<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997
REGISTRATION NO. 333-27421
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
OCULAR SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3851 94-2985696
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
475 ECCLES AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(415) 583-1400
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GREGORY E. LICHTWARDT
CHIEF FINANCIAL OFFICER
OCULAR SCIENCES, INC.
475 ECCLES AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(415) 583-1400
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
LAIRD H. SIMONS III, ESQ. JAY K. HACHIGIAN, ESQ.
BARRY J. KRAMER, ESQ. BENNETT L. YEE, ESQ.
DAVID K. MICHAELS, ESQ. OLUFUNMILAYO B. AREWA, ESQ.
ANDREW PICKHOLTZ, ESQ. JONATHAN J. NOBLE, ESQ.
FENWICK & WEST LLP GUNDERSON DETTMER STOUGH
TWO PALO ALTO SQUARE VILLENEUVE FRANKLIN & HACHIGIAN, LLP
PALO ALTO, CALIFORNIA 94306 155 CONSTITUTION DRIVE
(415) 494-0600 MENLO PARK, CALIFORNIA 94025
(415) 321-2400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued July 31, 1997
7,200,000 Shares
OCULAR SCIENCE LOGO
OCULAR SCIENCES, INC.
COMMON STOCK
------------------------
OF THE 7,200,000 SHARES OF COMMON STOCK BEING OFFERED, 3,600,000 SHARES ARE
BEING SOLD BY THE COMPANY AND 3,600,000 SHARES ARE BEING SOLD BY THE SELLING
STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT
RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES BY THE SELLING STOCKHOLDERS. PRIOR
TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE
COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER
SHARE WILL BE BETWEEN $15 AND $17. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE
FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
------------------------
THE COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "OCLR," SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 8 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
Total(3).................. $ $ $ $
</TABLE>
- ------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
(2) Before deducting expenses payable by the Company estimated at $1,080,000.
(3) Certain of the Selling Stockholders have granted to the Underwriters an
option, exercisable within 30 days of the date hereof, to purchase up to an
aggregate of 1,080,000 additional Shares at the price to public less
underwriting discounts and commissions for the purpose of covering
overallotments, if any. If the Underwriters exercise such option in full,
the total price to public, underwriting discounts and commissions, proceeds
to Company and proceeds to Selling Stockholders will be $ ,
$ , $ and $ , respectively. See "Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to the approval of certain legal
matters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
counsel for the Underwriters. It is expected that delivery of the Shares will be
made on or about August , 1997 at the offices of Morgan Stanley & Co.
Incorporated, New York, N.Y., against payment therefor in same day funds.
------------------------
MORGAN STANLEY DEAN WITTER
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
August , 1997
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
<PAGE> 4
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING STOCKHOLDER OR BY
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK OFFERED HEREBY TO ANY PERSON IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE ANY SUCH OFFER
OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.................................................................... 4
Risk Factors.......................................................................... 8
Use of Proceeds....................................................................... 19
Dividend Policy....................................................................... 19
Capitalization........................................................................ 20
Dilution.............................................................................. 21
Selected Consolidated Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 23
Business.............................................................................. 32
Management............................................................................ 50
Certain Transactions.................................................................. 57
Principal and Selling Stockholders.................................................... 60
Description of Capital Stock.......................................................... 62
Shares Eligible for Future Sale....................................................... 64
Underwriters.......................................................................... 65
Legal Matters......................................................................... 66
Experts............................................................................... 66
Additional Information................................................................ 67
Index to Consolidated Financial Statements............................................ F-1
</TABLE>
------------------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by an independent certified
public accounting firm and quarterly reports for the first three quarters of
each year containing unaudited consolidated financial information.
------------------------
Biomedics(R), Clinasoft(R), Edge(R), Procon(R), Mediflex(R), UltraFlex(R),
Hydron(R), Hydron(R) ProActive(R), Versa-Scribe(R), Echelon(R), 7/14(R),
Hydrovue(R) and Ultra T(R) are registered trademarks of the Company. The
Company's logo, Hydron Biomedics 38(TM), Hydron Biomedics 55(TM), Clinasoft
55(TM), Mediflex 55(TM), UltraFlex 7/14 38(TM), UltraFlex 7/14 55(TM), Edge
III(TM), Edge III XT(TM), Edge III Thin(TM) and Edge III 55(TM) are trademarks
of the Company. This Prospectus also includes trademarks of companies other than
the Company, which trademarks are the property of their respective owners.
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Prospectus. Except as otherwise noted herein,
information in this Prospectus assumes (i) no exercise of the Underwriters'
overallotment option, (ii) the conversion of all outstanding shares of Series A
Preferred Stock of the Company ("Preferred Stock") into shares of Common Stock
of the Company, (iii) the reincorporation of the Company in Delaware and (iv) a
two-for-one split of the Company's Common Stock. Unless the context otherwise
requires, the term "Company" when used herein shall mean Ocular Sciences, Inc.,
a Delaware corporation, its California predecessor and its subsidiaries.
THE COMPANY
Ocular Sciences is a rapidly growing manufacturer and marketer of soft
contact lenses. The Company manufactures a broad line of soft contact lenses for
annual and disposable replacement regimens. The Company believes that its lens
designs provide wearers with a higher level of comfort and greater ease of
handling than those of its leading competitors. The Company's manufacturing
technologies permit consistent, cost-effective reproduction of these designs,
allowing the Company to offer its lenses at competitive prices. In addition, the
Company has implemented marketing strategies designed to assist eyecare
practitioners, both in independent practice and in retail chains, in retaining
their patients and monitoring their patients' ocular health, thereby providing a
significant incentive for practitioners to prescribe the Company's lenses.
Furthermore, the Company has continuously focused on lowering its
non-manufacturing costs, or "cost-to-serve," enabling it to increase its
profitability and its flexibility to reduce prices. To minimize its
cost-to-serve, the Company utilizes a telemarketing sales force and directs its
marketing efforts toward eyecare practitioners rather than consumers.
Industry analysts estimate that approximately 50% of the world's population
need some type of vision correction. In the United States alone, over 130
million people require some form of vision correction. The United States
currently represents the world's largest market for contact lenses, with
approximately 26 million people, or 20% of those requiring vision correction,
wearing contact lenses according to estimates by industry analysts. The soft
contact lens market is characterized by increasing lens consumption. The number
of soft contact lenses sold in the United States has increased at a compound
annual growth rate of approximately 20% from 1985 to 1995, according to Health
Products Research, a market research firm, largely as a result of the
introduction in 1988 of soft contact lenses for disposable replacement regimens.
This increase in unit sales has provided manufacturing economies of scale that,
together with heightened competition among eyecare practitioners, has led to
significant reductions in average retail prices for soft contact lenses. Despite
the decline in per unit prices, wearers' annual expenditures for lenses have
increased as they have shifted to more frequent replacement regimens. The
Company believes that sales in many international markets will grow at faster
rates than the United States market and that this growth will be driven
principally by an increase in the number of contact lens wearers, which
currently is significantly lower than that in the United States, as the
availability of low-priced soft contact lenses increases.
The Company believes, based on a 1994 study sponsored by the American
Academy of Ophthalmology and management's recent experience in the eyecare
industry, that the eyecare profession suffers from a surplus of practitioners
and believes that the resulting competitive pressure has been exacerbated by the
increased prevalence of retail optical chains and mass merchandisers that
provide eyecare services. The typical eyecare practitioner in both the private
practice and retail chain channels depends heavily on sales of products, such as
contact lenses and eyeglasses. The Company believes, based on a 1996 industry
survey, that the typical optometric practice realizes approximately two-thirds
of its revenue from sales of optical products, such as contact lenses and
eyeglasses. Since the need for vision correction is chronic, repeat sales of
contact lenses can provide the practitioner with a recurring, predictable
revenue base. However, with the advent of disposable replacement regimens and
the availability of nationally advertised lens brands through many competing
channels of distribution, including mail-order and pharmacies, the prescribing
practitioner risks losing recurring sales to alternate distribution channels.
The Company believes that practitioners can increase their patient
retention and provide better ongoing patient care by providing
competitively-priced, high-quality products that are differentiated by brand
from those provided by competing distribution channels. Accordingly, the Company
has successfully implemented a
4
<PAGE> 6
strategy to address the needs of eyecare practitioners. The Company markets its
lenses solely to eyecare practitioners, both in private practice and in retail
optical chains, rather than to consumers. The Company believes that focusing on
the eyecare practitioner, who strongly influences the selection of the brand of
contact lenses worn by the patient, is critical to its ability to market contact
lenses successfully. The Company does not sell to mail-order companies,
pharmacies or other distribution channels that do not provide the eyecare
services necessary to maintain overall ocular health.
Over the last five years, the Company has established itself as a leader in
the spherical, non-specialty annual replacement segment of the United States
market with a market share estimated at 25% in 1996, based on unit sales. Since
its introduction of lenses for weekly disposable replacement regimens in 1993,
the Company has steadily increased its share of this growing market, reaching
approximately 8% of total unit sales in the United States during the second half
of 1996, based on data published by the Contract Lens Institute. The Company's
overall unit sales have increased at a compound annual growth rate of
approximately 81% since 1992, primarily due to increased sales of its lenses for
weekly disposable replacement regimens. During the same period, while the
overall average selling prices of all of the Company's lenses declined 50%, the
Company reduced its per unit production costs by approximately 64% by spreading
its relatively fixed manufacturing and operating costs over higher production
volumes, and by improving its manufacturing and packaging processes. As a
result, from 1992 to 1996, the Company's net sales and operating income
(excluding non-recurring charges in 1992) have increased at compound annual
growth rates of approximately 53% and 100%, respectively, while its operating
margins improved from 6.6% to 19.3%. The Company expects that the overall
average selling price that it realizes across its products will continue to
decline over time and does not expect there to be significant growth in its
sales of lenses for annual replacement. The Company does not believe that its
recent net sales and operating income growth rates are indicative of its
long-term growth rates.
STRATEGY
The Company believes that, by continuing to pursue its strategy focused on
addressing the needs of the eyecare practitioner, it will be well-positioned to
increase its sales and its share of the growing disposable lens market segment.
The principal elements of the Company's strategy include:
Focus Marketing on Eyecare Practitioners. The Company's sales and
marketing efforts are directed at eyecare practitioners because the
practitioner strongly influences the brand of lenses purchased by the
patient. The Company advertises and promotes its products solely to
practitioners rather than to consumers. In addition, the Company does not
sell its lenses to mail-order companies, pharmacies and other distribution
channels that do not provide the eyecare services necessary to confirm lens
fit and monitor ocular health. By bar-coding each disposable unit shipped,
the Company can identify any diversion of its lenses to non-eyecare
practitioner channels. The Company structures its branding and marketing
strategies so that the patient will be more likely to refill prescriptions
from the practitioner or retail chain from whom he or she received the
initial prescription. As a result, the Company believes that it assists
eyecare practitioners in retaining patient reorders and improves
practitioners' ability to monitor their patients' ongoing ocular health,
thereby providing a significant incentive for practitioners to prescribe
the Company's lenses.
Employ Unique Brand Segmentation by Channel. The high-volume use of
lenses for disposable replacement regimens has resulted in increased
mass-market advertising of competing products and intensified competition
across distribution channels. Unlike its larger competitors, which promote
nationally advertised consumer brands across multiple distribution
channels, the Company advertises and promotes its lenses for disposable
replacement regimens under specific brand names for the private practice
channel and other brand names for the retail chain channel. The Company
also provides private label brands for its larger customers. Branding by
distribution channel creates brand exclusivity and allows practitioners to
differentiate lenses sold by them from lenses sold through competing
channels, providing them with a greater ability to retain their patients'
prescription refill business. The Company believes that, as a result, its
channel-specific branding has become increasingly valuable to eyecare
practitioners. By promoting the repeat purchase of lenses from the
prescribing practitioner, the Company believes that its marketing
strategies increase patient satisfaction and thereby encourage long-term
loyalty to its products, while also motivating practitioners to prescribe
its lenses.
Produce Superior Performing Products. The Company believes that its
contact lenses are superior in performance to those of its major
competitors in terms of comfort and ease of handling. The
5
<PAGE> 7
Company's advanced dry cast molding process and sophisticated lens designs
maximize wearers' comfort and improve shape retention of lenses, making
them easier for wearers to handle. In addition, the Company's lenses are
designed and manufactured to provide fitting characteristics similar to
competitors' lenses. In general, this interchangeability enables the
practitioner to switch a patient to the Company's lenses without extensive
refitting time. These advantages enable the Company to market its lenses to
eyecare practitioners for both existing and new contact lens wearers.
Emphasize Low-Cost Efficient Manufacturing. With the growth of the
high-volume disposable market segment, low-cost, scalable manufacturing has
become increasingly important. The Company's dry cast molding technology
allows it to manufacture high-quality lenses efficiently. With dry cast
molding, the Company has been able to reduce its manufacturing costs per
lens by approximately 64% over the last three years while increasing its
production volumes by approximately 470%. The Company believes that the
increased unit volumes resulting from the growing disposable lens market
and continued investment in automation and capacity will enable it to
further reduce per unit production costs and increase production volumes.
Minimize Cost-to-Serve. A substantial portion of the Company's costs
consists of the costs required to sell and market lenses and to take and
fill an order. The Company focuses on lowering these non-manufacturing
costs, or "cost-to-serve," in order to increase its profitability and its
flexibility to reduce prices. The Company's primary means of minimizing
cost-to-serve are its use of telemarketing rather than a traditional direct
sales organization and its use of advertising targeted to practitioners
rather than to consumers. This strategy differentiates the Company from its
competitors, and the Company believes that the cost of its average sales
call is substantially lower than that of its competitors that rely on field
sales representatives, as the Company's inside sales personnel can make
more calls per day at a lower annual cost per salesperson. In addition,
unlike its leading competitors, which market their products to consumers
through expensive mass-media campaigns, the Company controls its operating
expenses by directing its marketing solely to the eyecare practitioners who
prescribe contact lenses. In addition, the Company is investing in
increased automation in its distribution operations in order to maintain
its low cost-to-serve.
Expand Internationally Through Strategic Relationships. The Company
believes that many international markets for soft contact lenses will grow
at faster rates than the United States market and that this growth will be
driven by increased availability of low-priced disposable lenses in
developed markets such as Europe, Japan and Canada and by increased
disposable income in emerging markets such as Asia and Latin America.
However, many markets outside the United States do not have the level of
demand necessary for local manufacturers to achieve the economies of scale
required for low-cost lens production. Consistent with its strategy of
minimizing cost-to-serve, the Company's international growth strategy is to
establish strategic distribution and marketing relationships with regional
optical companies, such as the contact lens division of the Carl Zeiss
Company in Europe and Seiko Contactlens, Inc. in Japan, to capitalize on
their existing market presence, customer relationships and local
infrastructure. The Company believes that, as a result, it can target
growing international markets effectively without significant investment in
direct operations.
BACKGROUND
The Company was founded in 1985 and was principally a distributor of
contact lenses until 1992. In September 1992, the Company began manufacturing
operations by acquiring Precision Lens Laboratories Ltd. ("PLL"), a United
Kingdom-based company and, until the acquisition, the primary supplier of the
Company's lenses. This acquisition provided the Company with the facilities and
technology to manufacture high-quality contact lenses. In October 1992, the
Company acquired the contact lens business of Allergan, Inc. in North and South
America, which had been operating under the name American Hydron ("American
Hydron"). This acquisition provided the Company with a significantly expanded
customer base, an additional line of contact lens products and a manufacturing
facility in Puerto Rico.
------------------------
The Company was incorporated under the name O.S.I. Corporation in
California in 1985 and will reincorporate in Delaware prior to the consummation
of this offering. The Company's principal executive offices are located at 475
Eccles Avenue, South San Francisco, California 94080, and its telephone number
is (415) 583-1400.
6
<PAGE> 8
THE OFFERING
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Common Stock offered:
By the Company.............................. 3,600,000 shares
By the Selling Stockholders................. 3,600,000 shares
Total............................... 7,200,000 shares(1)
Common Stock to be outstanding after the
offering.................................... 20,426,326 shares(1)(2)
Use of proceeds............................... Repayment of $23.1 million of indebtedness
and certain accrued liabilities outstanding
as of June 30, 1997, expansion and
automation of manufacturing facilities and
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol........ OCLR
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Net sales.......................... $16,548 $38,533 $48,503 $68,087 $90,509 $38,850 $52,969
Gross profit....................... 4,722 13,860 25,950 41,267 53,956 22,923 32,549
Total operating expenses........... 5,732 15,377 17,492 26,015 36,521 17,054 22,047
Income (loss) from operations(3)... (1,010) (1,517) 8,458 15,252 17,435 5,869 10,502
Net income (loss) applicable to
common stockholders.............. (2,894) (4,509) 4,955 8,708 10,094 3,219 6,719
Pro forma net income per
share(4)......................... $ 0.52 $ 0.35
Shares used in computing pro forma
net income per share(4).......... 19,527 19,554
OTHER DATA:
Lenses sold for disposable
replacement regimens as a
percentage of total lenses
sold............................. 15.2% 19.1% 53.0% 73.4% 83.5% 81.9% 88.3%
Depreciation and amortization...... $ 400 $1,775 $2,137 $ 2,578 $ 4,904 $1,963 $3,525
Capital expenditures............... 1,049 2,489 2,153 13,558 12,256 7,273 6,022
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
----------------------------
AS
ACTUAL ADJUSTED(5)
------- -----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and restricted cash........................... $ 4,473 $ 33,898
Working capital...................................................... 3,957 47,891
Total assets......................................................... 74,409 103,834
Total debt........................................................... 20,312 3,916
Stockholders' equity................................................. 30,487 82,975
</TABLE>
- ---------------
(1) Assumes the Underwriters' overallotment option is not exercised.
(2) Based on the number of shares outstanding as of June 30, 1997 after giving
effect to the conversion of all outstanding Preferred Stock into Common
Stock. Excludes 3,079,694 shares of Common Stock issuable upon the exercise
of options outstanding as of such date under the Company's 1989 Stock Option
Plan (the "1989 Plan") and the Company's 1992 Officers and Directors Stock
Option Plan (the "1992 Plan"). The Company expects that John D. Fruth, its
President, will exercise options to purchase 1,280,000 shares of Common
Stock under the 1992 Plan prior to consummation of this offering. See
"Management -- Employee Benefit Plans" and Note 10 of Notes to Consolidated
Financial Statements.
(3) Loss from operations for 1992 and 1993 includes non-recurring charges of
$2.1 million and $4.4 million, respectively, related to writedowns in the
carrying value of certain assets purchased in connection with the Company's
acquisition of American Hydron.
(4) For an explanation of the determination of the number of shares used in
computing pro forma net income per share, see Note 2 of Notes to
Consolidated Financial Statements.
(5) Adjusted to reflect the sale by the Company of 3,600,000 shares of Common
Stock offered hereby and the anticipated application of the estimated net
proceeds therefrom at an assumed initial public offering price of $16.00 per
share, and after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company. See "Use of
Proceeds" and "Capitalization."
7
<PAGE> 9
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered hereby. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in such forward-looking
statements. Factors that may cause such a difference include, but are not
limited to, those discussed below, in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Prospectus.
Intense Competition. The market for soft contact lenses is intensely
competitive and is characterized by decreasing prices for many products. The
Company's products compete with products offered by a number of larger companies
including the Vistakon division of Johnson & Johnson ("Johnson & Johnson"),
Ciba-Geigy Corporation ("Ciba-Geigy"), Bausch & Lomb, Inc. ("Bausch & Lomb") and
Wesley Jessen VisionCare, Inc. ("Wesley Jessen"). Most of the Company's
competitors have substantially greater financial, manufacturing, marketing and
technical resources, greater market penetration and larger manufacturing volumes
than the Company. Among other things, these advantages may afford the Company's
competitors greater ability to manufacture large volumes of lenses, reduce
product prices and influence customer buying decisions. The Company believes
that certain of its competitors are expanding, or are planning to expand, their
manufacturing capacity, and are implementing new, more automated manufacturing
processes, in order to support anticipated increases in volume. As many of the
costs involved in producing contact lenses are relatively fixed, if a
manufacturer can increase its volume, it can generally reduce its per unit costs
and thereby increase its flexibility to reduce prices. In addition, competitors
may reduce prices to achieve the sales volumes necessary to utilize their
increased capacity. Price reductions by competitors could make the Company's
products less competitive, and there can be no assurance that the Company would
be able to reduce its prices in response. The Company's ability to respond to
competitive pressures by decreasing its prices without adversely affecting its
gross margins and operating results will depend on its ability to decrease its
costs per lens. Any significant decrease in the Company's costs per lens will
depend, in part, on the Company's ability to increase its sales volume and
production capacity. There can be no assurance that the Company will be able to
continue to increase its sales volume or reduce its per unit production costs.
In response to competition, the Company may also increase cooperative
merchandising allowances or otherwise increase spending, which may adversely
affect its business, financial condition and results of operations. The failure
of the Company to respond to competitive pressures, and particularly price
competition, in a timely manner would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Manufacturing Capacity Constraints; Risks Associated with Expansion and
Automation of Manufacturing Operations."
The market for contact lenses is shifting from lenses marketed for annual
replacement regimens, where the Company has significant experience and a leading
market position, to lenses for disposable replacement regimens, where the
Company is less experienced and has a significantly smaller market share. The
disposable lens segment is particularly competitive and price-sensitive and is
currently dominated by the Acuvue product produced by Johnson & Johnson. The
Company believes that the per unit production costs of Johnson & Johnson and
certain of the Company's other competitors are currently lower than those of the
Company. A significant price reduction by Johnson & Johnson or certain of the
Company's other competitors could limit or reduce the Company's market share in
the disposable lens segment and, as a result, could materially adversely affect
the Company's business, financial condition and results of operations. In
addition, the lenses currently offered in the United States by the Company in
the disposable lens segment are marketed for weekly and monthly replacement
regimens. Certain of the Company's competitors have introduced lenses for daily
replacement at lower prices than their current weekly and bi-weekly disposable
lenses. The Company's ability to enter and to compete effectively in the market
for daily disposable lenses will depend in large part upon the Company's ability
to expand its production capacity and reduce its per unit production costs.
Additionally, as contact lenses for different replacement regimens are often
similar, the ability of competitors to reduce their per unit costs for daily
disposable lenses may also permit them to reduce their costs for lenses marketed
for other replacement regimens. Such reductions, if not matched by the Company,
could significantly adversely impact the Company's ability to compete over a
much broader level of products. See "-- Dependence on Single Product Line; Need
to Increase Sales of Lenses for Disposable Replacement Regimens."
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<PAGE> 10
The Company also encounters competition from manufacturers of eyeglasses
and from alternative technologies, such as surgical refractive procedures
(including new refractive laser procedures such as PRK, or photorefractive
keratectomy, and LASIK, or laser in situ keratomileusis). If surgical refractive
procedures become increasingly accepted as an effective and safe technique for
permanent vision correction, they could substantially reduce the demand for
contact lenses by enabling patients to avoid the ongoing cost and inconvenience
of contact lenses. Accordingly, there can be no assurance that these procedures,
or other alternative technologies that may be developed in the future, will not
cause a substantial decline in the number of contact lens wearers and thus have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Competition."
Manufacturing Capacity Constraints; Risks Associated with Expansion and
Automation of Manufacturing Operations. The Company's success will depend upon
its ability to increase its production volume on a timely basis while
maintaining product quality and lowering per unit production costs.
Manufacturers often encounter difficulties in increasing production volumes,
including problems involving delays, quality control and shortages of qualified
personnel. Any significant increase in production volume will require that the
Company increase its manufacturing capacity.
The Company intends to add new, highly automated production lines at its
facilities in the United Kingdom and Puerto Rico to increase its manufacturing
capacity and reduce its per unit manufacturing costs. However, there can be no
assurance that the Company will be able to implement these automated lines on a
timely basis or that the new automated lines will operate as efficiently as
expected. The Company could encounter significant difficulties in implementing
these automated lines. For example, suppliers could miss their equipment
delivery schedules, the efficiency of the new production lines could improve
less rapidly than expected, if at all, or the equipment or processes could
require redesigning after installation. In addition, these new production lines
will involve processes and equipment with which the Company and its personnel
are not experienced. Difficulties experienced by the Company in automating its
manufacturing facilities could impair the Company's ability to reduce its per
unit production costs and to compete in the disposable lens market and,
accordingly, could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the installation of
these highly automated production lines in Puerto Rico could increase the
Company's tax rate if it results in a significant reduction in the Company's
labor costs in Puerto Rico in relation to its Puerto Rican earnings.
The Company currently expects to invest approximately $44.0 million in
capital expenditures on automated production lines in the United Kingdom and
Puerto Rico through the year 2000. The Company intends to finance such capital
expenditures with approximately $22.0 million of the net proceeds of this
offering and with net cash (if any) from operations. If net cash from operations
is insufficient to fund such expenditures, the Company intends to utilize
borrowings under its credit facilities. No assurances can be given as to the
availability of such net cash from operations or borrowings, and if such funds
are not available, the Company could be required to curtail the installation of
the automated lines.
The Company is currently experiencing space constraints at its Puerto Rican
facility, which is now operating at or near capacity. As a result, the Company
is in the process of negotiating a lease for a new, larger facility to be
constructed to the Company's specifications. There can be no assurance that the
Company will be able to secure this space in a timely manner, if at all. If
space is secured, the facility must be constructed, and the Company will be
required to develop and install production lines that comply with applicable
laws including the Federal Food, Drug and Cosmetic Act (the "FDC Act") and
requirements of the U.S. Food and Drug Administration (the "FDA") pertaining to
current good manufacturing practices ("GMP"). Before any new facility for
manufacturing contact lenses can begin production, it must be inspected by the
FDA for compliance with GMP, and the inspection and approval process could
significantly delay the Company's ability to begin production in this new
facility. The development and construction of a new manufacturing facility is
subject to significant risks and uncertainties, including cost estimation errors
and overruns, construction delays, weather problems, equipment delays or
shortages, production start-up problems and other factors. As many of such
factors are beyond the Company's control, the Company cannot predict the length
of any such delays, which could be substantial. Accordingly, while the Company
expects to begin construction of the new facility during the third quarter of
1997, there can be no assurances as to when it will complete
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<PAGE> 11
construction and commence production. Given the long lead times associated with
constructing a new facility which can involve up to 18 months of development and
construction, as well as delays while seeking FDA approval, the Company will
incur substantial cash expenditures before production of commercial volumes of
contact lenses is achieved at its planned new facility in Puerto Rico.
Furthermore, the Company's development of a new facility will result in new
fixed and operating expenses, including substantial increases in depreciation
expense that will increase the Company's cost of sales. If revenue levels do not
increase sufficiently to offset these new expenses, the Company's operating
results could be materially adversely affected. There can be no assurance that
the Company will not encounter unforeseen difficulties, costs or delays in
constructing and equipping the new manufacturing facility in Puerto Rico, in
relocating operations to the new facility or in commencing production at the new
facility. Any such difficulties or delays would limit the Company's ability to
increase production volume and lower per unit costs (and consequently prices),
would limit the Company's ability to compete in the disposable lens market and,
accordingly, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has in the past experienced, and may in the future experience,
delays in its ability to fill customer orders for certain products on a timely
basis because of limits on its production capacity. Significant delays in
filling orders over an extended period would damage customer relations, which
would materially adversely affect the Company's business, financial condition
and results of operations. The production schedules for each of the Company's
products are based on forecasts of customer demand for such products, and the
Company has only limited ability to modify short-term production schedules. If
the Company were to underestimate materially the demand for any of its products,
it would not be able, on a short-term basis, to satisfy such demand fully. The
ability of the Company to estimate demand may be less precise during periods of
rapid growth or with respect to new products. The failure of the Company to
forecast its requirements accurately could lead to inventory shortages or
surpluses that could adversely affect results of operations and lead to
fluctuations in quarterly operating results. See "Business -- Manufacturing."
Risk of Trade Practice Litigation; Changes in Trade Practices. The contact
lens industry has been the subject of a number of class action and government
lawsuits and government investigations in recent years. In December 1996, over
twenty states sued three of the Company's largest competitors, as well as
certain eyecare practitioners and trade organizations. The suit alleges, among
other things, a conspiracy among such persons to violate antitrust laws by
refusing to sell contact lenses to mail-order and other non-practitioner contact
lens providers, so as to reduce competition in the contact lens industry. A
similar lawsuit was filed by the State of Florida in 1994 and may go to trial in
1997, and several similar class action lawsuits were also filed in 1994. It has
recently been announced that one of the defendants in such suits has agreed to
settle the lawsuits as to itself by agreeing to sell contact lenses to
mail-order and other alternative distribution channels, and to make substantial
cash and product rebates available to consumers. See "Business -- Sales and
Marketing." In an unrelated matter, one of the Company's largest competitors was
sued in a class action lawsuit brought in the Federal District Court in the
Northern District of Alabama in 1994 (the "Alabama Lawsuit"). This suit alleged
that the defendant engaged in fraudulent and deceptive practices in the
marketing and sale of contact lenses by selling identical contact lenses, under
different brand names and for different replacement regimens, at different
prices. The defendant subsequently modified certain of its marketing practices
and ultimately settled the lawsuit in August 1996 by making substantial cash and
product payments available to consumers. See "Business -- Products." Although
the Company has not been named in any of the foregoing lawsuits, the Company
from time to time receives claims or threats similar to those brought against
its competitors, and in one circumstance a suit was filed against the Company
making allegations similar to those made in the Alabama Lawsuit, which suit was
dismissed without prejudice for non-substantive reasons. There can be no
assurance that the Company will not face similar actions relating to its
marketing and pricing practices or other claims or lawsuits in the future. The
defense of any such action, lawsuit or claim could result in substantial expense
to the Company and significant diversion of attention and effort by the
Company's management personnel. There can be no assurance that any such lawsuit
would be settled or decided in a manner favorable to the Company, and a
settlement or adverse decision in any such action, lawsuit or claim could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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<PAGE> 12
In addition to the foregoing lawsuits, there is substantial federal and
state governmental regulation related to the prescribing of contact lenses.
These regulations relate to who is permitted to prescribe and fit contact
lenses, the prescriber's obligation to provide prescriptions to its patients,
the length of time a prescription is valid, the ability or obligation of
prescribers to prescribe lenses by brand rather than by generic equivalent or
specification, and other matters. Although these regulations primarily affect
contact lens prescribers, and not manufacturers or distributors of lenses such
as the Company, changes in these regulations, or their interpretation or
enforcement, could adversely affect the effectiveness of the Company's marketing
strategy to eyecare practitioners, most notably the effectiveness of the
Company's channel-specific and private label branding strategies. See
"Business -- Strategy." Additionally, given the Company's strategic emphasis on
focusing its marketing efforts on eyecare practitioners, the Company may be more
vulnerable than its competitors to changes in current trade practices. Finally,
although cost controls or other requirements imposed by third party health-care
payors such as insurers and health maintenance organizations have not
historically had a significant effect on contact lens prices or distribution
practices, this could change in the future, and could adversely affect the
Company's business, financial condition and results of operations. Adverse
regulatory or other decisions affecting eyecare practitioners, or material
changes in the selling and prescribing practices for contact lenses, could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Government Regulation."
Dependence on Single Product Line; Need to Increase Sales of Lenses for
Disposable Replacement Regimens. All of the Company's net sales to date have
been attributable to the Company's sale of soft contact lenses. Should the
demand for the Company's soft contact lenses decline due to increased
competitive pressures, changes in consumer preferences, the inability of the
Company to respond to reduced prices by its competitors, the advent of
alternative technologies for correcting vision or other factors, the Company's
business, financial condition and results of operations would be materially
adversely affected.
A substantial portion of the Company's net sales to date (and, through
1994, a majority of the Company's net sales) have been attributable to the
Company's sales of soft contact lenses for annual replacement regimens. The U.S.
market for contact lenses for annual replacement regimens has been marked by
reduced overall demand in recent years. The Company expects that this segment of
the market for contact lenses for annual replacement regimens will continue to
contract in its major geographic markets as the market for contact lenses for
disposable replacement regimens continues to expand. The Company, a relatively
recent entrant in the market for lenses for disposable replacement regimens,
introduced its first product marketed for weekly replacement in September 1993.
The Company's success depends on both continued growth of this market and
increased penetration of this market by the Company's products. As the number of
wearers of contact lenses in the U.S. has not grown significantly in recent
years, and has decreased in some periods, increased market penetration by the
Company will require that wearers of competing products switch to the Company's
products. The Company anticipates that prices for its products targeted for
disposable replacement regimens will decline in the future. There can be no
assurance that the Company's contact lenses for disposable replacement regimens
will achieve widespread consumer acceptance, or that net sales or net income
from the sale of the Company's lenses for disposable replacement regimens will
be sufficient to offset the decline in the Company's net sales or net income
from its contact lenses for annual replacement regimens, which have higher
prices and gross margins. Any such failure to achieve market acceptance or to
capture a significant share of the disposable contact lens market segment would
impair the Company's ability to reduce its per unit production costs and would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "-- Intense Competition," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Products" and "Business -- Competition."
Risk of New Products and Technological Change. The Company does not
allocate substantial resources to new product development and has historically
leveraged or licensed the technology developments of others. The Company
believes that many of its competitors have invested, and will continue to
invest, substantial amounts in developing new products and technologies, and
there can be no assurance that the Company's competitors do not have or will not
develop new products and technologies that could render the Company's products
less competitive. For example, Johnson & Johnson has recently introduced lenses
for disposable replacement regimens with an ultraviolet light inhibitor, which
could increase the appeal of its products. The
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<PAGE> 13
Company intends to develop a similar feature, but has only recently begun the
design process and no assurance can be given as to when or whether the Company
will be able to offer this feature. In addition, it has been reported that
Ciba-Geigy and others are seeking to develop lenses based on new polymers that
may significantly increase the period over which the lens may be left in the
eye. There can be no assurance that the Company will be able to sufficiently
utilize technology developed by third parties in order to remain competitive.
Any failure by the Company to stay current with its competitors with regard to
new product offerings and technological changes and to offer products that
provide performance that is at least comparable to competing products would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "-- Dependence on Single Product Line; Need to
Increase Sales of Lenses for Disposable Replacement Regimens" and
"Business -- Research and Development."
Fluctuations in Operating Results; Seasonality; Decreasing Average Sales
Prices. The Company's quarterly operating results have varied significantly in
the past and are likely to vary significantly in the future based upon a number
of factors. The Company's quarterly results can be affected significantly by
pricing changes by the Company or its competitors, the Company's ability to
increase manufacturing capacity efficiently and to reduce per unit manufacturing
costs, the time and costs involved in expanding existing distribution channels
and establishing new distribution channels, discretionary marketing and
promotional expenditures such as cooperative merchandising allowances paid to
the Company's customers, timing of the introduction of new products by the
Company or its competitors, inventory shortages, timing of regulatory approvals
and other factors. The Company's customers generally do not have long-term
commitments to purchase products and products are generally shipped as orders
are received. Consequently, quarterly sales and operating results depend
primarily on the volume and timing of orders received during the quarter, which
are difficult to forecast. A significant portion of the Company's operating
expenses are relatively fixed, and planned expenditures are based on sales
forecasts. If sales levels fall below expectations, operating results are likely
to be materially adversely affected. In particular, net income may be
disproportionately affected because only a small portion of the Company's
expenses varies with net sales in the short term. In response to competition,
the Company may reduce prices, increase cooperative merchandising allowances or
otherwise increase marketing expenditures, and such responses may adversely
affect the Company's business, financial condition and results of operations.
Due to the foregoing factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Further, it is
likely that in some future quarter the Company's net sales or operating results
will be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially
adversely affected.
The Company's historical sales have exhibited significant seasonality, with
the third and fourth quarters having the highest net sales in any year and the
first quarter of the following year having lower net sales than the preceding
two quarters. The Company believes that the seasonality of its quarterly results
is primarily due to consumer buying habits. The Company believes that the
historical increases in sales of its products in the third and fourth quarters
have been due to late summer (back-to-school) purchases by consumers and to
higher traffic in the fourth quarter through malls and mass merchandisers with
optical outlets. The Company further believes that the historical decline in the
first quarter has been due to reduced consumer buying in the post-holiday
season. In addition, due to the relatively high proportion of the Company's
fixed costs to its total costs, the Company's level of profitability has
historically increased significantly with increasing sales volumes, resulting in
disproportionately better results in the second half of each year. There can be
no assurance that these patterns will not continue in future years although the
pattern may be somewhat less pronounced if the Company continues to increase the
proportion of sales represented by more frequently replaced lenses for
disposable replacement regimens.
The Company expects that the overall average selling price that it realizes
across its products will decline over time because of (i) shifts in the
Company's product mix from lenses for annual replacement regimens to lenses for
disposable replacement regimens and, within its disposable lenses, to lenses
that are replaced more frequently, (ii) decreases in the prices of lenses for
disposable replacement regimens and (iii) increases in products sold
internationally through distributors at prices lower than direct sales prices in
the United States. The Company does not expect there to be significant growth in
its sales of lenses for annual replacement.
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<PAGE> 14
Accordingly, the Company will need to continue to reduce its per unit production
costs through increased automation, increased volume and reduced packaging costs
in order to improve, or even to maintain, its gross margins, and the Company
does not believe that its recent net sales and operating income growth rates are
indicative of the Company's long-term growth rates. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Risks Relating to International Operations; Need to Increase Sales in
International Markets. In 1995, 1996 and the first six months of 1997, the
Company's international sales represented 17.6%, 18.1% and 20.5%, respectively,
of the Company's net sales. In addition, a substantial portion of the Company's
products are manufactured in the United Kingdom. As a result, the Company's
business is subject to the risks generally associated with doing business
abroad, such as foreign consumer preferences, disruptions or delays in
shipments, changes in currency exchange rates, longer accounts receivable
payment cycles and greater difficulties in collecting accounts receivable,
foreign tax laws or tariffs, political unrest and changing economic conditions
in countries in which the Company's products are sold or manufacturing
facilities are located. These factors, among others, could adversely affect the
Company's ability to sell its products in international markets, as well as its
ability to manufacture its products. If any such factors were to render the
conduct of business in a particular country undesirable or impractical, there
could be a material adverse effect on the Company's business, financial
condition and results of operations. The Company and its representatives, agents
and distributors are also subject to the laws and regulations of the foreign
jurisdictions in which they operate or in which the Company's products are sold.
The regulation of medical devices in a number of jurisdictions, particularly in
the European Union, continues to develop, and there can be no assurance that new
laws or regulations will not have a material adverse effect on the Company's
business, financial condition and results of operations.
A substantial portion of the Company's sales and expenditures is collected
or paid in currencies other than the U.S. dollar. Therefore, the Company's
operating results are affected by fluctuations in foreign currency exchange
rates. Although the impact of exchange rate fluctuations on the Company's
results of operations have not been material in the past three years, there can
be no assurance that in the future exchange rate movements will not have a
material adverse effect on the Company's sales, gross profit, operating expenses
or foreign currency exchange gains and losses. In the six months ended June 30,
1997, the Company had an exchange gain of $59,000, primarily relating to changes
in exchange rates between the U.S. dollar and the U.K. pound sterling.
The Company's continued growth is dependent on the expansion of
international sales of its products. This expansion will involve operations in
markets with which the Company is not experienced and there can be no assurance
that the Company will be successful in capturing a significant portion of these
markets for contact lenses. In addition, the Company will not be able to market
and sell its products in certain international markets, such as Japan, until it
obtains regulatory approval. The failure of the Company to increase its
international sales substantially could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company will depend on distributors to market and sell its contact
lenses and, in some cases, to obtain necessary regulatory approvals in a number
of international markets, including Europe and Japan. There can be no assurance
that these distributor relationships will be successful, that other existing
distributor relationships will be maintained or that any disruptions in such
relationships will not have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Sales and
Marketing."
Uncertain Ability to Manage Growth; Risks Associated with Implementation of
New Management Information Systems. The Company has experienced rapid growth in
recent years. Continued rapid growth may place a significant strain on
management, operational infrastructure, working capital and financial and
management control systems. Growth in the Company's business has required, and
is expected to continue to require, significant personnel management and other
infrastructure resources. The Company's ability to manage any future growth
effectively will require it to attract, train, motivate and manage new employees
successfully, to integrate new employees into its overall operations and to
continue to improve its operational,
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<PAGE> 15
financial and management information systems. The Company is in the process of
replacing its management information systems. The new systems will significantly
affect many aspects of the Company's business, including its manufacturing,
sales and marketing, and accounting functions, and the successful implementation
of these systems will be important to facilitate future growth. Implementation
of the new management information systems could cause significant disruption in
operations. If the Company is not successful in implementing its new systems or
if the Company experiences difficulties in such implementation, the Company
could experience problems with the delivery of its products or an adverse impact
on its ability to access timely and accurate financial and operating
information. See "Business -- Employees."
Risks Associated with Interruption of Manufacturing Operations. The Company
manufactures substantially all of the products it sells. As a result, any
prolonged disruption in the operations of the Company's manufacturing
facilities, whether due to technical or labor difficulties, destruction of or
damage to any facility or other reasons, could have a material adverse effect on
the Company's business, financial condition and results of operations. In this
regard, one of the Company's principal two manufacturing facilities is located
in Puerto Rico and is thus exposed to the risks of damage from hurricanes. To
date, hurricanes have not materially affected the Company's operations in Puerto
Rico. However, if this facility were to be out of production for an extended
period, the Company's business, financial condition and results of operation
would be materially adversely affected. See "Business -- Manufacturing."
Dependence on Trademarks, Patent Licenses and Trade Secrets; Risk of
Intellectual Property Infringement. The Company has numerous trademark
registrations in the United States, Europe and other foreign countries. The
Company believes that its trademarks have significant value and are instrumental
to its ability to create and sustain demand for its products and to implement
its channel-based branding strategy. The Company believes that there are no
currently pending challenges to the use or registration of any of the Company's
material trademarks. There can be no assurance, however, that the Company's
trademarks do not or will not violate the proprietary rights of others, that
they would be upheld if challenged or that the Company would, in such an event,
not be prevented from using its trademarks, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
From time to time, the Company discovers products in the marketplace that
infringe on trademark rights held by the Company. If the Company is unsuccessful
in challenging a third party's trademark infringement, continued sales of such
product could adversely affect the Company's marketing strategy, which relies
heavily on the Company's proprietary trademarks, and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company currently relies on a licensed patent for a significant element
of the dry cast molding technology used in the production of its products. This
license is non-exclusive, and therefore this patented process may be licensed to
the Company's competitors. Also, the patent owners have a significant interest
in a United Kingdom company that competes with the Company in certain markets
and that was, until recently, contractually prohibited from selling lenses in
the United States. See "Certain Transactions -- OSL Acquisition and Related
Litigation." The Company also relies on non-exclusive licenses to certain design
patents for its toric and bifocal contact lenses, and these licenses limit the
Company's sales of products using the licensed technology to the Americas. The
Company owns no patents and has no patent applications pending. Certain of the
Company's competitors have significant patent portfolios. To the extent the
Company desires or is required to obtain additional licenses to patents or
proprietary rights of others, there can be no assurance that any such licenses
will be available on terms acceptable to the Company, if at all. The inability
of the Company to obtain any of these licenses could result in an inability to
make or sell products or reductions or delays in the introduction of new
products to meet consumer preferences. Any such prohibitions, reductions or
delays in the introduction of such products could have a material adverse effect
on the Company's business, financial condition and results of operations.
In addition to trademarks and patent licenses, the Company owns certain
trade secrets, copyrights, know-how and other intellectual property. The Company
seeks to protect these assets, in part, by entering into confidentiality
agreements with certain of its business partners, consultants and vendors. There
can be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any
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<PAGE> 16
such breach or that the Company's trade secrets and other intellectual property
will not otherwise become known or independently developed by others and thereby
become unprotected. Furthermore, no assurance can be given that competitors will
not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary technology or
that the Company can meaningfully protect its rights in unpatented proprietary
technology.
The defense and prosecution of intellectual property suits and related
administrative proceedings are both costly and time-consuming. Litigation may be
necessary to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. Any litigation or administrative proceedings will likely result in
substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. The prosecution and defense of
intellectual property rights, as with any lawsuit, are inherently uncertain and
carry no guarantee of success. The protection of intellectual property in
certain foreign countries is particularly uncertain. An adverse determination in
litigation or administrative proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties, prevent the Company from
selling its products or require the Company to modify its products. Although
patent and intellectual property disputes regarding medical devices are often
settled through licensing and similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that any necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, and such events would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Trademarks, Trade Secrets and Patent Licenses."
Risks of Regulatory Action. The Company's products and manufacturing
facilities are subject to stringent regulation by the FDA and by various
governmental agencies for the states and localities in which the Company's
products are manufactured and/or sold, as well as by governmental agencies in
certain foreign countries in which the Company's products are manufactured
and/or sold. Pursuant to the FDC Act, and the regulations promulgated
thereunder, the FDA regulates the preclinical and clinical testing, manufacture,
labeling, distribution, sale, marketing, advertising and promotion of medical
devices such as contact lenses. The process of obtaining FDA and other required
regulatory clearances or approvals can be lengthy, expensive and uncertain.
Failure to comply with applicable regulatory requirements can result in, among
other things, fines, suspensions or withdrawals of regulatory clearances or
approvals, product recalls, operating restrictions (including suspension of
production and distribution), product seizures and criminal prosecution. In
addition, governmental regulations may be established that could prevent or
delay regulatory clearances or approval of the Company's products. Delays in
receiving necessary United States or foreign regulatory clearances or approvals,
failure to receive clearances or approvals, or the loss of previously received
clearances or approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.
In general, the FDC Act requires that a new medical device be cleared by
the FDA prior to introducing such product to the United States market through
the submission of a Section 510(k) Pre-Market Notification (a "510(k)
notification") or approved by the FDA prior to introducing such product to the
market through the submission of a Pre-Market Approval Application (a "PMA").
The process of obtaining clearance of a 510(k) notification typically takes five
to twelve months without clinical data, or twelve to eighteen months or more if
clinical data are required to be included in the notification, but it may take
longer, and 510(k) clearance may never be obtained. Approval through the PMA
process, which likewise may never be obtained, generally takes at least eighteen
to twenty-four months and can take substantially longer, is more expensive and
requires the submission of extensive preclinical and clinical data and
manufacturing information, among other things. The soft contact lenses currently
marketed by the Company have received FDA clearance through the 510(k) process
or approval through the PMA process. In addition, the Company has made
modifications to its products that the Company believes do not require the
submission of new 510(k) notifications or PMA supplements. There can be no
assurance, however, that the FDA will agree with any of the Company's
determinations not to submit new 510(k) notifications or PMA supplements for
these changes, that the FDA will not require the Company to cease sales and
distribution while seeking clearances of 510(k)
15
<PAGE> 17
notifications and approvals of PMA supplements for the changes, or that such
clearances and approvals, if required, will be obtained in a timely manner or at
all. In addition, there can be no assurance that any future products developed
by the Company or any modifications to current products will not require
additional clearances or approvals from the FDA, or that such approvals, if
necessary, will be obtained in a timely manner or at all.
The Company's manufacturing facilities are subject to periodic GMP and
other inspections by the FDA. In March 1996, the Company received a warning
letter from the FDA regarding certain procedures used in manufacturing products
at its facilities in Puerto Rico. The Company has taken steps to address the
FDA's concerns, and, after reinspecting the facilities, the FDA notified the
Company that its concerns were satisfactorily addressed. There can be no
assurance that the Company will be found in compliance with GMP requirements in
future inspections by regulatory authorities, and noncompliance with GMP
requirements could result in the cessation or reduction of the Company's
production volume, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. These laws and
regulations range from simple product registration requirements in some
countries to complex clearance and production controls in others. Some countries
have historically permitted human studies earlier in the product development
cycle than regulations in the United States permit. Other countries have
requirements similar to those of the United States. This disparity in the
regulation of medical devices may result in more rapid product clearance in
certain countries than in the United States, while approvals in countries such
as Japan may require longer periods than in the United States. These differences
may also affect the efficiency and timeliness of international market
introduction of the Company's products, and there can be no assurance that the
Company will be able to obtain regulatory approvals or clearances for its
products in foreign countries in a timely manner or at all. See "Business --
Government Regulation."
Product Liability; Insurance. The Company has in the past been, and
continues to be, subject to product liability claims and lawsuits, and the
Company's Canadian subsidiary is currently a defendant in one such lawsuit,
filed by an individual in 1997 in the Province of Ontario, Canada, alleging that
the Company's lenses injured the plaintiff's cornea and seeking damages of
Can.$500,000 plus interest and costs. Because contact lenses are medical
devices, the Company faces an inherent risk of exposure to product liability
claims in the event that the use of its products results in personal injury. The
Company also faces the possibility that defects in the design or manufacture of
its products might necessitate a product recall. From time to time, the Company
has received, and may in the future receive, complaints of significant patient
discomfort, including corneal complications, while using the Company's contact
lenses. In certain cases, the reasons for the problems have never been
established. In addition, on two occasions, in 1995 and 1997, the Company has
recalled certain of its products due to labeling errors. Although the Company
has not experienced material losses to date due to product liability claims or
product recalls, there can be no assurance that the Company will not experience
such losses in the future, that insurance coverage will be adequate to cover
such losses, or that insurance coverage will be available on acceptable terms or
at all. A product liability or other judgment against the Company in excess of
the Company's insurance coverage or a product recall could have a material
adverse effect upon the Company's business, financial condition and results of
operations. See "Business -- Product Liability and Insurance."
Environmental Regulations. Federal, state and local regulations impose
various controls on the storage, handling, discharge and disposal of certain
substances used in the Company's manufacturing processes and on the Company's
facilities. The Company believes that its activities conform to present
governmental regulations applicable to its current operations and facilities,
including those related to environmental, land use, public utility utilization
and fire code matters. There can be no assurance that such governmental
regulations will not in the future impose the need for additional capital
equipment or other process requirements upon the Company or restrict the
Company's ability to expand its operations. The adoption of such measures or any
failure by the Company to comply with applicable environmental and land use
regulations or to restrict the discharge of hazardous substances could subject
the Company to future liability or could cause its manufacturing operations to
be curtailed or suspended.
16
<PAGE> 18
Dependence on Key Personnel. The Company is dependent upon a limited number
of key management and technical personnel. The Company's future success will
depend in part upon its ability to attract and retain highly qualified
personnel. The Company competes for such personnel with other companies,
academic institutions, government entities and other organizations. There can be
no assurance that the Company will be successful in retaining or hiring
qualified personnel. The loss of any of the Company's senior management or other
key research, clinical, regulatory, or sales and marketing personnel,
particularly to competitors, could have a material adverse effect on the
Company's business, financial condition and results of operations. In
particular, the loss of John D. Fruth, the Company's founder and President,
could have a material adverse effect on the Company. See "Business -- Employees"
and "Management."
Control by Existing Stockholders. After the offering contemplated hereby,
the directors, officers and principal stockholders of the Company will, in the
aggregate, beneficially own approximately 62.1% of the Company's outstanding
Common Stock (approximately 57.3% if the Underwriters' overallotment option is
exercised in full). As a result, these stockholders, acting together, will
possess voting control of the Company, giving them the ability, among other
things, to elect the Company's Board of Directors and approve significant
corporate transactions. Such control could have the effect of delaying,
deferring or preventing a change in control of the Company. See "Principal and
Selling Stockholders."
Certain Anti-Takeover Provisions. Upon completion of this offering, the
Company's Board of Directors will have the authority to issue up to 4,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing flexibility in connection with
possible financings or acquisitions or other corporate purposes, could have the
effect of making it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company. The Company has no current plans to
issue shares of Preferred Stock. The Company's Bylaws and indemnity agreements
provide that the Company will indemnify officers and directors against losses
they may incur in legal proceedings resulting from their service to the Company.
Further, the Company's charter documents contain a provision eliminating the
ability of the Company's stockholders to take action by written consent
effective upon the closing of this offering. This provision is designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal
and to render the use of stockholder written consents unavailable as a tactic in
a proxy fight. However, such provision could have the effect of discouraging
others from making tender offers for the Company's shares, thereby inhibiting
increases in the market price of the Company's shares that could result from
actual or rumored takeover attempts. Such provision also may have the effect of
preventing changes in the management of the Company. In addition, Section 203 of
the Delaware General Corporation Law, to which the Company is subject, restricts
certain business combinations with any "interested stockholder" as defined by
such statute. The statute may delay, defer or prevent a change in control of the
Company. See "Description of Capital Stock."
Shares Eligible for Future Sale; Registration Rights. Sales of a
substantial number of shares of Common Stock in the public market following this
offering could adversely affect the market price for the Company's Common Stock.
The number of shares of Common Stock available for sale in the public market is
limited by restrictions under the Securities Act of 1933, as amended (the
"Securities Act") and by lock-up agreements under which the holders of such
shares have agreed not to sell or otherwise dispose of any of their shares for a
period of 180 days after the date of this Prospectus without the prior written
consent of Morgan Stanley & Co. Incorporated. However, Morgan Stanley & Co.
Incorporated may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to lock-up agreements. In the
absence of any early release from lock-up agreements by Morgan Stanley & Co.
Incorporated, substantially all of the outstanding shares of Common Stock other
than the 7,200,000 shares offered hereby will become eligible for sale 180 days
after the date of this Prospectus. In addition, the Company intends to register
on or promptly after the effective date of this offering a total of 5,658,988
shares of Common Stock reserved for issuance under the Company's stock option
plans. Further, upon expiration of the lock-up agreements referred to above,
holders of approximately 12,323,120 shares of Common Stock will be entitled to
certain registration rights
17
<PAGE> 19
with respect to such shares. If such holders, by exercising their registration
rights, cause a large number of shares to be registered and sold in the public
market, such sales could have a material adverse effect on the market price for
the Company's Common Stock, and could adversely affect the Company's ability to
raise capital. See "Description of Capital Stock -- Registration Rights" and
"Shares Eligible for Future Sale."
No Prior Trading Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock of the Company,
and there can be no assurance that an active trading market will develop or
that, if one does develop, it will be maintained. The initial public offering
price, which will be established by negotiations between the Company, the
Selling Stockholders and the representatives of the Underwriters based upon a
number of factors, may not be indicative of prices that will prevail in the
trading market. See "Underwriters" for a discussion of the factors to be
considered in determining the initial public offering price. The market price of
the shares of Common Stock is likely to be highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results or those of its competitors, competitive
factors, new products offered by the Company or its competitors, developments
with respect to patents or proprietary rights, conditions and trends in its
industry and other related industries, regulatory actions, adoption of new
accounting standards, changes in financial estimates by securities analysts,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. Such litigation, if brought against the Company, could result in
substantial costs and a diversion of management's attention and resources. See
"Underwriters."
Immediate and Substantial Dilution. Investors participating in this
offering will incur immediate, substantial dilution in the amount of $12.37. To
the extent that options to purchase the Company's Common Stock are exercised,
there will be further dilution. See "Dilution."
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,600,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$52.5 million, at an assumed initial public offering price of $16.00 per share
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company. The Company will not receive
any of the proceeds from the sale of Common Stock by the Selling Stockholders.
See "Principal and Selling Stockholders."
The Company intends to use approximately $22.0 million of the net proceeds
of this offering for expansion and automation of its manufacturing facilities.
See "Risk Factors -- Manufacturing Capacity Constraints; Risks Associated with
Expansion and Automation of Manufacturing Operations." In addition, the Company
expects to use approximately $13.5 million of the net proceeds to repay all of
the debt outstanding under the Company's Credit Agreement with Comerica
Bank-California (the "Comerica Credit Agreement") and $2.9 million to repay
subordinated debt owed to John D. Fruth, the Company's President. As of June 30,
1997, the effective interest rate on the indebtedness under the Comerica Credit
Agreement was approximately 8.2% per annum. The amount outstanding under the
Comerica Credit Agreement was incurred on October 30, 1996 and utilized to repay
previously outstanding indebtedness. The debt owed to John D. Fruth was borrowed
from July 1986 to March 1990 to meet certain short-term operating cash
requirements, and bears interest at the prime rate plus 3%. This debt is due
upon the earlier of the consummation of this offering and November 1997. See
"Certain Transactions -- Loans from Mr. Fruth." The Company is also obligated,
upon the closing of this offering, to pay the remaining $6.7 million owed
pursuant to the settlement agreement in certain recent litigation in the United
Kingdom and California. See "Certain Transactions -- OSL Acquisition and Related
Litigation." The Company intends to use the remaining net proceeds of
approximately $7.4 million for other general corporate purposes, including
working capital. Pending such uses, the net proceeds of this offering will be
invested in short-term, interest-bearing, investment grade securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock, and the payment of cash dividends on its Common Stock is prohibited under
the Comerica Credit Agreement. Since January 31, 1993, the Company has paid
cumulative dividends quarterly on its Preferred Stock at the rate of $0.6975 per
share per annum. Upon the closing of this offering, all outstanding shares of
Preferred Stock will be converted into shares of Common Stock. The Company
currently expects to retain all future earnings for use in the operation and
expansion of its business and does not anticipate paying any cash dividends on
its capital stock in the foreseeable future.
19
<PAGE> 21
CAPITALIZATION
The following table sets forth, as of June 30, 1997, the capitalization of
the Company and the capitalization of the Company as adjusted to give effect to
(i) the conversion of all outstanding shares of Preferred Stock into shares of
Common Stock upon the closing of this offering, (ii) the sale of the 3,600,000
shares of Common Stock offered by the Company hereby, at an assumed initial
public offering price of $16.00 and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the Company
and (iii) the application of the net proceeds therefrom.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, including current portion:
Borrowings under the Comerica Credit Agreement(1).................... $13,501 $ --
Borrowings from John D. Fruth(2)..................................... 2,895 --
Note payable(1)...................................................... 1,973 1,973
Capital lease obligations and other(1)............................... 1,943 1,943
------- -------
Total long-term debt, including current portion................... 20,312 3,916
------- -------
Stockholders' equity:
Preferred stock, $0.001 par value; 4,000,000 shares authorized;
118,168 shares issued and outstanding, actual(3); none issued or
outstanding, as adjusted.......................................... 1 --
Common stock, $0.001 par value; 80,000,000 shares authorized;
16,589,990 shares issued and outstanding, actual; 20,426,326
shares issued and outstanding, as adjusted(4)..................... 16 20
Additional paid-in capital........................................... 8,457 60,942
Retained earnings.................................................... 22,299 22,299
Cumulative translation adjustment.................................... (286) (286)
------- -------
Total stockholders' equity........................................ 30,487 82,975
------- -------
Total capitalization............................................ $50,799 $86,891
======= =======
</TABLE>
- ---------------
(1) See Note 6 of Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(2) John D. Fruth is the President of the Company. See Note 12 of Notes to
Consolidated Financial Statements.
(3) See Note 9 of Notes to Consolidated Financial Statements.
(4) Excludes (i) 3,079,694 shares of Common Stock issuable at a weighted average
exercise price of $1.76 per share upon exercise of stock options outstanding
as of June 30, 1997 under the 1989 Plan and 1992 Plan, (ii) 2,279,294 shares
of Common Stock reserved for future issuance under the 1997 Equity Incentive
Plan, (iii) 300,000 shares of Common Stock reserved for future issuance
under the 1997 Directors Stock Option Plan and (iv) 400,000 shares of Common
Stock reserved for future issuance under the 1997 Employee Stock Purchase
Plan. See "Management -- Director Compensation," "Management -- Employee
Benefit Plans," "Description of Capital Stock" and Notes 10 and 16 of Notes
to Consolidated Financial Statements.
20
<PAGE> 22
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997
was approximately $21.7 million or $1.29 per share of Common Stock. "Pro forma
net tangible book value" per share represents the amount of total tangible
assets less total liabilities, divided by the number of shares of Common Stock
then outstanding (giving pro forma effect to the conversion of all
then-outstanding shares of Preferred Stock into shares of Common Stock). After
giving effect to the sale by the Company of the 3,600,000 shares of Common Stock
offered by the Company hereby (at an assumed initial public offering price of
$16.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company), the
Company's pro forma net tangible book value as of June 30, 1997 would have been
approximately $74.1 million, or $3.63 per share of Common Stock. This represents
an immediate increase in pro forma net tangible book value of $2.34 per share to
existing stockholders and an immediate dilution of $12.37 per share to new
investors purchasing shares of Common Stock in this offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $16.00
Pro forma net tangible book value per share at June 30,
1997.................................................. $ 1.29
Increase in pro forma net tangible book value per share
attributable to new investors......................... 2.34
------
Pro forma net tangible book value per share after
offering................................................. 3.63
------
Dilution per share to new public investors................. $12.37
======
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing stockholders and by new public investors purchasing shares in this
offering (at an assumed initial public offering price of $16.00 per share and
before deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
-------------------- --------------------- AVERAGE
NUMBER(1) PERCENT AMOUNT PERCENT PRICE PER SHARE
---------- ------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1).... 16,826,326 82.4% $ 8,098,000 12.3% $ 0.48
New public
investors.......... 3,600,000 17.6 57,600,000 87.7 16.00
---------- ----- ----------- -----
Total...... 20,426,326 100.0% $65,698,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares of Common Stock held by existing stockholders to 13,226,326, or
approximately 64.8% of the total shares of Common Stock outstanding
immediately after this offering, and will increase the number of shares of
Common Stock held by new investors to 7,200,000, or 35.2% of the total
number of shares of Common Stock outstanding immediately after this
offering. See "Principal and Selling Stockholders."
The foregoing computations assume no exercise of stock options outstanding
as of June 30, 1997. As of June 30, 1997, there were options outstanding to
purchase a total of 3,079,694 shares of Common Stock at a weighted average
exercise price of $1.76 per share. To the extent that any of these options are
exercised, there will be further dilution to new public investors. See
"Management -- Director Compensation," "Management -- Employee Benefit Plans"
and Notes 10 and 16 of Notes to Consolidated Financial Statements.
21
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus. The selected data
presented below under the captions "Consolidated Statement of Operations Data"
and "Consolidated Balance Sheet Data" for, and as of the end of, each of the
years in the five-year period ended December 31, 1996 are derived from the
consolidated financial statements of the Company, which consolidated financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The consolidated financial statements as of December 31,
1995 and 1996, and for each of the years in the three-year period ended December
31, 1996, and the report thereon, are included elsewhere in this Prospectus. The
consolidated balance sheet data as of June 30, 1997, and consolidated statement
of operations data for the six months ended June 30, 1996 and 1997, are derived
from unaudited consolidated financial statements included elsewhere in this
Prospectus that have been prepared on the same basis as the audited consolidated
financial statements, and, in the opinion of management, contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's consolidated operating results and financial
position. The consolidated operating results for the six months ended June 30,
1997 are not necessarily indicative of the results to be expected for any other
interim period or any future fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................................ $16,548 $38,533 $48,503 $68,087 $90,509 $38,850 $52,969
Cost of sales........................................ 11,826 24,673 22,553 26,820 36,553 15,927 20,420
------- ------- ------- ------- ------- ------- -------
Gross profit....................................... 4,722 13,860 25,950 41,267 53,956 22,923 32,549
Selling and marketing expenses....................... 2,035 4,122 6,405 11,728 18,101 8,241 11,972
General and administrative expenses.................. 3,697 10,509 11,087 14,287 18,420 8,813 10,075
Reorganization costs................................. -- 746 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations(1)................... (1,010) (1,517) 8,458 15,252 17,435 5,869 10,502
Interest expense..................................... (841) (3,328) (3,128) (3,024) (3,216) (1,556) (949)
Interest income...................................... -- 65 123 280 132 69 67
Other (expense) income, net.......................... (288) (1) (416) 151 (186) 156 37
------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes......................... (2,139) (4,781) 5,037 12,659 14,165 4,538 9,657
Income taxes......................................... (755) 368 -- (3,869) (3,989) (1,278) (2,897)
------- ------- ------- ------- ------- ------- -------
Net income (loss).................................. (2,894) (4,413) 5,037 8,790 10,176 3,260 6,760
Preferred stock dividends............................ -- (96) (82) (82) (82) (41) (41)
------- ------- ------- ------- ------- ------- -------
Net income (loss) applicable to common
stockholders..................................... $(2,894) $(4,509) $ 4,955 $ 8,708 $10,094 $ 3,219 $ 6,719
======= ======= ======= ======= ======= ======= =======
Pro forma net income per share(2).................... $ 0.52 $ 0.35
======= =======
Shares used in computing pro forma net income per
share(2)........................................... 19,527 19,554
======= =======
OTHER DATA:
Lenses sold for disposable replacement regimens as a
percentage of total lenses sold.................... 15.2% 19.1% 53.0% 73.4% 83.5% 81.9% 88.3%
Depreciation and amortization........................ $ 400 $1,775 $2,137 $ 2,578 $ 4,904 $1,963 $3,525
Capital expenditures................................. 1,049 2,489 2,153 13,558 12,256 7,273 6,022
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------- AS OF
1992 1993 1994 1995 1996 JUNE 30, 1997
------- ------- ------- ------- ------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and restricted cash............. $ 5,197 $ 3,774 $ 9,639 $ 5,346 $ 5,541 $ 4,473
Working capital........................................ 19,251 13,957 17,305 11,913 15,118 3,957
Total assets........................................... 35,892 32,191 35,645 50,874 63,503 74,409
Total debt............................................. 26,077 24,772 22,863 22,911 22,740 20,312
Stockholders' equity (deficit)......................... 4,096 (403) 4,447 13,292 23,889 30,487
</TABLE>
- ---------------
(1) Loss from operations for 1992 and 1993 includes non-recurring charges of
$2.1 million and $4.4 million, respectively, related to writedowns in the
carrying value of certain assets purchased in connection with the Company's
acquisition of American Hydron.
(2) For an explanation of the determination of the number of shares used in
computing pro forma net income per share, see Note 2 of Notes to
Consolidated Financial Statements.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. The following discussion contains forward-looking statements. The
Company's actual results may differ significantly from those projected in the
forward-looking statements. Factors that might cause future actual results to
differ materially from the Company's recent results or those projected in the
forward-looking statements include, but are not limited to, those discussed in
"Risk Factors" and below. The Company assumes no obligation to update the
forward-looking statements or such factors.
OVERVIEW
The Company's products compete in both the disposable and annual
replacement segments of the soft contact lens market. Since the Company was
incorporated in 1985, its strategy has been to market high-quality contact
lenses to eyecare practitioners at competitive prices using a low cost-to-serve
operating structure. Until 1992, the Company was principally a distributor of
contact lenses. In September 1992, the Company became an integrated contact lens
company by acquiring the primary supplier of its lenses, Precision Lens
Laboratories Ltd. ("PLL"), a United Kingdom-based company now called Ocular
Sciences Ltd. ("OSL"). In connection with the acquisition, PLL entered into a
royalty-bearing patent license with certain of the prior owners of PLL related
to the cast molding of contact lenses and agreed to supply lenses to Aspect
Vision Care Ltd. ("AVCL"), a United Kingdom-based contact lens distributor
controlled by certain of such owners. This license provided the Company with the
technology to manufacture high-quality contact lenses at significantly lower per
unit production costs than it could previously achieve. In connection with these
agreements, PLL agreed not to sell certain contact lenses covered by these
agreements to third parties in the United Kingdom and to pay an additional
royalty for certain sales to contact lens manufacturers, and AVCL agreed not to
sell such lenses in North and South America. See "Certain Transactions -- OSL
Acquisition and Related Litigation."
In October 1992, the Company acquired the contact lens business in North
and South America of Allergan, Inc., which had been operating under the name
American Hydron. This acquisition provided the Company with a significantly
expanded customer base, an additional line of contact lens products and a
manufacturing facility in Puerto Rico. The purchase price was $24.5 million,
including acquisition costs of $1.2 million. The transaction and working capital
requirements were financed by the issuance of $5.0 million in Common Stock, $1.0
million in Preferred Stock and $22.7 million in senior secured and senior
subordinated notes and warrants to purchase common stock to the seller and a
separate investor group. The senior secured notes were repaid from bank
borrowings in 1993 and the senior subordinated notes were repaid with borrowings
under the Comerica Credit Agreement, which the Company entered into in October
1996. The Company intends to repay all of the outstanding borrowings under the
Comerica Credit Agreement ($13.5 million as of June 30, 1997) with a portion of
the net proceeds of this offering. See "Use of Proceeds." The American Hydron
acquisition resulted in goodwill and other intangible assets of $3.4 million,
all of which will be fully amortized by the end of 1997. See "Certain
Transactions -- Allergan/American Hydron Acquisition; Galen Financing."
Prior to the summer of 1993, the Company derived a substantial majority of
its sales from lenses for annual replacement regimens and the remainder of its
sales from lenses for monthly disposable replacement regimens. In the third
quarter of 1993, the Company began selling lenses for weekly disposable
replacement regimens. Since that time, substantially all of the Company's growth
in net sales has resulted from sales of lenses for disposable replacement
regimens, primarily weekly disposable replacement regimens. In the first quarter
of 1995, the Company introduced a second line of lenses for weekly disposable
replacement regimens. The Company's lenses for disposable replacement regimens
historically have had lower selling prices and gross margins and are sold in
much greater volumes than its lenses for annual replacement regimens. In the
first six months of 1997, lenses for disposable replacement regimens accounted
for approximately 88.3% of the Company's unit volume and 73.8% of net sales. See
"Risk Factors -- Dependence on Single Product Line; Need to Increase Sales of
Lenses for Disposable Replacement Regimens." The Company's international sales
23
<PAGE> 25
represented 18.1% and 20.5% of the Company's net sales in 1996 and the six
months ended June 30, 1997, respectively, and are growing somewhat faster than
domestic sales as the Company establishes partnering and distributor
relationships abroad. See "Risk Factors -- Risks Relating to International
Operations; Need to Increase Sales in International Markets." In 1996,
approximately 54% of the Company's U.S. net sales came from sales to
ophthalmologists, optometrists and the distributors that sell to such
practitioners, and approximately 46% of the Company's U.S. net sales came from
sales to chain stores and mass merchants.
In May 1994, the Company and OSL commenced a litigation in the United
Kingdom against certain of the persons who sold OSL to the Company, including
Geoffrey and Anthony Galley, AVCL and certain related parties, for actions taken
after the acquisition. Certain of the defendants in that action brought suit
against OSL in a related patent infringement action. The Company also brought an
action in the United States against certain of the individuals that it had sued
in the United Kingdom (these suits, collectively, the "U.K. Litigation"). In
February 1997, the Company entered into a settlement agreement providing for,
among other things, (i) a mutual release and termination of all pending
litigation, (ii) the replacement of the previous patent license with a new,
fully paid, non-exclusive patent license that does not contain any restrictions
on the Company's ability to sell lenses to other contact lens manufacturers,
(iii) the grant by OSL to AVCL and the patent owners of a royalty-free,
non-exclusive license to certain OSL technology, (iv) the termination of OSL's
obligation to supply contact lenses to AVCL and (v) the elimination of the
geographic limitation on OSL's and AVCL's ability to sell certain contact
lenses. In connection with the settlement, the Company paid $3.3 million to the
defendants and agreed to pay an additional $6.7 million upon the earlier of
February 27, 1998 or the sale of the Company's Common Stock in an initial public
offering. The Company has allocated $8.8 million of the total consideration paid
to the defendants to identifiable intangible assets as of the date of the
settlement based on their relative fair market values. See Note 14 of Notes to
Consolidated Financial Statements. The Company plans to amortize these
intangible assets amount over a ten-year period. In connection with the U.K.
Litigation, the Company incurred legal expenses of $549,000, $1.3 million and
$2.5 million in 1994, 1995 and 1996 and $649,000 and $52,000 for the six months
ended June 30, 1996 and 1997, respectively, which are included in the Company's
general and administrative expenses. See "Certain Transactions -- OSL
Acquisition and Related Litigation."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain line items in the Company's Consolidated
Statements of Income.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 46.5 39.4 40.4 41.0 38.6
----- ----- ----- ----- -----
Gross margin..................... 53.5 60.6 59.6 59.0 61.4
Selling and marketing expenses..... 13.2 17.2 20.0 21.2 22.6
General and administrative
expenses......................... 22.9 21.0 20.3 22.7 19.0
----- ----- ----- ----- -----
Income from operations........... 17.4 22.4 19.3 15.1 19.8
Interest and other expense, net.... (7.0) (3.8) (3.6) (3.4) (1.6)
----- ----- ----- ----- -----
Income before taxes.............. 10.4 18.6 15.7 11.7 18.2
Income taxes....................... -- (5.7) (4.4) (3.3) (5.4)
----- ----- ----- ----- -----
Net income....................... 10.4% 12.9% 11.3% 8.4% 12.8%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Net Sales. Net sales represents gross sales less volume discounts, trial
set discounts, prompt payment discounts and allowances for sales returns. The
Company recognizes sales upon shipment of products to its customers. Discounts
and allowances for sales returns are accrued at the time sales are recognized.
Net sales increased 36.3% to $53.0 million in the six months ended June 30, 1997
from $38.9 million in the six months
24
<PAGE> 26
ended June 30, 1996. Substantially all of this growth resulted from increased
sales of the Company's lenses marketed for weekly disposable replacement
regimens. Unit sales of the Company's lenses for annual replacement regimens
remained virtually constant between the comparison periods. The prices of each
of the Company's primary products did not decrease significantly between the
comparison periods. However, as a result of a shift in product mix from lenses
marketed for annual replacement to lower priced lenses marketed for disposable
replacement, the Company's overall average selling price declined approximately
11%. The Company expects that the overall average selling price that it realizes
across its products will decline over time because of (i) shifts in the
Company's product mix from lenses for annual replacement regimens to lenses for
disposable replacement regimens and, within its disposable lenses, to lenses
that are replaced more frequently, (ii) decreases in the prices of lenses for
disposable replacement regimens and (iii) increases in products sold
internationally through distributors at prices lower than direct sales prices in
the United States. The Company does not expect there to be significant growth in
its sales of lenses for annual replacement. The Company does not believe that
its net sales growth rate from the six months ended June 30, 1996 to the six
months ended June 30, 1997 is indicative of the Company's long-term sales growth
rate.
Gross Profit. Cost of sales is comprised primarily of the overhead,
material and labor costs of production and packaging, freight and duty,
inventory reserves, royalties to third parties and amortization of certain
intangible assets. A substantial portion of the Company's cost of sales is fixed
and therefore declines as a percentage of net sales as volume increases. Gross
profit increased 42.0% to $32.5 million, or 61.4% of net sales, in the six
months ended June 30, 1997 from $22.9 million, or 59.0% of net sales, in the six
months ended June 30, 1996. The Company's per unit production cost reductions
resulting from manufacturing volume increases and process improvements were
slightly greater than the Company's overall average selling price decline,
resulting in improved margins. The Company anticipates that its overall average
selling price will decline over time and anticipates higher depreciation as a
result of significantly increased investment in property and equipment, which
will increase its cost of sales. Accordingly the Company will need to continue
to reduce its per unit production costs through increased automation, increased
volume and reduced packaging costs in order to improve, or even to maintain, its
gross margins. See "Risk Factors -- Manufacturing Capacity Constraints; Risks
Associated With Expansion and Automation of Manufacturing Operations."
Selling and Marketing Expenses. Selling and marketing expenses are
comprised primarily of cooperative merchandising allowances, salaries,
commissions and benefits for selling and marketing personnel, sample diagnostic
products provided to eyecare practitioners without charge and postage and
freight charges not billed to customers. Cooperative merchandising allowances
are reimbursements made principally to chain stores and mass merchants for items
such as advertising, displays and mailings that are intended to encourage the
fitting and wearing of the Company's lenses for disposable replacement regimens.
These allowances are limited to a percentage of purchases of lenses for
disposable replacement regimens from the Company. Selling and marketing expenses
increased 45.3% to $12.0 million, or 22.6% of net sales, in the six months ended
June 30, 1997 from $8.2 million, or 21.2% of net sales, in the six months ended
June 30, 1996. Nearly half of the dollar increase and substantially all of the
increase in the percentage of net sales resulted from increases in cooperative
merchandising allowances. An additional portion of the dollar increase came from
increased selling and marketing expenses in the United Kingdom and Canada and
increased shipments of diagnostic lenses to eyecare practitioners without
charge. The Company expects that it will continue to increase cooperative
merchandising allowances as a percentage of net sales in order to seek further
market share increases and, as a result, that selling and marketing expenses
will increase as a percentage of net sales.
General and Administrative Expenses. General and administrative expenses
are comprised primarily of salaries and benefits for distribution personnel,
general and administrative personnel, research and development personnel,
professional services, consultants' fees and non-manufacturing facilities costs.
General and administrative expenses increased 14.3% to $10.1 million in the six
months ended June 30, 1997 from $8.8 million in the six months ended June 30,
1996, but declined as a percentage of net sales from 22.7% to 19.0%. The
majority of the dollar increase came from sales and use tax provisions, higher
salaries and benefits to employees, fees to regulatory consultants and increased
depreciation. Substantially all of the decrease in the percentage of net sales
came from reductions in professional fees, partially as a result of the
settlement of the U.K. Litigation in February 1997. The Company believes that
its general and administrative expenses will
25
<PAGE> 27
increase as a result of expenses associated with being a public company and
amortization of intangible assets acquired in connection with the settlement of
the U.K. Litigation.
Interest and Other Expense, Net. Interest and other expense, net decreased
36.5% to $845,000, or 1.6% of net sales, in the six months ended June 30, 1997,
from $1.3 million, or 3.4% of net sales, in the three months ended March 31,
1996. This decrease primarily resulted from a reduction in the aggregate amount
of the Company's borrowings.
Income Taxes. Income taxes were $2.9 million in the six months ended June
30, 1997 and $1.3 million in the six months ended June 30, 1996 and income taxes
as a percentage of income before taxes increased to 30.0% in the six months
ended June 30, 1997 from 28.2% in the six months ended June 30, 1996. The
absolute level of the Company's effective tax rate is affected favorably by
earnings attributable to the Company's Puerto Rican operations, which are
partially exempt from United States income taxation. The Company anticipates
that it will continue to benefit from this favorable effect through 2001, when
the benefit of this exemption will expire for the Company under the current
provisions of the statute. Pending federal legislation would, if adopted, extend
this exemption beyond 2001 or replace it with other tax benefits after that
year. In addition, the Company's planned installation of highly automated
production lines in Puerto Rico could cause an increase in the Company's tax
rate if the automation results in a significant reduction in the Company's labor
costs in Puerto Rico in relation to its Puerto Rican earnings. See Note 11 of
Notes to Consolidated Financial Statements.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. Net sales increased 32.9% to $90.5 million in 1996 from $68.1
million in 1995. Substantially all of this growth resulted from increased sales
of the Company's weekly disposable lens products. The overall average price of
the Company's lenses for weekly disposable replacement regimens was similar in
1995 and 1996. The Company's sales of lenses for annual replacement regimens
declined slightly in both volume and average price from 1995 to 1996.
Gross Profit. Gross profit increased 30.8% to $54.0 million in 1996 from
$41.3 million in 1995, but gross margin decreased to 59.6% in 1996 from 60.6% in
1995. Gross margin declined primarily as a result of a faster decrease in
overall average selling price than decreases in unit cost of sales. The
reduction in overall average selling price of 13.2% was caused by an increased
percentage of lenses for disposable replacement regimens, which have lower
prices, and an increased percentage of lower-priced international distributor
sales in the Company's product mix. Implementation of certain manufacturing
process improvements was delayed by an unrelated postponement by the FDA of its
GMP inspection of the Company's new United Kingdom facility, and this delay
prevented the reduction in cost of sales from completely offsetting the
reduction in average selling price as planned. Additionally, the Company
recorded provisions in 1996 totalling approximately $500,000 related to start-up
and scrap costs in connection with the transition from vial to blister packaging
of the Company's lenses for disposable replacement regimens.
Selling and Marketing Expenses. Selling and marketing expenses increased
54.3% to $18.1 million in 1996 from $11.7 million in 1995, while increasing to
20.0% of net sales in 1996 from 17.2% of net sales in 1995. A combination of
increased expenditures for cooperative merchandising allowances and, to a lesser
extent, for Company-paid freight caused both by an increase in volume and by the
need to fulfill product backorders rapidly and for shipments of diagnostic
lenses to eyecare practitioners without charge accounted for $4.6 million of the
year-to-year increase. Both the shipment of free diagnostic lenses and the
payment of cooperative merchandising allowances were factors related to the
Company's sales of disposable lenses, which grew at rates in excess of the
Company's overall net sales volume. The increase in cooperative merchandising
allowances accounted for substantially all of the increase in selling and
marketing expenses as a percentage of net sales, with increases in advertising
and promotion accounting for the remainder.
General and Administrative Expenses. General and administrative expenses
increased 28.9% to $18.4 million in 1996 from $14.3 million in 1995, but
decreased as a percentage of net sales to 20.3% from 21.0%. Legal expenses
related to the U.K. Litigation and the expense of the associated settlement
accounted for $1.2 million of the year-to-year dollar increase in general and
administrative expenses. Most of the
26
<PAGE> 28
remaining increase resulted from increases in building and utilities expenses,
salaries and benefits for general and administrative personnel and professional
fees. Excluding expenses of the U.K. Litigation, general and administrative
expenses would have decreased to 17.6% of net sales in 1996 from 19.0% of net
sales in 1995. This decrease was the result of limited growth in distribution
expenses relative to the growth in net sales and absolute declines in the dollar
amounts of amortization of goodwill and other intangibles and of research and
development expenses.
Income From Operations. Income from operations increased 14.3% to $17.4
million in 1996 from $15.3 million in 1995 but decreased to 19.3% of net sales
in 1996 from 22.4% of net sales in 1995. Excluding expenses of the U.K.
Litigation, income from operations in 1996 would have been 22.0% of net sales,
as compared to 24.3% of net sales in 1995.
Interest and Other Expense, Net. Interest and other expense, net increased
to $3.3 million in 1996 from $2.6 million in 1995 as a result of an increase in
interest expense, a decrease in interest income and a decrease in other income.
Income Taxes. Income taxes were $4.0 million in 1996 and $3.9 million in
1995. Income taxes declined as a percentage of income before taxes to 28.2% in
1996 from 30.6% in 1995. This reduction in the Company's effective income tax
rate resulted from an increase in earnings attributable to the Company's Puerto
Rican operations, which are partially exempt from United States income taxation.
Net Income. Net income increased 15.8% to $10.2 million in 1996 from $8.8
million in 1995. Excluding expenses of the U.K. Litigation, net income would
have increased $2.3 million or 23.5% from 1995 to 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net Sales. Net sales increased 40.4% to $68.1 million in 1995 from $48.5
million in 1994. This growth in net sales resulted primarily from introduction
of the Company's 55% water lens for weekly disposable replacement regimens in
the first quarter of 1995 and continued increases in unit sales of the Company's
38% water lens for weekly disposable replacement regimens and, to a
significantly lesser extent, unit sales of the Company's daily-wear annual
replacement lenses.
Gross Profit. Gross profit increased to $41.3 million in 1995 from $26.0
million in 1994, while gross margin increased to 60.6% in 1995 from 53.5% in
1994. Gross margin improved because of per unit production cost declines
resulting from manufacturing volume increases and process improvements. These
per unit production cost declines more than offset a significant reduction in
overall average selling price caused by the increased percentage of lower-priced
disposable products in the Company's product mix. The Company incurred no
significant start-up costs from the launch of its second weekly disposable lens
product, and maintained historical product return and sales allowance rates as
well as provisions for excess and obsolete inventory.
Selling and Marketing Expenses. Selling and marketing expenses increased
83.1% to $11.7 million in 1995 from $6.4 million in 1994, while increasing to
17.2% of net sales in 1995 from 13.2% of net sales in 1994. A combination of
increased staffing levels in the United States, shipment of diagnostic lenses to
eyecare practitioners without charge, cooperative merchandising allowances and
company-paid freight caused largely by fulfillment of product backorders
accounted for $4.3 million of the year-to-year dollar increase and a substantial
majority of the increase in percentage of net sales. Both the shipment of free
diagnostic lenses and the payment of cooperative merchandising allowances were
factors related to the Company's sales of disposable lenses, which grew more
rapidly than the Company's overall net sales volume.
General and Administrative Expenses. General and administrative expenses
increased 28.9% to $14.3 million in 1995 from $11.1 million in 1994 but
decreased to 21.0% of net sales in 1995 from 22.9% of net sales in 1994.
Increased staffing levels in the Company's distribution center and finance
department, together with increases in depreciation and amortization related to
increased capital expenditures, accounted for $1.8 million of the increase.
Legal fees for the U.K. Litigation accounted for $771,000 of the year-to-year
increase. Excluding expenses of the U.K. Litigation, general and administrative
expenses declined from 21.7% of net sales in 1994 to 19.0% of net sales in 1995.
