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers jointly, or in such separate shares as they may mutually designate
in writing, a fee as set forth in a separate written agreement between Lessor
and said Brokers (or in the event there is no separate written agreement between
Lessor and said Brokers, the sum of $ Per Agreement for brokerage services
rendered by said Brokers to Lessor in this transaction.
15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor
further agrees that: (a) if Lessee exercises any Option (as defined in Paragraph
39.1) or any Option subsequently granted which is substantially similar to an
Option granted to Lessee in this Lease, or (b) if Lessee acquires any rights to
the Premises described in this Lease which are substantially similar to what
Lessee would have acquired had an Option herein granted to Lessee been
exercised, or (c) if Lessee remains in possession of the Premises, with the
consent of Lessor, after the expiration of the term of this Lease after having
failed to exercise an Option, or (d) if said Brokers are the procuring cause of
any other lease or sale entered into between the Parties pertaining to the
Premises and/or any adjacent property in which Lessor has an interest, or (e) if
Base Rent is increased, whether by agreement or operation of an escalation
clause herein, then as to any of said transactions, Lessor shall pay said
Brokers a fee in accordance with the schedule of said Brokers in effect at the
time of the execution of this Lease.
15.4 Any buyer or transferee of Lessor's interest in this Lease,
whether such transfer is by agreement or by operation of law, shall be deemed to
have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a
third party beneficiary of the provisions of this Paragraph 15 to the extent of
its interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.
15.5 Lessee and Lessor each represent and warrant to the other that it
has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. TENANCY STATEMENT.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days
after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, or the building of which the Premises are a part, Lessee and
all Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be Rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
PAGE 9 Initials _______ ______
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23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger or courier
service) or may be sent by regular, certified or registered mail or U.S. Postal
Service Express Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease
shall be that Party's address for delivery or mailing of notice purposes. Either
Party may by written notice to the other specify a different address for notice
purposes, except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to be
given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate by
written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received on
a Sunday or legal holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any preceding Default or Breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular Rent so accepted. Any payment given Lessor by Lessee may be accepted
by Lessor on account of moneys or damages due Lessor, not withstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of such default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership; (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lesser after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
such subordination or non-subordination, attornment and/or Non-Disturbance
Agreement as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to
enforce the terms or declare rights hereunder, the Prevailing Party (as
hereafter defined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the
same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY"
shall include, without limitation, a Party or Broker who substantially obtains
or defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorneys' fees award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys'
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are
PAGE 10 Initials _______ ______
<PAGE>
a part, as Lessor may reasonably deem necessary. Lessor may at any time place on
or about the Premises or building any ordinary "For Sale" signs and Lessor may
at any time during the last one hundred twenty (120) days of the term hereof
place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of Rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting of
the Premises by Lessee shall not constitute an acknowledgment that no Default or
Breach by Lessee of this Lease exists, nor shall consent be deemed a waiver of
any then existing Default or Breach, except as may be otherwise specifically
stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this
Lease are acknowledged by Lessee as being reasonable. The failure to specify
herein any particular condition to Lessor's consent shall not preclude the
imposition by Lessor at the time of consent of such further or other conditions
as are then reasonable with reference to the particular matter for which consent
is being given.
37. GUARANTOR.
37.1 If there are to be any Guarantors of this Lease per Paragraph
1.11, the form of the guaranty to be executed by each such Guarantor shall be in
the form most recently published by the American Industrial Real Estate
Association, and each said Guarantor shall have the same obligations as Lessee
under this Lease, including but not limited to the obligation to provide the
Tenancy Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if
any Guarantor fails or refuses, upon request by Lessor to give: (a) evidence of
the due execution of the guaranty called for by this Lease, including the
authority of the Guarantor (and the party signing on Guarantor's behalf) to
obligate such Guarantor on said guaranty, and including in the case of a
corporate Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, together with a certificate of
incumbency showing the signature of the persons authorized to sign on its
behalf, (b) current financial statements of Guarantor as may from time to time
be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation the
guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the Rent and the observance and
performance of all of the covenants, conditions and provisions on Lessee's part
to be observed and performed under this Lease, Lessee shall have quiet
possession and quiet enjoyment of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple
Options to extend or renew this Lease, a later Option cannot be exercised unless
the prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee); or (iii) during the time
Lessee is in Breach of this Lease; or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not
the Defaults are cured, during the twelve (12) month period immediately
preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity
PAGE 11 Initials _______ ______
<PAGE>
of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee
three (3) or more notices of Default under Paragraph 13.1 during any twelve (12)
month period, whether or not the Defaults are cured, or (iii) if Lessee commits
a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care and cleanliness of the grounds, the parking, and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under this Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission
of same to the Lessee shall not be deemed an offer to lease to Lessee. This
Lease is not intended to be binding until executed by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect adjustments that are made to the Base
Rent or other rent payable under this Lease. As long as they do not materially
change Lessee's obligations hereunder, Lessee agrees to make such reasonable
non-monetary modifications to this Lease as may be reasonably required by an
institutional, insurance company, or pension plan Lender in connection with the
obtaining of normal financing or refinancing of the property of which the
Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE
OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION
OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR
EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO
THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY
IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE
WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures
PAGE 12 Initials _______ ______
<PAGE>
<TABLE>
<S> <C>
Executed at: Executed at:
on: on:
--------------------------------------------
By LESSOR: By LESSEE:
Frank F. Parker Dental/Medical Diagnostic Systems, Inc.
A Delaware Corporation
By: By:
Name Printed: Frank F. Parker Name Printed: Robert H. Gurevitch
Title: Owner Title: CEO - Chariman
By:
Name Printed: By:
Title: Name Printed:
Address: 2923 So. Pullman Ave. Title:
Santa Ana, CA 92705 Address: 200 North Westlake Blvd., Suite 200
Telephone (714) 660-8014 Westlake Village, CA 91362
Facsimile (714) 660-8016 Telephone (805) 381-2700
Facsimile (805) 374-1966
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So.
Figueroa Street, Suite M-1, Los Angeles, California 90071. (213) 687-8777.
Fax No. (213) 687-8616
PAGE 13 Initials _______ ______
<PAGE>
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - GROSS,
DATED AUGUST 8, 1997
BY AND BETWEEN FRANK F. PARKER, AS LESSOR AND
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.,
FOR THE PREMISES LOCATED AT
16722 MILLIKAN AVENUE, IRVINE, CALIFORNIA
================================================================================
49. EARLY POSSESSION: AMENDS PARAGRAPH 1.4
Lessee shall be granted partial possession of the Premises October 1,
1997, for the purposes of performing "Lessee's Work" as set forth in
Exhibit "B" attached hereto. Lessee shall be granted full possession of
the Premises October 15, 1997, when the current tenant vacates. Though
no rent shall be due or payable during this early possession period,
all other terms of this lease shall be in effect including Lessee's
obligation to obtain the insurance policies required in Paragraph 8 of
this Lease.
50. PREMISES-CONDITION: AMENDS PARAGRAPH 2.2
Lessor shall replace the roof on the warehouse portion of the Premises
on or before October 31, 1997.
51. PREMISES-COMPLIANCE: AMENDS PARAGRAPH 2.3
If modifications are required to the Premises to comply with ADA
regulations or other governmental regulations or mandates, whether or
not the need for modification is caused by Lessee's work or
Lessee-owned alterations and/or Utility installation, Lessor and Lessee
agree to each pay fifty percent (50%) of the costs of the modifications
up to a maximum of five thousand dollars ($5,000) each, ten thousand
dollars ($10,000) total. Under no circumstances shall Lessee be
required to pay more than a total of five thousand dollars ($5,000) for
all city, state, federal or regulatory agency mandated modifications or
improvements.
52. MAINTENANCE; REPAIRS: AMENDS PARAGRAPH 7.
The provisions of Paragraph 7 notwithstanding, Lessor shall maintain
and repair the HVAC systems to the Premises.
53. ALTERATIONS: AMENDS PARAGRAPH 7.3
As a condition of this Lease, Lessee shall complete the work ("Lessee's
Work") which is set forth in Exhibit "B" attached. Lessee's failure to
complete Lessee's Work shall be considered a default under this Lease.
54. NOTICES: AMENDS PARAGRAPH 23
For the purpose of all notices given under the Lease, the addresses of
Lessor and Lessee shall be as follows, or such places as the parties
may from time to time designate by notice:
If to Lessor: Frank F. Parker
2923 S. Pullman Avenue Santa Ana, CA 92705
FAX: 714/660-8016
If to Lessee: Dental/Medical Diagnostic Systems, Inc.
200 N. Westlake Blvd., Ste. 202
Westlake Village, CA 91362
FAX: 805/374-1966
with a Copy to:
Dental/Medical Diagnostic Systems, Inc.
16722 Millikan Avenue
Irvine, CA 92606
FAX: 714/753-1766
55. (SEE ATTACHED OPTIONS TO EXTEND.)
56. LESSOR'S INDEMNIFICATION: AMENDS PARAGRAPH 6.2
(d) Lessor and its successors and assigns shall indemnify, defend,
reimburse and hold Lessee, its employees and lenders harmless from and
against any and all damages as a result of hazardous substances on, in,
around or under the Premises prior to the commencement date or which
are caused by the negligence or intentional acts of Lessor, its agents
or employees. Lessor's obligations shall include, but not be limited
to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this
Lease.
LESSOR: LESSEE:
Frank F. Parker Dental Medical Diagnostic Systems, Inc.
By: /S/ Frank F. Parker By: /S/ Robert H. Gurevitch
------------------------ -------------------------------------
Frank F. Parker Robert H. Gurewitch
Title: Owner Title: CEO-Chairman
Date: 9-18-97 Date: 9-17-97
------- -------
PAGE 14 Initials _______ ______
<PAGE>
OPTION(S) TO EXTEND
ADDENDUM TO
STANDARD LEASE
Dated August 8, 1997
By and Between (Lessor) o FRANK F. PARKER
(Lessee) DENTAL/MEDICAL DIAGNOSTICS SYSTEMS, INC.
Property Address: 16722 MILLIKAN AVENUE, IRVINE, CA
Paragraph 55
A. OPTIONS(S) TO EXTEND:
Lessor hereby grants to Lessee the option to extend the term of this
Lease for 3 additional 12 month period(s) commencing when the prior term expires
upon each and all of the following terms and conditions:
(i) Lessee gives to Lessor, and Lessor actually receives on a date which is
prior to the date that the option period would commence (if exercised) by at
least .. 3, and not more than 5 months, a written notice of the exercise of the
option(s) to extend this Lease for said additional term(s), time being of
essence. If said notification of the exercise of said option(s) is (are) not so
given and received, the option(s) shall automatically expire; said option(s) may
(if more than one) only be exercised consecutively;
(ii) The provisions of paragraph 39, including the provision relating to
default of Lessee set forth in paragraph 39.4 of this Lease are conditions of
this Option;
(iii) All of the terms and conditions of this Lease except where specifically
modified by this option shall apply;
(iv) The monthly rent for each month of the option period shall be
calculated as follows, using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
|X| II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV) TO BE USED FOR THE
THIRD OPTION PERIOD
(a) On (Fill in MRV Adjustment Date(s): NOVEMBER 1, 2000
the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be adjusted to the "Market Rental Value" of the property as follows:
1) Four months prior to the Market Rental Value (MRV)
Adjustment Date(s) described above, Lessor and Lessee shall meet to establish an
agreed upon new MRV for the specified term. If agreement cannot be reached,
then:
i) Lessor and Lessee shall immediately appoint
a mutually acceptable appraiser or broker to establish the new MRV within the
next 30 days. Any associated costs will be split equally between the parties, or
ii) Both Lessor and Lessee shall each
immediately select and pay the appraiser or broker of their choice to establish
a MRV within the next 30 days. If, for any reason, either one of the appraisals
is not completed within the next 30 days, as stipulated, then the appraisal that
is completed at that time shall automatically become the new MRV. If both
appraisals are completed and the two appraisers/brokers cannot agree on a
reasonable average MRV then they shall immediately select a third mutually
acceptable appraiser/broker to establish a third MRV within the next 30 days.
The average of the two appraisals closest in value shall then become the new
MRV. The costs of the third appraisal will be split equally between the parties.
2) In any event, the new MRV shall not be less than the
rent payable for the month immediately preceding the date for rent adjustment.
(b) Upon the establishment of each New Market Rental Value as
described in paragraph All:
(1) monthly rental sum so calculated for each term as
specified in paragraph All(a) will become the new "Base Rent" for the purpose of
calculating any further Cost of Living Adjustments as specified in paragraph
All(a) above and
(2) the first month of each Market Rental Value term as
specified in paragraph All(a) shall become the new "Base Month" for the purpose
of calculating any further Cost of Living Adjustments as specified in paragraph
Al(b).
|_| III. FIXED RENTAL ADJUSTMENT(S)(FRA) TO BE USED FOR THE FIRST
AND SECOND OPTION PERIODS
OPTION(S) TO EXTEND
Notice: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: American Industrial Real Estate Association, 345
South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777.
Fax No. (213) 687-8616
PAGE 1 Initials _______ ______
<PAGE>
The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be increased to the following amounts on the dates set forth below:
On (Fill in FRA Adjustment Date(s)): The New Base Rental shall be:
NOVEMBER 1 1998 $ 6750.00
NOVEMBER 1 1999 $ 7560.00
B. NOTICE: Unless specified otherwise herein, notice of any escalations
other than Fixed Rental Adjustments shall be made as specified in paragraph 23
of the attached Lease.
C. BROKER'S FEE:
The Real Estate Brokers specified in paragraph 1.10 of the attached
Lease shall be paid a Brokerage Fee for each adjustment specified above
in accordance with paragraph 15 of the attached Lease.
OPTION(S) TO EXTEND
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: American Industrial Real Estate Association, 345
South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777.