27
<PAGE> 29
Income From Operations. Income from operations increased 80.3% to $15.3
million in 1995 from $8.5 million in 1994, while increasing to 22.4% of net
sales in 1995 from 17.4% of net sales in 1994. Excluding expenses of the U.K.
Litigation, income from operations would have increased to 24.3% of net sales in
1995 from 18.6% of net sales in 1994.
Interest and Other Expense, Net. Interest and other expense, net decreased
to $2.6 million in 1995 from $3.4 million in 1994 as a result of lower
borrowings under the Company's credit facility, increased interest income on
higher cash and cash equivalent balances and increased other income.
Income Taxes. Income taxes in 1995 were $3.9 million or 30.6% of income
before taxes. In 1994, the Company did not record a tax provision because of
operating loss carryforwards from prior years. Those losses were fully utilized
in 1994. The effective tax rate for 1995 was below the combined federal and
state statutory rates, principally as a result of earnings attributable to the
Company's Puerto Rican operations, which are partially exempt from U.S. income
taxation.
Net Income. Net income increased 74.5% to $8.8 million in 1995 from $5.0
million in 1994. Excluding expenses of the U.K. Litigation, net income would
have increased 73.8% to $9.7 million in 1995 from $5.6 million in 1994.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth the consolidated statements of income of the
Company for its nine most recent quarters. In the opinion of management, this
unaudited consolidated financial information has been prepared on the same basis
as the audited consolidated financial information, and includes all adjustments
(consisting only of normal, recurring adjustments) necessary to present this
information fairly when read in conjunction with the Company's consolidated
financial statements and notes thereto appearing elsewhere in this Prospectus.
The operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $ 16,408 $18,249 $ 19,537 $17,176 $ 21,674 $25,600 $ 26,059 $23,879 $ 29,090
Cost of sales................ 7,036 6,722 6,904 6,891 9,037 10,207 10,418 9,462 10,958
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............... 9,372 11,527 12,633 10,285 12,637 15,393 15,641 14,417 18,132
Selling and marketing
expenses................... 2,975 2,923 3,238 3,723 4,519 4,765 5,094 5,774 6,198
General and administrative
expenses................... 3,649 3,875 3,486 4,340 4,473 4,649 4,958 5,399 4,676
------- ------- ------- ------- ------- ------- ------- ------- -------
Income from operations..... 2,748 4,729 5,909 2,222 3,645 5,979 5,589 3,244 7,258
Interest and other expense,
net........................ (611) (704) (635) (689) (643) (963) (975) (641) (204)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before taxes........ 2,137 4,025 5,274 1,533 3,002 5,016 4,614 2,603 7,054
Income taxes................. (641) (1,351) (1,510) (429) (847) (1,415) (1,298) (781) (2,116)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income................. $ 1,496 $ 2,674 $ 3,764 $ 1,104 $ 2,155 $ 3,601 $ 3,316 $ 1,822 $ 4,938
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
AS A PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- --------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................ 42.9 36.8 35.3 40.1 41.7 39.9 40.0 39.6 37.7
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross margin............... 57.1 63.2 64.7 59.9 58.3 60.1 60.0 60.4 62.3
Selling and marketing
expenses................... 18.1 16.0 16.6 21.7 20.9 18.6 19.6 24.2 21.3
General and administrative
expenses................... 22.3 21.3 17.8 25.3 20.6 18.1 19.0 22.6 16.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Income from operations..... 16.7 25.9 30.3 12.9 16.8 23.4 21.4 13.6 25.0
Interest and other expense,
net........................ (3.7) (3.8) (3.3) (4.0) (3.0) (3.8) (3.7) (2.7) (0.7)
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before taxes........ 13.0 22.1 27.0 8.9 13.8 19.6 17.7 10.9 24.3
Income taxes................. (3.9) (7.4) (7.7) (2.5) (3.9) (5.5) (5.0) (3.3) (7.3)
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income................. 9.1% 14.7% 19.3% 6.4% 9.9% 14.1% 12.7% 7.6% 17.0%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
28
<PAGE> 30
The Company's quarterly operating results have varied in the past and are
likely to vary in the future significantly based upon a number of factors. The
Company's historical sales have exhibited significant seasonality, with the
third and fourth quarters having the highest net sales in any year and the first
quarter of the following year having lower net sales than the preceding two
quarters. The Company believes that the seasonality of its quarterly results is
primarily due to consumer buying habits. The Company believes that the
historical increase in sales of its products in the third and fourth quarters
have been due to late summer (back-to-school) purchases by consumers and to
higher traffic in the fourth quarter through malls and mass merchandisers with
optical outlets. The Company further believes that the historical decline in the
first quarter has been due to reduced consumer buying in the post-holiday
season. In addition, due to the relatively high proportion of the Company's
fixed costs to its total costs, the Company's level of profitability has
historically increased significantly with increasing sales volumes, resulting in
disproportionately better results in the second half of each year. There can be
no assurance that these patterns will not continue in future years, although the
pattern may be somewhat less pronounced if the Company continues to increase the
proportion of sales represented by more frequently replaced lenses for
disposable replacement regimens. See "Risk Factors -- Fluctuations In Operating
Results; Seasonality; Decreasing Average Sales Prices."
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, a fair market value-based method of accounting for employee
stock options or similar equity instruments. The Company has elected to continue
to measure compensation cost under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," as was previously required, and to
comply with pro forma disclosure of net income and earnings per share as if the
fair market value-based method of accounting had been applied.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS 128 supersedes APB Opinion No. 15, "Earnings Per
Share," and specifies the computation, presentation, and disclosure requirements
for earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. It replaces the presentation of primary EPS with a
presentation of basic EPS and replaces the presentation of fully diluted EPS
with a presentation of diluted EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. The Company will adopt SFAS 128 for its interim and
annual consolidated financial statements that end after December 15, 1997 and
will restate all prior period earnings per share data. The Company expects that
its basic earnings per share will be greater than primary earnings per share and
diluted earnings per share will be substantially similar to the pro forma net
income per share disclosed in the consolidated financial statements included
elsewhere in this Prospectus.
LIQUIDITY AND CAPITAL RESOURCES
From January 1, 1994 to June 30, 1997, the Company's cash flows from
operating activities have been sufficient to fund substantially all of the
Company's cash requirements. Over this period, the Company generated cash-based
earnings (net income plus depreciation and amortization) of $43.9 million, which
were utilized to make purchases of property, plant and equipment of $34.0
million and to effect net repayments of long-term debt of $5.0 million. A
provision has been made for income taxes on unremitted earnings of subsidiaries
except in cases in which earnings of foreign subsidiaries are deemed to be
invested indefinitely. Such earnings would become taxable and payable upon the
sale or liquidation of these subsidiaries or upon remittance of dividends.
Although it is not practical to estimate the amount of additional tax that might
be payable upon such events, credits for foreign income taxes paid will be
available, at tax rates substantially equal to any resulting U.S. tax liability.
Net cash provided by operating activities was $10.0 million in 1994, $9.5
million in 1995, $12.7 million in 1996 and $10.7 million in the first six months
of 1997.
Working capital increased from $11.9 million at December 31, 1995 to $15.1
million at December 31, 1996 and then decreased to $4.0 million at June 30,
1997. The increase from 1995 to 1996 was primarily
29
<PAGE> 31
caused by an increase in accounts receivable offset in part by an increase in
accrued liabilities. The decrease from 1996 to 1997 was primarily the result of
an increase in accrued liabilities associated with the settlement of the U.K.
Litigation. At June 30, 1997, the Company had a cash and cash equivalents
balance of $4.0 million and restricted cash of $455,000 held in escrow for the
rent of the Company's United Kingdom facility.
In 1994, 1995, 1996 and the first six months of 1997, net cash provided by
operating activities was derived principally from net income of $5.0 million,
$8.8 million, $10.2 million and $6.8 million, respectively, adjusted for
depreciation and amortization of $2.1 million, $2.6 million, $4.9 million and
$3.5 million, respectively, offset by changes in operating assets and
liabilities.
Net cash used in investing activities in 1994, 1995, 1996 and the first six
months of 1997 was $2.1 million, $15.9 million, $11.5 million and $8.1 million.
In 1994, 1995 and 1996, substantially all of this net cash was used to purchase
property and equipment. In the first six months of 1997, the Company used $3.3
million to purchase intangible assets as part of the settlement of the U.K.
Litigation and $6.0 million to purchase property and equipment. Net cash used in
financing activities in 1994, 1995, 1996 and the first six months of 1997 was
$2.0 million, $217,000, $316,000 and $2.4 million. In each of these periods, net
cash was used primarily for net repayments of long-term debt.
Under the Comerica Credit Agreement, as of June 30, 1997, the Company had
outstanding $8.0 million principal amount of loans under a term loan facility
and $5.5 million principal amount of loans under a revolving line of credit
facility, all of which bore interest as of such date at a rate of approximately
8.2% per annum. The Company will utilize a portion of the net proceeds from this
offering to repay these loans in full. See "Use of Proceeds" and Note 6 of Notes
to Consolidated Financial Statements. Effective upon the closing of this
offering, the Company intends to amend the Comerica Credit Agreement and has
received a commitment from Comerica Bank-California for an amended and restated
credit agreement (the "Amended Credit Agreement") under which the Company could
borrow up to $20 million in revolving credit loans. Outstanding borrowings under
the Amended Credit Agreement are expected to fluctuate based on investment
levels in working capital and property and equipment. The Company expects that
the Amended Credit Agreement will terminate on June 30, 2000, and will be
secured by a pledge of stock of the Company's subsidiaries. Following the
closing of this offering, borrowings under the Amended Credit Agreement would
bear interest at Comerica's prime rate or at Comerica's Eurodollar rate plus a
specified margin that varies based on the Company's ratio of debt to tangible
net worth. The Company's Puerto Rican subsidiary also has a credit facility with
Banco Bilbao de Vizcaya, Puerto Rico ("BBV"), under which it may borrow up to
$5.8 million for the construction and development of a new manufacturing
facility in Puerto Rico and the purchase of new equipment. This loan is
guaranteed by the Company, matures in December 1997 and is secured by the
machinery and equipment purchased with the loan proceeds. As of June 30, 1997,
the Company's Puerto Rican subsidiary had loans with a principal amount of $2.0
million outstanding under this facility. The Company is negotiating with BBV for
an increase in the size and extension of the maturity of this facility. The
Company's Puerto Rican subsidiary has received a commitment from the Government
Development Bank for Puerto Rico (the "GDB") to provide up to $10.0 million of
long-term loans to refinance its borrowings from BBV upon completion of the new
manufacturing facility, and the Company is currently negotiating with the BBV
for a corresponding increase in its commitment. See Note 6 of Notes to
Consolidated Financial Statements. The Company's new financing arrangements with
Comerica Bank -- California and the GDB are subject to definitive documentation
and certain other conditions, and no assurance can be given as whether, or on
what terms, the Company will enter into such arrangements.
The Company is obligated to pay the remaining $6.7 million owed under the
settlement agreement in the U.K. Litigation upon the closing of this offering.
See "Certain Transactions -- OSL Acquisition and Related Litigation." The
Company also intends to use a portion of the net proceeds of this offering to
repay a $2.9 million note to John D. Fruth, the Company's President. In
addition, the Company is obligated to make minimum base payments on
noncancelable operating leases of $2.3 million, $2.2 million and $2.1 million in
1997, 1998 and 1999, respectively. Finally, the Company has existing commitments
to make capital expenditures of $2.9 million and expects to make additional
capital expenditures of $40.6 million through 1998, primarily to add highly
automated production lines at its facility in the United Kingdom and for
equipment and leasehold improvements at its planned new facility in Puerto Rico.
See "Use of Proceeds."
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<PAGE> 32
The Company believes that the net proceeds from this offering, together
with its current cash and cash equivalents, further borrowings available under
its credit facilities and its anticipated net cash flow from operations, will be
sufficient to meet its anticipated cash needs for working capital, contractual
commitments and capital expenditures for at least the next 12 months. If cash
generated from operations proves insufficient to satisfy the Company's liquidity
requirements, the Company may seek to sell additional equity or debt securities
or obtain another credit facility. The sale of additional equity or convertible
debt securities could result in additional dilution to the Company's
stockholders. The sale of additional debt or further bank borrowings could
subject the Company to additional restrictive financial covenants and
restrictions on the payment of dividends. There can be no assurance that
financing will be available to the Company in amounts or on terms acceptable to
the Company, if at all.
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<PAGE> 33
BUSINESS
The Company is a rapidly growing manufacturer and marketer of soft contact
lenses. The Company manufactures a broad line of soft contact lenses for annual
and disposable replacement regimens. The Company believes that its lens designs
provide wearers with a higher level of comfort and greater ease of handling than
those of its leading competitors. The Company's manufacturing technologies
permit consistent, cost-effective reproduction of these designs, allowing the
Company to offer its lenses at competitive prices. In addition, the Company has
implemented marketing strategies designed to assist eyecare practitioners, both
in independent practice and in retail chains, in retaining their patients and
monitoring their patients' ocular health, thereby providing a significant
incentive for practitioners to prescribe the Company's lenses. Furthermore, the
Company has continuously focused on lowering its non-manufacturing costs, or
"cost-to-serve," enabling it to increase its profitability and its flexibility
to reduce prices. To minimize its cost-to-serve, the Company utilizes a
telemarketing sales force and directs its marketing efforts toward eyecare
practitioners rather than consumers.
The Company believes that practitioners can increase their patient
retention and provide better ongoing patient care by providing
competitively-priced, high-quality products that are differentiated by brand
from those provided by competing channels. Accordingly, the Company has
successfully implemented a strategy to address the needs of eyecare
practitioners. The Company markets its lenses solely to eyecare practitioners,
both in private practice and in retail optical chains, rather than to consumers.
The Company believes that focusing on the eyecare practitioner, who
significantly influences the selection of the brand of contact lenses worn by
the patient, is critical to its ability to market contact lenses successfully.
The Company does not sell to mail-order companies, pharmacies or other
distribution channels that do not provide the regular eye examinations necessary
to maintain overall ocular health.
Over the last five years, the Company has established itself as a leader in
the spherical, non-specialty annual replacement segment of the United States
market with a market share estimated at 25% in 1996, based on unit sales. Since
its introduction of lenses for weekly disposable replacement regimens in 1993,
the Company has steadily increased its share of this growing market, reaching
approximately 8% of total unit sales in the United States during the second half
of 1996, based on data published by the Contact Lens Institute. The Company's
overall unit sales have increased at a compound annual growth rate of
approximately 81% since 1992, primarily due to increased sales of its lenses for
weekly disposable replacement regimens. During the same period, while the
overall average selling prices of all of the Company's lenses declined 50%, the
Company reduced its per unit production costs by approximately 64% by spreading
its relatively fixed manufacturing and operating costs over higher production
volumes, and by improving its manufacturing and packaging processes. As a
result, from 1992 to 1996, the Company's net sales and operating income
(excluding non-recurring charges in 1992) have increased at compound annual
growth rates of approximately 53% and 100%, respectively, while its operating
margins improved from 6.6% to 19.3%.
INDUSTRY OVERVIEW
The soft contact lens industry is characterized by increasing lens
consumption, declining unit prices and intense competition among the eyecare
practitioners and retail chains that fit, prescribe and sell contact lenses.
Industry analysts estimate that approximately 50% of the world's population
needs some type of vision correction. In the United States alone, over 130
million people require some form of vision correction. Approximately 26 million
people in the United States, or 20% of those requiring vision correction, wear
contact lenses according to estimates by industry analysts, making the United
States the world's largest market for contact lenses. While contact lenses have
been available for decades, the advent of soft lenses in 1971 changed the
industry substantially and stimulated significant penetration of the eyeglass
market by dramatically reducing the discomfort of earlier rigid lenses.
The first soft contact lenses were generally prescribed for replacement
every one to two years. Although they were significantly more comfortable than
hard contact lenses, they required an extensive cleaning routine, consisting of
daily cleaning with a surfactant cleanser and an additional weekly enzymatic
cleaning to reduce protein accumulation. Even with this cleaning program, these
lenses often became progressively less
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<PAGE> 34
comfortable to wear over time. Additionally, the long replacement schedule of
the lenses increased the likelihood of ocular health problems if the wearer did
not follow the required cleaning program. In response to these and other
factors, soft contact lenses for disposable replacement regimens were introduced
in 1988. These replacement regimens, in which lenses are to be replaced daily,
weekly or monthly, have spurred a rapid increase in contact lens consumption in
the United States. While contact lenses for disposable replacement regimens are
often made from the same or similar polymers and can have the same or similar
designs as lenses for annual replacement regimens, they are generally produced
at substantially higher volumes, sold in larger quantities and packaged in less
expensive materials. These factors allow the lenses to be sold at substantially
reduced per unit prices, making more frequent lens replacement economically
feasible for the consumer.
Largely as a result of this increased frequency of lens replacement, the
number of soft contact lenses sold in the United States has increased at a
compound annual growth rate of approximately 20% from 1985 to 1995, according to
Health Products Research, a market research firm. This increase in unit sales
has provided increased manufacturing economies of scale that, together with
increased competition in distribution channels, has led to significant
reductions in average retail prices for lenses for disposable replacement
regimens. The Company believes that this, in turn, has led to further increases
in lens consumption. Despite the decline in per unit prices, as wearers switch
to more frequent replacement regimens, their annual expenditures for lenses
increase. For example, the Company's annual sales are from five to seven times
higher for a wearer following a bi-weekly replacement regimen than they are for
a wearer following an annual replacement regimen. As a result, total dollar
sales of contact lenses in the United States has increased at a compound annual
growth rate of approximately 11% per year from 1994 through 1996. The Company
believes that the United States market for contact lenses will continue to grow,
although at a slower rate, as wearers continue to shift towards more frequent
lens replacement regimens. In addition, according to industry studies, while the
United States and Canadian market represented approximately 50% of worldwide
contact lens unit sales volumes in 1996, market growth rates outside the United
States now exceed those in the United States. The Company believes that
international contact lens sales will continue to increase as low-priced,
disposable contact lenses become increasingly available in many international
markets.
Most contact lenses are purchased from optometrists, either in private
practice or in retail chains, and from ophthalmologists in private practice. The
Company believes, based on a 1994 study sponsored by the American Academy of
Ophthalmology and management's experience in the eyecare industry, that the
eyecare profession suffers from a surplus of eyecare practitioners and believes
that the resulting competitive pressure has been exacerbated by the increased
prevalence of retail optical chains and mass merchandisers that provide eyecare
services. Eyecare practitioners in retail chains offer services and products
similar to those provided by practitioners in private practice but offer longer
hours in more convenient locations, such as shopping malls and other
high-traffic areas. Retail chains generally require higher patient volumes and
accordingly rely heavily on consumer advertising and promotional pricing to
generate sales. Consequently, the Company believes that competition to acquire
and retain patients has intensified.
The typical eyecare practitioner in both the private practice and retail
chain channels depends heavily on sales of products, such as contact lenses and
eyeglasses. The Company believes, based on a 1996 industry survey, that the
typical optometric practice or retail optical chain realizes approximately
two-thirds of its revenue from sales of corrective products, such as contact
lenses and eyeglasses, and approximately one-third of its revenue from
professional services such as eye examinations. Since the need for vision
correction is chronic, repeat sales of contact lenses can provide the
practitioner with a recurring, predictable revenue base.
While the introduction of disposable lens replacement regimens has led to
growth in the contact lens market, it has placed additional competitive pressure
on practitioners. Traditionally, patients purchased new lenses annually in
connection with their eye examinations. Today, a patient is still required to
see an eyecare practitioner initially to be fitted for contact lenses and to
receive a prescription. After the initial fitting, however, while the patient
may see the practitioner annually to monitor eye health, he or she may purchase
new contact lenses to refill the prescription three or four times per year. Most
patients select contact lenses based on the recommendation of their eyecare
practitioners, and accordingly practitioners have significant influence in
determining the brands of contact lenses worn by their patients. In addition,
because contact lens prescriptions are generally brand-specific, patients
typically continue to purchase the same brand for their
33
<PAGE> 35
prescription refills. However, the prescribing practitioner risks losing the
recurring sales represented by prescription refills as nationally advertised
lens brands are now available through virtually every possible channel of
distribution, including mail-order companies and pharmacies.
The Company believes that practitioners can increase their patient
retention and provide better ongoing patient care by providing
competitively-priced, high-quality products that are differentiated by brand
from those provided by competing channels. As a result, the Company believes
that there exist significant opportunities for manufacturers of contact lenses
that can effectively address these needs. Moreover, the Company believes that
the increased frequency of lens purchases resulting from the shift to lenses for
disposable replacement regimens can provide significant recurring revenues for
manufacturers that are able to produce and distribute large quantities of
high-quality lenses on a cost-effective basis.
STRATEGY
The Company has successfully implemented a strategy based on addressing the
needs of eyecare practitioners. This strategy has enabled the Company to achieve
a leading position in the U.S. market for lenses for annual replacement
regimens. The Company is continuing to pursue this strategy by leveraging the
practitioner relationships and reputation resulting from this leading position
to increase its share of the growing disposable market segment. The Company
believes that its high-quality, efficient manufacturing technology and
cost-effective operations position it to profitably exploit the growth
associated with this high-volume segment. The principal elements of the
Company's strategy include:
Focus Marketing on Eyecare Practitioners. The Company's sales and
marketing efforts are directed at eyecare practitioners because the
practitioner strongly influences the brand of lenses purchased by the
patient. The Company advertises and promotes its products solely to
practitioners rather than to consumers. In addition, the Company does not
sell its lenses to mail-order companies, pharmacies and other distribution
channels that do not provide the eyecare services necessary to confirm lens
fit and monitor ocular health. By bar-coding each disposable unit shipped,
the Company can identify any diversion of its lenses to non-eyecare
practitioner channels. The Company structures its branding and marketing
strategies so that the patient will be more likely to refill prescriptions
from the practitioner or retail chain from whom he or she received the
initial prescription. As a result, the Company believes that it assists
eyecare practitioners in retaining patient reorders and improves
practitioners' ability to monitor their patients' ongoing ocular health,
thereby providing a significant incentive for practitioners to prescribe
the Company's lenses.
Employ Unique Brand Segmentation by Channel. The high-volume use of
lenses for disposable replacement regimens has resulted in increased
mass-market advertising of competing products and intensified competition
across distribution channels. Unlike its larger competitors, which promote
nationally advertised consumer brands across multiple distribution
channels, the Company advertises and promotes its lenses for disposable
replacement regimens under specific brand names for the private practice
channel and other brand names for the retail chain channel. The Company
also provides private label brands for its larger customers. Branding by
distribution channel creates brand exclusivity and allows practitioners to
differentiate lenses sold by them from those sold through competing
channels, providing them with a greater ability to retain their patients'
prescription refill business. The Company believes that, as a result, its
channel-specific branding has become increasingly valuable to eyecare
practitioners. By promoting the repeat purchase of lenses from the
prescribing practitioner, the Company believes that its marketing
strategies increase patient satisfaction and thereby encourage long-term
loyalty to its products, while also motivating practitioners to prescribe
its lenses.
Produce Superior Performing Products. The Company believes that its
contact lenses are superior in performance to those of its major
competitors in terms of comfort and ease of handling. The Company's
advanced dry cast molding process and sophisticated lens designs maximize
wearers' comfort and improve shape retention of lenses, making them easier
for wearers to handle. In addition, the Company's lenses are designed and
manufactured to provide fitting characteristics similar to competitors'
lenses. In general, this interchangeability enables the practitioner to
switch a patient to the Company's
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<PAGE> 36
lenses without extensive refitting time. These advantages enable the
Company to market its lenses to eyecare practitioners for both existing, as
well as new, contact lens wearers.
Emphasize Low-Cost Efficient Manufacturing. With the growth of the
high-volume disposable market segment, low-cost, scalable manufacturing has
become increasingly important. The Company's dry cast molding technology
allows it to manufacture high-quality lenses efficiently. With dry cast
molding, the Company has been able to reduce its manufacturing costs per
lens by approximately 64% over the last three years while increasing its
production volumes approximately 470%. The Company believes that the
increased unit volumes resulting from the growing disposable lens market
and continued investment in automation and capacity will enable it to
further reduce per unit production costs and increase production volumes.
Minimize Cost-to-Serve. A substantial portion of the Company's costs
consists of the costs required to sell and market lenses and to take and
fill an order. The Company focuses on lowering these non-manufacturing
costs, or "cost-to-serve," in order to increase its profitability and its
flexibility to reduce prices. The Company's primary means of minimizing
cost-to-serve are its use of telemarketing rather than a traditional direct
sales organization and its use of advertising targeted to practitioners
rather than to consumers. This strategy differentiates the Company from its
competitors, and the Company believes that the cost of its average sales
call is substantially lower than that of its competitors that rely on field
sales representatives, as the Company's inside sales personnel can make
more calls per day at a lower annual cost per salesperson. Unlike its
leading competitors, which market their products to consumers through
expensive mass-media campaigns, the Company further controls its operating
expenses by directing its marketing solely to the eyecare practitioners who
prescribe contact lenses. In addition, the Company is investing in
increased automation in its distribution operations in order to maintain
its low cost-to-serve.
Expand Internationally Through Strategic Relationships. The Company
believes that many international markets for soft contact lenses will grow
at faster rates than the United States market and that this growth will be
driven by increased availability of low-priced disposable lenses in
developed markets such as Europe, Japan and Canada and by increased
disposable income in emerging markets such as Asia and Latin America.
However, many markets outside the United States do not have the level of
demand necessary for local manufacturers to achieve the economies of scale
required for low-cost lens production. Consistent with its strategy of
minimizing cost-to-serve, the Company's international growth strategy is to
establish strategic distribution and marketing relationships with regional
optical companies, such as the contact lens division of the Carl Zeiss
Company in Europe and Seiko Contactlens, Inc. in Japan, to capitalize on
their existing market presence, customer relationships and local
infrastructure. The Company believes that, as a result, it can target
growing international markets effectively without significant investment in
direct operations.
PRODUCTS
The Company manufactures a broad line of soft contact lenses that it
believes provide performance that is superior to other leading products at
competitive prices. Soft contact lens performance is defined primarily by
comfort (how the lens feels on the eye), handling (ease of placement and
removal), acuity of vision and physiological response. These qualities, in turn,
are determined primarily by lens design and the manufacturing process. The
Company's lenses incorporate sophisticated designs, including extremely thin
edges, a lenticulated carrier and a low-edge apex, that provide a high level of
comfort, enhanced shape retention and ease of handling. The Company's dry cast
molding process further improves handling and comfort by consistently and
accurately reproducing these designs. In addition, the Company's lenses are
designed and manufactured to provide fitting characteristics similar to those of
competitors' lenses. In general, these characteristics enable the practitioner
to switch a patient to the Company's lenses without extensive refitting time.
The Company believes that this interchangeability, together with its lenses'
performance and price, allows practitioners to easily prescribe the Company's
lenses to existing, as well as new, contact lens wearers.
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<PAGE> 37
The Company's contact lenses are made from flexible polymers containing 38%
or 55% water. The Company offers different brands for different replacement
regimens, from weekly and monthly replacement to annual replacement. A wearer's
replacement regimen is generally based on the recommendation of his or her
eyecare practitioner, who typically prescribes a lens brand targeted to that
regimen and who advises the wearer on the appropriate lens care procedures for
that regimen. However, the wearer may actually replace his or her lenses on a
more or less frequent basis. Given the basic functional similarity of lenses for
different replacement regimens, many of the Company's lenses for annual and
disposable replacement regimens are made from the same or similar polymers and
have the same or similar design specifications. Most of the Company's lenses
contain a light blue bulk-applied visibility tint that enables the wearer to see
and handle the lenses more easily, although some of the Company's more expensive
lenses for annual replacement contain a more expensive, individually applied
masked tint that improves handling and is less noticeable in the eye, and some
of the Company's lens are untinted. The Company's lenses for disposable and
annual replacement regimens are generally packaged in different quantities and
priced differently. See "Risk Factors -- Risk of Trade Practice Litigation;
Changes in Trade Practices."
Within different replacement regimens, the Company offers daily-wear
lenses, to be removed, cleaned and disinfected each night, and extended-wear
lenses that may be worn continuously, night and day, for up to seven days. In
addition, within each replacement regimen, the Company offers lenses having
different design parameters, diameters and base curves to enable practitioners
to fit their patients better.
Disposable Replacement Regimens
Lenses marketed for disposable replacement regimens accounted for 65.7% and
73.8% of the Company's net sales in 1996 and the six months ended June 30, 1997,
respectively. See "Risk Factors -- Dependence on Single Product Line; Need to
Increase Sales of Lenses for Disposable Replacement Regimens."
Weekly Replacement Regimens. The Company entered the growing weekly
disposable segment of the soft contact lens market with a 38% water content lens
in September 1993. The Company's introduction of a 55% water content lens in the
first quarter of 1995 provided a product directly competitive with the market
leader, Acuvue, which was the first soft contact lens to be marketed broadly in
the United States for weekly replacement. These lenses are marketed for
replacement every one to two weeks. The Company believes that its 55% water
lenses for weekly replacement can provide handling and comfort superior to that
provided by Acuvue, at a competitive price. The design and water content of the
55% water lens permit a high level of oxygen transmissibility and provide
increased comfort for overnight wear. A February 1997 independent study
comparing the Company's 55% water lens for weekly replacement to Acuvue found
that a substantial majority of the 70 patients studied preferred the Company's
lens for ease of use and comfort. This study reported that overall, 63% of these
70 patients preferred the Company's lens over the Acuvue lens. The Company
believes that its lenses for weekly replacement regimens have demonstrated
strong market acceptance, gaining U.S. market share steadily since their
introduction and representing approximately 8% (based on units sold) of the one
to two week disposable market segment in the United States in 1996. The Company
markets its weekly disposable lenses to independent practitioners under the
Hydron Biomedics, Clinasoft, Procon and Mediflex brands and to retail chains
under the UltraFlex 7/14 brand and private label brands. The Company packages
its lenses for weekly replacement in boxes, each containing six identical
blister-packed lenses.
Monthly Replacement Regimens (Planned Replacement Lenses). The Company
markets its lenses for monthly replacement regimens primarily under the Hydron
ProActive 55, Edge III ProActive and UltraFlex SmartChoice brands. These lenses
are marketed for replacement every one to three months. This replacement regimen
provides a lower cost alternative to weekly replacement.
Daily Replacement Regimens (Under Development). The Company is evaluating
the introduction of a low-cost lens for daily replacement. The product would be
packaged in boxes of 30 lenses. The Company believes that there may be
substantial demand for the convenience of a lens for single-day wear. However,
the Company believes that the level of demand for daily disposable lenses is
still uncertain. Certain of the Company's competitors have introduced, and
certain others plan to introduce, lenses for daily replacement. The Company
intends to evaluate the market response to their offerings before introducing
its own daily
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disposable lens. In addition, because of the substantially greater volume
requirements and lower selling prices that the Company believes will be required
to support daily replacement, the Company does not intend to offer lenses for
this replacement regimen until it has significantly increased its manufacturing
capacity and decreased its per unit production costs. See "Risk
Factors -- Intense Competition" and "-- Manufacturing Capacity Constraints;
Risks Associated with Expansion and Automation of Manufacturing Operations."
Annual Lens Replacement Regimens
The Company is a leading provider of soft lenses for annual replacement
regimens in the United States. Annual replacement lenses accounted for 31.2% and
23.3% of the Company's net sales in 1996 and the six months ended June 30, 1997,
respectively. These lenses must be cleaned nightly, with an additional weekly
enzymatic cleaning to reduce protein accumulation. Patients generally wear these
lenses until they become dirty or uncomfortable (usually a year for 38% water
products and about nine months for 55% water products). The Company markets its
annual replacement lenses primarily under three brand names, Edge III, UltraFlex
and Hydron. These product lines include a number of lens designs to allow
practitioners to choose the lens that best meets their patients' needs. Under
both the Edge III and UltraFlex brands, the Company offers a low-priced,
daily-wear product, a thinner product, a product that is both thinner and larger
in diameter and a product that may be utilized as an extended-wear lens. The
Company packages its lenses for annual replacement regimens in single-lens vials
or blister packs.
Specialty Lenses
Specialty lenses accounted for approximately 2.7% and 2.2% of the Company's
net sales in 1996 and the six months ended June 30, 1997, respectively. Toric
lenses are designed to correct vision for people with astigmatism, which is
characterized by an irregularly shaped cornea. The Company offers daily wear
toric lenses under the Ultra T brand that are manufactured for the Company by a
third party. In addition, the Company manufactures a line of custom toric
lenses, produced to order in its Markham, Ontario facility, although the Company
expects to sell these operations to a third party. These custom lenses accounted
for less than one percent of the Company's net sales in 1996 and the first six
months of 1997. Bifocal contact lenses can help to correct presbyopia, or
age-related difficulty in focusing on near objects. The Company offers daily-
wear bifocal lenses under the Echelon brand that are cast-molded by the Company.
In addition, the Company produces its Versa-Scribe tinted lenses, sold in blue,
aqua and green, to enhance the color of the eye.
SALES AND MARKETING
In the United States and the United Kingdom, the Company's products are
sold primarily by its 54-person inside sales force, based in South San Francisco
and the United Kingdom. In order to maintain a low cost-to-serve, the Company
has utilized an inside sales force since its inception. This inside sales force
relies on telemarketing to sell the Company's products to practitioners, both in
independent practice and retail chains. With over 40,000 practitioners in the
United States, the Company believes that this market can be reached effectively
and frequently through telemarketing, mailings, trade journals and trade shows,
at a relatively low cost. The Company's inside sales personnel can make
presentations to a significantly greater number of practitioners per day than
the traditional field sales representatives used by the Company's principal
competitors, at a lower annual cost per salesperson. The Company believes that
this sales efficiency provides it with a competitive advantage and contributes
to its low cost-to-serve. For larger national accounts, senior management also
frequently makes outside sales calls.
In recruiting its sales personnel, the Company seeks well-educated
candidates who it believes will be capable of both discussing technical
information and developing relationships with practitioners. As part of a
continuing effort to ensure the motivation, professionalism and effectiveness of
its sales representatives, the Company provides each sales representative with
substantial training in a program that was developed by the Company and has been
used since its inception. This program typically includes two weeks of initial
training and at least two hours a week of continuing instruction. This training
emphasizes the development of personal relationships with customers and the
technical aspects of contact lens fitting and design. The Company's current
sales representatives average approximately three years with the Company,
providing a level of experience that the Company believes enables them to work
effectively with optometrists and ophthalmolo-
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gists. Each salesperson is assisted by a computer database that maintains each
practitioner's profile, monitors ongoing activities and orders, allows sales
personnel to enter information for follow-up calls and highlights dates for
return calls.
The Company also utilizes distributors that resell the Company's contact
lenses primarily to independent practitioners. In 1996, sales through
distributors represented approximately 13% of the Company's United States sales
and a substantial majority of its international sales. The Company believes that
by using distributors, it increases the availability of its lenses to many
practitioners who prefer to utilize a single source for several brands of lenses
and manages the costs involved in numerous small orders. In addition, the
Company utilizes advertising targeted to practitioners, such as direct-mail and
advertisements in professional journals, to generate leads for its inside sales
force. The Company also provides customers with substantial merchandising
allowances and has developed a variety of promotional programs to offer lenses
at significantly reduced prices in order to encourage trial of its products.
As a matter of policy, the Company does not sell lenses to mail-order
companies because to do so would be inconsistent with its strategy of focusing
on the practitioner and because they do not provide the regular eye examinations
necessary to check the fit of the lenses and monitor overall ocular health. To
control the distribution of its lenses for disposable replacement regimens, the
Company places serialized bar-codes on each disposable product box and blister
pack and routinely monitors product availability at mail-order companies. The
Company has a policy of terminating the supply of disposable lenses to its
customers who are found to have diverted products to a mail-order company. See
"Risk Factors -- Risk of Trade Practice Litigation; Changes in Trade Practices."
In 1996, the Company sold its products to approximately 13,000 independent
practitioner accounts and approximately 80 retail chains. The Company's
customers in each of the past three years have included 18 of the top 20 United
States optical retailers. Thirteen of these top 20 U.S. retailers, as well as
key international corporate accounts such as Synsam in Scandinavia, have
selected the Company's lenses for their private label. No single customer
accounted for more than approximately 8% of the Company's net sales in 1996. The
Company's ten largest customers in 1996 represented approximately 27% of the
Company's net sales in that year.
Product Branding. The Company has developed many different trademarked
brands for its lenses for disposable replacement regimens. Certain brands are
offered only to independent practitioners. Other brands are offered only to
retail chains. In addition, private label brands are offered to certain
high-volume customers that wish to develop their own brand recognition and
loyalty, and private practitioners (or groups of private practitioners) meeting
certain volume criteria can similarly purchase "semi-exclusive" brands that are
not widely offered to other practitioners in their local market. The Company
believes that this approach differentiates the Company from its leading
competitors, which typically rely heavily on expensive consumer advertising and
promotion of national brands to generate brand awareness and demand. With the
same nationally advertised and promoted brands of disposable lenses available in
a number of major distribution channels, often including mail-order companies
and pharmacies, patients can bypass their original eyecare provider when
purchasing replacement lenses. By marketing its lenses under different brands,
segmented by distribution channel, the Company believes that it can assist
eyecare professionals in retaining their patients and improve patients'
long-term eyecare. See "Risk Factors -- Risk of Trade Practice Litigation;
Changes in Trade Practices."
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The following table summarizes the brands under which the Company's current
lenses for disposable replacement regimens are offered in the independent
practitioner and retail chain channels:
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INDEPENDENT
REPLACEMENT PRACTITIONER RETAIL CHAIN
REGIMEN BRANDS BRANDS
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Monthly Disposable Lenses Hydron ProActive 55 UltraFlex SmartChoice 55
Edge III ProActive UltraFlex SmartChoice
Clinasoft (semi-exclusive) Private labels
Procon (semi-exclusive)
Mediflex (semi-exclusive)
- --------------------------------------------------------------------------------------------
Weekly Disposable Lenses Hydron Biomedics 38 UltraFlex 7/14 38
Hydron Biomedics 55 UltraFlex 7/14 55
Clinasoft (semi-exclusive) Private labels
Procon (semi-exclusive)
Mediflex (semi-exclusive)
- --------------------------------------------------------------------------------------------
</TABLE>
International Markets. The Company anticipates that many international
markets for soft contact lenses will grow at faster rates than the United States
market, driven by increased availability of low-priced disposable lenses in
developed markets such as Europe, Japan and Canada and by increased disposable
income in emerging markets such as Asia and Latin America. However, many markets
outside the United States do not have the volume of demand necessary for local
manufacturers to achieve the economies of scale required for low cost lens
production. As a result, the Company's international strategy is to enter into
strategic distribution and marketing relationships with established regional
optical companies. The Company offers these companies lower cost lenses afforded
by its volume production efficiencies and the marketing benefits of a private
label brand, and they provide the Company with the benefits of their existing
market presence, customer relationships and local infrastructure. The Company
believes that this strategy permits it to target growing international markets
effectively without significant investment in direct operations. See "Risk
Factors -- Risks Relating to International Operations; Need to Increase Sales in
International Markets" and Note 13 of Notes to Consolidated Financial
Statements. The following summarizes the Company's international sales
operations:
Europe. To expand its penetration of this growing market, the Company
has developed strategic partnerships with a number of regional and local
contact lens distributors including the contact lens division of the Carl
Zeiss Company ("Zeiss"). In this relationship, Zeiss sells the Company's
disposable contact lenses under its brand names on a non-exclusive basis
throughout Europe. The Company also currently has distribution
relationships in Europe and the Middle East serving a number of countries,
as well as an inside sales organization based in Southampton, England that
uses telemarketing and other sales methods in the United Kingdom similar to
those used by the Company in the United States.
Canada. The Company has a direct selling organization based in Ontario
that uses field sales representatives as well as direct mail, journal
promotion and cooperative merchandising allowance programs similar to those
used by the Company in the United States. The Company also utilizes a small
number of Canadian distributors to resell its products, primarily to
independent eyecare practitioners.
Latin America. Although the Company expects unit growth in the
disposable segment of this emerging market, it also believes that unit
sales of lenses for annual replacement regimens will grow at a much faster
pace than in North America or Europe because of the lower level of consumer
disposable income. To expand the Company's penetration of this growing
market, the Company has entered into a number of non-exclusive distribution
arrangements in Latin America.
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<PAGE> 41
Asia. The Company believes that the growth of unit sales in this
market will be driven primarily by sales of contact lenses for disposable
replacement regimens, particularly in Japan. Unit sales of lenses for
annual replacement regimens in East Asia are also expected to grow at a
faster rate than in North America or Europe due to comparatively low levels
of consumer disposable income. To capitalize on expected growth in the
Japanese market, the Company has formed a strategic distribution
relationship with Seiko Contactlens, Inc., which is responsible for
obtaining local regulatory approvals and will distribute the Company's
lenses to Japanese eyecare practitioners through its network of
approximately 80 direct sales representatives. The Company has also
established distribution relationships with other soft contact lens
distributors in a number of countries in the Asian market.
DISTRIBUTION
The Company's distribution operations provide its customers with rapid and
reliable deliveries of its products in a cost-effective manner. Because the
Company's customers place both small orders for individual patients and large
inventory stocking orders, the Company's fulfillment system has the flexibility
to receive, fill and ship orders as small as a single lens and as large as tens
of thousands of lenses. Customers may place orders by toll-free telephone call
or by facsimile. Certain of the Company's larger customers use the Company's
electronic data interchange ("EDI") services to place orders and receive order
acknowledgments, invoices, inventory status reports and customized pricing
information online, improving efficiency and timeliness for both the Company and
the customer. If the product is in stock, customer orders received by 2:00 p.m.
local time are generally shipped the same day.
The Company maintains its primary warehouse and distribution facilities in
South San Francisco, California; Eastleigh, United Kingdom; and Markham,
Ontario. The largest and most sophisticated of these distribution centers is the
South San Francisco location, which primarily serves customers in the United
States and Latin America. Customers in Europe and Asia are primarily served from
the Eastleigh, United Kingdom facility and customers in Canada are primarily
served from the Markham, Ontario facility. Lenses are labeled and boxed at the
distribution center based on actual and anticipated customer orders. In 1996, an
average of approximately 2,100 orders were placed daily at the South San
Francisco facility from customers in North and Latin America and downloaded to
the distribution center for picking and shipping.
To further improve its cost-to-serve, the Company is currently testing, and
plans to implement, a highly computerized and automated retrieval system at its
South San Francisco facility. This system is designed to incorporate advanced
handling processes such as automatic dispensing, automated conveyors and radio
frequency dispatch. These processes will be integrated by software that, in
turn, is integrated into the Company's order entry system, allowing orders to be
downloaded, stocking locations determined and fulfillment instructions delivered
automatically.
MANUFACTURING
Substantially all of the Company's products are manufactured in facilities
in Santa Isabel, Puerto Rico and in Eastleigh, United Kingdom. The Company
produces its lenses primarily through a manufacturing process known as dry cast
molding. This process uses a single use, two-part plastic mold that is
manufactured by injection-molding machines utilizing high-precision optical
tooling that is also made by the Company. A liquid monomer mixture is dispensed
into the mold and polymerized to form a finished dry lens. The mold containing
the polymerized lens can be inventoried for an extended period under proper
conditions. The dry lens, once removed from the mold, is immersed in a fluid
bath to extract unreacted monomer and to be hydrated and is then inspected,
packaged and sterilized. Each of the Puerto Rico and United Kingdom plants can
generally hydrate dry lenses manufactured by the other. These capabilities
substantially increase the efficiency and flexibility of the Company's
manufacturing operations.
The Company's dry cast molding process enables the Company to reproduce
consistently the sophisticated designs of its lenses, including the lenticulated
carrier and low-edge apex that provide enhanced shape retention and superior
handling characteristics. In addition, the Company believes that this process
allows the reproduction of lenses that are designed to provide fitting
characteristics similar to those of leading
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<PAGE> 42
competitors' lenses, regardless of their manufacturing process. The Company also
believes that the dry cast molding process provides advantages over certain
alternate production methods in yield, throughput efficiency and performance.
For example, each dry lens in the Company's cast molding process emerges from
the mold completely finished, eliminating the need for additional polishing.
This cast molding process reduces manufacturing steps and facilitates automated
handling and inspection. The Company relies on a non-exclusive, perpetual,
irrevocable patent license for a significant element of its dry cast molding
technology. See "-- Trademarks, Trade Secrets and Patent Licenses." In addition
to dry cast molding, certain of the Company's competitors utilize wet cast
molding, lathing or spin-casting processes. While the Company also manufactures
certain low-volume lenses utilizing lathing, this process accounts for less than
2% of its total production.
The Company believes that dry cast molding is a highly scalable process,
which makes it well suited to address the high-volume requirements of the
growing disposable market. Using this technology, the Company has been able to
increase production volumes by approximately 470% from 1993 to 1996. The
disposable market, however, is relatively price-sensitive, and lenses for
disposable replacement regimens generally have significantly lower selling
prices than lenses for annual replacement regimens. The Company believes that
its ability to compete effectively in this growing market will depend on its
ability to continue to reduce its per unit production costs while increasing
manufacturing capacity and maintaining the high quality of its products.
The Company believes that reducing its manufacturing costs requires
increased automation to further improve manufacturing efficiencies and yields,
improved packaging designs that utilize lower cost materials and larger
production volumes to take advantage of economies of scale. While the Company
has implemented a number of cost reduction measures, such as blister packaging,
hot water extraction, automatic demolding and in-monomer tinting over the past
several years, the most significant improvements are expected to come from the
planned implementation of additional production lines incorporating a new
automated process based on the Company's current dry cast molding technology.
This automated process is currently being developed in a joint effort between
the Company and an engineering consulting firm. Initial design has been
substantially completed, and the Company has placed orders for much of the
equipment necessary for the first of the planned new production lines. This
first line is expected to be operational in 1998. The automated process is
designed to integrate standard components such as automated handling systems,
conveyors, robotics and video inspection into the manufacturing line. The
Company believes that the new automated process will enable it to reduce
significantly the labor content of production as well as unit packaging costs
while increasing yields and efficiencies through improved controls and
consistency of environment. The Company believes that the automated production
lines will be capable of manufacturing considerably greater volumes while
occupying less space than the Company's existing lines and will be installed in
both the United Kingdom and Puerto Rico locations within the next two years. The
Company currently expects to invest approximately $44 million in capital
expenditures on these automated production lines through the year 2000. See
"Risk Factors -- Manufacturing Capacity Constraints; Risks Associated with
Expansion and Automation of Manufacturing Operations."
Over the past two years, the Company at times has experienced significant
backorders for certain of its products, including lenses for disposable
replacement regimens. These backorders resulted primarily from customer demand
for certain products being in excess of the Company's inventory and short-term
production capabilities as well as the Company's inability to gain timely FDA
clearance or approval for certain products. The Company is developing expanded
production capacity and an integrated enterprise-wide computer system to manage
the supply chain dynamics of forecasting, manufacturing, labeling and stocking
of its products. The level of backorders is currently minimal and is limited to
certain low-volume products.
The Company's success will depend in part upon its ability to increase its
production volume on a timely basis while maintaining product quality, reducing
per unit production costs and complying with the FDA's GMP regulations. There
can be no assurance that the Company will not encounter difficulties in
expanding and automating its manufacturing facilities and increasing production,
including problems involving production yields, quality control, construction
delays and shortages of qualified personnel. The Company's failure to reduce per
unit production costs and maintain product quality could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors -- Manufacturing
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<PAGE> 43
Capacity Constraints; Risks of Expansion and Automation of Manufacturing
Operations" and "-- Risks Associated with Interruption of Manufacturing
Operations."
FACILITIES
The Company's principal administrative, sales, marketing, customer service,
packaging and distribution facility is located in South San Francisco,
California. The Company's principal manufacturing facilities are located near
Southampton, United Kingdom, and in Santa Isabel, Puerto Rico. The Company also
maintains sales offices in Canada, Hungary and the United Kingdom.
Rapid growth in sales volumes has required that the Company increase its
capacity by adding manufacturing space. The Company's first United Kingdom
manufacturing facility was established in 1988 and operated by PLL until 1992,
when it was acquired by the Company. The Company opened its second United
Kingdom manufacturing facility in 1996. The Company's Puerto Rican manufacturing
facility was acquired in late 1992 as part of the American Hydron acquisition.
This facility is now operating at or near capacity. As part of the Company's
plan to increase its manufacturing capacity, it intends to relocate its Puerto
Rican manufacturing facilities to a substantially larger new facility to be
constructed and leased near Santa Isabel, Puerto Rico. The Company is in the
process of negotiating the terms for the construction and leasing of the new
manufacturing facility with the Puerto Rican development agency. The Company
expects to begin construction during the third quarter of 1997. Until the new
Puerto Rican facility is completed, the Company intends to utilize excess
capacity in the United Kingdom to meet any requirements for increased volumes of
lens production. See "-- Manufacturing."
The following table describes the Company's principal facilities as of June
30, 1997:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION FUNCTION SQUARE FEET OWNED/LEASED
- ------------------------------- ------------------------------- ----------- -------------
<S> <C> <C> <C>
South San Francisco, Corporate 122,000 Leased
California(1) Headquarters/Sales/Distribution
Eastleigh, United Kingdom(2) Manufacturing 58,700 Leased
Santa Isabel, Puerto Rico(3) Manufacturing 34,372 Leased
Markham, Ontario Sales/Distribution/Custom 12,000 Leased
Manufacturing
Nursling, United Kingdom(4) Manufacturing 18,400 Owned/Leased
Budapest, Hungary Sales/Distribution 775 Leased
</TABLE>
- ---------------
(1) The Company's lease for this facility expires on October 30, 2002, and the
Company has an option to extend the lease until 2007 and to lease an
additional 30,000 square feet.
(2) The Company's lease for this facility expires on December 23, 2010.
(3) Represents three separate buildings. The Company plans to construct a
substantially larger facility in Santa Isabel, Puerto Rico, and to relocate
to this facility from its existing facilities.
(4) Represents three separate buildings. All three are currently vacant. Two are
leased under leases that expire on January 31, 1998 and March 24, 2011.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused primarily on the
development of automated manufacturing processes to increase the efficiency and
capacity of the manufacturing operation. See "-- Manufacturing." In addition,
the Company is engaged to a limited extent in development of new soft contact
lens products and additional features. For example, the Company intends to
develop lenses that absorb ultraviolet light and is evaluating the introduction
of lenses designed for daily disposable replacement regimens. See "-- Government
Regulation." During the years ended December 31, 1994, 1995 and 1996, and the
six months ended June 30, 1997, expenditures for research and development
(including obtaining regulatory approvals) were approximately $900,000, $1.0
million, $1.1 million and $1.1 million, respectively. See "Risk Factors -- Risk
of New Products and Technological Change."
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<PAGE> 44
TRADEMARKS, TRADE SECRETS AND PATENT LICENSES
The Company believes that its trademarks are among its most valuable assets
and has numerous trademark registrations in the United States, Europe and other
foreign countries. The Company's channel-specific branding strategy is dependent
on the Company's strategic use of its trademark portfolio, as the trademark for
each product brand is generally registered. The Company licenses the Hydron
trademarks under a license agreement that prohibits the use of those trademarks
outside of the Americas. The Company believes that there are no currently
pending challenges to the use or registration of any of the Company's material
trademarks. There can be no assurance, however, that the Company's trademarks do
not or will not violate the proprietary rights of others, that they would be
upheld if challenged or that the Company would, in such an event, not be
prevented from using its trademarks, any of which could have a material adverse
effect on the Company and its business.
The Company has obtained non-exclusive licenses from third parties to
patents for certain contact lens designs and manufacturing technologies used in
the production of its products. Pursuant to a patent license agreement with
several parties, including Geoffrey and Anthony Galley, principal stockholders
of the Company, the Company has obtained a perpetual, fully paid, worldwide,
non-exclusive, irrevocable license to certain patents and patent applications
covering technology that is significant in the Company's dry cast molding
processes. See "Certain Transactions -- OSL Acquisition and Related Litigation."
The Company has also obtained non-exclusive, fully paid, perpetual, worldwide
licenses to use certain technology relating to the tinting of lenses and to
manufacture a monomer used to produce certain of its lenses. In addition, the
Company licenses technology used in manufacturing its toric and bifocal contact
lenses under non-exclusive license agreements that limit the sales of products
manufactured using the licensed technology to the Americas. The Company believes
that it has all patent licenses that are necessary for the conduct of the
Company's business. However, to the extent the Company desires or is required to
obtain additional licenses to patents or proprietary rights of others, there can
be no assurance that any such licenses will be available on terms acceptable to
the Company, if at all.
In addition to trademarks and patent licenses, the Company owns certain
trade secrets, copyrights, know-how and other intellectual property. The Company
seeks to protect these assets, in part, by entering into confidentiality
agreements with certain of its business partners, consultants and vendors. There
can be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any such breach or that the Company's trade
secrets and other intellectual property will not otherwise become known or be
independently developed by others and thereby become unprotected. Furthermore,
no assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology or that the Company can
meaningfully protect its rights in unpatented proprietary technology.
The Company's policy is to prosecute and defend its key trademarks, trade
secrets and proprietary technology aggressively. The defense and prosecution of
intellectual property suits and related administrative proceedings are both
costly and time-consuming. There can be no assurance that the prosecution and
defense of the Company's intellectual property will be successful or that the
Company will be able to secure adequate intellectual property protections in the
future. The protection of intellectual property in certain foreign countries is
particularly uncertain. Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling its products, and such events would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Dependence on Trademarks, Patent
Licenses and Trade Secrets; Risk of Intellectual Property Infringement" and
"Certain Transactions -- OSL Acquisition and Related Litigation."
COMPETITION
The market for soft contact lenses is intensely competitive and is
characterized by decreasing prices for many products. The Company's products
compete with the products offered by a number of larger companies including
Johnson & Johnson, Ciba-Geigy, Bausch & Lomb and Wesley Jessen. Most of the
Company's competitors have substantially greater financial, manufacturing,
marketing and technical resources, greater
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<PAGE> 45
market penetration and larger manufacturing volumes than the Company. Among
other things, these advantages may afford the Company's competitors greater
ability to manufacture large volumes of lenses, reduce product prices and
influence customer buying decisions. The Company believes that certain of its
competitors are expanding, or are planning to expand, their manufacturing
capacity, and to implement new, more automated manufacturing processes in order
to support anticipated increases in volume. As many of the costs involved in
producing contact lenses are relatively fixed, if a manufacturer can increase
its volume, it can generally reduce its per unit costs and thereby increase its
flexibility to reduce prices. In addition, competitors may reduce prices to
achieve the sales volumes necessary to utilize their increased capacity. Price
reductions by competitors could make the Company's products less competitive,
and there can be no assurance that the Company would be able to reduce its
prices in response. The Company's ability to respond to competitive pressures by
decreasing its prices without adversely affecting its gross margins and
operating results will depend on its ability to decrease its costs per lens. Any
significant decrease in the Company's costs per lens will depend, in part, on
the Company's ability to increase its sales volume and production capacity.
There can be no assurance that the Company will be able to continue to increase
its sales volume or reduce its per unit production costs. The failure of the
Company to respond to competitive pressures, and particularly price competition,
in a timely manner would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, in
response to competition, the Company may reduce prices, increase cooperative
merchandising allowances or otherwise increase spending, any of which may also
adversely affect its business, financial condition and results of operations.
See "Risk Factors -- Manufacturing Capacity Constraints; Risks Associated with
Expansion and Automation of Manufacturing Operations."
Soft contact lens manufacturers have generally differentiated themselves
from their competitors on the basis of product performance, marketing,
distribution channels and price. The Company believes that it is able to
distinguish its products on the basis of performance advantages and cost to
eyecare professionals and patients. Since the purchase of contact lenses
requires a prescription in the United States, the Company also competes on the
basis of its relationships and reputation with eyecare practitioners. There can
be no assurance that the Company will continue to so distinguish its products or
that it will be able to realize the anticipated reductions in its per unit
production costs.
The market for contact lenses is shifting from lenses marketed for annual
replacement regimens, where the Company has significant experience and a leading
market position, to lenses for disposable replacement regimens, where the
Company is less experienced and has a smaller market share. The disposable lens
segment is particularly competitive and price-sensitive and is currently
dominated by the Acuvue product produced by Johnson & Johnson. The Company
believes that the per unit production costs of Johnson & Johnson and certain of
the Company's other competitors are currently lower than those of the Company. A
significant price reduction by Johnson & Johnson or certain of these other
competitors could limit or reduce the Company's market share in the disposable
lens segment and, as a result, could materially adversely affect the Company's
business, financial condition and results of operations. In addition, the lenses
currently offered in the United States by the Company in the disposable lens
segment are marketed for weekly and monthly replacement regimens. Certain of the
Company's competitors have introduced lenses for daily replacement at lower
prices than their current weekly and bi-weekly disposable lenses. The Company's
ability to enter and to compete effectively in the market for daily disposable
lenses will depend in large part upon the Company's ability to expand its
production capacity and reduce its per unit production costs. Additionally, as
contact lenses for different replacement regimens are often similar, the ability
of competitors to reduce their per unit costs for daily disposable lenses may
also permit them to reduce their costs for lenses marketed for other replacement
regimens. Such reductions, if not matched by the Company, could significantly
adversely impact the Company's ability to compete over a much broader level of
products. See "Risk Factors -- Dependence on Single Product Line; Need to
Increase Sales of Lenses for Disposable Replacement Regimens."
The Company also encounters competition from manufacturers of eyeglasses
and from alternative technologies, such as surgical refractive procedures
(including new refractive laser procedures such as PRK, or photorefractive
keratectomy, and LASIK, or laser in situ keratomileusis). If surgical refractive
procedures become increasingly accepted as an effective and safe technique for
permanent vision correction, they could substantially reduce the demand for
contact lenses by enabling patients to avoid the ongoing costs and
45
<PAGE> 46
inconvenience of contact lenses. Accordingly, there can be no assurance that
these procedures, or other alternative technologies that may be developed in the
future, will not cause a substantial decline in the number of contact lens
wearers and thus have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Intense
Competition" and "Risk Factors -- Risk of New Products and Technological
Change."
GOVERNMENT REGULATION
The FDC Act, other statutes, regulations of the FDA and other agencies as
well as state laws govern the preclinical and clinical testing, manufacture,
labeling, distribution, sale, marketing, advertising and promotion of medical
devices such as contact lenses. Noncompliance with applicable regulations can
result in, among other things, fines, injunctions, product recall or product
seizures, operating restrictions (including suspension of production and
distribution), refusal of the FDA to grant approval of a PMA or clearance of a
510(k), withdrawal of previously granted marketing approvals or clearances, and
criminal prosecution. Sales of the Company's products outside the U.S. are
subject to regulatory requirements that, while generally comparable to those in
the U.S., vary widely from country to country.
FDA Regulation. For purposes of the applicable statutes and regulations,
the Company's products are generally treated as "medical devices." With
exceptions for certain medical devices first marketed before May 28, 1976, prior
to their commercial sale in the United States, medical devices must be cleared
or approved by the FDA or be exempted from the requirement of FDA clearance or
approval. In general, the regulatory process can be lengthy, expensive and
uncertain, and securing FDA clearances or approvals may require the submission
of extensive clinical data together with other supporting information to the
FDA.
In the United States, medical devices are classified as Class I, II or III,
on the basis of the controls deemed by the FDA to be necessary to reasonably
ensure their safety and effectiveness. Class I devices are subject to general
controls (e.g., labeling, 510(k) notification and adherence to FDA-mandated
current GMP requirements), and Class II devices are subject to general controls
and special controls (e.g., performance standards). Generally, Class III devices
are those that must receive premarket approval by the FDA to ensure their safety
and effectiveness (e.g., life-sustaining, life-supporting and implantable
devices) and also include most devices that were not on the market before May
28, 1976 ("new medical devices") and for which the FDA has not made a finding of
"substantial equivalence" based on a 510(k). Class III devices usually require
clinical testing and FDA approval prior to marketing and distribution.
The Company's daily-wear products have been classified as Class II devices
subject to the 510(k) pre-market notification process, while the Company's
extended-wear products have been classified as Class III devices subject to the
PMA requirements. Regulation of the Company's daily-wear products under the
pre-market notification process dictates that new product introductions in this
category be preceded by FDA clearance of a 510(k) pre-market notification
containing information which establishes the new product as substantially
equivalent to a legally marketed Class I or II medical device or to a legally
marketed Class III device that does not itself require an approved PMA prior to
marketing ("predicate device"). A 510(k) must contain information to support a
claim of substantial equivalence, and this information may include laboratory
test results or the results of clinical studies of the device in humans. The FDA
has no specific time limitation by which it must respond to a 510(k). The FDA
may determine that a device is not "substantially equivalent" to a predicate
device or that additional information is needed before a substantial equivalence
determination can be made. The premarket notification process generally takes
five to twelve months without clinical data, or twelve to eighteen months or
more if clinical data are required to be included in the notifications but it
may take longer, and 510(k) clearance may never be obtained. The range of
clinical data required to be included in a 510(k), if any, or a PMA application
varies depending on the nature of the new product or product modification.
Generally, the 510(k) notifications filed by the Company do not require clinical
data, and, if clinical data are required, the trial is short-term. If the
Company is unable to establish to the FDA's satisfaction that a new product is
substantially equivalent to a predicate device, extensive preclinical and
clinical testing will be required, additional costs will be incurred, and FDA
approval of a PMA for the product will be required prior to market entry. Such
approval, which cannot be assured in a timely manner or at all, generally takes
at least eighteen to twenty-four months, and can take substantially longer.
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<PAGE> 47
Regulation of the Company's extended-wear products as Class III devices
requires that the Company submit a PMA to the FDA and obtain its approval of the
application prior to marketing such products in the United States. A PMA must be
supported by valid scientific evidence that typically includes extensive data,
including data from preclinical testing and human clinical trials to demonstrate
the safety and effectiveness of the device. The FDA ordinarily requires the
performance of at least two independent, statistically significant human
clinical trials that must demonstrate the safety and effectiveness of the device
in order to obtain FDA approval of the PMA. If the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) is required to file an investigational device
exemption ("IDE") application with the FDA prior to commencing human clinical
trials. The IDE application must be supported by data, typically including the
results of animal and laboratory testing. If the IDE application is approved by
the FDA and the study protocol is approved by one or more appropriate
institutional review boards ("IRBs"), human clinical trials may begin at a
specific number of investigational sites with a specific number of patients, as
approved by the FDA. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the human clinical trials after obtaining approval
of the study protocol by one or more appropriate IRBs, but FDA approval of an
IDE is not necessary unless the FDA notifies the sponsor that an IDE application
is required. An IDE supplement must be submitted to, and approved by, the FDA
before a sponsor or an investigator may make a change to the investigational
plan that may affect its scientific soundness or the rights, safety or welfare
of human subjects. The FDA has the authority to re-evaluate, alter, suspend or
terminate clinical testing based on its assessment of data collected throughout
the trials.
The PMA must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling and promotional labeling. Once the FDA accepts a PMA
submission for filing, the FDA begins an in-depth review of the PMA. An FDA
review of a PMA generally takes from twelve to eighteen months from the date the
PMA is accepted for filing, but may take significantly longer if the FDA
requests additional information and if the sponsor files any major amendments to
the PMA. The review time is often significantly extended by the FDA's request
for clarification of information already provided in the submission. Toward the
end of the PMA review process, the FDA generally will conduct an inspection of
the manufacturer's facilities to ensure that the facilities are in compliance
with the applicable GMP requirements.
If the FDA's evaluations of both the PMA and the manufacturing facilities
are favorable, the FDA will issue either an approval letter (order) or an
"approvable letter" containing a number of conditions that must be met in order
to secure approval of a PMA. When and if those conditions have been fulfilled to
the satisfaction of the FDA, the agency will issue an order approving the PMA
and authorizing commercial marketing of the device for certain indications. If
the FDA's evaluation of the PMA or manufacturing facilities is not favorable,
the FDA will deny approval of the PMA or issue a "not approvable letter." The
FDA may also determine that additional preclinical testing or human clinical
trials are necessary, in which case approval of the PMA could be delayed for
several years while additional testing or trials are conducted and submitted in
an amendment to the PMA. The PMA process can be expensive, uncertain and
lengthy, and a number of devices for which FDA approval has been sought by other
companies have never been approved for marketing.
Even if 510(k) clearance or PMA approval is obtained, this clearance or
approval can be withdrawn by the FDA due to the failure to comply with
regulatory requirements or the occurrence of unforeseen problems following
initial clearance or approval. Modifications to existing 510(k)-cleared devices,
including changes in design, material, or manufacturing process that could
significantly affect safety or effectiveness, require submission and clearance
of new 510(k) notifications as do significant changes in labeling, e.g., a
change in indications for use. Modifications to a device that is the subject of
an approved PMA, its labeling, or manufacturing process ordinarily require
approval by the FDA of PMA supplements or new PMAs. Supplements to a PMA
typically require the submission of similar information as is required for an
initial PMA, except that the supplement is generally limited to that information
needed to support the proposed change from the product covered by the original
PMA. The approval of supplemental PMAs requires approximately one to two years.
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All of the products currently marketed by the Company have received 510(k)
clearance or PMA approval. The Company anticipates that its planned
ultraviolet-absorbing daily-wear lens will be regulated as a Class II medical
device, requiring submission and clearance of a 510(k), and that its planned
ultraviolet-absorbing extended-wear lens will be regulated as a Class III
medical device, requiring submission and approval of a PMA supplement. There can
be no assurance that these planned products or any other future products will
receive FDA marketing clearance or approval on a timely basis or at all, or that
its new daily-wear lens will not be subjected to the PMA process. The Company
has made minor modifications to its lenses which it believes do not require the
submission and clearance of new 510(k) notifications or the submission and
approval of PMA supplements. There can be no assurance, however, that the FDA
will agree with any of the Company's determinations not to submit new 510(k)
notifications or PMA supplements for these changes, that the FDA will not
require the Company to cease sales and distribution while seeking clearances of
510(k) notifications or approvals of PMA supplements for the changes, or that
such clearances and approvals, if required, will be obtained in a timely manner
or at all.
The FDC Act requires that medical devices, including contact lenses, be
manufactured in accordance with the FDA's GMP regulations. These regulations
require, among other things, that (i) the manufacturing process be regulated,
controlled and documented by the use of written procedures, and (ii) the ability
to produce devices which meet the manufacturer's specifications be validated by
extensive and detailed testing of every aspect of the process. The regulations
also require detailed record keeping and investigation of any deficiencies in
the manufacturing process or in the products produced. Manufacturing facilities
are subject to FDA inspection on a periodic basis to monitor compliance with GMP
requirements. If violations of the applicable regulations are noted during FDA
inspections of manufacturing facilities, the FDA can prohibit further
manufacturing, distribution and sale of the devices until the violations are
cured. On October 7, 1996, the FDA published a revision of its GMP requirements,
incorporating them into a new regulation called the quality system ("QS")
regulation. The QS regulation requires, among other things, pre-production
design controls, purchasing controls and maintenance of service records. The QS
regulation became effective June 1, 1997, except that the FDA has stated that,
as long as manufacturers are taking reasonable steps to come into compliance
with the design control requirements, the FDA will not initiate action
(including enforcement cases) based on a failure to comply with these
requirements before June 1, 1998. Once in effect, the QS regulation is expected
to increase the cost of complying with FDA GMP and related requirements. The
Company believes that its facilities are in compliance with GMP regulations and
that the planned automation of its manufacturing facilities will not require FDA
approval.
The Company is also required to register as a medical device manufacturer
with the FDA. Devices marketed in the United States are subject to pervasive and
continuing regulatory oversight by the FDA and other agencies, and the Company
is subject to periodic inspection and record-keeping requirements. As a medical
device manufacturer, the Company is further required to comply with FDA
requirements regarding the reporting of allegations of death or serious injury
associated with the use of its medical devices, as well as product malfunctions
that would likely cause or contribute to death or serious injury if the
malfunction were to recur. Other FDA requirements govern product labeling and
prohibit a manufacturer from marketing a device with a cleared 510(k) or an
approved PMA for an uncleared or unapproved indication. Failure to comply with
applicable regulatory requirements can result in a wide variety of severe
administrative, civil, and criminal sanctions and penalties. See "Risk
Factors -- Risks of Regulatory Action."
International Regulation. Sales of medical devices outside the U.S. are
subject to foreign regulatory requirements that vary widely from country to
country. These laws and regulations range from simple product registration
requirements in some countries to complex clearance and production controls such
as those described above in others. As a result, the processes and time periods
required to obtain foreign marketing approval may be longer or shorter than
those necessary to obtain FDA approval. These differences may affect the
efficiency and timeliness of international market introduction of the Company's
products, and there can be no assurance that the Company will be able to obtain
regulatory approvals or clearances for its products in foreign countries.
Medical devices sold or marketed in the European Union ("EU") are subject
to the EU's medical devices directive. Under this directive, CE mark
certification procedures became available for medical
48
<PAGE> 49
devices, and the successful completion of such procedures would allow certified
devices to be marketed in all EU countries. In order to obtain the right to
affix the CE mark to its products, medical device companies must obtain
certification that its processes meet European quality standards and establish
that the product is considered safe and fit for its intended purpose. After June
14, 1998, medical devices other than active implants and in vitro diagnostic
products may not be sold in EU countries unless they display the CE mark.
Although member countries must accept for marketing medical devices bearing a CE
marking without imposing further requirements related to product safety and
performance, each country may require the use of its own language or labels and
instructions for use.
The Company may also have to obtain additional approvals from foreign
regulatory authorities in order to sell its products in non-EU countries. Some
countries have historically permitted human studies earlier in the product
development cycle than regulations in the United States permit. Other countries,
such as Japan, have requirements similar to those of the United States. This
disparity in the regulation of medical devices may result in more rapid product
clearance in certain countries than in the United States, while approvals in
countries such as Japan may require longer periods than in the United States.
Seiko Contactlens Inc., the Company's distributor in Japan, will be responsible
for management of clinical trials and obtaining regulatory approval for the
Company's products, and such approval will therefore be outside the Company's
control. Accordingly, there can be no assurance as to when or whether such
approval will be received.
Other Regulation. The Company is also subject to numerous federal, state
and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations in the future or that compliance with such
laws or regulations will not have a material adverse effect upon the Company's
ability to do business.
The Company's success depends to a significant extent upon the success of
its customers in the retail optical industry. These customers are subject to a
variety of federal, state and local laws, regulations and ordinances, including
those regarding advertising, location and design of stores, products sold and
qualifications and practices of the industry. The state and local legal
requirements vary widely among jurisdictions and are subject to frequent change.
Furthermore, numerous health-care related legislative proposals have been made
in recent years in the United States Congress and in various state legislatures.
The potential impact of these proposals with respect to the business of the
Company's customers is uncertain, and there is no assurance that the proposals,
if adopted, would not have a material adverse impact on the Company.
There is substantial United States federal and state governmental
regulation related to the prescribing of contact lenses. These regulations
relate to who is permitted to prescribe and fit contact lenses, the prescriber's
obligation to provide prescriptions to its patients, the length of time a
prescription is valid, the ability or obligation of prescribers to prescribe
lenses by brand rather than by generic equivalent or specification, and other
matters. Although these regulations primarily affect contact lens prescribers,
and not manufacturers or distributors of lenses such as the Company, changes in
these regulations, or their interpretation or enforcement, could adversely
affect the effectiveness of the Company's marketing strategy to eyecare
practitioners, most notably the effectiveness of the Company's channel-specific
and private label branding strategies. Additionally, given the Company's
strategic emphasis on focusing its marketing efforts on eyecare practitioners
rather than consumers, the Company may be more vulnerable than its competitors
to changes in current trade practices. Adverse regulatory or other decisions
affecting eyecare practitioners, or material changes in the selling and
prescribing practices for contact lenses, could have a material adverse affect
on the Company's business, operating results and financial condition.
PRODUCT LIABILITY AND INSURANCE
The Company has in the past been, and continues to be, subject to product
liability claims and lawsuits, and the Company's Canadian subsidiary is
currently a defendant in one such lawsuit, filed by an individual in 1997 in the
Province of Ontario, Canada, alleging that the Company's lenses injured the
plaintiff's cornea and seeking damages of Can.$500,000 plus interest and costs.
Because contact lenses are medical devices, the
48
<PAGE> 50
Company faces an inherent risk of exposure to product liability claims in the
event that the use of its products results in personal injury. The Company also
faces the possibility that defects in the design or manufacture of its products
might necessitate a product recall. From time to time, the Company has received,
and may continue to receive, complaints of significant patient discomfort,
including corneal complications, while using the Company's contact lenses. In
certain cases, the reasons for the problems have never been established. In
addition, on two occasions, in 1995 and 1997, the Company has recalled limited
volumes of certain of its product because certain labels on the vial or blister
did not match the enclosed lens. Although the Company has not experienced
material losses to date due to product liability claims or product recalls,
there can be no assurance that the Company will not experience such losses in
the future, that insurance coverage will be adequate to cover such losses, or
that insurance coverage will be available on acceptable terms or at all. The
Company maintains product liability insurance with coverage of $1 million per
occurrence and an annual aggregate maximum of $2 million with umbrella coverage
of $10 million. A product liability or other judgment against the Company in
excess of the Company's insurance coverage or a product recall could have a
material adverse effect on the Company's business, financial condition and
results of operations.
EMPLOYEES
As of June 30, 1997, the Company had 1,138 full-time employees, including
282 in the United States, 388 in the United Kingdom, 416 in Puerto Rico, 42 in
Canada and 10 in Hungary. Of the Company's full-time employees, 128 are engaged
in sales and marketing, 755 in manufacturing, 173 in distribution, six in
process development and 80 in finance and administration. The Company also
utilizes a number of part-time employees in its manufacturing and distribution
operations to supplement its full-time workforce. The Company's success is
dependent in part on its ability to attract and retain qualified employees. In
particular, the loss of John D. Fruth, the Company's founder and President,
would have a material adverse effect on the Company's development and marketing
efforts. None of the Company's employees is represented by a labor union or is
the subject of a collective bargaining agreement with respect to his or her
employment by the Company. The Company has never experienced a work stoppage and
believes that its employee relations are good. See "Risk Factors -- Dependence
on Key Personnel."
49
<PAGE> 51
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages and
positions as of June 30, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ------------------------------------------------------
<S> <C> <C>
John D. Fruth 53 President, Chief Executive Officer and Chairman of the
Board of Directors
Daniel J. Kunst 44 Vice President, Sales and Marketing, and Director
Gregory E. Lichtwardt 42 Vice President, Finance, Chief Financial Officer and
Treasurer
John Lilley 50 Vice President, Manufacturing
Edgar J. Cummins(1) 54 Director
Terence M. Fruth 59 Director and Corporate Secretary
William R. Grant(1) 72 Director
Francis R. Tunney, Jr.(1) 49 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee and the Compensation Committee
JOHN D. FRUTH founded the Company in 1985 and has been the President, Chief
Executive Officer and Chairman of the Board of Directors of the Company since
its inception. Prior to joining the Company, Mr. Fruth worked in the regulatory
affairs department and served as President, contact lens division, of
CooperVision, Inc., a contact lens manufacturer, from 1976 to 1983. From 1972 to
1976, Mr. Fruth worked in sales and marketing management positions at Bausch &
Lomb, a company that manufactures and markets health-care products, including
contact lenses. John D. Fruth is the brother of Terence M. Fruth.
DANIEL J. KUNST has been Vice President, Sales and Marketing, of the
Company since August 1995. Mr. Kunst has also been a member of the Board of
Directors of the Company since October 1987 and served as Executive Vice
President and Chief Operating Officer of the Company from 1987 to February 1992.
From November 1994 to May 1995, Mr. Kunst served as Chief Executive Officer of
NeoLens, Inc., an optical products company. From January 1993 to October 1994,
Mr. Kunst was President, Chief Executive Officer and a director of Cymed, Inc.,
a manufacturer and marketer of medical devices. From March 1992 to January 1993,
he worked as an independent consultant to ophthalmic companies. Additionally,
from 1990 to 1995, Mr. Kunst was a member of the board of directors of VISX,
Inc., a manufacturer of ophthalmic lasers. From 1979 to 1987, Mr. Kunst held
various management positions with CooperVision, Inc., including President,
Professional Resources Division; Senior Vice President, Ophthalmic Products
Division; and Vice President, Sales and Marketing, Revo Sunglass Division.
GREGORY E. LICHTWARDT has been Vice President, Finance, and Chief Financial
Officer of the Company since April 1993 and Treasurer since May 1997. Prior to
joining the Company, from November 1990 to February 1993, Mr. Lichtwardt was
Vice President, Finance, of the Humphrey Instruments Division of Allergan, Inc.
("Allergan"), a health-care company focused on specialty pharmaceutical
products. From February 1989 to November 1990, he served as Director of
Operations, Accounting and Planning, of Allergan's Optical Division. From
December 1986 to January 1989, he was Corporate Controller of AST Research,
Inc., a personal computer manufacturing company, and from June 1980 to December
1986, Mr. Lichtwardt held several financial positions within several different
divisions of American Hospital Supply Corporation, a health-care and medical
products company.
JOHN LILLEY has been Vice President, Manufacturing, of the Company since
June 1996. From 1990 to June 1996, Dr. Lilley served as Manufacturing Director
of Bespak plc, an English company that manufactures precision plastic
injection-molded components for the pharmaceutical industry. From 1989 to 1990,
he was Operations Director of Birkby Plastics, a division of the Plessey
Plastics Group, which manufactures plastic injection-molded components for the
automotive and computer industries.
52
<PAGE> 52
EDGAR J. CUMMINS has been a member of the Board of Directors of the Company
since October 1992. Since May 1995, Mr. Cummins has served as Chief Financial
Officer of Chiron Vision Corporation, an ophthalmic surgical company. From 1986
to May 1995, he was Chief Financial Officer of Allergan. Prior to his service
with Allergan, Mr. Cummins held various senior financial positions with American
Hospital Supply Corporation, a health-care and medical products company, and
Baxter Travenol Laboratories, Inc., a medical products company, over a period of
seven years. Prior to that, he spent five years as a financial consultant for
Arthur Young & Company, a certified public accounting company. Mr. Cummins also
sits on the board of directors of Biopsys, Inc., a surgical device company.
TERENCE M. FRUTH has been Corporate Secretary and a member of the Board of
Directors of the Company since August 1992. Since 1985, Mr. Fruth has been a
partner, Vice President and Corporate Secretary of Fruth & Anthony, P.A., a
Minneapolis-based law firm specializing in commercial litigation. Mr. Fruth has
been practicing law for 30 years. Mr. Fruth is a member of both the Minnesota
State and American Bar Associations. Terence M. Fruth is the brother of John D.
Fruth.
WILLIAM R. GRANT has been a member of the Board of Directors of the Company
since October 1992. Since 1989, he has been the Chairman of Galen Associates, a
venture capital firm specializing in emerging health-care companies. From 1987
to 1989, Mr. Grant served as Chairman of New York Life International Investment,
and, from 1979 to 1987, he was the Chairman and President of MacKay-Shields
Financial Corporation. Prior to 1979, Mr. Grant had 25 years' experience with
Smith Barney, Harris Upham & Co., Inc., where he served as President and, from
1976 to 1978, Vice Chairman. Mr. Grant currently serves as Vice Chairman of
SmithKline Beecham plc and serves on the boards of directors of Allergan; Fluor
Corporation, an engineering, construction and diversified services company;
MiniMed, Inc., a company that specializes in drug delivery devices and systems;
New York Life Insurance Company, an insurance and financial services company;
Seagull Energy Corporation, an oil and gas company; and Witco Corporation, a
specialty chemicals company.
FRANCIS R. TUNNEY, JR. has been a member of the Board of Directors of the
Company since October 1996. Mr. Tunney has been Corporate Vice President,
General Counsel and Corporate Secretary of Allergan since January 1990. From
1989 to 1991, Mr. Tunney was Senior Vice President, General Counsel and
Corporate Secretary of Allergan. From 1979 to 1989, Mr. Tunney held several
positions at SmithKline Beecham plc, including counsel for its Medical Device
and Diagnostics Division, acting general manager for its Medical Ultrasound
Division and senior international attorney within its corporate law department.
Directors are elected at each annual meeting of stockholders to serve until
the next annual meeting of stockholders, or until their successors are duly
elected and qualified or until their earlier resignation, removal or death.
William R. Grant and Francis R. Tunney, Jr. were elected to the Board of
Directors (the "Board") pursuant to the terms of a shareholders' agreement (the
"Shareholders' Agreement") under which Galen Partners, L.P. and Galen Partners
International, L.P., collectively, are entitled to nominate one director of the
Company and Allergan is entitled to nominate one director of the Company,
subject to certain conditions. See "Certain Transactions -- Allergan/Hydron
Acquisition; Galen Financing." Mr. Grant was nominated by Galen Partners, L.P.
and Galen Partners International, L.P., and Mr. Tunney was nominated by
Allergan. The Shareholders' Agreement will terminate on the closing of this
offering. Executive officers are chosen by, and serve at the discretion of, the
Board of Directors.
BOARD COMMITTEES
The Company's Compensation Committee was formed in January 1993 to review
and approve the compensation and benefits for the Company's key executive
officers, administer the Company's stock purchase and stock option plans and
make recommendations to the Board regarding such matters. The Compensation
Committee is currently composed of Edgar J. Cummins, William R. Grant and
Francis R. Tunney, Jr. No interlocking relationship exists between the Board or
Compensation Committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past. The Audit Committee was formed in January 1993 to review the internal
accounting procedures of the
53
<PAGE> 53
Company and to consult with and review the services provided by the Company's
independent auditors. The Audit Committee is currently comprised of Edgar J.
Cummins, William R. Grant and Francis R. Tunney, Jr.
DIRECTOR COMPENSATION
Members of the Board do not receive cash compensation for their services as
directors but are reimbursed for their reasonable expenses in attending meetings
of the Board. Historically, the Board members have been issued shares as
compensation for service. In January 1997, William R. Grant, Terence M. Fruth,
Edgar J. Cummins and Francis R. Tunney, Jr. were issued 742, 680, 680 and 186
shares of Common Stock, respectively, as compensation for service during 1996.
In June 1997, the Board adopted and the stockholders approved the 1997
Directors Stock Option Plan (the "Directors Plan") and reserved a total of
300,000 shares of the Company's Common Stock for issuance thereunder. Only
members of the Board who are not employees of the Company, or any parent,
subsidiary or affiliate of the Company, are eligible to participate in the
Directors Plan. On the effective date of the Registration Statement (the
"Effective Date"), each eligible director will automatically be granted an
option to purchase 30,000 shares. Each eligible director who becomes a member of
the Board after the Effective Date will automatically be granted an option to
purchase 30,000 shares upon joining the Board. In addition, each eligible
director will automatically be granted an option to purchase 15,000 shares on
each anniversary date of such director's initial option grant under the
Directors Plan if such director has served continuously as a member of the Board
since the date such director was first granted an option under the Directors
Plan. All options issued under the Directors Plan will vest as to 1/36 per month
commencing one month after the date of grant, for so long as the optionee
continues as a member of the Board or as a consultant to the Company. The
exercise price of all options granted under the Directors Plan will be the fair
market value of the Common Stock on the date of grant.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law (regarding
unlawful dividends and stock purchases) or (iv) for any transaction from which
the director derived an improper personal benefit.
As permitted by the Delaware General Corporation Law, the Bylaws of the
Company provide that (i) the Company is required to indemnify its directors and
officers to the fullest extent permitted by the Delaware General Corporation
Law, subject to certain very limited exceptions, (ii) the Company may indemnify
its other employees and agents as set forth in the Delaware General Corporation
Law, (iii) the Company is required to advance expenses, as incurred, to its
directors and executive officers in connection with a legal proceeding to the
fullest extent permitted by the Delaware General Corporation Law, subject to
certain very limited exceptions, (iv) the rights conferred in the Bylaws are not
exclusive and (v) the Company is authorized to enter into indemnification
agreements with its directors, officers, employees and agents.
The Company has entered into indemnity agreements with each of its current
directors and executive officers to give such directors and executive officers
additional contractual assurances regarding the scope of the indemnification set
forth in the Company's Bylaws and to provide additional procedural protections.
At present, there is no pending litigation or proceeding involving a director,
officer or employee of the Company regarding which indemnification is sought,
nor is the Company aware of any threatened litigation that may result in claims
for indemnification.