Fax No. (213) 687-8616
PAGE 2 Initials _______ ______
<PAGE>
EXHIBIT "B" LESSEE'S WORK
9/11/97
<TABLE>
<CAPTION>
# Description UOM Qty Cost Remarks
- - -- ----------- --- ----- ------- -------
<S> <C> <C> <C> <C>
1 Carpeting & Coving, SY 357 6,009
New
2 Ceiling, Tiles, New SF 2,237 3,042 Second Look "8" or "32"
(Front Offices)
3 Ceiling Tiles, SF 4,918 1,967
Resurface/Reorganize
4 Concrete - Strip & Clear SF 3,733 1,725
Coat
5 Counters, Sinks & LT 1 1,800
Faucets
6 Lighting, Diffusers 2x4, EA 166 708
New
7 Lighting, Diffusers & EA 9 270
Bulbs, 8'
8 Lighting, New Bulbs 4' EA 420 1,270
9 Lighting, New in LT 1 2,200
Warehouse
10 Paint - Exterior LT 1 2,800
11 Paint - Interior LT 1 5,650
12 Parking - Repair, Slurry SF 13,400 2,600
& Stripe
13 Tile, Vinyl, New with SF 1,290 3,070
Coving
14 Tile, Vinyl, Strip & Wax SF 4,464 500
(New + Exist)
15 Wall, Open-Up - Service EA 1 250
16 Wall, Open-Up - EA 1 250
Assembly
17 Landscape, Clean-up & LT 1 1000 Owner to resod
Trim Trees
18 Door, Hall Exit EA 1 745
19 Locate Fire Extinguisher EA 1 150
in Wall
20 Install Mirror in Men's LT 1 100
Bathroom
21 Install Windows in 4 EA 4 425
doors
22 Signage EA 1 600
23 Window Coverings (New EA 1 1,800
& Clean)
24 Front Door Repair EA 1 250
25 Repair 4 Window Panes LT 1 250
26 Total: $39,431
27 Note: All costs are approximate.
</TABLE>
Exhibit B97-09-03 9/11/97 Merle W. Robert, C.P.M.
PAGE 3 Initials _______ ______
SECOND ADDENDUM TO LEASE
LESSOR: FRANK F. PARKER
LESSEE: DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.,
A DELAWARE CORPORATION
ADDRESS: 16722 MILLIKAN AVENUE, IRVINE, CALIFORNIA
DATED: AUGUST 8, 1997
1. LEASE TERM: The above referenced lease is extended for one (1) year
commencing November 1, 1998, and ending October 31, 1999.
2. BASE RENTAL RATE: The base rental rate during the extended term shall
be $6,750.00 per month.
AGREED:
Lessor: Lessee:
Frank F. Parker Dental/Medical Diagnostic Systems,Inc.
/S/ Frank Parker /S/ Merle Roberts
- - ---------------------------- ----------------------------------
- - ---------------------------- ----------------------------------
Date: 7-29-98 Date: 7-27-98
---------------------- ----------------------------
CONFIDENTIAL
SUNI-DMD MANUFACTURING, ASSEMBLY & TEST SERVICES AGREEMENT
This Manufacturing, Assembly & Test Supply Agreement ("Manufacturing
Agreement") is entered into as of March 17, 1999, by and between SUNI IMAGING
MICROSYSTEMS ("SUNI") and DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. ("DMD"),
regarding the subject matter described in this document.
The parties agree as follows:
1. OVERVIEW.
DMD and SUNI entered into an Agreement dated October 10, 1997 (the
"Development Agreement") under which SUNI developed for DMD a CCD Chip, as
defined in the Development Agreement. DMD and SUNI desire that SUNI will
assemble, test and package Sensor Assembly Components provided by DMD to SUNI
into Sensor Assemblies and Combined Products as a manufacturing service to DMD.
2. DEFINITIONS.
2.1. "Bill of Materials" means the lists of materials and components set
forth in Exhibit A to this Agreement.
2.2. "Board Assembly" or "Camera Board" or "Board" means the electronics
board that is referred to as the "image capture board" in the Development
Agreement. The Board Assembly will include a PCI and/or USB personal computer
interface and be designed to be plugged into a personal computer.
2.3. "Board Assembly Specifications" shall mean the technical
specifications for Board Assemblies that are attached to this Agreement as
Exhibit B.
2.4. "Combined Product" means a tested Board Assembly and Sensor Assembly
that complies with the Combined Product Specifications.
2.5. "Combined Product Specification" means the functional specifications
for the Combined Product that are to be attached to this Agreement as Exhibit C
in accordance with Section 9.4 below.
2.6. "Production Year" shall mean the 12 month period that commences on the
date when SUNI: (a) has shipped to DMD a Sensor Assembly or
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<PAGE>
Combined Product that conforms to the Sensor Assembly Functional Specifications,
and (b) has provided written notice to DMD that SUNI is able to produce such
Sensor Assembly or Combined Product in commercial quantities, and each 12 month
period that commences on the anniversary of such first shipment and notice.
2.7. "Sensor Assembly" means the CCD Chip and packaging designed to be
inserted in a patient's mouth, together with the cable and plug used to connect
the Sensor Assembly to the Board Assembly.
2.8. "Sensor Assembly Component" means a part, such as a CCD Chip, cable or
plug, that is required in order to assemble a Sensor Assembly.
2.9. "Sensor Assembly Component Specification" means the technical and
functional specifications for each Sensor Assembly Component that are attached
to this Agreement as Exhibit A.
2.10. "Sensor Assembly Functional Specification" means the functional
specifications for the Sensor Assembly that are attached to this Agreement as
Exhibit C.
2.11. "Wafer Specifications" shall mean the following technical documents:
Attachment 1 to the Development Agreement and the memorandum from DMD to SUNI
dated January 14, 1999 that is attached to this Agreement as Exhibit E.
3. PARTS PROCUREMENT.
3.1. DMD and SUNI will jointly review and approve suppliers of Sensor
Assembly Components and of Board Assemblies, to be manufactured in accordance
with the Sensor Assembly Component and Board Assembly Specifications, and such
approval shall not be unreasonably withheld. The Bill of Materials for the PCI
personal computer interface attached as Exhibit A(i) to this Agreement includes
the materials and components determined by SUNI to be necessary to manufacture
each Sensor Assembly Component and Board Assembly that includes a PCI personal
computer interface. The Bill of Materials to manufacture each Sensor Assembly
Component and Board Assembly that includes a USB personal computer interface
shall be provided by SUNI to DMD, and attached as Exhibit A(ii) to this
Agreement, within 30 days of signing this Agreement. If SUNI is unable to
provide DMD with the Bill of Materials necessary, and acceptable to DMD, to
manufacture each Sensor Assembly Component and Board Assembly that includes a
USB personal computer interface within such time, either party may terminate
this Agreement in its entirety without liability to the other. Exhibit B sets
forth the technical specifications for each Sensor Assembly Component and Board
Assembly. DMD will manage all material procurement activities with the exception
of wafer
Page 2
<PAGE>
procurement. DMD shall place purchase orders with Orbit or such other
wafer supplier of SUNI's choice as shall be reasonably acceptable to DMD and
able to provide wafers at or below the wafer prices set forth in the Bill of
Materials and SUNI will manage all aspects of the wafer supplier's performance.
3.2. DMD will identify and contract with one or more vendors which are to
be approved by SUNI to manufacture and supply Board Assemblies. SUNI will not
withhold or delay approval without reasonable cause
3.3. DMD shall use commercially reasonable efforts to supply sets of all
required materials defined in the applicable Bill of Materials to SUNI no less
than 15 days prior to the 1st of each month in which the finished Sensor
Assemblies, or Combined Products, as applicable, to be produced from those
materials are to be delivered to DMD. If DMD or the suppliers of the required
materials deliver such required materials to SUNI later than fifteen (15) days
prior to the first day of the calendar month, as set forth in the preceding
sentence, then SUNI's time to deliver the Sensor Assemblies or Combined Products
to be assembled from such materials shall be extended for a commercially
reasonable period of time not to exceed the number of days that DMD or the
suppliers delivered the required materials after fifteen days prior to the first
day of such calendar month.
3.4. At the earliest possible date after execution of this Agreement, DMD
shall issue a purchase order for a quantity of wafers to the wafer supplier
selected in accordance with Section 3.1 above, in the configuration set forth in
the Wafer Specifications , sufficient to produce 4,500 sensors based on a 50%
yield from each wafer. DMD shall take delivery of all wafers on this purchase
order within 6 months of the first delivery of wafers.
4. PAYMENT FOR PARTS.
DMD will pay for all Sensor Assembly Components and Board Assemblies and
be responsible for assuring materiel flow that is sufficient to manufacture
required Sensor Assemblies and Board Assemblies consistent with quantities of
Sensor Assemblies and Combined Products ordered by DMD. SUNI is not responsible
for any consequences of delays in materiel supply which do not result from the
actions or omissions of SUNI.
5. MANUFACTURING SERVICES.
5.1. Equipment. SUNI will purchase, lease, sublease and install, or obtain
through subcontract arrangements, all equipment necessary to assemble, test and
package Sensor Assemblies (the "Equipment").
5.2. Manufacturing Support. SUNI will establish requirements for all
manufacturing of Sensor Assembly Components and Board Assemblies. DMD is
responsible for establishing and monitoring each vendor's compliance with
Page 3
<PAGE>
customary manufacturing processes to be established by SUNI. If the Sensor
Assembly Components or Board Assemblies delivered to SUNI fail to conform to the
applicable Sensor Assembly Component Specifications and Board Assembly Component
Specifications, SUNI's sole and exclusive remedy against DMD shall be to require
DMD to, as quickly as commercially reasonable, procure replacement parts that
meet such specifications, and DMD shall indemnify SUNI as set forth in Section
9.6 below.
5.3. Assembly. SUNI will use the Equipment to test, assemble and package
Sensor Assembly Components into Sensor Assemblies. SUNI will test all Assembly
Boards sold with SUNI manufactured and assembled Sensors as part of a Combined
Product.
5.4. Good Manufacturing Practices. SUNI will comply with the applicable
regulations of the United States Food and Drug Administration ("FDA") and of all
other applicable regulatory agencies applicable to the manufacture of the
medical devices manufactured by SUNI for DMD, including without limitation "Good
Manufacturing Practices" ("GMP") regulations. Prior to commencement of assembly
of the Combined Products, DMD may, on reasonable advance notice to SUNI, conduct
inspections of SUNI manufacturing facilities and records to determine SUNI's
compliance with applicable "Good Manufacturing Practices" ("GMP") regulations
and SUNI shall fully cooperate with such inspections.
6. ROYALTY ADVANCE.
6.1. DMD will advance to SUNI $CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION in cash as follows:
o $CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION paid to SUNI April 2, 1999
o $CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION paid to SUNI thirty days after execution of this
Agreement
o $CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION paid to SUNI sixty days after execution of this
Agreement
The $CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION advance will be credited against the first $CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION in royalties that DMD would otherwise be obligated to pay to SUNI
under the Development Agreement commencing with the first royalty payment that
becomes due under the Development Agreement, provided that DMD may not take such
credit with respect to royalties that become due during any calendar quarter if
the cumulative orders placed by DMD total fewer than CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION Sensor
Assemblies to be delivered by SUNI to DMD during such calendar quarter.
6.2. DMD will lease equipment ("DMD Leased Equipment") for SUNI's use in
connection with the manufacture, assembly and testing of DMD products, and SUNI
agrees that if it will not use the DMD Leased Equipment for other purposes,
unless SUNI is able to meet DMD's requirements for Sensor
Page 4
<PAGE>
Assemblies. DMD will lease the DMD Leased Equipment under a purchase/lease
agreement per the List of Equipment attached as Exhibit D and updated in
accordance with the following sentence, not to exceed a total value of
$CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. The parties agree that the List of Equipment attached as
Exhibit D, as of the date of this Agreement is preliminary, and SUNI will submit
a final and complete List of Equipment to DMD within thirty (30) days after the
date of this Agreement. DMD shall obtain SUNI's approval of any such agreement
with respect to the purchase or lease of DMD Leased Equipment and DMD will work
with SUNI to determine the structure that best fits SUNI's requirements. The
costs of these leases shall be recovered by DMD over the first 36 months of
deliveries as credits applied to royalty payments required under the Development
Agreement and/or payments otherwise due SUNI under this Agreement but if SUNI
terminates this Agreement under Section 7.6 or 7.7 or DMD terminates this
Agreement under Section 7.8 all unrecovered cost shall be immediately paid to
DMD by SUNI, and SUNI shall have the right, in its discretion, to become the
owner of the DMD Leased Equipment. If DMD terminates this Agreement under
Section 7.7, or if SUNI terminates this Agreement under Section 7.8, then SUNI
may elect either (a) to pay all of DMD's unrecovered cost with respect to the
DMD Leased Equipment, and upon such payment SUNI shall have the right, in its
discretion, to become the owner of the DMD Leased Equipment or (b) to return the
DMD Leased Equipment. SUNI shall own, or if a residual payment amount remains
due and owing at the end of the lease term shall have the option, by paying the
residual amount, of owning, the DMD Leased Equipment after DMD has recovered all
lease costs. If DMD elects not to buy additional Sensor Assemblies or Combined
Products beyond the first year from the date of this Agreement, then DMD shall
be responsible for all remaining lease costs and SUNI will own the DMD Leased
Equipment.
7. PURCHASE AGREEMENT.
7.1. DMD will fulfill all of its requirements for Sensor Assemblies and
Combined Products from SUNI during the Manufacturing Agreement term (which term
commences upon the date hereof and extends through the last day of the third
Production Year unless earlier terminated pursuant to Section 7.7 or Section 7.8
below) unless either (a) DMD's exclusive rights are terminated as set forth in
Section 7.3 and 7.6 below or (b) SUNI declines to accept any order that DMD
places prior to the 90 day lead time specified herein, for delivery of Sensor
Assemblies and Combined Products, in which case Section 7.6 below shall apply.
Upon the last day of the term, the term of this Agreement is extended
automatically one year at a time unless cancelled by either party within 90 days
of the last day of the term of this Agreement.
7.2. DMD shall, promptly following receipt of FDA notification for the
Sensor Assembly and/or Combined Product permitting marketing and sale of the
Sensor Assembly and/or Combined Product in the United States, issue a purchase
order, in the form attached as Exhibit F to this Agreement to SUNI for
Page 5
<PAGE>
assembly of CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION Sensor Assemblies (the "Initial Order") for
delivery over the first Production Year. With respect to the Initial Order, SUNI
agrees to produce a minimum of CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION Sensor Assemblies per
calendar month and a minimum of CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION Sensor Assemblies per
Production Year quarter for Q2, Q3 and Q4 of the first Production Year; and the
Q1 ramp-up under the Initial Order during the first Production Year shall be a
minimum of CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION Sensor Assemblies per month and minimum of
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION Sensor Assemblies for Q1 of the first Production Year. The
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION-Product shortfall for Q1 of the first Production Year shall
be delivered during Q2 of the first Production Year.