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<PAGE> 54
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation awarded to, earned by, or paid for services rendered to the Company
in all capacities during 1996 by (i) the Company's Chief Executive officer and
(ii) each of the Company's three other executive officers (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION
----------------------------------------- AWARDS
OTHER ANNUAL ---------------------------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(1) SECURITIES UNDERLYING OPTIONS (#)
- ------------------------------ --------- -------- ------------------ ---------------------------------
<S> <C> <C> <C> <C>
John D. Fruth, President and
Chief Executive Officer..... $ 262,692 $101,635 $ 6,234(2) --
Gregory E. Lichtwardt, Vice
President, Finance, Chief
Financial Officer and
Treasurer................... 133,000 34,467 167 --
Daniel J. Kunst, Vice
President, Sales and
Marketing................... 135,000 11,553 173 --
John Lilley, Vice President,
Manufacturing(3)............ 88,667 -- 32,397(4) 80,000
</TABLE>
- ---------------
(1) For all but John D. Fruth and John Lilley, Other Annual Compensation
represents premiums paid by the Company with respect to life insurance for
the benefit of the respective individual.
(2) Represents premiums paid by the Company with respect to term life insurance
for John D. Fruth's benefit in the amount of $884 and automobile expenses
paid by the Company for his benefit in the amount of $5,350.
(3) On March 27, 1996, the Company executed an employment agreement with John
Lilley, and in June 1996 he joined the Company. The Company agreed to employ
Dr. Lilley as Vice President, Manufacturing at an annual salary of L95,000.
In addition, Dr. Lilley is eligible to receive a bonus of up to 40% of his
annual salary at the discretion of the Company based on the achievement of
manufacturing goals and objectives established by the Company at the start
of each fiscal year. Dr. Lilley also received an option to purchase 80,000
shares of the Company's Common Stock at an exercise price of $5.03 per
share. Under the employment agreement, his employment will continue unless
and until either the Company or Dr. Lilley serves on the other 12 months'
notice of termination, provided that the Company has the right to terminate
his employment upon his 65th birthday.
(4) Represents a $22,165 contribution by the Company to a pension plan for the
benefit of Dr. Lilley and a $10,232 reimbursement for automobile expenses.
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<PAGE> 55
OPTION GRANTS IN 1996
The following table sets forth information regarding option grants during
1996 to each of the Named Executive Officers. In accordance with the rules of
the Securities and Exchange Commission, the table sets forth the hypothetical
gains or "option spreads" that would exist for the options at the end of their
respective six-year terms. These gains are based on assumed rates of annual
compound stock price appreciation of 5% and 10% from the date the option was
granted to the end of the option term.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------------- VALUE AT ASSUMED
% OF ANNUAL RATES
NUMBER OF TOTAL OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES IN OPTION TERM(3)
OPTIONS FISCAL EXERCISE PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) YEAR(2) PER SHARE ($/SH) DATE 5% 10%
- --------------------- ------------- ------------- ---------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
John D. Fruth........ -- -- -- -- -- --
Gregory E.
Lichtwardt......... -- -- -- -- -- --
Daniel J. Kunst...... -- -- -- -- -- --
John Lilley.......... 80,000 20.2% $ 5.03 05/31/02 $136,854 $310,476
</TABLE>
- ---------------
(1) The option granted to John Lilley under the 1989 Stock Option Plan in 1996
is a nonqualified stock option that was granted at fair market value and
that vests 20% per year over a five-year period so long as Dr. Lilley is
employed by the Company. The option has a term of six years.
(2) The Company granted options to purchase 395,534 shares of Common Stock to
employees during 1996.
(3) The 5% and 10% assumed annual compound rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
AGGREGATED OPTION EXERCISES IN 1996 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding the exercise of stock
options by the Named Executive Officers during 1996 and stock options held as of
December 31, 1996 by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END(#) AT FISCAL YEAR-END(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISES(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John D. Fruth......... -- -- 1,280,000 -- $ 9,864,128 --
Gregory E.
Lichtwardt.......... -- -- 96,000 64,000 627,000 $ 418,000
Daniel J. Kunst....... -- -- 20,000 80,000 99,300 397,200
John Lilley........... -- -- -- 80,000 -- 237,600
</TABLE>
- ---------------
(1) Based on the fair market value of the Company's Common Stock at December 31,
1996 ($8.00 per share) less the exercise price payable for such shares.
EMPLOYEE BENEFIT PLANS
1989 Stock Option Plan. Under the 1989 Plan, as of June 30, 1997 options to
purchase 1,799,694 shares of Common Stock were outstanding and 279,294 shares of
Common Stock were reserved for issuance for options available for grant to
employees, officers, directors, consultants, independent contractors and
advisors. In July 1997, the Company granted options to purchase an aggregate of
18,000 additional shares of Common Stock under the 1989 Plan at an exercise
price of $14.00 per share, including an option to purchase 5,000 shares granted
to Mr. Tunney, a director of the Company and granted options to purchase in
aggregate of 13,000 shares of common stock under the 1989 Plan at an exercise
price equal to the initial public offering of the Common Stock. The 1989 Plan
will be terminated upon the effective date of the Registration Statement for
this offering, when the 1997 Equity Incentive Plan will become effective. As a
result, no further options may be granted under the 1989 Plan following the
closing of this offering. However, termination does not
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<PAGE> 56
affect any outstanding options, all of which will remain outstanding until
exercised or until they terminate or expire in accordance with their terms. The
terms of options granted under the 1989 Plan and the administration of the plan
are substantially the same as those that pertain to the 1997 Equity Incentive
Plan, except that the vesting of options granted prior to March 1, 1995 under
the 1989 Plan accelerates upon certain acquisitions of the Company unless the
options are assumed or substituted by the acquiring corporation.
1992 Officers and Directors Stock Option Plan. There are options to
purchase 1,280,000 shares of the Company's Common Stock outstanding under the
1992 Plan, all of which have been granted to John D. Fruth. These options were
granted in 1992 at an exercise price of $0.29 per share, are fully vested and
terminate in September 1997. The 1992 Plan will be terminated upon the effective
date of the Registration Statement for this offering, when the 1997 Equity
Incentive Plan will become effective. However, termination does not affect these
outstanding options, which will remain outstanding until exercised or until they
terminate or expire in accordance with their terms. The Company expects that Mr.
Fruth will exercise such options prior to the consummation of this offering.
1997 Equity Incentive Plan. In June 1997, the Board adopted and the
stockholders approved the 1997 Equity Incentive Plan, under which 2,000,000
shares of Common Stock are reserved for issuance. Any authorized shares not
issued or subject to outstanding grants under the 1989 Plan on the effective
date of this offering (279,294 shares as of June 30, 1997) and any shares that
are issuable upon exercise of options granted pursuant to the 1989 Plan that
expire or become unexercisable for any reason without having been exercised in
full will be available for future grant and issuance under the 1997 Equity
Incentive Plan. No options have been issued under the 1997 Equity Incentive
Plan. The 1997 Equity Incentive Plan will become effective on the effective date
of the Registration Statement for this offering and will terminate in May 2007,
unless sooner terminated by the Board. The 1997 Equity Incentive Plan authorizes
the award of options, opportunities to purchase restricted stock and stock
bonuses (each an "Award"). The 1997 Equity Incentive Plan is administered by a
committee appointed by the Board, currently the Compensation Committee,
consisting of Messrs. Cummins, Grant and Tunney, all of whom are "nonemployee
directors" under applicable federal securities laws and "outside directors" as
defined under applicable federal tax laws. The committee has the authority to
construe and interpret the 1997 Equity Incentive Plan and any agreement made
thereunder, grant Awards and establish their terms and make all other
determinations necessary or advisable for the administration of the 1997 Equity
Incentive Plan.
The 1997 Equity Incentive Plan provides for the grant of both incentive
stock options ("ISOs") that qualify under Section 422 of the Internal Revenue
Code of 1986, as amended, and nonqualified stock options ("NQSOs"). ISOs may be
granted only to employees of the Company or of a parent or subsidiary of the
Company. NQSOs may be granted to employees, officers, directors, consultants,
independent contractors and advisors of the Company or of any parent or
subsidiary of the Company, provided such consultants, independent contractors
and advisors render bona fide services not in connection with the offer and sale
of securities in a capital-raising transaction ("Eligible Service Providers").
The exercise price of ISOs must be at least equal to the fair market value of
the Company's Common Stock on the date of grant (110% of that value in the case
of ISOs issued to ten percent stockholders). The exercise price of NQSOs must be
at least equal to 85% of that value. The maximum term of options granted under
the 1997 Equity Incentive Plan is ten years. Options granted under the 1997
Equity Incentive Plan may not be transferred in any manner other than by will or
by the laws of descent and distribution and may be exercised during the lifetime
of the optionee only by the optionee. Options granted under the 1997 Equity
Incentive Plan generally expire 90 days after the termination of the optionee's
service to the Company or to a parent or subsidiary of the Company, except in
the case of death or disability, in which case the options may be exercised up
to 12 months following the date of death or termination of service. Options
terminate immediately upon termination of employment for cause.
Opportunities to purchase shares of the Company's Common Stock and awards
of shares of the Company's Common Stock, either of which may be subject to a
right of repurchase in favor of the Company or other restrictions on ownership
or transfer, may be given to Eligible Service Providers.
In the event of certain acquisitions of the Company, any or all outstanding
Awards may be assumed or replaced by the successor corporation. In the
alternative, the successor corporation may substitute equivalent
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<PAGE> 57
Awards or provide consideration to Award recipients which is substantially
similar to that provided to stockholders. If the successor does not assume or
substitute Awards, outstanding Awards will expire upon consummation of the
transaction, provided that the Board in its sole discretion may provide that the
vesting of any or all Awards will accelerate prior to such consummation.
1997 Employee Stock Purchase Plan. In June 1997, the Board adopted and the
stockholders approved the 1997 Employee Stock Purchase Plan (the "Purchase
Plan") and reserved a total of 400,000 shares of the Company's Common Stock for
issuance thereunder. The Purchase Plan will become effective upon the effective
date of the Registration Statement for this offering and will permit eligible
employees to acquire shares of the Company's Common Stock through payroll
deductions. Eligible employees may select a rate of payroll deduction between 2%
and 10% of their compensation and are subject to certain maximum purchase
limitations described in the Purchase Plan. Except for the first offering, each
offering under the Purchase Plan will be for a period of 24 months (the
"Offering Period") and will consist of four six-month purchase periods (each a
"Purchase Period"). The purchase price for the Company's Common Stock purchased
under the Purchase Plan is 85% of the lesser of the fair market value of the
Company's Common Stock on the first day of the applicable Offering Period and
the last day of the applicable Purchase Period. The Board has the authority to
determine the date on which the first Offering Period will begin and the length
of such Offering Period. The Board has the power to change the duration of
Offering Periods and Purchase Periods. The Purchase Plan is intended to qualify
as an "employee stock purchase plan" under Section 423 of the Code.
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CERTAIN TRANSACTIONS
Since January 1, 1994, there has not been nor is there currently proposed,
any transaction or series of similar transactions to which the Company or any of
its subsidiaries was or is to be a party in which the amount involved exceeds
$60,000 and in which any director, executive officer, holder of more than 5% of
the Common Stock of the Company or any member of the immediate family of any of
the foregoing persons had or will have a direct or indirect material interest
other than (i) compensation agreements, which are described where required in
"Management," and (ii) the transactions described below.
OSL ACQUISITION AND RELATED LITIGATION
In September 1992, the Company acquired PLL, a United Kingdom-based
manufacturer of contact lenses and, until the acquisition, a supplier to the
Company, for a total of 1,728,000 shares of the Company's Common Stock (the "PLL
Acquisition"). After the acquisition, PLL was renamed Ocular Sciences Ltd.
("OSL"). The owners of PLL (the "PLL Owners") included John D. Fruth, the
Company's President and a director and principal stockholder of the Company, who
received 496,976 shares of the Company's Common Stock in the acquisition, and
Geoffrey H. Galley and his son Anthony D. Galley (together, the "Galleys"),
principal stockholders of the Company, who received 1,015,024 shares of the
Company's Common Stock in the acquisition.
In connection with the PLL Acquisition, PLL entered into a patent license
agreement with the PLL Owners other than Mr. Fruth (the "Patent Owners"),
pursuant to which PLL obtained a non-exclusive license to certain contact lens
manufacturing patents in exchange for royalty payments that were to aggregate up
to $4.4 million, of which up to $3.6 million was to be paid to the Galleys. An
additional royalty was to be payable by PLL on certain sales by it to other
contact lens manufacturers. Royalties totaling $1.7 million were accrued in
1994, and, as of December 31, 1994, the Company had made cumulative royalty
payments of approximately $3.2 million. No royalty payments were made after 1994
as a result of the lawsuit described below. Also in connection with the PLL
Acquisition, PLL entered into a purchase and supply agreement with Aspect Vision
Care Ltd. ("AVCL"), a United Kingdom-based contact lens distributor controlled
by certain of the Patent Owners, pursuant to which PLL agreed to manufacture and
supply contact lenses to AVCL at a purchase price equal to the Company's direct
and indirect costs of processing the lenses, plus 20% (the "Purchase and Supply
Agreement"). In connection with the Purchase and Supply Agreement, PLL agreed
not to sell the contact lenses covered by such agreement to third parties in the
United Kingdom, and AVCL agreed not to sell such lenses in North and South
America, for a period of ten years (subject to certain exceptions). AVCL
accounted for approximately $1.9 million of the Company's net sales for the year
ended December 31, 1994 and $407,000 of accounts receivable as of December 31,
1995 and 1996. There were no sales to AVCL in 1995 and 1996. See Note 12 of
Notes to Consolidated Financial Statements.
In May 1992, Anthony Galley was appointed Managing Director of PLL and in
November 1992 entered into an employment agreement with PLL. Mr. Galley was also
appointed Vice President, Manufacturing, of the Company. In 1993 and 1994,
disputes arose between the Company, OSL, Anthony Galley and AVCL regarding the
type, price and quantity of contact lenses that OSL was obligated to supply to
AVCL under the Purchase and Supply Agreement. AVCL constructed its own
manufacturing facility in 1994 using information that the Company believed to be
proprietary to OSL.
In April 1994, OSL terminated Anthony Galley's employment, and, in the
following month, the Company and OSL sued AVCL, the Galleys, the other Patent
Owners and certain related persons in the United Kingdom and later in
California. The suit in the United Kingdom alleged misappropriation of
intellectual property, breach of fiduciary duty, breach of contract and other
claims, while the suit in California alleged securities fraud arising out of the
PLL Acquisition. The defendants brought a counterclaim against OSL and the
Company for sums allegedly due under the patent license agreement and breach of
Anthony Galley's employment contract, and other claims, and brought a separate
action in the United Kingdom against OSL alleging patent infringement.
In November 1996, judgment was rendered in the United Kingdom actions. The
judgment found against the Company and OSL on the most important claims brought
by them. In the judgment, the judge harshly
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criticized the Company's business practices and stated that he did not believe
the testimony of Messrs. Fruth and Lichtwardt, the Company's Chief Executive
Officer and Chief Financial Officer, respectively. The judge found in favor of
the defendants on a number of their counterclaims, although not on the issue of
patent infringement, which was decided in favor of OSL.
In February 1997, prior to the determination of any costs or damages, the
Company and the other parties to the foregoing litigations entered into a
settlement agreement (the "Settlement Agreement") providing for, among other
things (i) a mutual release among the parties, including a release from any
further amounts owed under the patent license agreement or Purchase and Supply
Agreement, and the termination of all pending litigation, (ii) the replacement
of the patent license agreement with a new, fully paid-up, non-exclusive patent
license that did not limit OSL's ability to sell contact lenses to other contact
lens manufacturers, (iii) the grant by OSL to AVCL and the Patent Owners of a
royalty-free, non-exclusive license to any OSL proprietary information that was
in their possession as of the commencement of the lawsuits in May 1994, (iv) the
termination of the Purchase and Supply Agreement, including the elimination of
the restriction on the Company's ability to sell contact lenses in the United
Kingdom (with the payment of a royalty in certain limited circumstances) and the
elimination of the restriction on AVCL's ability to sell contact lenses in North
and South America, (v) the placement of the Company's shares owned by the Patent
Owners in a voting trust, which trust is to expire upon the effectiveness of
this offering and (vi) certain priority registration rights for the Patent
Owners in connection with public offerings of the Company, including this
offering. The Settlement Agreement also provided for the payment of $10 million
by the Company, of which $3.3 million (net of withholding) was paid on the date
of the Settlement Agreement and the remaining $6.7 million is to be paid upon
the closing of the Company's initial public offering. See Note 14 of Notes to
Consolidated Financial Statements.
ALLERGAN/AMERICAN HYDRON ACQUISITION; GALEN FINANCING
In October 1992, the Company acquired the North and South American contact
lens business of Allergan Optical, Inc., which had been operating under the name
American Hydron, for $24.5 million. Allergan Optical, Inc. was a wholly-owned
subsidiary of Allergan, Inc. (together referred to as "Allergan"). The American
Hydron acquisition and related working capital requirements were financed by the
issuance of (i) a senior secured note in the amount of $7.0 million to Allergan,
(ii) senior subordinated notes in the aggregate principal amount of $16.3
million, $13.8 million of which was issued to Allergan and $2.5 million of which
was issued to Galen Partners, L.P. and Galen Partners International L.P.
(together, the "Galen Group"), (iii) 118,168 shares of Series A Preferred Stock
(valued at $8.46 per share, for an aggregate value of approximately $1.0
million) to Allergan, (iv) 3,403,192 shares of Common Stock at $1.47 per share,
for an aggregate price of approximately $5.0 million, to the Galen Group and (v)
warrants to purchase an aggregate of 3,492,688 shares of Common Stock at an
exercise price of $0.00125 per share, 2,957,000 of which were issued to Allergan
and 535,688 of which were issued to the Galen Group. The senior secured note was
repaid from bank borrowings in 1993 and the senior subordinated notes were
repaid from bank borrowings in October 1996. In December 1994, Allergan and the
Galen Group exercised their warrants to purchase 2,467,456 and 356,936 shares of
Common Stock, respectively. Effective December 31, 1996, the remaining warrants
were canceled pursuant to their terms because the Company had met certain
financial milestones.
In connection with the American Hydron acquisition, the Company entered
into a Shareholders' Agreement that provided each of Allergan and the Galen
Group with the right to appoint one person to the Board, which positions are
currently filled by Messrs. Tunney and Grant, respectively. The Shareholders'
Agreement also placed certain restrictions on the ability of the signatories
thereto to transfer their shares. Such rights and restrictions will expire on
consummation of this offering. The Company also entered into a registration
rights agreement providing the Company's then current shareholders, including
John D. Fruth, Allergan, the Galen Group and the Galleys, with certain
registration rights. See "Description of Capital Stock -- Registration Rights."
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PAYMENTS TO DIRECTOR
Fruth & Anthony, a law firm in which Terence M. Fruth, a director of the
Company and the brother of John D. Fruth, the President of the Company, is a
partner, has provided legal services to the Company since its formation. The
Company made payments of $399,834 in 1994, $309,253 in 1995, $283,945 in 1996
and $58,470 in the first six months of 1997 to Fruth & Anthony for such legal
services.
LOANS FROM MR. FRUTH
From July 1986 to March 1990, John D. Fruth loaned the Company a total of
$2.9 million to meet certain short-term operating cash requirements. In October
1992, in connection with the American Hydron acquisition, Mr. Fruth was issued a
junior subordinated promissory note in the principal amount of $2.9 million to
evidence the outstanding principal and interest on such loans (the "Fruth
Note"). The Fruth Note bears interest at the prime rate plus 3%. The Fruth Note
was further subordinated in connection with the Company's borrowings under the
Comerica Credit Agreement in October 1996. In June 1997, the Fruth Note was
amended to provide, among other things, that all principal and unpaid interest
is payable on the earlier of November 1, 1997 or the consummation by the Company
of a public offering in which it receives net proceeds of at least $37.0
million. The Company expects to repay the Fruth Note with a portion of the
proceeds of this offering.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 30, 1997 and as
adjusted to reflect the sale of the shares offered hereby, assuming no exercise
of the Underwriters' overallotment option, by: (i) each person who is known by
the Company to own beneficially more than 5% of the Company's Common Stock, (ii)
each director of the Company, (iii) each of the Named Executive Officers, (iv)
all directors and executive officers of the Company as a group and (v) each
Selling Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
5% STOCKHOLDERS, DIRECTORS AND NAMED -------------------- NUMBER OF --------------------
EXECUTIVE OFFICERS NUMBER PERCENT SHARES BEING OFFERED NUMBER PERCENT
- -------------------------------------------- ----------- ------- -------------------- ---------- -------
<S> <C> <C> <C> <C> <C>
John D. Fruth(2)............................ 8,314,576 45.9% 741,591 7,572,985 34.9%
Galen Partners, L.P. and affiliates(3)...... 3,771,138 22.4 350,000 3,421,138 16.7
William R. Grant(4)......................... 3,771,138 22.4 350,000 3,421,138 16.7
Allergan, Inc.(5)........................... 2,783,792 16.5 475,201 2,308,591 11.3
Francis R. Tunney, Jr.(6)................... 2,783,978 16.5 475,201 2,308,777 11.3
Anthony D. Galley(7)........................ 1,312,480 7.8 1,312,480 -- *
Geoffrey H. Galley(8)....................... 1,225,744 7.3 1,225,744 -- *
Terence M. Fruth............................ 104,970 * -- 104,970 *
Edgar J. Cummins............................ 10,948 * -- 10,948 *
Daniel J. Kunst(9).......................... 49,886 * -- 49,886 *
Gregory E. Lichtwardt(10)................... 96,000 * -- 96,000 *
John Lilley(11)............................. 8,000 * -- 8,000 *
All directors and executive officers as a
group
(8 persons)(12)........................... 15,139,496 82.9 1,566,792 13,572,704 62.1
OTHER SELLING STOCKHOLDERS
Ronald E. Hansman(13)....................... 320,000 2.0 36,894 283,106 1.3
Barrie Bevis................................ 86,400 * 86,400 -- *
Albert H. Morland........................... 86,400 * 86,400 -- *
Ivor Atkinson............................... 43,200 * 43,200 -- *
Anita Hall(14).............................. 32,000 * 3,690 28,310 *
</TABLE>
- ---------------
* Less than 1% of the Company's outstanding Common Stock
(1) Percentage ownership is based on 16,826,326 shares outstanding as of June
30, 1997 and 20,426,326 shares outstanding after the offering. Unless
otherwise indicated below, the persons and entities named in the table have
sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Shares of Common Stock subject to options that are currently exercisable or
will become exercisable within 60 days of June 30, 1997 are deemed to be
outstanding and to be beneficially owned by the person holding such options
for the purpose of computing the percentage ownership of such person but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Includes 1,280,000 shares of Common Stock that may be acquired upon
exercise of stock options that are currently exercisable or will become
exercisable within 60 days of June 30, 1997. The Company expects that Mr.
Fruth will exercise such options prior to the consummation of this
offering. Assuming exercise of the overallotment option in full, the number
of shares being offered by Mr. Fruth will be increased by 258,409 shares
and the number of shares beneficially owned by Mr. Fruth after the offering
will be reduced to 33.7% of the shares outstanding.
(3) Represents 3,409,184 shares held of record by Galen Partners, L.P., 350,944
shares held of record by Galen Partners International, L.P., and 11,010
shares held of record by Galen Associates. William R. Grant (a director of
the Company), Bruce F. Wesson and Rebound Investments, Inc. are the general
partners of BBW Partners, L.P., the general partner of Galen Partners, L.P.
and Galen Partners International, L.P. and thus may be deemed to have
voting and investment power with respect to these shares. The address is
for these individuals and entities is c/o Galen Associates, 610 Fifth
Avenue, New York, New York 10020. Assuming exercise of the overallotment
option in full, the number of shares being offered by Galen Partners, L.P.
and its affiliates will be increased by an aggregate of 456,069 shares and
the number of shares beneficially owned by Galen Partners, L.P. and its
affiliates after the offering will be reduced to 14.5% of the shares
outstanding.
(4) Represents 3,771,138 shares held of record and the 350,000 shares being
offered by Galen Partners, L.P. and its affiliates. See Note (3).
(5) Represents 2,783,792 shares held of record by Allergan, Inc. Does not
include 186 shares held of record by Francis R. Tunney, Jr. Mr. Tunney, a
director of the Company, is the General Counsel of Allergan, Inc. Also does
not include 1,992,624 shares held of record by Francis R. Tunney, Jr. as
trustee of a voting trust, including the 1,225,744 shares owned
beneficially by Geoffrey H. Galley and 550,880 shares owned by his son,
Anthony D. Galley, because the voting trust terminates upon the
effectiveness of this offering. Allergan's address is 2525 Dupont Drive,
Irvine, California 92612. Assuming exercise of the overallotment option in
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<PAGE> 62
full, the number of shares being offered by Allergan, Inc. will be
increased by 330,868 shares and the number of shares beneficially owned by
Allergan after the offering will be reduced to 9.7% of the shares
outstanding.
(6) Represents 2,783,792 shares held of record and the 475,201 shares being
offered by Allergan, Inc. and 186 shares held of record by Francis R.
Tunney, Jr. See Note (5).
(7) Represents 550,880 shares held of record and being offered by Anthony D.
Galley and 761,600 shares held of record and being offered by Geoffrey H.
Galley over which Anthony D. Galley has power of attorney including the
right to vote such shares. Anthony D. Galley's address is Beacon Wey, The
Hangers, Bishops Waltham, Hampshire SO32 1FZ, England.
(8) Represents shares of Common Stock held of record and being offered by
Geoffrey H. Galley. Does not include 550,880 shares held of record and
being offered by Anthony D. Galley, Geoffrey Galley's son. Geoffrey H.
Galley's address is Red Lodge, The Close, Totteridge, London N20 8PJ,
England.
(9) Includes 40,000 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable or will become exercisable
within 60 days of June 30, 1997.
(10) Represents shares of Common Stock that may be acquired upon exercise of
stock options that are currently exercisable or will become exercisable
within 60 days of June 30, 1997.
(11) Represents shares of Common Stock that may be acquired upon exercise of
stock options that are currently exercisable or will become exercisable
within 60 days of June 30, 1997.
(12) Includes 1,424,000 shares of Common Stock that may be acquired upon
exercise of stock options exercisable within 60 days of June 30, 1997.
(13) Assuming exercise of the overallotment option in full, the number of shares
being offered by Mr. Hansman will be increased by 31,505 shares and the
number of shares beneficially owned by Mr. Hansman after the offering will
be reduced to 1.2 % of the shares outstanding.
(14) Assuming exercise of the overallotment option in full, the number of shares
being offered by Ms. Hall will be increased by 3,149 shares and the number
of shares owned by Ms. Hall after the offering will be reduced to 25,161
shares.
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DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 80,000,000 shares of Common Stock, $0.001 par value, and
4,000,000 shares of Preferred Stock, par value $0.001. As of June 30, 1997, and
assuming the conversion of all outstanding Preferred Stock into Common Stock,
there were outstanding 16,826,326 shares of Common Stock held of record by
approximately 50 stockholders, and options to purchase 3,079,694 shares of
Common Stock.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Amended and Restated
Certificate of Incorporation, which is included as an exhibit to the
Registration Statement of which this Prospectus forms a part, and by the
provisions of applicable law.
COMMON STOCK
Subject to preferences that may be applicable to any Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board may from time to time determine. Each
stockholder is entitled to one vote for each share of Common Stock held on all
matters submitted to a vote of stockholders. The Common Stock is not entitled to
preemptive rights and is not subject to conversion or redemption. Upon
liquidation, dissolution or winding-up of the Company, the assets legally
available for distribution to stockholders are distributable ratably among the
holders of the Common Stock and any participating Preferred Stock outstanding at
that time after payment of liquidation preferences, if any, on any outstanding
Preferred Stock and payment of other claims of creditors. Each outstanding share
of Common Stock is, and all shares of Common Stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, each outstanding share of Preferred
Stock (the "Convertible Preferred") will be converted into two shares of Common
Stock. See Note 9 of Notes to Consolidated Financial Statements for a
description of the Convertible Preferred. Pursuant to the Company's Certificate
of Incorporation, the Board is authorized to provide for the issuance of shares
of Preferred Stock in one or more series, to establish from time to time the
number of shares to be included in each such series, to fix the rights,
preferences and privileges of the shares of each wholly unissued series and any
qualifications, limitations or restrictions thereon, and to increase or decrease
the number of shares of any such series (but not below the number of shares of
such series then outstanding), without any further vote or action by the
stockholders. The Board may authorize the issuance of Preferred Stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of Common Stock. Thus, the issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has no current plan to issue any shares of
Preferred Stock.
REGISTRATION RIGHTS
Following this offering, the holders of approximately 12,323,120 shares of
Common Stock (the "Registrable Securities") will have certain rights to register
those shares under the Securities Act. The holders of Registrable Securities
have agreed that they will not exercise any right with respect to any such
registrations for a period ending 180 days after the effective date of the
Registration Statement for this offering without the prior written consent of
Morgan Stanley & Co. Incorporated. Thereafter, if requested by the holders of at
least 10% of the Registrable Securities, the Company must file a registration
statement under the Securities Act covering all Registrable Securities requested
to be included by all holders of such Registrable Securities, provided such
offering represents at least 20% of the Registrable Securities then outstanding.
These rights are subject to certain conditions and limitations, among them the
right of the underwriters of an offering to limit the number of shares included
in such registration in certain circumstances. The Company may be required to
effect up to three such registrations, plus one additional such registration for
each registration that does not include all holders' Registrable Securities
requested to be included. All expenses incurred in connection with such
registrations (other than underwriters' discounts and commissions) will be borne
by the Company. These demand registration rights expire October 30, 2002.
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<PAGE> 64
In addition, if the Company proposes to register any of its securities
under the Securities Act, whether or not for sale for its own account, other
than in connection with a Company employee benefit plan or a corporate
reorganization, the holders of Registrable Securities are entitled to notice of
such registration and are entitled to include shares of such Common Stock
therein. These rights are subject to certain conditions and limitations, among
them the right of the underwriters of an offering to limit the number of shares
included in such registration in certain circumstances. All expenses incurred in
connection with such registrations (other than underwriters' discounts and
commissions) will be borne by the Company. These registration rights expire
October 30, 2002.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is American
Stock Transfer & Trust Company. The Transfer Agent's telephone number is (212)
936-5100.
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding, for purposes of determining the number of
shares outstanding, those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer or (iii) on or subsequent to
such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least two-thirds of the outstanding
voting stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition involving the interested stockholder
of 10% or more of the assets of the corporation; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder or
(iv) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation. In general, Section 203 defines an interested stockholder as
any entity or person beneficially owning 15% or more of the outstanding voting
stock of the corporation and any entity or person affiliated with or controlling
or controlled by such entity or person. See "Risk Factors -- Certain
Anti-Takeover Provisions."
LISTING
The Common Stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "OCLR," subject to official notice of issuance.
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SHARES ELIGIBLE FOR FUTURE SALE
In addition to the 7,200,000 shares of Common Stock offered hereby
(assuming no exercise of the Underwriters' overallotment option), as of the
effective date of the Registration Statement of which this Prospectus forms a
part (the "Effective Date"), there will be 13,226,326 shares of Common Stock
outstanding, all of which are "restricted" shares (the "Restricted Shares")
under the Securities Act. Of the Restricted Shares, an aggregate of 13,222,166
shares of Common Stock will be eligible for sale in the public market subject to
Rule 144 and Rule 701 under the Securities Act after expiration of a contractual
lock-up beginning 180 days after the date of the Prospectus, unless earlier
released, in whole or in part, by Morgan Stanley & Co. Incorporated. Of these
shares, an aggregate of 12,148,704 shares are held by "affiliates" of the
Company and accordingly will be subject to certain volume and resale
restrictions set forth in Rule 144. In addition, an aggregate of 2,660 shares of
Common Stock will become eligible for resale in the public market upon
expiration of a one-year holding period, subject to certain volume and resale
restrictions set forth in Rule 144, in the first quarter of 1998. Sales of a
substantial number of Restricted Shares in the public market following this
offering could adversely affect the market price of the Common Stock and the
ability of the Company to raise equity capital in the future.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an affiliate of the Company) would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of (i) 1% of the number of shares of Common Stock then
outstanding (which will equal approximately 204,263 shares immediately after
this offering) or (ii) the average weekly trading volume of the Common Stock on
the Nasdaq National Market during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an affiliate of the Company), is entitled to sell such shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144. Unless otherwise restricted, "144(k) shares"
may therefore be sold immediately upon the completion of this offering.
Rule 701 permits resales of shares in reliance upon Rule 144, but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of, or consultant to, the Company
who purchased his or her shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. The
Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, along
with the shares acquired upon exercise of such options (including exercises
after the date of this Prospectus). Rule 701 permits affiliates to sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides that non-affiliates may sell
such shares in reliance on Rule 144 without having to comply with the holding
period, public information, volume limitation or notice provisions of Rule 144.
In both cases, a holder of Rule 701 shares is required to wait until 90 days
after the date of this Prospectus before selling such shares.
Immediately after this offering, the Company intends to file a registration
statement under the Securities Act covering 5,658,988 shares of Common Stock
reserved for issuance under the Company's stock option plans. Shares of Common
Stock issued upon exercise of options under the Form S-8 will be available for
sale in the public market, subject to Rule 144 volume limitations applicable to
affiliates and subject to lock-up agreements. At June 30, 1997, options to
purchase 3,079,694 shares of Common Stock were outstanding. Beginning 180 days
after the Effective Date, shares issuable upon the exercise of vested options
will be eligible for sale, if such options are exercised. See
"Management -- Director Compensation" and "Management -- Employee Benefit
Plans."
67
<PAGE> 66
UNDERWRITERS
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated as of the date hereof, the Underwriters named below, for whom
Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc. and Cowen & Company
are serving as Representatives (the "Representatives"), have severally agreed to
purchase, and the Company and the Selling Stockholders have agreed to sell to
them severally, the respective numbers of shares of Common Stock set forth
opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---------------------------------------------------------------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...............................
Bear, Stearns & Co. Inc.........................................
Cowen & Company.................................................
---------
Total................................................. 7,200,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all the shares of Common Stock offered hereby (other than the shares
covered by the overallotment option described below) if any such shares are
taken.
The Underwriters propose to offer part of the shares of Common Stock
directly to the public at the public offering price set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $ per share under the initial public offering price. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to other Underwriters or to certain other
dealers. After the initial offering of the Common Stock, the offering price and
other selling terms may from time to time be varied by the Representatives.
Pursuant to the Underwriting Agreement, certain of the Selling Stockholders
have granted to the Underwriters an option, exercisable for 30 days from the
date of this Prospectus, to purchase up to 1,080,000 additional shares of Common
Stock at the initial public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering overallotments, if any, incurred in
the sale of the shares of Common Stock offered hereby. To the extent such option
is exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the preceding
table bears to the total number of shares of Common Stock offered hereby to the
Underwriters.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales in excess of five percent of the number of shares of
Common Stock offered hereby to accounts over which they exercise discretionary
authority.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers, directors, stockholders and option holders
of the Company have agreed not to sell or otherwise dispose of Common Stock or
convertible securities of the Company for up to 180 days after the date of this
Prospectus without the prior consent of Morgan Stanley & Co. Incorporated. The
Company has agreed in the Underwriting Agreement that it will not, directly or
indirectly, without the prior written consent of Morgan Stanley & Co.
Incorporated, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable for Common Stock, for a period of
180 days after the date of this Prospectus, except under certain circumstances.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may
68
<PAGE> 67
overallot in connection with the offering, creating a short position in the
Common Stock for their own account. In addition, to cover overallotments or to
stabilize the price of the Common Stock, the Underwriters may bid for, and
purchase, shares of Common Stock in the open market. Finally, the underwriting
syndicate may reclaim selling concessions allowed to an underwriter or a dealer
for distributing the Common Stock in the offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities
and may end any of these activities at any time.
The Underwriters have reserved for sale, at the initial public offering
price, up to five percent of the Common Stock offered hereby for employees and
directors of the Company and certain others who have expressed an interest in
purchasing such shares of Common Stock in the offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the Underwriters to the general public on the same basis as other
shares offered hereby.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Common
Stock of the Company. The initial public offering price for the Common Stock
will be determined by negotiations among the Company, the Selling Stockholders
and the Representatives. Among the factors to be considered in determining the
initial public offering price will be the future prospects of the Company and
its industry in general, sales, earnings and certain other financial and
operating information of the Company in recent periods, and the price-earnings
ratios, price-sales ratios, market prices of securities and certain financial
and operating information of companies engaged in activities similar to those of
the Company. The estimated initial public offering price range set forth on the
cover page of this Preliminary Prospectus is subject to change as a result of
market conditions and other factors.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Fenwick & West LLP, Palo Alto, California. Certain legal
matters will be passed upon for the Underwriters by Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, Menlo Park, California.
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1995 and 1996, and for each of the years in the three-year period
ended December 31, 1996, have been included herein and in the Registration
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
69
<PAGE> 68
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedule filed therewith. Certain
items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedule filed therewith. Statements contained in this Prospectus
as to the contents of any contract or any other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement, and the exhibits and schedule
filed therewith, may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the Registration Statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov.
70
<PAGE> 69
OCULAR SCIENCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets......................................................... F-3
Consolidated Statements of Income................................................... F-4
Consolidated Statements of Stockholders' Equity..................................... F-5
Consolidated Statements of Cash Flows............................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ocular Sciences, Inc.
We have audited the accompanying consolidated balance sheets of Ocular
Sciences, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ocular
Sciences, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
February 14, 1997, except as to Notes 1 and 16,
of the notes to Consolidated Financial Statements
which are as of July 14, 1997
San Francisco, California
F-2
<PAGE> 71
OCULAR SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
----------------- JUNE 30, JUNE 30,
1995 1996 1997 1997
------- ------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents...................................... $ 3,025 $ 3,795 $ 4,018
Restricted cash................................................ 2,321 1,746 455
Accounts receivable, less allowance for sales returns and
doubtful accounts of $1,930, $1,451 and $1,185 for 1995,
1996 and 1997, respectively................................. 11,722 16,022 14,330
Inventories.................................................... 12,581 12,956 13,615
Loans to officers and employees................................ -- -- 900
Other current assets........................................... 1,519 1,746 2,555
------- ------- -------
Total Current Assets................................... 31,168 36,265 35,873
Property and equipment, net.................................... 18,192 26,462 29,614
Intangible assets, net......................................... 1,401 683 8,827
Other assets................................................... 113 93 95
------- ------- -------
Total Assets........................................... $50,874 $63,503 $ 74,409
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................... $ 4,819 $ 4,006 $ 3,501
Accrued liabilities............................................ 6,868 8,578 7,992
Accrued liabilities to related parties......................... -- -- 6,667
Accrued cooperative merchandise allowances..................... 496 2,194 3,067
Current portion of long-term debt.............................. 1,716 4,273 5,411
Current portion of related-party debt.......................... 2,868 -- 2,895
Current deferred taxes......................................... 462 1,155 1,147
Income and other taxes payable................................. 2,026 941 1,236
------- ------- -------
Total Current Liabilities.............................. 19,255 21,147 31,916
Long-term debt, less current portion............................. 2,258 15,572 12,006
Long-term related-party debt, less current portion............... 16,069 2,895 --
------- ------- -------
Total Liabilities...................................... 37,582 39,614 43,922
------- ------- -------
Commitments, contingencies and subsequent events
Stockholders' Equity:
Preferred Stock, $0.001 par value; 4,000,000 shares authorized:
118,168 shares issued and outstanding for 1995, 1996 and
1997; none pro forma........................................ 1 1 1 $ --
Common Stock, $0.001 par value; 80,000,000 shares authorized;
15,854,864, 16,539,570, and 16,589,990 shares issued and
outstanding for 1995, 1996 and 1997, respectively;
16,826,326 pro forma........................................ 16 16 16 16
Additional paid-in capital..................................... 7,859 8,360 8,457 8,458
Retained earnings.............................................. 5,486 15,580 22,299 22,299
Cumulative translation adjustment.............................. (70) (68) (286) (286)
------- ------- ------- -------
Total Stockholders' Equity............................. 13,292 23,889 30,487 $ 30,487
------- ------- ------- -------
Total Liabilities and Stockholders' Equity............. $50,874 $63,503 $ 74,409
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 72
OCULAR SCIENCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- -----------------------
1994 1995 1996 1996 1997
------- ------- ----------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $48,503 $68,087 $ 90,509 $38,850 $ 52,969
Cost of sales.......................... 22,553 26,820 36,553 15,927 20,420
------- ------- --------- ------- ---------
Gross profit...................... 25,950 41,267 53,956 22,923 32,549
Selling and marketing expenses......... 6,405 11,728 18,101 8,241 11,972
General and administrative expenses.... 11,087 14,287 18,420 8,813 10,075
------- ------- --------- ------- ---------
Income from operations............ 8,458 15,252 17,435 5,869 10,502
Interest expense....................... (3,128) (3,024) (3,216) (1,556) (949)
Interest income........................ 123 280 132 69 67
Other (expense) income, net............ (416) 151 (186) 156 37
------- ------- --------- ------- ---------
Income before taxes............... 5,037 12,659 14,165 4,538 9,657
Income taxes........................... -- (3,869) (3,989) (1,278) (2,897)
------- ------- --------- ------- ---------
Net income........................ 5,037 8,790 10,176 3,260 6,760
Preferred stock dividends.............. (82) (82) (82) (41) (41)
------- ------- --------- ------- ---------
Net income applicable to common
stockholders.................... $ 4,955 $ 8,708 $ 10,094 $ 3,219 $ 6,719
======= ======= ========= ======= =========
Pro forma net income per share data:
Pro forma net income per share....... $ 0.52 $ 0.35
========= =========
Pro forma weighted average common and
common equivalent shares
outstanding....................... 19,526,985 19,553,651
========= =========
Supplementary pro forma net income
per share......................... $ 0.61 $ 0.36
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 73
OCULAR SCIENCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS CUMULATIVE TOTAL
---------------- ------------------- PAID-IN (ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT EQUITY
------- ------ ---------- ------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31,
1993.......................... 118,168 $1 12,821,112 $ 13 $7,760 $ (8,177) $ -- $ (403)
Exercise of employee stock
options..................... -- -- 8,320 -- 3 -- -- 3
Conversion of warrants to
common stock................ -- -- 2,904,392 3 1 -- 4
Net income.................... -- -- -- -- -- 5,037 -- 5,037
Preferred stock dividends..... -- -- -- -- -- (82) -- (82)
Cumulative translation
adjustment.................. -- -- -- -- -- -- (112) (112)
--
------- ---------- ---- ------ -------- ----- --------
Balances as of December 31,
1994.......................... 118,168 1 15,733,824 16 7,764 (3,222) (112) 4,447
Exercise of employee stock
options..................... -- -- 85,136 -- 42 -- -- 42
Directors' compensation....... -- -- 35,904 -- 53 -- -- 53
Net income.................... -- -- -- -- -- 8,790 -- 8,790
Preferred stock dividends..... -- -- -- -- -- (82) -- (82)
Cumulative translation
adjustment.................. -- -- -- -- -- -- 42 42
--
------- ---------- ---- ------ -------- ----- --------
Balances as of December 31,
1995.......................... 118,168 1 15,854,864 16 7,859 5,486 (70) 13,292
Exercise of employee stock
options..................... -- -- 679,140 -- 200 -- -- 200
Directors' compensation....... -- -- 5,566 -- 28 -- -- 28
Income tax benefits from stock
options exercised........... -- -- -- -- 273 -- -- 273
Net income.................... -- -- -- -- -- 10,176 -- 10,176
Preferred stock dividends..... -- -- -- -- -- (82) -- (82)
Cumulative translation
adjustment.................. -- -- -- -- -- -- 2 2
--
------- ---------- ---- ------ -------- ----- --------
Balances as of December 31,
1996.......................... 118,168 $1 16,539,570 $ 16 $8,360 $ 15,580 $ (68) $ 23,889
Exercise of employee stock
options (unaudited)......... -- -- 47,760 -- 75 -- -- 75
Directors' compensation....... -- -- 2,660 -- 22 -- -- 22
Net income (unaudited)........ -- -- -- -- -- 6,760 -- 6,760
Preferred stock dividends
(unaudited)................. -- -- -- -- -- (41) -- (41)
Cumulative translation
adjustment (unaudited)...... -- -- -- -- -- -- (218) (218)
--
------- ---------- ---- ------ -------- ----- --------
Balances as of June 30, 1997
(unaudited)................... 118,168 $1 16,589,990 $ 16 $8,457 $ 22,299 $(286) $ 30,487
======= == ========== ==== ====== ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 74
OCULAR SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1994 1995 1996 1996 1997
------ -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $5,037 $ 8,790 $ 10,176 $ 3,260 $ 6,760
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 2,137 2,578 4,904 1,963 3,525
Allowances for sales returns and doubtful
accounts..................................... 813 311 193 365 496
Provision for excess and obsolete inventory.... 240 475 605 136 562
Provision for damaged and scrap products....... -- -- 548 234 397
(Gain)/loss on sale of property and
equipment.................................... 114 28 (35) -- --
Exchange loss (gain)........................... 48 37 (49) (164) (59)
Deferred income taxes.......................... (656) 1,353 932 -- --
Changes in operating assets and liabilities:
Accounts receivable............................ (837) (5,942) (4,339) 833 1,141
Inventories.................................... 2,395 (3,005) (1,259) (2,152) (1,704)
Income and other taxes payable................. 428 1,333 (1,024) (313) 300
Other current and non-current assets........... 324 (1,115) (164) (1,166) (1,737)
Accounts payable............................... (994) 2,759 (973) (1,222) (481)
Accrued liabilities............................ 924 1,915 3,183 1,313 1,459
------ ------ -------- ------- -------
Net cash provided by operating
activities.............................. 9,973 9,517 12,698 3,087 10,659
------ ------ -------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment................ (2,153) (13,558) (12,256) (7,273) (6,022)
Purchase of marketing rights and license
agreement...................................... -- -- -- -- (3,333)
Proceeds from liquidation of property and
equipment...................................... 60 7 55 -- --
(Deposits to)/payments from restricted cash....... -- (2,321) 730 761 1,228
------ ------ -------- ------- -------
Net cash used in investing activities..... (2,093) (15,872) (11,471) (6,512) (8,127)
------ ------ -------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.......... 95 1,637 19,343 3,270 5,731
Repayment of long-term debt....................... (2,134) (1,702) (19,805) (914) (8,197)
Preferred stock dividends......................... -- (247) (82) (41) (41)
Proceeds from issuance of common stock............ 7 95 228 211 97
------ ------ -------- ------- -------
Net cash (used in) provided by financing
activities.............................. (2,032) (217) (316) 2,526 (2,410)
------ ------ -------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents....................................... 17 (42) (141) 69 101
------ ------ -------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 5,865 (6,614) 770 (830) 223
Cash and cash equivalents at beginning of year...... 3,774 9,639 3,025 3,025 3,795
------ ------ -------- ------- -------
Cash and cash equivalents at end of year............ $9,639 $ 3,025 $ 3,795 $ 2,195 4,018
====== ====== ======== ======= =======
Supplemental cash flow disclosures:
Cash paid (received) during the year for:
Interest....................................... $3,284 $ 3,021 $ 3,561 $ 1,487 $ 886
Income taxes................................... $ (490) $ 1,188 $ 3,393 $ 1,586 $ 2,605
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 75
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS
FORMATION AND BUSINESS OF THE COMPANY
O.S.I. Corporation was incorporated in California in 1985. The Company is
engaged in the design, manufacture and distribution of contact lenses and
conducts business under the name of Ocular Sciences/American Hydron.
On May 12, 1997, the Company's Board of Directors approved a
reincorporation into the state of Delaware. The Board of Directors also approved
a change in the Company's name to Ocular Sciences, Inc. (the "Company") and
authorized the filing of a registration statement with the Securities and
Exchange Commission permitting the Company to sell shares of its common stock in
a proposed initial public offering. In connection with the reincorporation, the
stockholders of the Company approved a two-for-one stock split and increased its
authorized common stock to 80,000,000. All applicable share and per share
amounts in the accompanying consolidated financial statements have been
retroactively adjusted to reflect the reincorporation and the stock split.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Ocular Sciences Ltd. ("OSL")
(formerly Precision Lens Laboratories Ltd.), O.S.I. Puerto Rico Corporation,
O.S.I. Canada Corporation and Ocular Sciences Hungary. All significant
intercompany balances and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period.
Cash and Cash Equivalents
The Company considers all highly liquid cash investments, primarily
consisting of money market funds, with an original maturity of three months or
less to be cash equivalents.
Restricted Cash
Restricted cash consists of cash held in an escrow account for payment of
various commitments of the Company's United Kingdom subsidiary. The largest
component of restricted cash as of December 31, 1995 and 1996 related to
royalties due under a molding patent license for which the Company was in
litigation with the patent owners. The royalties related to liabilities that
were recorded and charged to expense in 1994 and 1995. The Company settled the
litigation with the patent holders in February 1997 (see Notes 12 and 14). The
restricted cash balance as of June 30, 1997 related to cash held in escrow for
the construction and rent of the Company's United Kingdom facility.
F-7
<PAGE> 76
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
Inventories
Inventories are recorded at the lower of cost (first-in, first-out method)
or market. Cost includes material, labor and applicable factory overhead.
Provision for potentially obsolete or slow moving inventory is made based upon
management's analysis of inventory levels and forecasted sales.
Revenue Recognition
The Company recognizes sales upon shipment of products to its customers.
Allowances for sales returns are accrued at the time sales are recognized.
Cooperative Merchandise Allowances
The Company offers a cooperative merchandise program to certain of its
customers whereby the Company reimburses these customers for items such as
advertising, displays and mailings that are intended to encourage the fitting
and wearing of the Company's disposable lenses. The Company records the
provisions for cooperative merchandising at the time of sale to the customers
and as a component of selling and marketing expense.
Foreign Currencies
During the quarter ended December 31, 1994, the functional currencies of
the Company's United Kingdom and Canadian subsidiaries were changed from the
U.S. dollar to the respective local currencies, reflecting the fact that the
local currencies are the currencies in which the subsidiaries primarily generate
and expend cash.
As a result of this change, the subsidiaries translate all asset and
liability accounts at current exchange rates in effect at the balance sheet date
and statement of income accounts at average exchange rates during the period.
Translation adjustments arising from differences in exchange rates from period
to period are included in the financial statements as a separate component of
stockholders' equity.
Concentration of Credit Risk
The Company sells its products to a diverse group of ophthalmologists,
optometrists, optical retailers and optical product distributors, and therefore
the concentration of credit risk with respect to receivables is limited due to
the large number and diversity of customers across broad geographic areas.
Accounts receivable from customers are uncollateralized. As of December 31,
1995, approximately 11% of accounts receivable and 8% of consolidated net sales
were concentrated in one customer, while, as of December 31, 1996, approximately
22% of accounts receivable and 12% of consolidated net sales were concentrated
in two customers and, as of June 30, 1997, approximately 14% of accounts
receivable and 8% of consolidated net sales were concentrated in one customer.
To reduce credit risk, the Company performs ongoing credit evaluations of its
significant customers' respective financial conditions. The Company establishes
an allowance for doubtful accounts based upon factors surrounding the credit
risk of specific customers, historical trends and other information.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the respective estimated useful lives of the assets,
which range from three to ten years. Leasehold improvements are amortized over
the shorter of the respective lease terms or the respective estimated useful
lives of the assets.
F-8
<PAGE> 77
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
Long-Lived Assets, Including Intangible Assets
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," as of January 1, 1996. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of SFAS No. 121 did not have
an impact on the Company's consolidated financial position, results of
operations or liquidity.
Marketing rights, trademarks, licenses, and covenants not to compete are
carried at cost less accumulated amortization, which is calculated on a
straight-line basis over the estimated useful lives of the respective assets,
which are typically five to ten years. Goodwill, which represents the excess of
purchase price over fair value of the tangible and intangible assets acquired,
is amortized on a straight-line basis over five years.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred income taxes are
recognized for tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each
balance sheet date based on enacted tax laws and statutory tax rates expected to
apply in the periods in which the differences are expected to affect taxable
income.
The provision for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
income taxes reflect the tax consequences on future years of temporary
differences between the tax bases of assets and liabilities and their financial
reporting amounts. Provision has been made for income taxes on unremitted
earnings of subsidiaries, except in cases in which earnings of foreign
subsidiaries are deemed to be permanently invested.
Stock-Based Compensation
The Company has adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," and has elected to continue to account for
stock-based compensation using methods prescribed in Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations.
The Company follows the practice of recording amounts received upon the
exercise of options by crediting common stock and additional paid-in capital.
The Company realizes an income tax benefit from the exercise and early
disposition of certain stock options and the exercise of other stock options.
The benefit results in a decrease in current income taxes payable and an
increase in common stock.
Reclassifications
Certain reclassifications were made to the 1994 and 1995 consolidated
financial statements to conform to the 1996 presentation.
F-9
<PAGE> 78
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
Unaudited Interim Consolidated Financial Information
The unaudited interim consolidated financial information as of June 30,
1997 and for the three months ended June 30, 1996 and 1997 has been prepared on
the same basis as the audited consolidated financial statements. In the opinion
of management, such unaudited information includes all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of this
interim information. Operating results for the six months ended June 30, 1997
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1997.
Unaudited Pro Forma Stockholders' Equity
The unaudited pro forma stockholders' equity section assumes the conversion
of all outstanding shares of Series A preferred stock into 236,336 shares of the
Company's common stock upon the closing of the Company's anticipated initial
public offering.
Pro Forma Net Income Per Share
Pro forma net income per share is computed based on the weighted average
number of common shares and common equivalent shares outstanding during the
period. Common equivalent shares include convertible preferred shares and the
conversion of stock options using the treasury stock method. The conversion of
the shares of Series A Preferred Stock into 236,336 shares of common stock is
included in the pro forma computation for all periods presented. In accordance
with Securities and Exchange Commission Staff Accounting Bulletins and staff
policy, pro forma net income per share includes all common and common equivalent
shares granted or issued within 12 months of the offering date as if they were
outstanding for all periods presented, even if antidilutive, using the treasury
stock method and the anticipated initial public offering price. Historical net
income per share has not been presented since such amounts are not deemed
meaningful due to the change in the Company's capital structure that will occur
in connection with the Company's anticipated initial public offering.
Supplementary Net Income Per Share
Supplementary net income per share is computed as if the June 30, 1997 debt
balances outstanding of $13,501,000 under the Company's Credit Agreement and
$2,895,000 under a long-term subordinated note payable due to a stockholder had
been paid at the beginning of the period or the date of issuance, if later,
resulting in the elimination of $2,741,000 and $865,000 in interest expense for
the year ended December 31, 1996 and the six months ended June 30, 1997,
respectively.
New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which will be effective for financial statements for
periods ending after December 15, 1997, including interim periods, and
establishes standards for computing and presenting earnings per share. Earlier
application is not permitted. In its consolidated financial statements for the
year ending December 31, 1997, the Company will make the required disclosures of
basic and diluted earnings per share and provide a reconciliation of the
numerator and denominator of its basic and diluted earnings per share
computations. All prior period earnings per share data will be restated by the
Company upon adoption of SFAS 128. The Company expects that basic earnings per
share of the Company will be greater than primary earnings per share and diluted
earnings per share will be substantially similar to the pro forma net income per
share disclosed herein.
F-10
<PAGE> 79
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
NOTE 3. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
------- ------- ---------
<S> <C> <C> <C>
Raw materials......................................... $ 1,950 $ 1,845 $ 1,955
Work in process....................................... 950 1,535 1,298
Finished goods........................................ 9,681 9,576 10,362
------- ------- -------
$12,581 $12,956 13,615
======= ======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT, NET
Property and equipment net, consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
------- ------- ---------
<S> <C> <C> <C>
Equipment and machinery.............................. $ 9,940 $18,247 $ 21,672
Furniture and fixtures............................... 817 1,870 2,194
Vehicles............................................. 297 297 254
Building and leasehold improvements.................. 3,006 8,911 9,343
Construction in progress............................. 10,013 6,668 8,508
------- ------- --------
24,073 35,993 41,971
Less accumulated depreciation and amortization....... (5,881) (9,531) (12,357)
------- ------- --------
$18,192 $26,462 $ 29,614
======= ======= ========
</TABLE>
NOTE 5. INTANGIBLE ASSETS, NET
Intangible assets, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
------- ------- ---------
<S> <C> <C> <C>
Marketing rights, trademarks, licenses and covenants
not to compete...................................... $ 1,483 $ 1,475 $10,271
Goodwill.............................................. 2,094 2,094 2,094
------- ------- -------
3,577 3,569 12,365
Less accumulated amortization......................... (2,176) (2,886) (3,538)
------- ------- -------
$ 1,401 $ 683 $ 8,827
======= ======= =======
</TABLE>
F-11
<PAGE> 80
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
------- ------- ---------
<S> <C> <C> <C>
Revolving line of credit to a bank, due October 31,
1999, bearing interest at the bank's Eurodollar rate
plus 2.75%.......................................... $ -- $ 7,474 $ 5,501
Term loan to a bank, principal payments due quarterly
from January 31, 1997 through October 31, 1998,
bearing interest at the bank's Eurodollar rate plus
2.75%............................................... -- 10,000 8,000
Senior note payable to a bank, due serially until June
1997, bearing interest at prime plus 3/4%.......... 2,250 -- --
Note payable to Banco Bilbao Vizcaya Puerto Rico, due
the earlier of December 1997 or upon closing of
permanent financing, bearing interest at the bank's
rate plus 2%........................................ 834 1,069 1,973
Capital lease obligations, bearing an effective
interest rate of 8.763%, 10.5% and 10.5%,
respectively, for 1995, 1996 and 1997, secured by
certain equipment................................... 778 1,248 1,918
Other................................................. 112 54 25
------- ------- -------
Total long-term debt........................ 3,974 19,845 17,417
Less current portion of long-term debt................ (1,716) (4,273) (5,411)
------- ------- -------
$ 2,258 $15,572 $12,006
======= ======= =======
</TABLE>
On October 30, 1996, the Company executed a commercial lending facility
(the "Agreement") with a major commercial bank. The Agreement provides for a
term loan and a revolving line of credit, the proceeds of which were used to
retire the Company's pre-existing line of credit.
The revolving line of credit is available up to the lesser of $17,000,000
or 80% of the Company's eligible accounts receivable plus 50% of the Company's
net inventory, inclusive of an amount of up to $3,000,000 for letters of credit.
The outstanding balance of this line of credit is due in full on October 31,
1999. However, the Company may elect to prepay the principal due under the
revolving line of credit, or the term loan, for a 2% fee on the prepayment
amount if prepaid by October 31, 1997 or a 1% fee thereafter, provided that only
the prepayments under the line of credit may be reborrowed.
The term loan in the amount of $10,000,000 is payable in eight quarterly
installments beginning January 31, 1997, $1,000,000 each quarter in 1997 and
$1,500,000 each quarter in 1998. In addition to the foregoing payments, the term
loan must be repaid with cash proceeds, if applicable, from the Company's sale
of its assets, issuance of its equity (less all placement fees and underwriting
expenses) or subordinated debt, and other extraordinary receipts from litigation
settlement, key man life insurance or tax refunds.
The Agreement provides the Company with two interest rate
options -- interest at 0.25% to 0.75% above the bank's base rate or at 2.25% to
2.75% above the rate at which deposits in eurodollars are offered to the bank by
other prime banks in the eurodollar market, with the percentages varying based
on certain leverage ratios. The effective interest rates on the Agreement as of
December 31, 1996 and June 30, 1997 were 8.125% and 8.1875%, respectively. The
Company pays commitment fees of 0.375% on the unused amount of the revolving
line of credit. There are no commitment fees on the term loan. As of December
31, 1996 and June 30, 1997, the uncommitted line of credit under the Agreement
was $9,400,000 and $11,400,000, respectively, with no amounts outstanding under
the letters of credit. The Agreement is secured by the Company's accounts
receivable, inventory, equipment, loans and notes receivable, and general
intangibles provided that the collateral must not include more than 65% of any
class of equity securities of any foreign
F-12
<PAGE> 81
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
subsidiary. The Company is also required under the Agreement to maintain minimum
debt to tangible net worth, interest coverage and tangible net worth ratios, and
the Agreement places certain limitations on debt, liens, contingent obligations,
investments and cash dividends on common stock. The Company was in compliance
with all covenants associated with the Agreement as of December 31, 1996 and
June 30, 1997.
In late 1995, the Company entered into a bank line of credit under which up
to $3,500,000 was available for borrowings through September 30, 1996. The
Company's accounts receivable, inventory and equipment located in the United
States were pledged as collateral under the agreement. The interest rate for
this facility was fixed at the bank's reference rate plus 0.75% (9.25% at
December 31, 1995). The agreement contained a commitment fee of 0.5% per annum
on the unused portion of the line of credit and also contained restrictive
financial covenants that required maintenance of certain financial ratios and
limited the total amount of fixed or capital purchases. As of December 31, 1995,
no amounts were outstanding on this credit line, which was terminated on October
30, 1996.
The Company has guaranteed the borrowings of its Puerto Rican subsidiary
under a loan agreement with Banco Bilbao Vizcaya Puerto Rico ("BBV") for the
financing of the construction of an industrial building at Santa Isabel
Industrial Park, Santa Isabel, Puerto Rico, and for purchase of machinery and
equipment not to exceed the total sum of $5,800,000. The loan is secured by a
chattel mortgage upon all machinery and equipment purchased with any part of the
loan proceeds and for the full amount of the loan plus interest and other sums
due to the bank. The principal amount of this loan is payable in December 1997
or upon the closing of a permanent financing loan from the Government
Development Bank of Puerto Rico ("GDB"). The Company has secured the commitment
for permanent financing. The BBV loan bears interest at 2% over the lender's
defined cost of funds or, in the event that such funds are not available, 1.5%
over the lender's prime lending rate. The effective interest rates as of
December 31, 1995 and 1996 and June 30, 1997 were 10%, 8% and 9%, respectively.
The BBV loan agreement also contains a commission fee equal to 1% of the
principal and drawing fees equal to 0.5% of the loan amount. As of December 31,
1995 and 1996 and June 30, 1997, the loan amount outstanding on this agreement
was $834,000, $1,069,000 and $1,973,000, respectively.
The long-term debt, including current portion, is due in aggregate annual
installments of $4,273,000, $6,257,000, $7,974,000, $381,000 and $960,000 in
each of the years from 1997 through 2001 and thereafter.
NOTE 7. OPERATING LEASES
The Company leases its offices and warehouse facilities under noncancelable
operating leases. The future minimum lease payments on these noncancelable
operating leases with an initial term in excess of one year as of December 31,
1996, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-----------------------------------------------------------
<S> <C>
1997....................................................... $ 2,314
1998....................................................... 2,168
1999....................................................... 2,100
2000....................................................... 1,348
2001....................................................... 1,310
Thereafter................................................. 4,767
-------
$14,007
=======
</TABLE>
F-13
<PAGE> 82
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
Rent expense on operating leases was approximately $711,000, $918,000 and
$1,643,000 for the years ended December 31, 1994, 1995 and 1996, respectively,
and $854,000 and $1,166,000, for the six months ended June 30, 1996 and 1997,
respectively.
NOTE 8. STOCK SPLIT
On February 21, 1995, the stockholders of the Company approved a
four-for-one split of the Company's common and preferred stock.
NOTE 9. PREFERRED STOCK AND ACCRUED DIVIDENDS
Each share of preferred stock is convertible into two shares of common
stock, at the option of the holder, at any time, on a two-for-one basis, subject
to adjustment for dilution. Each share of preferred stock will automatically
convert into two shares of common stock in the event of (1) the closing of an
underwritten public offering, a sale of substantially all of the assets of the
Company, or a consolidation or merger of the Company in which the stockholders
prior to the event do not represent a majority of the outstanding shares after
the event or (2) upon the written consent of a majority of the total number of
outstanding shares of Series A preferred stock. The shares of preferred stock
may be redeemed, at the Company's election, at a redemption price of 110% of
their original purchase price plus accrued dividends.
Except as required by law, the Series A preferred stock is non-voting. When
Series A preferred stock is entitled to vote as a matter of law, the shares of
Series A preferred stock will have a number of votes equal to the number of
shares of common stock into which they could then be converted.
The holders of Series A preferred stock are entitled to cumulative annual
dividends of 8.25% per annum, prior and in preference to the payment of any
dividends on the common stock (other than a common stock dividend). Such
dividends are cumulative from November 1, 1992 and accrue day to day until paid,
whether or not earned or declared. The cumulative dividends are to be paid by
the Company in cash, in quarterly installments in arrears on April 30, July 31,
October 31 and January 31 of each year ("payment dates"). Cumulative dividends
of $14,000 were outstanding as of December 31, 1995, 1996 and as of June 30,
1997 and are included in accrued liabilities. Holders of Series A preferred
stock, as their sole and exclusive remedy, may elect, at their option upon
written notice to the Company, to receive shares of common stock in lieu of cash
dividends accrued if the Company fails to pay accrued dividends for eight
consecutive payment dates. Cumulative dividends accrued through October 31, 1994
were paid to holders of Series A preferred stock in January 1995 and scheduled
quarterly dividend payments were made thereafter.
In the event of liquidation, holders of Series A preferred stock are
entitled to receive an amount equal to the original purchase price of their
shares of preferred stock plus all accrued and unpaid dividends.
NOTE 10. COMMON STOCK
Warrants
As of December 31, 1995, warrants were outstanding that entitled the
warrant holders to purchase up to 588,296 shares of common stock for $0.00125
per share, subject to adjustment for dilution. The warrants expire on the
earlier of October 30, 2002 or the date of effectiveness of a registration
statement covering at least 35% of the common stock then outstanding. The number
of shares subject to the warrants are reduced if the Company meets certain
financial performance goals and the Company prepays the subordinated notes
payable to stockholders prior to October 30, 1996. The Company repaid this note
on October 30, 1996 (see Note 6 and 12). The warrants were issued on October 30,
1992 in connection with the acquisition of the contact lens business in North
and South America of Allergan, Inc. In accordance with the original terms of
F-14
<PAGE> 83
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
the warrant agreement, all outstanding warrants were cancelled effective
December 31, 1996, as a result of the Company achieving certain financial
results and prepaying certain subordinated notes payable.
Stock Option Plans
The Company has two stock-based compensation plans that are described
below. In 1996, the Company adopted the provisions of SFAS No. 123 and elected
to continue to account for stock-based compensation using the methods prescribed
in APB No. 25. Accordingly, no compensation expense has been recognized for its
fixed stock option plans in 1994, 1995 and 1996. Had compensation expense for
the stock option plans been determined consistent with SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------ SIX MONTHS ENDED
1995 1996 JUNE 30, 1997
------ ------- --------------------
<S> <C> <C> <C>
Net income
As reported......................... $8,790 $10,176 $6,760
Pro forma........................... $8,632 $ 9,787 $6,662
Net income per share
As reported......................... -- 0.52 0.35
Pro forma........................... -- 0.50 0.34
</TABLE>
The initial effect of applying the SFAS No. 123 disclosure requirement may
not be representative of the effects on reported net income for future years.
The Company's 1989 stock option plan provides for the grant to employees,
directors or consultants of incentive stock options, exercisable at a price not
less than the fair market value of the shares on the grant date, or for
nonqualified options, exercisable at a price not less than 85% of the fair
market value of the shares on the grant date. The options generally are granted
for a six year term and vest over a five-year period. During 1994, the
stockholders approved an amendment to the Company's incentive stock option plan
increasing the number of shares reserved for issuance under that plan by 938,064
to 2,938,064. The fair value of each option grant is estimated on the grant date
by calculating the difference between the current market value of the Company's
common stock and the present value of the exercise price using a risk-free
interest rate of 6.65% over the expected life of five years. The Company
calculated the fair value of options using the minimum value method, which
applies a dividend rate and expected volatility of zero. The per share weighted
average fair value of options granted during the years ended December 31, 1994,
1995, 1996 and six months ended June 30, 1997 were $0.4066, $0.8114, $1.6413 and
$2.2817, respectively.
F-15
<PAGE> 84
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
A summary of stock option transactions under this plan follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RANGE OF NUMBER OF EXERCISE
EXERCISE PRICES SHARES PRICE
------------------- --------- --------
<S> <C> <C> <C>
Outstanding as of December 31, 1993............... $0.267 to $1.4688 1,024,480 $ 0.3587
Exercised....................................... 0.267 (8,320) 0.267
Granted......................................... 1.4688 1,333,200 1.4687
Canceled........................................ 0.267 to 1.4688 (192,080) 1.1847
----------------- --------- -------
Outstanding as of December 31, 1994............... $0.267 to $1.4688 2,157,280 $ 1.0018
Exercised....................................... 0.267 to 1.4688 (85,136) 0.5036
Granted......................................... 1.4688 to 3.035 392,120 2.8752
Canceled........................................ 0.267 to 3.035 (243,094) 1.4361
----------------- --------- -------
Outstanding as of December 31, 1995............... $0.267 to $3.035 2,221,170 $ 1.3040
Exercised....................................... 0.267 to 3.035 (679,140) 0.2993
Granted......................................... 5.03 to 7.355 395,534 5.8159
Canceled........................................ 0.267 to 7.355 (133,260) 2.4839
----------------- --------- -------
Outstanding as of December 31, 1996............... $0.267 to $7.355 1,804,304 $ 2.5842
Exercised....................................... 0.267 to 8.085 (47,760) 1.5782
Granted......................................... 8.085 76,850 8.0850
Canceled........................................ 1.4688 to 8.085 (33,700) 3.7197
----------------- --------- -------
Outstanding as of June 30, 1997................... $0.267 to $8.085 1,799,694 $ 2.8215
================= ========= =======
</TABLE>
The total number of shares exercisable as of December 31, 1996 was 602,566,
at exercise prices ranging from $0.267 to $5.03 and, as of June 30, 1997 was
718,300, at exercise prices ranging from $0.267 to $8.085. As of December 31,
1994, 1995 and 1996 and June 30, 1997, there were available for grant under the
plan 733,744, 584,718, 322,444 and 279,294 shares, respectively.
In 1992, the Company adopted a stock option plan for officers and
directors, which provides for the grant of incentive stock options exercisable
at a price not less than the fair market value of the shares on the grant date
or nonqualified stock options exercisable at a price not less than 85% of the
fair market value of the shares on the grant date. A total of 1,280,000 shares
of common stock are reserved for issuance under this plan. As of December 31,
1996, an option to purchase the 1,280,000 shares of common stock reserved under
this plan had been granted to the Company's president. The option is fully
vested and can be exercised at $0.29365 per share, subject to adjustment (see
Note 12).
NOTE 11. INCOME TAXES
Deferred taxes are provided, where warranted, to reflect the future tax
consequences of differences between the financial reporting and tax reporting of
various assets and liabilities; these differences will be either taxable or
deductible when the related assets and liabilities are recovered or settled. The
income tax benefits related to the exercise of stock options reduces taxes
currently payable and is credited to common stock. Such amounts approximated
$273,000 for 1996.
F-16
<PAGE> 85
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
Income before income tax expense includes the following components (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
United States................................... 4,226 10,692 12,993
Foreign......................................... 810 1,970 1,172
------- -------- --------
Total................................. 5,036 12,662 14,165
======= ======== ========
</TABLE>
Income tax expense (benefit) for the years ended December 31, 1994, 1995
and 1996, consisted of (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------------------------ -------------------------- -------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ----- ------- -------- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal...... $ -- $ (374) $(374) $ 764 $1,311 $ 2,075 $ 1,963 $ (648) $1,315
State........ 1 -- 1 611 254 865 627 389 1,016
Foreign...... 655 (282) 373 1,141 (212) 929 706 952 1,658
---- ----- ----- ------ ------ ------ ------ ----- ------
$ 656 $ (656) $ -- $ 2,516 $1,353 $ 3,869 $ 3,296 $ 693 $3,989
==== ===== ===== ====== ====== ====== ====== ===== ======
</TABLE>
The total income tax expense (benefit) differed from the amount computed by
applying the federal statutory income tax rate of 34% to income before taxes as
a result of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Computed tax expense at federal statutory rate
of 34%........................................ $ 1,713 $ 4,304 $ 4,816
Foreign tax rate differential................... (21) (33) (4)
Puerto Rico possessions tax credit.............. (255) (429) (1,135)
State taxes..................................... 181 510 367
Amortization of goodwill........................ 168 168 168
Other permanent differences..................... 98 529 (223)
Net change in deferred tax asset valuation
allowance..................................... (1,884) (1,180) --
------- ------- -------
$ -- $ 3,869 $ 3,989
======= ======= =======
</TABLE>
The Company has used the profit split method to calculate taxable income
since January 1, 1995. Prior to that date, the Company used the cost plus
method.
F-17
<PAGE> 86
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Accrual of royalties deductible when paid...................... $ 276 $ 425
Net operating loss carryforwards............................... -- --
Deferred compensation and interest............................. 426 295
Accounts receivable, principally due to allowance for doubtful
accounts.................................................... 319 660
Inventories, principally due to reserves and additional costs
capitalized for tax purposes................................ 899 1,189
State taxes.................................................... 124 236
Other accrued liabilities...................................... 846 576
------- -------
Total gross deferred tax assets........................ 2,890 3,381
Less valuation allowance....................................... -- --
Gross deferred tax assets, net of valuation allowance....... 2,890 3,381
Deferred tax liabilities:
Investment in subsidiaries..................................... (461) (461)
Puerto Rico tollgate tax....................................... -- (818)
Puerto Rico profit split and basis difference.................. (957) (957)
Other basis differences........................................ (1,695) (1,401)
Depreciation of property and equipment......................... (239) (899)
Total gross deferred tax liabilities................... (3,352) (4,536)
------- -------
Net deferred tax asset (liability)..................... $ (462) $(1,155)
======= =======
</TABLE>
At December 31, 1996, taxes have not been provided on $2,121,000 of
accumulated foreign unremitted earnings which are expected to remain invested
indefinitely. Applicable foreign income taxes have been provided. Although, it
is not practical to estimate the amount of additional tax that might be payable
on the foreign unremitted earnings, credits for foreign income taxes paid will
be available, at tax rates substantially equal to any U.S. tax liability. For
financial reporting purposes, a valuation allowance was recognized as of
December 31, 1994, to reflect the uncertainty of generating taxable income
sufficient to utilize the gross deferred tax asset.
NOTE 12. RELATED PARTY TRANSACTIONS
On September 30, 1992, the Company entered into a non-exclusive patent
license agreement, which granted the Company the right to manufacture, use and
sell products and processes covered by patents and patent applications owned by
certain former stockholders of OSL, some of whom are stockholders of the
Company. The term of the patent license agreement was the life of the licensed
patents (up to 17 years). The agreement required the Company to pay royalties to
the former OSL stockholders of $0.50 per lens, with a minimum $1,000,000 per
royalty year (from July 1 to June 30) commencing in 1993, until $4,400,000 in
total royalties has been paid on a cumulative basis. Royalty payments totaling
$1,650,000 were made in 1994, and as of December 31, 1994, the Company made
cumulative royalty payments of approximately $3,200,000. Royalty payments of
$1,200,000 were deposited into an escrow account pending settlement of
litigation against certain stockholders of the Company (see Note 14).
F-18
<PAGE> 87
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
Also, on September 30, 1992, the Company entered into a purchase and supply
agreement with Aspect Vision Care Ltd. ("AVCL"), an entity affiliated with
certain stockholders of the Company. The agreement provided that the Company
would sell lenses to AVCL at a purchase price equal to the Company's direct and
indirect costs of processing the lenses, plus 20%. As discussed in Note 14, AVCL
and the Company were involved in litigation which was settled in February 1997.
AVCL accounted for net sales of approximately $1,863,000 for the year ended
December 31, 1994 and $407,000 of accounts receivable as of December 31, 1995
and 1996. There were no sales to AVCL in 1995 or 1996. A provision was recorded
for the full amount of the accounts receivable from AVCL as of December 31,
1995, which was subsequently written off during the three months ended March 31,
1997.
During 1993 and 1994 certain individuals who held a controlling interest in
AVCL also served as members of the board of directors of the Company's United
Kingdom subsidiary (OSL).
On September 30, 1992, the Company entered into consulting agreements with
two stockholders that called for an aggregate of approximately $7,000 per month
to be paid for consulting services rendered. These agreements were terminated in
February 1997 (see Note 14).
As of December 31, 1995, the Company had approximately $16,042,000 in
subordinated notes, net of debt discount, of which $2,868,000 represented the
current portion. The Company also had accrued interest of $481,000 due to the
Company's warrant holders and certain stockholders. This debt agreement
contained certain restrictive financial covenants requiring the Company to
maintain certain levels of tangible net worth and cash, to maintain specified
ratios (debt to net worth and quick ratio) and to achieve certain levels of
interest expense coverage. The debt was retired on October 30, 1996 (see Note
6).
As of December 31, 1995 and 1996 and June 30, 1997, the Company had a
$2,895,000 long-term junior subordinated note payable due to the Company's
president bearing interest at prime plus 3% (11.5%, 11.25% and 11.25% as of
December 31, 1995, December 31, 1996 and June 30, 1997, respectively). An
agreement was signed by the president on October 30, 1996 that provided for
subordination of this junior subordinated note to debt outstanding to a major
commercial bank (see Note 6). This note was amended on June 1, 1997 whereby
provisions of the subordination was removed and all principal and unpaid
interest is payable to him on November 1, 1997. The president had advanced the
Company funds periodically, prior to 1993, to meet certain short-term operating
cash requirements. Accrued interest on this debt totaled $56,000 as of December
31, 1995 and $54,000 as of December 31, 1996 and June 30, 1997. The president
has the right to exercise stock options held by reducing the principal balance
owed on the note payable in lieu of providing cash payments upon exercise. The
president holds options to purchase 1,280,000 shares of common stock with an
exercise price of $0.29365 per share, subject to adjustment.
A director of the Company, who is also the brother of the President, is a
partner in a law firm which has provided legal services to the Company since its
formation. The Company made payments for legal services of $400,000, $309,000
$284,000 and $93,000 and $59,000 in the years ended December 31, 1994, 1995 and
1996 and the six months ended June 30, 1996 and 1997.
F-19
<PAGE> 88
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
NOTE 13. FOREIGN OPERATIONS
The Company operates in a single industry segment and has several wholly
owned subsidiaries that manufacture the Company's products in the United
Kingdom, Canada and Puerto Rico. The Company's operations by geographic area for
1994, 1995 and 1996 and for the six months ended June 30, 1997 are as follows
(in thousands):
<TABLE>
<CAPTION>
NORTH
AMERICA EUROPE ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1994
Sales to unaffiliated customers... $ 45,212 $ 3,291 $ -- $ 48,503
Intercompany sales................ 20,838 9,342 (30,180) --
-------- ------- -------- -------
Total net sales................... $ 66,050 $12,633 $(30,180) $ 48,503
======== ======= ======== =======
Income from operations............ $ 5,692 $ 1,094 $ 1,672 $ 8,458
======== ======= ======== =======
Net assets........................ $ 7,416 $ 2,509 $ (5,478) $ 4,447
======== ======= ======== =======
December 31, 1995
Sales to unaffiliated customers... $ 64,377 $ 3,710 $ -- $ 68,087
Intercompany sales................ 25,059 13,291 (38,350) --
-------- ------- -------- -------
Total net sales................... $ 89,436 $17,001 $(38,350) $ 68,087
======== ======= ======== =======
Income from operations............ $ 14,929 $ 1,724 $ (1,401) $ 15,252
======== ======= ======== =======
Net assets........................ $ 12,623 $10,459 $ (9,790) $ 13,292
======== ======= ======== =======
December 31, 1996
Sales to unaffiliated customers... $ 84,009 $ 6,500 $ -- $ 90,509
Intercompany sales................ 29,702 20,345 (50,047) --
-------- ------- -------- -------
Total net sales................... $113,711 $26,845 $(50,047) $ 90,509
======== ======= ======== =======
Income from operations............ $ 16,587 $ 1,523 $ (675) $ 17,435
======== ======= ======== =======
Net assets........................ $ 29,729 $15,340 $(21,180) $ 23,889
======== ======= ======== =======
Six Months Ended June 30, 1997
Sales to unaffiliated customers... $ 47,972 $ 4,997 $ -- $ 52,969
Intercompany sales................ 15,498 10,056 (25,554) --
-------- ------- -------- -------
Total net sales................... $ 63,470 $15,053 $(25,554) $ 52,969
======== ======= ======== =======
Income from operations............ $ 10,972 $ 1,004 $ 1,474 $ 10,502
======== ======= ======== =======
Net assets........................ $ 35,817 $17,924 $(25,254) $ 30,487
======== ======= ======== =======
</TABLE>
Europe is comprised of the Company's United Kingdom and Hungary operations
that make up 99.4% and 0.6%, respectively, as of December 31, 1996 and 99.2% and
0.8%, respectively, of the Company's European net assets as of June 30, 1997.
NOTE 14. LITIGATION
In 1994, litigation was commenced by the Company and OSL, its United
Kingdom subsidiary, against former employees and a former director of OSL, its
United Kingdom distributor (AVCL) and certain related parties. The claims by the
Company were essentially for misappropriation of intellectual property, breach
of contract and nonpayment of accounts. In a related matter, there was also a
patent infringement action against OSL which involved the validity of a certain
molding patent that was licensed by OSL from certain of the
F-20
<PAGE> 89
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
defendants. The Company also brought an action in federal court in California
against certain of the same individuals who were sued in the United Kingdom. The
California action was essentially one for breach of employment, breach of
contract and violation of securities laws.
In November 1996, judgment was rendered in the United Kingdom actions. In
February 1997, prior to the determination of any costs or damages by the United
Kingdom courts, the parties to the above litigations entered into a settlement
agreement for total monetary consideration of $10,000,000. The settlement
agreement provided for, among other things, (i) a mutual release and termination
of all pending litigation; (ii) the replacement of the September 30, 1992 patent
license agreement (See Note 12) with a new, fully paid-up, non-exclusive, patent
license, that did not contain any restrictions on the Company's ability to sell
contact lenses to other contact lens manufacturers; and, (iii) the termination
of the Company's obligation to supply contact lenses under the September 30,
1992 purchase and supply agreement (See Note 12), including a limitation of the
Company to sell contact lenses directly into the United Kingdom. The Company
paid $3,333,000 to the defendants upon consummation of the settlement agreement
and agreed to pay an additional $6,667,000 upon the earlier of February 27, 1998
or the sale of the Company's common stock in an initial public offering. The
Company has the option of paying a portion of this remaining amount in common
stock at a designated fixed value.
The Company engaged a third party valuation firm to value the United
Kingdom marketing rights and the prepaid patent license agreement acquired as a
result of the settlement agreement and assigned values to the liabilities
identified as a result of the court judgment. The Company then allocated the
$10,000,000 of consideration to the liabilities identified and the intangible
assets acquired on a pro rata basis. As a result of this allocation and in
accordance with APB Opinion No. 17, "Intangible Assets," the Company allocated
$8,800,000 of the consideration to the United Kingdom marketing rights and the
prepaid patent license agreement acquired. The Company has assigned an estimated
useful life of 10 years to the United Kingdom marketing rights and the prepaid
patent license agreement.
The Company incurred legal expenses, which were included in general and
administrative expenses, in 1994, 1995, 1996 and the six months ended June 30,
1996 and 1997 of $549,000, $1,320,000, $2,513,000, $649,000 and $52,000,
respectively, related to this litigation.
Various other legal actions arising in the normal course of business have
been brought against the Company and certain of its subsidiaries. Management
believes that the ultimate resolution of the these actions will not have a
material adverse effect on the Company's financial position or results of
operations.
NOTE 15. OTHER COMMITMENTS
Commitments for the remodeling of existing facilities and purchase of
capital equipment over the next year are approximately $2,849,000 and
$7,686,000, respectively, as of December 31, 1996 and June 30, 1997.
NOTE 16. SUBSEQUENT EVENTS
Compensation Plans
In June 1997, the Board of Directors and the stockholders of the Company
adopted the following compensation plans:
The 1997 Equity Incentive Plan provides for grants of incentive stock
options to employees (including officers and employee directors) and
nonqualified stock options to employees, officers, directors, consultants,
independent contractors and advisors of the Company. The exercise price of all
incentive stock options must be equal to the fair market value of the Company's
common stock on the date of grant. The exercise price of
F-21
<PAGE> 90
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
all nonqualified stock options must be at least equal to 85% of that value. A
total of 2,000,000 shares of common stock are reserved for future issuances
under the plan.
The 1997 Directors Stock Option Plan provides for grants of nonqualified
stock options to certain non-employee directors of the Company. The exercise
price per share of all options granted under the plan must be equal to the fair
market value of the Company's common stock on the date of grant. A total of
300,000 shares of common stock are reserved for future issuances under the plan.
The 1997 Employee Stock Purchase Plan will be implemented by an offering
commencing on the date of the closing of the proposed initial public offering.
The plan permits employees to purchase common stock at a price equal to 85% of
the fair market value of the Company's common stock. A total of 400,000 shares
of common stock are reserved for future issuances under the plan.
Financing
Effective upon the closing of a public offering of the Company's common
stock, the Company intends to amend and restate the commercial lending facility
(the "Revised Agreement") and has received a commitment from its bank for a
modification to the Revised Agreement under which the Company could borrow up to
$20 million in revolving credit loans. Outstanding borrowings under the Revised
Agreement are expected to fluctuate based on investment levels in working
capital and property and equipment. The Company expects that the Revised
Agreement will terminate on June 30, 2000, and would be secured by a pledge of
the Company's stock in its subsidiaries and the Company's inventory and accounts
receivable. Borrowings under the Revised Agreement would bear interest at
Comerica's prime rate or at Comerica's eurodollar rate plus a specified margin
that varies based on the Company's ratio of debt to tangible net worth.
Loans to Officer
In April 1997, the Company loaned a total of $892,195 to certain employees
of the Company, of which $550,923 is a full-recourse promissory note loaned to
the Company's Vice President, U.S. Sales. All the loans, except for the loan to
this officer, are non-recourse but are secured by a total of 228,846 shares of
the Company's Common Stock, 102,212 of which have been pledged by the officer.
The loans bear interest at a rate of 6%, payable on or before the earliest to
occur of the one year anniversary of each loan, respectively, termination of
employment, liquidation or dissolution of the Company or, under certain
circumstances, merger or consolidation of the Company.
F-22
<PAGE> 91
OCULAR SCIENCE LOGO
<PAGE> 92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses to be paid by the Registrant in connection with this
offering are as follows:
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 40,146
NASD Filing Fee.................................................. 13,748
Nasdaq National Market Application Fee........................... 50,000
Printing......................................................... 100,000
Legal Fees and Expenses.......................................... 450,000
Accounting Fees and Expenses..................................... 180,000
Director and Officer Liability Insurance......................... 136,000
Blue Sky Fees and Expenses....................................... 10,000
Transfer Agent and Registrar Fees................................ 2,500
Miscellaneous.................................................... 97,606
----------
Total.................................................. $1,080,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law Code authorizes a court
to award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). Article VI of the Registrant's Bylaws provides for mandatory
indemnifications of its directors and officers and permissible indemnifications
of employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. In addition, the Registrant has entered into Indemnity
Agreements with its officers and directors, and has entered into a Registration
Rights Agreement with certain of its stockholders providing for, among other
things, indemnification of selling stockholders under certain circumstances.
Reference is also made to Section 9 of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities.
The indemnification provision in the Bylaws, and the indemnity agreements
entered into between the Registrant and its directors and executive officers,
may be sufficiently broad to permit indemnification of the Registrant's
directors and executive officers for liabilities arising under the Securities
Act.
As authorized by the Registrant's Bylaws, the Registrant, with approval by
the Registrant's Board of Directors, has applied for, and expects to obtain,
directors' and officers' liability insurance with a per claim and annual
aggregate coverage limit of $30 million.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
--------------------------------------------------------------- --------------
<S> <C>
Underwriting Agreement......................................... 1.01
Registrant's Bylaws............................................ 3.04
Registration Rights Agreement.................................. 4.01
Form of Indemnity Agreement.................................... 10.06
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth information regarding all securities sold by
the Registrant since May 1, 1994.
II-1
<PAGE> 93
<TABLE>
<CAPTION>
NUMBER AGGREGATE FORM OF
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES OF SHARES PURCHASE PRICE CONSIDERATION
- -------------------------------- ------------ ------------------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Exercise of options by 31 05/94-
optionees....................... 04/30/97 Common Stock 808,356 $ 273,837.79 Cash
Edgar J. Cummins, William R.
Grant(1), Daniel J. Kunst and
Terence M. Fruth................ 11/30/94 Common Stock 26,928 39,550.50 Services as
director
Allergan, Inc., Galen Partners,
L.P., .......................... 12/14/94 and
Galen Partners International
L.P. ........................... 12/22/94 Common Stock 2,178,294 3,630.49 Cash
Edgar J. Cummins, William R.
Grant(1), Daniel J. Kunst,
Terence M. Fruth and Richard M.
Haugen(2)....................... 01/10/96 Common Stock 5,566 27,996.98 Services as
director
</TABLE>
- ---------------
(1) Stock certificate issued to Galen Associates.
(2) Stock certificate issued to Richard M. Haugen and Mary J. Haugen as trustees
of the Haugen Family Trust.
All sales of Common Stock made pursuant to the exercise of stock options
granted under the Registrant's stock option plan and issuances to directors and
independent contractors were made pursuant to the exemption from the
registration requirements of the Securities Act afforded by Rule 701 promulgated
under the Securities Act.
All other sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. These sales were made
without general solicitation or advertising. Each purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment who represented to the Registrant that the shares were being acquired
for investment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ ----------------------------------------------------------------------------------
<C> <C> <S>
1.01 -- Underwriting Agreement.
2.01 -- Form of Agreement and Plan of Merger by and between O.S.I. Corporation, a
California corporation, and Registrant.+
3.01 -- Registrant's Certificate of Incorporation.+
3.02 -- Registrant's Certificate of Designation of Preferred Stock.+
3.03 -- Form of Registrant's Restated Certificate of Incorporation to be effective upon
the closing of this offering.+
3.04 -- Registrant's Bylaws.+
4.01 -- Registration Rights Agreement dated as of October 30, 1992 by and among the
Registrant and the other parties listed on the signature pages thereto.+
4.02 -- Amendment to Registration Rights Agreement and Shareholders' Agreement dated as of
February 27, 1997 by and among the Registrant and the other parties listed on the
signature pages thereto.+
5.01 -- Opinion of Fenwick & West LLP regarding legality of the securities being issued.
10.01 -- Registrant's 1989 Stock Option Plan adopted July 21, 1989, as amended November 30,
1994.+
10.02 -- Registrant's 1992 Officers and Directors Stock Option Plan adopted September 30,
1992.+
10.03 -- Registrant's 1997 Equity Incentive Plan.+
10.04 -- Registrant's 1997 Directors Stock Option Plan.+
</TABLE>
II-2
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ ----------------------------------------------------------------------------------
<C> <C> <S>
10.05 -- Registrant's 1997 Employee Stock Purchase Plan.+
10.06 -- Form of Indemnity Agreement to be entered into by Registrant with each of its
directors and executive officers.+
10.07 -- Junior Subordinated Promissory Note dated October 30, 1996, issued by O.S.I.
Corporation to John Fruth, as amended.+
10.08 -- Settlement Agreement and Release dated as of February 27, 1997 between Aspect
Vision Care Ltd., New Focus Health Care Ltd., Geoffrey Galley, Anthony Galley,
Barrie Bevis, Albert Morland, Ivor Atkinson, Wilfred Booker, Ocular Sciences Ltd.,
O.S.I. Corporation and John Fruth.#
10.09 -- Amendment to Settlement Agreement and Release dated as of February 27, 1997
between the parties to the Settlement Agreement and Contact Lens Technologies
Ltd.+
10.10 -- Patent License Agreement dated February 27, 1997 by and between Ocular Sciences
Ltd. and certain persons referred to therein as the Patent Owners.+
10.11 -- Employment Agreement dated March 27, 1996 by between John Lilley and O.S.I.
Corporation.+
10.12 -- Lease for 475 - 479 Eccles Avenue dated May 18, 1995, between Stanley D. McDonald,
Norman H. Scherdt, Herbert A. West and McDonald Ltd. as "Landlord" and O.S.I.
Corporation as "Tenant."+
10.13 -- Lease for Santa Isabel, Puerto Rico Kingdom dated September 14, 1984, between The
Puerto Rico Industrial Development Company as "Landlord" and O.S.I. Puerto Rico
Corporation as "Tenant," as amended.+
10.14 -- Counterpart Underlease of Distribution Depot dated November 30, 1995 among Boots
the Chemist Limited as "Landlord," Ocular Sciences Limited as "Tenant" and O.S.I.
Corporation as "Guarantor."+
10.15 -- Credit Agreement between O.S.I. Corporation and Comerica Bank - California dated
October 30, 1996 and exhibits thereto.
11.01 -- Statement regarding computation of pro forma and supplementary pro forma net
income per share.+
21.01 -- List of Subsidiaries.+
23.01 -- Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 -- Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants.
24.01 -- Power of Attorney.+
27.01 -- Financial Data Schedule.
</TABLE>
- ---------------
+ Previously filed.
# Confidential treatment has been requested from the Securities and Exchange
Commission with respect to certain portions of this exhibit. Omitted portions
have been filed separately with the Commission.
II-3
<PAGE> 95
(b) The following financial statement schedule is filed herewith:
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowance for sales returns and 1,930 193 -- (672)(1) 1,451
doubtful accounts
receivable....................
Provision for excess and obsolete 2,341 983 -- (1,082)(2) 2,242
inventory.....................
YEAR ENDED DECEMBER 31, 1995
Allowance for sales returns and 2,011 468 -- (549)(1) 1,930
doubtful accounts
receivable....................
Provision for excess and obsolete 4,554 575 -- (2,788)(2) 2,341
inventory.....................
YEAR ENDED DECEMBER 31, 1994
Allowance for sales returns and 1,465 950 -- (404)(1) 2,011
doubtful accounts
receivable....................
Provision for excess and obsolete 11,892 256 -- (7,594)(2) 4,554
inventory.....................
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Discontinued, expired, damaged and scrap inventory.
Other financial statement schedules are omitted because the information
called for is not required or is shown either in the Consolidated Financial
Statements or the Notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 4 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of South San Francisco, State of
California, on the thirty-first day of July, 1997.
OCULAR SCIENCES, INC.
By: /s/ GREGORY E. LICHTWARDT
------------------------------------
Gregory E. Lichtwardt
Vice President, Finance and
Chief Financial Officer
In accordance with the requirements of the Securities Act, this Amendment
No. 4 was signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
* President and Chief Executive July 31, 1997
- --------------------------------------------- Officer and Chairman of the Board
John D. Fruth of Directors
PRINCIPAL FINANCIAL AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ GREGORY E. LICHTWARDT Vice President, Finance and Chief July 31, 1997
- --------------------------------------------- Financial Officer
Gregory E. Lichtwardt
DIRECTORS:
* Director July 31, 1997
- ---------------------------------------------
Edgar J. Cummins
* Director July 31, 1997
- ---------------------------------------------
Terence M. Fruth
* Director July 31, 1997
- ---------------------------------------------
William R. Grant
* Director July 31, 1997
- ---------------------------------------------
Daniel J. Kunst
* Director July 31, 1997
- ---------------------------------------------
Francis R. Tunney, Jr.
*By: /s/ GREGORY E. LICHTWARDT
- ---------------------------------------------
Gregory E. Lichtwardt
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 97
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Ocular Sciences, Inc.
Under date of February 14, 1997, except as to Notes 1 and 16 of the Notes to
Consolidated Financial Statements, which are as of July 14, 1997, we reported on
the consolidated balance sheets of Ocular Sciences, Inc. as of December 31, 1995
and 1996, and the related consolidated statements of income, stockholders
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996, which are included in the prospectus. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule included in the
registration statement. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
February 14, 1997, except as to Notes 1 and 16
of the Notes to Consolidated Financial Statements
which are as of July 14, 1997
San Francisco, California
II-6
<PAGE> 98
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE PAGE
- ------ -------------------------------------------------------------------------- -----
<C> <C> <S> <C>
1.01 -- Underwriting Agreement....................................................
2.01 -- Form of Agreement and Plan of Merger by and between O.S.I. Corporation, a
California corporation, and Registrant+...................................
3.01 -- Registrant's Certificate of Incorporation+................................
3.02 -- Registrant's Certificate of Designation of Preferred Stock+...............
3.03 -- Form of Registrant's Restated Certificate of Incorporation to be effective
upon the closing of this offering+........................................
3.04 -- Registrant's Bylaws+......................................................
4.01 -- Registration Rights Agreement dated as of October 30, 1992 by and among
the Registrant and the other parties listed on the signature pages
thereto+..................................................................
4.02 -- Amendment to Registration Rights Agreement and Shareholders' Agreement
dated as of February 27, 1997 by and among the Registrant and the other
parties listed on the signature pages thereto+............................
5.01 -- Opinion of Fenwick & West LLP regarding legality of the securities being
issued....................................................................
10.01 -- Registrant's 1989 Stock Option Plan adopted July 21, 1989, as amended
November 30, 1994+........................................................
10.02 -- Registrant's 1992 Officers and Directors Stock Option Plan adopted
September 30, 1992+.......................................................
10.03 -- Registrant's 1997 Equity Incentive Plan+..................................
10.04 -- Registrant's 1997 Directors Stock Option Plan+............................
10.05 -- Registrant's 1997 Employee Stock Purchase Plan+...........................
10.06 -- Form of Indemnity Agreement to be entered into by Registrant with each of
its directors and executive officers+.....................................
10.07 -- Junior Subordinated Promissory Note dated October 30, 1996, issued by
O.S.I. Corporation to John Fruth, as amended+.............................
10.08 -- Settlement Agreement and Release dated as of February 27, 1997 between
Aspect Vision Care Ltd., New Focus Health Care Ltd., Geoffrey Galley,
Anthony Galley, Barrie Bevis, Albert Morland, Ivor Atkinson, Wilfred
Booker, Ocular Sciences Ltd., O.S.I. Corporation and John Fruth#..........
10.09 -- Amendment to Settlement Agreement and Release dated as of February 27,
1997 between the parties to the Settlement Agreement and Contact Lens
Technologies Ltd.+........................................................
10.10 -- Patent License Agreement dated February 27, 1997 by and between Ocular
Sciences Ltd. and certain persons referred to therein as the Patent
Owners+...................................................................
10.11 -- Employment Agreement dated March 27, 1996 by between John Lilley and
O.S.I. Corporation+.......................................................
10.12 -- Lease for 475 - 479 Eccles Avenue dated May 18, 1995, between Stanley D.
McDonald, Norman H. Scherdt, Herbert A. West and McDonald Ltd. as
"Landlord" and O.S.I. Corporation as "Tenant"+............................
10.13 -- Lease for Santa Isabel, Puerto Rico Kingdom dated September 14, 1984,
between The Puerto Rico Industrial Development Company as "Landlord" and
O.S.I. Puerto Rico Corporation as "Tenant," as amended+...................
10.14 -- Counterpart Underlease of Distribution Depot dated November 30, 1995 among
Boots the Chemist Limited as "Landlord," Ocular Sciences Limited as
"Tenant" and O.S.I. Corporation as "Guarantor"+...........................
10.15 -- Credit Agreement between O.S.I. Corporation and Comerica Bank - California
dated October 30, 1996.
11.01 -- Statement regarding computation of pro forma and supplementary pro forma
net income per share+.....................................................
21.01 -- List of Subsidiaries+.....................................................
23.01 -- Consent of Fenwick & West LLP (included in Exhibit 5.01)..................
23.02 -- Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants...............................................................
24.01 -- Power of Attorney+........................................................
27.01 -- Financial Data Schedule...................................................
</TABLE>
- ---------------
+ Previously filed.
# Confidential treatment has been requested from the Securities and Exchange
Commission with respect to certain portions of this exhibit. Omitted portions
have been filed separately with the Commission.
<PAGE> 1
EXHIBIT 1.1
7,200,000 Shares
OCULAR SCIENCES, INC.
COMMON STOCK (PAR VALUE $0.001 PER SHARE)
UNDERWRITING AGREEMENT
________________, 1997
<PAGE> 2
____________, 1997
Morgan Stanley & Co. Incorporated
Bear, Stearns & Co. Inc.
Cowen & Company
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
Ocular Sciences, Inc., a Delaware corporation (the "Company"), proposes
to issue and sell to the several Underwriters named in Schedule II hereto (the
"Underwriters"), and certain stockholders of the Company (the "Selling
Stockholders") named in Schedule I hereto severally propose to sell to the
several Underwriters, an aggregate of 7,200,000 shares of the Common Stock (par
value $0.001 per share) of the Company (the "Firm Shares"), of which 3,600,000
shares are to be issued and sold by the Company and 3,600,000 shares are to be
sold by the Selling Stockholders, each Selling Stockholder selling the amount
set forth opposite such Selling Stockholder's name in Schedule I hereto. The
Company is successor by merger to O.S.I. Corporation, a California corporation
(the "Predecessor"), as a result of a reincorporation transaction that became
effective on ____________, 1997 (the "Reincorporation"). For the purposes of
Section 1 hereof, all references to "Company" shall also refer to the
Predecessor prior to the Reincorporation.
Certain of the Selling Stockholders also propose to sell to the several
Underwriters not more than an additional 1,080,000 shares of its Common Stock
(par value $0.001 per share) (the "Additional Shares") if and to the extent that
you, as Managers of the offering, shall have determined to exercise, on behalf
of the Underwriters, the right to purchase such shares of Common Stock granted
to the Underwriters in Section 3 hereof. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "Shares." The shares of
Common Stock (par value $0.001 per share) of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "Common Stock." The Company and the Selling Stockholders are hereinafter
sometimes collectively referred to as the "Sellers."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement;" the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "Rule 462 Registration Statement"), then any reference herein to the
term "Registration Statement" shall be deemed to include such Rule 462
Registration Statement.
As part of the offering contemplated by this Agreement, Morgan Stanley
& Co. Incorporated ("Morgan Stanley") has agreed to reserve out of the Shares
set forth opposite its name on Schedule II to this Agreement, up to ____________
shares, for sale to the Company's employees, officers, and directors and other
parties associated with the Company (collectively, "Participants"), as set forth
in the Prospectus under the heading "Underwriting" (the "Directed Share
Program"). The Shares to be sold by Morgan Stanley pursuant to the Directed
Share Program (the "Directed Shares") will be sold by Morgan Stanley pursuant to
this Agreement at the public offering price. Any Directed Shares not orally
confirmed for purchase by any Participants by the end of the first business day
after the date on which this Agreement is executed will be offered to the public
by Morgan Stanley as set forth in the Prospectus.
1
<PAGE> 3
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and
no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all material
respects with the Securities Act and the applicable rules and regulations of
the Commission thereunder and, (iii) the Prospectus does not contain and, as
amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this Section l(b) do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property and
to conduct its business as described in the Prospectus and is duly qualified
to transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to be so qualified
or be in good standing would not have a material adverse effect on the
Company and its Subsidiaries (as defined below), taken as a whole.
(d) Other than O.S.I. Puerto Rico Corporation, a Delaware corporation
("OSI Puerto Rico"), O.S.I. Canada Corporation, a New Brunswick corporation
("OSI Canada"), Ocular Sciences Limited, a company organized in the United
Kingdom ("OSL"), and Ocular Sciences Hungary, a Hungarian corporation
("OSH") (each of OSH, OSI Puerto Rico, OSI Canada and OSL being referred to
herein as a "Subsidiary" and collectively as the "Subsidiaries"), the
Company has no subsidiaries. Each Subsidiary of the Company has been duly
incorporated or organized, as the case may be, is validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization, as the case may be, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its Subsidiaries, taken as a
whole. All of the issued shares of capital stock of each Subsidiary have
been duly and validly authorized and issued, are fully paid and
non-assessable, and are beneficially owned directly by the Company, free and
clear of all liens, encumbrances, equities or claims.
(e) The Company and each of its Subsidiaries have good and marketable
title to all personal and real property owned by them that is material to
the business of the Company and its Subsidiaries, taken as a whole, in each
case free and clear of all liens, encumbrances and defects except such as
are described in the Prospectus or such as do not materially affect the
value of such property and do not interfere with the use made and proposed
to be made of such property by the Company and each of its Subsidiaries; and
any real property and buildings held under lease by the Company and each of
its Subsidiaries are held by them under valid, subsisting and enforceable
leases except with such exceptions as are not material to the Company and do
not interfere with the current and proposed use of such property and
buildings by the Company and each of its Subsidiaries, in each case except
as described in or contemplated by the Prospectus.
2
<PAGE> 4
(f) This Agreement has been duly authorized, executed and delivered by
the Company.
(g) The authorized capital stock of the Company conforms as to legal
matters in all material respects to the description thereof contained in the
Prospectus.
(h) The shares of Common Stock (including the Shares to be sold by the
Selling Stockholders) outstanding prior to the issuance of the Shares to be
sold by the Company have been duly authorized and are validly issued, fully
paid and non-assessable. Except as set forth in the Prospectus and other
than options to purchase 3,079,694 shares of the Company's Common Stock
granted to employees pursuant to the Company's 1989 Stock Option Plan (the
"1989 Plan") and the Company's 1992 Officers and Directors Stock Option Plan
(the "1992 Plan") as described in the Prospectus, neither the Company nor
any of its Subsidiaries has outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments
to issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. All outstanding shares of capital
stock and options and other rights to acquire capital stock have been issued
in compliance with the registration and qualification provisions of all
applicable securities laws (or applicable exemptions thereof) and were not
issued in violation of any preemptive rights, rights of first refusal and
other similar rights.
(i) The Shares to be sold by the Company have been duly authorized, and
when issued and delivered in accordance with the terms of this Agreement,
will be validly issued, fully paid and non-assessable, and the issuance of
such Shares will not be subject to any preemptive or similar rights.
(j) The execution and delivery by the Company of, and the performance by
the Company of its obligations under, this Agreement will not contravene any
provision of applicable law or the certificate of incorporation or bylaws of
the Company or any of its Subsidiaries or any agreement or other instrument
binding upon the Company or any of its Subsidiaries that is material to the
Company and its Subsidiaries, taken as a whole, or any judgment, order or
decree of any governmental body, agency or court having jurisdiction over
the Company or any of its Subsidiaries, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
governmental agency is required for the performance by the Company of its
obligations under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states or international
jurisdictions in connection with the offer and sale of the Shares.
(k) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and Subsidiaries, taken as a whole, from that set
forth in the Prospectus.
(l) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, (i) the Company and its
Subsidiaries have not incurred any material liability or obligation, direct
or contingent, nor entered into any material transaction not in the ordinary
course of business; (ii) the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any dividend
or distribution of any kind on its capital stock; and (iii) there has not
been any material change in the capital stock, short-term debt or long-term
debt of the Company and its consolidated Subsidiaries, taken as a whole,
except in each case as described or specifically contemplated in the
Prospectus.
(m) There are no legal or governmental proceedings pending or, to the
best of the Company's knowledge, threatened to which the Company or any of
its Subsidiaries is a party or to which any of the properties of the Company
or any of its Subsidiaries is subject that are required to be described in
the Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
3
<PAGE> 5
(n) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 or Rule 462 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder.
(o) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended.
(p) There is no owner of any securities of the Company who has any
right, not effectively satisfied or waived, to require registration of any
shares of capital stock of the Company in connection with the filing of the
Registration Statement or the sale of any shares thereunder. There are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities of the
Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement, except in each case as
described in the Prospectus.
(q) The Company and each of its Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any of its Subsidiaries has been
refused any material insurance coverage sought or applied for since May 1,
1993; and neither the Company nor any of its Subsidiaries has any reason to
believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would
not materially and adversely affect the condition, financial or otherwise,
or the earnings, business or operations of the Company and its Subsidiaries,
taken as a whole, except as described in or contemplated by the Prospectus.
(r) The Company and each of its Subsidiaries (i) are in compliance with
any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received all permits,
licenses or other approvals required of them under applicable Environmental
Laws to conduct their respective businesses and (iii) are in compliance with
all terms and conditions of any such permit, license or approval, except
where such noncompliance with Environmental Laws, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company
and its Subsidiaries, taken as a whole.
(s) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or
with any person or affiliate located in Cuba.
(t) Except as specifically disclosed in the Prospectus, (i) the Company
and its Subsidiaries own or possess adequate licenses or other rights to use
all patents, copyrights, trademarks, service marks, trade names, technology
and know-how necessary to conduct their respective businesses in the manner
described in the Prospectus , (ii) neither the Company nor any of its
Subsidiaries has received any notice of infringement or conflict with
asserted rights of others with respect to any patents, copyrights,
trademarks, service marks, trade names, technology or know-how that could
reasonably be expected to result in any material adverse effect upon the
Company and its Subsidiaries, taken as a whole, and (iii) the discoveries,
inventions, products or processes of the Company and its Subsidiaries
referred to in the Prospectus do not, to the best knowledge of the Company,
infringe or conflict with any right or patent of any third party, or any
discovery, invention, product or process that could reasonably be expected
to have a material adverse effect on the Company and its Subsidiaries, taken
as a whole.
4
<PAGE> 6
(u) The Company and its Subsidiaries possess all consents, approvals,
orders, certificates, authorizations and permits issued by, and has made all
declarations and filings with, all appropriate federal, state or foreign
governmental and self-regulatory authorities and all courts and other
tribunals necessary to conduct their respective businesses and to own,
lease, license and use their properties in the manner described in the
Prospectus, except to the extent that the failure to obtain or file would
not have a material adverse effect on the Company and its Subsidiaries,
taken as a whole, and neither the Company nor its Subsidiaries has received
any notice of proceedings related to the revocation or modification of any
such consent, approval, order, certificate, authorization or permit that,
singly or in the aggregate, could reasonably be expected to result in a
material adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company and its Subsidiaries, taken
as a whole.
(v) The Company and its Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principals of the United States and to maintain asset
accountability; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(w) No material labor dispute with employees of the Company or any of
its Subsidiaries exists or to the knowledge of the Company is imminent, and,
without conducting any independent investigation, the Company is not aware
of any written communication of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could result in any material adverse
change in the condition, financial or otherwise, the earnings, the business
or operations of the Company and its Subsidiaries, taken as a whole.
(x) __________ and ________ outstanding shares of the Common Stock and
securities convertible into or exercisable or exchangeable for Common Stock,
respectively, are subject to valid, binding and enforceable agreements
(collectively, the "Lock-Up Agreements") that restrict the holders thereof
from selling, making any short sale of, granting any option for the purchase
of, or otherwise transferring or disposing of, any of such shares of Common
Stock, or any such securities convertible or exercisable or exchangeable for
Common Stock, for a period of 180 days, respectively, after the date of the
Prospectus without the prior written consent of Morgan Stanley.
(y) The Company has notified each holder of a currently outstanding
option issued under the 1989 Plan and 1992 Plan and each person who has
acquired shares of Common Stock pursuant to the exercise of any option
granted under the 1989 Plan and 1992 Plan, that none of such options or
shares may be sold or otherwise transferred or disposed of for a period of
180 days after the date of the initial public offering of the Shares and has
imposed a stop-transfer instruction with the Company's transfer agent in
order to enforce the foregoing lock-up provision imposed pursuant to the
1989 Plan and 1992 Plan.
(z) As of the date the Registration Statement became effective, the
Common Stock was authorized for quotation on The Nasdaq National Market upon
official notice of issuance.
(aa) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the
sale or resale of the Shares.
(bb) The financial statements, including the notes thereto, included in
the Registration Statement and the Prospectus fairly present, in all
material respects, the financial position of the Company as of the dates
indicated and the results of its operations for the periods specified; said
financial statements
5
<PAGE> 7
have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis.
(cc) The Company has not offered, or caused the Underwriters to offer,
Shares to any person pursuant to the Directed Share Program with the
specific intent to unlawfully influence (i) a customer or supplier of the
Company to alter the customer's or supplier's level or type of business with
the Company, or (ii) a trade journalist or publication to write or publish
favorable information about the Company or its products.
(dd) The Shares to be sold by the Selling Stockholders pursuant to this
Agreement have been duly authorized and are validly issued, fully paid and
non-assessable.
(ee) The Company does not own any equity or capital interests in any
corporation, partnership, joint venture, association or other entity, other
than the Subsidiaries.
Furthermore, the Company represents and warrants to Morgan Stanley that
(i) the Registration Statement, the Prospectus and any preliminary prospectus
comply, and any further amendments or supplements thereto will comply, with any
applicable laws or regulations of foreign jurisdictions in which the Prospectus
or any preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the Directed Share Program, and that (ii) no
authorization, approval, consent, license, order, registration or qualification
of or with any government, governmental instrumentality or court, other than
such as have been obtained, is necessary under the securities laws and
regulations of foreign jurisdictions in which the Directed Shares are offered
outside the United States.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each of
the Selling Stockholders, severally and not jointly, represents and warrants to
and agrees with each of the Underwriters that:
(a) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Stockholder and constitutes a valid and binding
obligation upon such Selling Stockholder.
(b) The execution and delivery by such Selling Stockholder of, and the
performance by such Selling Stockholder of its obligations under, this
Agreement, the Custody Agreement signed by such Selling Stockholder and the
Company, as Custodian, relating to the deposit of the Shares to be sold by
such Selling Stockholder (the "Custody Agreement") and the Power of Attorney
appointing certain individuals as such Selling Stockholder's
attorneys-in-fact to the extent set forth therein (the "Power of Attorney")
does not contravene any provision of applicable law, or the certificate of
incorporation or bylaws of such Selling Stockholder (if such Selling
Stockholder is a corporation), or any material agreement or other material
instrument binding upon such Selling Stockholder or any judgment, order or
decree of any governmental body, agency or court having jurisdiction over
such Selling Stockholder, and no consent, approval, authorization or order
of, or qualification with, any governmental body or agency is required for
the performance by such Selling Stockholder of its obligations under this
Agreement or the Custody Agreement or Power of Attorney of such Selling
Stockholder, except such as may be required under the Securities Act or by
the state securities or Blue Sky laws of the various states in connection
with the offer and sale of the Shares.
(c) Such Selling Stockholder has, and on the Closing Date will have,
valid title to the Shares to be sold by such Selling Stockholder and the
legal right and power, and all authorization and approval required by law,
to enter into this Agreement, the Custody Agreement and the Power of
Attorney and to sell, transfer and deliver the Shares to be sold by such
Selling Stockholder.
(d) The Custody Agreement and the Power of Attorney have been duly
authorized, executed and delivered by such Selling Stockholder and are valid
and binding agreements of such Selling Stockholder.
6
<PAGE> 8
(e) Upon delivery of and payment for the stock to be sold by such
Selling Stockholder as provided in this Agreement and upon registration of
the Shares in the names of the Underwriters (or their nominees) in the stock
records of the Company, the Underwriters will be the owners of the Shares,
free and clear of any adverse claim, security interests, liens, equities and
other encumbrances, provided that the Underwriters are purchasing the Shares
in good faith and without notice of any adverse claim.
(f) All information furnished in writing by or on behalf of such Selling
Stockholder for use in the Registration Statement is, and on the Closing
Date will be, true, correct and complete, and does not, and on the Closing
Date will not, contain any untrue statement of a material fact or omit to
state any material fact necessary to make such information not misleading,
and all information furnished in writing by or on behalf of such Selling
Stockholder for use in the Prospectus is, and on the Closing Date will be,
true, correct and complete, and does not, and on the Closing Date will not,
contain any untrue statement of a material fact or omit to state any
material fact necessary to make such information not misleading in the light
of the circumstances under which they were made.
3. AGREEMENTS TO SELL AND PURCHASE. Each Seller, severally and not
jointly, hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from such Seller at $______ a share (the "Purchase
Price") the number of Firm Shares (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
number of Firm Shares to be sold by such Seller as the number of Firm Shares set
forth in Schedule II hereto opposite the name of such Underwriter bears to the
total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, each of the Selling
Stockholders agree to sell to the Underwriters, severally and not jointly, and
the Underwriters shall have a one-time right to purchase, at the Purchase Price,
such number of Additional shares as is set forth with respect to such Selling
Stockholder on Schedule I hereto. If you, on behalf of the Underwriters, elect
to exercise such option, you shall so notify the Selling Stockholders in writing
not later than 30 days after the date of this Agreement, which notice shall
specify the number of Additional Shares to be purchased by the Underwriters and
the date on which such shares are to be purchased. Such date may be the same as
the Closing Date (as defined below) but not earlier than the Closing Date nor
later than ten business days after the date of such notice. Additional Shares
may be purchased as provided in Section 5 hereof solely for the purpose of
covering over-allotments made in connection with the offering of the Firm
Shares. If any Additional Shares are to be purchased, each Underwriter agrees,
severally and not jointly, to purchase the number of Additional Shares (subject
to such adjustments to eliminate fractional shares as you may determine) that
bears the same proportion to the total number of Additional Shares to be
purchased as the number of Firm Shares set forth in Schedule II hereto opposite
the name of such Underwriter bears to the total number of Firm Shares.
Each Seller hereby agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of the Prospectus, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or (ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise (the "Market Stand-Off"). The foregoing sentence shall not apply to
(A) the Shares to be sold hereunder, (B) the issuance by the Company of shares
of Common Stock upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof, (C) options issued under the 1989 Plan,
1992 Plan, the 1997 Equity Incentive Plan, the 1997 Directors Stock Option Plan,
and the shares issuable upon exercise thereof, (D) shares issued under the 1997
Employee Stock Purchase Plan and the shares issuable upon exercise thereof;
provided, however, that any receiver of securities issued under (B), (C) or (D)
above agrees to the Market Stand-Off. In addition, each Selling Stockholder
agrees that, without the prior written consent of Morgan Stanley on behalf of
the Underwriters, it will not, during the period ending 180 days after the
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date of the Prospectus, make any demand for, or exercise any right with respect
to, the registration of any shares of Common Stock or any security convertible
into or exercisable or exchangeable for Common Stock.
4. TERMS OF PUBLIC OFFERING. The Sellers are advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at
$_____ a share (the "Public Offering Price") and to certain dealers selected by
you at a price that represents a concession not in excess of $0.___ a share
under the Public Offering Price, and that any Underwriter may allow, and such
dealers may reallow, a concession, not in excess of $___ a share, to any
Underwriter or to certain other dealers.
5. PAYMENT AND DELIVERY. Payment for the Firm Shares to be sold by each
Seller shall be made in federal or immediately available funds at the office of
Fenwick & West LLP at 10:00 A.M., New York time, on _____________, 1997 or at
such other time on the same or such other date, not later than ______________,
1997, as shall be designated in writing by you. The time and date of such
payment are hereinafter referred to as the "Closing Date."
Payment for any Additional Shares shall be made by certified or
official bank check or checks payable to the order of the Company in same day
funds at the office of Fenwick & West LLP at 10:00 A.M., New York time, on the
date specified in the notice described in Section 3 or on such other date as
shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "Option Closing Date."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. CONDITIONS TO THE UNDERWRITER'S OBLIGATIONS. The obligations of the
Sellers to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 5:30 p.m. (New York time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of any
review for a possible change that does not indicate the direction of the
possible change, in the rating accorded any of the Company's securities
by any "nationally recognized statistical rating organization," as such
term is defined for purposes of Rule 436(g)(2) under the Securities Act;
and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or otherwise,
or in the earnings, business or operations of the Company and its
Subsidiaries, taken as a whole, from that set forth in the Prospectus
(exclusive of any amendments or supplements thereto subsequent to the
date of this Agreement) that, in your judgment, is material and adverse
and that makes it, in your judgment, impracticable to market the Shares
on the terms and in the manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company on behalf of the Company, to the effect set forth
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<PAGE> 10
in clause (a) above and to the effect that the representations and
warranties of the Company contained in this Agreement are true and correct
as of the Closing Date and that the Company has complied with all of the
agreements and satisfied all of the conditions on its part to be performed
or satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon his
or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Fenwick & West LLP, outside counsel for the Company, dated the
Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
corporate authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact business
and is in good standing in each jurisdiction in which the Company
maintains employees or leased or owned real property;
(ii) OSI Puerto Rico has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation and has the corporate power and
corporate authority to own its property and to conduct its business as
described in the Prospectus;
(iii) to such counsel's knowledge, other than director
qualifying shares, the Company is the sole holder of all outstanding
stock of the Subsidiaries;
(iv) the authorized capital stock of the Company conforms as
to legal matters in all material respects to the description thereof
contained in the Prospectus;
(v) the shares of Common Stock (including the Shares to be
sold by the Selling Stockholders) outstanding prior to the issuance of
the Shares to be sold by the Company have been duly authorized and are
validly issued and non-assessable and, to such counsel's knowledge,
fully paid;
(vi) the Shares to be sold by the Company have been duly
authorized and, when issued and delivered in accordance with the terms
of this Agreement, will be validly issued, fully paid and
non-assessable, and, to such counsel's knowledge, the issuance of such
Shares will not be subject to any preemptive or similar rights;
(vii) to the knowledge of such counsel, there is no owner of
any securities of the Company who has any rights, not effectively
satisfied or waived, to require registration of any shares of capital
stock of the Company in connection with the filing of the Registration
Statement;
(viii) the Company has corporate power and corporate authority
to enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by the Company;
(ix) this Agreement has been duly authorized, executed and
delivered by the Company;
(x) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the certificate
of incorporation or bylaws of the Company or, to such counsel's
knowledge, any agreement or other instrument binding upon the Company
or any of its Subsidiaries that is material to the Company and its
Subsidiaries, taken as a whole (where such agreements and
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<PAGE> 11
instruments have been identified to such counsel by the Company as all
of the material agreements and instruments binding upon the Company or
its Subsidiaries) (the "Material Agreements"), or, to such counsel's
knowledge, any judgment, order or decree of any governmental body,
agency or court having jurisdiction over the Company or its
Subsidiaries, and no consent, approval, authorization or order of, or
qualification with, any governmental body or governmental agency is
required for the performance by the Company of its obligations under
this Agreement, except such as may be required by the securities or
Blue Sky laws of the various states or international jurisdictions in
connection with the offer and sale of the Shares (as to which such
counsel need not opine);
(xi) to such counsel's knowledge based solely upon oral advice
from the Staff of the Commission: (I) the Registration Statement has
become effective under the Securities Act, no stop order proceedings
with respect thereto have been instituted or are pending or threatened
under the Securities Act, and (II) any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time period
required by such Rule 424(b);
(xii) the Shares to be sold under this Agreement to the
Underwriters by the Company and the Selling Stockholders are duly
authorized for quotation on the Nasdaq National Market;
(xiii) the statements (A) in the Prospectus under the captions
"Management--Director Compensation," "Management--Indemnification of
Directors and Executive Officers and Limitation of Liability,"
"Management--Employee Benefit Plans," "Certain Transactions" (except
the third, fourth and fifth paragraphs of "OSL Acquisition and Related
Litigation" thereunder), "Description of Capital Stock," and "Shares
Eligible for Future Sale" and "Underwriters" (to the extent of the
description of this Agreement) and (B) in the Registration Statement in
Items 14 and 15, in each case insofar as such statements constitute
summaries of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to such
legal matters, documents and proceedings and fairly summarize the
matters referred to therein;
(xiv) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company or any of its
Subsidiaries is a party or to which any of the properties of the
Company or any of its Subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not
so described or of any statutes, regulations, or to such counsel's
knowledge, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be
filed as exhibits to the Registration Statement that are not described
or filed as required;
(xv) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the net proceeds
therefrom as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended;
(xvi) the Agreement and Plan of Merger (the "Plan of Merger")
by and between the Company and the Predecessor has been duly authorized
by all necessary Board of Directors and stockholder action on the part
of the Company and the Predecessor and has been duly executed and
delivered by each of the parties thereto;
(xvii) the execution and delivery of the Plan of Merger and
the consummation of the merger contemplated thereby do not contravene
any provision of applicable law or the certificate of incorporation or
bylaws of the Company or the articles of incorporation or bylaws of the
Predecessor or, to such counsel's knowledge, any judgment or decree of
any governmental body, agency or court having jurisdiction over the
Predecessor or any of the Subsidiaries, and, to such counsel's
knowledge, no consent, approval, authorization or order of or
qualification with any
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governmental body or agency is required for the performance by the
Company and the Predecessor of their respective obligations under the
Plan of Merger except such as have been obtained or are not material to
the Company; the consummation of the Reincorporation does not
contravene, or result in any breach of, or constitute a default under
(or constitute any event which with notice, lapse of time or both would
constitute a breach of or default under), any provision of any Material
Agreement;
(xviii) the merger contemplated by the Plan of Merger is
effective under the laws of the State of California and the State of
Delaware; the Company has succeeded to all of the rights, privileges,
powers and franchises, and is subject to all of the restrictions,
disabilities and duties, of the Predecessor as provided under Section
259 of the Delaware General Corporation Law; to the knowledge of such
counsel, the Company has succeeded to all of the rights of the
Predecessor with respect to each Material Agreement of the Predecessor,
and all required material consents to the merger and assignments with
respect to such Material Agreements have been obtained; all of the
shares of capital stock of the Company have the same rights,
preferences and privileges (except for differences resulting from
applicable law) as described in the Prospectus; all of the outstanding
options of the Predecessor outstanding as of the date set forth in the
Prospectus are outstanding for that number of shares of Common Stock of
the Company as described in the Prospectus, other than options which
have terminated or expired by their terms and not as a result of the
Reincorporation; the issuance of capital stock by the Company in the
Reincorporation was in compliance with all applicable registration and
qualification provisions of state securities or blue sky laws as are
identified therein and was exempt from registration under the
Securities Act; and
(xix) The statements in the Prospectus under the captions
"Risk Factors--Regulatory Approvals Uncertain" and
"Business--Government Regulation," insofar as such statements purport
to summarize applicable provisions of the Federal Food, Drug and
Cosmetic Act and the regulations promulgated thereunder, are accurate
summaries in all material respects of the provisions purported to be
summarized under such captions in the Prospectus.
In addition, such counsel shall state that in addition to rendering
legal advice and assistance to the Company in the course of the preparation of
the Registration Statement and the Prospectus, involving, among other things,
discussions and inquiries concerning various legal matters and the review of
certain corporate records, documents and proceedings, such counsel also
participated in conferences with certain officers and other representatives of
the Company, including its independent certified public accountants and with the
Underwriters and their counsel, at which the contents of the Registration
Statement and the Prospectus and related matters were discussed; provided, such
counsel may state that they have not independently verified the accuracy,
completeness or fairness of the information contained in the Registration
Statement and Prospectus.
In addition to the matters set forth above, counsel rendering the
foregoing opinion shall also include a statement to the effect that nothing has
come to the attention of such counsel that causes it to believe that (i) the
registration statement (except as to the financial statements, the notes
thereto, the schedules and the other financial and statistical data contained
therein, as to which such counsel need not express any opinion or belief) at the
date the Registration Statement became effective contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii) the
Prospectus (except as to the financial statements, the notes thereto, the
schedules and the other financial and statistical data contained therein, as to
which such counsel need not express an opinion or belief) as of its date
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading and (iii) the Registration Statement or the Prospectus (except as to
the financial statements, the notes thereto, the schedules and the other
financial and statistical data contained therein, as to which such counsel need
not express any opinion or belief) did not comply as to form in all material
respects with the Securities Act and the applicable rules and regulations
thereunder.
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(d) The Underwriters shall have received on the Closing Date
an opinion or opinions of counsel for the Selling Stockholders (who may
also be counsel for the Company) to the effect that with respect to the
Selling Stockholder that such counsel represents:
(i) this Agreement has been duly authorized, executed
and delivered by or on behalf of such Selling Stockholder;
(ii) the execution and delivery by such Selling
Stockholder of, and the performance by such Selling
Stockholder of its obligations under, this Agreement and the
Custody Agreement and Power of Attorney of such Selling
Stockholder does not contravene any provision of applicable
law, or the certificate of incorporation or bylaws of such
Selling Stockholder (if such Selling Stockholder is a
corporation) or, to such counsel's knowledge, any agreement or
other instrument binding upon such Selling Stockholder (where
such agreements and instruments have been identified to such
counsel by such Selling Stockholder as all of the material
agreements and instruments binding upon such Selling
Stockholder) or, to such counsel's knowledge, any judgment,
order or decree of any governmental body, agency or court
having jurisdiction over such Selling Stockholder, and, to
such counsel's knowledge, no consent, approval, authorization
or order of, or qualification with, any governmental body or
governmental agency is required for the performance by such
Selling Stockholder of its obligations under this Agreement or
the Custody Agreement or Power of Attorney of such Selling
Stockholder, except such as may be required under the
Securities Act or by the securities or Blue Sky laws of the
various states or international jurisdiction in connection
with the offer and sale of the Shares (as to which such
counsel need not opine);
(iii) to such counsel's knowledge, such Selling
Stockholder has the legal right and power, and all
authorization and approval required by law, to enter into this
Agreement and the Custody Agreement and Power of Attorney of
such Selling Stockholder and to sell, transfer and deliver the
Shares to be sold by such Selling Stockholder;
(iv) the Custody Agreement and the Power of Attorney
of such Selling Stockholder have been duly authorized,
executed and delivered by such Selling Stockholder and are
valid and binding agreements of such Selling Stockholder; and
(v) upon delivery of and payment for the stock to be
sold by such Selling Stockholder as provided in this Agreement
and upon registration of the Shares in the names of the
Underwriters (or their nominees) in the stock records of the
Company (but without having conducted a search of the records
of any governmental authority or any third person), the
Underwriters will be the owners of the Shares, free and clear
of any adverse claim, security interests, liens, equities and
other encumbrances, provided that the Underwriters are
purchasing the Shares in good faith and without notice of any
adverse claim.
The opinions of Fenwick & West LLP described in paragraphs (c)
and (d) above (and any opinions of counsel for any Selling Stockholder referred
to in the immediately preceding paragraph) shall be rendered to the Underwriters
at the request of the Company or one or more of the Selling Stockholders, as the
case may be, and shall so state therein.
(e) The Underwriters shall have received on the Closing Date
an opinion of Moore & Blatch, counsel for OSL, dated the Closing Date,
to the effect that:
(i) OSL has been duly incorporated, is validly
existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power
and authority to own its property and to conduct its business
as described in the Prospectus and is duly qualified to
transact business and is in good standing in the United
Kingdom;
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(ii) all of the issued shares of capital stock of OSL
have been duly validly authorized and issued, are fully paid
and non-assessable, and owned directly by the Company, free
and clear of all liens and encumbrances;
(iii) the execution and delivery by the Company of,
and the performance by the Company of its obligations under,
this Agreement will not contravene any provision of English
law or the Memorandum of Articles of Association of OSL;
(f) The Underwriters shall have received on the Closing Date
an opinion of Bird, Bird and Huestres, counsel for OSI Puerto Rico,
dated as of the Closing Date, that OSI Puerto Rico is duly qualified to
transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a material
adverse effect on OSI Puerto Rico.
(g) The Underwriters shall have received on the Closing Date
an opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, counsel for the Underwriters, dated the Closing Date, covering the
matters referred to in the first clause of subparagraph (c)(i), in
subparagraphs (c)(vi), (c)(viii), (c)(ix), (c)(xi) (but only as to the
opinion in clause (I) thereof) and (c)(xiii) (but only as to the
statements in the Prospectus under "Description of Capital Stock" and
"Underwriters") and the second paragraph following the enumerated
opinions in paragraph (c) above. Such opinion shall also cover the
matters referred to in subparagraph (d)(i).
(h) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from KPMG Peat Marwick LLP, independent certified
public accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a
"cut-off date" not earlier than the date hereof.
(i) The "lock-up" agreements between you and certain
stockholders, officers and directors of the Company relating to sales
and certain other dispositions of shares of Common Stock or certain
other securities, delivered to you on or before the date hereof, shall
be in full force and effect on the Closing Date.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the Additional Shares.
7. COVENANTS OF THE COMPANY. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four (4) signed copies
of the Registration Statement (including exhibits thereto) and for
delivery to each other Underwriter a conformed copy of the Registration
Statement (without exhibits thereto) and to furnish to you in New York
City, without charge, prior to 5:00 P.M. local time on the business day
next succeeding the date of this Agreement and during the period
mentioned in paragraph (c) below, as many copies of the Prospectus and
any supplements and amendments thereto or to the Registration Statement
as you may reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file
with the Commission within the
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applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall
occur or condition exist as a result of which it is necessary to amend
or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the
Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names and addresses you will furnish to the Company)
to which Shares may have been sold by you on behalf of the Underwriters
and to any other dealers upon request, either amendments or supplements
to the Prospectus so that the statements in the Prospectus as so
amended or supplemented will not, in the light of the circumstances
when the Prospectus is delivered to a purchaser, be misleading or so
that the Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earnings statement
covering the twelve-month period ending September 30, 1998 that
satisfies the provisions of Section 11(a) of the Securities Act and the
rules and regulations of the Commission thereunder.
(f) To pay or cause to be paid all expenses incident to the
performance of its obligations under this Agreement, including: (i) the
fees, disbursements and expenses of the Company's counsel and the
Company's accountants in connection with the registration and delivery
of the Shares under the Securities Act and all other fees or expenses
in connection with the preparation and filing of the Registration
Statement, any preliminary prospectus, the Prospectus and amendments
and supplements to any of the foregoing, including all printing costs
associated therewith, and the mailing and delivering of copies thereof
to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and
delivery of the Shares to the Underwriters, including any transfer or
other taxes payable thereon, (iii) the cost of printing or producing
any Blue Sky memorandum in connection with the offer and sale of the
Shares under state securities laws, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in
connection with the Blue Sky memorandum, (iv) all filing fees and
reasonable disbursements of counsel to the Underwriters incurred in
connection with the review and qualification of the offering of the
Shares by the National Association of Securities Dealers, Inc., (v) all
fees and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all
costs and expenses incident to listing the Shares on the Nasdaq
National Market, (vi) the cost of printing certificates representing
the Shares, (vii) the costs and charges of any transfer agent,
registrar or depositary, (viii) the costs and expenses of the Company
relating to investor presentations on any "road show" undertaken in
connection with the marketing of the offering of the Shares, including,
without limitation, expenses associated with the production of road
show slides and graphics, fees and expenses of any consultants engaged
in connection with the road show presentations with the prior approval
of the Company, travel and lodging expenses of the representatives and
officers of the Company and any such consultants and, if approved by
the Company, the cost of any aircraft chartered in connection with the
road show, and (ix) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which
provision is not otherwise made in this Section. It is understood,
however, that except as provided in this Section, Section 9 entitled
"Indemnity and Contribution", and the last paragraph of Section 11
below, the Underwriters will pay all of their costs and expenses,
including fees and disbursements of their counsel, stock transfer taxes
payable on resale of any of the Shares by them, and any advertising
expenses connected with any offers they may make.
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(g) To not release any shares of Common Stock from any
restrictions imposed upon such shares by the Lock-Up Agreements without
the prior written consent of Morgan Stanley.
(h) That in connection with the Directed Share Program, the
Company will ensure that the Directed Shares will be restricted to the
extent required by the NASD or the NASD rules from sale, transfer,
assignment, pledge or hypothecation for a period of three months
following the date of the effectiveness of the Registration Statement.
Morgan Stanley will notify the Company as to which Participants will
need to be so restricted. The Company will direct the transfer agent to
place stop-transfer restrictions upon such securities for such period
of time.
(i) To pay all reasonable fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share
Program and stamp duties, similar taxes or duties or other taxes, if
any, incurred by the Underwriters in connection with the Directed Share
Program; provided such fees and disbursements would not otherwise have
been incurred by the Underwriters in connection with the sale of the
Shares.
Furthermore, the Company covenants with Morgan Stanley that the Company
will comply with all applicable securities and other applicable laws, rules and
regulations in each foreign jurisdiction in which the Directed Shares are
offered in connection with the Directed Share Program.
8. EXPENSES OF SELLING STOCKHOLDERS. The Underwriters shall not be
liable for any expenses of any Selling Stockholders in connection with the sale
of their Shares in the offering. Subject to any agreements between the Company
and Selling Stockholders providing that the Company shall pay Selling
Stockholder expenses, each Selling Stockholder, severally and not jointly,
agrees to pay or cause to be paid (i) all taxes, if any, on the transfer and
sale of the Shares being sold by such Selling Stockholder and (ii) such Selling
Stockholder's pro rata share of expenses of counsel for the Selling
Stockholders.
9. INDEMNITY AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
either Section 15 of the Securities Act or Section 20 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), from and against any
and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection
with defending or investigating any such action or claim) caused by any
untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are caused by
any such untrue statement or omission or alleged untrue statement or
omission based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use
therein; provided, however, that the foregoing indemnity agreement with
respect to any preliminary prospectus shall not inure to the benefit of any
Underwriter, or any person controlling such Underwriter, from whom the
person asserting any such losses, claims, damages or liabilities purchased
Shares, if a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not
sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus
(as so amended or supplemented) would have cured the defect giving rise to
such loss, claim, damage or liability.
15
<PAGE> 17
(b) The Company agrees to indemnify and hold harmless Morgan Stanley and
each person, if any, who controls Morgan Stanley within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act
("Morgan Stanley Entities"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating
any such action or claim) (i) caused by any untrue statement or alleged
untrue statement of a material fact contained in the prospectus wrapper
material prepared by or with the consent of the Company for distribution in
foreign jurisdictions in connection with the Directed Share Program attached
to the Prospectus or any preliminary prospectus, or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statement therein, when considered in
conjunction with the Prospectus or any applicable preliminary prospectus,
not misleading; (ii) caused by the failure of any Participant to pay for and
accept delivery of the shares which, immediately following the effectiveness
of the Registration Statement, were subject to a properly confirmed
agreement to purchase; or (iii) related to, arising out of, or in connection
with the Directed Share Program, provided that, the Company shall not be
responsible under this subparagraph (iii) for any losses, claim, damages or
liabilities (or expenses relating thereto) that are finally judicially
determined to have resulted from the bad faith or gross negligence of Morgan
Stanley Entities.
(c) Each Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless each Underwriter, the Company, its directors,
its officers who sign the Registration Statement and each person, if any,
who controls any Underwriter or the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any amendment thereof, any
preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading, but only with reference to information relating to such
Selling Stockholder furnished in writing by or on behalf of such Selling
Stockholder expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto;
provided, however, that the foregoing indemnity agreement with respect to
any preliminary prospectus shall not inure to the benefit of any
Underwriter, or any person controlling such Underwriter, from whom the
person asserting any such losses, claims, damages or liabilities purchased
Shares, if a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not
sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus
(as so amended or supplemented) would have cured the defect giving rise to
such loss, claim, damage or liability.
(d) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, the Selling Stockholders, the directors of the
Company, the officers of the Company who sign the Registration Statement and
each person, if any, who controls the Company or any Selling Stockholder
within the meaning of either Section 15 of the Securities Act or Section 20
of the Exchange Act from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, but only with reference to
information relating to such Underwriter furnished to the Company in writing
by or on behalf of such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
16
<PAGE> 18
(e) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to paragraph (a), (b), (c) or (d) of this Section 9, such
person (the "indemnified party") shall promptly notify the person against
whom such indemnity may be sought (the "indemnifying party") in writing and
the indemnifying party, upon request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may reasonably
designate in such proceeding and shall pay the fees and disbursements of
such counsel related to such proceeding. In any such proceeding, any
indemnified party shall have the right to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such
indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii)
the named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them. It is
understood that the indemnifying party shall not, in respect of the legal
expenses of any indemnified party in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm (in addition to any local counsel)
for (i) all Underwriters and all persons, if any, who control any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, (ii) the Company, its directors, its
officers who sign the Registration Statement and each person, if any, who
controls the Company within the meaning of either such Section and (iii) all
Selling Stockholders and all persons, if any, who control any Selling
Stockholder within the meaning of either such Section, and that all such
fees and expenses shall be reimbursed as they are incurred. In the case of
any such separate firm for the Underwriters and such control persons of the
Underwriters, such firm shall be designated in writing by Morgan Stanley. In
the case of any such separate firm for the Company, and such directors,
officers and control persons of the Company, such firm shall be designated
in writing by the Company. In the case of any such separate firm for the
Selling Stockholders and such controlling persons of the Selling
Stockholders, such firm shall be designated in writing by the persons named
as attorneys-in-fact for the Selling Stockholders under the Powers of
Attorney. The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent, but if settled with
such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified
party for fees and expenses of counsel as contemplated by the second and
third sentences of this paragraph, the indemnifying party agrees that it
shall be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and (ii)
such indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter
of such proceeding. Notwithstanding anything contained herein to the
contrary, if indemnity may be sought pursuant to Section 9(b) hereof in
respect of such action or proceeding, then in addition to such separate firm
for the indemnified parties, the indemnifying party shall be liable for the
reasonable fees and expenses of not more than one separate firm (in addition
to any local counsel) for Morgan Stanley for the defense of any losses,
claims, damages and liabilities arising out of the Directed Share Program,
and all persons, if any, who control Morgan Stanley within the meaning of
either Section 15 of the Act or Section 20 of the Exchange Act.
(f) To the extent the indemnification provided for in paragraph (a),
(b), (c) or (d) of this Section 9 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities
referred to therein, then each indemnifying party under such paragraph, in
lieu of indemnifying such indemnified party thereunder, shall contribute to
the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the indemnifying
party or parties on the one hand and the
17
<PAGE> 19
indemnified party or parties on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the indemnifying party or parties on the one hand and of
the indemnified party or parties on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholders on
the one hand and the Underwriters on the other hand in connection with the
offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by each Seller and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate
Public Offering Price of the Shares. The relative fault of each Seller and
the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such Seller or by the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters' respective obligations
to contribute pursuant to this Section 9 are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
(g) The Sellers and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Section 9 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (f) of this
Section 9. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages and liabilities referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations
set forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of
any damages that such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 9 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(h) The indemnity and contribution provisions contained in this Section
9 and the representations, warranties and other statements of the Company
and the Selling Stockholders contained in this Agreement shall remain
operative and in full force and effect regardless of (i) any termination of
this Agreement, (ii) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter, any Selling
Stockholder or any person controlling any Selling Stockholder, or the
Company, its officers or directors or any person controlling the Company and
(iii) acceptance of and payment for any of the Shares. The aggregate
liability of each Selling Stockholder under the indemnity and contribution
agreements contained in this Section 9 and under the representations and
warrants contained in paragraph (f) of Section 2 hereof shall be limited to
an amount equal to the net proceeds received by such Selling Stockholder
(before deducting expenses) from the offering of the Shares sold by such
Selling Stockholder.
10. TERMINATION. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial
18
<PAGE> 20
markets or any calamity or crisis that, in your judgment, is material and
adverse and (b) in the case of any of the events specified in clauses (a)(i)
through (iv), such event, singly or together with any other such event, makes
it, in your judgment, impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
11. EFFECTIVENESS: DEFAULTING UNDERWRITERS. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares that
it has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule II bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 11 by an amount in excess of one-ninth of
such number of Shares without the written consent of such Underwriter. If, on
the Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased, and arrangements satisfactory to you, the Company and
the Selling Stockholders for the purchase of such Firm Shares are not made
within 36 hours after such default, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter, the Company or the
Selling Stockholders. In any such case either you or the relevant Sellers shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. If, on the Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Additional Shares to be purchased, the
non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase Additional Shares or (ii) purchase not less
than the number of Additional Shares that such non-defaulting Underwriters would
have been obligated to purchase in the absence of such default. Any action taken
under this paragraph shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of any Seller to comply with
the terms or to fulfill any of the conditions placed upon it in this Agreement,
or if for any reason any Seller shall be unable to perform its obligations under
this Agreement that are within its control, the Sellers will reimburse the
Underwriters or such Underwriters as have so terminated this Agreement with
respect to themselves, severally, for all out-of-pocket expenses (including the
fees and disbursements of their counsel) reasonably incurred by such
Underwriters in connection with this Agreement or the offering contemplated
hereunder.
12. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York.
14. HEADINGS. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
19
<PAGE> 21
Very truly yours,
OCULAR SCIENCES, INC.
By:
--------------------------------
Name:
Title:
THE SELLING STOCKHOLDERS NAMED IN
SCHEDULE I HERETO, ACTING SEVERALLY
By:
--------------------------------
Attorney-in-Fact
Accepted as of the date hereof:
MORGAN STANLEY & CO. INCORPORATED
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
Acting severally on behalf of themselves
and the several Underwriters named in
Schedule II hereto.
By: Morgan Stanley & Co. Incorporated
By:
--------------------------------
<PAGE> 22
SCHEDULE I
<TABLE>
<CAPTION>
Number of Number of
Firm Shares Additional Shares
Selling Stockholder To Be Sold To Be Sold
- ------------------- ----------- -----------------
<S> <C> <C>
Galen Partners, L.P. 317,333 413,503
Galen Partners International, L.P. 32,667 42,566
Allergan, Inc. 475,201 330,868
John Fruth 741,591 258,409
Geoffrey H. Galley 1,225,744 0
Anthony Galley 550,880 0
Albert Morland 86,400 0
Barrie Bevis 86,400 0
Ivor Atkinson 43,200 0
Ronald Hansman 36,894 31,505
Anita Hall 3,690 3,149
------- ---------
</TABLE>
<PAGE> 23
SCHEDULE II
<TABLE>
<CAPTION>
Number of
Firm Shares
Underwriter To Be Purchased
- ----------- ---------------
<S> <C>
Morgan Stanley & Co. Incorporated
Bear, Stearns & Co. Inc.
Cowen & Company
Total: 7,200,000
</TABLE>
<PAGE> 1
EXHIBIT 5.01
July 31, 1997
Ocular Sciences, Inc.
475 Eccles Avenue
South San Francisco, CA 94080
Gentlemen/Ladies:
At your request, we have examined the Registration Statement on Form S-1
(the "Registration Statement") filed by you with the Securities and Exchange
Commission (the "Commission") on May 19, 1997 (Registration Number 333-27421),
Amendment No. 1 to such Registration Statement filed by you with the Commission
on June 4, 1997, Amendment No. 2 to such Registration Statement filed by you
with the Commission on July 2, 1997, Amendment No. 3 to such Registration
Statement filed by you with the Commission on July 15, 1997 and Amendment No. 4
to such Registration statement to be filed by you with the Commission on July
30, 1997 (collectively, the "Registration Statement") in connection with the
registration under the Securities Act of 1933, as amended, of an aggregate of
8,280,000 shares of your Common Stock (the "Stock"), up to 4,680,000 of which
are presently issued and outstanding and will be sold by certain selling
stockholders (the "Selling Stockholders").
In rendering this opinion, we have examined the following:
(1) the Registration Statement, including exhibits;
(2) your registration statement on Form 8-A (File Number 000-22623)
filed with the Commission on May 30, 1997;
(3) the prospectuses prepared in connection with the Registration
Statement;
(4) the minutes of meetings and actions by written consent of the
stockholders and Board of Directors that are contained in your
minute books of your predecessor, O.S.I. Corporation, a
California corporation ("O.S.I. California"), that are in our
possession.
(5) the stock records for both you and O.S.I. California that you
have provided to us (consisting of a list of stockholders issued
by you and a list of option holders respecting your capital stock
that was prepared by you and dated the date hereof);
(6) the documentation relating to the acquisition of the shares to be
sold by each Selling Shareholder pursuant to the Registration
Statement; and
<PAGE> 2
Ocular Sciences, Inc.
July 31, 1997
Page 2
(7) a Management Certificate addressed to us and dated of even date
herewith executed by the Company containing certain factual and
other representations.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies, the legal capacity of all natural persons executing the same, the lack
of any undisclosed terminations, modifications, waivers or amendments to any
documents reviewed by us and the due execution and delivery of all documents
where due execution and delivery are prerequisites to the effectiveness thereof.
As to matters of fact relevant to this opinion, we have relied solely
upon our examination of the documents referred to above and have assumed the
current accuracy and completeness of the information obtained from public
officials and records included in the documents referred to above. We have made
no independent investigation or other attempt to verify the accuracy of any such
information or to determine the existence or non-existence of any other factual
matters; however, we are not aware of any facts that would lead us to believe
that the opinion expressed herein is not accurate.
Based upon the foregoing, it is our opinion that the up to 4,680,000
shares of Stock to be sold by the Selling Stockholders pursuant to the
Registration Statement are legally issued, fully paid and nonassessable and
that the 3,600,000 shares of Stock to be issued and sold by you, when issued and
sold in the manner referred to in the relevant prospectus associated with the
Registration Statement, will be legally issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the registration
Statement and further consent to all references to us in the Registration
Statement, the prospectus constituting a part thereof and any amendments
thereto.
This opinion speaks only as of its date and is intended solely for the
your use as an exhibit to the Registration Statement for the purpose of the
above sale of the Stock and is not to be relied upon for any other purpose.
Very Truly Yours,
FENWICK & WEST LLP
<PAGE> 1
Exhibit 10.08
Confidential Treatment has been requested from the Securities and Exchange
Commission with respect to certain portions of this Exhibit 10.08. Omitted
portions have been filed with separately with the Commission.
<PAGE> 2
EXHIBIT 10.08
SETTLEMENT AGREEMENT AND RELEASE
This Agreement is entered into as of February 27, 1997 by and between the
parties set forth below.
The parties hereto are Aspect Vision Care Ltd. ("AVCL"), New Focus Health
Care Ltd. ("NFHC"), Geoffrey Harrison Galley ("GHG"), Anthony David Galley
("ADG"), Barrie Bevis ("BB"), Albert Henry Morland ("AHM"), Ivor Atkinson
("I.A.") and Wilfred Trevor Brooker ("WTB"), which parties are sometimes
referred to herein as the "Defendants" and Ocular Sciences Ltd., which was
formerly known as Precision Lens Laboratories Ltd. ("OSL"), O.S.I. Corporation
("OSI") and John David Fruth ("JDF"), which parties are sometimes referred to
herein as the "Plaintiffs".
RECITALS
A. Various of the parties hereto are parties to those certain actions in
the High Court of Justice in England known as CH 1995 P 106 and CH 1995 GP 1116
and in the United States District Court for the Northern District of California
under Docket Number C95-0054-VRW(CMP) (together the "Actions").
B. The parties hereto wish to completely settle the Actions, and all
other disputes between them, on the terms and conditions set forth herein.
NOW, THEREFORE, the parties hereto hereby agree as follows:
I. Definitions.
1.01 The "Patent Owners" shall mean GHG, ADG, BB, AHM, and IA.
1.02 The "Purchase and Supply Agreement" shall mean that certain
Purchase and Supply Agreement between OSL and AVCL dated 30th September 1992.
1.03 The "Patent License Agreement" shall mean that certain Patent
License Agreement between the Patent Owners and OSL dated 30th September 1992.
1.04 The "Exchange Agreement" shall mean that certain Exchange
Agreement between the Patent Owners, JDF and OSI dated 30th September 1992.
1.05 The "Patent Side Letter" shall mean that certain side letter
between the Patent Owners and JDF dated 30th September 1992.
1.06 The "GH Galley Consulting Agreement" shall mean that certain
Consulting Agreement between GHG and OSL dated 30th September 1992.
1.07 The "Morland Consulting Agreement" shall mean that certain
Consulting Agreement between AHM and OSL dated 30th September 1992.
1.08 The "AD Galley Employment Agreement" shall mean that certain
Employment Agreement between ADG and OSL dated November 1992.
<PAGE> 3
1.09 The "AD Galley Confidentiality and Invention Assignment
Agreement" shall mean that certain Employee Invention Assignment and
Confidentiality Agreement between AD Galley and OSL effective March 1, 1988.
1.10 The "1992 Agreements" shall mean all the agreements set forth in
Sections 1.02 through 1.09 above.
2. Termination of Rights and Obligations under the 1992 Agreements,
License.
2.01 Termination. The parties hereto shall have no further rights or
obligations under the 1992 Agreements, except as set forth in Section 2.02
below.
2.02 Exceptions.
(a) Confidentiality: License. The parties hereto acknowledge
that Section 8 of the Exchange Agreement, Section 11 of the Purchase and Supply
Agreement, Section 4 of the GH Galley and Morland Consulting Agreements and the
AD Galley Confidentiality and Invention Assignment Agreement contain
confidentiality obligations of some or all of the parties hereto. These
provisions are to remain in full force and effect; provided, however, that OSL
hereby grants to AVCL and each of the Patent Owners a perpetual, royalty free
license to use any confidential and/or proprietary OSL information that was in
their possession, or which had been in their possession, as of 19th May 1994,
the date of commencement of the first Action. AVCL and the Patent Owners shall
treat any information licensed hereunder (the "Licensed Information") in the
same manner as they treat their own confidential and/or proprietary information,
and will not disclose the same to third parties except for appropriate business
purposes, and only if such third party agrees in writing to maintain the
confidentiality of such information. The provisions of this Section 2.02 are
subject to the provisions of Section 13 hereof.
(b) OSL Rights to AG Work Product. The parties further
acknowledge that OSL has the right to use, disclose, copy and commercialize as
it sees fit any work product or information generated by ADG in his capacity as
an employee of OSL, whether or not inventive, including, without limitation, any
software programs written by AG.
3. Termination of Actions and Release.
3.01 Termination. Upon execution of this Agreement by each of the
parties hereto, all actions and proceedings between the parties are to be
terminated and dismissed with prejudice (or in such manner in the Actions before
the High Court of Justice in England as will give similar effect). Each party
shall instruct its attorneys to promptly take such actions as may be required or
appropriate to effectuate such dismissals with prejudice, including, without
limitation, filing of stipulations of dismissal in the form of Exhibits A-1,
A-2 and A-3, hereto within one business day. No orders or motions for costs or
damages will be sought or accepted by any party hereto against the other. All
interlocutory orders and judgments (draft or otherwise) will be of no further
force or effect.
2
<PAGE> 4
3.02 Release.
(a) Defendants' Release. Each of the Defendants, on behalf of itself
or himself, and on behalf of its or his respective agents, officers, directors,
employees, affiliates, predecessors and attorneys, and any persons or entities
acting by, through, under, or in concert with any of them, hereby releases and
forever discharges each of the Plaintiffs, and their respective agents,
officers, directors, employees (including, without limitation, Carmen Lester),
affiliates, predecessors and attorneys, and any persons acting by, through,
under, or in concert with any of them, of and from any and all manner of action,
actions or causes of action, in law or in equity, suits, debts, liens,
contracts, agreements, promises, liabilities, claims, demands, losses, damages,
costs, or expenses, whether or not now known, claimed or suspected, fixed or
contingent, which any of the Defendants now has, owns or holds, or at any time
heretofore had, owned or held or ever claimed to have had, owned or held or may
hereafter have, own or hold, based upon or arising from any matter, cause, fact,
thing, act or omission whatsoever occurring or existing at any time to and
including the date hereof, including, without limitation, the matters set forth
or which could have been set forth in the Actions, and matters arising from or
relating to the Defendants' capacity as shareholders of OSI, including, without
limitation, rights in derivative actions, provided, that this Release does not
release and discharge the Plaintiffs from their respective obligations,
agreements, acknowledgments, representations and warranties under this Agreement
or the exhibits hereto.
(b) Plaintiffs' Release. Each of the Plaintiffs, on behalf of itself
and himself, and on behalf of its and his respective agents, officers,
directors, employees, affiliates, predecessors and attorneys, and any persons or
entities acting by, through, under, or in concert with any of them, hereby
releases and forever discharges the Defendants, and their respective agents,
officers, directors, employees, affiliates, predecessors and attorneys, and any
persons acting by, through, under, or in concert with any of them, of and from
any and all manner of action, actions or causes of action, in law or in equity,
suits, debts, liens, contracts, agreements, promises, liabilities, claims,
demands, losses, damages, costs, or expenses, whether or not now known, claimed
or suspected, fixed or contingent, which any of the Plaintiffs now has, owns or
holds, or at any time heretofore had, owned or held or ever claimed to have had,
owned or held or may hereafter have, own or hold, based upon or arising from any
matter, cause, fact, thing, act or omission whatsoever occurring or existing at
any time to and including the date hereof, including, without limitation, the
matters set forth or which could have been set forth in the Actions, and matters
arising from or relating to the Defendants' capacity as shareholders of OSI,
including, without limitation, rights in derivative actions, provided, that this
Release does not release and discharge the Defendants from their respective
obligations, agreements, acknowledgments, representations and warranties under
this Agreement or the exhibits hereto.
(c) Waiver. Notwithstanding the choice of law provisions set forth
below, each of the parties understands and acknowledges that he or it is
familiar with California Civil Code Section 1542, which provides as follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have
materially affected his settlement with the debtor.
3
<PAGE> 5
Each party expressly waives and relinquishes any rights it may have under Civil
Code Section 1542 or any other statute or common law principle with a similar
effect as to the releases set forth above. In connection with such release, each
of the parties acknowledges that he or it is aware that his or its attorneys or
agents may hereafter discover claims or facts in addition to or different from
those which he or it now knows or believes to exist, but that it is his or its
intention to hereby fully, finally and forever to settle and release all of the
disputes and differences, known or unknown, suspected or unsuspected, which now
exist, may exist, or heretofore have existed between the parties to this
Agreement, except as otherwise expressly provided herein. In furtherance of this
intention, the releases herein given shall be and remain in effect as full and
complete releases notwithstanding the discovery or existence of any such
additional or different claim of fact.
3.03 Covenant Not to Sue or Instigate Action. The Defendants and
Plaintiffs each further agree not to institute, authorize, instigate or assist
in the institution of any administrative, legal or governmental proceeding
against the other, or the other's agents, officers, directors, employees,
affiliates, predecessors and attorneys, arising from or related to the matters
released above or any other matters arising on or before the date hereof, except
and only to the extent required by law, and hereby represent and warrant that
except for the Actions, as of the date hereof they have not so instituted,
authorized, instigated or assisted in any such proceedings.
3.04 Irrevocable. The provisions of this Section 3 are irrevocable and
will not be affected by the breach or default of any other provision of this
Agreement; provided, however, that nothing herein shall limit any other rights
or remedies a party hereto may have on account of a breach or default of this
Agreement.
3.05 No Admission of Liability. Nothing herein shall be construed as
an admission of liability by any party hereto, and the parties hereto
acknowledge that this Agreement is being entered into by the parties to avoid
the time and expense of further litigation.
3.06 Exception. Nothing herein shall limit the parties future rights
and obligations under that certain Registration Rights Agreement dated October
30, 1992 and that certain Shareholders Agreement also dated October 30, 1992,
which agreements shall remain in full force and effect.
4. Payments to Defendants.
4.01 Immediate Payment. Upon execution of this Agreement by each of
the parties hereto, OSL shall pay to the Defendants the sum of $3,333,333. Any
amounts due under this Section 4.01, and any amounts due under Section 4.02
below, may be paid by OSL to GHG on behalf of all Defendants.
4.02 Deferred Payment. OSL shall also pay to the Defendants the
additional amount of $6,666.667. Such payment shall be made upon the earlier of
(i) the first anniversary hereof, (ii) the initial public offering of the Common
Stock of OSI or (iii) upon the acquisition of OSI in which the shareholders of
OSI prior to the transaction own less than a majority of the surviving
corporation. At the sole discretion of OSL, payment of up to $5 million of the
total may be made in Common Stock of OSI having an agreed upon value of $20 per
share, such that the number of shares issued in lieu of a cash payment of $5
million would be 250,000 shares. In the event that the Common Stock of OSI is
subject to any subdivision or amalgamation prior to
4
<PAGE> 6
the issuance of such shares to the Defendants, then the number of shares issued
shall be increased or diminished so that the total value of the shares issued
equates to $5 million (or the applicable percentage thereof to be paid in stock)
based on the agreed upon value of $20 per presently existing share.
4.03 OSI Guaranty. Payment of the amounts due under Sections 4.01 and
4.02 above, whether in cash or shares, is hereby unconditionally guaranteed by
OSI; provided, however, that this guaranty shall be subordinated to any
obligations of OSI to its lender, and the Defendants agree to enter into any
subordination agreement reasonably requested by such lender to effect the
foregoing. If OSL fails to make any payment due or issue any shares due within
three days after such is due, such obligation shall immediately become the
obligation of OSI. The transfer of the obligation to OSI shall not however
limit the Defendants' rights to take any action at law to secure such
outstanding payment from OSL as well as OSI unless and until such outstanding
obligation is paid in full. If the payment or shares due are not paid within 30
days of written notice of default by the Defendants to OSI, then the right to
make partial payment in shares shall terminate and all outstanding sums shall be
due in cash. Overdue amounts shall bear interest at the rate of prime plus 2%.
4.04 Disclosure/Investment Representations. Each Defendant hereby
represents and warrants to OSI and OSL as follows:
(a) Such Defendant has had access to all information regarding
OSI, and its business, assets, liabilities and financial condition that such
Defendant reasonably considers important in agreeing to the $20 per share
valuation set forth above, and such Defendant has had ample opportunity to ask
questions of OSI's representatives concerning such matters. Without limiting the
foregoing, the Defendants agree to keep confidential any OSI financial
information provided to them pursuant to this Section 4.04(a), and to use such
information only for the purpose of valuing OSI shares.
(b) By reason of such Defendant's business or financial
experience, such Defendant is capable of evaluating the merits and risks of this
decision and has the ability to protect his or its own interests in this
transaction. Each Defendant expressly acknowledges that he or it is very
knowledgeable about the contact lens business. Such Defendant is making his or
its investment decision in this regard based solely on the Defendant's own
analysis of OSI, and such decision is not based on any representation, warranty
or statement made by OSI, OSL or any of its officers or directors.
(c) The Defendant understands and acknowledges that, in reliance
upon the representations and warranties made by the Defendants herein, any
shares issued to him or it will not be registered with the Securities and
Exchange Commission ("SEC") under the Securities Act of 1933, as amended (the
"Act"), or qualified under the California Corporate Securities Law of 1968, as
amended (the "Law"), but instead will be issued under an exemption or exemptions
from the registration and qualification requirements of such Act and Law, which
impose certain restrictions on the Defendants' ability to transfer the
certificates. Specifically, the Defendants understand that any shares issued to
them will not be transferable unless registered under the Act and qualified
under the Law, or unless an exemption from such registration or qualification is
available. The Defendants acknowledge that they will be acquiring any shares
issued to them pursuant to this Agreement for their own account for investment
purposes and not with a view to, or for sale in connection with, a distribution
of such shares within the meaning of
5
<PAGE> 7
the Act. The Defendants agree to execute an appropriate investment
representation letter at the time that any shares are issued to them pursuant to
this Agreement, and understand that any such shares will be appropriately
legended to reflect the restrictions set forth herein.
4.05 Mechanics of Payment. To the extent that cash is to be paid
hereunder, payment shall be made to the Defendants in pounds sterling, at the
spot dollar/sterling exchange rate published in the London Financial Times on
the date of payment. Payment in cash shall be made to such accounts, by wire
transfer or certified cheque drawn on a U.K. clearing bank, as OSL shall be
instructed in writing by GHG. Payment in stock shall be made by stock
certificates in such names as OSL shall be instructed in writing by GHG. The
Plaintiffs shall have no obligation or responsibility for the division of any
proceeds among the Defendants, and may rely entirely on instructions from GHG.
4.06 No Setoff/Other Matters. With respect to payment hereunder,
time is of the essence in this Agreement and all due payments and/or issuance of
stock certificates in lieu of cash shall be made within three working days of
the due date. Payment shall be due notwithstanding any dispute of any nature
between the parties hereto whether related to this Agreement or any other
matter. OSL expressly accepts that it shall have no right to setoff in relation
to the payment to be made hereunder nor any cause whatsoever to withhold such
payment. Notwithstanding the foregoing, nothing herein shall limit any other
remedies OSL may have in the event of breach of this Agreement or otherwise.
4.07 Taxes. The amounts set forth for payment to the Defendants
herein are pre-tax amounts. It is understood that the amounts actually to be
paid to the Defendants shall be net of any taxes to be withheld on account of
such payment. The parties agree that there will be 25% withholding on any
amounts paid by OSL hereunder, based on current law. The Defendants shall
provide OSL with any information reasonably requested by OSL to assist it to
determine the appropriate withholding amount. OSL shall provide the Defendants
with appropriate certification of any payments made to any taxing authority in
respect of such payments.
4.08 Other Amounts. For the avoidance of doubt, the parties
hereby confirm that no further amounts are owed (i) by AVCL to OSL under the
Purchase and Supply Agreement or (ii) by OSL to the Patent Owners under the
Patent License Agreement. OSL shall be entitled to the return of the
approximately 768,000 pounds sterling held in escrow at Royal Bank of Scotland.
4.09 Voting Trust. The parties acknowledge that, pursuant to
Section 8 hereof, the Patent Owners, OSI and Francis R. Tunney, Jr. are entering
into a Voting Trust Agreement. It is agreed that any shares issued pursuant to
Section 4.02 hereof shall be subject to such Voting Trust Agreement and that the
parties hereto will take any actions reasonably requested by OSI to implement
the foregoing.
5. Additional Payment to AVCL.
5.01 Payment. OSL will pay to AVCL a commission of [ ]* in respect of
each and every lens which is a "Covered Product," as defined in Section 5.02
below, and which is sold by OSI or OSL, or their agents, during the three-year
period commencing 1 January 1997, to any branch or franchise retail outlet of
[ ]* operating in the United Kingdom. Such payment shall be made in respect of
each quarterly period commencing on 1 January 1997 within 60 days of the end
of each quarterly period, and shall be accompanied by a statement certified
by the
6
* Confidential treatment has been requested from the Securities and Exchange
Commission. Omitted portions have been filed separately with the Commission.
<PAGE> 8
Financial Director of OSL listing the number of Covered Products sold to
[ ]* in the United Kingdom in the quarterly period. OSL shall keep its
records regarding such information for at least three years after the end of the
relevant period. AVCL shall have the right, once per calendar year, upon 30 days
prior written notice to OSL and OSI, to review OSL's and OSI's books and records
regarding sales to [ ]* to verify the information provided to AVCL. Such
audit shall be at the expense of AVCL; provided, however, that if as a result of
such audit it is determined that the amounts owed to AVCL in any given quarter
were understated by more than 5%, then the cost of such audit shall be borne by
OSL. Upon the conclusion of any audit OSL shall pay to AVCL any amount underpaid
to AVCL, and AVCL shall pay to OSL any amount overpaid to AVCL. AVCL shall
maintain any information disclosed to them in confidence and shall not use such
information for any purpose other than verifying the amounts owed to them
hereunder.
5.02 Covered Products. A "Covered Product" is any contact lens having,
or labelled or otherwise claimed in writing to have, the characteristics listed
on Exhibit B. A contact lens will not be considered a Covered Product if one or
more of the parameters of such contact lens is outside the variance listed below
relative to the parameters of Covered Products listed on Exhibit B.
Lens Diameter [ ]* mm
Lens Base Curve [ ]* mm
Lens Centre Thickness [ ]* mm of nominal
thickness [ ]* power, and
normally incremented
thickness throughout power
range.
Lens Water Content [ ]*
A Covered Product that is manufactured from a material that incorporates an
ultra-violet inhibitor shall continue to be a Covered Product. Inclusion or
exclusion of a light handling tint will not affect whether a lens was considered
a Covered Product. If another company acquires OSI or OSL, or OSI or OSL
acquires another company, then the designs and brands of such other company will
not be considered Covered Products; provided, however, that if such company
sells OSI or OSL designs or brands, then such OSI or OSL designs or brands will
be considered Covered Products to the extent that they are within the designated
parameters.
6. Stock Ownership. Upon the signing hereof, OSI will deliver to the
Trustee under that certain Voting Trust Agreement (as defined in Section 8
below), for the benefit of the Patent Owners, share certificates for the shares
of OSI Common Stock to which the Patent Owners are entitled on account of OSI's
previous stock split. Separate certificates will be issued for the benefit of
each of the Patent Owners in the amounts set forth below:
Patent Owner Number of Shares
------------ ----------------
GHG 459,654
ADG 206,580
7
* Confidential treatment has been requested from the Securities and Exchange
Commision. Omitted portions have been filed separately with the Commission.
<PAGE> 9
BB 32,400
AHM 32,400
IBA 16,200
7. Registration Rights and Related Matters. Upon the signing hereof, OSI,
the Patent Owners and other shareholders of OSI will enter into an Amendment to
Registration Rights Agreement and Shareholder Agreement in the form attached
hereto as Exhibit C to provide certain priority registration rights to the
Patent Owners.
8. Voting Trust Agreement. Upon the signing hereof, the Patent Owners,
OSI and Francis R. Tunney, Jr., will enter into a Voting Trust Agreement in the
form attached hereto as Exhibit D. In connection therewith, the Patent Owners
will deliver to the Trustee all certificates held by them for shares of OSI
stock.
9. Patent License Agreement. Upon the signing hereof, the Patent Owners
and OSL will enter into a Patent License Agreement in the form attached hereto
as Exhibit E.