7.3. With respect to all orders after the first Production Year, DMD agrees
to order and take delivery of, and SUNI agrees to deliver, Sensor Assemblies at
a rate of at least CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION Sensor Assemblies per calendar month of
each Production Year; provided, however, that if DMD refuses to order a minimum
of CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION Sensor Assemblies for delivery in each calendar month of the
second or third Production Years and such failure continues for 30 calendar days
after delivery by SUNI to Robert Gurevitch and Dr. Jack Preston of DMD of a
written demand describing such failure and referencing this paragraph 7.3, SUNI
may as its sole and exclusive remedy for failure by DMD to order the quantities
of Sensor Assemblies specified to be ordered in the second and third Production
Years by the terms of this Paragraph terminate DMD's exclusive rights to market
the Sensor Assembly and terminate all exclusivity relating to SUNI's designs, as
set forth in Section 8.1 of the Development Agreement; whereupon SUNI shall
continue to supply DMD pursuant to this Agreement on a non-exclusive basis,
provided that if DMD orders fewer than CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION Sensor Assemblies
during any Production Year, then SUNI may elect to transfer production of Sensor
Assemblies to a third party that DMD identifies rather than continue to support
production at that level.
7.4. DMD shall guarantee payment in full for at least CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION Sensor Assemblies during the first Production Year during the term of
this Agreement. If DMD fails to purchase and pay for at least CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION Sensor Assemblies during Q1 of the first Production Year or
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION Sensor Assemblies during any of Q2, Q3 and Q4 of the first
Production Year (the "Required Minimum Quantities"), then SUNI shall provide
written notice to DMD of such purchase shortfall, and DMD shall have 30 days
from the date of such written notice to pay to SUNI the difference between price
calculated under Section 8.1 below for the Required Minimum Quantities and the
actual quantity of Sensor Assemblies that DMD ordered and paid SUNI for during
the applicable calendar quarter. If DMD fails to pay such amount, then, in
addition to its other remedies, SUNI may terminate DMD's exclusive rights to
market the Sensor Assembly and terminate all exclusivity relating to SUNI's
designs as set forth in Section 8.1 of the Development Agreement. If DMD has
purchased more than CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION Sensor Assemblies in a given Production
Year, then SUNI will credit DMD based on volume pricing, as described in Section
8.1 of this Agreement below, for an amount equal to the difference between the
price paid by DMD for each Sensor Assembly that DMD purchased
Page 6
<PAGE>
and paid for during the Production Year and the volume discount price for the
Sensor Assemblies. The credit amount will be credited against future royalties
and/or payments under this Agreement that would otherwise be payable by DMD in
the following Production Year.
7.5. Any increases over minimum orders specified in Section 7.3 above
requires 90-day advance notice to SUNI.
7.6. If DMD does not place orders for a minimum of CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION Sensor
Assemblies within the required purchase order lead time, to be delivered during
each quarter of the second Production Year of this Agreement (other than
following notice from SUNI that it cannot accept all orders for the Second
Production year) then SUNI will be entitled, in its sole discretion, to maintain
in effect all lease or other agreements with respect to DMD Leased Equipment. If
SUNI decides not to accept all of DMD's Production Year orders in year two or
three or part of such orders in excess of CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION Sensor Assemblies
per Production Year quarter (the "Rejected Orders") then SUNI shall provide DMD
with written notice of such decision. Provided that the Rejected Orders are bona
fide and were made within the applicable minimum purchase order lead times set
forth in this Section 7, then SUNI shall supervise transition of production to a
second source of DMD's choice for (a) in the case of a rejection by SUNI only of
orders in excess of CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION Sensor Assemblies in any given Production
Year quarter, all future quantities of Sensor Assemblies and Combined Products
above CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION Sensor Assemblies per Production Year quarter, and (b)
in the case of a rejection which results in SUNI accepting orders totaling fewer
then CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION Sensor Assemblies in a given Production Year quarter,
all future quantities of Sensor Assemblies that DMD desires to purchase from
such second source. SUNI shall continue to assemble and deliver Sensor
Assemblies and Combined Products during the period that SUNI is assisting to
establish the second source, and thereafter SUNI shall promptly deliver the DMD
Leased Equipment to DMD or fully pay all lease obligations of DMD with respect
to such equipment, unless SUNI has elected to continue to supply to DMD the
minimum quantities of CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION Sensor Assemblies during each Production
Year quarter. However, SUNI is not required to support DMD for more than six
months after such notice of Rejected Orders. Both DMD and SUNI are required to
give a 90-day notice of intent not to extend manufacture of a minimum of
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION Sensor Assemblies per Production Year quarter prior to
commencement of Production Years two and three.
7.7. Either party may terminate this Agreement effective on the last day of
a Production Year by written notice given in writing at least 90 days prior to
the end of the then current Production Year.
7.8. This agreement may be terminated prior to the expiration of the term
by either party if the other materially breaches this Agreement and such
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<PAGE>
breach remains uncured for 30 days from delivery by the non-breaching party of
written notice of breach.
7.9. Sections 6.2 (as to rights post-termination) 7.3, 7.4, 7.9, 7.11, 8.1,
9.4, 9.5, 9.6 and 9.10 through 9.16 shall survive termination of this Agreement.
7.10. If there are yield problems with components that DMD supplies to SUNI
including wafers, SUNI will identify the problem and report it to DMD along with
recommendations of corrective action. DMD will be responsible for any
manufacturing defects in such components, except to the extent that such defect
is caused by SUNI's negligence, and SUNI may, but will have no obligation to,
conduct acceptance testing of components received from DMD suppliers. If a
manufacturing defect exists in any such component, SUNI's sole and exclusive
remedy against DMD shall be to require DMD to, as quickly as commercially
reasonable, procure replacement parts that meet such specifications, and DMD
shall indemnify SUNI against any third party claims as set forth in Section 9.7
below.
7.11. SUNI terms of sale of Sensor Assembly services to DMD shall be:
payable NET 5 days from date of invoice, FOB, Mountain View, CA. The "date of
invoice" shall mean when a Sensor Assembly and Product Quality Report for such
Sensor Assembly, as described in Section 8.2 below is delivered to DMD. A
payments due under this Section and delayed more than thirty (30) days from the
date of invoice, shall bear interest at a rate equal to the Bank of America
Prime Rate plus one percent (1%) from the date due until paid in full.