10. Return of Documentation and Media. Within 60 days of the signing
hereof, the parties will return to each other or destroy all documentation and
other media which belongs to the other parties hereto, including, without
limitation, documentation and other media discovered or otherwise obtained or
provided pursuant to the Actions, and each party warrants to the other that
within such 60 day period it will have returned or destroyed all documentation
and media of the other party in its possession and will not have taken or
retained any copies of such materials for future use. Notwithstanding the
foregoing, it is understood that AVCL may retain a copy of the documentation and
media to the extent that it is part of the Licensed Information. For the
avoidance of doubt, all documentation and media relating primarily to the
private affairs of ADG or the business of AVCL, and not materially related to
OSL's or OSI's business, which were removed from ADG's office at OSL Nursling
following termination of ADG's employment on 19th April 1994, shall be returned
to the respective owners. As to any documentation or media held by legal counsel
to the parties hereto, such may be returned by them, destroyed or retained by
them, provided that if they elect to retain such information they must agree in
writing to maintain the confidentiality of such information and not use such
information for any purpose (other than in connection with an arbitration of
this Agreement) or disclose such information to any person, including their
clients. For the avoidance of doubt, and notwithstanding any other provision
hereof, the Defendants and Plaintiffs each acknowledge that they do not have the
right to use and are not using information that was obtained from the other
after May 19, 1994, whether pursuant to the Actions or otherwise, except that
nothing herein limits the provisions of the Patent License Agreement.
11. Nondisparagement. The Plaintiffs hereby agree to not take any actions
to disparage the Defendants, and the Defendants hereby agree not to take any
actions to disparage the Plaintiffs, from and after the date hereof. AVCL, NFHC,
OSL and OSI shall instruct their respective employees, distributors and agents
to also not engage in any such disparagement. The foregoing shall not prevent
the parties hereto from competing with each other in good faith and in a
commercially reasonable manner.
12. Press Releases. OSI and AVCL may each issue a press release in the
forms attached hereto as Exhibits F-1 and F-2, respectively, within 15 days of
the signing of this Agreement. Except for such press releases, no party hereto
shall make any comment regarding
8
<PAGE> 10
this settlement or the dispute or legal proceedings between them. Following the
earlier of (i) the conclusion of such 15-day period or (ii) the issuance of the
press releases, no further comments will be made by any party concerning the
settlement or the disputes or legal proceedings between them, and any inquiry
for further particulars shall be met with a reference to the above-mentioned
press releases with no further comment. Nothing herein limits the ability of the
parties to make necessary disclosures to professional advisors, potential
investors or acquirors and government regulatory agencies. Notwithstanding the
above, either party shall have the right to refute in detail any
misrepresentations of the outcome of the Actions which are made by either party
or its agents or distributors to customers or business associates of the other
party. Such refutation may be made to the customer or associate to whom the
misrepresentation has been made and/or to the person making the
misrepresentation. The parties reserve the right to take action against any
third party which continues to make such misrepresentations.
13. Confidentiality.
13.01 Terms of Agreement. The parties hereto will keep the terms of
this Agreement confidential and will not disclose the same to any other persons
except for disclosures made in confidence to professional advisors, potential
investors or acquirors, and government regulatory agencies. Notwithstanding the
foregoing, each of the parties shall have the right to correct any material
misrepresentation of this Agreement made by the other party, or the other
party's agents or distributors, to customers or business associates of the first
party. Such correction may be communicated to the party making the
misrepresentation and the third party to whom such misrepresentation is made.
The parties reserve the right to take action against a third party which
continues to misrepresent the terms of this Agreement.
13.02 Covered Products Confidentiality. Notwithstanding any other
provision hereof, including, without limitation, Section 2.02, the parties
hereto agree to keep confidential and not to release to others information
concerning the detail design, formulation and curing conditions of lenses that
are Covered Products, except that nothing herein shall limit the ability of OSI
and AVCL to disclose information to a company that has acquired them. The
Defendants and their successors will not assist any third party, directly or
indirectly, whether or not such party is licensed under the Licensed Patents, to
reproduce any of the Covered Products, and hereby represent to the Plaintiffs
that they have not previously done so, with the exception that the Defendants
have previously assisted [ ]* in the manufacture of its own [ ]* lens, which
is a Covered Product. Nothing herein shall preclude either party from
manufacturing and selling Covered Products or from publishing or otherwise
disseminating information relating to such Covered Product to the extent
normally undertaken by contact lens manufacturers and/or historically practiced
by OSI or AVCL in connection with the marketing of lenses.
13.03 Covered Product Claims. The parties hereto shall not make any
claim that any Covered Product that they sell is the identical product or that
they are manufactured using the exact same technology as a product sold by the
other party. Nothing herein shall prevent the parties from disclosing
information relating to such Covered Products to the extent normally undertaken
by contact lens manufacturers and/or historically practiced by OSI or AVCL in
connection with the marketing of lenses.
14. Governing Law, Arbitration. All disputes arising from or related
to this Agreement, shall be resolved by binding arbitration. If the arbitration
is initiated by the Plaintiffs, then the arbitration shall be held in London,
England, shall be conducted by one or
9
* Confidential treatment has been requested from the Securities and Exchange
Commission. Omitted portions have been filed separately with the Commission.
<PAGE> 11
more Queens Counsellors nominated by the London Common Law and Commercial Bar
Association, shall be governed by the law of England and Wales and shall be
conducted pursuant to the Rules of the London Court of International
Arbitration. If the arbitration is initiated by the Defendants, then the
arbitration shall be held in San Francisco, California, USA pursuant to the
Commercial Rules of Arbitration of the American Arbitration Association and
shall be governed by the laws of California. Any such arbitration shall be
conducted in a confidential manner. Notwithstanding the foregoing, the
Defendants may bring suit through normal legal channels in England and
California solely to enforce the Plaintiff's obligations under Sections 4.02 and
4.03 hereof. Such suit may not make any claims other than non-payment under
Section 4.02 and/or 4.03 hereof.
15. Severability. If any provision of this Agreement is found invalid or
unenforceable, that provision will be enforced to the maximum extent permissible
by law, and the other provisions of this Agreement will remain in full force and
effect.
16. Entire Agreement. This Agreement, together with the Exhibits hereto,
constitutes the entire agreement among the parties hereto pertaining to the
subject matter hereof, and supersedes in its entirety all prior and
contemporaneous agreements, understandings, negotiations and discussions between
the parties, whether oral or written, with respect to the subject matter hereof,
including, without limitation, that certain Heads of Settlement dated December
4, 1996. No supplement, modification or amendment to this Agreement will be
binding as to a given party unless executed in writing by such party; provided,
however, that GHG is authorized to agree to and execute supplements,
modifications and amendments on behalf of all Defendants other than AVCL.
17. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original and all of which together shall constitute one
and the same instrument.
18. Notices. Any notice required or permitted to be given hereunder, shall
be given in writing, by delivery in person or by recognized express courier
addressed to the parties at their address set forth below their signatures, or
to such other place or places as any of the parties may have designated for that
purpose by written notice given in the manner provided herein to the other
parties hereto.
19. Further Assurances. The parties hereto will take any actions
reasonably requested by another party hereto to implement this Agreement.
20. Binding Effect. This Agreement is binding on, and shall inure to the
benefit of, the assigns, successors and heirs of the parties hereto. The parties
expressly acknowledge that this agreement may be assigned to an acquiror in
connection with an acquisition of OSI or AVCL.
10
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as
of the day and year first written above.
Aspect Vision Care Ltd. /s/ ALBERT HENRY MORLAND
-------------------------------
By: /s/ A.D. GALLEY Albert Henry Morland
------------------------------
Its: Director Address: 7 Bitterne Place,
----------------------------- Newport, Isle of Wight
Address: Unit 2, Northbridge Road
Berkhamstead, Hertfordshire /s/ IVOR ATKINSON
HP4 1EH England -------------------------------
Ivor Atkinson
New Focus Health Care Ltd. Address: 90 Queens Drive,
By: /s/ A.D. GALLEY Surbiton, Surrey, KT5 8PP
------------------------------ England
Its: Director
----------------------------- /s/ WILFRED TREVOR BROOKER
Address: Unit 2, Northbridge Road -------------------------------
Berkhamstead, Hertfordshire Wilfred Trevor Brooker
HP4 1EH England
Address: Grimbles Barn, Buckland Village
/s/ GEOFFREY HARRISON GALLEY Aston Clinton, Buckinghamshire
- ------------------------------- HP22 5HY England
Geoffrey Harrison Galley
Address: Red Lodge, The Close, Ocular Sciences Ltd.
Totteridge, London N20 8PJ By: /s/ JOHN D. FRUTH
England -----------------------------
Its: Director
/s/ ANTHONY DAVID GALLEY ----------------------------
- ------------------------------- Address: Reliant Close, Chandlers Ford,
Anthony David Galley Eastleigh, Hampshire S053 4ND
England
Address: Beacon Wey, The Hangers,
Bishops Waltham,
Hants S032 1FZ O.S.I. Corporation
England By: /s/ JOHN D. FRUTH
-----------------------------
/s/ BARRIE BEVIS Its: President
- ------------------------------- ----------------------------
Barrie Bevis Address: 475 Eccles Avenue
So. San Francisco, CA 94080
Address: 53, Wilderness Heights, USA
West End, Southampton S03 3PS
England
/s/ JOHN D. FRUTH
-------------------------------
John David Fruth
Address: c/o OSI Corporation
475 Eccles Avenue
So. San Francisco, CA 94080
USA
(Settlement Agreement and Release]
11
<PAGE> 13
List of Exhibits
A-1 Stipulation of Dismissal of U.S. Action
A-2 Stipulation of Dismissal of U.K. Action
A-3 Stipulation of Dismissal of U.K. Action
B Covered Products
C Amendment to Registration Rights Agreement and Shareholder Agreement
D Voting Trust Agreement
E Patent License Agreement
F-1 OSI Press Release
F-2 AVCL Press Release
12
<PAGE> 14
EXHIBIT A-1
STIPULATION OF DISMISSAL OF U.S. ACTION
<PAGE> 15
Terence M. Fruth Filed February 28, 1997
Thomas E. Jamison RICHARD W. WIEKING
FRUTH & ANTHONY, P.A. Clerk, U.S. District Court
3750 IDS Center Northern District of California
80 S. Eighth Street
Minneapolis, MN 55402
Telephone: 612-349-6969
Timothy K. Roake, SBN 99539
FENWICK & WEST LLP
Two Palo Alto Square
Palo Alto, CA 94306
Telephone: 415-494-0600
Attorneys for Plaintiff, O.S.I.
Corporation, d/b/a Ocular
Sciences/American Hydron, Inc.
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
No. C95-0054 VRW (CMP)
STIPULATION RE DISMISSAL WITH PREJUDICE AND ORDER
O.S.I. Corporation, d/b/a
Ocular Sciences/American Hydron
Plaintiff,
v.
Geoffrey H. Galley, Anthony D. Galley, Albert H. Morland,
Ivor Atkinson and Barrie Bevis,
Defendants.
The parties hereto, by and through their respective counsel, pursuant
to Federal Rules of Civil Procedure, Rule 41(a)(1), and pursuant to a
Settlement Agreement And Release dated as of February 27, 1997, hereby
stipulate that this matter may now be, and should be, dismissed with prejudice.
STIPULATION RE DISMISSAL WITH PREJ. & [PROPOSED] ORDER
CASE NO. C95-0054-VRW
<PAGE> 16
The parties further stipulate that each party hereby waives any right
to reimbursement of any costs or fees in this action.
Dated: February 28, 1997 FRUTH & ANTHONY, P.A.
and
FENWICK & WEST LLP
By /s/ TIMOTHY K. ROAKE
-----------------------------------
Timothy K. Roake
Attorneys for Plaintiff O.S.I.
Corporation, d/b/a Ocular
Sciences/American Hydron, Inc.
Dated: February 27, 1997 BROWNE & WOODS
By /s/ ROBERT B. BROADBELT
-----------------------------------
Robert B. Broadbelt, Esq.
Attorneys for Defendants
Geoffrey H. Galley and
Anthony D. Galley
ORDER
IT IS SO ORDERED.
Dated: February __, 1997. By [SIG]
-----------------------------------
UNITED STATES DISTRICT JUDGE
STIPULATION RE DISMISSAL WITH PREJ. & [PROPOSED] ORDER
CASE NO. C95-0054-VRW
<PAGE> 17
EXHIBIT A-2
STIPULATION OF DISMISSAL OF U.K. ACTION
<PAGE> 18
Exhibit A-2
IN THE HIGH COURT OF JUSTICE CH 1995 P No 106
CHANCERY DIVISION
PATENTS COURT
BETWEEN:
(1) OCULAR SCIENCES LIMITED
(formerly Precision Lens Laboratories Limited)
(2) OSI CORPORATION
(A Corporation incorporated under the
laws of State of California)
Plaintiffs
- and -
(1) ASPECT VISION CARE LIMITED
(2) NEW FOCUS HEALTH CARE LIMITED
(3) ANTHONY DAVID GALLEY
(4) GEOFFREY HARRISON GALLEY
(5) ALBERT HENRY MORLAND
(6) IVOR ATKINSON
(7) BARRIE BEVIS
(8) W TREVOR BROOKER
Defendants
---------------------
CONSENT ORDER
---------------------
UPON THE Plaintiffs and Defendants by the respective solicitors agreeing in
writing to this Order by the countersigning thereof,
BY CONSENT IT IS ORDERED THAT
1. These proceedings, including without limitation all claims and
counterclaims, be dismissed; and
2. There be no order as to costs.
/s/ BRISTOWS COOKE & CARPMAEL /s/ BOND PEARCE
- ----------------------------- ---------------
Bristows Cooke & Carpmael Bond Pearce
(Solicitors for the Plaintiffs) (Solicitors for the Defendants)
Dated this 27th day of Feb. 1997
<PAGE> 19
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
PATENTS COURT
CH 1995 P No 106
BETWEEN:
(1) OCULAR SCIENCES LIMITED
(formerly Precision Lens Laboratories Limited)
(2) OSI CORPORATION
(A Corporation incorporated under the
laws of the State of California)
Plaintiffs
- and -
(1) ASPECT VISION CARE LIMITED
(2) NEW FOCUS HEALTH CARE LIMITED
(3) ANTHONY DAVID GALLEY
(4) GEOFFREY HARRISON GALLEY
(5) ALBERT HENRY MORLAND
(6) IVOR ATKINSON
(7) BARRIE BEVIS
(8) W TREVOR BROOKER
Defendants
---------------------
ORDER
---------------------
Messrs Bristows Cooke & Carpmael
10 Lincoln's Inn Fields
London
WC2A 3BP
Solicitors for the Plaintiffs
Tel: 0171 400 8000
Fax: 0171 400 8050
Ref: 277/C
- 2 -
<PAGE> 20
EXHIBIT A-3
STIPULATION OF U.K. ACTION
<PAGE> 21
Exhibit A-3
IN THE HIGH COURT OF JUSTICE CH 1995 G No 1116
CHANCERY DIVISION
PATENTS COURT
BETWEEN:
(1) GEOFFREY HARRISON GALLEY
(2) ANTHONY DAVID GALLEY
(3) ALBERT HENRY MORLAND
(4) BARRIE BEVIS
(5) IVOR ATKINSON
Plaintiffs
- and -
OCULAR SCIENCES LIMITED
Defendant
---------------------
CONSENT ORDER
---------------------
UPON THE Plaintiffs and Defendant by the respective solicitors agreeing in
writing to this Order by the countersigning thereof,
BY CONSENT IT IS ORDERED THAT
1. These proceedings, including without limitation all claims and
counterclaims, be dismissed; and
2. There be no order as to costs.
/s/ BOND PEARCE /s/ BRISTOWS COOKE & CARPMAEL
- --------------- -----------------------------
Bond Pearce Bristows Cooke & Carpmael
(Solicitors for the Plaintiffs) (Solicitors for the Defendant)
Dated this 27th day of Feb. 1997
<PAGE> 22
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
PATENTS COURT
CH 1995 G No 1116
BETWEEN:
(1) GEOFFREY HARRISON GALLEY
(2) ANTHONY DAVID GALLEY
(3) ALBERT HENRY MORLAND
(4) BARRIE BEVIS
(5) IVOR ATKINSON
Plaintiffs
- and -
OCULAR SCIENCES LIMITED
Defendant
---------------------
CONSENT ORDER
---------------------
Messrs Bristows Cooke & Carpmael
10 Lincoln's Inn Fields
London
WC2A 3HP
Solicitors for the Defendant
Tel: 0171 400 8000
Fax: 0171 400 8050
Ref: 277/C
- 2 -
<PAGE> 23
CONFIDENTIAL VERSION
EXHIBIT B
COVERED PRODUCTS
1. [ ]*
Material: [ ]*
Water Content: [ ]*
Fittings: [ ]*
Powers: [ ]*
Nominal Center Thickness: [ ]*
2. [ ]*
Material: [ ]*
Water Content: [ ]*
Fittings: [ ]*
Powers: [ ]*
[ ]*
Nominal Center Thickness: [ ]*
3. [ ]*
Material: [ ]*
Water Content: [ ]*
Fittings: [ ]*
Powers: [ ]*
Nominal Center Thickness: [ ]*
4. [ ]*
Material: [ ]*
Water Content: [ ]*
Fittings: [ ]*
Powers: [ ]*
Nominal Center Thickness: [ ]*
5. [ ]*
Material: [ ]*
Water Content: [ ]*
Fittings: [ ]*
Powers: [ ]*
Nominal Center Thickness: [ ]*
<PAGE> 24
6. [ ]*
Material: [ ]*
Water Content: [ ]*
Fittings: [ ]*
Powers: [ ]*
Nominal Center Thickness: [ ]*
All of the above specified lenses being of a design having [ ]*.
* Confidential treatment has been requested from the Securities and
Exchange Commission. Omitted portions have been filed separately with the
Commission.
<PAGE> 25
EXHIBIT C
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT AND SHAREHOLDER AGREEMENT
Filed as Exhibit 4.02 to the Registrant's Registration Statement on Form S-1
filed May 19, 1997 (Registration No. 333-27421).
<PAGE> 26
EXHIBIT D
VOTING TRUST AGREEMENT
<PAGE> 27
EXHIBIT D
VOTING TRUST AGREEMENT
This Voting Trust Agreement (the "Agreement") is entered into and
effective as of February 27, 1997, by and among Geoffrey H. Galley, Anthony D.
Galley, Barrie Bevis, Albert H. Morland and Ivor Atkinson (collectively, the
"Shareholders"), Francis R. Tunney, Jr. as Trustee (Mr. Tunney, or any successor
Trustee appointed in accordance herewith, is referred to as the "Trustee"), and
O.S.I. Corporation, a California corporation (the "Company").
RECITALS
A. The Shareholders are current shareholders of the Company and, in
the aggregate, hold 996,312 shares of the Company's Common Stock.
B. Pursuant to a Settlement Agreement and Release dated as of the
date hereof by and among the Shareholders, the Company and certain other
parties, the Shareholders have agreed to place all of their shares of the
Company's voting stock in a voting trust to be voted as set forth herein.
In consideration of the mutual covenants herein contained, the
Shareholders, the Trustee and the Company agree as follows:
1. Purpose of Voting Trust. The purpose of this Voting Trust is to
ensure that, during the term of this Agreement, all votes, actions and consents
to be taken with respect to all shares of voting stock of the Company now owned,
or to be owned in the future, by the Shareholders shall be taken by the Trustee
on behalf of the Shareholders.
2. Transfer of Voting Stock to Trustee. Each of the Shareholders
shall, upon execution of this Agreement, duly endorse or cause to be endorsed in
blank the certificate or certificates representing all shares of the Company's
voting stock now owned (whether of record or beneficially) by such Shareholder,
and will deliver the same to the Trustee. Each Shareholder further agrees that,
during the term of this Agreement, such Shareholder will likewise immediately
endorse and deliver to the Trustee any and all certificates for additional
shares of the Company's voting stock that such Shareholder may hereafter
acquire. Shares of the Company's stock which the Shareholders are required to
deliver to the Trustee under this Section 2 shall be hereinafter collectively
referred to as the "Shares". Promptly upon receipt of such certificates, the
Trustee shall cause such Shares to be transferred in the name of the Trustee or
a nominee name designated by the Trustee on the Company's books and records, and
shall file a duplicate copy of this Agreement with the Secretary of the Company.
The failure by any Shareholder to deliver certificates for Shares to the Trustee
shall not affect or impair the trust created hereby or the rights of the Trustee
under this Agreement.
<PAGE> 28
3. Voting Trust Certificates.
(a) Issuance. Pursuant to Section 25102(f) of the California
Corporations Code and in reliance on the representations of each Shareholder in
Section 7 of this Agreement, the Trustee shall issue and deliver to each
Shareholder a Voting Trust Certificate (a "Certificate") representing the Shares
deposited with and held by the Trustee for the benefit of such Shareholder under
this Agreement. Such Certificates shall be in the form of Exhibit "A" hereto and
shall be signed by the Trustee.
(b) Certificate Book. The Trustee shall keep correct books
of account of all his business and transactions in his capacity as Trustee; and
shall also keep a book to be known as the Certificate Book, containing the names
of all persons who are Shareholders, showing their mailing addresses, the number
and type of Shares represented by the Certificates held by them and the date on
which they became the owner thereof.
(c) Legend. The Certificates shall be legended with all
legends with which the underlying Shares were required to be legended, together
with substantially the following legend:
THE SHARES REPRESENTED BY THIS VOTING TRUST CERTIFICATE ARE
SUBJECT TO THE TERMS AND CONDITIONS OF A VOTING TRUST
AGREEMENT DATED FEBRUARY __, 1997, A COPY OF WHICH IS ON FILE
AT THE PRINCIPAL OFFICE OF O.S.I. CORPORATION, AND THESE
SHARES MAY NOT BE SOLD, PLEDGED, GIFTED, HYPOTHECATED OR
OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH THE TERMS AND
CONDITIONS OF SUCH VOTING TRUST AGREEMENT.
(d) Lost Certificates. If a Certificate shall be lost,
stolen, mutilated or destroyed, the Trustee, in his discretion, may issue a
duplicate of such Certificate upon receipt of evidence of such loss satisfactory
to him and an indemnity agreement satisfactory to him, and upon receipt of the
existing Certificate, if mutilated. The Trustee may also require the holder of
such Certificate to pay fees and expenses as may be applicable to the reissuance
of a duplicate Certificate.
(e) Registered Owner. The Trustee may treat the registered
holder of each Certificate as the absolute owner thereof for all purposes
whatsoever, and accordingly shall not be required to recognize any legal,
equitable or other claim or interest in such Certificate on the part of any
other person, whether or not it or they shall have express or other notice
thereof.
(f) Transfer Procedures. A Certificate shall be transferable
on the books of the Trustee by the registered holder thereof, only to the extent
that the underlying Shares were transferable by the applicable Shareholder, in
person or by attorney-in-fact, and upon surrender of such Certificate duly
endorsed for assignment or accompanied by a duly executed instrument of
assignment, and upon payment of any transfer taxes or other charges in
connection with the transfer. All permitted transfers of Certificates shall be
recorded in the Certificate Book and any permitted transfer made of any
Certificate shall vest in the transferee all rights of the transferor,
2
<PAGE> 29
and shall subject the transferee to the same limitations as those imposed on the
transferor by the terms of the Certificate and this Agreement. Upon any such
permitted transfer, the Trustee shall deliver a Certificate to such transferee
representing the number of Shares represented by the Certificate so transferred.
Each permitted transferee of a Certificate shall be deemed to be a Shareholder
under this Agreement. If a transfer is to be made of less than all of the Shares
represented by a Certificate, the Trustee shall reissue to the transferor a
Certificate with respect to the Shares being retained by transferor.
(g) Securities Laws Compliance and Compliance with Other
Agreements. Neither the Shares nor the Certificates have been registered under
the Securities Act of 1933, as amended (the "Act") or registered or qualified
for resale under any applicable state law regulating securities. The
Certificates may not be offered, sold, transferred or hypothecated in the
absence of registration or the availability of an exemption from registration
under the Act and any applicable state law regulating securities. Each
Shareholder agrees not to sell, transfer, pledge or hypothecate such Certificate
unless the Trustee shall be reasonably satisfied that such sale or other
disposition does not violate the provisions of any agreement to which the
Shareholder is a party and unless either: (i) the transfer of the Certificate is
registered under the Act pursuant to a current and effective registration
statement at the time of such sale, transfer, pledge or hypothecation and is
registered or qualified under any applicable state law regulating securities; or
(ii) the Trustee has been furnished an opinion of counsel satisfactory in form
and substance to the Trustee that the Certificate may be so transferred or
disposed of without such registration or qualification. Each holder of
Certificate agrees that the Trustee may refuse to transfer any Certificate
except as aforesaid.
4. Acceptance of Trust. The Trustee, by executing this Agreement,
and each successor Trustee upon being appointed as such, accepts the voting
trust created hereby and agrees to carry out the terms and provisions hereof.
5. Trustees Rights, Powers, Duties and Expenses.
(a) Voting Rights. During the term of this Agreement, and
except as otherwise provided herein, the Trustee shall possess and shall be
entitled to exercise, with respect to the Shares, in person, or by his agent,
attorney-in-fact, or proxies, all voting rights and powers of absolute owners
and holders of such Shares, specifically including the right to vote, assent or
consent with respect thereto, and to take part in and consent to any corporate
or shareholder action of any kind whatsoever, whether by a vote at a meeting of
shareholders or by written consent, and to receive stock distributions with
respect to said Shares as provided in subsection 5(e) herein. In all such votes
the Trustee will vote the Shares in the same manner and same percentage as
Allergan, Inc., or any successor corporation ("Allergan") and Galen Partners,
L.P. and Galen Partners International, L.P., or any successor entity ("Galen")
vote their shares of the voting stock of the Company, in the aggregate. For
example, if Allergan and Galen, when taken together, vote 80% of their shares
for an issue and 20% against, then the Shares shall also be voted 80% for and
20% against. Notwithstanding anything to the contrary herein, the Trustee will
not vote the Shares in favor of any action that would materially and adversely
affect the rights of the Shareholders in a different manner than the other
Common Stock shareholders of the Company, as determined by the Trustee.
3
<PAGE> 30
(b) Scope of Voting Rights. The right of the Trustee to
vote, assent or consent with respect to the Shares shall include, without
limitation, the right to vote at any election of directors, to vote on any
proposal to amend the articles of incorporation and/or by-laws of the Company,
to vote in favor of, or in opposition to, approval of any merger, consolidation,
dissolution, liquidation or reorganization of the Company and on any other
action of any character whatsoever which may be presented at any meeting or
require the consent of shareholders of the Company.
(c) No Right to Sell Shares. The Trustee shall have no
authority to sell, pledge, hypothecate, or otherwise dispose of any of the
Shares deposited pursuant to this Agreement.
(d) Permitted Activities. The Trustee and any firm,
corporation, trust, or association of which Trustee may be a trustee, owner,
member, shareholder, director, officer, agent, or employee may contract with or
may become financially interested in any matter or transaction to which the
Company or any subsidiary or controlled or affiliated corporation may be a party
or in which it may be concerned, as fully and freely as though such Trustee were
not a trustee hereunder. The Trustee may act as a director and/or officer of the
Company or of any subsidiary or controlled or affiliated corporation of the
Company, and may vote the Shares held hereunder in favor of his election as
such. The Shareholders acknowledge that the Trustee is currently a director of
the Company and the general counsel of Allergan, Inc., a major shareholder of
the Company.
(e) Notices, Dividends and Distributions.
(i) Notices. The Trustee shall forward to each
Shareholder copies of all notices, reports, statements and other communications
received from the Company with respect to the Shares.
(ii) Non-Stock Distributions. Each Shareholder shall
be entitled to receive payments equal to the amount of cash dividends, if any,
collected or received by the Trustee upon the number of Shares in respect of
which such Shareholder is the registered holder of a Certificate, less the
deductions provided for in subsection 5(e)(vi) below. Such payments shall be
made, as soon as practicable after the receipt of such dividends, to the
Certificate holders registered as such at the close of business on the record
date determined by the Company for such dividend. In his discretion, the Trustee
may arrange with the Company for the direct payment by the Company of dividends
to the registered Certificate holders.
(iii) Stock Distributions. If the Trustee shall
receive, as a dividend or other distribution upon any Shares held by him under
this Agreement, any additional shares of the Company's stock having voting power
(as that term is defined in the California General Corporation Law), or
convertible into or exchangeable for securities having such voting power, the
Trustee shall hold the same subject to this Agreement in proportion to the
Shareholders' respective interests as shown on the books of the Trustee. The
Trustees shall issue Certificates with respect of such shares or other
securities to the Shareholders as their interests may appear.
4
<PAGE> 31
(iv) Dissolution of the Company. Notwithstanding
anything to the contrary herein, in the event that upon dissolution or total or
partial liquidation of the Company, whether voluntary or involuntary, the
Trustee shall receive the moneys, securities, rights or property to which the
holders of the Shares deposited hereunder are entitled, then the Trustee shall
distribute the same among the Shareholders in accordance with the terms of the
Company's Articles of Incorporation in proportion to the Shareholders'
respective interests as shown by the books of the Trustee, less the deductions
provided for in subsection 5(e)(vi) below, or the Trustee may in his discretion
deposit such moneys, securities, rights or property with any bank or trust
company with authority and instructions to distribute the same as above
provided, and upon such deposit all further obligations or liabilities of the
Trustee in respect of such moneys, securities, rights or property so deposited
shall cease.
(v) Other Distributions. If the Trustee shall
receive or collect any moneys or property through a distribution by the Company
to its shareholders not covered by subsections 5(e)(ii), (iii) or (iv) hereof,
then the Trustee shall distribute the same to the Shareholders in proportion to
their respective interests as shown on the books of the Trustee, less the
deductions provided for in subsection 5(e)(vi) below.
(vi) Withholdings. There shall be deducted and
withheld from every distribution under this Agreement any taxes, assessments,
and other amounts that may be required by law to be deducted or withheld.
(f) Use of Discretion; Limited Liability.
(i) In voting, or otherwise acting hereunder with
respect to the Shares deposited hereunder, the Trustee shall be entitled to
exercise his own absolute discretion and judgment subject to the conditions
imposed by subsection 5(a) hereof; and neither the Trustee nor any of his agents
shall incur any responsibility or liability by reason of any error of law or
anything done or suffered or omitted, except for individual willful misconduct
or gross negligence. Neither the Trustee nor any of his agents shall be required
to give any bond or other security for the discharge of duties.
(ii) Under no circumstances will the Trustee be
obligated to notify, confer with or seek the advice, consent, counsel, approval,
confirmation or ratification of the Shareholders with regard to any matter which
does or may be submitted to the shareholders of the Company for their approval.
The Trustee will not be liable to the Shareholders for any vote cast by the
Trustee in accordance with the terms of this Agreement.
(g) Expenses of Trustee. The Trustee may employ counsel, and
provide for such other assistance as may be convenient, in the performance of
his functions. The Company shall indemnify the Trustee against all expenses,
claims and liabilities incurred by him in connection with or arising out of this
Agreement for the discharge of his duties hereunder to the full extent permitted
by law. The Company shall, at the request of the Trustee, advance funds to pay
expenses incurred for legal or other assistance provided to the Trustee or for
legal fees or other expenses incurred by the Trustee in the defense of any
action, claim or proceeding arising as aforesaid.
5
<PAGE> 32
(h) Construction of Agreement. The Trustee is authorized and
empowered to construe this Agreement, and his reasonable construction made in
good faith shall be conclusive and binding upon the Shareholders and upon all
parties hereto. The Trustee may consult with legal counsel, which may but need
not be counsel to the Company, and any action under this Agreement taken or
permitted in good faith by him in accordance with the opinion of such counsel
shall be conclusive upon the Shareholders and upon all parties hereto, and the
Trustee shall be fully protected and be subject to no liability with respect to
such action.
6. Rights of Shareholders. The Shareholders shall have rights in
the Certificates and in the Shares deposited in trust by such Shareholders
subject to the terms and provisions of this Agreement. Any heir, assignee or
transferee or person entitled to an interest in the rights of the Shareholders
to the Voting Trust Certificates or the Shares deposited by such Shareholders in
trust hereunder shall be subject to and bound by the provisions of this
Agreement.
7. Representations of Shareholders. Each Shareholder hereby
represents and warrants to the Trustee and the Company that:
(a) such Shareholder is acquiring the Certificate(s) for
such Shareholder's own account for investment purposes only and not with a view
to, or for sale in connection with, a distribution of the Certificate(s) within
the meaning of the Act;
(b) such Shareholder has had access to all information
regarding the Company and its present and prospective business, assets,
liabilities and financial condition that such Shareholder reasonably considers
important in making the decision to acquire the Certificate(s), and the
Shareholder has had ample opportunity to ask questions of the Company's
representatives concerning such matters and this acquisition;
(c) By reason of such Shareholder's business or financial
experience or the business or financial experience of such Shareholder's
professional advisors who are unaffiliated with and who are not compensated by
the Company or the Trustee, such Shareholder is capable of evaluating the merits
and risks of this investment and has the ability to protect such Shareholder's
own interests in this transaction; and
(d) such Shareholder understands and acknowledges that, in
reliance upon the representations and warranties made by such Shareholder
herein, the Certificate(s) are not being registered with the Securities and
Exchange Commission ("SEC") under the Act or being qualified under the
California Corporate Securities Law of 1968, as amended (the "Law"), but instead
are being issued under an exemption or exemptions from the registration and
qualification requirements of the Act and the Law which impose certain
restrictions on such Shareholder's ability to transfer the Certificate(s).
8. Successor Trustee. The Company and the Shareholders holding
Certificates representing a majority in interest in the Shares may at any time
jointly remove the Trustee from office and appoint a successor Trustee. The
Trustee may at any time resign by delivering to the Company his resignation in
writing, to be effective in accordance with its terms. Except as otherwise
provided herein, if the Trustee shall resign, or in the event of the death or
incapacity to
6
<PAGE> 33
act of a Trustee, then a successor will be appointed jointly by the Company and
the Shareholders holding Certificates representing a majority in interest in the
Shares. If a successor Trustee has not been appointed within 30 days of the
resignation, removal or death of the current Trustee, then the successor Trustee
shall be William Grant.
9. Reorganization of Company. In case the Company is merged into or
consolidated with another corporation, then in connection with such transfer the
term "Company" for all purposes of this Agreement shall be taken to include such
successor corporation, and the Trustee shall receive and hold under this
Agreement the stock of such successor corporation received on account of the
ownership, as Trustee hereunder, of the stock held hereunder prior to such
merger or consolidation. Certificates issued and outstanding under this
Agreement at the time of such merger or consolidation may remain outstanding, or
the Trustee may, in his discretion, substitute for such Certificates new
Certificates in appropriate form, and the term "Shares" as used herein shall be
taken to include any stock which may be received by the Trustee in lieu of all
or any part of the Shares. Nothing herein shall limit the applicability of
Section 10(b)(ii) regarding the termination of this Agreement in the event of a
merger or consolidation meeting certain requirements.
10. Term and Termination.
(a) Irrevocable During Term. The voting trust created by
this Agreement is hereby expressly declared to be irrevocable during its term,
and may not be terminated except as provided in subsection 10(b) below.
(b) Term. The term of this Agreement shall commence on the
date of this Agreement and shall terminate upon the first to occur of any of the
following events:
(i) the second anniversary of the date hereof;
(ii) the effective date of a merger or consolidation
of the Company with or into any other corporation or a sale of all or
substantially all of the Company's assets, where the Company's shareholders
prior to such transaction do not retain stock representing a majority of the
voting power of the surviving corporation of such transaction;
(iii) the date on which a registration statement
relating to the Company's initial public offering of its Common Stock is
declared effective by the Securities and Exchange Commission; or
(iv) the voluntary or involuntary dissolution of the
Company.
(c) Post-Termination Procedures. As soon as practicable
after the termination of this Agreement, the Trustee shall deliver to each
Shareholder share certificates or securities representing the number of Shares
or other securities in respect of which Certificates registered in the name of
such Shareholder were issued, upon the surrender of such Certificate properly
endorsed and upon payment of a sum sufficient to cover any tax or governmental
charge applicable to the transfer or delivery of such Certificates. If any such
Shareholder cannot be located or fails or refuses to surrender Certificates in
exchange for shares or other securities as
7
<PAGE> 34
provided for above, the Trustee may, in his discretion, deliver said Shares or
other securities to the Company or to any bank or trust company in California
for the benefit of the person or persons entitled thereto. Upon any such
delivery, the Trustee will be fully acquitted and discharged from all
responsibility or liability with respect to said shares or other securities.
11. Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed to have been duly given (i) on
the date of service if delivered personally or (ii) on the date of deposit for
delivery with a commercial express courier service, in each case addressed as
follows: if to registered holders of Certificates, at the address for each such
holder set forth on his Certificate; if to the Trustee at the address specified
below its signature on this Agreement; if to the Company, at 475 Eccles Avenue,
South San Francisco, CA 94080; or such different address as may be specified to
the other parties by notice given as provided herein.
12. Filing, Inspection Rights. A duplicate of this Agreement and of
each amendment hereto shall be kept on file with the Secretary of the Company
and shall be open to inspection by any holder of a Certificate or any
shareholder of the Company on the same terms as the record of shareholders of
the Company is open to inspection.
13. Amendment. Except as otherwise provided, any term of this Voting
Trust may be amended and the observance of any term of this Voting Trust may be
waived (either generally or in a particular instance and either retroactively or
prospectively), only with the consent of the Company, the Trustee and
Shareholders holding Certificates representing a majority in interest in the
Shares.
14. Successors and Assigns. Except as expressly set forth to the
contrary in this Agreement, this Agreement shall be binding upon and inure to
the benefit of the successors, assigns, heirs, administrators, executors and
legal representatives of the parties hereto; provided, however, that the
transfer of any interest in this Agreement shall be subject to the transferee's
consent to be bound by all provisions of this Agreement.
15. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original but all of which taken
together shall constitute one instrument.
16. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, excluding that body of
law relating to conflict of laws.
17. Severability. If at any time any provision of this Agreement
shall be held by any court of competent jurisdiction to be illegal, void, or
unenforceable in any respect, then such provision shall be enforced only to the
extent to which it shall be valid and enforceable, and any such invalidity or
unenforceability shall not affect any other provisions of this agreement. If any
unenforceable provision of this Agreement may be modified so as to be
enforceable under applicable law, then such provision shall be deemed to have
been modified so as to be enforceable to the fullest extent permitted by law.
8
<PAGE> 35
18. Captions. The captions to Sections of this Agreement have been
inserted for identification and reference purposes and shall not by themselves
determine the construction or interpretation of this Agreement.
19. Entire Agreement. This Agreement represents the entire agreement
of the parties with respect to the subject matter hereof, and supersedes any
prior agreement or understandings, whether written or oral, regarding such
subject matter.
[THE REMAINDER OF THIS PAGE HAS INTENTIONALLY BEEN LEFT BLANK.]
9
<PAGE> 36
IN WITNESS WHEREOF, the Company, the Trustee and the Shareholders have
executed this Voting Trust Agreement as of the date first written above.
TRUSTEE: THE COMPANY:
/s/ Francis R. Tunney, Jr. By: /s/ John Fruth
- ------------------------------- -------------------------------
Francis R. Tunney, Jr.
c/o Allergan, Inc. Name: John Fruth
2525 DuPont Drive -----------------------------
Irvine, CA 92612 Title: President
----------------------------
Address: 475 Eccles Avenue
South San Francisco, California 94080
SHAREHOLDERS: U.S.A.
The undersigned hereby agrees to serve as
/s/ Geoffrey H. Galley the successor Trustee, as contemplated by
- ------------------------------- Section 8, if necessary
Geoffrey H. Galley
Address: Red Lodge, The Close, /s/ William Grant
Totteridge, London N20 8PJ ----------------------------------
England William Grant
/s/ Anthony D. Galley Address: 200 E. 66th St. #2007
- ------------------------------- New York, NY 10021
Anthony D. Galley
Address: Beacon Wey, The Hangers
Bishops Waltham, Hants S032 1FZ
England
/s/ Barrie Bevis
- -------------------------------
Barrie Bevis
Address: 53, Wilderness Heights,
West End, Southampton S03 3PS
England
/s/ Albert H. Morland
- -------------------------------
Albert H. Morland
Address: 7 Bitterne Place,
Newport, Isle of Wight
/s/ Ivor Atkinson
- -------------------------------
Ivor Atkinson
Address: 90 Queens Drive,
Surbiton, Surrey, KT5 8PP
England
[VOTING TRUST AGREEMENT]
10
<PAGE> 37
EXHIBIT A TO VOTING TRUST AGREEMENT
VOTING TRUST CERTIFICATE
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES
ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE
THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF
THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND
ANY APPLICABLE STATE SECURITIES LAWS.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED UNLESS SUCH TRANSFER COMPLIES WITH THE TERMS AND
CONDITIONS SET FORTH IN A SHAREHOLDERS' AGREEMENT, DATED
OCTOBER 30, 1992, AS AMENDED FEBRUARY __, 1997, A COPY OF
WHICH IS ON FILE WITH THE SECRETARY OF O.S.I. CORPORATION (THE
"COMPANY") AND WHICH WILL BE FURNISHED BY THE COMPANY TO THE
HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE. NO
TRANSFER OF SUCH SECURITIES WILL BE ALLOWED UNLESS ACCOMPANIED
BY EVIDENCE OF COMPLIANCE WITH THE TERMS OF SUCH AGREEMENT."
THE SHARES REPRESENTED BY THIS VOTING TRUST CERTIFICATE ARE
SUBJECT TO THE TERMS AND CONDITIONS OF A VOTING TRUST
AGREEMENT DATED FEBRUARY __, 1997, A COPY OF WHICH IS ON FILE
AT THE PRINCIPAL OFFICE OF THE COMPANY, AND THESE SHARES MAY
NOT BE SOLD, PLEDGED, GIFTED, HYPOTHECATED OR OTHERWISE
TRANSFERRED EXCEPT IN COMPLIANCE WITH THE TERMS AND CONDITIONS
OF SUCH VOTING TRUST AGREEMENT.
Certificate No. __________
This certifies that the undersigned Trustee has received from
__________________, of [address], __________ share certificates representing
___________ shares of the common stock of O.S.I. Corporation, a California
corporation (the "Company"), and that such shares are held and are to be held by
the Trustee subject to the terms and conditions of a Voting Trust Agreement
dated February __, 1997 by and among various shareholders of the Company, the
Company and
<PAGE> 38
the undersigned Trustee (the "Voting Trust Agreement"), a copy of which is on
file with the Secretary of the Company. During the term of the Voting Trust
Agreement, the Trustee, or his successor, shall possess and be entitled to the
exclusive right to vote such shares upon the terms and conditions stated in the
Voting Trust Agreement. The terms and conditions of the Voting Trust Agreement
are incorporated herein by reference.
During the term of the Voting Trust Agreement, the holder of this
certificate shall be entitled to all dividends and distributions and all other
benefits attributable to the share certificates transferred to the Trustee,
subject to the terms and conditions of the Voting Trust Agreement.
Subject to the terms and conditions of the Voting Trust Agreement, this
Voting Trust Certificate is transferable on the books of the Trustee only by the
registered holder hereof upon the surrender hereof, properly endorsed by the
registered holder, to the Trustee. The holder of this Voting Trust Certificate,
by the acceptance hereof, assents to and agrees to be bound by all the terms and
conditions of the Voting Trust Agreement.
Upon termination of the Voting Trust Agreement, and subject to its terms
and conditions, the Trustee will deliver to the holder of this Voting Trust
Certificate share certificates representing the number of shares designated
above, on surrender to the Trustee of this Voting Trust Certificate, properly
endorsed by the holder, together with payment of a sum sufficient to cover any
expenses relating to transfer and delivery of said share certificates.
Dated:
-------------------------------
TRUSTEE
-----------------------------------
Francis R. Tunney, Jr.
2
<PAGE> 39
EXHIBIT E
PATENT LICENSE AGREEMENT
Filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-1
filed May 19, 1997 (Registration No. 333-27421).
<PAGE> 40
EXHIBIT F-1
OCULAR SCIENCES LTD AND ASPECT VISION CARE LTD. AGREE TO SETTLE
LEGAL DISPUTES
OCULAR SCIENCES LTD AND ASPECT VISION CARE LTD., HAVE AGREED
TO ENTER INTO A GLOBAL SETTLEMENT TERMINATING ALL DISPUTES
BETWEEN THEM.
BOTH OSL AND ASPECT CONTINUE TO HOLD LICENSES TO MAKE, USE
AND SELL CONTACT LENSES WORLDWIDE UNDER PATENTS HELD BY GH
GALLEY AND OTHER INDIVIDUALS COLLECTIVELY KNOWN AS THE
PATENT OWNERS.
THE PARTIES HAVE AGREED TO CONCENTRATE ON THE FURTHER GROWTH
AND DEVELOPMENT OF THEIR RESPECTIVE BUSINESSES IN THE
WORLDWIDE CONTACT LENS MARKET, AND TO MAKE NO FURTHER
COMMENT IN RELATION TO THEIR PREVIOUS DISPUTE.
<PAGE> 41
EXHIBIT F-2
ASPECT VISION CARE WINS IN HIGH COURT
JUDGMENT WAS GIVEN BY JUSTICE LADDIE ON 11TH NOVEMBER IN
ASPECT VISION CARE'S LONG RUNNING SUIT WITH OCULAR SCIENCES
LTD AND OSI CORPORATION.
AFTER 30 MONTHS OF LITIGATION AND EIGHT WEEKS OF HEARINGS IN
THE HIGH COURT THE JUDGE RULED THAT OSL BREACHED ITS SUPPLY
CONTRACT WITH AVCL.
THE TWO COMPANIES HAVE NOW AGREED TO SETTLE THE MATTER UPON
PAYMENT BY OCULAR SCIENCES OF CERTAIN UNDISCLOSED AMOUNTS TO
AVCL AND OTHERS.
BOTH AVCL AND OSI CONTINUE TO HOLD LICENSES TO MAKE USE AND
SELL CONTACT LENSES WORLD-WIDE UNDER PATENTS HELD BY G H
GALLEY AND OTHER INDIVIDUALS COLLECTIVELY KNOWN AS "THE
PATENT OWNERS" WHICH WERE FOUND BY THE COURT TO BE VALID.
SINCE OSL CEASED TO SUPPLY ASPECT WITH PRODUCT IN MAY 1994,
ASPECT HAS DEVELOPED ITS OWN MANUFACTURING PLANT AND NOW
MANUFACTURES LENSES USING ITS OWN STATE OF THE ART
MANUFACTURING TECHNOLOGY WHICH HAS BEEN SEPARATELY
DEVELOPED.
BOTH PARTIES NOW INTEND TO TERMINATE ALL DISPUTES BETWEEN
THEM AND CONCENTRATE ON THE FURTHER GROWTH AND DEVELOPMENT
OF THEIR RESPECTIVE BUSINESSES IN THE WORLD-WIDE CONTACT
LENS MARKET.
<PAGE> 1
EXHIBIT 10.15
EXECUTION COPY
$27,000,000
CREDIT AGREEMENT
Dated as of October 30, 1996
Between
O.S.I. CORPORATION,
a California corporation,
AS BORROWER,
and
COMERICA BANK-CALIFORNIA,
AS LENDER
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS.................................. 1
SECTION 1.1. Certain Defined Terms....................................... 1
SECTION 1.2. Accounting Terms............................................ 18
SECTION 1.3. Other Definitional Provisions............................... 19
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES................................. 20
SECTION 2.1. Advances.................................................... 20
(a) Facility A Advances......................................... 20
(b) Facility B Advance.......................................... 20
SECTION 2.2. Mechanics of Advances....................................... 20
(a) Borrowings.................................................. 20
(b) Notice of Borrowing......................................... 20
(c) Telephonic Notice........................................... 21
(d) Funding of Advances......................................... 21
(e) Notice of Borrowing Irrevocable............................. 21
SECTION 2.3. Evidence of Debt............................................ 21
(a) Promise to Repay............................................ 21
(b) Loan Account................................................ 21
SECTION 2.4. Fees........................................................ 21
(a) Closing Fee................................................. 21
(b) Commitment Fees............................................. 22
(c) Additional Fees............................................. 22
SECTION 2.5. Repayment................................................... 22
(a) Facility A.................................................. 22
(b) Facility B.................................................. 22
(c) Maturity.................................................... 22
(d) Nonscheduled Mandatory Facility Prepayments................. 22
(e) Nonscheduled Voluntary Facility Prepayments................. 23
(f) Application of Nonscheduled Facility B
Prepayments................................................. 24
(g) Optional Reduction or Termination of Facility A............. 24
(h) Excess Exposure............................................. 24
(i) Change of Control........................................... 24
(j) Prepayment Fee.............................................. 25
SECTION 2.6. Interest.................................................... 25
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
(a) Base Rate Advances.......................................... 25
(b) Eurodollar Rate Advances.................................... 25
(c) Default Interest............................................ 25
SECTION 2.7. Interest Rate Determination and Protection.................. 26
(a) Determination of Eurodollar Rate............................ 26
(b) Notice of Eurodollar Rate................................... 26
(c) Suspension of Eurodollar Rate Advances...................... 26
(d) Failure to Specify Duration................................. 26
(e) Minimum Amounts............................................. 26
(f) Lender's Determination Conclusive........................... 26
SECTION 2.8. Voluntary Conversion of Advances............................ 27
(a) Notice of Conversion/Continuation........................... 27
(b) Telephonic Notice........................................... 27
(c) Requirements................................................ 27
(d) Base Rate Advances.......................................... 27
SECTION 2.9. Funding Losses.............................................. 27
SECTION 2.10. Increased Costs............................................. 28
(a) Increase in Cost............................................ 28
(b) Increase in Capital Requirements............................ 29
SECTION 2.11. Illegality.................................................. 29
SECTION 2.12. Payments and Computations................................... 30
(a) Payments.................................................... 30
(b) Computations................................................ 30
(c) Payment on Business Day..................................... 30
SECTION 2.13. Taxes....................................................... 30
(a) Net Payments................................................ 30
(b) Payment of Other Taxes...................................... 30
(c) Indemnification............................................. 31
(d) Evidence of Payments........................................ 31
SECTION 2.14. Issuance of Letters of Credit............................... 31
SECTION 2.15. Payment of Letters of Credit; Reimbursement................. 32
SECTION 2.16. Letter of Credit Fees....................................... 33
ARTICLE III
CONDITIONS OF LENDING............................................. 33
SECTION 3.1. Conditions Precedent on the Closing Date.................... 33
(a) Loan Documents.............................................. 34
(b) Corporate Documents......................................... 34
(c) Governmental Consents....................................... 35
(d) No Injunction............................................... 35
(e) Other Deliveries............................................ 35
(f) Legal Opinions.............................................. 36
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
(g) Payment of Existing Debt.................................... 36
(h) Payment of Fees and Expenses................................ 36
(i) No Material Adverse Change.................................. 36
SECTION 3.2. Conditions Precedent to Each Extension of Credit............ 36
(a) Notice...................................................... 36
(b) Certification............................................... 36
ARTICLE IV
REPRESENTATIONS AND WARRANTIES..................................... 37
SECTION 4.1. Representations and Warranties of the Borrower.............. 37
(a) Organization................................................ 37
(b) Power and Authority......................................... 37
(c) Due Authorization........................................... 37
(d) Subsidiaries and Ownership of Capital Stock................. 38
(e) Governmental Approval....................................... 38
(f) Binding and Enforceable..................................... 38
(g) Financial Information....................................... 38
(h) Material Adverse Change..................................... 39
(i) Compliance.................................................. 39
(j) Litigation.................................................. 39
(k) No Conflict................................................. 39
(l) No Default.................................................. 39
(m) Payment of Taxes............................................ 39
(n) Margin Regulations.......................................... 40
(o) Conduct of Business......................................... 40
(p) Environmental Matters....................................... 40
(q) ERISA Compliance............................................ 40
(r) Title to Assets............................................. 41
(s) Perfection.................................................. 41
(t) Undisclosed Liabilities..................................... 42
ARTICLE V
COVENANTS OF BORROWER.............................................. 42
SECTION 5.1. Financial Covenants......................................... 42
(a) Maximum Leverage Ratio...................................... 42
(b) Minimum Fixed Charge Coverage Ratio......................... 42
(c) Minimum Profitability....................................... 43
(d) Minimum Consolidated Tangible Effective Net Worth........... 43
SECTION 5.2. Affirmative Covenants....................................... 43
(a) Compliance with Laws........................................ 43
(b) Inspection of Property and Books and Records................ 43
(c) Reporting Requirements...................................... 44
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
(d) Preservation of Corporate Existence, Etc.................... 45
(e) New Subsidiaries............................................ 45
(f) Maintenance of Property..................................... 46
(g) Insurance................................................... 46
(h) Payment of Taxes and Lienable Items......................... 47
(i) Use of Proceeds............................................. 47
(j) Permitted Cash Investments.................................. 47
(k) Further Assurances.......................................... 47
SECTION 5.3. Negative Covenants.......................................... 48
(a) Liens....................................................... 48
(b) Disposition of Assets....................................... 51
(c) Investments................................................. 52
(d) Limitation on Debt and Accommodation Obligations............ 53
(e) Transactions with Affiliates................................ 55
(f) Restricted Junior Payments.................................. 55
(g) Mergers, Etc................................................ 56
(h) Conduct of Business......................................... 57
(i) Compliance with ERISA....................................... 57
(j) Payment Restrictions Affecting Subsidiaries................. 57
ARTICLE VI
EVENTS OF DEFAULT................................................. 57
SECTION 6.1. Events of Default........................................... 57
(a) Non-Payment of Principal.................................... 58
(b) Non-Payment of Interest..................................... 58
(c) Non-Payment of Other Obligations............................ 58
(d) Representations and Warranties.............................. 58
(e) Financial and Negative Covenants............................ 58
(f) Reporting and Collateral Covenants.......................... 58
(g) Other Agreements............................................ 58
(h) Default as to Other Debt.................................... 58
(i) Bankruptcy.................................................. 59
(j) Judgments................................................... 59
(k) Material Adverse Change..................................... 59
(l) Loan Documents.............................................. 59
(m) Collateral Documents........................................ 60
(n) ERISA....................................................... 60
SECTION 6.2. Rights Not Exclusive........................................ 61
ARTICLE VII
MISCELLANEOUS..................................................... 61
SECTION 7.1. Amendments.................................................. 61
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C> <C>
SECTION 7.2. Notices..................................................... 61
SECTION 7.3. No Waiver; Remedies......................................... 61
SECTION 7.4. Costs and Expenses.......................................... 61
SECTION 7.5. Right of Set-off............................................ 62
SECTION 7.6. General Indemnity........................................... 62
SECTION 7.7. Assignments and Participations.............................. 64
SECTION 7.8. Binding Effect.............................................. 64
SECTION 7.9. Governing Law............................................... 64
SECTION 7.10. Waiver of Jury Trial........................................ 65
SECTION 7.11. Limitation of Liability..................................... 65
SECTION 7.12. Confidentiality............................................. 65
SECTION 7.13. Entire Agreement............................................ 66
SECTION 7.14. Survival.................................................... 66
SECTION 7.15. Execution in Counterparts................................... 66
</TABLE>
v
<PAGE> 7
EXHIBITS
Exhibit A-1 Form of Notice of Borrowing
Exhibit A-2 Form of Notice of Continuance/Conversion
Exhibit B-1 Form of Subsidiary Guaranty
Exhibit B-2 Form of Borrower Pledge and Security Agreement
Exhibit B-3 Form of Subsidiary Pledge and Security Agreement
Exhibit B-4 Form of Intellectual Property Security Agreement
Exhibit B-5 Form of Notice of Security Interest in Deposit Accounts
Exhibit B-6 Form of Notice of Security Interest in Financial
Intermediary Accounts
Exhibit B-7 Form of Subordination Agreement
Exhibit B-8 Form of Intercreditor Agreement
Exhibit C-1 Form of Opinion of Counsel for the Borrower and the
Guarantors
Exhibit C-2 Form of Opinion of Puerto Rican Counsel for O.S.I.
Puerto Rico
Exhibit C-3 Form of Opinion of Foreign Counsel for the Guarantors
Exhibit D-1 Form of Compliance Certificate
Exhibit D-2 Form of Borrowing Base Certificate
SCHEDULES
Borrower Schedules:
Schedule 4.1(d) List of Subsidiaries
Schedule 4.1(e) List of Governmental Approvals
Schedule 4.1(j) List of Litigation
Schedule 4.1(o) List of Business Lines
Schedule 4.1(p) List of Environmental Matters
Schedule 4.1(q) List of ERISA Matters
Schedule 4.1(t) List of Undisclosed Liabilities
Schedule 5.3(c) List of Investments
Schedule 5.3(d) List of Liens and Debts
vi
<PAGE> 8
CREDIT AGREEMENT
This CREDIT AGREEMENT, dated as of October 30, 1996, is made
by and between O.S.I. CORPORATION, a California corporation, as the Borrower,
and COMERICA BANK-CALIFORNIA, a California chartered bank, as the Lender.
RECITALS
WHEREAS, the Borrower has requested that the Lender loan funds to the
Borrower and the Lender has agreed to lend money to the Borrower subject to the
terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the promises and the agreements,
provisions and comments herein contained, the Borrower and the Lender agree as
follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1. CERTAIN DEFINED TERMS. As used in this Agreement:
ACCOMMODATION OBLIGATION means, as applied to any Person, any
direct or indirect guaranty, endorsement or other liability of that Person with
respect to any Debt, lease, dividend, letter of credit or other obligation (the
"primary obligation") of another Person (the "primary obligor"), including any
obligation of that Person, whether or not contingent, (i) to purchase,
repurchase or otherwise acquire any such primary obligation or any property
constituting direct or indirect security therefor, or (ii) to advance or provide
funds (A) for the payment or discharge of any such primary obligation, or (B) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency or any balance sheet item, level of income
or financial condition of the primary obligor, or (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation, or (iv) otherwise to assure or hold harmless the holder
of any such primary obligation against loss in respect thereof. The amount of
any Accommodation Obligation shall be deemed to be an amount equal to the
maximum stated or determinable amount of the primary obligation in respect of
which such Accommodation Obligation is made or, if not stated or if
indeterminable, the maximum reasonably estimated potential liability in respect
thereof. Endorsements of checks for collection or deposit in the ordinary course
of business are not Accommodation Obligations.
ACCOUNT means any right to receive payment arising from the
sale or lease of goods or the rendering of services, as further defined in the
UCC.
ADVANCE means a Facility A Advance or the Facility B Advance.
1
<PAGE> 9
AFFILIATE of a specified Person means any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with the Person specified. For this
purpose, "control," "controlled by" and "under common control with" with respect
to any Person mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.
AGREEMENT means this Credit Agreement.
ASSET SALE means the sale, sale-leaseback, license, transfer
or other disposition of any asset, business or property of the Borrower or any
of its Subsidiaries, other than (i) sales and other dispositions of inventory in
the ordinary course of business, (ii) sales of used, worn-out or surplus
equipment in which the proceeds are reinvested in other fixed assets within one
hundred eighty (180) days from the date of sale, (iii) sales and leasebacks of
equipment acquired by the Borrower or any of its Subsidiaries not more than one
hundred eighty (180) days prior to such sale or leaseback, (iv) non-exclusive
licenses, and (v) licenses granted outside of the United States in connection
with the settlement or resolution of the Galley Litigation.
AUTHORIZED OFFICER means the chief executive officer, chief
financial officer or controller of the Borrower.
BANKRUPTCY, INSOLVENCY OR LIQUIDATION PROCEEDING means (i) any
case commenced by or against the Borrower under any chapter of the United States
Bankruptcy Code, any other proceeding for the reorganization, recapitalization
or adjustment or marshalling of the assets or liabilities of the Borrower, any
receivership or assignment for the benefit of creditors relating to the Borrower
or any similar case or proceeding relative to the Borrower or its creditors, as
such, in each case whether or not voluntary, (ii) any liquidation, dissolution,
marshalling of assets or liabilities or other winding up of or relating to the
Borrower, in each case whether or not voluntary and whether or not involving
bankruptcy or insolvency, and (iii) any other proceeding of any type or nature
in which claims against the Borrower generally are determined, proven or paid.
BASE RATE means, for any day, a fluctuating interest rate per
annum equal to the higher of (i) the then effective rate of interest announced
publicly by the Lender at its head office from time to time as its prime
commercial lending rate (it being understood that such rate is merely a
reference rate and is not the best, lowest or most favorable rate offered by the
Lender), or (ii) the then effective Federal Funds Rate PLUS one percent (1.00%)
per annum.
BASE RATE ADVANCE means an Advance which bears interest by
reference to the Base Rate as provided in Section 2.6(a).
BORROWER means O.S.I. Corporation, a California corporation.
2
<PAGE> 10
BORROWER PLEDGE AND SECURITY AGREEMENT means the pledge and
security agreement in substantially the form of Exhibit B-2, executed by the
Borrower and delivered pursuant to Section 3.1(a)(iii), and each other security
agreement at any time delivered by the Borrower to create a Lien that secures
any of the Obligations.
BORROWING means the Base Rate Advances or Eurodollar Rate
Advances made by the Lender on the date requested by the Borrower.
BORROWING BASE means, as of any date of determination, the sum
of (i) eighty percent (80%) of Consolidated Net Accounts Receivable, PLUS (ii)
fifty percent (50%) of Consolidated Net Inventory, as determined by the
Borrowing Base Certificate most recently submitted by the Borrower to the
Lender.
BORROWING BASE CERTIFICATE means a certificate in
substantially the form of Exhibit D-2.
BREAKAGE COSTS is defined in Section 2.9.
BUSINESS DAY means any day except a Saturday or Sunday or a
day when commercial banks are authorized or required by law to be closed in San
Jose, California and, where used in reference to any Eurodollar Rate Advance,
additionally means such a day on which commercial banks are authorized or
required by law to be closed in Detroit, Michigan; New York, New York or London,
England.
CAPITAL LEASE means, with respect to any Person, any lease of
any property by that Person as lessee which, in accordance with GAAP, is
required to be accounted for as a capital lease on the balance sheet of that
Person.
CASH FLOW means, for any period, an amount determined as (i)
Consolidated Net Income for such period, PLUS, (ii) to the extent deducted in
determining Consolidated Net Income and without duplication, (A) the sum of all
charges for Consolidated Interest Expense, depreciation and amortization for
such period, (B) all non-cash charges required by GAAP relating to dispositions
of property, plant and equipment, and (C) proceeds from Permitted Outside Funded
Debt for such period, MINUS (iii) without duplication, (x) preferred stock
dividends paid or payable by the Borrower or any of its consolidated
Subsidiaries during such period, and (y) Consolidated Capital Expenditures for
such period, all computed and calculated in accordance with GAAP.
CASH PROCEEDS means all cash and cash equivalents received by
the Borrower or any of its Subsidiaries (i) as the cash consideration in any
Asset Sale (or from any payment or distribution on, or sale or liquidation of,
any promissory note or other property received as noncash consideration in any
Asset Sale) or (ii) in any Equity Issuance or in any issuance of Subordinated
Debt or (iii) in any extraordinary event as described in Section 2.5(d)(iii), in
each case, after deducting therefrom (A) reasonable brokerage commissions,
underwriting fees and
3
<PAGE> 11
discounts, legal fees, finder's fees and other similar fees and commissions and
other reasonable and customary expenses incurred in connection with such
transaction, (B) the amount of taxes payable in connection with or as a result
of such transaction, and (C) with respect to Asset Sales, the amount of any Debt
secured by a Lien on the sold asset that, by the terms of such transaction, is
required to be repaid upon disposition, in each case to the extent, but only to
the extent, that the amounts so deducted are properly attributable to such
transaction or to the asset that is sold.
CHANGE OF CONTROL means a transaction or series of related
transactions by which both (i) either (A) any Person or group (within the
meaning of Section 13(d)(3) of the 1934 Act) acquires beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act), directly or indirectly, of
securities of the Borrower (or other securities convertible into such
securities) representing fifty percent (50%) or more of the combined voting
power of all securities of the Borrower entitled to vote in the election of
directors, or (B) from and after the completion of an Initial Public Offering, a
majority of the Borrower's directors are Persons who were not in office on the
Closing Date and were not initially nominated by directors who were in office on
the Closing Date or by successor directors elected or appointed upon the initial
nomination of such directors or successor directors and (ii) either (x) an Event
of Default or Potential Default shall have occurred and be continuing at the
time of the events specified in clause (i) hereof or would occur as a result
thereof, or (y) any three of the following four individuals are no longer
employed by the Borrower in the following respective capacities: John Fruth as
President and Chief Executive Officer, Dan Kunst as Vice President of Sales and
Marketing, Greg Lichtwardt as Vice President of Finance and Chief Financial
Officer, or Bradley Jones as Vice President of U.S. Sales; PROVIDED that the
foregoing notwithstanding, an Initial Public Offering shall not constitute a
Change of Control.
CLAIMS is defined in Section 7.6.
CLOSING DATE means the date on which all of the conditions
precedent set forth in Section 3.1 are satisfied or waived in writing by the
Lender.
CODE means the Internal Revenue Code of 1986.
COLLATERAL means all property which at any time is subject or
is to become subject to any Lien granted or created under any of the Collateral
Documents.
COLLATERAL DOCUMENTS means the Borrower Pledge and Security
Agreement, the Subsidiary Pledge and Security Agreement, the Intellectual
Property Security Agreement, and all other security agreements, collateral
assignments, mortgages, deeds of trust and other instruments, documents and
agreements at any time delivered to the Lender to create or evidence Liens to
secure the Obligations.
COMPLIANCE CERTIFICATE means a certificate in substantially
the form of Exhibit D-1.
4
<PAGE> 12
CONSOLIDATED CAPITAL EXPENDITURES means, for any period, the
aggregate of all expenditures (whether paid in cash or accrued as a liability
(but without duplication) during that period and including that portion of
Capital Leases which is capitalized on the consolidated balance sheet of the
Borrower and its Subsidiaries) made or incurred during such period which, in
accordance with GAAP, are required to be included in or reflected by the
Borrower's or any of its Subsidiaries' fixed asset accounts as reflected in any
of their balance sheets (including expenditures for equipment purchased within
one hundred eighty (180) days of the trade-in or sale of existing equipment
owned by the Borrower or any of its Subsidiaries to the extent the gross amount
of such purchase price exceeds the book value of the equipment being traded in,
or sold, but excluding expenditures made in connection with the replacement or
restoration of assets, to the extent reimbursed or financed from insurance
proceeds or condemnation awards.)
CONSOLIDATED INTEREST EXPENSE means, for any period, total
interest expense (including the interest component of Capital Leases) of the
Borrower and its consolidated Subsidiaries for such period determined in
accordance with GAAP, except that amortization or write-off of original issue
discount, capitalized debt issuance costs and expenses, and non-cash interest
payments or accruals shall in any event be excluded.
CONSOLIDATED NET ACCOUNTS RECEIVABLE means, as of any date of
determination for the Borrower and its consolidated Subsidiaries in accordance
with GAAP, Accounts of the Borrower and its consolidated Subsidiaries (net of
applicable reserves).
CONSOLIDATED NET INCOME means, for any period, the net income
of the Borrower and its consolidated Subsidiaries for such period determined in
accordance with GAAP, PLUS, to the extent deducted in determining such net
income and without duplication, the Litigation Adjustment (net of applicable
taxes) for such period.
CONSOLIDATED NET INVENTORY means, as of any date of
determination for the Borrower and its consolidated Subsidiaries in accordance
with GAAP, Inventory of the Borrower and its consolidated Subsidiaries (net of
applicable reserves).
CONSOLIDATED TANGIBLE EFFECTIVE NET WORTH means, as of any
date of determination for the Borrower and its consolidated Subsidiaries in
accordance with GAAP, the amount determined as (i) the net book value of all
assets (other than Intangible Assets) after all appropriate deductions which are
either required or reflected by the Borrower or any of its consolidated
Subsidiaries in any of their balance sheets, both in accordance with GAAP
(including, without limitation, reserves for doubtful receivables, returns,
obsolescence, depreciation and amortization), MINUS (ii) Consolidated Total
Debt, PLUS (iii) the Litigation Adjustment (net of applicable taxes).
CONSOLIDATED TOTAL DEBT means, as of any date of determination
for the Borrower and its consolidated Subsidiaries, all items of indebtedness,
obligation or liability (other than Subordinated Debt and Debt permitted under
Section 5.3(d)(vii)) that should be classified, and reported on the Borrower's
consolidated balance sheet, as liabilities in accordance with GAAP.
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<PAGE> 13
DEBT means, as applied to any Person, (i) all indebtedness of
such Person for borrowed money (whether by loan or the issuance of debt
securities or otherwise); (ii) all obligations of such Person issued, undertaken
or assumed as the deferred purchase price of property or services or interest
thereon, except accounts and accrued expenses currently payable; (iii) all
reimbursement obligations of such Person with respect to surety bonds, letters
of credit, bankers' acceptances and similar instruments, whether or not
contingent; (iv) all monetary obligations of such Person under any Capital
Lease; (v) all obligations of such Person (contingent or otherwise) to purchase,
retire or redeem any capital stock or other equity interest in such Person or
any Affiliate of such Person; (vi) all monetary obligations of such Person
measured by, or determined on the basis of, the value of any capital stock of
such Person or any Affiliate of such Person; (vii) all Accommodation Obligations
of such Person; and (viii) all liabilities and obligations secured by (or as to
which the holder of the liability or obligation has an existing right,
contingent or otherwise, to be secured by) any Lien, except a Non-Consensual
Lien, upon any property of such Person or any property of any Subsidiary of such
Person.
DISALLOWED POST-PETITION INTEREST/EXPENSE CLAIMS means any
claim for interest on Advances accrued or computed for or as to any period of
time at any time after the commencement of any Bankruptcy, Insolvency or
Liquidation Proceeding at the rate (including any applicable post-default rate)
set forth in this Agreement or other applicable Loan Document or for fees,
expense reimbursements, indemnification or other similar Obligations accrued or
determined for or as to any such period of time in accordance with the
provisions of this Agreement or any such Loan Document, if such claim is not
allowed, allowable or enforceable in such Bankruptcy, Insolvency or Liquidation
Proceeding.
DOLLARS and $ mean United States dollars or such coin or
currency of the United States as at the time of payment shall be legal tender
for the payment of public and private debts in the United States.
ENVIRONMENTAL CLAIMS means any and all administrative,
regulatory or judicial claims, demands, directives, proceedings, orders, decrees
and judgments relating in any way to any Environmental Law or any Environmental
Permit.
ENVIRONMENTAL LAWS means all federal, state and local laws,
statutes, rules, regulations, ordinances and codes, and any binding judicial or
administrative interpretation thereof or requirement thereunder, including any
judicial or administrative order, by any Governmental Authority, relating to the
regulation or protection of human health, safety, the environment and natural
resources.
ENVIRONMENTAL PERMIT means any license, permit, authorization,
registration or approval issued or required under any Environmental Law.
EQUITY ISSUANCE means the issuance or sale of any capital
stock of or other equity, ownership or profit interest (except a dividend on any
such stock or interest declared and payable
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<PAGE> 14
solely in additional shares of such stock or interest), by (i) the Borrower to
any Person or (ii) any Subsidiary of the Borrower to any Person other than to
the Borrower or to a wholly-owned Subsidiary of the Borrower.
ERISA means the Employee Retirement Income Security Act of
1974.
ERISA AFFILIATE means any entity which is (or at any relevant
time was) a member of a "controlled group of corporations," under "common
control" or a member of an "affiliated service group" with the Borrower as
defined in Section 414(b), (c) or (m) of the Code.
ERISA EVENT means (i) any of the events set forth in Section
4043(b) of ERISA with respect to a Pension Plan; (ii) a withdrawal by the
Borrower or any ERISA Affiliate from a Pension Plan subject to Section 4063 of
ERISA during a plan year in which it was a substantial employer (as defined in
Section 4001(a)(2) of ERISA); (iii) a complete or partial withdrawal by the
Borrower or any ERISA Affiliate from a Multiemployer Plan; (iv) the filing of a
notice of intent to terminate, the treatment of a plan amendment as a
termination under Section 4041 or 4041A of ERISA or the commencement of
proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan
subject to Title IV of ERISA; (v) a failure to make required contributions to a
Pension Plan or Multiemployer Plan; (vi) the imposition of any liability under
Title VI of ERISA, other than PBGC premiums due but not delinquent under Section
4007 of ERISA, upon the Borrower or any ERISA Affiliate; (vii) an application
for a funding waiver or an extension of any amortization period pursuant to
Section 412 of the Code with respect to any Pension Plan; (viii) the Borrower or
ERISA Affiliate engages in a nonexempt prohibited transaction or otherwise
becomes liable with respect to a nonexempt prohibited transaction, the
consequences of which, in the aggregate, constitute or could reasonably be
expected to result in a Material Adverse Change; or (ix) a violation of the
applicable requirements of Section 404 or 405 of ERISA or the exclusive benefit
rule under Section 401(a) of the Code by the Borrower or any ERISA Affiliate
with respect to any Pension Plan for which the Borrower or any of its
Subsidiaries may be liable, the consequences of which, in the aggregate,
constitute or could reasonably be expect to result in a Material Adverse Change.
EURODOLLAR RATE means, for any Interest Period for each
Eurodollar Rate Advance,
(i) the per annum interest rate at which deposits in
eurodollars are offered to the Lender by other prime banks in the eurodollar
market in an amount comparable to the relevant Eurodollar Rate Advance and for a
period equal to the relevant Interest Period at approximately 11:00 a.m.
(Pacific time) two (2) Business Day prior to the first day of such Interest
Period, DIVIDED BY,
(ii) an amount equal to one MINUS the stated maximum rate
(expressed as a decimal) of all reserve requirements (including any marginal,
emergency, supplemental, special or other reserves) that is specified on the
first day of such Interest Period by the Board of Governors of the Federal
Reserve System (or any successor agency thereto) for determining the
7
<PAGE> 15
maximum reserve requirement with respect to eurodollar funding (currently
referred to as "eurocurrency liabilities" in Regulation D of such Board)
maintained by a member bank of such System,
all as conclusively determined (absent manifest error) by the Lender, such sum
to be rounded upward, if necessary, to the nearest whole multiple of 1/16 of 1%.
EURODOLLAR RATE ADVANCE means an Advance which bears interest
by reference to the Eurodollar Rate as provided in Section 2.6(b).
EVENT OF DEFAULT is defined in Section 6.1.
EXCLUDED PROCEEDS means up to $1,000,000 in Cash Proceeds
received in each Fiscal Year from Asset Sales.
EXISTING BANK OF AMERICA CREDIT AGREEMENT means the Amended
and Restated Business Loan Agreement dated as of November 9, 1995, as amended,
by and between the Borrower and Bank of America National Trust & Savings
Association.
FACILITY A means the credit available to the Borrower pursuant
to Section 2.1(a) and Section 2.14.
FACILITY A ADVANCE means a loan in Dollars by the Lender to
the Borrower pursuant to Section 2.1(a).
FACILITY A AMOUNT means, on any date of determination,
$17,000,000 LESS all Facility A Reductions that have become effective.
FACILITY A AVAILABILITY means, as of any date of
determination, the lesser of:
(i) the Facility A Amount then in effect, LESS the aggregate
Facility A Advances then outstanding, LESS the Letter of Credit Usage then
outstanding; and
(ii) the Borrowing Base then in effect LESS the aggregate
Facility A Advances then outstanding, LESS the Letter of Credit Usage then
outstanding.
FACILITY A MATURITY DATE means October 31, 1999.
FACILITY AMOUNT means the Facility A Amount and the Facility B
Amount.
FACILITY A REDUCTION means each permanent reduction of the
credit available to the Borrower under Facility A, whether made voluntarily
pursuant to Section 2.5(g) or required to be made pursuant to Section 2.5(i),
Section 6.1 or any other provision of this Agreement or otherwise becoming
effective in accordance with this Agreement.
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<PAGE> 16
FACILITY B means the credit available to the Borrower pursuant
to Section 2.1(b).
FACILITY B ADVANCE means a loan in Dollars by the Lender to
the Borrower pursuant to Section 2.1(b).
FACILITY B AMOUNT means, on any date of determination,
$10,000,000 LESS all Facility B Reductions that have become effective.
FACILITY B REDUCTION means each permanent reduction of the
loan outstanding to the Borrower under Facility B, whether made voluntarily
pursuant to Section 2.5(e) or required to be made pursuant to Section 2.5 (b),
(d) or (i), Section 6.1 or any other provision of this Agreement or otherwise
becoming effective in accordance with this Agreement.
FEDERAL FUNDS RATE means, for any day, a fluctuating interest
rate per annum equal to the weighted average of the rates on overnight federal
funds transactions with members of the Federal Reserve System arranged by
federal funds brokers, as published for such day (or, if such day is not a
Business Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations for such day on such transactions
received by the Lender from three federal funds brokers of recognized standing
selected by it, all as conclusively determined by the Lender, such sum to be
rounded upward, if necessary, to the nearest whole multiple of 1/16th of 1%.
FEDERAL RESERVE BANK means any one of twelve central banks, or
any one of their branches, that are part of the Federal Reserve System and that
constitute the so-called Federal Reserve Banks.
FEE LETTER means the letter from Comerica Bank-California to
the Borrower, relating to fees, dated the Closing Date.
FISCAL QUARTER means a fiscal quarter of the Borrower.
FISCAL QUARTER END DATE means the last day of a Fiscal
Quarter.
FISCAL YEAR means a fiscal year of the Borrower.
FIXED CHARGE COVERAGE RATIO means, as of any Fiscal Quarter
End Date, the ratio of (i) Cash Flow for the four consecutive Fiscal Quarters
ending on such Fiscal Quarter End Date TO (ii) the sum of Consolidated Interest
Expense for the four consecutive Fiscal Quarters ending on such Fiscal Quarter
End Date PLUS the aggregate of all principal payments with respect to all
indebtedness for borrowed money (including Capital Leases and Facility B, but
excluding Facility A and Debt permitted under Section 5.3(d)(vii)) due and
payable or paid during the four consecutive Fiscal Quarters ending on such
Fiscal Quarter End Date.
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<PAGE> 17
FOREIGN SUBSIDIARIES means initially the Persons listed on
Schedule 4.1(d) below the heading "Foreign" and hereafter shall mean such
Persons who are or may become Subsidiaries of the Borrower whose assets and
business are then located primarily outside of the United States. For purposes
of determining after the Closing Date which Subsidiaries of the Borrower shall
be subject to the provision of Section 5.2(e) requiring that such Subsidiary
deliver a joinder to the Guaranty and that sixty-five percent (65%) of the stock
or other equity interests thereof owned by the Borrower be delivered to the
Lender, "Foreign Subsidiaries" shall mean such other Persons as may become
Subsidiaries of the Borrower (i) to whom Section 956(d) of the Code applies and
(ii) who meet the requirements of clause (i), (ii) or (iii) of the definition of
Material Subsidiary, as measured during the most recent Fiscal Quarter. For the
purposes of this Agreement, O.S.I. Puerto Rico shall not be treated as a Foreign
Subsidiary.
GAAP means generally accepted accounting principles set forth
in the opinions and pronouncements of the Accounting Principles Board and the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the accounting
profession), or in such other statements by such entity as may be in general use
by significant segments of the U.S. accounting profession, which are applicable
to the facts and circumstances on the date of determination.
GALLEY LITIGATION means the pending litigations involving
Geoffrey Galley and certain other former shareholders of Ocular Sciences Limited
(some of whom are current shareholders of the Borrower).
GOVERNMENTAL AUTHORITY means any nation, state, sovereign or
government, any political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
GUARANTOR means each Material Subsidiary of the Borrower that
executes, or joins in, the Guaranty.
GUARANTY means the guaranty by the Material Subsidiaries, in
substantially the form of Exhibit B-1, executed by each of the Material
Subsidiaries and delivered pursuant to Section 3.1(a)(ii), and each joinder
therein by any other Subsidiary of the Borrower and all guaranties, instruments
and agreements at any time delivered by any Subsidiary of the Borrower in
respect of or in exchange or substitution for or in replacement of such guaranty
or to evidence its guaranty of payment of any of the Obligations.
HAZARDOUS MATERIALS means (i) flammable explosives,
radioactive materials, friable asbestos, urea formaldehyde foam insulation,
transformers or other equipment that contain dielectric fluid containing
regulated levels of polychlorinated biphenyls and petroleum products, and (ii)
chemicals, materials, substances or wastes which are now or hereafter become
defined as or included in the definition, listing or identification of
"hazardous substances,"
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<PAGE> 18
"hazardous wastes," hazardous materials," "extremely hazardous wastes,"
"restricted hazardous wastes," "toxic substances," "toxic pollutants," "medical
waste," "infectious waste," "biomedical waste," "biohazardous waste," or words
of similar import, under any applicable Environmental Law.
INDEMNIFIED PERSON is defined in Section 7.6.
INITIAL PUBLIC OFFERING means an underwritten public offering
of the Borrower's common stock pursuant to which such stock becomes tradeable on
a national stock exchange or the over-the-counter market.
INSOLVENCY PROCEEDING means any proceeding commenced by or
against any Person under any provision of the United States Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency law, including assignments
for the benefit of creditors, formal or informal moratoria, compositions,
extension generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
INTANGIBLE ASSETS means, as of any date of determination for
the Borrower and its consolidated Subsidiaries in accordance with GAAP, assets
having no physical existence and that should be classified as intangible assets
including, without limitation, goodwill, patents, patent rights, trademarks,
trade names, franchises, copyrights, licenses, organizational expenses and
deferred charges (including, without limitation, unamortized debt issuance
costs).
INTELLECTUAL PROPERTY SECURITY AGREEMENT means the
intellectual property Security Agreement in substantially the form of Exhibit
B-4, executed by the Borrower and each Material Subsidiary and delivered
pursuant to Section 3.1(a)(vi), and each other security agreement at any time
delivered by the Borrower or any Subsidiary of the Borrower to create a Lien
securing any of the Obligations upon any property of the type described in such
security agreement.
INTERCREDITOR AGREEMENT means an intercreditor agreement in
substantially the form of Exhibit B-8.
INTEREST MARGIN means, with respect to any Base Rate Advance
or Eurodollar Rate Advance, as applicable, the amount set forth below
corresponding to the Leverage Ratio set forth below determined by the Lender,
with reference to the most recent financial statements and Compliance
Certificate delivered by the Borrower pursuant to Section 5.2(c), on the fifth
Business Day after receipt of such financial statements and Compliance
Certificate; PROVIDED, HOWEVER, that if (i) the Borrower shall have received
proceeds of at least $25,000,000 net of underwriting discounts and commissions
from an Initial Public Offering and (ii) the Leverage Ratio is less than 1.25 to
1.00, then the applicable Interest Margin for Eurodollar Rate Advances shall be
2.00%. Any such change in the applicable Interest Margin shall be given
prospective effect only, effective (A) as to all Base Rate Advances outstanding
hereunder on the fifth Business Day after receipt of the most recent financial
statements and Compliance Certificate,
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<PAGE> 19
and (B) as to each Eurodollar Rate Advance outstanding hereunder, effective upon
the expiration of the applicable Interest Period(s), if any, in effect on the
fifth Business Day after receipt of such financial statements and Compliance
Certificate, in each case with no retroactivity or clawback; PROVIDED, HOWEVER,
that during the period from and including the Closing Date to and including the
fifth Business Day following the earlier of (x) April 30, 1997, or (y) receipt
by the Lender of the audited financial statements and Compliance Certificate for
the Fiscal Year ended December 31, 1996 delivered hereunder, the applicable
Interest Margin shall be the highest Interest Margin provided herein; and
PROVIDED, FURTHER, that if the Borrower shall fail to timely deliver such
financial statements and Compliance Certificate for any period, then the
applicable Interest Margin shall be the highest Interest Margin provided herein
until the fifth Business Day after the Borrower shall deliver such financial
statements and Compliance Certificate:
<TABLE>
<CAPTION>
Leverage Ratio Base Rate Eurodollar Rate
-------------- --------- ---------------
<S> <C> <C>
more than or equal to 1.75:1.00 0.75% 2.75%
less than 1.75:1.00 but 0.50% 2.50%
more than or equal to 1.25:1.00
less than 1.25:1.00 0.25% 2.25%
</TABLE>
INTEREST PERIOD means, for each Eurodollar Rate Advance, the
period commencing on the date of such Advance or the date of the conversion of
any Advance into such an Advance and ending on the last day of the period
selected by the Borrower pursuant to the provisions below and, thereafter, each
subsequent period commencing on the last day of the immediately preceding
Interest Period and ending on the last day of the period selected by the
Borrower pursuant to the provisions below. The duration of each such Interest
Period shall be one, two, three or six months, as the Borrower may select by
notice received by the Lender not later than 11:00 a.m. (Pacific time) two (2)
Business Days prior to the first day of such Interest Period; PROVIDED, HOWEVER,
that:
(i) the Borrower may not select any Interest Period
applicable to a Facility A Advance which ends after the Facility A
Maturity Date;
(ii) the Borrower may not select any Interest Period
applicable to a portion of the Facility B Advance which ends after any
date on which such portion is scheduled to be repaid unless, after
giving effect to such selection, the aggregate unpaid principal amount
of Base Rate Advances and Eurodollar Rate Advances under Facility B
having Interest Periods which end on or prior to such date is at least
equal to the principal amount of the Facility B Advance due and payable
on and prior to such date;
(iii) whenever the last day of any Interest Period would
otherwise occur on a day that is not a Business Day, the last day of
such Interest Period shall be extended to
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<PAGE> 20
the next succeeding Business Day, except that if such extension would
cause the last day of such Interest Period to occur in the next
following calendar month, the last day of such Interest Period shall be
the next preceding Business Day; and
(iv) the Borrower may not have more than an aggregate of five
(5) Interest Periods in effect at any one time under Facility A and
Facility B.
INVENTORY is as defined in the UCC.
INVESTMENT means (i) the acquisition of any interest in any
property, assets or business from any Person, whether by sale, lease or
otherwise, (ii) the funding of any loan, extension of credit, accommodation or
capital contribution to or for the benefit of any Person, and (iii) the
acquisition of any debt or equity securities of or claim against or interest in
any Person, whether upon original issuance, by purchase or otherwise.
LENDER means Comerica Bank-California, a California chartered
bank.
LETTER OF CREDIT means a letter of credit or similar
undertaking issued by the Lender for the benefit of the Borrower as provided in
Section 2.14.
LETTER OF CREDIT USAGE means, as of any date of determination,
the sum of (i) the aggregate undrawn amount of all Letters of Credit then
outstanding PLUS (ii) the aggregate unreimbursed drawings under all such Letters
of Credit then outstanding.
LEVERAGE RATIO means, for any Fiscal Quarter End Date, the
ratio of (i) Consolidated Total Debt as of such Fiscal Quarter End Date TO (ii)
Consolidated Tangible Effective Net Worth as of such Fiscal Quarter End Date.
LIEN means any mortgage, deed of trust, lien, pledge, charge,
security interest, hypothecation, assignment, deposit arrangement or encumbrance
of any kind in respect of any asset, whether or not filed, recorded or otherwise
perfected or effective under applicable law, as well as the interest of a vendor
or lessor under any conditional sale agreement, capital or finance lease or
other title retention agreement relating to such asset (other than an operating
lease).
LITIGATION ADJUSTMENT means the amount of any one-time
settlement, award, judgment or order paid or payable by or against the Borrower
and/or Ocular Sciences Limited, a wholly-owned Subsidiary of the Borrower, in an
amount not to exceed $5,000,000 in the aggregate (including accrued royalties of
$1,104,000) which fully discharges the Galley Litigation.
LOAN DOCUMENTS means this Agreement, the Guaranty, the
Subordination Agreement, the Intercreditor Agreement, the Collateral Documents
and all other guaranties and other agreements, instruments and written indicia
of the Obligations delivered to the Lender by or on behalf of the Borrower or
any other Loan Party pursuant to or in connection with the
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<PAGE> 21
transactions contemplated hereby.
LOAN PARTIES means the Borrower and each Subsidiary of the
Borrower (other than a Foreign Subsidiary) that is a party to any Loan Document.
MATERIAL ADVERSE CHANGE means any materially adverse change in
the financial condition, assets, liabilities, business, operations or prospects
of the Borrower and its Subsidiaries, taken as a whole (it being understood that
the Litigation Adjustment shall not be deemed a Material Adverse Change).
MATERIAL ENVIRONMENTAL CLAIM means any Environmental Claim,
regardless of merit, which does or can reasonably be expected to (i) result in
the Borrower or any of its Subsidiaries expending in the aggregate an amount in
excess of $1,000,000 to defend against, settle or satisfy, or (ii) prevent or
enjoin the Borrower or any of its Subsidiaries from carrying on business on any
property on which it conducts operations if the inability to carry on business
on any such property does or can reasonably be expected to cause a Material
Adverse Change.
MATERIAL SUBSIDIARY means each Subsidiary of the Borrower
(other than a Foreign Subsidiary) that has (i) as of the end of the most recent
Fiscal Quarter, total assets representing two percent (2%) or more of the total
assets of the Borrower and its consolidated Subsidiaries, (ii) for the most
recent Fiscal Quarter, total revenues representing two percent (2%) or more of
the revenues of the Borrower and its consolidated Subsidiaries, or (iii) for the
most recent Fiscal Quarter, net income representing two percent (2%) or more of
Consolidated Net Income.
MULTIEMPLOYER PLAN means any Plan which is "multiemployer
plan," as defined in Section 4001(a)(3) of ERISA.
1934 ACT means the Securities Exchange Act of 1934.
NON-CONSENSUAL LIEN means a Lien permitted under Section
5.3(a)(v), (vi), (vii), (viii), (ix), or (xi).
NOTICE OF BORROWING means a notice substantially in the form
of Exhibit A-1.
NOTICE OF CONTINUANCE/CONVERSION means a notice substantially
in the form of Exhibit A-2.
OBLIGATIONS means all present and future debts, obligations
and liabilities of every type and description of the Borrower or any other Loan
Party at any time arising under or in connection with this Agreement, any other
Loan Document or any Rate Contract, due or to become due to the Lender, any
Indemnified Person or any other Person and includes, without limitation, (i) all
liability for principal of and interest on any Advances, and (ii) all liability
under the Loan Documents for any fees, taxes, compensation, costs, losses,
expense reimbursements and indemnification.
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<PAGE> 22
OCULAR SCIENCES LIMITED means Ocular Sciences Limited, a
corporation organized under the laws of the United Kingdom, and a wholly-owned
Subsidiary of the Borrower.
O.S.I. PUERTO RICO means O.S.I. Puerto Rico, a Delaware
corporation and a wholly-owned Subsidiary of the Borrower.
OTHER TAXES is defined in Section 2.13(b).
PBGC means the Pension Benefit Guaranty Corporation or any
entity succeeding to any of its functions under ERISA.
PENSION PLAN means any Plan which is (i) an "employee pension
benefit plan" as defined in Section 3(2) of ERISA and (ii) not a Multiemployer
Plan.
PERMITTED CASH INVESTMENTS means (i) certificates of deposit
or money market securities with maturities of one year or less issued by any
United States commercial bank with capital, surplus, and undivided profits of
$500,000,000 or more; (ii) obligations issued by, or guaranteed by, the United
States government and maturing within one year from the date of acquisition
thereof; (iii) commercial paper, municipal bonds and similar instruments with
maturities of one year or less rated at least P2 or Aa, respectively, by Moody's
Investors Service, Inc., or rated at least A2 or AA, respectively, by Standard &
Poor's Corporation, or receiving an equivalent rating from any other nationally
recognized rating agency; (iv) repurchase or reverse repurchase agreements
issued by any United States commercial bank with capital, surplus and undivided
profits of $500,000,000 or more; and (v) investments in money market funds or
mutual funds that invest solely in investments described in clauses (i) through
(iv).
PERMITTED OUTSIDE FUNDED DEBT means that Debt specified in
Section 5.3(d)(iii) and (vi).
PERSON means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture or other entity, or a government or any political
subdivision or agency thereof.
PLAN means any "employee benefit plan" as defined in Section
3(3) of ERISA (i) which the Borrower or any ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or, within the six
years prior to the Closing Date, maintained, administered, contributed to or was
required to contribute to, or under which the Borrower or any ERISA Affiliate
may incur any liability and (ii) which covers any employee or former employee of
the Borrower or any ERISA Affiliate (with respect to their relationship with
such entities).
PLEDGE AND SECURITY AGREEMENT means the Borrower Pledge and
Security Agreement and the Subsidiary Pledge and Security Agreement.
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<PAGE> 23
POTENTIAL DEFAULT means any event or condition described in
Section 6.1 which, with any notice or passage of time (or both) expressly
described in Section 6.1, would constitute an Event of Default.
QUALIFIED PLAN means a pension plan (as defined in Section
3(2) of ERISA) intended to be tax-qualified under Section 401(a) of the Code and
which the Borrower or any ERISA Affiliate sponsors, maintains, or to which it
makes or is obligated to make contributions, or in the case of a multiple
employer plan (as described in Section 4064(a) of ERISA) has made contributions
at any time during the immediately preceding period covering at least five plan
years, but excluding any Multiemployer Plan.
RATE CONTRACT means any interest rate and currency swap
agreement, cap, floor or collar agreement, interest rate insurance, currency
spot or forward contract or other agreement or arrangement designed to provide
protection against fluctuations in interest or currency exchange rates entered
into by the Borrower and any Person which is, or at the time such contract,
agreement or arrangement was entered into, the Lender or an Affiliate of the
Lender.
REPORTABLE EVENT means any of the events set forth in Section
4043(b) of ERISA, a withdrawal from a plan described in Section 4063 of ERISA or
a cessation of operations described in Section 4062(e) of ERISA.
SUBORDINATED DEBT means any Debt of the Borrower or any of its
Subsidiaries, which is subordinate to the Obligations on terms and conditions
satisfactory to the Lender.
SUBORDINATION AGREEMENT means the subordination agreement in
substantially the form of Exhibit B-7, executed by John Fruth and delivered
pursuant to Section 3.1(a)(iv).
SUBSIDIARY means, with respect to any Person, any corporation,
association, partnership, joint venture or other business entity of which more
than fifty percent (50%) of the voting stock or other equity interests is owned
or controlled directly or indirectly by such Person or one or more Subsidiaries
of such Person or a combination thereof.
SUBSIDIARY PLEDGE AND SECURITY AGREEMENT means the pledge and
security agreement in substantially the form of Exhibit B-3, executed by each
Material Subsidiary (other than O.S.I. Puerto Rico) and delivered pursuant to
Section 3.1(a)(iii) and each joinder therein by any other Material Subsidiary of
the Borrower and each other security agreement at any time delivered by any
Material Subsidiary of the Borrower to create a Lien that secures any of the
Obligations.
TAXES is defined in Section 2.13(a).
TRANSFER AND PERFECTION NOTICE means an instrument in the form
of Exhibit B-5 or Exhibit B-6 (if such instrument is then sufficient under
applicable law, when duly signed by the parties indicated thereon, to perfect a
security interest in the account or investments described
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<PAGE> 24
therein) or any other instrument by which a Lien upon Permitted Cash
Investments, as security for the Obligations, is lawfully and enforceably
created and perfected without any consent, acknowledgment or other act of any
Person other than the Lender. No Transfer and Perfection Notice shall limit or
restrict the control and dominion of the Borrower and the Guarantor(s) over
their cash or Permitted Cash Investments or any account to which cash or
Permitted Cash Investments may be deposited or give the Lender any control or
dominion over any such cash, Permitted Cash Investment or account.
UCC means the Uniform Commercial Code, as adopted and applied
in the state of California.
UNFUNDED PENSION LIABILITY means, with respect to any Pension
Plan that is subject to Title IV of ERISA, the excess of such Pension Plan's
accrued benefits, as defined in Section 3(23) of ERISA, over the current value
of such Pension Plan's assets, as defined in Section 3(26) of ERISA (but
excluding from the definition of "current value" of "assets" of such Pension
Plan, accrued but unpaid contributions).
UNITED STATES and U.S. mean the United States of America.
WELFARE PLAN means any Plan which is an "employee welfare
benefit plan" as defined in Section 3(1) of ERISA.
WITHDRAWAL LIABILITIES means the aggregate amount of the
liabilities, if any, pursuant to Section 4201 of ERISA if the Borrower and each
ERISA Affiliate made a complete withdrawal from all Multiemployer Plans and any
increase in contributions pursuant to Section 4243 of ERISA.
SECTION I.2. ACCOUNTING TERMS. All accounting terms not
expressly defined herein shall be construed, except where the context otherwise
requires, and all financial computations required under this Agreement shall be
made in accordance with GAAP applied on a consistent basis. If GAAP changes
during the term of this Agreement so as to affect the calculation of any term
defined herein or any measure of financial performance or financial condition
employed or referred to herein, the Borrower and the Lender agree to negotiate
in good faith toward an amendment of this Agreement which shall approximate, to
the extent possible, the economic effect of the original provisions hereof after
taking into account such change in GAAP, but until the parties are able to agree
upon such amendment (i) the Borrower shall be deemed in compliance with the
provisions hereof only if and to the extent it would have been in compliance if
such change in GAAP had not occurred and (ii) the Borrower shall deliver to the
Lender, with each financial report delivered by the Borrower hereunder,
information sufficient to confirm such compliance as if such change in GAAP had
not occurred.
SECTION I.3. OTHER DEFINITIONAL PROVISIONS.
(a) Unless otherwise specified herein or therein, all terms
defined in this
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<PAGE> 25
Agreement shall have the defined meanings when used in any other Loan
Document or in any certificate or other document made or delivered
pursuant hereto.
(b) The words "hereof," "herein" and "hereunder" and words of
similar import when used in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement, and
section, schedule and exhibit references are to this Agreement unless
otherwise specified. The meaning of defined terms shall be equally
applicable to the singular and plural forms of the defined terms. The
term "including" is not limiting and means "including without
limitation."
(c) In the computation of periods of time from a specified
date to a later specified date, the word "from" means "from and
including"; the words "to" and "until" each mean "to but excluding";
and the word "through" means "to and including."
(d) References to agreements and other documents shall be
deemed to include all subsequent amendments and other modifications
thereto, but only to the extent such amendments and other modifications
are not prohibited by the terms of any Loan Document.
(e) References to statutes, acts or codes shall include all
regulations promulgated thereunder and references to statutes, acts,
codes or regulations shall be construed as including all statutory and
regulatory provisions consolidating, amending or replacing the statute
or regulation.
(f) The captions and headings of this Agreement are for
convenience of reference only and shall not affect the construction of
this Agreement.
(g) Unless the context otherwise requires, all terms used in
this Agreement and defined in the UCC shall have the meanings assigned
therein.
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<PAGE> 26
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
SECTION II.1. ADVANCES.
(a) FACILITY A ADVANCES. Subject to the terms and conditions
herein, the Lender agrees to make Facility A Advances to the Borrower,
from time to time on any Business Day from the Closing Date and prior
to the Facility A Maturity Date, in an aggregate principal amount
outstanding at any time not to exceed the Facility A Amount as such
Facility A Amount may be reduced from time to time in accordance with
the provisions of this Agreement; PROVIDED, HOWEVER, that the aggregate
principal amount of Facility A Advances outstanding at any time shall
not exceed the lesser of (i) the Facility A Amount then in effect, less
the Letter of Credit Usage then outstanding, and (ii) the Borrowing
Base then in effect less the Letter of Credit Usage then outstanding.
Within the foregoing limits, the Borrower may borrow, repay and
reborrow Facility A Advances.
(b) FACILITY B ADVANCE. Subject to the terms and conditions
herein, the Lender agrees to make the Facility B Advance to the
Borrower, on the Closing Date in a principal amount not to exceed the
Facility B Amount. Amounts repaid under Facility B may not be
reborrowed.
(c) USE OF PROCEEDS. The Facility A Advances and Facility B
Advance shall be used (i) initially to repay (A) all outstanding
indebtedness owing under the Existing Bank of America Credit Agreement
and (B) all outstanding indebtedness owing to Allergan, Inc. and Galen
Partners, L.P., or their respective affiliates, and (ii) thereafter to
provide working capital to the Borrower and for other general corporate
purposes of the Borrower.
SECTION II.2. MECHANICS OF ADVANCES
(a) BORROWINGS. Each Base Rate Advance shall be in an
aggregate amount not less than $250,000 or an integral multiple of
$50,000 in excess thereof. Each Eurodollar Rate Advance shall be in an
aggregate amount not less than $1,000,000 or an integral multiple of
$100,000 in excess thereof.
(b) NOTICE OF BORROWING. To request a Borrowing, the Borrower
shall deliver a Notice of Borrowing to the Lender not later than 11:00
a.m. (Pacific time) (i) two (2) Business Days prior to the date of the
requested Borrowing, in the case of a Eurodollar Rate Advance, and (ii)
on the date of the requested Borrowing, in the case of a Base Rate
Advance. The Notice of Borrowing shall specify (A) the date of the
requested Borrowing, (B) the amount of such Borrowing, (C) whether such
Borrowing will consist of a Base Rate Advance or Eurodollar Rate
Advance, (D) whether such Borrowing will
19
<PAGE> 27
be a Facility A Advance or the Facility B Advance, and (E) in the case
of a Borrowing comprised of a Eurodollar Rate Advance, the initial
Interest Period for such Eurodollar Rate Advance.
(c) TELEPHONIC NOTICE. In lieu of delivering a Notice of
Borrowing, the Borrower may give the Lender telephonic notice of any
proposed Borrowing by the time required under Section 2.2(b) and in
such event shall promptly (but in no event later than 5:00 p.m.
(Pacific time) on the date of the requested Borrowing) deliver a
written confirmatory Notice of Borrowing to the Lender. If the
telephonic request differs in any respect from the written Notice of
Borrowing subsequently delivered, the telephonic request shall govern
as to the terms of the Advance made in accordance with such telephonic
request. The Lender's determination of the contents of any telephonic
request shall, absent manifest error, be conclusive and binding on all
parties hereto.
(d) FUNDING OF ADVANCES. Upon fulfillment of the applicable
conditions set forth in Article III, the Lender shall, not later than
2:00 p.m. (Pacific time) on the date of the requested Borrowing, make
same day funds in Dollars in the amount of the Borrowing available to
the Borrower as the Borrower may direct.
(e) NOTICE OF BORROWING IRREVOCABLE. Each Notice of Borrowing
and telephonic request shall be irrevocable and binding on the
Borrower.
SECTION II.3. EVIDENCE OF DEBT.
(a) PROMISE TO REPAY. The Borrower hereby agrees to pay when
due the principal amount of each Advance, and further agrees to pay all
unpaid interest accrued thereon, in accordance with the terms of this
Agreement.
(b) LOAN ACCOUNT. The Lender shall maintain in accordance with
its usual practice an account or accounts evidencing the Debt of the
Borrower to the Lender resulting from each Advance owing to the Lender
from time to time, including the amount of principal and interest
payable and paid to the Lender from time to time hereunder. The entries
made in each such loan account or accounts shall be conclusive and
binding for all purposes, absent manifest error.
SECTION II.4. FEES.
(a) CLOSING FEE. On the Closing Date, the Borrower shall pay
to the Lender a one time non-refundable fee equal to one-half percent
(0.50%) of the Facility Amount.
(b) COMMITMENT FEES. On the last day of each January, April,
July and October, commencing January 31, 1997 and continuing thereafter
until the Facility A Maturity Date, the Borrower shall pay a commitment
fee to the Lender, in an amount equal to three-eighths percent (0.375%)
of the Facility A Availability (PLUS, for the
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<PAGE> 28
purposes of this computation only, the outstanding amount of Letter of
Credit Usage consisting of standby Letters of Credit but excluding
documentary (commercial) Letters of Credit), day to day in the prior
Quarter. No commitment fee shall be payable in respect of Facility B.
(c) ADDITIONAL FEES. The Borrower shall pay when due all fees
payable under the Fee Letter.
SECTION II.5. REPAYMENT. The Borrower agrees to repay the
Advances as follows:
(a) FACILITY A. The Facility A Advances shall be repaid in
full on the Facility A Maturity Date.
(b) FACILITY B. The Facility B Advance shall be repaid in
eight quarterly principal installments payable as follows:
<TABLE>
<CAPTION>
Quarterly Principal
Payment Date Installment
------------ -----------
<S> <C>
January 31, 1997 $1,000,000
April 30, 1997 $1,000,000
July 31, 1997 $1,000,000
October 31, 1997 $1,000,000
January 31, 1998 $1,500,000
April 30, 1998 $1,500,000
July 31, 1998 $1,500,000
October 31, 1998 $1,500,000
</TABLE>
(c) MATURITY. Facility B shall terminate on October 31, 1998
at which time the Facility B Advance and any accrued and unpaid
interest thereon shall be due and payable. Facility A shall terminate
on the Facility A Maturity Date at which time all outstanding amounts
under this Agreement shall be due and payable.
(d) NONSCHEDULED MANDATORY FACILITY PREPAYMENTS. In addition
to the foregoing payments, Facility B shall be repaid as follows, and
shall be applied as set forth in Section 2.5(f):
(i) ASSET SALE PROCEEDS. Whenever the Borrower or any
of its Subsidiaries receives any Cash Proceeds in respect of
an Asset Sale, except Excluded Proceeds, by an amount equal to
one hundred percent (100%) of such Cash Proceeds;
(ii) EQUITY ISSUANCE AND SUBORDINATED DEBT PROCEEDS.
Whenever the
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<PAGE> 29
Borrower or any of its Subsidiaries receives any Cash Proceeds
from any Equity Issuance or any issuance or sale of
Subordinated Debt that is permitted to be issued and sold upon
any waiver of the provisions of Section 5.3(d)(viii) by the
Lender (excluding any issuance of stock to employees of the
Borrower pursuant to a stock option plan), by an amount equal
to one hundred percent (100%) of all Cash Proceeds so
received, LESS all placement fees and underwriting expenses
paid in cash by the Borrower or such Subsidiary in connection
with such Equity Issuance or Subordinated Debt issuance or
sale; and
(iii) EXTRAORDINARY RECEIPTS. Whenever the Borrower
or any of its Subsidiaries receives any Cash Proceeds in any
extraordinary event outside of the ordinary course of business
(including insurance recoveries not reasonably and promptly
applied toward the repair or replacement of the damaged
property, but excluding (A) monies received by the Borrower or
any of its Subsidiaries in connection with the Galley
Litigation, (B) Cash Proceeds of any Asset Sale or Equity
Issuance covered by clauses (i) and (ii) above, (C) proceeds
of key man life insurance received under Section 5.2(g)(ii),
and (D) tax refunds and credits), by an amount equal to one
hundred percent (100%) of such receipts;
(e) NONSCHEDULED VOLUNTARY FACILITY PREPAYMENTS. The Borrower
may prepay the outstanding principal amount of Advances under either
Facility A or Facility B, or both, as the Borrower may elect, in whole
or ratably in part, so long as (i) the Borrower gives two (2) Business
Day's prior written notice to the Lender no later than 11:00 a.m.
(Pacific time) (except that notices regarding Facility A prepayments
may be given by no later than 11:00 a.m. (Pacific time) on the same day
as the prepayment) stating (A) the proposed date of the prepayment, (B)
the principal amount of the prepayment, (C) whether such prepayment
will consist of Base Rate Advances or Eurodollar Rate Advances, and (D)
whether such prepayment will consist of Facility A Advances or Facility
B Advances, (ii) each partial prepayment is made in a principal amount
of not less than $250,000 and integral multiples of $50,000 in excess
thereof, (iii) if any Eurodollar Rate Advance is paid prior to the last
day of the Interest Period for such Advance, all unpaid interest
accrued to the date of prepayment on the principal amount prepaid and
all Breakage Costs incurred as a result of the prepayment are also
paid, and (iv) all unpaid interest under Facility B accrued to the date
of prepayment is paid concurrently with any prepayment in full. Notice
of prepayment, once given, shall be irrevocable, and the amount of the
prepayment specified in the notice shall accordingly be due and payable
on the prepayment date specified therein. Prepayments under Facility A
may be reborrowed on the terms and conditions set forth herein;
prepayments under Facility B may not be reborrowed.
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<PAGE> 30
(f) APPLICATION OF NONSCHEDULED FACILITY B PREPAYMENTS. All
mandatory prepayments of Facility B shall be credited to the future
scheduled Facility B payments in the inverse order of maturity. All
voluntary prepayments of Facility B shall be credited to the future
scheduled Facility B payments in the order of maturity or as the
Borrower may otherwise direct. All Facility B prepayments whether
mandatory or voluntary shall automatically and permanently reduce the
Facility B Amount by the amount so credited.
(g) OPTIONAL REDUCTION OR TERMINATION OF FACILITY A. The
Borrower may permanently reduce the Facility A Amount, in whole or in
part or terminate Facility A, upon at least five (5) Business Days'
prior written notice to the Lender; PROVIDED that (i) each partial
reduction of the Facility A Amount shall be in an aggregate principal
amount of $1,000,000 or an integral multiple of $100,000 in excess
thereof; (ii) each reduction or termination shall be accompanied by the
payment of the commitment fee, if any, accrued on the Facility A Amount
so reduced through the date of such reduction or termination; (iii) the
Facility A Amount, as so reduced, shall not be less than the sum of the
aggregate Facility A Advances then outstanding plus the Letter of
Credit Usage then outstanding; (iv) the Borrower shall prepay the
amount, if any, by which the sum of the aggregate Facility A Advances
then outstanding plus the Letter of Credit Usage then outstanding
exceeds the Facility A Amount as so reduced, together with interest
thereon to the date of prepayment; and (v) if the termination or
reduction of the Facility A Amount requires the prepayment of
Eurodollar Rate Advances, the termination or reduction may be made only
on the last Business Day of the then current Interest Period applicable
to such Eurodollar Rate Advance.
(h) EXCESS EXPOSURE. If at any time for any reason, the
aggregate outstanding Facility A Advances PLUS the outstanding Letter
of Credit Usage exceed the Facility A Availability then in effect, the
Borrower shall immediately, without notice or demand, repay Facility A
Advances in an amount equal to such excess.
(i) CHANGE OF CONTROL. The Borrower shall give the Lender
written notice of a Change of Control twenty (20) Business Days prior
to a Change of Control (or if twenty (20) Business Days' notice is not
practicable, such lesser notice (but not less than five (5) Business
Days) as is practicable). On the date of a Change of Control (i) all
Advances then outstanding shall be due and payable in full, (ii) the
Borrower shall deposit with the Lender cash collateral (in a form
acceptable to the Lender) in an amount equal to the Letter of Credit
Usage then outstanding, and (iii) the Facility Amount shall be
automatically and permanently reduced to zero.
(j) PREPAYMENT FEE. The foregoing notwithstanding, if the
Borrower prepays all Advances then outstanding, and terminates Facility
A (or the Facility A Amount is permanently reduced to zero) in
connection with a Change of Control or with the proceeds of Debt (other
than Debt borrowed from the Lender), then the Borrower shall pay to the
Lender in addition to the amounts otherwise described herein, a fee
equal to (i) two percent (2%) of the principal amount of the Advances
prepaid, if such amounts are
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<PAGE> 31
prepaid after the Closing Date through and including the first
anniversary of the Closing Date, or (ii) one percent (1%) of the
principal amount of the Advances prepaid, if such amounts are prepaid
from but excluding the date of the first anniversary of the Closing
Date through and including the date of the second anniversary of the
Closing Date. The Borrower and the Lender agree that damages for the
prepayment set forth herein are difficult to ascertain and that such
prepayment fee is not and shall not be deemed to be a penalty, but an
agreed upon reasonable amount of liquidated damages.
SECTION II.6. INTEREST. The Borrower agrees to pay interest on
the unpaid principal amount of each Advance made by the Lender from the date of
such Advance until such principal amount shall be repaid in full, at the
following rates per annum:
(a) BASE RATE ADVANCES. Whenever such Advance is a Base Rate
Advance, a rate per annum equal on each day to the Base Rate as in
effect on such day PLUS the applicable Interest Margin, with all such
interest payable quarterly in arrears on the last day of each January,
April, July and October (commencing January 31, 1997) and, with respect
to the Facility A Advances, on the Facility A Maturity Date and, with
respect to the Facility B Advance, such other date that such Advance is
repaid, or required to be repaid, in full.
(b) EURODOLLAR RATE ADVANCES. Whenever such Advance is a
Eurodollar Rate Advance, a rate per annum equal on each day during the
Interest Period for such Eurodollar Rate Advance to the sum of the
Eurodollar Rate for such Interest Period determined for such day PLUS
the applicable Interest Margin, with all interest so accrued payable on
the last day of such Interest Period and, if such Interest Period has a
duration of more than three months, on the day which occurs three
months after the first day of such Interest Period.
(c) DEFAULT INTEREST. From and after the occurrence of an
Event of Default, all amounts outstanding under this Agreement, to the
extent permitted by law, will bear interest equal to the greater of (i)
the rate applicable to Base Rate Advances PLUS three percent (3%) per
annum or (ii) the rate otherwise payable on such amount (without giving
effect to this provision) PLUS three percent (3%) per annum.
SECTION II.7. INTEREST RATE DETERMINATION AND PROTECTION.
(a) DETERMINATION OF EURODOLLAR RATE. The Eurodollar Rate for
each Interest Period for Eurodollar Rate Advances shall be determined
by the Lender at or before 11:00 am (Pacific time) two (2) Business
Days before the first day of such Interest Period.
(b) NOTICE OF EURODOLLAR RATE. The Lender shall give prompt
notice to the Borrower of the Eurodollar Rate for any Interest Period
when determined by the Lender.
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<PAGE> 32
(c) SUSPENSION OF EURODOLLAR RATE ADVANCES. If, with respect
to any Eurodollar Rate Advance, the Lender determines that, by reason
of circumstances affecting the foreign exchange and interbank markets
generally, either (i) the Eurodollar Rate for any Interest Period for
such Eurodollar Rate Advance is insufficient to cover the cost to the
Lender of obtaining deposits in eurodollars in an amount substantially
equal to the Eurodollar Rate Advance and for a period equal to such
Interest Period or (ii) deposits are not available to the Lender in
such market in eurodollars, then the Lender shall forthwith so notify
the Borrower and thereupon (A) each Eurodollar Rate Advance will
automatically, on the last day of the then existing Interest Period
therefor, convert into a Base Rate Advance, and (B) the obligation of
the Lender to make or continue, or to convert Advances into, Eurodollar
Rate Advances shall be suspended until the Lender shall notify the
Borrower that the circumstances causing such suspension no longer
exist.
(d) FAILURE TO SPECIFY DURATION. If the Borrower fails, prior
to the date the Eurodollar Rate for any Interest Period is determined
by the Lender, to specify the duration of any Interest Period for any
Eurodollar Rate Advances, the Interest Period shall be one month.
(e) MINIMUM AMOUNTS. No Borrowing of LESS than $1,000,000 may
be made or continued as, or converted into, Eurodollar Rate Advances.
If at any time the aggregate outstanding principal amount of all
Eurodollar Rate Advances having the same Interest Period is reduced to
less than $1,000,000, such Advances shall automatically and immediately
convert into Base Rate Advances.
(f) LENDER'S DETERMINATION CONCLUSIVE. Each determination by
the Lender of an interest rate hereunder shall be conclusive and
binding for all purposes, absent manifest error.
SECTION II.8. VOLUNTARY CONVERSION OF ADVANCES.
(a) NOTICE OF CONVERSION/CONTINUATION. Subject to the
provisions of Sections 2.7 and 2.11, the Borrower may on any Business
Day, by giving the Lender a Notice of Continuance/Conversion not later
than 11:00 a.m. (Pacific time) on the second preceding Business Day,
(i) convert Base Rate Advances into Eurodollar Rate Advances, (ii)
convert Eurodollar Rate Advances into Base Rate Advances or (iii)
continue Eurodollar Rate Advances as Eurodollar Rate Advances, but (A)
the Borrower may convert a Eurodollar Rate Advance into a Base Rate
Advance only on the last day of an Interest Period for such Eurodollar
Rate Advance, (B) the Borrower may continue a Eurodollar Rate Advance
as a Eurodollar Rate Advance only as of the last day of an Interest
Period for such Eurodollar Rate Advance, and (C) no Advance may be
converted into or continued as a Eurodollar Rate Advance at any time
when an Event of Default or Potential Default has occurred and is
continuing.
(b) TELEPHONIC NOTICE. In lieu of delivering a Notice of
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<PAGE> 33
Continuance/Conversion, the Borrower may give the Lender telephonic
notice of any proposed conversion or continuance by the time required
under Section 2.8(a) and in such event shall promptly (but in no event
later than 5:00 p.m. (Pacific time) on the second Business Day prior to
the date of the requested conversion or continuance) deliver a
confirmatory written Notice of Continuance/Conversion to the Lender. If
the telephonic request differs in any respect from the written Notice
of Continuance/Conversion subsequently furnished, the telephonic
request shall govern as to the terms of such notice. The Lender's
determination of the contents of any telephonic request shall, absent
manifest error, be conclusive and binding on all parties hereto.
(c) REQUIREMENTS. Each Notice of Continuance/Conversion or
telephonic request shall specify (i) the date of the continuance or
conversion, (ii) whether such Advance is a continuance or conversion of
an outstanding Advance, (iii) the aggregate principal amount of the
Advance to be converted or continued, (iv) whether such Advance is a
Facility A Advance or the Facility B Advance, and (v) when such Advance
is converted into or continued as a Eurodollar Rate Advance, the
duration of the Interest Period for such Advance.
(d) BASE RATE ADVANCES. Unless a Eurodollar Rate has been
determined for a particular Advance and applies to such Advance on a
particular day in accordance with the provisions hereof, such Advance
shall be a Base Rate Advance and shall accrue interest at the rate then
applicable to Base Rate Advances.
SECTION II.9. FUNDING LOSSES. If (i) any Eurodollar Rate
Advance is repaid or converted to a Base Rate Advance on any day other than the
last day of an Interest Period for such Eurodollar Rate Advance (whether as a
result of any optional prepayment, mandatory prepayment, payment upon
acceleration, mandatory conversion or otherwise), (ii) the Borrower fails to
borrow any Eurodollar Rate Advance in accordance with a Notice of Borrowing or a
telephonic request delivered to the Lender (whether as a result of the failure
to satisfy any applicable conditions or otherwise), (iii) any Base Rate Advance
is not converted into a Eurodollar Rate Advance or any Eurodollar Rate Advance
is not continued as a Eurodollar Rate Advance in accordance with a Notice of
Continuance/Conversion or telephonic request delivered to the Lender (whether as
a result of the failure to satisfy any applicable conditions or otherwise), or
(iv) the Borrower fails to make any prepayment in accordance with any notice of
prepayment delivered to the Lender, the Borrower shall, upon demand by the
Lender, reimburse the Lender for all reasonable costs and losses incurred by the
Lender as a result of such repayment, prepayment or failure ("Breakage Costs"),
including reasonable costs and losses incurred by the Lender as a result of
funding arrangements or contracts entered into by the Lender to fund Eurodollar
Rate Advances. Breakage Costs shall be payable only if demanded within ninety
(90) days after the end of the applicable Interest Period and shall be due
thirty (30) days after demand. Demand shall be made by delivery to the Borrower
of a certificate making the demand, setting forth in reasonable detail the
calculation of the Breakage Costs for which demand is made. Such certificate
shall, in the absence of manifest error, be conclusive and binding on the
Borrower. The calculation of any amounts payable to the Lender shall be made as
though the Lender shall
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<PAGE> 34
have actually funded or committed to fund the relevant Eurodollar Rate Advance
through the purchase of an underlying deposit in an amount equal to such
Eurodollar Rate Advance and having a maturity comparable to the relevant
Interest Period; PROVIDED that the Lender may fund any Eurodollar Rate Advance
in any manner it deems fit and the foregoing assumptions shall be utilized only
for the purpose of the calculation of amounts payable under this paragraph. If
the Borrower shall be obligated to repay Eurodollar Rate Advances pursuant to
Section 2.5(d) or Section 2.11 on a date that is not the last day of the
Interest Period for such Eurodollar Rate Advances, then the Borrower may, in
lieu of making such payment on such date in order to avoid the obligation to pay
Breakage Costs, deposit Dollars with the Lender in an amount equal to the amount
of the Eurodollar Rate Advances being repaid plus interest to the date such
prepayment will be applied. Such deposit shall (A) be held by the Lender on
terms and conditions satisfactory to the Lender in its sole discretion and (B)
be applied by the Lender to such Eurodollar Rate Advances on the last day of the
Interest Period therefor.
SECTION II.10. INCREASED COSTS.
(a) INCREASE IN COST. If, due to either (i) the introduction
of or any change in or in the interpretation of any law or regulation
after the Closing Date or (ii) the compliance with any guideline or
request from any central bank or other Governmental Authority (whether
or not having the force of law) made after the Closing Date, there
shall be any increase in the cost to the Lender of agreeing to make or
making, funding or maintaining Eurodollar Rate Advances, then the
Borrower shall from time to time pay to the Lender, additional amounts
sufficient to compensate the Lender or participant for such increased
cost. Such costs shall be payable only if demanded within six (6)
months after they were incurred and shall be due thirty (30) days after
demand. Demand shall be made by delivery to the Borrower of a
certificate of the Lender, setting forth in reasonable detail the
calculation of the costs for which demand is made. Such certificate
shall, in the absence of manifest error, be conclusive and binding on
the Borrower.
(b) INCREASE IN CAPITAL REQUIREMENTS. If the Lender determines
that compliance with any change in law or regulation or any guideline
or request from any central bank or other Governmental Authority
(whether or not having the force of law), in each case after the
Closing Date, affects or would affect the amount of capital required or
expected to be maintained by the Lender or any corporation controlling
the Lender and that the amount of such capital is increased by or based
upon the existence of the Lender's commitment to lend or funding
hereunder and other commitments or funding of this type, then, upon
demand by the Lender, the Borrower shall, within thirty (30) days after
demand from time to time by the Lender, pay to the Lender, additional
amounts sufficient to compensate the Lender in the light of such
circumstances, to the extent that the Lender determines in good faith
that such increase in capital to be allocable to the existence of the
Lender's commitment to lend or funding hereunder. No such compensation
may be demanded as to increased capital maintained by the Lender more
than six (6) months before compensation was first demanded by the
Lender under this Section 2.10(b). Demand for such compensation shall
be made by delivery to the Borrower of a certificate
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of the Lender setting forth the amount demanded. Such certificate
shall, in the absence of manifest error, be conclusive and binding on
the Borrower.
SECTION II.11. ILLEGALITY. Notwithstanding any other provision
of this Agreement, if the Lender shall notify the Borrower that the introduction
of or any change in or in the interpretation of any law or regulation makes it
unlawful, or any central bank or other Governmental Authority asserts that it is
unlawful, for the Lender to perform its obligations hereunder to make Eurodollar
Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, then
(i) the obligation of the Lender to make or continue, or to convert Advances
into, Eurodollar Rate Advances shall be suspended until the Lender shall notify
the Borrower that the circumstances causing such suspension no longer exist, and
(ii) the Borrower shall forthwith either (A) prepay in full all Eurodollar Rate
Advances of the Lender then outstanding, together with interest accrued thereon
and Breakage Costs related thereto, or (B) convert all Eurodollar Rate Advances
of the Lender then outstanding into Base Rate Advances and pay all interest
accrued thereon to the date of conversion and all Breakage Costs related
thereto.
SECTION II.12. PAYMENTS AND COMPUTATIONS.
(a) PAYMENTS. The Borrower shall make each payment due
hereunder not later than 2:00 p.m. (Pacific time) on the day payment is
due, in Dollars received by the Lender at its address referred to in
Section 7.2 in same day funds.
(b) COMPUTATIONS. Except as otherwise specified in Section
2.16(a), all computations of interest and fees accruing at a per annum
rate shall be made on the basis of the actual number of days (including
the first day but excluding the last day) occurring in the period for
which such interest or fees are payable and a year of three hundred
sixty (360) days.
(c) PAYMENT ON BUSINESS DAY. Whenever any payment hereunder is
due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day, and such extension of time shall be
included in the computation of interest or fees. If, however, such
extension would cause payment of interest on or principal of Eurodollar
Rate Advances to be made in the next following calendar month, such
payment shall be made on the next preceding Business Day.
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SECTION II.13. TAXES.
(a) NET PAYMENTS. Any and all payments by the Borrower
hereunder shall be made free and clear of, and without deduction for,
any and all present or future taxes, levies, imposts, deductions,
charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of the Lender, taxes imposed on its net income,
and franchise taxes imposed on it, by the jurisdiction under the laws
of which the Lender is organized or any municipal subdivision thereof
(all such non-excluded taxes, levies, imposts, deductions, charges,
withholdings and liabilities, collectively, are "Taxes"). If the
Borrower is required by law to deduct any Taxes from or in respect of
any sum payable hereunder to the Lender, (i) the sum payable shall be
increased as may be necessary so that after making all required
deductions (including deductions applicable to additional sums payable
under this Section 2.13) the Lender receives an amount equal to the sum
it would have received if no such deductions had been made, (ii) the
Borrower shall make such deductions, and (iii) the Borrower shall pay
the full amount deducted to the relevant taxation authority or other
authority in accordance with applicable law.
(b) PAYMENT OF OTHER TAXES. In addition, the Borrower agrees
to pay any present or future stamp or documentary taxes or any other
excise or property taxes, charges or similar levies which arise from
any payment made hereunder or under or from the execution, delivery or
registration of, or otherwise with respect to, this Agreement or any
other Loan Document ("Other Taxes").
(c) INDEMNIFICATION. The Borrower will indemnify the Lender
for the full amount of Taxes or Other Taxes (including any Taxes or
Other Taxes imposed by any jurisdiction on amounts payable under this
Section 2.13) paid by the Lender and any liability (including
penalties, interest and expenses) arising therefrom or with respect
thereto. Payment under this indemnity shall be due thirty (30) days
after written demand therefor.
(d) EVIDENCE OF PAYMENTS. Within thirty (30) days after the
date of any payment of Taxes, the Borrower will furnish to the Lender,
at its address referred to in Section 7.2, the original or a certified
copy of a receipt evidencing payment thereof. If no Taxes are payable
in respect of any payment hereunder, the Borrower will furnish to the
Lender, at such address, a certificate from each appropriate taxing
authority, or an opinion of counsel acceptable to the Lender, in either
case stating that such payment is exempt from or not subject to Taxes.
SECTION II.14. ISSUANCE OF LETTERS OF CREDIT. Upon the request
of the Borrower, and subject to the conditions set forth in Article III hereof
and such other conditions to the opening of Letters of Credit as the Lender
requires of its customers generally, the Lender shall from time to time open
standby and/or documentary (commercial) letters of credit (each, a "Letter of
Credit") for the account of the Borrower; PROVIDED, HOWEVER, that the Letter of
Credit Usage shall not at any time exceed $3,000,000; and PROVIDED, FURTHER,
that no Letter of Credit
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shall be opened if at such time the sum of the Letter of Credit Usage then
outstanding (after giving effect to the proposed new Letter of Credit) plus the
aggregate Facility A Advances then outstanding shall exceed the lesser of the
Facility A Amount or the Borrowing Base at such time. The issuance of each
Letter of Credit shall be made on at least five (5) Business Days' prior written
notice from the Borrower to the Lender which written notice shall be an
application for a Letter of Credit on the Lender's customary form completed to
the satisfaction of the Lender, together with the proposed form of the Letter of
Credit (which shall be denominated in Dollars and require drafts payable at
sight and otherwise be satisfactory to the Lender) and such other certificates,
documents and other papers and information as the Lender may reasonably request.
The Lender shall not at any time be obligated to issue any Letter of Credit if
such issuance would conflict with, or cause the Lender to exceed any limits
imposed by, any applicable requirements of law. The expiration date of any
standby Letter of Credit shall not be later than three hundred sixty (360) days
from the date of issuance thereof or such later date to which a Letter of Credit
expiration date may be extended by the application of automatic extension or
"evergreen" provisions of such Letter of Credit and the expiration date of any
documentary (commercial) Letter of Credit shall not be later than one hundred
eighty (180) days from the date of issuance thereof; PROVIDED, HOWEVER, that in
no event shall any Letter of Credit shall have an expiration date later than the
Facility A Maturity Date. The Letters of Credit shall be issued with respect of
transactions occurring in the ordinary course of business of the Borrower.
SECTION II.15. PAYMENT OF LETTERS OF CREDIT; REIMBURSEMENT.
The Lender shall review each draft and any accompanying documents presented
under a Letter of Credit. Promptly after the Lender shall have ascertained that
any draft and any accompanying documents presented under such Letter of Credit
appear on their face to be in substantial conformity with the terms and
conditions of the Letter of Credit, (i) the Lender shall, not later than 11:00
a.m. (Pacific time) on the date payment under the Letter of Credit is to be
made, give telephonic or facsimile notice to the Borrower of the receipt and
amount of such draft and the date on which payment thereon will be made, and
(ii) the Lender shall, not later than 2:00 p.m. (Pacific time) on such day, make
the appropriate payment to the beneficiary of such Letter of Credit, and (iii)
the Borrower shall, not later than 2:00 p.m. (Pacific time) on such date,
reimburse the Lender for such payment (such reimbursement may be in the form of
an Advance under Facility A, if the Borrower meets all of the conditions
precedent for such an Advance and complies with the requirements of Section
2.1). If the Borrower does not reimburse the Lender within the time set forth
above, then the Borrower shall pay to the Lender (in addition to the amount of
the drawing) interest on such amount at a rate per annum equal to the rate
applicable to Base Rate Advances hereunder PLUS three percent (3%), payable on
demand. The obligations of the Borrower under this Section 2.15 to reimburse the
Lender for all drawings under Letters of Credit shall be absolute, unconditional
and irrevocable and shall be satisfied strictly in accordance with their terms,
irrespective of:
(A) any lack of validity or enforceability of any Letter of
Credit;
(B) the existence of any claim, setoff, defense or other right
which the Borrower or any other Person may at any time have against the
beneficiary under any Letter of
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Credit or the Lender (other than the defense of payment in accordance with the
terms of this Agreement or a defense based on the gross negligence or willful
misconduct of the Lender) or any other Person in connection with this Agreement
or any other transaction;
(C) any draft or other document presented under any Letter of
Credit proving to be forged, fraudulent, invalid or insufficient in any respect
or any statement therein being untrue or inaccurate in any respect;
(D) payment by the Lender under any Letter of Credit against
presentation of a draft or other document which does not comply with the terms
of such Letter of Credit; and
(E) any other circumstance or event whatsoever, whether or not
similar to any of the foregoing.
It is understood that in making any payment under any Letter of Credit
(x) the Lender's exclusive reliance on the documents presented to it under such
Letter of Credit as to any and all matters set forth therein, including, without
limitation, reliance on the amount of any draft presented under such Letter of
Credit, whether or not the amount due to the beneficiary equals the amount of
such draft and whether or not any document presented pursuant to such Letter of
Credit proves to be insufficient in any respect, if such document on its face
appears to be in order, and whether or not any other statement or any other
document presented pursuant to such Letter of Credit proves to be forged or
invalid or any statement therein proves to be inaccurate or untrue in any
respect whatsoever, and (y) any noncompliance in any immaterial respect of the
documents presented under such Letter of Credit with the terms thereof shall, in
each case, not be deemed willful misconduct or gross negligence of the Lender.
SECTION II.16. LETTER OF CREDIT FEES.
(a) The Borrower agrees to pay to the Lender with respect to
each standby Letter of Credit, an issuance fee equal to the then effective per
annum Interest Margin applicable to Eurodollar Rate Advances multiplied by the
face amount of such Letter of Credit for the period from and including the date
of issuance to and including the stated expiry date, payable prior to issuance
of such Letter of Credit.
(b) The Borrower agrees to pay to the Lender with respect to
each documentary (commercial) Letter of Credit, an issuance fee at the rate
customarily charged by the Lender at the time in like circumstances, payable
prior to issuance of such Letter of Credit.
(c) The Borrower agrees to pay to the Lender on demand, such
other commissions, negotiation fees, transfer fees, and other fees, charges and
expenses in connection with the issuance, amendment, transfer, cancellation,
handling or administration of each Letter of Credit which are customarily
charged by the Lender at the time in connection with such matters.
(d) Any fees paid pursuant to this Section 2.16 are
non-refundable.
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ARTICLE III
CONDITIONS OF LENDING
SECTION III.1. CONDITIONS PRECEDENT ON THE CLOSING DATE. This
Agreement shall become effective and binding upon the parties hereto only if
each of the following conditions precedent is satisfied or waived by the Lender
no later than October 30, 1996:
(a) LOAN DOCUMENTS. The Lender must have received:
(i) this Agreement, including all exhibits and
schedules hereto, duly executed by the Borrower and the
Lender;
(ii) the Guaranty, duly executed by each Material
Subsidiary;
(iii) the Borrower Pledge and Security Agreement,
duly executed by the Borrower, and the Subsidiary Pledge and
Security Agreement, duly executed by each Material Subsidiary
(other than O.S.I. Puerto Rico), together with (A)
certificates representing the Pledged Shares referred to in
Schedule A to each Pledge and Security Agreement, accompanied
by undated stock powers executed in blank, and (B) evidence
satisfactory to the Lender that all other actions necessary
or, in the reasonable opinion of the Lender, desirable to
perfect and protect the security interests created by the
Pledge and Security Agreements have been taken, including
delivery to the Lender of (x) all instruments constituting
Collateral, duly endorsed (to the extent required by the
Pledge and Security Agreements) and (y) UCC-1 financing
statements duly executed by the Borrower and each Material
Subsidiary (other than O.S.I. Puerto Rico) in form sufficient
for filing in all offices in which the Lender may consider
filing to be appropriate in order to perfect the Lender's
security interest;
(iv) the Subordination Agreement, duly executed by
John Fruth, and acknowledged by the Borrower;
(v) the Intercreditor Agreement, duly executed by
Banco Vizcaya Puerto Rico, and acknowledged by the Borrower;
(vi) the Intellectual Property Security Agreement,
duly executed by the Borrower, in form sufficient for
recording in the United States Patent and Trademark Office and
the United States Copyright Office; and
(vii) Transfer and Perfection Notices as to Permitted
Cash Investments of the Borrower and the Guarantors, to the
extent required under Section 5.2(j).
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(b) CORPORATE DOCUMENTS. The Lender must have received:
(i) copies of the articles or certificate of
incorporation and by-laws or other governing documents of each
Loan Party as in effect on the Closing Date, certified as of
the Closing Date by the Secretary of State of the state in
which such Loan Party is incorporated or formed or the
Secretary or an Assistant Secretary of such Loan Party, as
applicable;
(ii) copies of resolutions of the Board of Directors
of each Loan Party approving the transactions contemplated
hereby and authorizing the execution, delivery and performance
of each Loan Document to which it is a party, certified as of
the Closing Date by a Secretary or an Assistant Secretary of
such Loan Party;
(iii) a certificate of the Secretary or an Assistant
Secretary of each Loan Party certifying the names and true
signatures of the officers of such Loan Party authorized to
sign each Loan Document to which it is a party and, in the
case of the Borrower, to request an extension of credit
hereunder; and
(iv) a good standing certificate for each Loan Party,
issued as of a recent date by the Secretary of State of (A)
the state in which such Loan Party is incorporated or formed
and (B) each state in which it owns material assets and
conducts material operations.
(c) GOVERNMENTAL CONSENTS. Each Loan Party must have obtained
all consents, approvals and authorizations required from any
Governmental Authority in connection with the execution, delivery and
performance of its obligations under the Loan Documents.
(d) NO INJUNCTION. No law or regulation shall prohibit, and no
order, judgment or decree of any Governmental Authority shall enjoin,
prohibit or restrain, and no litigation shall be pending or threatened
which in the reasonable judgment of the Lender would enjoin, prohibit
or restrain (i) the making of the Advances or the issuance of Letters
of Credit, or (ii) the consummation of the transactions contemplated by
the Loan Documents.
(e) OTHER DELIVERIES. The Lender must have received:
(i) a copy of the Borrower's audited financial
statement for the Fiscal Year ended December 31, 1995;
(ii) certificates evidencing the Loan Parties'
compliance with the insurance requirements set forth in
Section 5.2(g), including loss payable clauses in favor of the
Lender;
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(iii) a certificate dated as of the Closing Date and
signed by an Authorized Officer, certifying on behalf of the
Borrower that, as of the Closing Date, (A) the representations
and warranties contained in Article IV of this Agreement and
in each other Loan Document are true and correct on and as of
the Closing Date, as though made on and as of such date, (B)
no Event of Default or Potential Default has occurred and is
continuing, (C) since December 31, 1995, there has been no
Material Adverse Change, and (D) each of the other applicable
conditions precedent set forth in this Article III has been
satisfied;
(iv) all documents evidencing other necessary
corporate action and governmental approvals, if any, with
respect to this Agreement or any other Loan Document; and
(v) such other certificates, agreements, documents or
instruments as the Lender may reasonably request in writing.
(f) LEGAL OPINIONS. The Lender must have received an opinion
of (i) Fenwick & West, LLP, outside counsel for the Borrower and the
Guarantor, (ii) Bird Bird and Hestres, Puerto Rican counsel to O.S.I.
Puerto Rico and (ii) outside foreign counsel in Canada and the United
Kingdom, substantially in the forms of Exhibits C-1, C-2 and C-3,
respectively, and as to such other matters as the Lender may reasonably
request.
(g) PAYMENT OF EXISTING DEBT. The Lender must have received
evidence satisfactory to the Lender that all Debt of the Borrower and
its Subsidiaries, except Debt permitted to be outstanding pursuant to
Section 5.3(d), has been repaid in full and all related financing
commitments have been terminated.
(h) PAYMENT OF FEES AND EXPENSES. The Lender shall have
received the Fee Letter, duly executed by an Authorized Officer, and
all fees and expense reimbursements due to the Lender under this
Agreement and the Fee Letter must have been paid.
(i) NO MATERIAL ADVERSE CHANGE. Since December 31, 1995,
there must not have been any Material Adverse Change.
SECTION III.2. CONDITIONS PRECEDENT TO EACH EXTENSION OF
CREDIT. The Lender shall not be obligated to make any Advance on the date of any
Borrowing (including the Closing Date) and/or to issue a Letter of Credit on any
date, unless each of the following conditions precedent is then satisfied or
waived:
(a) NOTICE. The Borrower shall have delivered a fully
completed Notice of Borrowing or request for Letter of Credit, as
applicable.
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(b) CERTIFICATION. Each of the following statements shall be
true and correct, and the Lender shall have received a certificate
dated such date and signed by an Authorized Officer, certifying on
behalf of the Borrower that:
(i) the representations and warranties contained in
Article IV of this Agreement and in Article III of each Pledge
and Security Agreement are true and correct in all material
respects on and as of such date, both before and after giving
effect to the extension of credit to be made hereunder on such
date and the application of the proceeds therefrom, as though
made on and as of such date; and
(ii) no event has occurred and is continuing, or
would result from such extension of credit or from the
application of the proceeds therefrom, which constitutes an
Event of Default or a Potential Default.
The delivery of a Notice of Borrowing or request for Letter of Credit and the
acceptance by the Borrower of the proceeds of a Borrowing or the issuance of a
Letter of Credit shall constitute a representation and warranty by the Borrower
that, on the date of such credit extension, the foregoing statements are true.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION IV.1. REPRESENTATIONS AND WARRANTIES OF THE BORROWER.
The Borrower represents and warrants as follows:
(a) ORGANIZATION. Each Loan Party is a corporation, limited
liability company or partnership duly organized, validly existing and
in good standing under the laws of the jurisdiction in which it is
organized and is duly qualified to do business and in good standing in
each jurisdiction where its material assets are located or its material
operations are conducted, except where the failure to be so qualified
could not reasonably be expected to cause a Material Adverse Change.
(b) POWER AND AUTHORITY. Each Loan Party has the corporate or
partnership power (i) to carry on its business as now being conducted
and as proposed to be conducted by it, (ii) to execute, deliver and
perform each Loan Document to which it is a party, and (iii) to take
all action necessary to consummate the transactions contemplated under
each Loan Document to which it is a party.
(c) DUE AUTHORIZATION. The execution, delivery and performance
by each Loan Party of each Loan Document to which it is or will be a
party have been duly authorized by all necessary action of its board of
directors (or, in case of a Loan Party that is not a corporation,
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its governing authority) and neither contravene its certificate or
articles of incorporation or by-laws (or, in case of a Loan Party that
is not a corporation, its governing agreements) nor result in or
require the creation of any Lien (other than pursuant to the Collateral
Documents) upon any of its property or assets.
(d) SUBSIDIARIES AND OWNERSHIP OF CAPITAL STOCK. Set forth in
Schedule 4.1(d) or in Schedule A to the Borrower Pledge and Security
Agreement, as such Schedule may be amended pursuant to Section 5.2(e),
or in Schedule A to the Subsidiary Pledge and Security Agreement, as
such Schedule may be amended pursuant to Section 5.2(e), is a complete
list of all direct and indirect Subsidiaries of the Borrower. Such
Schedules also set forth the number of issued and authorized shares of
each class of capital stock of and other equity, ownership or profit
interests in such Subsidiary and the identity of the holders of all
such shares. Except as set forth in such Schedules, no capital stock of
or other equity, ownership or profit interest in any such Subsidiary is
subject to issuance or sale under any warrant, option or purchase
right, conversion or exchange right, call, commitment or claim of any
right, title or interest therein or thereto. The outstanding capital
stock of each such Subsidiary is duly authorized, validly issued, fully
paid and nonassessable and, is not "margin stock," as that term is
defined in Regulations G, T, U and X of the Board of Governors of the
Federal Reserve System.
(e) GOVERNMENTAL APPROVAL. No authorization or approval or
other action by, and no notice to or filing with, any Governmental
Authority is required for the due execution, delivery and performance
by each of the Loan Parties of any Loan Document to which it is or will
be a party, except for (i) those listed on Schedule 4.1(e), (ii) any
filings or recordings required under the Loan Documents to perfect the
security interest in favor of the Lender, each of which has been duly
obtained or made and is in full force and effect, and (iii) filings and
other actions required in connection with the exercise by the Lender of
its remedies in respect of the Pledged Shares (as defined in the
Collateral Documents).
(f) BINDING AND ENFORCEABLE. This Agreement is, and each other
Loan Document to which any Loan Party will be a party is or when
delivered will be, legal, valid and binding obligations of the Loan
Parties enforceable against the Loan Parties in accordance with their
respective terms, subject to laws generally affecting the enforcement
of creditors' rights.
(g) FINANCIAL INFORMATION. The consolidated balance sheets of
the Borrower and its Subsidiaries as at December 31, 1994 and December
31, 1995 and the related income and cash flow statements for the
periods then ended, each other financial statement of the Borrower and
its Subsidiaries delivered to the Lender on or prior to the Closing
Date (excluding any forecasts or financial projections which may have
been delivered to the Lender), and each financial statement delivered
to the Lender pursuant to Section 5.2(c), as and when delivered to the
Lender, fairly present the financial condition of the Borrower
and its Subsidiaries as at the date thereof and the results of their
operations for the period then ended, all in accordance with GAAP
consistently applied but subject, in the case of unaudited financial
statements, to normal year-end adjustments
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and the absence of footnotes.
(h) MATERIAL ADVERSE CHANGE. Since December 31, 1995, there
has been no Material Adverse Change.
(i) COMPLIANCE. The execution, delivery and performance by
each Loan Party of each Loan Document to which it is or will be a party
complies with all applicable laws. Each Loan Party is in compliance in
all material respects with all material applicable laws, rules,
regulations and orders.
(j) LITIGATION. Set forth on Schedule 4.1(j) is a list, as of
the Closing Date, of all pending or, to the Borrower's knowledge,
overtly threatened actions or proceedings affecting any Loan Party
before any court, governmental agency or arbitrator, other than any
action or proceeding that would not subject the Loan Parties to
liability in excess of $1,000,000 individually or in the aggregate.
Except as identified on Schedule 4.1(j), there is no pending or, to the
Borrower's knowledge, overtly threatened action or proceeding affecting
any Loan Party before any court, governmental agency or arbitrator,
which could reasonably be expected to result in a Material Adverse
Change or which relates to or could reasonably be expected to affect
the legality, validity or enforceability of any Loan Document.
(k) NO CONFLICT. The execution, delivery and performance by
each Loan Party of each of the Loan Documents to which it is a party do
not and will not (i) to its best knowledge, conflict with, result in a
breach of, or constitute (with or without notice or the lapse of time
or both) a default under, any instrument, lease, indenture, agreement
or other contractual obligation issued by any Loan Party or enforceable
against it or any of its property or assets if (A) such agreement is
required to be filed with the Securities and Exchange Commission in
accordance with the 1934 Act (or would be required to be so filed if
the Borrower is subject to the reporting requirements of the 1934 Act),
(B) such Agreement is not readily replaceable without any material
adverse effect on such Loan Party or its business, or (C) any such
conflict, breach or default would have a material adverse effect on the
business of such Loan Party or (ii) require any approval of its
stockholders or partners that has not been obtained.
(l) NO DEFAULT. No event has occurred and is continuing which
constitutes an Event of Default or a Potential Default.
(m) PAYMENT OF TAXES. Each Loan Party has filed all federal
income tax returns and all other tax returns required to be filed by it
or has timely filed extensions relating thereto and has paid all taxes
and assessments payable by it which have become due except (i) to the
extent being contested in accordance with the provisions of Section
5.2(h), and (ii) in the case of state and local tax returns and taxes,
where the same would not reasonably be expected to result in aggregate
liability to the Borrower and its Subsidiaries in excess of $500,000.
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(n) MARGIN REGULATIONS. No proceeds of any Advance will be
used for any purpose that requires any the Lender to deliver or obtain
any certification under, or to comply with any margin requirement or
other provision of, Regulations G, T, U or X of the Board of Governors
of the Federal Reserve System.
(o) CONDUCT OF BUSINESS. The Borrower and its Subsidiaries are
engaged in the lines of business described in Schedule 4.1(o) and
activities substantially similar or reasonably incidental thereto.
(p) ENVIRONMENTAL MATTERS. Except as set forth in Schedule
4.1(p), as it may from time to time be amended by the Borrower, no
Material Environmental Claim is pending or, to the knowledge of the
Borrower, overtly threatened against the Borrower or any of its
Subsidiaries or any of their past or present property or assets. Except
as set forth in Schedule 4.1(p), and except in respect of matters that,
in the aggregate, are not and cannot reasonably be expected to result
in a Material Environmental Claim or a Material Adverse Change, the
operations of the Borrower and its Subsidiaries comply and, to the
knowledge of the Borrower, have complied in all material respects with
all applicable Environmental Laws.
(q) ERISA COMPLIANCE.
(i) Each Plan is in compliance in all material
respects with the applicable provisions of ERISA, the Code and
other applicable federal or state law.
(ii) Each Pension Plan which is intended to be
tax-qualified under Section 401(a) of the Code has been
determined by the Internal Revenue Service to qualify under
Section 401 of the Code, and the trusts created thereunder
have been determined to be exempt from tax under the
provisions of Section 501 of the Code, and to the best
knowledge of the Borrower nothing has occurred which would
cause the loss of such qualification or tax-exempt status.
(iii) Except as set forth in Schedule 4.1(q), (A)
none of the Pension Plans which is subject to Title IV of
ERISA has any material Unfunded Pension Liability as to which
the Borrower or any ERISA Affiliate is or may be liable; (B)
neither the Borrower nor any ERISA Affiliate has nor
reasonably expects to incur any material liability (and no
event has occurred which, with the giving of notice under
Section 4219 of ERISA, would result in such material
liability) under Section 4201 or 4243 of ERISA with respect to
any Multiemployer Plan; (C) no ERISA Event has occurred or, to
the best knowledge of the Borrower, is reasonably expected to
occur; and (D) neither the Borrower nor any ERISA Affiliate
has maintained any Welfare Plan which provides, or requires
the Borrower or any ERISA Affiliate to provide, medical or
other welfare benefits to
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<PAGE> 46
any participant after the termination of such participant's
employment with the Borrower or such ERISA Affiliate (except
to the extent required by the provisions of Part 6 of Title I,
Subtitle B of ERISA or Sections 162(k) and 4980B of the Code).
(iv) Each Welfare Plan which is a "group health
plan," as defined in Section 607(1) of ERISA, has been
operated in compliance with provisions of Part 6 of Title I of
ERISA and Sections 162(k) and 4980B of the Code at all times.
(v) Neither the Borrower nor any ERISA Affiliate has
engaged, directly or indirectly, in a prohibited transaction
(as defined in Section 4975 of the Code or Section 406 of
ERISA) for which no statutory or administrative exemption is
applicable in connection with any Plan the consequences of
which, in the aggregate, constitute or can reasonably be
expected to result in a Material Adverse Change.
(r) TITLE TO ASSETS. Each Loan Party has good and merchantable
title to, or valid leasehold interest in, as of the date of each of its
financial statements delivered hereunder, all of its material assets
reflected therein and all assets and properties acquired since the date
of such financial statements, free and clear of all Liens except Liens
permitted under Section 5.3(a) (it being understood that the Galley
Litigation and the Litigation Adjustment shall not be deemed a breach
of this representation). Each Loan Party has complied with all material
obligations under all leases of real property to which it is a party
and under which it is in occupancy, and all such leases are in full
force and effect and each Loan Party enjoys peaceful and undisturbed
possession under all such leases.
(s) PERFECTION. On and after the Closing Date and, with
respect to perfection upon the filing, recording or delivery of the
financing statements, Intellectual Property Assignment, Transfer and
Perfection Notices delivered pursuant to Section 3.1(a) or Section
5.2(e), the provisions of each Collateral Document are effective to
create, for the benefit of the Lender, legal, valid and perfected
security interests in all right, title and interest in the Collateral
described therein (to the extent that a security interest in such
Collateral can be perfected by the filing, recording or delivery of
such financing statements, Intellectual Property Security Agreement,
Transfer and Perfection Notices) enforceable against each Loan Party
that owns an interest in such Collateral, subject to laws generally
affecting the enforcement of creditors' rights. The Loan Parties have
delivered to the Lender the instruments constituting Collateral as to
which (i) delivery to the Lender is required under Section 3.1(a) or
Section 5.2(e), and (ii) possession by the Lender is required to
perfect the security interest in favor of the Lender in such
Collateral.
(t) UNDISCLOSED LIABILITIES. Except as set forth on Schedule
4.1(t), neither the Borrower nor any of its Subsidiaries has any
liabilities, contingent or otherwise, which
39
<PAGE> 47
are not reflected on the most recent financial statements delivered to
the Lender pursuant to Section 5.2(c) and which could reasonably be
expected to constitute a Material Adverse Change (it being understood
that the Galley Litigation and the Litigation Adjustment shall not be
deemed a breach of this representation).
ARTICLE V
COVENANTS OF BORROWER
SECTION V.1. FINANCIAL COVENANTS. So long as any Obligation
remains unpaid or the Lender is obligated to extend credit hereunder, unless the
Lender otherwise consents in writing:
(a) MAXIMUM LEVERAGE RATIO. The Borrower will not cause,
permit or suffer the Leverage Ratio determined as of each Fiscal
Quarter End Date occurring during the applicable period set forth below
to be greater than the ratio set forth as to such date below:
<TABLE>
<CAPTION>
Fiscal Quarter End Date Maximum Leverage Ratio
----------------------- ----------------------
<S> <C>
Closing Date through and
including June 30, 1997 1.75:1.00
September 30, 1997 and thereafter 1.50:1.00
</TABLE>
(b) MINIMUM FIXED CHARGE COVERAGE RATIO. The Borrower will not
cause, permit or suffer the Fixed Charge Coverage Ratio as of each
Fiscal Quarter End Date occurring during the applicable period set
forth below, to be less than the ratio set forth as to such date below:
<TABLE>
<CAPTION>
Minimum Fixed Charge
Fiscal Quarter End Date Coverage Ratio
----------------------- --------------------
<S> <C>
Closing Date through and
including March 31, 1997 1.10:1.00
June 30, 1997 1.25:1.00
September 30, 1997 through
and including September 30, 1998 1.40:1.00
December 31, 1998 and thereafter 1.50:1.00
</TABLE>
(e) MINIMUM PROFITABILITY. The Borrower will not cause, permit
or suffer Consolidated Net Income for each Fiscal Quarter to be less
than $1.00.
(d) MINIMUM CONSOLIDATED TANGIBLE EFFECTIVE NET WORTH. The
Borrower will not cause, permit or suffer Consolidated Tangible
Effective Net Worth as of each Fiscal Quarter End Date to be less than
the sum of (i) $18,750,000, PLUS (ii) eighty
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<PAGE> 48
percent (80%) of Consolidated Net Income for each Fiscal Quarter (on a
cumulative basis but without taking into account any loss incurred
during any Fiscal Quarter), commencing with the Fiscal Quarter ending
on September 30, 1996 (provided that the Fiscal Quarter ending on
September 30, 1996 shall include August 1, 1996 through September 30,
1996 only), PLUS (iii) one hundred percent (100%) of the Cash Proceeds
from any Equity Issuance after the Closing Date.
SECTION V.2. AFFIRMATIVE COVENANTS. So long as any Obligation
remains unpaid or any the Lender is obligated to extend credit hereunder, unless
the Lender otherwise consents in writing, the Borrower will, and will cause its
Subsidiaries to:
(a) COMPLIANCE WITH LAWS. Comply in all material respects with
all applicable laws, rules, regulations and orders.
(b) INSPECTION OF PROPERTY AND BOOKS AND RECORDS. (i) Maintain
proper books of record and account, in which full, true and correct
entries in conformity with GAAP consistently applied shall be made of
all financial transactions and matters involving its assets and
business, as and to the extent required by GAAP, and (ii) permit
representatives of the Lender to visit and inspect any of its
properties, to examine its corporate, financial and operating records
and make copies thereof or abstracts therefrom, and to discuss its
affairs, finances and accounts with its officers, employees and
independent public accountants, and to conduct an audit of the
Collateral, all at the expense of the Borrower (not to exceed $1,500
per audit) and at such reasonable times during normal business hours
and as often as may be reasonably requested (but not more than twice
per calendar year, unless an Event of Default or Potential Default
shall have occurred and be continuing in which case such limitation
shall not apply), upon at least three (3) Business Days' advance notice
to the Borrower, except that when an Event of Default exists the Lender
may take any such action at any time during business hours and on
same-day notice.
(d) REPORTING REQUIREMENTS. Furnish to the Lender:
(i) as soon as available and in any event within
thirty (30) days after the end of each of calendar month, the
consolidated and consolidating balance sheet of the Borrower
and its Subsidiaries as at the end of such month and their
consolidated and consolidating income and cash flow statements
for such month and for the Fiscal Year to date, prepared by
the Borrower and certified by an Authorized Officer;
(ii) as soon as available and in any event within one
hundred and twenty (120) days after the end of each Fiscal
Year, consolidated financial statements of the Borrower and
its Subsidiaries for such Fiscal Year, certified without any
qualification by a firm of certified public accountants of
nationally recognized standing, together with a company-
prepared consolidating balance
41
<PAGE> 49
sheet of the Borrower and its Subsidiaries as at the end of
such Fiscal Year and their consolidating income and cash flow
statements for such Fiscal Year, certified by an Authorized
Officer;
(iii) as soon as available, a copy of each management
letter delivered to the Borrower by any outside auditing firm,
if such management letter identifies a material weakness;
(iv) as soon as possible and in any event within five
(5) Business Days after becoming aware of any Event of Default
or Potential Default, any pending or overtly threatened
material litigation, any Material Environmental Claim, any
ERISA Event or any Material Adverse Change, a statement of an
Authorized Officer setting forth details of such Event of
Default or Potential Default, litigation, claim, event or
change and the action which the Borrower has taken and
proposes to take with respect thereto;
(v) promptly after the filing thereof, copies of all
reports and all registration statements filed by or on behalf
of the Borrower with the Securities and Exchange Commission or
any national securities exchange, excluding filings on Form
S-8 (or any successor form) and any other filing solely in
respect of stock option plans of the Borrower;
(vi) as soon as available and in any event within
thirty (30) days after the end of each Fiscal Quarter, a
Compliance Certificate signed by an Authorized Officer in
substantially the form of Exhibit D-1 and setting forth the
information requested therein;
(vii) as soon as possible and in any event within
thirty (30) days after the end of each Fiscal Year,
company-prepared financial forecasts and projections for the
ensuing Fiscal Year in a form reasonably acceptable to the
Lender;
(viii) within thirty (30) days after the end of each
month, a Borrowing Base Certificate signed by an Authorized
Officer in substantially the form of Exhibit D-2 and setting
forth the information requested therein, together with a
summary accounts receivable aging and summary inventory
reports as of the last day of such month; and
(ix) such other information respecting the assets,
liabilities, condition or operations, financial or otherwise,
of the Borrower or any of its Subsidiaries as the Lender from
time to time may reasonably request.
(d) PRESERVATION OF CORPORATE EXISTENCE, ETC. Subject to
Section 5.3(h) and in the case of each Loan Party, (i) preserve and
maintain in full force and effect its corporate or partnership
existence and good standing under the laws of the jurisdiction in
42
<PAGE> 50
which it was incorporated or organized and all rights, privileges,
qualifications, permits, licenses and franchises material to the normal
conduct of its business, (ii) use its reasonable efforts, in the
ordinary course and consistent with past practice, to preserve its
business organization, reputation and goodwill, and (iii) preserve or
renew all of its patent, copyrights, trademarks and licenses therefor
and other intellectual property, in each case where the
non-preservation of which constitutes or could reasonably be expected
to result in a Material Adverse Change; PROVIDED, HOWEVER, that the
Borrower may consummate any merger or consolidation permitted under
Section 5.3(g); and PROVIDED, FURTHER, that neither the Borrower nor
any of its Subsidiaries shall be required to preserve or maintain any
right, asset, goodwill, business or franchise if the Borrower shall
determine that the preservation thereof is not longer desirable in the
conduct of the business of the Borrower or such Subsidiary, as the case
may be, and that the loss thereof is not disadvantageous in any
material respect to the Borrower, such Subsidiary or the Lender.
(e) NEW SUBSIDIARIES. Promptly, and in any event within ten
(10) Business Days, after the date on which a new (direct or indirect)
Subsidiary of the Borrower is formed or acquired, (i) notify the Lender
of such event and (ii) amend Schedule 4.1(d); and promptly, and in any
event within twenty (20) Business Days, after the formation,
acquisition or change of each Material Subsidiary and each Foreign
Subsidiary, (A) deliver to the Lender all stock certificates and other
instruments added to the Collateral thereby (to the extent required by
the Pledge and Security Agreements), accompanied by an undated stock
power or transfer document executed in blank (provided that in the case
of a Foreign Subsidiary, stock certificates or other instruments
representing only sixty-five percent (65%) of the Borrower's equity
interest therein shall be delivered to the Lender) and amend Schedules
A, B and C of the appropriate Pledge and Security Agreement in light of
such event; (B) cause each such Material Subsidiary (but not each such
Foreign Subsidiary) to execute and deliver a joinder to the Guaranty, a
joinder to the Subsidiary Pledge and Security Agreement, a joinder to
the Intellectual Property Security Agreement, and all financing
statements and other documents required thereunder or appropriate to
perfect the security interest created thereby; and (C) deliver to the
Lender in respect of the new Subsidiary an opinion of counsel
confirming as to the new Subsidiary the matters required to be
confirmed under Section 3.1(a)(iii) and 3.1(f), as applicable.
(f) MAINTENANCE OF PROPERTY. Maintain and preserve all its
property which is necessary for use in its business in good working
order and condition, except as permitted under Section 5.3(b), and
except to the extent that the Borrower determines in good faith that it
is not in the best interests of the Borrower and its Subsidiaries to do
so.
(g) INSURANCE.
(i) Maintain insurance with financially sound and
reputable insurers with respect to its properties and business
against loss or damage of the kinds
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<PAGE> 51
consistent with industry practice of Persons engaged in the
same or similar business, of such types and in such amounts as
are carried under similar circumstances by such other Persons.
(ii) Maintain, at the Borrower's expense, a key man
life insurance policy for John Fruth, in an amount not less
than $5,000,000, which policy shall name the Lender as the
principal beneficiary, for the purpose of securing the
Obligations hereunder. During the continuance of an Event of
Default, all proceeds payable under such policy shall be paid
to the Lender to be applied on account of the Obligations
hereunder; during the continuance of a Potential Default (and
so long as no Event of Default is then continuing), all
proceeds payable under such policy shall be paid to the Lender
and held as cash collateral until such event becomes an Event
of Default (in which case the proceeds shall be applied to the
Obligations) or such event is cured or waived (in which case
the proceeds shall be paid to the Borrower); in all other
circumstances the proceeds of such policy shall be paid to the
Borrower. The receipt of such proceeds shall not be treated as
an extraordinary receipt under Section 2.5(d)(iii). Upon the
payment in cash in full of the Facility B Advance and any
accrued but unpaid interest thereunder, the Lender shall no
longer be named as the principal beneficiary of such insurance
policy.
(h) PAYMENT OF TAXES AND LIENABLE ITEMS. Pay and discharge, as
they become due and payable, all claims for tax liabilities,
assessments and governmental charges or levies against it or upon its
properties or assets and all lawful claims which, if unpaid, would,
with the passage of time or notice or both, by law become a Lien upon
its property (other than a Lien permitted by Section 5.3(a) (excluding
clause (x) thereof)), unless (i) such claim is contested in good faith,
(ii) adequate reserves have been established for such claim to the
extent required by GAAP or other adequate provision for the payment
thereof has been made, (iii) enforcement of such claim is effectively
stayed during any time as such claim may otherwise become a Lien, and
(iv) if such claim is finally determined to be due, it is paid, with
all interest or penalties thereon, promptly and in any event within the
time period prescribed by applicable law, after resolution of such
contest.
(i) USE OF PROCEEDS. Use the proceeds of the Advances solely
for lawful and permitted corporate purposes of the Borrower and its
Subsidiaries and not in contravention of this Agreement or any other
agreement or obligation binding upon it and in strict compliance with
all applicable laws, regulations and orders.
(j) PERMITTED CASH INVESTMENTS. To the extent it has cash,
keep its cash (other than (i) cash in collection or disbursement, (ii)
cash of Foreign Subsidiaries not in excess of $2,000,000 for each
Foreign Subsidiary, and (iii) cash of O.S.I. Puerto Rico not in excess
of $2,000,000) invested in such accounts and through such
intermediaries that the Lender's security interest under the Borrower
Pledge and Security Agreement and
44
<PAGE> 52
Subsidiary Pledge and Security Agreement can lawfully be created and
perfected by the provisions of such Pledge and Security Agreements and
a Transfer and Perfection Notice to the depositary or intermediary.
(k) FURTHER ASSURANCES.
(i) Promptly (and in no event later than five (5)
Business Days after becoming aware thereof) notify the Lender
if any written information, exhibits and reports furnished to
the Lender contained any untrue statement of a material fact
or omitted to state any material fact or any fact necessary to
make the statements contained therein not misleading in light
of the circumstances in which made, and correct any defect or
error that may be discovered therein or in the execution,
acknowledgment or recordation of any Loan Document.
(ii) Promptly upon request by the Lender, execute,
deliver, acknowledge, file, re-file, register and re-register
any and all such further acts, security agreements,
assignments, estoppel certificates, financing statements and
continuations thereof, termination statements, notices of
assignment, transfers, certificates, assurances and other
instruments as the Lender may reasonably require from time to
time in order (A) to carry out more effectively the purposes
of this Agreement or any other Loan Document, (B) to subject
to the Liens created by any of the Collateral Documents any of
the properties, rights or interests described in or intended
to be covered by any Collateral Document as being subject to
such Lien, (C) to establish and maintain the validity,
effectiveness, perfection and priority of any Collateral
Document or any Liens intended to be created thereby, (D) to
maintain the pledge to the Lender of (x) one hundred percent
(100%) of the outstanding equity interests of each domestic
Subsidiary or (y) sixty-five percent (65%) of the outstanding
equity interest of each Foreign Subsidiary, as required by
Sections 3.1(a) and 5.2(e), or (E) to better assure, convey,
grant, assign, transfer, preserve, protect and confirm to the
Lender the rights granted or now or hereafter intended to be
granted to the Lender under any Loan Document or under any
other instrument executed in connection therewith.
(iii) Notwithstanding clause (ii) above, (A) the
Borrower shall not be required to deliver to the Lender notes
or other instruments evidencing loans and advances to
employees of the Borrower or any of its Subsidiaries, and (B)
the Borrower shall not be required to deliver to the Lender
any note or other instrument evidencing an intercompany loan
so long as the principal amount thereof is less than
$1,000,000.
SECTION V.3. NEGATIVE COVENANTS. So long as any Obligation
remains unpaid or the Lender is obligated to extend credit hereunder, without
the written consent of the Lender, the Borrower will not, and will not cause or
permit any Subsidiary of the Borrower to:
45
<PAGE> 53
(a) LIENS. Directly or indirectly make, create, incur, assume
or suffer to exist any Lien upon or with respect to any part of its
property or assets, whether now owned or hereafter acquired, or become
or remain bound by any agreement to do so, except:
(i) any Lien (A) existing on the Closing Date and
described in Schedule 5.3(d), securing Debt permitted under
Section 5.3(d)(i), or (B) granted to secure any extension,
renewal, refinancing or replacement of any such Debt if (x)
the principal amount secured thereby is not increased and (y)
the property subject to the Lien so granted is limited to the
property that was subject to the original Lien and any
accessions, fixtures, improvements or equipment added thereto
in the ordinary course of business;
(ii) any Lien created under any Loan Document;
(iii) Liens on the Collateral evidenced by the
Collateral Documents securing Debt permitted by Section
5.3(d)(xii);
(iv) Liens existing on any fixed assets acquired by
the Borrower or a Subsidiary, to the extent such Lien exists
on the date such fixed asset is acquired so long as such Lien
was not created in anticipation thereof, securing Debt
permitted under Section 5.3(d)(xi) and any extension, renewal,
refinancing or replacement of any such Debt if (A) the
principal amount secured thereby is not increased and (B) the
property subject to the Liens so granted is limited to the
property that was subject to the original Lien and any
accessions, fixtures, improvements or equipment added thereto
in the ordinary course of business;
(v) any Lien for taxes, fees, assessments or other
governmental charges which are not delinquent and remain
payable without penalty or which are being contested as
permitted under Section 5.2(h);
(vi) any carriers', warehousemen's, mechanics',
landlords', materialmen's, repairmen's or other similar Lien
created by operation of law and arising in the ordinary course
of business which is not delinquent or remains payable without
penalty or which is being contested as permitted under Section
5.2(h);
(vii) any Lien (other than a Lien imposed by
Environmental Laws or by ERISA) on the property of the
Borrower or any of its Subsidiaries imposed by law, or pledges
or deposits required by law pursuant to worker's compensation,
unemployment insurance and other social security legislation
(exclusive of obligations in respect of the payment for
borrowed money);
(viii) any Lien on the property of the Borrower or
any of its Subsidiaries
46
<PAGE> 54
made to secure the performance of (A) tenders, statutory
obligations, surety and appeal bonds, bids, leases (including
landlords' Liens), government contracts, performance and
return-of-money bonds and other similar obligations incurred
in the ordinary course of business (exclusive of obligations
in respect of the payment for borrowed money), in an aggregate
amount not exceeding $2,000,000 at any one time outstanding,
and (B) one or more appeal bonds issued in connection with the
Galley Litigation in an aggregate amount not exceeding the
Litigation Adjustment;
(ix) any easement, right-of-way, restriction and
other similar encumbrance incurred in the ordinary course of
business if, in the aggregate, such items are not substantial
in amount and do not constitute and cannot reasonably be
expected to result in a Material Adverse Change;
(x) any Lien arising out of any judgment or award
against it, if (A) such Lien is being contested as permitted
under Section 5.2(h), (B) there is no material likelihood of
the sale, forfeiture or loss of any part of its properties,
(C) such Lien does not materially interfere with the use of
any material part of its properties, and (D) the existence of
such Lien is not an Event of Default under Section 6.1(j);
(xi) Leases or subleases and licenses and sublicenses
granted to others not interfering in any material respect with
the business of the Borrower and its Subsidiaries taken as a
whole, and any interest or title of a lessor or licensor or
under any lease or license;
(xii) Liens which constitute rights of set-off of a
customary nature or bankers' Liens with respect to amounts on
deposit, whether arising by operation of law or by contract,
in connection with arrangements entered into with banks in the
ordinary course of business;
(xiii) rights of consignees of inventory in the
ordinary course of business, in an aggregate amount not
exceeding $1,000,000 at any one time outstanding;
(xiv) Liens securing Debt permitted and described in
Section 5.3(d)(iii); and
(xv) Liens on fixed assets (and proceeds thereof) of
O.S.I. Puerto Rico located in Puerto Rico securing Debt
permitted and described in Section 5.3(d)(vi);
or become or remain bound by any agreement restricting its ability to
grant, create, incur, assume or suffer to exist any Lien upon or with
respect to any part of its property or
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<PAGE> 55
assets, whether now owned or hereafter acquired, as security for the
payment of the Obligations or any refinancing or replacement thereof,
except (A) restrictions set forth in the Loan Documents, (B)
restrictions on junior Liens on property secured by a Lien permitted
under Section 5.3(a)(i), if such restrictions are enforceable solely by
the holder of the Lien so permitted, (C) restrictions on the creation
of a Lien on the Borrower's or any Subsidiary's interest under a lease
or any other contract, if such restrictions are enforceable solely by
the lessor under such lease or other party to such contract, and (D)
restrictions contained in agreements for the sale or lease of assets if
such sale or lease is permitted hereunder. Notwithstanding anything to
the contrary in this Agreement, the Borrower shall not create, incur,
assume or suffer to exist any Lien upon or with respect to any other
assets that are not subject to a Lien in favor of the Lender.