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<PAGE>
8. PURCHASE PRICE.
8.1. SENSOR ASSEMBLY. DMD will pay the following amount to SUNI for each
Sensor Assembly that SUNI assembled and delivered to DMD. DMD may, but is not
required to inspect Sensor Assemblies on delivery, and the remedy for defective
Sensor Assemblies shall be as set forth in Section 9.5 below:
<TABLE>
<CAPTION>
NUMBER OF SENSOR ASSEMBLIES SUNI SHIPPED DURING THE PRODUCTION YEAR PRICE PER SENSOR ASSEMBLY
- - ----------------------------------------------------------------------------- ----------------------------------
<S> <C>
CONFIDENTIAL INFORMATION OMITTED CONFIDENTIAL INFORMATION OMITTED $CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE AND FILED SEPARATELY WITH THE AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION to SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION
WITH THE SECURITIES AND EXCHANGE WITH THE SECURITIES AND EXCHANGE WITH THE SECURITIES AND EXCHANGE
COMMISSION COMMISSION COMMISSION
CONFIDENTIAL INFORMATION OMITTED CONFIDENTIAL INFORMATION OMITTED $CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE AND FILED SEPARATELY WITH THE AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION to SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION
WITH THE SECURITIES AND EXCHANGE WITH THE SECURITIES AND EXCHANGE WITH THE SECURITIES AND EXCHANGE
COMMISSION COMMISSION COMMISSION
CONFIDENTIAL INFORMATION OMITTED CONFIDENTIAL INFORMATION OMITTED $CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE AND FILED SEPARATELY WITH THE AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION to SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION
WITH THE SECURITIES AND EXCHANGE WITH THE SECURITIES AND EXCHANGE WITH THE SECURITIES AND EXCHANGE
COMMISSION COMMISSION COMMISSION
CONFIDENTIAL INFORMATION OMITTED CONFIDENTIAL INFORMATION OMITTED $CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE AND FILED SEPARATELY WITH THE AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION to SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION
WITH THE SECURITIES AND EXCHANGE WITH THE SECURITIES AND EXCHANGE WITH THE SECURITIES AND EXCHANGE
COMMISSION COMMISSION COMMISSION
CONFIDENTIAL INFORMATION OMITTED $CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION and more SECURITIES AND EXCHANGE COMMISSION
WITH THE SECURITIES AND EXCHANGE WITH THE SECURITIES AND EXCHANGE
COMMISSION COMMISSION
</TABLE>
8.2 EXTENDED WARRANTY. DMD will pay the following amount (subject to
adjustment in accordance with this Section below) to SUNI for each Sensor
Assembly and each Board Assembly that is covered under an Extended Warranty, as
defined in Section 9.5 below.
<TABLE>
<CAPTION>
Sensor Assembly Board Assembly
<S> <C>
$CONFIDENTIAL INFORMATION OMITTED $CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION
WITH THE SECURITIES AND EXCHANGE WITH THE SECURITIES AND EXCHANGE
COMMISSION COMMISSION
</TABLE>
The Extended Warranty price is based on DMD's purchase of a minimum of
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION Sensor Assemblies during the first Production Year of this
Agreement and of CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION Sensor Assemblies during each month of each
Production Year after the first Production Year of this Agreement. If DMD has
failed to purchase such minimum quantities, as of the time that DMD purchases
the Extended Warranty from SUNI, then SUNI shall have no obligation to provide
Extended Warranty services under Section 9.5 below, unless and until, DMD and
SUNI agree on a mutually acceptable Extended Warranty fee to be paid to SUNI.
8.3 PRODUCT QUALITY REPORT. Every Sensor Assembly shipped by SUNI to DMD
shall be accompanied by a product quality report confirming that such Sensor
Assembly meets the Sensor Assembly Functional Specification.
Page 9
<PAGE>
9. MISCELLANEOUS
9.1. PROJECT MANAGERS. DMD and SUNI each will appoint Project Managers. The
Project Managers will meet monthly to review the status of the Manufacturing
Agreement.
9.2. MANUFACTURING PROCESS AND RESPONSIBILITY FOR SENSOR ASSEMBLY
COMPONENTS. SUNI will guarantee conformity to the manufacturing process used to
manufacture the Sensor Assembly Components but DMD will look to the individual
vendors for any claims with respect to defects in material or workmanship in
relation to Sensor Assembly Components and Board Assemblies and third party
Board Assembly manufacturing services. Issues pertaining to the design of the
Sensor Assembly and Assembly Board are covered under the Development Agreement.
9.3. WORKER'S COMPENSATION AND INSURANCE. SUNI shall carry (i) adequate
workers compensation, and (ii) insurance, naming DMD as an insured, adequate to
cover the costs of possible loss of or damage to DMD-owned materiel including
the Sensor Assembly Components and Board Assemblies while in its possession and
the DMD Leased Equipment, unless and to the extent that such DMD Leased
Equipment is covered by insurance maintained under the terms of the lease
agreement. SUNI will provide copies of such policies and endorsements within 30
days following execution of this Agreement. SUNI shall guard the DMD Leased
Equipment, Products and components from damage during the period that such
property is in the possession or control of SUNI. SUNI agrees to keep the Sensor
Assembly Components separated from other products of SUNI and take such other
action as DMD may reasonably request (including execution of such
acknowledgments of DMD's ownership and UCC financing statements as DMD may
reasonably require) in order to protect and confirm DMD's ownership rights in
the Sensor Assemblies, Combined Products and their components, and DMD's
interest in the DMD Leased Equipment, subject to SUNI's rights in the DMD Leased
Equipment as set forth in this Agreement.
9.4. SPECIFICATIONS. SUNI and DMD shall agree upon the Sensor Assembly
Functional Specification and Combined Product Specification for both units that
include a PCI personal computer interface and units that include a USB personal
computer interface within 30 days of the signing of this Agreement. The Sensor
Assembly Functional Specification for units that include a PCI personal computer
interface will be attached as Exhibit C(i) to this Agreement and the Sensor
Assembly Functional Specification for units that include a USB personal computer
interface will be attached as Exhibit C(ii) to this Agreement. If the parties
are unable to agree upon the Sensor Assembly Functional Specification and
Combined Product Specification for units that include a PCI, and units that
include a USB, personal computer interface by such time, either party may
terminate this Agreement in its entirety without liability to the other. These
Page 10
<PAGE>
specifications can be modified subject to mutual written agreement from time to
time. SUNI owns all right, title and interest in and to the Wafer Specification,
Sensor Assembly Component Specification, Sensor Assembly Functional
Specification, Combined Product Specification and any other technical
specifications that are attached to this Agreement as Exhibit B. If DMD is
entitled to obtain an alternate or replacement source for production of Sensor
Assemblies, in accordance with the terms and conditions of this Agreement under
either of Sections 7.3 or 7.6, then SUNI shall be deemed to grant to DMD a
limited license to use the Specifications for the purpose of such production,
which license shall be identical to the license SUNI granted to DMD with respect
to the Developed Subsystem under Section 7.1 of the Development Agreement
9.5. WARRANTY.
(a) SUNI warrants that all Sensor Assemblies will comply with the Sensor
Assembly Functional Specifications and be free of defects resulting from
workmanship performed by SUNI or its subcontractors for the longer of (i) 90
days from the date of shipment by DMD and (ii) 180 days from the date of
shipment from SUNI to DMD. Visible signs of negligent use or abuse voids this
warranty. This warranty does not extend to the Sensor Assembly Components or
Board Assemblies, and DMD agrees that it will look to the individual vendors for
any claims with respect to defects in material or workmanship in relation to
Sensor Assembly Components and Board Assemblies and third party Board Assembly
manufacturing services. If a Sensor Assembly fails to conform to the foregoing
warranty, then DMD's sole and exclusive remedy against SUNI will be to require
SUNI to correct SUNI's workmanship with respect to any defective test, assembly
and packaging services. In addition, both parties shall participate in the
Warranty Pool that is described in Section 9.5(b) below. EXCEPT AS EXPRESSLY SET
FORTH IN THIS SECTION 9.5, SUNI MAKES NO WARRANTIES , EXPRESS OR IMPLIED, WITH
RESPECT TO THE SERVICES PROVIDED UNDER THIS AGREEMENT, INCLUDING BUT NOT LIMITED
TO THE IMPLIED WARRANTIES OF MERCHANTABILITY AND OF FITNESS FOR A PARTICULAR
PURPOSE.