(b) DISPOSITION OF ASSETS. Engage in any Asset Sale or
otherwise directly or indirectly sell, assign, lease, convey, transfer
or otherwise dispose of all or any portion of its assets, business or
property, or agree to do any of the foregoing, except:
(i) dispositions of inventory or used, worn-out or
surplus property or equipment or Permitted Cash Investments,
in each case in the ordinary course of business;
(ii) sale of any business unit of the Borrower or any
Subsidiary that the Board of Directors of the Borrower
determines in good faith to be non-material;
(iii) any Asset Sale so long as (A) such transaction
is on an arm's length basis, (B) no Event of Default or
Potential Default is continuing or would result from such
Asset Sale, (C) the purchase price paid to the Borrower or
such Subsidiary for such asset shall be not less than the fair
market value of such asset at the time of such sale, (D) the
purchase price for such asset shall be paid to the Borrower or
such Subsidiary solely in cash (except for non-cash
consideration in the form of promissory notes in an aggregate
principal amount for all such transactions not to exceed
$1,000,000 at any time outstanding so long as each such
promissory note is, promptly upon consummation of the
applicable transaction, pledged and delivered to the Lender
pursuant to the Pledge and Security Agreement), (E) the
aggregate book value of assets sold pursuant to this paragraph
in any Fiscal Year does not exceed five percent (5%) of the
Borrower's consolidated total assets (determined in accordance
with GAAP) as of the last day of the preceding Fiscal Year,
and (F) the Borrower shall apply the Cash Proceeds of such
Asset Sale as required by Section 2.5(d)(i);
(iv) so long as no Event of Default or Potential
Default is continuing or would result from the proposed
transaction, the grant of an option or other right to purchase
an asset in a transaction that would be permitted under this
Section 5.3(b);
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<PAGE> 56
(v) the sale, lease, transfer or other disposition of
assets by any of the Borrower's Subsidiaries to the Borrower;
(vi) sales, transfers or other dispositions of fixed
assets or equipment by the Borrower or any of its Subsidiaries
to the extent that such equipment is traded in for credit
against the purchase price of other fixed assets or equipment,
or that the proceeds of such sale are applied to the purchase
price of such other fixed assets or equipment within one
hundred eighty (180) days from the date of sale, transfer or
disposition;
(vii) non-exclusive licenses; and
(viii) licenses granted outside of the United States
in connection with the settlement or resolution of the Galley
Litigation;
PROVIDED, HOWEVER, that neither the Borrower nor any Subsidiary shall
dispose of any asset to effect a leaseback of any asset, other than
sale-leasebacks of equipment effected less than one hundred eighty
(180) days after the Borrower or such Subsidiary shall have acquired
such equipment.
(c) INVESTMENTS. Directly or indirectly make, acquire, carry
or maintain any Investment, or become or remain bound by any agreement
to make, acquire, carry or maintain any Investment, except:
(i) Investments held on the Closing Date and
described in Schedule 5.3(c);
(ii) Permitted Cash Investments;
(iii) loans by the Borrower to any Subsidiary of the
Borrower or by any such Subsidiary to the Borrower, so long as
(A) if such loan is in an amount of $1,000,000 or more, it is
evidenced by a promissory note or other instrument, and (B)
each such promissory note or other instrument has been
delivered to the Lender in pledge;
(iv) loans and advances to employees of the Borrower
or any of its Subsidiaries, not in excess of $1,000,000 in the
aggregate at any one time outstanding;
(v) acquisitions permitted under Section 5.3(g)(i)
or (iv);
(vi) other Investments so long as the aggregate
unrecovered investment made by the Borrower and its
Subsidiaries therein (counted at cost and not counting
recoveries fairly characterized as income) does not exceed
$1,000,000 at
49
<PAGE> 57
any one time outstanding;
(vii) Investments constituting non-cash consideration
permitted to be received in connection with dispositions of
assets permitted under Section 5.3(b)(iii);
(viii) Investments by the Borrower in any of its
direct wholly- owned Subsidiaries (other than a Foreign
Subsidiary and other than O.S.I. Puerto Rico);
(ix) Investments by the Borrower in Ocular Sciences
Limited to the extent required by the Inland Revenue Authority
of the United Kingdom rules and regulations to maintain the
deductibility of interest expense incurred by Ocular Sciences
Limited; and
(x) Investments by the Borrower and its Subsidiaries
consisting of accounts receivable from customers (including
Subsidiaries of the Borrower), or received in settlement of
delinquent obligations of and other disputes with customers
and suppliers, in each case arising in the ordinary course of
business.
(d) LIMITATION ON DEBT AND ACCOMMODATION OBLIGATIONS. Directly
or indirectly create, incur, assume, guarantee or suffer to exist, or
otherwise become or remain directly or indirectly liable with respect
to, any Debt or any Accommodation Obligation, except:
(i) Debt existing on the Closing Date and described
in Schedule 5.3(d) and any extension, renewal or refinancing
of such Debt so long as both (A) either (i) the principal
amount of such Debt is not increased, or (ii) any increase in
the principal amount of such Debt is permitted pursuant to
another clause of this Section 5.3(d) and (B) the terms and
conditions (including financial and other restrictive
covenants) are not materially more restrictive on any Loan
Party than the terms and conditions existing on the date
hereof;
(ii) the Obligations;
(iii) Capital Leases, conditional sales agreements
and other purchase money Debt for property, plant or
equipment, not in excess of $3,500,000 in the aggregate at any
one time outstanding;
(iv) Debt (but not Accommodation Obligations in
respect of such Debt), in an aggregate amount not exceeding
$1,000,000 at any one time outstanding, consisting of
obligations of the Borrower or a Subsidiary to purchase
capital stock, warrants, options or other equity interests
from an officer, employee or consultant of such Person
pursuant to an employment contract or consulting agreement
entered into with such officer, employee or consultant on
reasonable
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and customary business terms;
(v) Debt in the nature of surety bonds or appeal
bonds issued at the request of the Borrower or any Subsidiary
to secure contingent obligations of such Person either (A) in
the ordinary course of business, (B) in connection with the
enforcement of rights or claims of the Borrower and its
Subsidiaries, (C) in connection with judgments to the extent
permitted under Section 5.3(a)(x), or (D) in connection with
the Galley Litigation not in excess of the Litigation
Adjustment (and not in duplication of any Debt permitted under
clause (viii) below);
(vi) Debt in an aggregate principal amount not
exceeding $5,800,000 at any one time outstanding, consisting
of obligations of O.S.I. Puerto Rico to Banco Bilbao Vizcaya
Puerto Rico on terms existing on the Closing Date, and any
extension, renewal or refinancing of such Debt so long as (A)
either (i) the principal amount of such Debt is not increased
or (ii) any increase in the principal amount of such Debt is
permitted pursuant to another clause of this Section 5.3(d)
and (B) the terms and conditions (including financial and
other restrictive covenants) are not materially more
restrictive on any Loan Party than the terms and conditions
existing on the date hereof and (C) the holder of such Debt
enters into an intercreditor agreement with the Lender in form
and substance satisfactory to the Lender; and Accommodation
Obligations pertaining to the Debt permitted under this clause
(vi) that is not secured by any property or assets of the
Borrower;
(vii) Debt permitted under Section 5.3(c)(iii);
(viii) Debt, in an aggregate principal amount not
exceeding $3,896,000 at any one time outstanding (and not in
duplication of any appeal bond permitted under clause (v)
above), consisting of obligations owing by the Borrower and
Ocular Sciences Limited to Geoffrey Galley and certain other
former employees of Ocular Sciences Limited that is not
secured by any property or assets of any Loan Party;
(ix) Subordinated Debt on terms and conditions
approved by the Lender;
(x) Debt (but not Accommodation Obligations in
respect of such Debt) permitted under Section 5.3(g)(iv);
(xi) Debt consisting of up to $5,000,000 in the
aggregate at any one time outstanding of foreign exchange
contracts on which delivery is to be effected and settlement
allowed at any time in the future (plus related fees, costs
and indemnities) entered into between the Borrower and the
Lender;
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(xii) endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary
course of business;
(xiii) obligations to pay dividends and may other
payments permitted under Section 5.3(f) (to the extent such
obligations are construed as "Debt" hereunder); and
(xiv) Accommodation Obligations of operating leases
and performance obligations entered into in the ordinary
course of business; and
(xv) other Debt not in excess of $1,000,000 in the
aggregate at any one time outstanding.
(e) TRANSACTIONS WITH AFFILIATES. Enter or agree to enter into
any transaction with any Affiliate of the Borrower or of any Subsidiary
of the Borrower except (i) under the Loan Documents or (ii) in the
ordinary course of business and pursuant to the reasonable requirements
of the business of the Borrower or such Subsidiary and upon fair and
reasonable terms no less favorable to the Borrower or such Subsidiary
than those that would prevail in a comparable arm's length transaction
with a Person not an Affiliate of the Borrower or such Subsidiary;
PROVIDED, HOWEVER, that nothing in this Section 5.3(e) shall be
construed to prohibit (A) customary directors' and officers'
indemnities, (B) customary directors' fees, (C) reasonable compensation
to officers (as determined by the Borrower's or such Subsidiary's board
of directors) and (D) administrative services provided by the Borrower
to its Subsidiaries in the ordinary course of business consistent with
past practice.
(f) RESTRICTED JUNIOR PAYMENTS. Directly or indirectly (i)
declare or make any dividend payment or other distribution of assets,
properties, cash, rights, obligations or securities on account of any
shares of any class of its capital stock or any other equity, ownership
or profit interests, (ii) purchase, redeem or otherwise acquire for
value any shares of any class of capital stock of, or other equity,
ownership or profit interests in, the Borrower or any of its
Subsidiaries or any warrants, rights or options to acquire any such
shares or interests, now or hereafter outstanding, (iii) enter into any
agreement restricting the ability of any Subsidiary of the Borrower to
declare or make any dividend payment or other distribution of assets,
properties, cash, rights, obligations or securities to its stockholders
(other than as permitted in Section 5.3(j)), (iv) agree to or permit
any amendment or modification of, or change in, any of the terms of
agreements governing Subordinated Debt, or (v) pay, prepay, redeem, or
purchase or otherwise acquire any Subordinated Debt, or make any
deposit to provide for the payment of any Subordinated Debt when due,
or exchange any Subordinated Debt, or give any notice in respect
thereof, except that:
(A) the Borrower may declare and make any dividend
payments or
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other distributions payable solely by the Borrower in common
stock of the Borrower;
(B) any Subsidiary of the Borrower may declare and
make dividends and distributions made solely to the Borrower
or to a wholly-owned Subsidiary of the Borrower;
(C) the Borrower may make payments of interest on the
Subordinated Debt of John Fruth as specified in and subject to
the terms and conditions of the Subordination Agreement
between the Lender and John Fruth of even date herewith so
long as no Event of Default is continuing or would result from
such payments; and
(D) the Borrower may declare and make cash dividend
payments on its Series A Preferred Stock outstanding on the
Closing Date to the extent required under the terms of its
Articles of Incorporation as in existence on the Closing Date,
so long as no Event of Default is continuing or would result
from such payments.
(g) MERGERS, ETC. Merge or consolidate with or into or enter
into any agreement to merge or consolidate with or into any Person, or
acquire any ownership interest in any assets, business or Person,
except:
(i) acquisitions of property, plant and equipment in
the ordinary course of business;
(ii) mergers or consolidations between wholly-owned
Subsidiaries of the Borrower or between the Borrower and any
of its wholly-owned Subsidiaries;
(iii) Investments permitted under Section 5.3(c); and
(iv) an acquisition of the entire ownership interest
in any assets primarily used for, or any business or Person
primarily engaged in, any of the lines of business currently
conducted by the Borrower and its Subsidiaries and activities
reasonably incidental thereto, so long as (A) the total
consideration (including cash, Debt incurred and value of
stock) paid for all such acquisitions does not exceed
$5,000,000 in the aggregate, (B) no Debt is assumed (other
than Debt secured solely by fixed assets being acquired) or
incurred in connection with the acquisition, (C) if the
acquisition is accomplished by merger or consolidation, the
Borrower is the surviving corporation, and (D) no Event of
Default or Potential Default is continuing or would result
from such acquisition.
(h) CONDUCT OF BUSINESS. Engage in any business or activity
other than the businesses described in Section 4.1(o) and any activity
reasonably incidental thereto.
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(i) COMPLIANCE WITH ERISA. Directly or indirectly (or permit
any ERISA Affiliate directly or indirectly to) (i) terminate any Plan
subject to Title IV of ERISA so as to result in liability to the
Borrower or any ERISA Affiliate in excess of $1,000,000; (ii) permit
any ERISA Event to exist; (iii) make a complete or partial withdrawal
(within the meaning of ERISA Section 4201) from any Multiemployer Plan
so as to result in liability to the Borrower or any ERISA Affiliate in
excess of $1,000,000; or (iv) permit the total Unfunded Pension
Liabilities (using the actuarial assumptions utilized by the PBGC) for
all Pension Plans (other than Pension Plans which have no Unfunded
Pension Liabilities) to exceed $1,000,000.
(j) PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. Cause, permit
or suffer any Subsidiary to become or remain subject to any contractual
obligation that in any manner limits or restricts its right to pay
dividends or make distributions, whether in cash or in property, to its
stockholders or to make loans or sell assets to the Borrower or any of
its Subsidiaries or to enter into any other lawful transaction with the
Borrower or any of its Subsidiaries, except (i) limitations and
restrictions set forth in the Loan Documents and (ii) covenants
contained in the existing documentation evidencing the Debt permitted
under Section 5.3(d)(vi) or reflected in the commitment letter dated
August 10, 1995 from the Government Development Bank for Puerto Rico to
O.S.I. Puerto Rico and substantially similar covenants in any Debt
replacing, extending, refinancing or renewing such Debt.
ARTICLE VI
EVENTS OF DEFAULT
SECTION VI.1. EVENTS OF DEFAULT. If any of the following
events (each, an "Event of Default") shall occur and be continuing:
(a) NON-PAYMENT OF PRINCIPAL. The Borrower fails to pay when
due any principal of any Advance; or
(b) NON-PAYMENT OF INTEREST. The Borrower fails to pay when
due any interest payable under Section 2.6 or any fee payable under
Section 2.4 or 2.16 and such failure continues for three (3) Business
Days; or
(c) NON-PAYMENT OF OTHER OBLIGATIONS. The Borrower fails to
pay any other payment Obligation, and such failure continues for ten
(10) Business Days after either (i) it is acknowledged in writing by
the Borrower or (ii) written notice thereof is given to the Borrower by
the Lender; or
(d) REPRESENTATIONS AND WARRANTIES. Any representation or
warranty made by any Loan Party under or in connection with any Loan
Document proves to have been
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incorrect in any material respect when made; or
(e) FINANCIAL AND NEGATIVE COVENANTS. The Borrower fails to
perform or observe any term, covenant or agreement set forth in Section
5.1 or Section 5.3; or
(f) REPORTING AND COLLATERAL COVENANTS. The Borrower fails to
perform or observe any term, covenant or agreement set forth in
Sections 5.2(c), (e), (j) or (k), and such failure continues for ten
(10) Business Days after either (i) it is acknowledged in writing by
the Borrower or (ii) written notice thereof is given to the Borrower by
the Lender; or
(g) OTHER AGREEMENTS. The Borrower or any Loan Party fails to
perform or observe any term, covenant or agreement contained in this
Agreement or any other Loan Document (other than those specifically
referred to in any of the preceding paragraphs of this Section 6.1) and
such failure continues for thirty (30) days after either (i) it is
acknowledged in writing by the Borrower or (ii) written notice thereof
is given to the Borrower by the Lender; or
(h) DEFAULT AS TO OTHER DEBT. The Borrower or any of its
Subsidiaries (i) fails to pay, when due and payable (whether at the
scheduled maturity or upon any required prepayment, acceleration,
demand or otherwise), any principal of or premium or interest on any
Debt (except any Borrowings) outstanding in a principal amount of at
least $1,000,000, and such failure continues for longer than the period
of grace, if any, specified for such failure in the indenture or
agreement governing such Debt, or (ii) commits, permits or suffers a
breach, default or event of default to occur under any indenture or
agreement governing any Debt (except any Borrowings) outstanding in a
principal amount of at least $1,000,000 and such breach, default or
event of default continues for longer than the period of grace, if any,
specified for such failure in such indenture or agreement; or any such
Debt of at least $1,000,000 is declared to be due and payable or is
required to be prepaid prior to the stated maturity thereof; PROVIDED,
HOWEVER, that no such failure, breach, default, event of default,
declaration or requirement as to any Debt (x) which is the liability
solely of a Foreign Subsidiary (except for the Debt permitted under
Section 5.3(d)(vi)) shall be an Event of Default hereunder until either
(A) it is acknowledged in writing by the Borrower, or (B) it continues
for ten (10) Business Days after written notice thereof is given to the
Borrower by the Lender and (y) no such failure, breach, default, event
of default, declaration or requirement as to any Debt shall be an Event
of Default hereunder if, in the case of a wholly-owned Subsidiary, such
Debt is held entirely by the Borrower, or, in the case of the Borrower,
such Debt is held entirely by one or more of its wholly-owned
Subsidiaries; or
(i) BANKRUPTCY. (i) Any Loan Party or any Material Subsidiary
is generally not paying its debts as they become due or admits in
writing its inability to pay its debts generally or makes a general
assignment for the benefit of creditors; (ii) or any proceeding is
instituted by or against any Loan Party or any Subsidiary of a Loan
Party
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seeking an order for relief under the United States Bankruptcy Code or
seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of it or its debts or
the appointment of a receiver, trustee, custodian or other similar
official for it or for any substantial part of its property under any
law relating to bankruptcy, insolvency, liquidation or reorganization
or relief of debtors and either (A) any such relief in any such
proceeding is sought or consented to by it or an order for any such
relief is entered against it, or (B) any such proceeding instituted
against it remains undismissed and unstayed for a period of sixty (60)
days, or (C) any Loan Party or any Material Subsidiary takes any
corporate action to authorize any of the actions set forth above in
this Section 6.1(i); or
(j) JUDGMENTS. Any judgment or order for the payment of money
is rendered against any of the Loan Parties or any of their
Subsidiaries in an amount in excess of $1,000,000 individually or in
the aggregate and either (i) enforcement proceedings are commenced by
any creditor upon such judgment or order and not stayed, or (ii) there
is any period of sixty (60) consecutive days during which such judgment
has not been paid in full or a stay of enforcement of such judgment or
order, by reason of a pending appeal or otherwise, is not in effect; or
(k) MATERIAL ADVERSE CHANGE. There is any Material Adverse
Change since December 31, 1995; or
(l) LOAN DOCUMENTS. Any provision of any Loan Document after
delivery thereof for any reason ceases to be valid and binding on each
Loan Party thereto, or any Loan Party shall repudiate or purport to
revoke or terminate any of its obligations under any Loan Document to
which it is party, and such event continues for ten (10) Business Days
after written notice thereof is given to the Borrower; or
(m) COLLATERAL DOCUMENTS. The Collateral Documents, after
delivery thereof pursuant to Section 3.1(a), for any reason (other than
pursuant to the terms thereof) cease to create a valid and perfected
first priority security interest (subject to Liens permitted by Section
5.3(a)) in any collateral purported to be covered thereby, and such
event continues for ten (10) Business Days after written notice thereof
is given to the Borrower; or
(n) ERISA. (i) The Borrower or any ERISA Affiliate fails to
satisfy its contribution requirements under Section 412(c)(11) of the
Code, whether or not it has sought a waiver under Section 412(d) of the
Code; or (ii) in the case of an ERISA Event involving the withdrawal
from a Pension Plan of a "substantial employer" (as defined in Section
4001(a)(2) or Section 4062(e) of ERISA), the withdrawing employer's
proportionate share of that Pension Plan's Unfunded Pension Liabilities
is more than $1,000,000; or (iii) in the case of an ERISA Event
involving the complete or partial withdrawal from a Multiemployer Plan,
the withdrawing employer incurs a withdrawal liability in an aggregate
amount exceeding $1,000,000; or (iv) a Plan that is intended to
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be qualified under Section 401(a) of the Code loses its qualification,
and with respect to such loss of qualification, the Borrower or any
ERISA Affiliate can reasonably be expected to be required to pay (for
additional taxes, payments to or on behalf of Plan participants, or
otherwise) an aggregate amount exceeding $1,000,000; or (vi) any
combination of events listed in clauses (ii) through (iv) occurs that
involves a net increase in aggregate Unfunded Pension Liabilities and
unfunded liabilities in excess of $1,000,000;
then, and in any such event, the Lender (A) shall declare its obligation to make
Facility A Advances and issue Letters of Credit to be terminated, whereupon the
same shall forthwith terminate and the Facility A Amount shall be automatically
and permanently reduced to zero, and (B) shall by notice to the Borrower,
declare all Advances, together with all interest thereon and all other
Obligations, to be immediately due and payable, and thereupon the Advances and
such interest and all other Obligations, shall be immediately due and payable,
without presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived by the Borrower; PROVIDED, HOWEVER, that if an order
for relief under the United States Bankruptcy Code is entered at the request or
upon the consent of the Borrower or involuntarily against the Borrower (x) the
obligation of the Lender to make Facility A Advances and issue Letters of Credit
shall automatically be terminated and the Facility A Amount shall be
immediately, automatically and permanently reduced to zero, and (y) all Advances
and all such interest and other Obligations shall automatically become and be
immediately due and payable, without presentment, demand, protest or any notice
of any kind, all of which are hereby expressly waived by the Borrower.
SECTION VI.2. RIGHTS NOT EXCLUSIVE. The rights provided for in
this Agreement and the other Loan Documents are cumulative and are not exclusive
of any other rights, powers or privileges or remedies provided by law or in
equity, or under any other instrument, document or agreement.
ARTICLE VII
MISCELLANEOUS
SECTION VII.1. AMENDMENTS. No amendment or waiver of any
provision of this Agreement, nor consent to any departure by the Borrower
therefrom, shall be effective unless it is in writing and signed by the Lender
(and any such waiver or consent shall in any case be effective only in the
specific instance and for the specific purpose for which given), except that the
Borrower may amend Schedule 4.1(d) as provided in Section 5.2(e) by delivering a
copy of such amended Schedule to the Lender in accordance with Section 7.2.
SECTION VII.2. NOTICES. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic,
telex or cable communication) and mailed, telecopied, telegraphed, telexed,
cabled or delivered, if to the Borrower, at 475 Eccles Avenue, South San
Francisco, CA 94080, Attention: Chief Financial
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Officer; if to the Lender, at Comerica Bank-California, 333 West Santa Clara
Street, San Jose, CA 95113, Attention: Lori Edwards; or, as to each party, at
such other address as shall be designated by such party in a written notice to
the other parties. All such notices and communications shall be effective when
received.
SECTION VII.3. NO WAIVER; REMEDIES. No failure on the part of
the Lender to exercise, and no delay in exercising, any right under any Loan
Document shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right preclude any other or further exercise thereof or the
exercise of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION VII.4. COSTS AND EXPENSES. The Borrower agrees to pay
within twenty (20) days after the Borrower receives an invoice itemizing the
same, all reasonable out of pocket costs and expenses incurred by the Lender in
connection with the preparation, negotiation, execution, delivery, modification,
administration and amendment of the Loan Documents and the other documents to be
delivered under the Loan Documents, including the reasonable fees and
out-of-pocket expenses of counsel for the Lender with respect thereto and with
respect to advising the Lender as to its rights and responsibilities under the
Loan Documents in connection with actions or inactions of the Loan Parties and
including the Lender's Collateral audit fees, PROVIDED, HOWEVER, that attorneys
fees (excluding expenses, filing, recording fees and the like) incurred by the
Lender in connection with the preparation and negotiation of the Loan Documents
shall not exceed $50,000 provided that there are no more than four drafts of
this Agreement and four drafts of each other Loan Document. The Borrower further
agrees to pay on demand all reasonable costs and expenses, including reasonable
fees and expenses of attorneys (including allocable costs of in-house counsel),
accountants, advisors and other experts, incurred by the Lender in respect of
any Event of Default or while any Event of Default is continuing or in
connection with the protection, resolution or enforcement (whether through
negotiations, by legal proceedings, in bankruptcy or otherwise) of the
Obligations or the Collateral or any right, remedy, power, interest or claim of
the Lender under any Loan Document.
SECTION VII.5. RIGHT OF SET-OFF. Whenever any Event of Default
is continuing, the Lender may at any time or from time to time without any prior
notice to the Borrower or any other Person, set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other debt at any time owing by the Lender to or for the credit or the
account of the Borrower, whether or not then due, against any and all Advances
and other Obligations then owing to the Lender, whether or not then due. After
any such set-off and application is made, the Lender shall promptly notify the
Borrower thereof, but the failure to do so shall not affect the validity of the
set-off and application and shall not expose the Lender to any liability. The
Lender's right of set-off under this Section 7.5 is cumulative with and
additional to all other rights and remedies (including other rights of set-off).
SECTION VII.6. GENERAL INDEMNITY. The Borrower agrees to
indemnify and hold harmless the Lender and its Affiliates and each director,
officer, employee, attorney or agent of any of the foregoing persons (each such
Person, an "Indemnified Person") from any
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losses, claims, costs, damages, expenses or liabilities (or actions, suits or
proceedings, including any inquiry or investigation, with respect thereto)
(collectively, "Claims") to which any Indemnified Person may become subject,
insofar as such Claims arise out of, in any way relate to, or result from, this
Agreement or any other Loan Document or any of the transactions contemplated
hereby and thereby and to reimburse upon demand each Indemnified Person for any
and all reasonable legal and other expenses incurred in connection with
investigating, preparing to defend or defending any such Claim; PROVIDED,
HOWEVER, that the Borrower shall not have any indemnity obligation to any
Indemnified Person for any Claim (i) based on or arising from the gross
negligence or wilful misconduct of such Indemnified Person or a breach of any
Loan Document or applicable law by an Indemnified Person or (ii) made or
prosecuted by the Borrower. The Borrower shall be given prompt notice of the
commencement of any action or proceeding on any Claim and of any overt written
threat of litigation on any Claim, but the failure to receive such notice shall
not relieve the Borrower from any of its obligations under this Section 7.6 or
under Section 7.4. The Borrower shall have the right, with the consent of the
Indemnified Person (which shall not unreasonably be withheld), to select a firm
of attorneys as legal counsel to defend any Claim, and the Borrower shall pay
the fees, expenses and disbursements of such counsel and any special or local
counsel; and if the Indemnified Person would or could result in a conflict of
interest, or that a defense, crossclaim or counterclaim is available to such
Indemnified Person that is not available to any other Person represented by such
legal counsel in the same proceeding, then to the extent reasonably necessary to
avoid such a conflict of interest or to permit unqualified assertion of such a
defense, crossclaim or counterclaim, such Indemnified Person shall be entitled
to separate representation, at the Borrower's expense, by legal counsel selected
by such Indemnified Person and reasonably acceptable to the Borrower, with all
such legal counsel using reasonable efforts to avoid unnecessary duplication of
effort by counsel. Each Indemnified Person shall have the right to be
represented by counsel of its own choosing (A) at the Borrower's expense
whenever any Event of Default or Potential Default is continuing and (B) at such
Indemnified Person's expense at any time; and the Borrower and the attorneys
selected by the Borrower shall cooperate in all reasonable respects with such
counsel. The Borrower shall be entitled to settle any Claim, at the Borrower's
sole cost and expense, without consent of the Indemnified Person if (x) no Event
of Default or Potential Default is continuing, (y) the settlement does not and
will not, under any circumstances, impose any present or future payment or
performance obligation upon the Indemnified Person, and (z) the settlement
includes the giving by the claimant to the Indemnified Person of a release from
all liability in respect of such Claim; and otherwise only upon the prior
written consent of the Indemnified Person.
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SECTION VII.7. ASSIGNMENTS AND PARTICIPATIONS. The Lender may
at any time, sell, assign, grant participation in, or otherwise transfer all or
any part of its rights and obligations under this Agreement (i) without the
Borrower's consent if such transfer is to a Federal Reserve Bank or to an
Affiliate of the Lender or if an Event of Default is continuing and (ii) with
the Borrower's consent (which consent shall not be unreasonably withheld) to any
other Person. In the event of any such sale by the Lender of a participation,
the holder of such participation, other than an Affiliate of the Lender, shall
not have any rights under this Agreement except that such holder may under the
terms of such participation, be granted the right to participate with the Lender
in connection with any action that (i) increases the Facility Amount, (ii)
postpones the scheduled final maturity date of Facility A or Facility B, (iii)
postpones any scheduled Facility B payment date, (iv) postpones any nonscheduled
mandatory reduction of Facility B, (v) decreases the rate of interest applicable
to any Advances, (vi) releases all or substantially all of the Collateral, or
any right to obtain additional Collateral, or (vii) releases any Guarantor or
any right to have an additional Material Subsidiary become a Guarantor. In all
other respects, the Lender's obligations under this Agreement shall remain
unchanged, the Lender shall remain solely responsible for the performance
thereof, and the Borrower shall continue to deal solely and directly with the
Lender in connection with the Lender's rights and obligations under this
Agreement. The Borrower hereby authorizes the Lender and each such participant
or assignee, in case of default by the Borrower hereunder to proceed directly by
right of setoff, bankers' lien, or otherwise, against any assets of the Borrower
which may at the time of such default be in the hands of the Lender or any such
participant or assignee.
SECTION VII.8. BINDING EFFECT. This Agreement shall become
effective when it has been executed by the parties hereto and the conditions set
forth in Section 3.1 have been satisfied and thereafter shall be binding upon
and inure to the benefit of the Borrower and the Lender and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of the Lender.
SECTION VII.9. GOVERNING LAW. This Agreement and the other
Loan Documents shall be governed by, and construed in accordance with, the laws
of the State of California. Any legal action or proceeding with respect to any
Loan Document may be brought in the courts of the State of California or of the
United States for the Northern District or the Central District of California,
and by execution and delivery of this Agreement, each of the Borrower and the
Lender consents, for itself and in respect of its property, to the jurisdiction
of those courts. Each of the Borrower and the Lender irrevocably waives any
objection, including any objection to the laying of venue or based on the
grounds of forum non conveniens, which it may now or hereafter have to the
bringing of any action or proceeding in such jurisdiction in respect of any Loan
Document. The Borrower and the Lender each waive personal service of any
summons, complaint or other process, which may be made by any other means
permitted by California law.
SECTION VII.10. WAIVER OF JURY TRIAL. The Borrower and the
Lender
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WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY of any claim or cause of action
based upon or arising out of or related to this Agreement or any other Loan
Document or the transactions contemplated hereby or thereby in any action,
proceeding or other litigation of any type brought by any of the parties against
any other party or parties, whether based on contract, tort, statutory liability
or otherwise. The Borrower and the Lender agree that any such claim or cause of
action shall be tried by the court WITHOUT A JURY. This waiver shall apply to
each future amendment, renewal, supplement or modification of any Loan Document
and to each future Loan Document.
SECTION VII.11. LIMITATION OF LIABILITY. No claim may be made
by the Borrower, any Subsidiary of the Borrower, the Lender or any other Person
against the Lender or its Affiliates, directors, officers, employees, attorneys
or agents for any special, indirect or consequential damages or, to the fullest
extent permitted by law, for any punitive damages in respect of any claim or
cause of action (whether based on contract, tort, statutory liability, or any
other ground) based on, arising out of or related to any Loan Document or the
transactions contemplated hereby or any act, omission or event occurring in
connection therewith, and the Borrower (for itself and on behalf of each of its
Subsidiaries), and the Lender hereby waives, releases and agrees never to sue
upon any claim for any such damages, whether such claim now exists or hereafter
arises and whether or not it is now known or suspected to exist in its favor.
SECTION VII.12. CONFIDENTIALITY. The Lender agrees that it
will not, without the prior consent of the Borrower, disclose any information
with respect to the Borrower which is furnished to the Lender pursuant to this
Agreement and which the Borrower has notified the Lender, in writing,
constitutes confidential information, except (i) to the Lender's directors,
officers, employees, agents and financial and legal advisors under instructions
to maintain confidentiality, (ii) to any actual or prospective assignee or
participant under Section 7.7, so long as such assignee or participant agrees to
be bound by the provisions of this Section 7.12, (iii) information that is known
to the Lender or its directors, officers, employees or advisors prior to its
disclosure by the Borrower, (iv) information that has become publicly available
other than by the Lender's improper disclosure, (v) information that is obtained
from any source other than the Borrower or its Affiliates, unless the Lender has
actual knowledge that such source disclosed such information to it in breach of
an obligation of confidentiality, and (vi) as may be required or appropriate in
any proceeding to collect the Obligations or protect or enforce any right or
remedy of the Lender under the Loan Documents or in defense of any claim
asserted against the Lender or in any other litigation or for compliance with
any applicable law or any subpoena, discovery request or other legal process, so
long as the Lender (if not prohibited from doing so) gives the Borrower at least
three (3) Business Days' prior notice thereof.
SECTION VII.13. ENTIRE AGREEMENT. This Agreement, together
with the other Loan Documents, embodies the entire Agreement and understanding
among the Borrower and the Lender and supersedes all prior or contemporaneous
agreements and understandings of such Persons, verbal or written, relating to
the subject matter hereof and thereof, except for the rights of the Lender under
the Fee Letter.
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SECTION VII.14. SURVIVAL. The Borrower's liability for any and
all fees, taxes, compensation, costs, losses, expense reimbursements,
indemnification and other similar Obligations arising under any Loan Document
shall survive the expiration or termination of the commitments of the Lender to
extend credit hereunder and the repayment and retirement of all Advances and
Letters of Credit at any time outstanding hereunder.
SECTION VII.15. EXECUTION IN COUNTERPARTS. This Agreement may
be executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Credit
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
O.S.I. CORPORATION
By: _________________________________
Name:
Title:
COMERICA BANK-CALIFORNIA
By: _________________________________
Name:
Title:
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NOTICE OF BORROWING
October 28, 1996
Comerica Bank-California
333 West Santa Clara Street
San Jose, CA 95113
Attention: Lori Edwards
Re: Notice of Borrowing
Ladies and Gentlemen:
The undersigned, O.S.I. Corporation (the "Borrower"), refers to the
Credit Agreement dated as of October 30, 1996 by and between the Borrower and
Comerica Bank-California (as amended, modified and supplemented to date, the
"Credit Agreement," the terms defined therein being used herein as therein
defined), and pursuant to Section 3.2 of the Credit Agreement hereby gives you
irrevocable notice that the undersigned requests a Borrowing under the Credit
Agreement, and in connection therewith sets forth below the information relating
to such Borrowing as required by Section 2.2 of the Credit Agreement:
1. The Business Day of such Borrowing is October 30, 1996 (the
"Borrowing Date").
2. The Borrowing is under Facility A.
3. The Borrowing will be a Eurodollar Rate Advance.
4. The amount of such Borrowing is $7,600,000.
5. The initial Interest Period for the Eurodollar Rate Advance made as
part of such Borrowing is one month.
6. The Borrower hereby certifies that the following statements are true
on the date hereof, and will be true on the Borrowing Date (before and after
giving effect to the proceeds of such Borrowing and the application of the
proceeds therefrom):
a. the representations and warranties contained in Article IV
of the Credit Agreement and Article III of each Pledge and Security
Agreement are correct in all material respects on and as of the date
hereof (or in the case of representations and warranties stated as
having been made only on the date of such Agreement, on the date of
such Agreement); and
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b. no event has occurred and is continuing which constitutes
an Event of Default or a Potential Default; and
c. Since December 31, 1995, there has been no Material Adverse
Change.
Very truly yours,
O.S.I. CORPORATION,
a California corporation
By
----------------------------------
Name: Gregory E. Lichtwardt
Title: Vice President, CFO
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EXHIBIT A-2
FORM OF
NOTICE OF CONTINUANCE/CONVERSION
[DATE]
Comerica Bank-California
333 West Santa Clara Street
San Jose, CA 95113
Attention: Lori Edwards
Re: Notice of Continuance/Conversion
Ladies and Gentlemen:
The undersigned, O.S.I. Corporation ("Borrower"), refers to the Credit
Agreement, dated as of October 30, 1996, by and between Borrower and Comerica
Bank- California (as amended, modified and supplemented to date, the "Credit
Agreement," the terms defined therein being used herein as therein defined).
Pursuant to Section 2.8 of the Credit Agreement, this represents a Notice of
Continuance/Conversion, and in that connection sets forth below the information
relating to such [continuance] [conversion] as required by Section 2.8 of the
Credit Agreement:
1. The effective date of the [continuance] [conversion] shall be
________________, 19__ (which shall be the last day of an Interest Period if
continuing an Advance as a Eurodollar Rate Advance or converting an Advance from
a Eurodollar Rate Advance to a Base Rate Advance).
2. $______________ shall be [converted from] a [Base Rate] [Eurodollar
Rate] Advance to a [Base Rate] [Eurodollar Rate] [continued as a Eurodollar
Rate] Advance.
3. The Advances being [continued] [converted] are under [Facility A]
[Facility B].
[4. The Interest Period for the [continued] [converted] Eurodollar Rate
Advances shall be [one month] [two months] [three months] [six months].
5. The Borrower hereby certifies to the Lender that, on the date of
this Notice of Continuance/Conversion:
a. the representations and warranties contained in Article IV
of the Credit Agreement and Article III of each of the Pledge and
Security Agreements are correct in all material respects on and as of
the effective date of the [continuance] [conversion] (or, in the case
of representations and warranties stated as having been made only on
the date of such Agreement, on the date of such Agreement);
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b. no event has occurred and is continuing, or would result
from the [continuance] [conversion], which constitutes an Event of
Default or a Potential Default; and
c. Since December 31, 1995 there has been no Material Adverse
Change.
6. This Notice of Continuance/Conversion shall only be effective if
delivered to the Lender at the above address at least two (2) Business Days
before the date of the requested [continuance] [conversion].
O.S.I CORPORATION
a California corporation
By:
---------------------------------
Name:
Title:
A-2-2
<PAGE> 74
SUBSIDIARY GUARANTY
This SUBSIDIARY GUARANTY, dated as of October 30, 1996, is made by each
entity that is identified on the signature pages hereof or that hereafter
executes and delivers a Subsidiary Joinder in substantially the form set forth
as Annex 1 hereto (each such entity, a "Guarantor") in favor of Comerica
Bank-California (the "Lender").
RECITALS
A. The Lender has entered into that certain Credit Agreement, dated as
of October 30, 1996 (as amended, supplemented or otherwise modified from time to
time, the "Credit Agreement"), by and between O.S.I. Corporation (the
"Borrower") and Lender.
B. Each Guarantor is a direct or indirect subsidiary of the Borrower
and expects to derive substantial direct and indirect benefit from the
transactions contemplated by the Credit Agreement.
C. It is a condition precedent to the extension of credit under the
Credit Agreement that each Guarantor shall have guaranteed payment of each and
all the Obligations (as that term is defined in the Credit Agreement) and all
other debts, liabilities and obligations of the Borrower and each other
Subsidiary of the Borrower under the Loan Documents, on the terms set forth
herein.
D. The Borrower has agreed, in the Credit Agreement, to cause all
future Material Subsidiaries of the Borrower to become party to this Guaranty,
as a Guarantor hereunder.
NOW, THEREFORE, in consideration of the foregoing and in order to
induce the Lender to extend credit to the Borrower under the Credit Agreement,
each Guarantor hereby agrees as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1 General Definitions. Except as otherwise specifically
provided herein, the terms that are defined in Section 1.1 of the Credit
Agreement shall have the same meanings when used in this Guaranty and the
provisions of Sections 1.2 and 1.3 of the Credit Agreement shall apply to this
Guaranty.
SECTION 1.2 Certain Defined Terms. As used in this Guaranty, the
following terms shall have the following meanings:
"Bankruptcy Code" means Title 11 of the United States Code, as from
time to time amended.
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"Guaranteed Obligations" is defined in Section 2.1(a).
"Guaranty" means this Subsidiary Guaranty, dated as of October
30, 1996, made by the Guarantors for the benefit of the Lender.
"Guaranty Taxes" is defined in Section 3.8(a).
"Subordinated Liabilities" is defined in Section 2.8(a).
"Subsidiary Joinder" means an instrument substantially in the
form of Annex 1 hereto.
ARTICLE II
GUARANTY AND RELATED PROVISIONS
SECTION II.1 Guaranty. Each Guarantor hereby unconditionally:
(a) guarantees the punctual payment when due, whether at
stated maturity, by acceleration or otherwise, of (i) all Obligations
now outstanding or hereafter arising under or in connection with the
Credit Agreement or any other Loan Document, whether for principal,
interest, fees, taxes, additional compensation, expense reimbursements,
indemnification or otherwise, and (ii) all liabilities of each
Guarantor now outstanding or hereafter arising under the Guaranty and
any Subsidiary Joinder, and (iii) each other debt, liability or
obligation of the Borrower or any Subsidiary of the Borrower now
outstanding or hereafter arising under any of the Loan Documents (such
Obligations, liabilities and other debts, liabilities and obligations,
collectively, are the "Guaranteed Obligations"), and
(b) agrees to pay on demand (i) all Disallowed
Post-Commencement Interest and Expenses, to the Person entitled to
payment thereof if the claim therefor had been allowed in any
Bankruptcy, Insolvency or Liquidation Proceeding, and (ii) all costs
and expenses (including, without limitation, reasonable attorneys' fees
and legal expenses) incurred by the Lender in enforcing this Guaranty.
SECTION II.2 Acceleration of Payment. If (i) the Advances
become immediately due and payable pursuant to Section 6.1 of the Credit
Agreement, (ii) any Bankruptcy, Insolvency or Liquidation Proceeding is
commenced voluntarily by any Guarantor, or (iii) any Bankruptcy, Insolvency or
Liquidation Proceeding is commenced involuntarily against any Guarantor and
either (x) remains pending for more than 30 days or (y) an order for relief is
granted or consented to by the Borrower or by the debtor therein, then all
liability of each Guarantor under this Guaranty in respect of any Guaranteed
Obligation that is not then due and payable shall thereupon become and be
immediately due and payable, without notice or demand.
SECTION II.3 Guaranty Absolute and Unconditional. Each
Guarantor guarantees that the Guaranteed Obligations will be paid in accordance
with the terms of the Credit Agreement and the other Loan Documents, regardless
of any law, regulation or order now or hereafter in effect in any jurisdiction
affecting any of such terms or the rights and claims of the Lender against the
Borrower or any Subsidiary of the Borrower with respect thereto and even if any
such rights or claims are modified, reduced or discharged in a Bankruptcy,
Insolvency or Liquidation Proceeding or otherwise. The obligations of each
Guarantor under this Guaranty are
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independent of the Guaranteed Obligations, and a separate action or actions may
be brought and prosecuted against each Guarantor to enforce this Guaranty,
whether or not any action is brought against the Borrower or any other Guarantor
and whether or not the Borrower or any other Guarantor is joined in any such
action or actions. The liability of each Guarantor under this Guaranty shall be
absolute and unconditional irrespective of: (i) any lack of validity or
enforceability of the Credit Agreement or any other Loan Document or any other
agreement or instrument relating thereto; (ii) any change in the time, manner or
place of payment of, or in any other term of, any of the Guaranteed Obligations,
or any other amendment or waiver of or any consent to departure from the Credit
Agreement or any other Loan Document, including, without limitation, any
increase in the Guaranteed Obligations resulting from the extension of
additional credit to the Borrower or any of its Subsidiaries or otherwise; (iii)
any taking, exchange, release or non-perfection of any Lien securing, or any
taking, release or amendment or waiver of or consent to departure from any other
guaranty of, any of the Guaranteed Obligations; (iv) any manner or order of sale
or other enforcement of any Lien securing any or all of the Guaranteed
Obligations or any manner or order of application of the proceeds of any such
Lien to the payment of the Guaranteed Obligations or any failure to enforce any
Lien or to apply any proceeds thereof; (v) any change, restructuring or
termination of the corporate structure or existence of the Borrower or any of
its Subsidiaries; or (vi) any other circumstance which might otherwise
constitute a defense (except the defense of payment) available to, or a
discharge of, a surety or guarantor.
SECTION II.4 Guaranty Irrevocable and Continuing. This
Guaranty is an irrevocable and continuing offer and agreement guaranteeing
payment of any and all Guaranteed Obligations and shall extend to all Guaranteed
Obligations now outstanding or created or incurred at any future time, whether
or not created or incurred pursuant to any agreement presently in effect or
hereafter made, until all obligations of the Lender to extend credit to the
Borrower have expired or been terminated and all Guaranteed Obligations have
been fully, finally and indefeasibly paid. To the extent any contingent
Obligation survives the expiration or termination of the Credit Agreement and
the repayment of the Advances, each Guarantor's liability under this Guaranty
shall likewise survive. This Guaranty may be released only in writing except,
with respect to a given Guarantor, as provided for in Section 2.10.
SECTION II.5 Reinstatement. If at any time any payment on any
Guaranteed Obligation is set aside, avoided or rescinded or must otherwise be
restored or returned, this Guaranty and the liability of each Guarantor under
this Guaranty shall remain in full force and effect and, if previously released
or terminated, shall be automatically and fully reinstated, without any
necessity for any act, consent or agreement of any Guarantor, as fully as if
such payment had never been made and as fully as if any such release or
termination had never become effective.
SECTION II.6 Waiver. Guarantor hereby waives and relinquishes
all rights, remedies and defenses accorded by applicable law to sureties or
guarantors and agrees not to assert or take advantage of any such rights,
remedies or defenses, including without limitation:
(a) any right to require the Lender to proceed against
Borrower or any other Person or to proceed against or exhaust any
security held by the Lender at any time or to pursue any other remedy
in the power of the Lender before proceeding against Guarantor;
(b) the defense of the statute of limitations in any action
hereunder or in any action for the
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collection or performance of any Guaranteed Obligations;
(c) any defense that may arise by reason of the incapacity,
lack of authority, death or disability of any other Person or the
failure of the Lender to file or enforce a claim against the estate (in
administration, bankruptcy or any other proceeding) of any other
Person;
(d) demand, presentment, protest and notice of any kind,
including without limitation notice of the existence, creation or
incurring of any new or additional indebtedness or obligation or of any
action or non-action on the part of Borrower, Lender, any endorser or
creditor of Borrower or Guarantor or on the part of any other Person
under this or any other instrument in connection with any obligation or
evidence of indebtedness held by Lender as Collateral or in connection
with any Guaranteed Obligations;
(e) any defense based upon an election of remedies by the
Lender (including without limitation an election to proceed by
non-judicial rather than judicial foreclosure) irrespective of whether
such election destroys or otherwise impairs any subrogation rights of
Guarantor, the right of Guarantor to proceed against Borrower for
reimbursement, or both (it being understood that as a consequence of
the waiver set forth in this Section 2.6(e), Guarantor is waiving,
among other things, any defense that Guarantor might be able to invoke
under California law based upon the argument (as enunciated in, among
other cases, Union Bank v. Gradsky, 265 Cal. App. 2d 40 (1968), and
Cathay Bank v. Lee, 93 Los Angeles Daily Journal D.A.R. 4871 (1993)),
that an election by a lender to foreclose non-judicially under a deed
of trust effects a release of the Guarantor from any obligation to pay,
under its guaranty, any portion of the guaranteed obligation remaining
unpaid after the non-judicial foreclosure since the non-judicial
foreclosure could destroy or impair Guarantor's subrogation or other
rights to obtain any reimbursement from the Borrower for such
payments);
(f) any defense based upon any statute or rule of law which
provides that the obligation of a surety must be neither larger in
amount nor in other respects more burdensome than that of the
principal;
(g) any duty on the part of the Lender to disclose to
Guarantor any facts the Lender may now or hereafter know about
Borrower, regardless of whether the Lender has reason to believe that
any such facts materially increase the risk beyond that which Guarantor
intends to assume, or has reason to believe that such facts are unknown
to Guarantor, or has a reasonable opportunity to communicate such facts
to Guarantor, since Guarantor acknowledges that Guarantor is fully
responsible for being and keeping informed of the financial condition
of Borrower and of all circumstances bearing on the risk of non-payment
of any Guaranteed Obligations;
(h) any defense arising because of the election by the Lender,
in any proceeding instituted under the Bankruptcy Code, of the
application of Section 1111(b)(2) of the Bankruptcy Code; and
(i) any defense based upon any borrowing or grant of a
security interest under Section 364 of the Federal Bankruptcy Code.
Without limiting the generality of the foregoing, Guarantor
hereby expressly waives any and all benefits which might otherwise be available
to Guarantor under California Civil Code Sections 2809, 2810, 2819,
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2839, 2845 through 2850, 2899 and 3433, California Code of Civil Procedure
Sections 580(a), 580(b), 580(d) and 726, and California Commercial Code Section
3606(1).
SECTION II.7 Subrogation. Each Guarantor hereby represents,
warrants and agrees, in respect of any and all present and future rights of
subrogation, recourse, reimbursement, indemnity, exoneration, contribution and
other claims that such Guarantor at any time may have against the Borrower, any
other Guarantor or any other Person liable for the payment of any of the
Guaranteed Obligations (including, without limitation, the owner of any interest
in collateral subject to a Lien securing any of the Guaranteed Obligations) as a
result of or in connection with this Guaranty or any payment hereunder, that:
(a) No Agreement. Such Guarantor has not entered into, and
agrees that it will not enter into, any agreement providing, directly
or indirectly, for any such right or claim against the Borrower or,
except as set forth in Section 2.10, against any other Subsidiary of
the Borrower, and each such agreement now existing or hereafter entered
into (except as provided for in Section 2.10) is and shall be void;
(b) Release. Such Guarantor waives and releases any such right
or claim against the Borrower, any other Guarantor or any other such
Person until the Guaranteed Obligations have been paid in full;
(c) Capital Contribution. Neither the execution and delivery
of this Guaranty by such Guarantor nor any payment by such Guarantor
under this Guaranty shall give rise to any claim (as that term is
defined in the Bankruptcy Code) in favor of such Guarantor against the
Borrower until the Guaranteed Obligations have been paid in full; and
(d) Subordination of Contribution Rights. Such Guarantor
reserves, as against each other Guarantor, its right of contribution
under Section 2.10 but agrees that all such contribution rights shall
be included among the Subordinated Liabilities.
SECTION II.8 Subordination Provisions.
(a) Subordination. Any and all present and future debts,
liabilities and obligations of every type and description (whether for
money borrowed, on intercompany accounts, for provision of goods or
services, under tax sharing or contribution agreements or on account of
any other transaction, agreement, occurrence or event and whether
absolute or contingent, direct or indirect, matured or unmatured,
liquidated or unliquidated, created directly or acquired from another,
or sole, joint, several or joint and several) of the Borrower or any
Subsidiary of the Borrower now outstanding or hereafter incurred or
owed to any Guarantor (the "Subordinated Liabilities") shall be, and
hereby are, subordinated to full and final payment of the Guaranteed
Obligations.
(b) Prohibited Payments. If any Event of Default or Potential
Default occurs, then for so long as such Event of Default or Potential
Default may be continuing, no Guarantor will demand, sue for, accept or
receive, or cause or permit any other Person to make, any payment on or
transfer of property on account of any Subordinated Liabilities.
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(c) No Liens or Transfers. Each Guarantor agrees that (i) it
will not demand, accept or hold any Lien upon any real or personal
property of the Borrower or any of its Subsidiaries as security for any
of the Subordinated Liabilities and (ii) any such Lien shall be void.
(d) Insolvency Proceedings. In any Bankruptcy, Insolvency or
Liquidation Proceeding, the Lender shall be entitled to receive payment
in full of all amounts due or to become due on or in respect of the
Guaranteed Obligations, or provision shall be made for such payment in
money or money's worth, before any Guarantor is entitled to receive any
payment or distribution of any kind or character, whether in cash,
property or securities, on account of any of the Subordinated
Liabilities, and to that end the Lender shall be entitled to receive,
for application to the payment thereof, all payments and distributions
of any kind or character, whether in cash, property or securities
(including any such payment or distribution which may be payable or
deliverable by reason of the payment of any other debt or liability of
the Borrower or any Subsidiary of the Borrower being subordinated to
the payment of the Subordinated Liabilities), which may be payable or
deliverable in respect of the Subordinated Liabilities in any such
Bankruptcy, Insolvency or Liquidation Proceeding.
(e) Disallowed Post-Commencement Interest and Expenses. If in
any Bankruptcy, Insolvency or Liquidation Proceeding (i) any payment or
distribution of any kind or character, whether in cash, property or
securities (including any such payment or distribution which may be
payable or deliverable by reason of the payment of any other debt or
liability of the Borrower or any Subsidiary of the Borrower being
subordinated to the payment of the Subordinated Liabilities) is payable
or deliverable in respect of the Subordinated Liabilities, and (ii) the
Lender is not otherwise entitled to receive such payment or
distribution pursuant to Section 2.8(d), and (iii) any amount remains
unpaid to the Lender on account of any Disallowed Post- Commencement
Interest and Expenses, then the Lender shall be entitled to receive
payment of all such unpaid Disallowed Post-Commencement Interest and
Expenses from and out of any and all such payments and distributions in
respect of the Subordinated Liabilities.
(f) Held in Trust. If any payment, transfer or distribution is
made to any Guarantor upon any Subordinated Liabilities that is not
permitted to be made under this Section 2.8 or that the Lender is
entitled to receive under this Section 2.8, such Guarantor shall
receive and hold the same in trust, as trustee for the benefit of the
Lender, and shall forthwith transfer and deliver the same to the
Lender, in precisely the form received (except for any required
endorsement), for application to the payment of Guaranteed Obligations
or any unpaid Disallowed Post-Commencement Interest and Expenses.
(g) Claims in Bankruptcy. Each Guarantor will file all claims
against the Borrower or any Subsidiary of the Borrower in any
Bankruptcy, Insolvency or Liquidation Proceeding in which the filing of
claims is required or permitted by law upon any of the Subordinated
Liabilities and will assign to the Lender, all rights of such Guarantor
thereunder. If any Guarantor does not file any such claim at least 30
days prior to any applicable claims bar date, the Lender is hereby
authorized (but shall not be obligated), as attorney-in-fact for such
Guarantor with full power of substitution, either to file such claim or
proof thereof in the name of such Guarantor or, at the option of the
Lender, to assign the claim and cause the claim or proof thereof to be
filed by an agent or nominee. The Lender and its agents and nominees
shall have the sole right, but no obligation, to accept or reject any
plan proposed in such Bankruptcy, Insolvency or Liquidation Proceeding
and to cast any votes and to take any other action with respect to
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all claims upon any of the Subordinated Liabilities.
(h) Subordination Effective and not Impaired. This Section 2.8
shall remain effective for so long as this Guaranty is continuing and
thereafter for so long as any Guaranteed Obligation is outstanding.
Each Guarantor's obligations under this Section 2.8: (i) shall be
absolute and unconditional as set forth in Section 2.3, irrevocable and
continuing as set forth in Section 2.4, subject to reinstatement as set
forth in Section 2.5 and not be affected or impaired by any of the
matters waived in Section 2.6; (ii) shall be subject to the provisions
of Article III; and (iii) shall otherwise be as equally enduring and
free from defenses as such Guarantor's liability under this Guaranty.
SECTION II.9 Fraudulent Transfer Limitation. If, in any action
to enforce this Guaranty or any proceeding to allow or adjudicate a claim under
this Guaranty, a court of competent jurisdiction determines that enforcement of
this Guaranty against any Guarantor for the full amount of the Guaranteed
Obligations is not lawful under, or would be subject to avoidance under, Section
548 of the Bankruptcy Code or any applicable provision of comparable state law,
the liability of such Guarantor under this Guaranty shall be limited to the
maximum amount lawful and not subject to avoidance under such law.
SECTION II.10 Contribution among Guarantors. The Guarantors
desire to allocate among themselves, in a fair and equitable manner, their
rights of contribution from each other when any payment is made by one of the
Guarantors under this Guaranty. Accordingly, if any payment is made by a
Guarantor under this Guaranty (a "Funding Guarantor") that exceeds its Fair
Share, the Funding Guarantor shall be entitled to a contribution from each other
Guarantor in the amount of such other Guarantor's Fair Share Shortfall, so that
all such contributions shall cause each Guarantor's Aggregate Payments to equal
its Fair Share. For these purposes:
(a) "Fair Share" means, with respect to a Guarantor as of any
date of determination, an amount equal to (i) the ratio of (x) the
Adjusted Maximum Amount of such Guarantor to (y) the aggregate Adjusted
Maximum Amounts of all Guarantors, multiplied by (ii) the aggregate
amount paid on or before such date by all Funding Guarantors under this
Guaranty.
(b) "Fair Share Shortfall" means, with respect to a Guarantor
as of any date of determination, the excess, if any, of the Fair Share
of such Guarantor over the Aggregate Payments of such Guarantor.
(c) "Adjusted Maximum Amount" means, with respect to a
Guarantor as of any date of determination, the maximum aggregate amount
of the liability of such Guarantor under this Guaranty, limited to the
extent required under Section 2.9 (except that, for purposes solely of
this calculation, any assets or liabilities arising by virtue of any
rights to or obligations of contribution under this Section 2.10 shall
not be counted as assets or liabilities of such Guarantor).
(d) "Aggregate Payments" means, with respect to a Guarantor as
of any date of determination, the aggregate net amount of all payments
made on or before such date by such Guarantor under this Guaranty
(including, without limitation, under this Section 2.10).
The amounts payable as contributions hereunder shall be determined by the
Funding Guarantor as of the date on which the related payment or distribution is
made by the Funding Guarantor, and such determination shall be
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binding on the other Guarantors absent manifest error. The allocation and right
of contribution among the Guarantors set forth in this Section 2.10 shall not be
construed to limit in any way the liability of any Guarantor under this Guaranty
to the Lender.
SECTION II.11 Joint and Several Obligation. This Guaranty and
all liabilities of each Guarantor hereunder shall be the joint and several
obligation of each Guarantor and may be freely enforced against each Guarantor,
for the full amount of the Guaranteed Obligations (subject to Section 2.9),
without regard to whether enforcement is sought or available against any other
Guarantor.
ARTICLE III
MISCELLANEOUS PROVISIONS
SECTION III.1 Condition of the Borrower. Each Guarantor is
fully aware of the financial condition of the Borrower and its Subsidiaries and
is executing and delivering this Guaranty based solely upon such Guarantor's own
independent investigation of all matters pertinent hereto and is not relying in
any manner upon any representation or statement by the Lender. Each Guarantor
represents and warrants that it is in a position to obtain, and each Guarantor
hereby assumes full responsibility for obtaining, any additional information
concerning the financial condition of the Borrower and each of its Subsidiaries
and any other matter pertinent hereto as such Guarantor may desire, and such
Guarantor is not relying upon or expecting the Lender to furnish to such
Guarantor any information now or hereafter in the possession of the Lender
concerning the same or any other matter. By executing this Guaranty, each
Guarantor knowingly accepts the full range of risks encompassed within a
contract of this type, which risks each Guarantor acknowledges. No Guarantor
shall have the right to require the Lender to obtain or disclose any information
with respect to the Guaranteed Obligations, the financial condition or prospects
of the Borrower or any Subsidiary of the Borrower, the ability of the Borrower
or any Subsidiary of the Borrower to pay or perform the Guaranteed Obligations,
the existence, perfection, priority or enforceability of any collateral security
for any or all of the Guaranteed Obligations, the existence or enforceability of
any other guaranties of all or any part of the Guaranteed Obligations, any
action or non-action on the part of the Lender, the Borrower, any Subsidiary of
the Borrower or any other Person, or any other event, occurrence, condition or
circumstance whatsoever.
SECTION III.2 Amendments.
(a) Amendment to Guaranty. No amendment or waiver of any
provision of this Guaranty, no consent to any departure by any
Guarantor herefrom, shall in any event be effective unless the same
shall be in writing and signed by the Lender, and then such waiver or
consent shall be effective only in the specific instance and for the
specific purpose for which given, except that no amendment, waiver or
consent shall, unless in writing and signed by the Lender, (i) reduce
or discharge the liability of any Guarantor hereunder, or (ii) postpone
any date fixed for payment hereunder.
(b) Amendment or Modification of Other Loan Documents. The
other Loan Documents may be amended, modified or supplemented in
accordance with their terms without notice to or consent or agreement
by any Guarantor, including, without limitation, so as to (i) alter,
compromise, modify, accelerate, extend, renew, refinance or change the
time or manner for making of Advances, provision of
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other financial accommodations, or the payment or performance of all or
any portion of the Guaranteed Obligations, (ii) increase or reduce the
rate of interest or amount of principal payable on the Guaranteed
Obligations, (iii) release or discharge the Borrower, any other Loan
Party or any other Person as to all or any portion of the Guaranteed
Obligations, or (iv) release, substitute or add any one or more
guarantors or endorsers, accept additional or substituted security for
payment or performance of the Guaranteed Obligations, or release or
subordinate any security therefor.
SECTION III.3 Notices. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic,
telex or cable communication) and mailed, telecopied, telegraphed, telexed,
cabled or delivered, if to any Guarantor, c/o O.S.I. Corporation, 475 Eccles
Avenue, South San Francisco, California 94080, Attention: Treasurer, with a copy
to the General Counsel at the same address, and if to the Lender, at its address
specified in the Credit Agreement, or, as to any party, at such other address as
shall be designated by such party in a written notice to each other party. All
such notices and other communications shall, when mailed, telecopied,
telegraphed, telexed or cabled, be effective when deposited in the mails,
telecopied, delivered to the telegraph company, confirmed by telex answerback or
delivered to the cable company, respectively.
SECTION III.4 Right of Set off. If any Advances become
immediately due and payable pursuant to Section 6.1 of the Credit Agreement, the
Lender shall have the right at any time, and from time to time thereafter, to
the fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other liability at any time owing by Lender to or for the credit or the account
of any Guarantor against any and all liability of such Guarantor under this
Guaranty, whether or not Lender shall have made any demand under this Guaranty
and even though such deposit or liability may then be unmatured. Lender agrees
to promptly notify the affected Guarantor after any such set-off and application
made by Lender, but the failure to give such notice shall not affect the
validity of such set-off and application. The rights of the Lender under this
Section 3.4 are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which Lender may have.
SECTION III.5 Successors and Assigns. This Guaranty is binding
upon and enforceable against each Guarantor, its successors and assigns, and
shall inure to the benefit of, and be enforceable by, the Lender and its
representatives, successors and assigns.
SECTION III.6 No Inquiry. The Lender may rely, without further
inquiry, on the power and authority of each Guarantor, the Borrower and each of
its Subsidiaries and on the authority of all officers, directors and agents
acting or purporting to act on their behalf.
SECTION III.7 Involuntary Proceedings. So long as the Lender
is obligated to extend credit under the Credit Agreement or any Guaranteed
Obligations are outstanding, no Guarantor will, without the prior written
consent of the Lender, commence or join with any other Person in commencing any
Bankruptcy, Insolvency or Liquidation Proceeding against the Borrower or any of
its Subsidiaries.
SECTION III.8 Payments Free and Clear of Taxes.
(a) Payment. Each Guarantor agrees to pay any and all present
or future taxes, levies, imposts, deductions, charges or withholdings,
and all liabilities with respect thereto which arise from any
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payment made hereunder or from the execution, delivery or registration
of, or otherwise with respect to, this Guaranty, excluding, with
respect to the Lender, taxes imposed on its net income (collectively,
the "Guaranty Taxes").
(b) Indemnity. Each Guarantor hereby indemnifies the Lender
for the full amount of Guaranty Taxes (including, without limitation,
any Guaranty Taxes imposed by any jurisdiction on amounts payable under
this Section 3.8) paid by the Lender and any liability (including
penalties, interest and expenses) arising therefrom or with respect
thereto (plus interest on any amounts not paid within thirty days from
the date written demand is made therefor at a rate equal to the rate
payable under the Credit Agreement on Base Rate Advances during the
continuance of a default in the repayment of Advances), whether or not
such Guaranty Taxes were correctly or legally asserted; provided,
however, that if the Lender subsequently recoups all or any part of
such amount from the relevant taxation authority or other authority,
then the Lender shall identify and remit the amount of the recoupment
to such Guarantor within five Business Days after it receives the
recoupment.
(c) Survival. Without prejudice to the survival of any other
agreement of any Guarantor hereunder, the agreements and obligations of
each Guarantor contained in this Section 3.8 shall survive the full and
final payment and performance of the Guaranteed Obligations.
(d) Receipt. Within 30 days after the date of any payment of
Guaranty Taxes by any Guarantor, such Guarantor shall furnish to the
Lender a receipt for any Guaranty Taxes paid by such Guarantor pursuant
to this Section 3.8.
SECTION III.9 No Waiver; Remedies. No failure on the part of
the Lender to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof, and no single or partial exercise of any right
hereunder shall preclude any other or further exercise of any other right or of
the same right as to any other matter or on a subsequent occasion.
SECTION III.10 Remedies Cumulative. All rights, powers and
remedies of the Lender under this Guaranty, under any other agreement now or at
any time hereafter in effect between the Lender and any Guarantor (whether
relating to the Guaranteed Obligations or otherwise) or now or hereafter
existing at law or in equity or by statute or otherwise, shall be cumulative and
concurrent and not alternative and each such right, power and remedy may be
exercised independently of, and in addition to, each other such right, power or
remedy.
SECTION III.11 Severally Enforceable. This Guaranty may be
enforced severally and successively by the Lender in one or more actions,
whether independent, concurrent, joint, successive or otherwise.
SECTION III.12 Counterparts. This Guaranty may be executed in
counterparts, and each such counterpart for all purposes shall be deemed an
original and all such counterparts together shall constitute but one and the
same agreement.
SECTION III.13 Severability. If any provision hereof or the
application thereof in any particular circumstance is held to be unlawful or
unenforceable in any respect, all other provisions hereof and such provision in
all other applications shall nevertheless remain effective and enforceable to
the maximum extent lawful.
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SECTION III.14 Integration. This Guaranty and the other Loan
Documents to which any Guarantor is party are intended as an integrated and
final expression of the entire agreement of such Guarantor with respect to the
subject matter hereof and thereof. No representation, understanding, promise or
condition concerning the subject matter hereof and thereof shall be binding upon
the Lender unless expressed herein or therein, and no course of prior dealing or
usage of trade, and no parol or extrinsic evidence of any nature, shall be
admissible to supplement, modify or vary any of the terms hereof or thereof.
Acceptance of or acquiescence in a course of performance rendered under this
Guaranty or any other dealings between any Guarantor and the Lender shall not be
relevant to determine the meaning of this Guaranty even though the accepting or
acquiescing party had knowledge of the nature of the performance and opportunity
for objection.
SECTION III.15 GOVERNING LAW; SUBMISSION TO JURISDICTION;
WAIVER OF JURY TRIAL; WAIVER OF DAMAGES.
(a) GOVERNING LAW. THIS GUARANTY SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
(b) SUBMISSION TO JURISDICTION. ANY LEGAL ACTION OR PROCEEDING
WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE
STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT
OR THE CENTRAL DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF
THIS GUARANTY, EACH PARTY HERETO CONSENTS, FOR ITSELF AND IN RESPECT OF
ITS PROPERTY, TO THE JURISDICTION OF THOSE COURTS. EACH PARTY
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING
OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY
NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN
SUCH JURISDICTION IN RESPECT OF THIS GUARANTY OR ANY DOCUMENT RELATED
HERETO. SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS MAY BE MADE
BY ANY MEANS PERMITTED BY CALIFORNIA LAW.
(c) WAIVER OF JURY TRIAL. EACH PARTY HERETO WAIVES ALL RIGHTS
TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF OR RELATED TO THIS GUARANTY, THE OTHER LOAN DOCUMENTS OR
THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE
PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO
CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE, AND AGREES THAT ANY SUCH
CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A
JURY. WITHOUT LIMITING THE FOREGOING, EACH PARTY FURTHER AGREES THAT
ITS RIGHT TO A TRIAL BY JURY IS HEREBY WAIVED AS TO ANY ACTION,
COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO
CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS GUARANTY OR ANY OTHER
LOAN DOCUMENT OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL
APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS GUARANTY AND THE OTHER LOAN DOCUMENTS.
(d) LIMITATION OF LIABILITY. NO CLAIM MAY BE MADE BY ANY
GUARANTOR AGAINST THE LENDER OR ANY OF ITS AFFILIATES, DIRECTORS,
OFFICERS, EMPLOYEES, ATTORNEYS
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OR AGENTS FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES
IN RESPECT OF ANY CLAIM (WHETHER BASED UPON ANY BREACH OF CONTRACT,
TORT, BREACH OF STATUTORY DUTY OR ANY OTHER THEORY OF LIABILITY)
ARISING OUT OF OR RELATED TO THE TRANSACTIONS CONTEMPLATED BY THIS
GUARANTY, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION
THEREWITH, AND EACH GUARANTOR HEREBY WAIVES, RELEASES AND AGREES NOT TO
SUE UPON ANY CLAIM FOR ANY SUCH DAMAGES, WHETHER OR NOT NOW ACCRUED AND
WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR.
SECTION III.16 Acceptance and Notice. Each Guarantor
acknowledges acceptance hereof and reliance hereon by the Lender and waives,
irrevocably and forever, all notice thereof.
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IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to
be duly executed and delivered by its officer thereunto duly authorized as of
the date first above written.
O.S.I. Puerto Rico Corporation
By: ________________________________
Name:
Title:
S-1
<PAGE> 87
Annex 1
Form of Subsidiary Joinder
AGREEMENT TO BE BOUND BY GUARANTY
This Agreement to be Bound by Guaranty (this "Agreement") is
executed as of the _____ day of _________, ____, by [NAME OF NEW SUBSIDIARY] , a
____________ [corporation] [partnership] [etc.] (the "New Subsidiary").
RECITALS
A. On or about October 30, 1996, O.S.I. Corporation, a
California corporation (the "Borrower") executed that certain Credit Agreement,
dated as of October 30, 1996 (as amended to date, the "Credit Agreement"), by
and between the Borrower and Comerica Bank-California (the "Lender"). Terms not
defined herein are used as defined in the Credit Agreement.
B. As a condition to the execution of the Credit Agreement by
the Lender, all of the Material Subsidiaries of the Borrower (other than the
Foreign Subsidiaries) executed that certain Subsidiary Guaranty, dated as of
October 30, 1996 (as amended to date, the "Guaranty"), by and among the entities
listed in the signature pages thereof in favor of the Lender.
C. Section 5.2(e) of the Credit Agreement provides that when
the Borrower acquires or forms a new Material Subsidiary or when a Subsidiary
becomes a Material Subsidiary, the Borrower will cause such Subsidiary to
deliver an executed counterpart to the Guaranty and such Subsidiary shall become
a party to the Guaranty.
D. On [Insert Date] , the New Subsidiary [Describe
acquisition/formation of New Subsidiary, or growth of Material Subsidiary] . The
New Subsidiary will benefit from the funds available to the Borrower under the
Credit Agreement, and in recognition of this benefit and in order to comply with
the Credit Agreement, the New Subsidiary is willing to enter into this
Agreement.
AGREEMENT
NOW, THEREFORE, the New Subsidiary agrees as follows:
1.Representations and Warranties. On and as of the date of
this Agreement (the "Effective Date") and for the benefit of the Lender, the New
Subsidiary hereby makes each of the representations and warranties contained in
the Guaranty.
2. Agreement to be Bound. The New Subsidiary agrees that, on
and as of the Effective Date, it shall become a Guarantor under the Guaranty and
shall be bound by all the provisions of the Guaranty the same as if the New
Subsidiary had executed the Guaranty on the Closing Date.
3. Waiver. Without limiting the generality of the waivers in
the Guaranty, the New
Annex-1
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Subsidiary specifically agrees to be bound by the Guaranty and waives any right
to notice of acceptance of its execution of this Agreement and of its agreement
to be bound by the Guaranty.
4. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
IN WITNESS WHEREOF, the New Subsidiary has caused this
Agreement to be Bound by Guaranty to be executed by its duly authorized officer.
[NAME OF NEW SUBSIDIARY]
By: ___________________________
Name:
Title:
Annex-2
<PAGE> 89
BORROWER PLEDGE AND SECURITY AGREEMENT
This BORROWER PLEDGE AND SECURITY AGREEMENT, dated as of
October 30, 1996, is made by and between O.S.I. CORPORATION, a California
corporation (the "Grantor"), in favor of COMERICA BANK-CALIFORNIA, a California
chartered bank (the "Secured Party").
RECITALS
A. The Grantor has entered into that certain Credit Agreement,
dated as of October 30, 1996 (as amended, supplemented or otherwise modified
from time to time, the "Credit Agreement"), by and between the Grantor and
Secured Party, as the Lender.
B. It is a condition precedent to the extension of credit
under the Credit Agreement that the Grantor shall have granted the security
interests described herein as security for each and all the Obligations (as that
term is defined in the Credit Agreement) and as security for the other debts,
liabilities and obligations secured hereunder.
NOW, THEREFORE, in consideration of the foregoing and in order
to induce the Lender to extend credit under the Credit Agreement, the Grantor
hereby agrees as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION I.1 General Definitions. Except as otherwise
specifically provided herein, the terms that are defined in Section 1.1 of the
Credit Agreement shall have the same meanings when used in this Agreement and
the provisions of Sections 1.2 and 1.3 of the Credit Agreement shall apply to
this Agreement.
SECTION I.2 U.C.C. Definitions. Where applicable and except as
otherwise expressly provided herein, terms used herein (whether or not
capitalized) shall have the respective meanings assigned to them in the Uniform
Commercial Code as enacted in the State of California (the "Code").
SECTION I.3 Certain Defined Terms. As used in this Agreement,
the following terms shall have the following meanings:
"Agreement" means this Borrower Pledge and Security Agreement,
dated as of October 30, 1996, made by and between the Grantor and the Secured
Party.
"Claims" is defined in Section 2.1(g).
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"Collateral" is defined in Section 2.1.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Intellectual Property Collateral" means
(a) Copyrights, Trademarks and Patents;
(b) Any and all trade secrets, and any and all
intellectual property rights in computer software and computer software products
now or hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available
to Borrower now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past,
present and future infringement of any of the rights included above, with the
right, but not the obligation, to sue for and collect such damages for said use
or infringement of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the
Copyrights, Patents or Trademarks, and all license fees and royalties arising
from such use to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of
the Copyrights, Trademarks or Patents; and
(g) All proceeds and products of the foregoing,
including without limitation all payments under insurance or any indemnity or
warranty payable in respect of any of the foregoing.
"Patents" means all patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same.
"Pledged Shares" is defined in Section 2.1(a).
"Proceeds" includes (i) all payments, dividends, cash,
options, warrants, rights, instruments and other property of any type or nature
at any time received, receivable or otherwise distributed, voluntarily or
involuntarily, (x) on account of, in respect of or in exchange for any item of
Collateral or (y) upon the collection, sale or other disposition of any item of
Collateral; (ii) any insurance or payments under any indemnity, warranty or
guaranty now or hereafter payable in respect of any item of Collateral or any
proceeds thereof or any loss relating thereto; (iii) all proceeds of any
Collateral; and (iv) any property or interest in property acquired with or in
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exchange for any of the foregoing.
"Secured Obligations" is defined in Section 2.2.
"Secured Party" means Comerica Bank-California.
"Trademarks" means any trademark and servicemark rights,
whether registered or not, applications to register and registrations of the
same and like protections, and the entire goodwill of the business of Assignor
connected with and symbolized by such trademarks.
ARTICLE II
SECURITY INTEREST AND COLLATERAL
SECTION II.1 Creation of Security Interest. As security for
the due and punctual payment and performance of all present and future Secured
Obligations, the Grantor hereby grants Secured Party a security interest in all
right, title and interest of the Grantor in, to, under or derived from the
following property (collectively, the "Collateral"), in each case whether now
owned or hereafter acquired by the Grantor and wherever located:
(a) The shares of stock listed on Schedule A hereto (the
"Pledged Shares");
(b) All other shares of stock or equity securities of, or
ownership interests in, any issuer of the Pledged Shares or any other
Person, in each case whether or not represented by a certificated
security or other instrument;
(c) All options, warrants and rights to subscribe for or
purchase voting or nonvoting capital stock or equity securities of, or
ownership interests in, any issuer of the Pledged Shares or any other
corporation, partnership, trust or Person, whether or not represented
by a certificated security or other instrument;
(d) All inventory, including, without limitation, (i) all raw
materials, work in process and finished goods held for sale or lease or
leased or furnished or to be furnished under contracts of service, (ii)
all goods returned to or stopped in transit by the Grantor and (iii)
all supplies and materials used or consumed in any business of the
Grantor; and all documents of title;
(e) All equipment, including, without limitation,
manufacturing, distribution and sales equipment, office equipment,
supplies, appliances, data processing and communications equipment,
furniture, furnishings, tools, fixtures, trade fixtures, automobiles,
trucks, trailers, other motor vehicles and aircraft and all other goods
(other than inventory) used or bought for use for any business;
(f) All accounts and accounts receivable, including, without
limitation, all rights to payment for goods sold or leased or for
services rendered which are not evidenced by an instrument or chattel
paper, and all liens and security interests at any time securing the
same;
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(g) All money, notes, bonds, debentures, evidences of
indebtedness and all other debt instruments, all chattel paper, all
loans receivable, all tax refunds, all insurance proceeds, all deposits
and deposit accounts, all royalties, guaranties, and indemnities, all
claims and causes of action of every type and description, and all
other rights and claims for the payment of money (in each case whether
due or to become due, whether arising by contract or founded in tort or
arising by law or otherwise, and whether or not earned by performance,
and specifically including all "claims", as such term is defined in
Section 101 of the United States Bankruptcy Code, as in effect on the
date hereof; hereinafter, "Claims"), and all liens and security
interests at any time securing the same;
(h) All other general intangibles, including, without
limitation, Intellectual Property Collateral, permits, licenses,
franchises, contracts, including, but not limited to all key man life
insurance contracts, patents, patent applications, copyrights,
copyright applications, rights and interests in copyrights and works
protectable by copyright, trademarks, trademark applications, trade
names, service marks and service mark applications and other indicia of
origin, technical knowledge and processes, formal or informal licensing
arrangements, blueprints, technical specifications, computer software,
know-how, trade secrets, customer lists, supplier lists, corporate
books and records, business plan and other corporate information, and
all embodiments thereof, and rights thereto, together with the goodwill
of the business symbolized by or connected with the Grantor's
trademarks, licenses and other rights described in this subsection
("General Intangibles");
(i) All replacements, additions, parts, appurtenances,
accessions, substitutions, repairs, products, offspring, issues, rents
and profits of, to or from any of the foregoing; and
(j) All Proceeds of any of the foregoing,
provided, nevertheless, that (A) the Collateral shall not include (i) any
interest in real property (or any estate for years therein) or (ii) more than
65% of any class of equity securities of any Foreign Subsidiary (or any options,
warrants or rights to subscribe for equity securities which if exercised would
cause the Collateral to include more than 65% of any class of equity securities
of any Foreign Subsidiary), (B) the foregoing grant of a security interest shall
not require Secured Party to provide any goods or services or assume any other
duties or obligations under the documents or agreements set forth in Section
2.1(h) above and (C) the foregoing grant of a security interest shall not extend
to, and the term "Collateral" shall not include, any rights in any General
Intangibles representing rights under agreements between the Grantor and any
third party, (x) that are now held by the Grantor as lessee or otherwise or (y)
that are hereafter entered into between the Grantor and any third party with
respect to which Grantor has complied with Section 4.1(k) herein, to the extent
that (i) such General Intangibles are not assignable or capable of being
encumbered as a matter of law or under the terms of the agreement applicable
thereto (but solely to the extent that any such restriction shall be enforceable
under applicable law), without the consent of the other party thereto and (ii)
such consent has not been obtained; provided, however, that the foregoing grant
of security interest shall extend to, and the term Collateral shall include, (a)
any and all proceeds of such General Intangibles to the extent that the
assignment or encumbering of such proceeds is not so restricted and upon any
such other applicable party's consent with respect to any such otherwise
excluded General Intangibles being obtained, thereafter such General Intangibles
as well as any and all proceeds thereof that might theretofore have been
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excluded from such grant of a security interest and the term Collateral. In the
event that an Event of Default shall have occurred and be continuing, the
Grantor shall use all reasonable efforts to obtain the consents of any such
other party as may be requested from time to time by the Secured Party in
writing.
SECTION II.2 Secured Obligations. The Collateral secures (i)
the payment of all present and future Obligations and all other debts and
liabilities of the Grantor now outstanding or hereafter arising under (A) the
Credit Agreement, this Agreement, any other Loan Document or (B), unless the
Grantor and the Secured Party otherwise specifically agree in writing, any other
agreement between Grantor and Secured Party, and all other debts and liabilities
of the Grantor to the Secured Party, now outstanding or hereafter arising, and
whether for principal, interest, fees, cost and expense reimbursements,
indemnification or otherwise, (ii) the performance by the Grantor of all its
other obligations of every kind and character arising under (A) the Credit
Agreement, this Agreement or any other Loan Document or (B), unless the Grantor
and the Secured Party otherwise specifically agree in writing, any other
agreement, document or instrument between the Grantor and the Secured Party, now
outstanding or hereafter arising and (iii) all costs and expenses incurred by
Secured Party in asserting, enforcing or protecting a Claim in respect of any
such debts, liabilities and obligations or the Collateral in any bankruptcy case
or insolvency proceeding to which the Grantor or any other Loan Party may be
party and all collection costs and enforcement expenses incurred by Secured
Party in collecting any such Claim or in retaking, holding, preparing for sale,
selling or otherwise disposing of or realizing on any Collateral or otherwise
exercising or enforcing any of its rights or remedies hereunder, together (in
each case) with Secured Party's reasonable attorneys' fees and disbursements and
court costs related thereto (collectively, the "Secured Obligations").
SECTION II.3 Delivery of Instruments. All stock certificates,
notes, bonds, debentures and other instruments constituting the Collateral
(except checks received and collected in the ordinary course of business) shall
be delivered to and held by Secured Party on the date hereof or, if hereafter
acquired, promptly, and, in any case, no later than five (5) days, after or upon
acquisition thereof by the Grantor and without any notice from or demand by
Secured Party, in each case in suitable form for transfer by delivery or
accompanied by duly executed instruments of transfer or assignments in blank or
with appropriate endorsements, in form and substance reasonably satisfactory to
Secured Party.
SECTION II.4 Further Assurances. The Grantor will promptly
(and in no event later than five days after request by Secured Party) execute
and deliver, and use its reasonable and diligent best efforts to obtain from
other Persons, all instruments and documents (including, without limitation,
assignments, transfer documents and transfer notices, financing statements and
other lien notices), in form and substance reasonably satisfactory to Secured
Party, and take all other actions which are necessary or, in the reasonable good
faith judgment of Secured Party, desirable or appropriate to create, perfect,
protect or enforce Secured Party's security interests in the Collateral, to
enable Secured Party to exercise and enforce its rights and remedies hereunder
with respect to any Collateral, to protect the Collateral against the rights,
Claims or interests of third Persons or to effect or to assure further the
purposes and provisions of this Agreement, and the Grantor will pay all costs
related thereto and all reasonable expenses incurred by Secured Party in
connection therewith; provided, the foregoing shall not apply to Collateral that
is Inventory with an aggregate value of less than One Million Dollars
($1,000,000) held by consignees in the ordinary course of business so long as an
Event of Default has not occurred.
SECTION 2.5 Survival of Security Interest. Except as
otherwise required by law, the security
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interest granted hereby shall, (i) remain enforceable as security for all
Secured Obligations now outstanding or created or incurred at any future time
(whether or not created or incurred pursuant to any agreement presently in
effect or hereafter made and notwithstanding any subsequent repayment of any of
the Secured Obligations or any other act, occurrence or event), until all
obligations of the Lender to extend credit to the Grantor have expired or been
terminated and all Secured Obligations have been fully and finally paid, (ii)
survive the expiration or termination of the Credit Agreement and the repayment
of the Advances to the same extent that any contingent Obligation survives, and
(iii) survive any sale, exchange or other disposition of the Grantor's interest
in any Collateral and remain enforceable against each transferee and subsequent
owner of such interest, unless such sale, exchange or other disposition is
permitted at the time under the Credit Agreement.
SECTION 2.6 Reinstatement. If at any time any payment on any
Secured Obligation is set aside, avoided, or rescinded or must otherwise be
restored or returned, this Agreement and the security interest created hereby
shall remain in full force and effect and, if previously released or terminated,
shall be automatically and fully reinstated, without any necessity for any act,
consent or agreement of the Grantor, as fully as if such payment had never been
made and as fully as if any such release or termination had never become
effective.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION II.1 Representations and Warranties of Grantor. The
Grantor represents and warrants that:
(a) Schedule A completely and accurately sets forth all shares
of stock, and all other equity, ownership and profit interests in which
the Grantor owns any interest. The Pledged Shares have been duly
authorized and validly issued, are fully paid and non-assessable and
were not issued in breach or derogation of preemptive rights of any
Person.
(b) The Grantor's chief executive office is located at the
address shown as the chief executive office on Schedule B hereto. The
Grantor has no places of business other than its chief executive office
and the other locations set forth on Schedule B. All tangible
Collateral, except instruments and stock certificates delivered to
Secured Party in pledge, and all of the Grantor's records relating to
any Claims owned by it are kept solely at the locations set forth in
Schedules B hereto (other than (i) Inventory in transit in the ordinary
course of business, (ii) Inventory temporarily held by contractors or
agents in the ordinary course of business, and (iii) Inventory with an
aggregate value of less than One Million Dollars ($1,000,000) held by
consignees in the ordinary course of business).
(c) The Grantor does not do business, and for the previous
five years has not done business, under any fictitious business names
or trade names other than those listed on Schedule C hereto.
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(d) The Grantor at all times is (or, as to any item of
Collateral acquired after the date hereof, will be) the sole legal and
beneficial owner of all Collateral reflected on its books and records
as belonging to it and has exclusive possession and control thereof
(except for Inventory (with an aggregate value of less than One Million
Dollars ($1,000,000) in the possession of consignees, agents or
contractors) free and clear of any Liens except those created by this
Agreement or permitted under Section 5.3(a) of the Credit Agreement. No
financing statement, notice of lien, mortgage, deed of trust or
instrument similar in effect covering the Collateral or any portion
thereof or any proceeds thereof exists or is on file in any public
office, except as may have been filed in favor of Secured Party, and
those relating to Liens permitted by the Credit Agreement.
(e) The Collateral has not been and will not be used or bought
by the Grantor for personal, family or household purposes.
(f) All originals of all stock certificates, notes, bonds,
debentures and other instruments constituting Collateral (except checks
received and collected by the Grantor in the ordinary course of
business) have been delivered to Secured Party with all necessary or
appropriate endorsements.
(g) Except (i) as set forth in Schedule D and (ii) as to laws
generally applicable to the creation, perfection or enforcement of
security interests in personal property, neither the Grantor nor any of
the Collateral purported to granted by it is subject to any requirement
of law or contractual obligation which prohibits, restricts or limits
the execution, delivery or performance of this Agreement or the
creation, perfection or enforcement of the security interest purported
to be created hereby.
(h) None of the Collateral constitutes "margin stock," as
defined in Regulation U of the Board of Governors of the Federal
Reserve System.
(k) The proper taxpayer identification number for the Grantor
is accurately set forth on Schedule E.
(l) Grantor is the sole owner of the Intellectual Property
Collateral listed below its name on Exhibits A, B and C to the
Intellectual Property Security Agreement, except for non-exclusive
licenses granted by Grantor in the ordinary course of business and
except for the grant of licenses in connection with the settlement or
enforcement of the Galley Litigation outside of the United States. Each
of the Patents is valid and enforceable. No part of the Intellectual
Property Collateral has been judged invalid or unenforceable, in whole
or in part except for such Intellectual Property Collateral that the
Grantor deems, in its reasonable business judgment, to be immaterial to
the operation of Grantor's business and does not generate any of
Grantor's accounts. No claim has been made that any part of the
Intellectual Property Collateral violates the rights of any third party
(it being understood that the Galley Litigation and the Litigation
Adjustment shall not be deemed a breach of this representation). Except
for and upon the filing with the United States Patent and Trademark
Office with respect to the Patents and Trademarks and the Register of
Copyrights with respect to the Copyrights necessary to perfect the
security interests created hereunder, and except as has been already
made or obtained, no authorization, approval or other action
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by, and no notice to or filing with, any United States governmental
authority or United States regulatory body is required either (i) for
the grant by Grantor of the security interest granted hereby or for the
execution, delivery or performance of Loan Documents by Grantor in the
United States or (ii) for the perfection in the United States or the
exercise by Secured Party of its rights and remedies hereunder.
ARTICLE IV
COVENANTS
SECTION IV.1 Covenants of Grantor. The Grantor covenants and
agrees that so long as the security interest created hereby remains outstanding:
(a) The Grantor will deliver to Secured Party each instrument
included in the Collateral as set forth in Section 2.3.
(b) The Grantor will not (i) cause, permit or suffer any
voluntary or involuntary change in its name, identity or corporate
structure, or in the location of its chief executive office, and (ii)
keep any tangible Collateral or any records relating to any Claim owned
by it, or permit or suffer any such Collateral or records to be moved,
to any location other than those specified in Schedule B (except with
respect to (i) Inventory in transit in the ordinary course of business,
(ii) Inventory temporarily held by contractors or agents in the
ordinary course of business, and (iii) Inventory with an aggregate
value of less than One Million Dollars ($1,000,000) held by consignees
in the ordinary course of business) unless (in each case) (x) Schedule
B has first been appropriately supplemented with respect thereto, and
(y) an appropriate financing statement has been filed in the proper
office and in the proper form, and all other requisite actions have
been taken, to perfect or continue the perfection (without loss of
priority) of Secured Party's security interest in the Collateral.
(c) The Grantor will defend the Collateral against all claims
and demands of all Persons at any time claiming the same or any
interest therein unless such interest is permitted hereunder and under
the Credit Agreement.
(d) The Grantor will not encumber, sell, exchange or otherwise
dispose of any item of Collateral or any interest therein, or permit or
suffer any such item to be encumbered, sold, exchanged or otherwise
disposed of, unless (i) such action is permitted at the time under the
Credit Agreement and (ii) the Grantor makes all payments on account of
the Obligations required to be made therefrom (provided that any such
payments made in connection with any Asset Sale permitted under Section
5.3(b)(iii) of the Credit Agreement shall be made concurrently with the
closing of such Asset Sale), and the Grantor and each other Loan Party
takes all other actions required to be taken in connection therewith,
under the Credit Agreement, this Agreement or any other Loan Document.
(e) Secured Party is hereby authorized to file one or more
financing statements, and continuations thereof and amendments thereto,
relative to all or any part of the Collateral, without the signature of
the Grantor where permitted by law.
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(f) The Grantor will (i) maintain insurance as required in
Section 5.2(g) of the Credit Agreement, (ii) give the Lender written
notice of any default in the payment of premiums on such insurance
policies and at least ten (10) days written notice prior to
cancellation of any such policies, and (iii) cause the Lender to be
named (A) as the principal beneficiary on any key-man life insurance
policy, and (B) as an additional insured on a lender's loss payable
endorsement, in a form satisfactory to the Lender for any other such
insurance policies.
(g) Secured Party may at any time (but shall not be obligated
to) (i) perform any of the obligations of the Grantor under this
Agreement if the Grantor fails to perform such obligation within 30
days (or, in the case of insurance, within 10 days) after written
demand by Secured Party and (ii) make any payments and do any other
acts it may deem reasonably necessary or desirable to protect its
security interest in the Collateral, including, without limitation, the
right to pay, purchase, contest or compromise any Lien that attaches or
is asserted against any Collateral (other than Liens permitted under
Section 5.3(a) of the Credit Agreement), to procure insurance required
to be provided by the Grantor under the Credit Agreement, and to the
extent the Grantor is required hereunder or under the Credit Agreement
to do so, to appear in and defend any action or proceeding relating to
the Collateral, if the Grantor fails to make such payments or perform
such acts within 30 days after written demand by Secured Party, and the
Grantor will promptly reimburse Secured Party for all payments made by
Secured Party in doing so, together with interest thereon at the rate
then applicable under the Credit Agreement to the Advances, and all
costs and expenses related thereto as set forth in Section 8.10 hereof.
(h) Grantor shall give Secured Party prompt notice of any
adverse material change in the composition of the Intellectual Property
Collateral, including, but not limited to, any subsequent ownership
right of the Grantor in or to any Copyright, Patent or Trademark not
specified in any intellectual property security agreement between
Grantor and Secured Party or knowledge of an event that materially
adversely affects the value of the Intellectual Property Collateral.
(i) Grantor shall register or cause to be registered (to the
extent not already registered) with the United States Patent and
Trademark Office or the United States Copyright Office, as applicable,
those intellectual property rights listed below its name on Exhibits A,
B and C to the Intellectual Property Security Agreement delivered to
Secured Party by Grantor in connection with this Agreement within
thirty (30) days of the date of this Agreement. Grantor shall register
or cause to be registered with the United States Patent and Trademark
Office or the United States Copyright Office, as applicable, those
additional United States Copyrights, Trademarks, Patents or maskworks
developed or acquired by Grantor from time to time in connection with
any product prior to the sale or licensing of such product to any third
party, including without limitation revisions or additions to the
intellectual property rights listed below its name on such Exhibits A,
B and C but excluding Copyrights or Trademarks with respect to
advertising.
(j) Grantor shall (i) protect, defend and maintain the
validity and enforceability of the Trademarks, Patents and Copyrights
unless the Grantor in good faith determines that such actions are not
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in the best interests of the Grantor and the failure to so act could
not reasonably be expected to have a Material Adverse Change on the
value of the Intellectual Property Collateral, (ii) use its
commercially reasonable efforts to detect infringements of the
Trademarks, Patents and Copyrights and promptly advise Secured Party in
writing of material infringements detected and (iii) not allow any
Trademarks, Patents or Copyrights to be abandoned, forfeited or
dedicated to the public, without the written consent of Secured Party
unless the Grantor determines in good faith that such abandonment or
forfeiture is in the best interests of the Grantor and could not
reasonably be expected to have a Material Adverse Change on the value
of the Intellectual Property Collateral.
(k) Grantor shall not permit the inclusion in any material
contract to which it becomes a party of any provisions that could or
might in any way prevent the creation of a security interest in
Grantor's rights and interests in any property included within the
definition of the General Intangibles acquired under such contracts,
except to the extent that such provisions are necessary in Grantor's
exercise of its reasonable business judgement.
ARTICLE V
VOTING RIGHTS, DIVIDENDS AND DISTRIBUTIONS
SECTION V.1 Voting Rights. So long as no Event of Default has
occurred and is continuing or would result from any exercise thereof, the
Grantor shall have and may exercise all voting rights with respect to any and
all shares of stock, equity securities and other equity, ownership or profit
interests constituting Collateral, except that:
(a) the Grantor may not and will not act or vote in favor of
any action that would be or cause a breach of any obligations of the
Grantor or any other Loan Party under the Credit Agreement or under any
other Loan Document;
(b) the Grantor may not and will not act or vote in favor of
(i) the authorization or issuance of any options, warrants, voting
rights, or preference shares or additional shares, or (ii) any
reclassification, readjustment, reorganization, merger, consolidation,
sale or disposition of assets, or dissolution, without giving Secured
Party at least 5 days' prior written notice thereof provided that for
the conversion of Debt to equity permitted under Section 5.3(c)(ix) of
the Credit Agreement, such notice period shall be limited to subsequent
notice only; and
(c) the Grantor may not and will not act or vote in favor of
any action that does or is reasonably likely to have a material adverse
effect on the aggregate value of the Collateral provided that, for
purposes of this Section 5.1(c), the effect of any such act or vote
shall be determined with respect to the facts and circumstances at the
time of such act or vote.
Upon the occurrence and during the continuance of an Event of Default, Secured
Party may (but shall not be obligated to) terminate the Grantor's right to
exercise voting rights with respect to any or all such shares of stock, equity
securities and ownership interests, either by giving written notice of such
termination to the Grantor or by
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transferring such shares, securities or interests into Secured Party's name, and
Secured Party shall thereupon have the sole right and power to exercise such
voting rights.
SECTION V.2 Dividends, Distributions and Payments. So long as
no Event of Default has occurred and is continuing or would result, the Grantor
shall be entitled to receive all dividends and distributions on all shares of
stock, equity securities and other equity, ownership and profit interests
constituting Collateral and all payments on any notes, bonds, debentures and
other instruments constituting Collateral, so long as the Grantor makes all
payments on account of the Obligations required to be made therefrom, and the
Grantor and each other Loan Party takes all other actions required to be taken
in connection therewith, under the Credit Agreement, this Agreement or any other
Loan Document.
ARTICLE VI
DEFAULTS AND REMEDIES
SECTION VI.1 Remedies. Upon and at any time after the
occurrence and during the continuance of any Event of Default, Secured Party may
exercise and enforce, in any order, (i) each and all of the rights and remedies
available to a secured party upon default under the Code or other applicable
law, (ii) each and all of the rights and remedies available to it, as Lender or
as Secured Party, under the Credit Agreement or any other Loan Document and
(iii) each and all of the following rights and remedies:
(a) Secured Party may notify any or all account debtors and
obligors on any Collateral to make payment directly to Secured Party.
(b) Secured Party may take possession of all items of
Collateral that are not then in its possession and require the Grantor
or the Person in possession thereof to deliver such Collateral to
Secured Party at one or more locations designated by Secured Party and
reasonably convenient to it and the Grantor.
(c) Secured Party may sell, lease, license or otherwise
dispose of any or all of the Collateral or any part thereof in one or
more parcels at a public sale or in a private sale or transaction, on
any exchange or market or at Secured Party's offices or on the
Grantor's premises or at any other location, for cash, on credit or for
future delivery, and may enter into all contracts necessary or
appropriate in connection therewith, without any notice whatsoever
unless required by law. The Grantor agrees that at least ten calendar
days' written notice to the Grantor of the time and place of any public
sale or the time after which any private sale is to be made shall be
commercially reasonable. The giving of notice of any such sale or other
disposition shall not obligate Secured Party to proceed with the sale
or disposition, and any such sale or disposition may be postponed or
adjourned from time to time, without further notice.
(d) Secured Party may, on a royalty-free basis, use and
license use of any trademark, trade name, trade style, copyright,
patent or technical knowledge or process owned, held or used by the
Grantor in respect of any Collateral as to which any right or remedy of
Secured Party is exercised or enforced.
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In addition, each holder of any Secured Obligation may exercise and enforce such
rights and remedies for the collection of such Secured Obligation as may be
available to it by law or agreement.
SECTION VI.2 Remedies Cumulative. Secured Party may exercise
and enforce each right and remedy available to it upon the occurrence of an
Event of Default either before or concurrently with or after, and independently
of, any exercise or enforcement of any other right or remedy of Secured Party or
any holder of any Secured Obligation against any Person or property. All such
rights and remedies shall be cumulative, and no one of them shall exclude or
preclude any other.
SECTION VI.3 Surplus; Deficiency. Any surplus proceeds of any
sale or other disposition of Collateral by Secured Party remaining after all the
Secured Obligations are paid in full shall be paid over to the Grantor or to
whomever may be lawfully entitled to receive such surplus or as a court of
competent jurisdiction may direct, but if any obligation to make Advances then
remains outstanding or if any contingent, unliquidated or unmatured Secured
Obligation then remains outstanding, such surplus proceeds may be retained by
Secured Party and held as Collateral until such time as all such obligations
have expired or been terminated and all outstanding Secured Obligations have
been determined, liquidated, paid in full and discharged. The Grantor shall be
and remain liable for any deficiency.
SECTION VI.4 Information Related to Collateral. If Secured
Party determines to sell or otherwise dispose of any Collateral, the Grantor
shall, and shall cause any Person controlled by it to, furnish to Secured Party
all information Secured Party may request that pertains or could pertain to the
value or condition of such Collateral or would or might facilitate its sale.
SECTION VI.5 Sale Exempt from Registration. Secured Party
shall be entitled at any sale or other disposition of Collateral, if it deems it
advisable to do so, to restrict the prospective bidders or purchasers to persons
who will provide assurances satisfactory to Secured Party that they may be
offered and sold the Collateral to be sold without registration under the
Securities Act of 1933, as amended (the "Securities Act"), or any other
applicable state or federal statute, and upon the consummation of any such sale,
Secured Party shall have the right to assign, transfer and deliver to the
purchaser or purchasers thereof the Collateral so sold. Secured Party may
solicit offers to buy the Collateral, or any part of it, from a limited number
of investors deemed by Secured Party, in its commercially reasonable judgment,
to meet the requirements to purchase securities under Regulation D promulgated
under the Securities Act as then in effect (or any other regulation of similar
import). If Secured Party solicits such offers from such investors, then the
acceptance by Secured Party of the highest offer obtained therefrom shall be
deemed to be a commercially reasonable method of disposition of such Collateral.
SECTION VI.6 Registration Rights. During the continuance of an
Event of Default, if Secured Party determines that registration of any
securities constituting Collateral under the Securities Act or other applicable
law is required or desirable in connection with any sale, the Grantor will use
its best efforts to cause such registration to be effectively made, at no
expense to Secured Party, and to continue any such registration effective for
such time as may be reasonably necessary in the opinion of the Secured Party.
ARTICLE VII
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THE SECURED PARTY
SECTION VII.1 Credit Agreement Provisions. Secured Party is
executing and delivering this Agreement, and accepting the security interests,
rights, remedies, powers and benefits conferred upon Secured Party hereby, as
Lender under the Credit Agreement. The provisions of Article VII of the Credit
Agreement and all rights, powers, immunities and indemnities granted to the
Lender under the Credit Agreement and other Loan Documents shall apply in
respect of such execution, delivery and acceptance and in respect of any and all
actions taken or omitted by Secured Party under, in connection with or with
respect to this Agreement.
SECTION VII.2 No Liability. Secured Party makes no statement,
promise, representation or warranty whatsoever, and shall have no liability
whatsoever, to any holder of any Secured Obligations as to the authorization,
execution, delivery, legality, enforceability or sufficiency of this Agreement
or as to the creation, perfection, priority or enforceability of any security
interest granted hereunder or as to existence, ownership, quality, condition,
value or sufficiency of any Collateral or as to any other matter whatsoever.
SECTION VII.3 Duty of Care. Neither Secured Party nor any
director, officer, employee, attorney or agent of Secured Party shall be
obligated to care for the Collateral hereunder or to collect, enforce, vote or
protect the Collateral or any rights or interests of the Grantor related thereto
or to preserve or enforce any rights which the Grantor or any other Person may
have against any third party, except only that Secured Party shall exercise
reasonable care in physically safekeeping any item of Collateral that was
delivered into Secured Party's possession. Secured Party shall be deemed to have
exercised such reasonable care if the Collateral is accorded treatment
substantially equal to that which Secured Party accords to its own property or
if it selects, with reasonable care, a custodian or agent to hold such
collateral for Secured Party's account.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
SECTION VIII.1 Notices. All notices, requests, approvals,
consents and other communications required or permitted to be made hereunder
shall, except as otherwise provided, be given in the manner specified and to the
addresses set forth in Section 7.2 of the Credit Agreement.
SECTION VIII.2 Headings. The various headings in this
Agreement are inserted for convenience only and shall not affect the meaning or
interpretation of this Agreement or any provision hereof.
SECTION VIII.3 Changes. This Agreement or any provision hereof
may be changed, waived or terminated only by a statement in writing signed by
the party against which such change, waiver or termination is sought to be
enforced or otherwise in accordance with Section 7.1 of the Credit Agreement
except as provided in Section 5.2(e) of the Credit Agreement or as required to
comply with Section 4.1(b). Any such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.
SECTION VIII.4 Grantor Remains Liable. The Grantor shall
remain liable under all contracts and
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agreements included in the Collateral to the extent set forth therein to perform
all of its duties and obligations thereunder to the same extent as if this
Agreement had not been executed. The exercise or enforcement by Secured Party of
any of its rights and remedies under this Agreement or in respect of the
Collateral shall not release the Grantor from any of its duties or obligations
under any such contracts or agreements. Secured Party shall not be obligated to
perform any such duties or obligations and shall not be liable for any breach
thereof.
SECTION VIII.5 No Waiver. No failure by Secured Party to
exercise, or delay by Secured Party in exercising, any power, right or remedy
under this Agreement shall operate as a waiver thereof. No waiver by Secured
Party shall be effective unless given in a writing signed by it. No waiver so
given shall operate as a waiver in respect of any other matter or in respect of
the same matter on a future occasion. Acceptance of or acquiescence in a course
of performance in respect of this Agreement shall not waive or affect the
construction or interpretation of the terms of this Agreement even if the
accepting or acquiescing party had knowledge of the nature of the performance
and opportunity for objection.
SECTION VIII.6 Entire Agreement. This Agreement and the other
Loan Documents are intended by the parties as a final expression of their
agreement and a complete and exclusive statement of the terms and conditions
thereof.
SECTION VIII.7 Severability. If any provision of this
Agreement is invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions hereof, or of
such provision in any other application, shall not be in any way affected or
impaired thereby and such other provisions and applications shall enforceable to
the full extent lawful.
SECTION VIII.8 Power of Attorney. The Grantor hereby appoints
and constitutes Secured Party or any delegate, nominee or agent acting for
Secured Party as the Grantor's attorney-in-fact with the power and authority
(but not the duty), in the name of the Grantor or in the name of Secured Party
or such delegate, nominee or agent, to (i) execute, deliver and file such
financing statements, agreements, deeds and writings as the Grantor is required
to execute, deliver or file hereunder, (ii) endorse, collect or transfer any
item of Collateral (A) which the Grantor is required to endorse, collect or
transfer hereunder after either (x) the occurrence and continuance of an Event
of Default, or (y) Secured Party has requested that Grantor so endorse, collect
or transfer and Grantor has failed to so endorse, collect or transfer or which
Secured Party is permitted to endorse, collect or transfer hereunder, (iii) make
any payments or take any action under Section 2.4 or Section 4.1(g) hereof, (iv)
modify, in its sole discretion, the Intellectual Property Security Agreement
entered into between Grantor and Secured Party without first obtaining Grantor's
approval of or signature to such modification by amending Exhibit A, Exhibit B
and Exhibit C, thereof, as appropriate, to include reference to any right, title
or interest in any Copyrights, Patents or Trademarks acquired by Grantor after
the execution hereof or to delete any reference to any right, title or interest
in any Copyrights, Patents or Trademarks in which Grantor no longer has or
claims any right, title or interest, (v) transfer, upon the occurrence and
during the continuance of an Event of Default, the Intellectual Property
Collateral into the name of Secured Party or a third party to the extent
permitted under the California Uniform Commercial Code, (vi) take any other
action (A) permitted to Secured Party hereunder or (B) required of the Grantor
hereunder after either (x) an Event of Default has occurred and is continuing or
(y) the Secured party has requested that Grantor take such action and Grantor
has failed to do so, and (vi) take any action reasonably necessary to any of the
foregoing. This power of attorney is coupled with an interest and is irrevocable
as to the
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Grantor. Secured Party shall have no duty whatsoever to exercise any power
herein granted it.
SECTION VIII.9 Counterparts. This Agreement and any
amendments, waivers, consents or supplements may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, but all of which shall together constitute one and the same agreement.
SECTION VIII.10 Costs and Expenses. The Grantor hereby agrees
to pay or reimburse Secured Party for all reasonable costs and expenses
(including, without limitation, reasonable attorneys' fees and disbursements and
court costs) incurred in connection with or as a result of the exercise or
enforcement by Secured Party of any right or remedy available to it or the
protection or enforcement of its interest in the Collateral in any bankruptcy
case or insolvency proceeding.
SECTION VIII.11 GOVERNING LAW; SUBMISSION TO JURISDICTION;
WAIVER OF JURY TRIAL; LIMITATION OF LIABILITY; WAIVER OF BOND.
(a) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
INTERPRETED UNDER THE LAWS OF THE STATE OF CALIFORNIA, EXCEPT TO THE
EXTENT THAT THE PERFECTION OF THE SECURITY INTERESTS HEREUNDER IN
RESPECT OF ANY PARTICULAR COLLATERAL IS GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF CALIFORNIA.
(b) SUBMISSION TO JURISDICTION. ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS
OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE NORTHERN
DISTRICT OR THE CENTRAL DISTRICT OF CALIFORNIA, AND BY EXECUTION AND
DELIVERY OF THIS AGREEMENT, EACH PARTY HERETO CONSENTS, FOR ITSELF AND
IN RESPECT OF ITS PROPERTY, TO THE JURISDICTION OF THOSE COURTS. EACH
PARTY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE
LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH
IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR
PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY
DOCUMENT RELATED HERETO. SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER
PROCESS MAY BE MADE BY ANY MEANS PERMITTED BY CALIFORNIA LAW.
(c) WAIVER OF JURY TRIAL. EACH PARTY HERETO WAIVES ALL RIGHTS
TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS
OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE
PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO
CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE, AND AGREES THAT ANY SUCH
CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A
JURY. WITHOUT LIMITING THE FOREGOING, EACH PARTY FURTHER AGREES THAT
ITS RIGHT TO A TRIAL BY JURY IS HEREBY WAIVED AS TO ANY ACTION,
COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO
CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER
LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL
APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS AGREEMENT
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AND THE OTHER LOAN DOCUMENTS.
(d) LIMITATION OF LIABILITY. NO CLAIM MAY BE MADE BY THE
GRANTOR AGAINST THE SECURED PARTY OR ITS AFFILIATES, DIRECTORS,
OFFICERS, EMPLOYEES, ATTORNEYS OR AGENTS FOR ANY SPECIAL, INDIRECT,
CONSEQUENTIAL OR PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM (WHETHER
BASED UPON BREACH OF CONTRACT, TORT, BREACH OF STATUTORY DUTY OR ANY
OTHER THEORY OF LIABILITY) ARISING OUT OF OR RELATED TO THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, OR ANY ACT, OMISSION OR
EVENT OCCURRING IN CONNECTION THEREWITH, AND THE GRANTOR HEREBY WAIVES,
RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR ANY SUCH DAMAGES,
WHETHER OR NOT NOW ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO
EXIST IN ITS FAVOR.
(e) WAIVER OF BOND. THE GRANTOR WAIVES THE POSTING OF ANY BOND
OTHERWISE REQUIRED OF SECURED PARTY IN CONNECTION WITH THE ENFORCEMENT
OF ANY OF ITS REMEDIES HEREUNDER, INCLUDING, WITHOUT LIMITATION, ANY
ORDER OR WRIT FOR REPLEVIN OR DELIVERY OF POSSESSION OF ANY COLLATERAL.
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SECTION 8.12 Successors and Assigns. This Agreement is
binding upon and enforceable against the Grantor and its successors and assigns.
It shall inure to the benefit of and may be enforced by Secured Party and its
successors and assigns, for its and their own benefit and for the benefit of
each and every present and future Lender or other Person entitled to enforce any
of the Secured Obligations and each of their respective heirs, representatives,
successors and assigns.
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IN WITNESS WHEREOF, the parties have caused this Borrower
Pledge and Security Agreement to be duly executed and delivered by their
respective officers thereunto duly authorized as of the date first above
written.
O.S.I. CORPORATION,
a California corporation
By: _________________________________
Name:
Title:
COMERICA BANK-CALIFORNIA
By: _________________________________
Name:
Title:
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EXHIBIT B-3
FORM OF
SUBSIDIARY PLEDGE AND SECURITY AGREEMENT
This SUBSIDIARY PLEDGE AND SECURITY AGREEMENT, dated as of
October 30, 1996, is made by each entity that is identified on the signature
pages hereof or that hereafter executes and delivers a Subsidiary Joinder in
substantially the form set forth as Annex 1 hereto (each such entity, a
"Grantor"), in favor of COMERICA BANK- CALIFORNIA, a California chartered bank
(the "Lender"), as Lender under the Credit Agreement (defined below).
RECITALS
A. The Lender has entered into that certain Credit Agreement,
dated as of October 30, 1996 (as amended, supplemented or otherwise modified
from time to time, the "Credit Agreement"), by and between O.S.I. Corporation, a
California corporation (the "Borrower") and the Lender.
B. Each Grantor is a direct or indirect subsidiary of the
Borrower and expects to derive substantial direct and indirect benefit from the
transactions contemplated by the Credit Agreement. Each Grantor has entered into
a Subsidiary Guaranty (or a Subsidiary Joinder thereto) dated of even date
herewith, in favor of the Lender.
C. It is a condition precedent to the extension of credit
under the Credit Agreement that each Grantor shall have granted the security
interests described herein as security for each and all the Obligations (as that
term is defined in the Credit Agreement) and as security for the other debts,
liabilities and obligations secured hereunder.
D. The Borrower has agreed, in the Credit Agreement, to cause
all future Material Subsidiaries of the Borrower to become party to this
Subsidiary Pledge and Security Agreement, as a Grantor hereunder.
NOW, THEREFORE, in consideration of the foregoing and in order
to induce the Lender to extend credit under the Credit Agreement, each Grantor
hereby agrees as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION I.1 General Definitions. Except as otherwise
specifically provided herein, the terms that are defined in Section 1.1 of the
Credit Agreement shall have the same meanings when used in this Agreement and
the provisions of Sections 1.2 and 1.3 of the Credit Agreement shall apply to
this Agreement.
SECTION I.2 U.C.C. Definitions. Where applicable and except as
otherwise expressly provided herein, terms used herein (whether or not
capitalized) shall have the respective meanings assigned to them in the
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Uniform Commercial Code as enacted in the State of California (the "Code").
SECTION I.3 Certain Defined Terms. As used in this Agreement,
the following terms shall have the following meanings:
"Agreement" means this Subsidiary Pledge and Security
Agreement, dated as of October 30, 1996, made by and between the Grantor and the
Secured Party.
"Claims" is defined in Section 2.1(g).
"Collateral" is defined in Section 2.1.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Intellectual Property Collateral" means
(a) Copyrights, Trademarks and Patents;
(b) Any and all trade secrets, and any and all
intellectual property rights in computer software and computer software products
now or hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available
to Borrower now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past,
present and future infringement of any of the rights included above, with the
right, but not the obligation, to sue for and collect such damages for said use
or infringement of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the
Copyrights, Patents or Trademarks, and all license fees and royalties arising
from such use to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of
the Copyrights, Trademarks or Patents; and
(g) All proceeds and products of the foregoing,
including without limitation all payments under insurance or any indemnity or
warranty payable in respect of any of the foregoing.
"Patents" means all patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same.
"Pledged Shares" is defined in Section 2.1(a).
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"Proceeds" includes (i) all payments, dividends, cash,
options, warrants, rights, instruments and other property of any type or nature
at any time received, receivable or otherwise distributed, voluntarily or
involuntarily, (x) on account of, in respect of or in exchange for any item of
Collateral or (y) upon the collection, sale or other disposition of any item of
Collateral; (ii) any insurance or payments under any indemnity, warranty or
guaranty now or hereafter payable in respect of any item of Collateral or any
proceeds thereof or any loss relating thereto; (iii) all proceeds of any
Collateral; and (iv) any property or interest in property acquired with or in
exchange for any of the foregoing.
"Secured Obligations" is defined in Section 2.2.
"Secured Party" means Comerica Bank-California.
"Trademarks" means any trademark and servicemark rights,
whether registered or not, applications to register and registrations of the
same and like protections, and the entire goodwill of the business of Assignor
connected with and symbolized by such trademarks.
ARTICLE II
SECURITY INTEREST AND COLLATERAL
SECTION II.1 Creation of Security Interest. As security for
the due and punctual payment and performance of all present and future Secured
Obligations, each Grantor hereby grants Secured Party a security interest in all
right, title and interest of such Grantor in, to, under or derived from the
following property (collectively, the "Collateral"), in each case whether now
owned or hereafter acquired by such Grantor and wherever located:
(a) The shares of stock listed on Schedule A hereto (the
"Pledged Shares");
(b) All other shares of stock or equity securities of, or
ownership interests in, any issuer of the Pledged Shares or any other
Person, in each case whether or not represented by a certificated
security or other instrument;
(c) All options, warrants and rights to subscribe for or
purchase voting or nonvoting capital stock or equity securities of, or
ownership interests in, any issuer of the Pledged Shares or any other
corporation, partnership, trust or Person, whether or not represented
by a certificated security or other instrument;
(d) All inventory, including, without limitation, (i) all raw
materials, work in process and finished goods held for sale or lease or
leased or furnished or to be furnished under contracts of service, (ii)
all goods returned to or stopped in transit by such Grantor and (iii)
all supplies and materials used or consumed in any business of such
Grantor; and all documents of title;
(e) All equipment, including, without limitation,
manufacturing, distribution and sales equipment, office equipment,
supplies, appliances, data processing and communications equipment,
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furniture, furnishings, tools, fixtures, trade fixtures, automobiles,
trucks, trailers, other motor vehicles and aircraft and all other goods
(other than inventory) used or bought for use for any business;
(f) All accounts and accounts receivable, including, without
limitation, all rights to payment for goods sold or leased or for
services rendered which are not evidenced by an instrument or chattel
paper, and all liens and security interests at any time securing the
same;
(g) All money, notes, bonds, debentures, evidences of
indebtedness and all other debt instruments, all chattel paper, all
loans receivable, all tax refunds, all deposits and deposit accounts,
all royalties, guaranties, and indemnities, all claims and causes of
action of every type and description, and all other rights and claims
for the payment of money (in each case whether due or to become due,
whether arising by contract or founded in tort or arising by law or
otherwise, and whether or not earned by performance, and specifically
including all "claims", as such term is defined in Section 101 of the
United States Bankruptcy Code, as in effect on the date hereof;
hereinafter, "Claims"), and all liens and security interests at any
time securing the same;
(h) All other general intangibles, including, without
limitation, Intellectual Property Collateral, permits, licenses,
franchises, contracts, patents, patent applications, copyrights,
copyright applications, rights and interests in copyrights and works
protectable by copyright, trademarks, trademark applications, trade
names, service marks and service mark applications and other indicia of
origin, technical knowledge and processes, formal or informal licensing
arrangements, blueprints, technical specifications, computer software,
know-how, trade secrets, customer lists, supplier lists, corporate
books and records, business plan and other corporate information, and
all embodiments thereof, and rights thereto, together with the goodwill
of the business symbolized by or connected with such Grantor's
trademarks, licenses and other rights described in this subsection
("General Intangibles");
(i) All replacements, additions, parts, appurtenances,
accessions, substitutions, repairs, products, offspring, issues, rents
and profits of, to or from any of the foregoing; and,
(j) All Proceeds of any of the foregoing,
provided, nevertheless, that (A) the Collateral shall not include (i) any
interest in real property (or any estate for years therein) or (ii) more than
65% of any class of equity securities of any Foreign Subsidiary (or any options,
warrants or rights to subscribe for equity securities which if exercised would
cause the Collateral to include more than 65% of any class of equity securities
of any Foreign Subsidiary), (B) the foregoing grant of a security interest shall
not require Secured Party to provide any goods or services or assume any other
duties or obligations under the documents or agreements set forth in Section
2.1(h) above and (C) the foregoing grant of a security interest shall not extend
to, and the term "Collateral" shall not include, any rights in any General
Intangibles representing rights under agreements between the Grantor and any
third party, (x) that are now held by the Grantor as lessee or otherwise or (y)
that are hereafter entered into between the Grantor and any third party with
respect to which Grantor has complied with Section 4.1(k) herein, to the extent
that (i) such General Intangibles are not assignable or capable of being
encumbered as a matter of law or under the terms of the agreement applicable
thereto (but solely to the extent that any such restriction shall be enforceable
under applicable law), without the consent of the other party thereto and (ii)
such consent has not been obtained; provided, however, that the foregoing grant
of security
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interest shall extend to, and the term Collateral shall include, (a) any and all
proceeds of such General Intangibles to the extent that the assignment or
encumbering of such proceeds is not so restricted and upon any such other
applicable party's consent with respect to any such otherwise excluded General
Intangibles being obtained, thereafter such General Intangibles as well as any
and all proceeds thereof that might theretofore have been excluded from such
grant of a security interest and the term Collateral. In the event that an Event
of Default shall have occurred and be continuing, the Grantor shall use all
reasonable efforts to obtain the consents of any such other party as may be
requested from time to time by the Secured Party in writing.
SECTION II.2 Secured Obligations. The Collateral secures (i)
the payment of all present and future Obligations and all other debts and
liabilities of the Grantor now outstanding or hereafter arising under (A) the
Credit Agreement, this Agreement, any other Loan Document or (B), unless the
Grantor and the Secured Party otherwise specifically agree in writing, any other
agreement between Grantor and Secured Party, and all other debts and liabilities
of the Grantor to the Secured Party, now outstanding or hereafter arising, and
whether for principal, interest, fees, cost and expense reimbursements,
indemnification or otherwise, (ii) the performance by the Grantor of all its
other obligations of every kind and character arising under (A) the Credit
Agreement, this Agreement or any other Loan Document or (B), unless the Grantor
and the Secured Party otherwise specifically agree in writing, any other
agreement, document or instrument between the Grantor and the Secured Party, now
outstanding or hereafter arising and
(iii) all costs and expenses incurred by Secured Party in asserting, enforcing
or protecting a Claim in respect of any such debts, liabilities and obligations
or the Collateral in any bankruptcy case or insolvency proceeding to which the
Grantor or any other Loan Party may be party and all collection costs and
enforcement expenses incurred by Secured Party in collecting any such Claim or
in retaking, holding, preparing for sale, selling or otherwise disposing of or
realizing on any Collateral or otherwise exercising or enforcing any of its
rights or remedies hereunder, together (in each case) with Secured Party's
reasonable attorneys' fees and disbursements and court costs related thereto
(collectively, the "Secured Obligations").
SECTION II.3 Delivery of Instruments. All stock certificates,
notes, bonds, debentures and other instruments constituting the Collateral
(except checks received and collected in the ordinary course of business) shall
be delivered to and held by Secured Party on the date hereof or, if hereafter
acquired, promptly, and, in any case, no later than five (5) days, after or upon
acquisition thereof by any Grantor and without any notice from or demand by
Secured Party, in each case in suitable form for transfer by delivery or
accompanied by duly executed instruments of transfer or assignments in blank or
with appropriate endorsements, in form and substance reasonably satisfactory to
Secured Party.
SECTION II.4 Further Assurances. Each Grantor will promptly
(and in no event later than five days after request by Secured Party) execute
and deliver, and use its reasonable and diligent best efforts to obtain from
other Persons, all instruments and documents (including, without limitation,
assignments, transfer documents and transfer notices, financing statements and
other lien notices), in form and substance reasonably satisfactory to Secured
Party, and take all other actions which are necessary or, in the reasonable good
faith judgment of Secured Party, desirable or appropriate to create, perfect,
protect or enforce Secured Party's security interests in the Collateral, to
enable Secured Party to exercise and enforce its rights and remedies hereunder
with respect to any Collateral, to protect the Collateral against the rights,
Claims or interests of third Persons or to effect or to assure further the
purposes and provisions of this Agreement, and the Grantor will pay all costs
related thereto and all
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reasonable expenses incurred by Secured Party in connection therewith; provided,
the foregoing shall not apply to Collateral that is Inventory with an aggregate
value of less than One Million Dollars ($1,000,000) held by consignees in the
ordinary course of business so long as an Event of Default has not occurred.
SECTION II.5 Survival of Security Interest. Except as
otherwise required by law, the security interest granted hereby shall, (i)
remain enforceable as security for all Secured Obligations now outstanding or
created or incurred at any future time (whether or not created or incurred
pursuant to any agreement presently in effect or hereafter made and
notwithstanding any subsequent repayment of any of the Secured Obligations or
any other act, occurrence or event), until all obligations of the Lender to
extend credit to the Grantor have expired or been terminated and all Secured
Obligations have been fully and finally paid, (ii) survive the expiration or
termination of the Credit Agreement and the repayment of the Advances to the
same extent that any contingent Obligation survives, and (iii) survive any sale,
exchange or other disposition of the Grantor's interest in any Collateral and
remain enforceable against each transferee and subsequent owner of such
interest, unless such sale, exchange or other disposition is permitted at the
time under the Credit Agreement.
SECTION II.6 Reinstatement. If at any time any payment on any
Secured Obligation is set aside, avoided, or rescinded or must otherwise be
restored or returned, this Agreement and the security interest created hereby
shall remain in full force and effect and, if previously released or terminated,
shall be automatically and fully reinstated, without any necessity for any act,
consent or agreement of any Grantor, as fully as if such payment had never been
made and as fully as if any such release or termination had never become
effective.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION III.1 Representations and Warranties of Grantors. Each
Grantor represents and warrants that:
(a) Schedule A completely and accurately sets forth all shares
of stock, and all other equity, ownership and profit interests in which
the Grantor owns any interest. The Pledged Shares have been duly
authorized and validly issued, are fully paid and non-assessable and
were not issued in breach or derogation of preemptive rights of any
Person.
(b) The Grantor's chief executive office is located at the
address shown as the chief executive office on Schedule B hereto. The
Grantor has no places of business other than its chief executive office
and the other locations set forth on Schedule B. All tangible
Collateral, except instruments and stock certificates delivered to
Secured Party in pledge, and all of the Grantor's records relating to
any Claims owned by it are kept solely at the locations set forth in
Schedules B hereto (other than (i) Inventory in transit in the ordinary
course of business, (ii) Inventory temporarily held by contractors or
agents in the ordinary course of business, and (iii) Inventory with an
aggregate value of less than One Million Dollars ($1,000,000) held by
consignees in the ordinary course of business).
(c) The Grantor does not do business, and for the previous
five years has not done business, under any fictitious business names
or trade names other than those listed on Schedule C hereto.
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(d) The Grantor at all times is (or, as to any item of
Collateral acquired after the date hereof, will be) the sole legal and
beneficial owner of all Collateral reflected on its books and records
as belonging to it and has exclusive possession and control thereof
(except for Inventory with an aggregate value of less than One Million
Dollars ($1,000,000) in the possession of consignees, agents or
contractors) free and clear of any Liens except those created by this
Agreement or permitted under Section 5.3(a) of the Credit Agreement. No
financing statement, notice of lien, mortgage, deed of trust or
instrument similar in effect covering the Collateral or any portion
thereof or any proceeds thereof exists or is on file in any public
office, except as may have been filed in favor of Secured Party those
relating to Liens permitted by the Credit Agreement.
(e) The Collateral has not been and will not be used or bought
by the Grantor for personal, family or household purposes.
(f) All originals of all stock certificates, notes, bonds,
debentures and other instruments constituting Collateral (except checks
received and collected by the Grantor in the ordinary course of
business) have been delivered to Secured Party with all necessary or
appropriate endorsements.
(g) Except (i) as set forth in Schedule D and (ii) as to laws
generally applicable to the creation, perfection or enforcement of
security interests in personal property, neither the Grantor nor any of
the Collateral purported to granted by it is subject to any requirement
of law or contractual obligation which prohibits, restricts or limits
the execution, delivery or performance of this Agreement or the
creation, perfection or enforcement of the security interest purported
to be created hereby.
(h) None of the Collateral constitutes "margin stock," as
defined in Regulation U of the Board of Governors of the Federal
Reserve System.
(k) The proper taxpayer identification number for the Grantor
is accurately set forth on Schedule E.
(l) Grantor is the sole owner of the Intellectual Property
Collateral listed below its name on Exhibits A, B and C to the
Intellectual Property Security Agreement, except for non-exclusive
licenses granted by Grantor in the ordinary course of business and
except for the grant of licenses in connection with the settlement or
enforcement of the Galley Litigation outside of the United States. Each
of the Patents is valid and enforceable. No part of the Intellectual
Property Collateral has been judged invalid or unenforceable, in whole
or in part except for such Intellectual Property Collateral that the
Grantor deems, in its reasonable business judgment, to be immaterial to
the operation of Grantor's business and does not generate any of
Grantor's accounts. No claim has been made that any part of the
Intellectual Property Collateral violates the rights of any third party
(it being understood that the Galley Litigation and the Litigation
Adjustment shall not be deemed a breach of this representation). Except
for and upon the filing with the United States Patent and Trademark
Office with respect to the Patents and Trademarks and the Register of
Copyrights with respect to the Copyrights necessary to perfect the
security interests created hereunder, and except as has been already
made or obtained, no authorization, approval or other action by, and no
notice to or filing with, any United States governmental authority or
United States regulatory
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body is required either (i) for the grant by Grantor of the security
interest granted hereby or for the execution, delivery or performance
of Loan Documents by Grantor in the United States or (ii) for the
perfection in the United States or the exercise by Secured Party of its
rights and remedies hereunder.
ARTICLE IV
COVENANTS
SECTION IV.1 Covenants of Grantors. Each Grantor covenants and
agrees that so long as the security interest created hereby remains outstanding:
(a) The Grantor will deliver to Secured Party each instrument
included in the Collateral as set forth in Section 2.3.
(b) The Grantor will not (i) cause, permit or suffer any
voluntary or involuntary change in its name, identity or corporate
structure, or in the location of its chief executive office, and (ii)
keep any tangible Collateral or any records relating to any Claim owned
by it, or permit or suffer any such Collateral or records to be moved,
to any location other than those specified in Schedule B (except with
respect to (i) Inventory in transit in the ordinary course of business,
(ii) Inventory temporarily held by contractors or agents in the
ordinary course of business, and (iii) Inventory with an aggregate
value of less than One Million Dollars ($1,000,000) held by consignees
in the ordinary course of business) unless (in each case) (x) Schedule
B has first been appropriately supplemented with respect thereto, and
(y) an appropriate financing statement has been filed in the proper
office and in the proper form, and all other requisite actions have
been taken, to perfect or continue the perfection (without loss of
priority) of Secured Party's security interest in the Collateral.
(c) The Grantor will defend the Collateral against all claims
and demands of all Persons at any time claiming the same or any
interest therein unless such interest is permitted hereunder and under
the Credit Agreement.
(d) The Grantor will not encumber, sell, exchange or otherwise
dispose of any item of Collateral or any interest therein, or permit or
suffer any such item to be encumbered, sold, exchanged or otherwise
disposed of, unless (i) such action is permitted at the time under the
Credit Agreement and (ii) the Grantor makes all payments on account of
the Obligations required to be made therefrom (provided that any such
payments made in connection with any Asset Sale permitted under Section
5.3(b)(iii) of the Credit Agreement shall be made concurrently with the
closing of such Asset Sale), and the Grantor and each other Loan Party
takes all other actions required to be taken in connection therewith,
under the Credit Agreement, this Agreement or any other Loan Document.
(e) Secured Party is hereby authorized to file one or more
financing statements, and continuations thereof and amendments thereto,
relative to all or any part of the Collateral, without the signature of
the Grantor where permitted by law.
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(f) The Grantor will (i) maintain insurance as required in
Section 5.2(g) of the Credit Agreement, (ii) give the Lender written
notice of any default in the payment of premiums on such insurance
policies and at least ten (10) days written notice prior to
cancellation of any such policies, and (iii) cause the Lender to be
named (A) as the principal beneficiary on any key-man life insurance
policy and (B) as an additional insured on a lender's loss payable
endorsement, in a form satisfactory to the Lender, for any other such
insurance policies.
(g) Secured Party may at any time (but shall not be obligated
to) (i) perform any of the obligations of the Grantor under this
Agreement if the Grantor fails to perform such obligation within 30
days (or, in the case of insurance, within 10 days) after written
demand by Secured Party and (ii) make any payments and do any other
acts it may deem reasonably necessary or desirable to protect its
security interest in the Collateral, including, without limitation, the
right to pay, purchase, contest or compromise any Lien that attaches or
is asserted against any Collateral (other than Liens permitted under
Section 5.3(a) of the Credit Agreement), to procure insurance required
to be provided by the Grantor under the Credit Agreement, and, to the
extent the Grantor is required hereunder or under the Credit Agreement
to do so, to appear in and defend any action or proceeding relating to
the Collateral, if the Grantor fails to make such payments or perform
such acts within 30 days after written demand by Secured Party and the
Grantor will promptly reimburse Secured Party for all payments made by
Secured Party in doing so, together with interest thereon at the rate
then applicable under the Credit Agreement to the Advances, and all
costs and expenses related thereto as set forth in Section 8.10 hereof.
(h) Grantor shall give Secured Party prompt notice of any
material adverse change in the composition of the Intellectual Property
Collateral, including, but not limited to, any subsequent ownership
right of Grantor in or to any Copyright, Patent or Trademark not
specified in any intellectual property security agreement between
Grantor and Secured Party or knowledge of an event that materially
adversely affects the value of the Intellectual Property Collateral.
(i) Grantor shall register or cause to be registered (to the
extent not already registered) with the United States Patent and
Trademark Office or the United States Copyright Office, as applicable,
those intellectual property rights listed below on Exhibits A, B and C
to the Intellectual Property Security Agreement delivered to Secured
Party by Grantor in connection with this Agreement within thirty (30)
days of the date of this Agreement. Grantor shall timely register or
cause to be registered with the United States Patent and Trademark
Office or the United States Copyright Office, as applicable, those
additional United States Copyrights, Trademarks, Patents or maskworks
developed or acquired by Grantor from time to time in connection with
any product prior to the sale or licensing of such product to any third
party, including without limitation revisions or additions to the
intellectual property rights listed on Exhibits A, B and C but
excluding Copyrights or Trademarks with respect to advertising.
(j) Grantor shall (i) protect, defend and maintain the
validity and enforceability of the Trademarks, Patents and Copyrights
unless the Grantor in good faith determines that such actions are not
in the best interests of the Grantor and the failure to so act could
not reasonably be expected to have a Material Adverse Change on the
value of the Intellectual Property Collateral, (ii) use its
commercially reasonable efforts to detect infringements of the
Trademarks, Patents and Copyrights and promptly advise
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Secured Party in writing of material infringements detected and (iii)
not allow any Trademarks, Patents or Copyrights to be abandoned,
forfeited or dedicated to the public without the written consent of
Secured Party unless the Grantor determines in good faith that such
abandonment or forfeiture is in the best interests of the Grantor and
could not reasonably be expected to have a Material Adverse Change on
the value of the Intellectual Property Collateral.
(k) Grantor shall not permit the inclusion in any material
contract to which it becomes a party of any provisions that could or
might in any way prevent the creation of a security interest in
Grantor's rights and interests in any property included within the
definition of the General Intangibles acquired under such contracts,
except to the extent that such provisions are necessary in Grantor's
exercise of its reasonable business judgement.
ARTICLE V
VOTING RIGHTS, DIVIDENDS AND DISTRIBUTIONS
SECTION V.1 Voting Rights. So long as no Event of Default has
occurred and is continuing or would result from any exercise thereof, each
Grantor shall have and may exercise all voting rights with respect to any and
all shares of stock, equity securities and other equity, ownership or profit
interests constituting Collateral, except that:
(a) the Grantor may not and will not act or vote in favor of
any action that would be or cause a breach of any obligations of the
Grantor or any other Loan Party under the Credit Agreement or under any
other Loan Document;
(b) the Grantor may not and will not act or vote in favor of
(i) the authorization or issuance of any options, warrants, voting
rights, or preference shares or additional shares, or (ii) any
reclassification, readjustment, reorganization, merger, consolidation,
sale or disposition of assets, or dissolution, without giving Secured
Party at least 15 days' prior written notice thereof; and
(c) the Grantor may not and will not act or vote in favor of
any action that does or is reasonably likely to have a material adverse
effect on the aggregate value of the Collateral provided that, for
purposes of this Section 5.1(c), the effect of any such act or vote
shall be determined with respect to the facts and circumstances at the
time of such act or vote.
Upon the occurrence and during the continuance of an Event of Default, Secured
Party may (but shall not be obligated to) terminate the Grantor's right to
exercise voting rights with respect to any or all such shares of stock, equity
securities and ownership interests, either by giving written notice of such
termination to the Grantor or by transferring such shares, securities or
interests into Secured Party's name, and Secured Party shall thereupon have the
sole right and power to exercise such voting rights.
SECTION V.2 Dividends, Distributions and Payments. So long as
no Event of Default has occurred and is continuing or would result, the Grantors
shall be entitled to receive all dividends and distributions on all shares of
stock, equity securities and other equity, ownership and profit interests
constituting Collateral and
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all payments on any notes, bonds, debentures and other instruments constituting
Collateral, so long as the Grantors make all payments on account of the
Obligations required to be made therefrom, and the Grantors and each other Loan
Party takes all other actions required to be taken in connection therewith,
under the Credit Agreement, this Agreement or any other Loan Document.
ARTICLE VI
DEFAULTS AND REMEDIES
SECTION VI.1 Remedies. Upon and at any time after the
occurrence and during the continuance of any Event of Default, Secured Party may
exercise and enforce, in any order, (i) each and all of the rights and remedies
available to a secured party upon default under the Code or other applicable
law, (ii) each and all of the rights and remedies available to it, as Lender or
as Secured Party, under the Credit Agreement or any other Loan Document and
(iii) each and all of the following rights and remedies:
(a) Secured Party may notify any or all account debtors and
obligors on any Collateral to make payment directly to Secured Party.
(b) Secured Party may take possession of all items of
Collateral that are not then in its possession and require the Grantors
or the Person in possession thereof to deliver such Collateral to
Secured Party at one or more locations designated by Secured Party and
reasonably convenient to it and the Grantors.
(c) Secured Party may sell, lease, license or otherwise
dispose of any or all of the Collateral or any part thereof in one or
more parcels at a public sale or in a private sale or transaction, on
any exchange or market or at Secured Party's offices or on the
Grantor's premises or at any other location, for cash, on credit or for
future delivery, and may enter into all contracts necessary or
appropriate in connection therewith, without any notice whatsoever
unless required by law. The Grantors agree that at least ten calendar
days' written notice to the Grantor of the time and place of any public
sale or the time after which any private sale is to be made shall be
commercially reasonable. The giving of notice of any such sale or other
disposition shall not obligate Secured Party to proceed with the sale
or disposition, and any such sale or disposition may be postponed or
adjourned from time to time, without further notice.
(d) Secured Party may, on a royalty-free basis, use and
license use of any trademark, trade name, trade style, copyright,
patent or technical knowledge or process owned, held or used by the
Grantor in respect of any Collateral as to which any right or remedy of
Secured Party is exercised or enforced.
In addition, Secured Party may exercise and enforce such rights and remedies for
the collection of any Secured Obligation as may be available to it by law or
agreement.
SECTION VI.2 Remedies Cumulative. Secured Party may exercise
and enforce each right and remedy available to it upon the occurrence of an
Event of Default either before or concurrently with or after, and
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independently of, any exercise or enforcement of any other right or remedy of
Secured Party against any Person or property. All such rights and remedies shall
be cumulative, and no one of them shall exclude or preclude any other.
SECTION VI.3 Surplus; Deficiency. Any surplus proceeds of any
sale or other disposition of Collateral by Secured Party remaining after all the
Secured Obligations are paid in full shall be paid over to the Grantors or to
whomever may be lawfully entitled to receive such surplus or as a court of
competent jurisdiction may direct, but if any obligation to make Advances then
remains outstanding or if any contingent, unliquidated or unmatured Secured
Obligation then remains outstanding, such surplus proceeds may be retained by
Secured Party and held as Collateral until such time as all such obligations
have expired or been terminated and all outstanding Secured Obligations have
been determined, liquidated, paid in full and discharged. The Grantors shall be
and remain liable for any deficiency.
SECTION VI.4 Information Related to Collateral. If Secured
Party determines to sell or otherwise dispose of any Collateral, the Grantor
shall, and shall cause any Person controlled by it to, furnish to Secured Party
all information Secured Party may request that pertains or could pertain to the
value or condition of such Collateral or would or might facilitate its sale.
SECTION VI.5 Sale Exempt from Registration. Secured Party
shall be entitled at any sale or other disposition of Collateral, if it deems it
advisable to do so, to restrict the prospective bidders or purchasers to persons
who will provide assurances satisfactory to Secured Party that they may be
offered and sold the Collateral to be sold without registration under the
Securities Act of 1933, as amended (the "Securities Act"), or any other
applicable state or federal statute, and upon the consummation of any such sale,
Secured Party shall have the right to assign, transfer and deliver to the
purchaser or purchasers thereof the Collateral so sold. Secured Party may
solicit offers to buy the Collateral, or any part of it, from a limited number
of investors deemed by Secured Party, in its commercially reasonable judgment,
to meet the requirements to purchase securities under Regulation D promulgated
under the Securities Act as then in effect (or any other regulation of similar
import). If Secured Party solicits such offers from such investors, then the
acceptance by Secured Party of the highest offer obtained therefrom shall be
deemed to be a commercially reasonable method of disposition of such Collateral.
SECTION VI.6 Registration Rights. During the continuance of an
Event of Default, if Secured Party determines that registration of any
securities constituting Collateral under the Securities Act or other applicable
law is required or desirable in connection with any sale, the Grantors will use
their best efforts to cause such registration to be effectively made, at no
expense to Secured Party, and to continue any such registration effective for
such time as may be reasonably necessary in the opinion of the Secured Party.
ARTICLE VII
THE SECURED PARTY
SECTION VII.1 Credit Agreement Provisions. Secured Party is
executing and delivering this Agreement, and accepting the security interests,
rights, remedies, powers and benefits conferred upon Secured Party hereby, as
Lender under the Credit Agreement. The provisions of Article VI of the Credit
Agreement and all rights, powers, immunities and indemnities granted to the
Lender under the Credit Agreement and other Loan Documents shall apply in
respect of such execution, delivery and acceptance and in respect of any and all
actions taken or
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omitted by Secured Party under, in connection with or with respect to this
Agreement.
SECTION VII.2 No Liability. Secured Party makes no statement,
promise, representation or warranty whatsoever, and shall have no liability
whatsoever, to any holder of any Secured Obligations as to the authorization,
execution, delivery, legality, enforceability or sufficiency of this Agreement
or as to the creation, perfection, priority or enforceability of any security
interest granted hereunder or as to existence, ownership, quality, condition,
value or sufficiency of any Collateral or as to any other matter whatsoever.
SECTION VII.3 Duty of Care. Neither Secured Party nor any
director, officer, employee, attorney or agent of Secured Party shall be
obligated to care for the Collateral hereunder or to collect, enforce, vote or
protect the Collateral or any rights or interests of the Grantor related thereto
or to preserve or enforce any rights which the Grantor or any other Person may
have against any third party, except only that Secured Party shall exercise
reasonable care in physically safekeeping any item of Collateral that was
delivered into Secured Party's possession. Secured Party shall be deemed to have
exercised such reasonable care if the Collateral is accorded treatment
substantially equal to that which Secured Party accords to its own property or
if it selects, with reasonable care, a custodian or agent to hold such
collateral for Secured Party's account.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
SECTION VIII.1 Incorporation of Guaranty Provisions. The
obligations of the Grantors under this Agreement: (i) shall be absolute and
unconditional as set forth in Section 2.3 of the Guaranty, irrevocable and
continuing as set forth in Section 2.4 of the Guaranty, subject to reinstatement
as set forth in Section 2.5 of the Guaranty and not affected or impaired by any
of the matters waived in Section 2.6 of the Guaranty; (ii) shall be subject to
the provisions of Article III of the Guaranty; and (iii) shall otherwise be as
equally enduring and free from defenses as such Grantor's respective liability
under the Guaranty.
SECTION VIII.2 Notices. All notices, requests, approvals,
consents and other communications required or permitted to be made hereunder
shall, except as otherwise provided, be given in the manner specified and to the
addresses set forth in Section 7.2 of the Credit Agreement.
SECTION VIII.3 Headings. The various headings in this
Agreement are inserted for convenience only and shall not affect the meaning or
interpretation of this Agreement or any provision hereof.
SECTION VIII.4 Changes. This Agreement or any provision hereof
may be changed, waived or terminated only by a statement in writing signed by
the party against which such change, waiver or termination is sought to be
enforced except as required to comply with Section 4.1(b). Any such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
SECTION VIII.5 Grantors Remains Liable. The Grantors shall
remain liable under all contracts and agreements included in the Collateral to
the extent set forth therein to perform all of its duties and obligations
thereunder to the same extent as if this Agreement had not been executed. The
exercise or enforcement by Secured Party of any of its rights and remedies under
this Agreement or in respect of the Collateral shall not release the
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Grantor from any of its duties or obligations under any such contracts or
agreements. Secured Party shall not be obligated to perform any such duties or
obligations and shall not be liable for any breach thereof.
SECTION VIII.6 No Waiver. No failure by Secured Party to
exercise, or delay by Secured Party in exercising, any power, right or remedy
under this Agreement shall operate as a waiver thereof. No waiver by Secured
Party shall be effective unless given in a writing signed by it. No waiver so
given shall operate as a waiver in respect of any other matter or in respect of
the same matter on a future occasion. Acceptance of or acquiescence in a course
of performance in respect of this Agreement shall not waive or affect the
construction or interpretation of the terms of this Agreement even if the
accepting or acquiescing party had knowledge of the nature of the performance
and opportunity for objection.
SECTION VIII.7 Entire Agreement. This Agreement and the other
Loan Documents are intended by the parties as a final expression of their
agreement and a complete and exclusive statement of the terms and conditions
thereof.
SECTION VIII.8 Severability. If any provision of this
Agreement is invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions hereof, or of
such provision in any other application, shall not be in any way affected or
impaired thereby and such other provisions and applications shall enforceable to
the full extent lawful.
SECTION VIII.9 Power of Attorney. Each Grantor hereby appoints
and constitutes Secured Party or any delegate, nominee or agent acting for
Secured Party as the Grantor's attorney-in-fact with the power and authority
(but not the duty), in the name of the Grantor or in the name of Secured Party
or such delegate, nominee or agent, to (i) execute, deliver and file such
financing statements, agreements, deeds and writings as the Grantor is required
to execute, deliver or file hereunder, (ii) endorse, collect or transfer any
item of Collateral (A) which the Grantor is required to endorse, collect or
transfer hereunder after either (x) the occurrence and continuance of an Event
of Default, or (y) Secured Party has requested that Grantor so endorse, collect
or transfer and Grantor has failed to so endorse, collect or transfer or which
Secured Party is permitted to endorse, collect or transfer hereunder, (iii) make
any payments or take any action under Section 2.4 or Section 4.1(g) hereof, (iv)
modify, in its sole discretion, the Intellectual Property Security Agreement
entered into between Grantor and Secured Party without first obtaining Grantor's
approval of or signature to such modification by amending Exhibit A, Exhibit B
and Exhibit C, thereof, as appropriate, to include reference to any right, title
or interest in any Copyrights, Patents or Trademarks acquired by Grantor after
the execution hereof or to delete any reference to any right, title or interest
in any Copyrights, Patents or Trademarks in which Grantor no longer has or
claims any right, title or interest, (v) transfer, upon the occurrence and
during the continuance of an Event of Default, the Intellectual Property
Collateral into the name of Secured Party or a third party to the extent
permitted under the California Uniform Commercial Code, (vi) take any other
action (A) permitted to Secured Party hereunder or (B) required of the Grantor
hereunder after either (x) an Event of Default has occurred and is continuing or
(y) the Secured party has requested that Grantor take such action and Grantor
has failed to do so, , and (vii) take any action reasonably necessary or
incidental to any of the foregoing. This power of attorney is coupled with an
interest and is irrevocable as to each Grantor. Secured Party shall have no duty
whatsoever to exercise any power herein granted it.
SECTION VIII.10 Counterparts. This Agreement and any
amendments, waivers, consents or
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supplements may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed an original, but all of which shall
together constitute one and the same agreement.
SECTION VIII.11 Costs and Expenses. Each Grantor hereby agrees
to pay or reimburse Secured Party for all reasonable costs and expenses
(including, without limitation, reasonable attorneys' fees and disbursements and
court costs) incurred in connection with or as a result of the exercise or
enforcement by Secured Party of any right or remedy available to it or the
protection or enforcement of its interest in the Collateral in any bankruptcy
case or insolvency proceeding.
SECTION VIII.12 GOVERNING LAW; SUBMISSION TO JURISDICTION;
WAIVER OF JURY TRIAL; LIMITATION OF LIABILITY; WAIVER OF BOND.
(a) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
INTERPRETED UNDER THE LAWS OF THE STATE OF CALIFORNIA, EXCEPT TO THE
EXTENT THAT THE PERFECTION OF THE SECURITY INTERESTS HEREUNDER IN
RESPECT OF ANY PARTICULAR COLLATERAL IS GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF CALIFORNIA.
(b) SUBMISSION TO JURISDICTION. ANY LEGAL ACTION OR PROCEEDING
WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE
STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT
OR THE CENTRAL DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF
THIS AGREEMENT, EACH PARTY HERETO CONSENTS, FOR ITSELF AND IN RESPECT
OF ITS PROPERTY, TO THE JURISDICTION OF THOSE COURTS. EACH PARTY
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING
OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY
NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN
SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED
HERETO. SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS MAY BE MADE
BY ANY MEANS PERMITTED BY CALIFORNIA LAW.
(c) WAIVER OF JURY TRIAL. EACH PARTY HERETO WAIVES
ALL RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER
LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN
ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY
OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT
TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE, AND AGREES THAT ANY SUCH
CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A
JURY. WITHOUT LIMITING THE FOREGOING, EACH PARTY FURTHER AGREES THAT
ITS RIGHT TO A TRIAL BY JURY IS HEREBY WAIVED AS TO ANY ACTION,
COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO
CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER
LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL
APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
(d) LIMITATION OF LIABILITY. NO CLAIM MAY BE MADE BY THE
GRANTOR AGAINST THE LENDER OR ANY OF ITS AFFILIATES, DIRECTORS,
OFFICERS, EMPLOYEES, ATTORNEYS OR
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AGENTS FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES IN
RESPECT OF ANY CLAIM (WHETHER BASED UPON BREACH OF CONTRACT, TORT,
BREACH OF STATUTORY DUTY OR ANY OTHER THEORY OF LIABILITY) ARISING OUT
OF OR RELATED TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, OR
ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, AND THE
GRANTOR HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM
FOR ANY SUCH DAMAGES, WHETHER OR NOT NOW ACCRUED AND WHETHER OR NOT
KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR.
(e) WAIVER OF BOND. EACH GRANTOR WAIVES THE POSTING OF ANY
BOND OTHERWISE REQUIRED OF SECURED PARTY IN CONNECTION WITH THE
ENFORCEMENT OF ANY OF ITS REMEDIES HEREUNDER, INCLUDING, WITHOUT
LIMITATION, ANY ORDER OR WRIT FOR REPLEVIN OR DELIVERY OF POSSESSION OF
ANY COLLATERAL.
SECTION VIII.12 Successors and Assigns. This Agreement is
binding upon and enforceable against the Grantors and their successors and
assigns. It shall inure to the benefit of and may be enforced by Secured Party
and its successors and assigns, for its and their own benefit and for the
benefit of each and every present and future lender or other Person entitled to
enforce any of the Secured Obligations and each of their respective heirs,
representatives, successors and assigns.
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IN WITNESS WHEREOF, the parties have caused this Subsidiary
Pledge and Security Agreement to be duly executed and delivered by their
respective officers thereunto duly authorized as of the date first above
written.
_______________________________________
By: ___________________________________
Name:
Title:
COMERICA BANK-CALIFORNIA
By: ___________________________________
Name:
Title:
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Annex 1
Form of Subsidiary Joinder
AGREEMENT TO BE BOUND BY PLEDGE AND SECURITY AGREEMENT
This Agreement to be Bound by Pledge and Security Agreement
(this "Agreement") is executed as of the _____ day of _________, ____, by [NAME
OF NEW SUBSIDIARY] , a ____________ [corporation] [partnership] [etc.] (the "New
Subsidiary").
RECITALS
A. On or about October 30, 1996, O.S.I. Corporation, a
California corporation (the "Borrower") executed that certain Credit Agreement,
dated as of October 30, 1996 (as amended to date, the "Credit Agreement"), by
and between the Borrower and Comerica Bank-California (the "Lender"). Terms not
defined herein are used as defined in the Credit Agreement.
B. As a condition to the execution of the Credit Agreement by
the Lender, all of the Material Subsidiaries of the Borrower executed that
certain Subsidiary Guaranty, dated as of October 30, 1996 (as amended to date,
the "Guaranty"), by and among the entities listed in the signature pages thereof
in favor of the Lender.
C. In connection with the Credit Agreement and the Guaranty,
all of the Material Subsidiaries of the Borrower executed that certain
Subsidiary Pledge and Security Agreement dated as of October 30, 1996 (as
amended to date, the "Pledge and Security Agreement") by and among the entities
listed on the signature pages thereof in favor of the Lender.
D. Section 5.2(e) of the Credit Agreement provides that when
the Borrower acquires or forms a new Material Subsidiary or when a Subsidiary
becomes a Material Subsidiary, the Borrower will cause such Subsidiary to
deliver an executed counterpart to the Pledge and Security Agreement and such
Subsidiary shall become a party to the Pledge and Security Agreement.
E. On [Insert Date] , the New Subsidiary [Describe
acquisition/formation of New Subsidiary, or growth of Material Subsidiary]. The
New Subsidiary will benefit from the funds available to the Borrower under the
Credit Agreement, and in recognition of this benefit and in order to comply with
the Credit Agreement, the New Subsidiary is willing to enter into this
Agreement.
AGREEMENT
NOW, THEREFORE, the New Subsidiary agrees as follows:
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1. Representations and Warranties. On and as of the date of
this Agreement (the "Effective Date") and for the benefit of the Lender, the New
Subsidiary hereby makes each of the representations and warranties contained in
the Pledge and Security Agreement, and delivers herewith (i) amended Schedules
to the extent necessary to make the representations and warranties true and
correct, (ii) all instruments, Pledged Shares and documents of title required
under the Pledge and Security Agreement and (iii) all UCC-1 financing statements
required to be filed in order to perfect the security interest in the
Collateral.
2. Agreement to be Bound. The New Subsidiary agrees that, on
and as of the Effective Date, it shall become a Grantor under the Pledge and
Security Agreement and shall be bound by all the provisions of the Pledge and
Security Agreement the same as if the New Subsidiary had executed the Pledge and
Security Agreement on the Closing Date.
3. Waiver. Without limiting the generality of the waivers in
the Pledge and Security Agreement, the New Subsidiary specifically agrees to be
bound by the Pledge and Security Agreement and waives any right to notice of
acceptance of its execution of this Agreement and of its agreement to be bound
by the Pledge and Security Agreement.
4. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
IN WITNESS WHEREOF, the New Subsidiary has caused this
Agreement to be Bound by Pledge and Security Agreement to be executed by its
duly authorized officer.
[NAME OF NEW SUBSIDIARY]
By: ___________________________
Name:
Title:
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INTELLECTUAL PROPERTY SECURITY AGREEMENT
This Intellectual Property Security Agreement is made as of October 30,
1996 by O.S.I. CORPORATION, a California corporation ("OSI") and each other
entity that is identified on the signature pages hereof or that hereafter
executes and delivers a Subsidiary Joinder in substantially the form set forth
as Annex 1 hereto (OSI and each such entity, a "Grantor") in favor of COMERICA
BANK-CALIFORNIA, a California chartered bank, as the Lender (the "Lender").
RECITALS
A. OSI and Lender entered into Credit Agreement, dated of even date
herewith (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement").
B. Each Grantor, other than OSI, is a direct or indirect subsidiary of
OSI and expects to derive substantial direct and indirect benefit from the
transactions contemplated by the Credit Agreement. Each Grantor, other than OSI,
has entered into a Subsidiary Guaranty (or a Subsidiary Joinder thereto) dated
of even date herewith, in favor of Lender.
C. OSI has entered into a Borrower Pledge and Security Agreement, dated
of even date herewith, in favor of the Lender. Each Grantor, other than OSI, has
entered into a Subsidiary Pledge and Security Agreement (or a Subsidiary Joinder
thereto), dated of even date herewith in favor of the Lender.
D. It is a condition precedent to the extension of credit under the
Credit Agreement that each Grantor shall have granted the security interests
described herein as security for each and all the Secured Obligations (as that
term is defined in the Pledge and Security Agreements) and as security for the
other debts, liabilities and obligations secured hereunder.
NOW, THEREFORE, in consideration of the foregoing and in order
to induce the Lender to extend credit under the Credit Agreement, each Grantor
hereby agrees as follows:
AGREEMENT
To secure the Secured Obligations (as defined in the Pledge and
Security Agreements), each Grantor grants and pledges to Lender a security
interest in all of such Grantor's right, title and interest in, to and under its
Intellectual Property Collateral (including without limitation those Copyrights,
Patents and Trademarks listed on Schedules A, B and C hereto), and including
without limitation all proceeds thereof (such as, by way of example but not by
way of limitation, license royalties and proceeds of infringement suits), the
right to sue for past, present and future infringements, all rights
corresponding thereto throughout the world and all reissues, divisions
continuations, renewals, extensions and continuations-in-part thereof.
This security interest is granted in conjunction with the security
interest granted to Lender
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under the Pledge and Security Agreements. The rights and remedies of Lender with
respect to the security interest granted hereby are in addition to those set
forth in the Pledge and Security Agreements and the other Loan Documents, and
those which are now or hereafter available to Lender as a matter of law or
equity. Each right, power and remedy of Lender provided for herein or in the
Pledge and Security Agreements or any of the Loan Documents, or now or hereafter
existing at law or in equity shall be cumulative and concurrent and shall be in
addition to every right, power or remedy provided for herein and the exercise by
Lender of any one or more of the rights, powers or remedies provided for in this
Intellectual Property Security Agreement, the Credit Agreement or any of the
other Loan Documents, or now or hereafter existing at law or in equity, shall
not preclude the simultaneous or later exercise by any person, including Lender,
of any or all other rights, powers or remedies.
IN WITNESS WHEREOF, the parties have cause this Intellectual Property
Security Agreement to be duly executed by its officers thereunto duly authorized
as of the first date written above.
GRANTOR:
Address of Grantor: O.S.I. Corporation
475 Eccles Ave. By: ________________________________
South San Francisco, CA 94080
Title: _____________________________
Attn: ________________________
LENDER:
Address of Bank: COMERICA BANK-CALIFORNIA
333 West Santa Clara Street By: ________________________________
San Jose, California 95113
Title: _____________________________
Attn: ________________________
2
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Annex 1
Form of Subsidiary Joinder
AGREEMENT TO BE BOUND BY
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This Agreement to be Bound by Intellectual Property Security Agreement
(this "Agreement") is executed as of the _____ day of _________, ____, by [NAME
OF NEW SUBSIDIARY] , a ____________ [corporation] [partnership] [etc.] (the "New
Subsidiary").
RECITALS
A. On or about October ___, 1996, O.S.I. Corporation, a California
corporation (the "Borrower") executed that certain Credit Agreement, dated as of
October ____, 1996 (as amended to date, the "Credit Agreement"), by and between
the Borrower and Comerica Bank-California, as Lender (the "Lender"). Terms not
defined herein are used as defined in the Credit Agreement.
B. As a condition to the execution of the Credit Agreement by the
Lender, all of the Material Subsidiaries of the Borrower executed that certain
Subsidiary Guaranty, dated as of October ___, 1996 (as amended to date, the
"Guaranty"), by and among the entities listed in the signature pages thereof in
favor of the Lender.
C. In connection with the Credit Agreement and the Guaranty, all of the
Material Subsidiaries of the Borrower executed that certain Subsidiary Pledge
and Security Agreement dated as of October __, 1996 (as amended to date, the
"Pledge and Security Agreement") and an Intellectual Property Security Agreement
dated as of October __, 1996 (as amended to date, the "Intellectual Property
Security Agreement") by and among the entities listed on the signature pages
thereof in favor of the Lender.
D. Section 5.2(e) of the Credit Agreement provides that when the
Borrower acquires or forms a new Material Subsidiary or when a Subsidiary
becomes a Material Subsidiary, the Borrower will cause such Subsidiary to
deliver an executed counterpart to the Intellectual Property Security Agreement
and such Subsidiary shall become a party to the Intellectual Property Security
Agreement.
E. On [Insert Date] , the New Subsidiary [Describe
acquisition/formation of New Subsidiary, or growth of Material Subsidiary] . The
New Subsidiary will benefit from the funds available to the Borrower under the
Credit Agreement, and in recognition of this benefit and in order to comply with
the Credit Agreement, the New Subsidiary is willing to enter into this
Agreement.
AGREEMENT
Annex 1-1
<PAGE> 129
NOW, THEREFORE, the New Subsidiary agrees as follows:
1. Agreements. On and as of the date of this Agreement (the "Effective
Date") and for the benefit of the Lender, the New Subsidiary hereby makes all of
the agreements contained in the Intellectual Property Security Agreement, and
delivers herewith amended Schedules to the extent necessary to make the
statements therein true and correct, listing all Copyrights, Trademarks and
Patents, with all registration and other identifying numbers thereto, and all
other information required to be filed in order to perfect the security interest
in the Intellectual Property Collateral.
2. Agreement to be Bound. The New Subsidiary agrees that, on and as of
the Effective Date, it shall become a Grantor under the Intellectual Property
Security Agreement and shall be bound by all the provisions of the Intellectual
Property Security Agreement the same as if the New Subsidiary had executed the
Intellectual Property Security Agreement on the Closing Date.
3. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California.
IN WITNESS WHEREOF, the New Subsidiary has caused this Agreement to be
Bound by Intellectual Property Security Agreement to be executed by its duly
authorized officer.
[NAME OF NEW SUBSIDIARY]
By: ___________________________
Name:
Title:
Annex 1-2
<PAGE> 130
NOTIFICATION OF SECURITY INTEREST IN DEPOSIT ACCOUNTS
October 30, 1996
Bank of America
349 Montgomery Street
Concourse Level, SR #1499
San Francisco, California 94104
Re: Notice of Security Interest in Deposit Accounts
Ladies and Gentlemen:
O.S.I. Corporation (the "Borrower") has established at your branch the
deposit accounts described in Exhibit A attached hereto (the "Deposit
Accounts"). This letter shall constitute notice from Comerica Bank-California
(the "Lender") to Bank of America that, pursuant to a Credit Agreement dated as
of October 30, 1996, by and between the Borrower and the Lender, the Borrower
has granted a security interest in, among other things, the Deposit Accounts,
all rights to receive payment, other general intangibles and rights to payment
related thereto and all proceeds arising therefrom. This letter is sent to you
in accordance with the provisions of Section 9302(1)(g) of the California
Commercial Code.
Other than the making of an internal notation to reflect receipt of
this Notice, no action is required of you at this time. Upon the occurrence of a
default under the Credit Agreement and the taking of any remedial action by the
Lender with respect thereto, we will provide you with further notices and
instructions.
We do, however, respectfully request that you acknowledge receipt of
this Notice, and confirm in writing whether you have received any prior notice
of assignment of the Deposit Accounts. An acknowledgement copy of this Notice
and a return envelope is enclosed for your convenience.
Very truly yours,
COMERICA BANK-CALIFORNIA
By: _________________________________
<PAGE> 131
ACKNOWLEDGMENT:
Receipt is hereby acknowledged of the foregoing notice of assignment of security
interest in each of the Deposit Accounts held by us for the Borrower. We have no
notice of any other assignments thereof.
Date: _____________ Bank of America, as depositary
By: ______________________________
______________________________
Its: ______________________________
<PAGE> 132
EXHIBIT B-6
FORM OF
NOTICE OF SECURITY INTEREST IN FINANCIAL INTERMEDIARY ACCOUNTS
[Date]
[Financial Intermediary]
Re: Notice of Security Interest in Financial Intermediary Accounts
Ladies and Gentlemen:
O.S.I. Corporation (the "Borrower") has established at your branch the
financial intermediary accounts described in Exhibit A attached hereto (the
"Accounts"). This letter shall constitute notice from Comerica Bank-California
(the "Lender") to [Financial Intermediary] that, pursuant to a Credit Agreement
dated as of October 30, 1996, by and between the Borrower and the Lender, the
Borrower has granted a security interest in, among other things, the Accounts,
all rights to receive payment, other general intangibles and rights to payment
related thereto and all proceeds arising therefrom. This letter is sent to you
in accordance with the provisions of Section 9302(1)(g) of the California
Commercial Code.
Other than the making of an internal notation to reflect receipt of
this Notice, no action is required of you at this time. Upon the occurrence of a
default under the Credit Agreement and the taking of any remedial action by the
Lender with respect thereto, we will provide you with further notices and
instructions.
We do, however, respectfully request that you please acknowledge
receipt of this Notice and confirm in writing whether you have received any
prior notice of assignment of the Accounts. An acknowledgement copy of this
Notice and a return envelope is enclosed for your convenience.
Very truly yours,
COMERICA BANK-CALIFORNIA
By: _________________________________
B-6-1
<PAGE> 133
ACKNOWLEDGMENT:
Receipt is hereby acknowledged of the foregoing notice of assignment of security
interest in each of the Accounts held by us for the Borrower. We have no notice
of any other assignments thereof.
Date: _____________ [Financial Intermediary]
By: ________________________________
________________________________
Its: ________________________________
B-6-2
<PAGE> 134
EXHIBIT A
LIST OF FINANCIAL INTERMEDIARY ACCOUNTS
Exhibit A to Notice of Security Interest in Deposit Accounts from Comerica
Bank-California to [Financial Intermediary].
Account No. Account Name
- ----------- ------------
B-6-A-1
<PAGE> 135
EXHIBIT B-7
FORM OF
SUBORDINATION AGREEMENT
This SUBORDINATION AGREEMENT (the "Agreement"), dated as of
October 30, 1996, is made by JOHN D. FRUTH (the "Subordinated Creditor"), in
favor of COMERICA BANK-CALIFORNIA, a California chartered bank (the "Lender"),
as Lender under the Credit Agreement (defined below).
RECITALS
A. O.S.I. Corporation, a California Corporation (the
"Borrower") has entered into that certain Credit Agreement, dated as of October
30, 1996 (as amended, supplemented or otherwise modified from time to time (the
"Credit Agreement"), by and between the Borrower and the Lender.
B. The Subordinated Creditor has extended loans or other
credit accommodations to the Borrower, including such debt as evidenced by a
Junior Subordinated Promissory Note by the Borrower dated November 1, 1996 in
the principal amount of $2,894,649 in favor of the Subordinated Creditor, the
Borrower (the "Fruth Note"), and/or may extend loans or other credit
accommodations to the Borrower from time to time.
C. In order to induce the Lender to extend credit to the
Borrower under the Credit Agreement, and, at any time or from time to time, at
the Lender's option, to make such further loans, extensions of credit, or other
accommodations to or for the account of the Borrower, or to purchase or extend
credit upon any instrument or writing in respect of which the Borrower may be
liable in any capacity, or to grant such renewals or extension of any such loan,
extension of credit, purchase, or other accommodation as the Lender may deem
advisable, the Subordinated Creditor is willing to subordinate: (i) all of the
Borrower's indebtedness and obligations to the Subordinated Creditor due and
owing under the Fruth Note, whether presently existing or arising in the future
(the "Subordinated Debt"), to all of the Borrower's indebtedness and obligations
to the Lender, including, but not limited to, those amounts due and owing under
the Credit Agreement, whether presently existing or arising in the future; and
(ii) all of the Subordinated Creditor's security interests, if any, to all of
the Lender's security interests in the Borrower's property.
NOW, THEREFORE, in consideration of the foregoing and in order
to induce the Lender to extend credit under the Credit Agreement, the
Subordinated Creditor hereby agrees as follows:
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1. The Subordinated Creditor subordinates to the Lender any security
interest or lien that the Subordinated Creditor may have in any property of the
Borrower. Notwithstanding the respective dates of attachment or perfection of
the security interest of the Subordinated Creditor and the security interest of
the Lender, the security interest of the Lender in the Collateral, as defined in
the Credit Agreement, shall at all times be prior to the security interest of
the Subordinated Creditor.
2. All Subordinated Debt is subordinated in right of payment to all
obligations of the Borrower to the Lender now existing or hereafter arising,
together with all costs of collecting such obligations (including attorneys'
fees), including, without limitation, all interest accruing after the
commencement by or against the Borrower of any bankruptcy, reorganization or
similar proceeding, and all obligations under the Credit Agreement (the "