(b) Both SUNI and DMD agree that it is in their mutual interest to
promptly remedy any failure of a Sensor Assembly to conform to the Sensor
Assembly Functional Specifications for reasons other than misuse or abuse of the
Sensor Assembly (a "Sensor Assembly Defect") and agree to do so in accordance
with this Section 9.5(b) below:
(i) 12 MONTH NO FAULT REPAIRS. DMD and SUNI each agree that if during
the 12 month period from the date that DMD ships a Sensor
Assembly or Board Assembly to a customer, the customer claims a
Sensor Assembly Defect that is covered under DMD's standard
twelve (12) month warranty, then, and provided that at the time
that the customer or DMD returns the defective Sensor Assembly to
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<PAGE>
SUNI, SUNI is still in the business of selling Sensor Assemblies
to DMD under this Agreement, then DMD shall provide all necessary
replacement Sensor Assembly Components and Board Assemblies to
SUNI, and SUNI will provide test, assembly and packaging services
as necessary to re-assemble the defective Sensor Assembly and
re-test the Board Assembly, in accordance with the RMA procedures
set forth in subsection (b)(iii) below. DMD agrees that failures
or defects due to visible misuse or abuse of the Sensor Assembly
or Board Assembly will not be covered under DMD's standard twelve
(12) month warranty.
(ii) EXTENDED WARRANTY. DMD may offer to its customers, the
opportunity to purchase a twelve month extension of DMD's
standard twelve (12) month warranty for Sensor Assemblies, Board
Assemblies and Combined Products (an "Extended Warranty"). If DMD
elects to offer an Extended Warranty, then it must notify SUNI
within thirty (30) days after SUNI's shipment to DMD of a Sensor
Assembly, Board Assembly or Combined Product that the Extended
Warranty will apply to the shipped product. DMD will provide, as
part of such notice, the product identification number for each
Sensor Assembly, Board Assembly and Combined Product to be
covered under the Extended Warranty and will remit to SUNI
payment of the Extended Warranty Fee calculated in accordance
with Section 8.2 above. Provided that DMD has complied with the
requirement of this subsection (b)(ii), then SUNI's obligations
to repair and replace Sensor Assembly Defects will be the same
during the Extended Warranty period as they are during the
initial 12 month warranty period described in Subsection (b)(i)
above, otherwise SUNI's only obligations with respect to Sensor
Assembly Defects after the initial twelve month period shall be
as set forth in Subsection (b)(iii) below.
(iii) CORRECTION OF SENSOR ASSEMBLIES DEFECTS NOT COVERED BY A
WARRANTY.
A. SYSTEMIC DEFECTS. For purposes of this Agreement a "Systemic
Defect" means a Sensor Assembly Defect that occurs in
identical or substantially similar form or from a
substantially similar cause in at least fifteen percent
(15%) of the field population of Sensor Assemblies within
two (2) years after receipt of delivery of the Sensor
Assemblies by DMD. DMD agrees that it will, at all times
during the term of this Agreement, and for so long as it
continues to sell or otherwise support Sensor Assemblies and
Board Assemblies, carry insurance that names SUNI as an
additional insured and that is sufficient to cover the costs
of possible loss or damage arising out of
Page 12
<PAGE>
Systemic Defects, including, but not limited to, the cost of
replacement Components and of manufacturing, test and
assembly services. DMD will provide a copy of such insurance
policy to SUNI upon SUNI's request. SUNI and DMD agree that
they will complete negotiation of the allocation of the cost
of such Systemic Defect insurance within thirty (30) days
from the date of this Agreement.
B. OTHER DEFECTS. With respect to Sensor Assembly Defects that
are not covered under DMD's standard 12 month warranty or
under and Extended Warranty and that are not Systemic
Defects, both DMD and SUNI agree that it is in their mutual
best interest to preserve customer good will and to
cooperate on a case by case basis to remedy such defects in
a manner that is in the customer's interest and is equitable
for DMD and SUNI.
(iv) RMA PROCEDURES. If DMD authorizes a customer to return a Sensor
Assembly, Board Assembly or Combined Product that the customer
claims is defective, DMD shall assign a RMA number to the
returned item and then forward the returned item to SUNI together
with a written description of the claimed defect. SUNI will test
the returned item and if SUNI agrees that: (i) the item is
defective, (ii) the defect is covered under the terms of DMD's
standard twelve (12) month warranty, and (iii) the defect did not
result from abuse or misuse of the returned item, then SUNI will
notify DMD whether the returned item should be repaired or
replaced. If SUNI recommends repair, then it will notify DMD of
the replacement Components that SUNI requires in order to repair
the returned item. If SUNI recommends replacement, then SUNI will
provide a replacement Sensor Assembly or Combined Product to DMD,
provided that SUNI has the Sensor Assembly Components and/or
Board Assembly available to assemble the replacement Sensor
Assembly or Combined Product, as applicable. All repaired and
replacement Sensor Assemblies, Board Assemblies and Combined
Products will remain under warranty for the balance of the
warranty term that applied to the original Sensor Assembly, Board
Assembly or Combined Product, as applicable. If, as a result of a
defect that is covered under an original 12 month warranty, an
Extended Warranty, or Systemic Defect, DMD is required to
purchase a replacement Sensor Assembly Component that is a
Licensed Product under the Development Agreement, DMD shall be
relieved of any obligations it may have under the Development
Agreement to pay SUNI a royalty on such replacement Licensed
Product.
9.6. DMD INDEMNITY. DMD assumes all risk, responsibility and liability
arising out of defects in the Sensor Assembly Components and Board Assemblies,
except to the extent that such liability arises from defects in the design for
which SUNI is liable in accordance with the terms and conditions of
Page 13
<PAGE>
the Development Agreement or its omissions or negligence or defects in the
services provided by SUNI under this Agreement and for which SUNI is liable in
accordance with Section 9.5 above (collectively, the "DMD Assumed Risks"). DMD
will, and hereby agrees to, indemnify and hold harmless SUNI from and against
any losses, costs, liability or damages that SUNI may suffer as a result of such
DMD Assumed Risks.
9.7. COMPLIANCE WITH LAWS. SUNI shall comply with all applicable federal,
state and local laws and regulations including labor and environmental laws and
regulations.
9.8. FORCE MAJEURE. Neither SUNI nor DMD shall be deemed to be in default
or liable to each other on account of delays in delivery or in the performance
of any other act to be performed by SUNI or DMD under this Agreement due to any
cause to the extent it is beyond SUNI's or DMD's control or not occasioned by
SUNI's or DMD's fault or negligence. Notwithstanding the foregoing:: (a) if SUNI
estimates that the delay in delivery of Sensor Assemblies will exceed six (6)
months where the delay is attributable to delays or shortfalls in the wafer
supply, or three (3) months where the delay is attributable to reasons other
than delays or shortfalls in the wafer supply; or (b) if the delay in fact
exceeds six months in the case of delays or shortfalls of wafer supply; or three
(3) months in the case of all other delays that are subject to this Section,
then DMD may elect to purchase Sensor Assemblies from an alternative supplier
unless the delay results from delays in the supply of Sensor Assembly Components
or Board Assemblies and but for such delay SUNI would be able to assemble Sensor
Assemblies and Combined Products in accordance with the terms of this Agreement
(the "DMD Alternate Supply Election"). If DMD makes a DMD Alternate Supply
Election, then; (a) SUNI shall render all necessary assistance to DMD and the
alternative supplier, at no additional expense to DMD during the first sixty
(60) days from the date that SUNI commences to provide such assistance and at
SUNI's then current commercial consulting rates after such initial sixty (60)
day period, to facilitate the manufacturing, assembling and packaging of Sensor
Assemblies; (b) all purchases made by DMD from the alternative supplier shall be
credited to DMD for the purposes of the purchase requirements under this
Agreement; and (c) within four (4) months of such delay in delivery being
resolved, DMD shall cease purchasing Product from such alternate supplier and
shall again purchase Sensor Assemblies and Combined Products from SUNI under the
terms of this Agreement.
Page 14
<PAGE>
9.9. AMENDMENTS. This Agreement may only be amended by express written
agreement signed by an authorized representative of each party. Failure by a
party to insist upon strict conformance to any provision herein, or in purchase
orders issued hereunder, or failure by a party to act in the event of a breach
of default, shall not construed as a consent or waiver by the non-breaching
party of that breach or default or any subsequent breach of default of the same
or of any other provision contained herein.
9.10. ASSIGNMENT. SUNI's rights and obligations under this Agreement are
personal and not assignable (either voluntarily or by operation of law) without
the prior written consent of DMD except to a successor to all or substantially
all of SUNI's assets or to a majority of SUNI's voting stock; provided, however,
that if such successor is a direct competitor of DMD, then DMD's prior consent
shall be required, which consent may be withheld in DMD's sole discretion. DMD
shall not assign its rights and obligations hereunder without the prior written
consent of SUNI, which shall not be unreasonably withheld. This Agreement shall
be binding upon and inure to the benefit of each party's permitted successors
and assigns.
9.11. SUBCONTRACT. SUNI may, from time to time, subcontract or permit
entities other than SUNI to perform the work, services or other performance
required under this Agreement without he prior written consent of DMD; provided
that SUNI shall remain responsible for each such subcontractor's performance.
SUNI is and will remain at all times during this Agreement an independent
contractor of DMD. SUNI is responsible for the acts of its employees.
9.12. ATTORNEYS FEES. If SUNI or DMD, for any cause whatsoever, brings suit
against the other party and the other party is finally adjudicated not to have
liability, then the party bringing suit will pay the other party's reasonable
attorneys' fees and costs which were incurred in defending said suit.
9.13. NO CONSEQUENTIAL Damages. EXCEPT IN THE CASE OF A WILLFUL AND
INTENTIONAL BREACH OF A MATERIAL PROVISION OF THIS AGREEMENT, NEITHER PARTY WILL
BE LIABLE TO THE OTHER WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT
UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE
THEORY FOR ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR INDIRECT DAMAGES OR LOST
PROFITS. THIS LIMITATION SHALL APPLY EVEN IF A PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
9.14. ENTIRE AGREEMENT. Except as expressly set forth in Sections 7.3 and
7.4 above, nothing in this Agreement shall be deemed to modify the terms and
conditions of the Development Agreement. This Agreement and its exhibits
contains the entire understanding of the parties with respect to the matters
contained herein. There are no promises, covenants or undertakings, either oral
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<PAGE>
or in writing, other than those expressly set forth in this Agreement.
9.15. NOTICE. All notices which any party may be required or desire to give
to another Party shall be in writing and shall be given by personal service,
facsimile, or registered or certified mail to the party at its respective
address or facsimile telephone number set forth below. Mailed notices shall be
deemed to be given upon actual receipt by the party to be notified. Notices
delivered by facsimile shall be confirmed in writing by overnight courier and
shall be deemed to be given upon actual receipt by the party to be notified.
If to DMD:
Dental/Medical Diagnostic Systems, Inc.
200 North Westlake Blvd., Suite 202
Westlake Village, CA 91362
Attn: Dr. Jack Preston
Robert Gurevitch
With a copy to:
Murray Markiles
If to SUNI: President
SUNI Imaging Microsystems, Inc.
185 E. Dana Street
Mountain View, CA 94041
Page 16
<PAGE>
9.16. CHOICE OF LAW. This Agreement, its validity, construction and effect
shall be governed by the internal laws of the State of California, without
giving effect to its rules relating to conflicts of laws.
IN WITNESS WHEREOF, the parties to this Agreement have caused it to be
executed by their duly authorized officers as of the date set first set forth
above.
DENTAL/MEDICAL DIAGNOSTICS, INC.
By: /S/ Jack Preston
Its:
SUNI IMAGING MICROSYSTEMS, INC.
By: /S/ Paul Suni
Its:
<PAGE>
EXHIBIT A-1
PCI BILL OF MATERIALS
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
<PAGE>
EXHIBIT A-2
USB BILL OF MATERIALS
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
<PAGE>
EXHIBIT B-1
PCI BOARD ASSEMBLY SPECIFICATIONS
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
<PAGE>
EXHIBIT B-2
USB BOARD ASSEMBLY SPECIFICATIONS
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
<PAGE>
EXHIBIT C-1
PCI SENSOR ASSEMBLY FUNCTIONAL SPECIFICATION
AND COMBINED PRODUCT SPECIFICATIONS
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
<PAGE>
EXHIBIT C-2
USB SENSOR ASSEMBLY FUNCTIONAL SPECIFICATION
AND COMBINED PRODUCT SPECIFICATIONS
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
<PAGE>
EXHIBIT D
EQUIPMENT LIST
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
<PAGE>
EXHIBIT E
MEMORANDUM FROM DMD TO SUNI DATED JANUARY 14, 1999
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
<PAGE>
EXHIBIT F
INITIAL ORDER
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT:
DMDS, Ltd.-a wholly owned subsidiary created under the laws of the
United Kingdom.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in previously filed registration
statements of Dental/Medical Diagnostic Systems, Inc., including, without
limitation, registration statements on Form S-3 (Registration Nos. 333-42865,
333-51775, 333-68271) and Form S-8 (Registration Nos. 333-42867, 333-66441) of
our report dated February 5, except for subsequent events described in Note 19,
as to which the date is March 17, 1999, on our audits of the consolidated
financial statements of Dental/Medical Diagnostic Systems, Inc. as of December
31, 1998 and 1997 and for the fiscal years ended December 31, 1998 and 1997 and
the ten-month period ended December 31, 1996, which report is included in this
Annual Report on Form 10-KSB.
/s/ PricewaterhouseCoopers, LLP
PricewaterhouseCoopers, LLP
Woodland Hills, CA
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AS
OF THE FISCAL YEAR ENDED DECEMBER 31, 1998 INCLUDED IN THIS REPORT ON FORM
10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,941,305
<SECURITIES> 0
<RECEIVABLES> 3,778,840
<ALLOWANCES> 20,975
<INVENTORY> 5,559,751
<CURRENT-ASSETS> 14,655,864
<PP&E> 1,471,530
<DEPRECIATION> 474,590
<TOTAL-ASSETS> 16,570,360
<CURRENT-LIABILITIES> 8,129,239
<BONDS> 0
0
0
<COMMON> 52,556
<OTHER-SE> 8,121,309
<TOTAL-LIABILITY-AND-EQUITY> 16,570,360
<SALES> 19,227,798
<TOTAL-REVENUES> 19,227,798
<CGS> 9,820,882
<TOTAL-COSTS> 9,314,214
<OTHER-EXPENSES> 235,484
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,739,693
<INCOME-PRETAX> (1,686,943)
<INCOME-TAX> (129,759)
<INCOME-CONTINUING> (1,816,702)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,816,702)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
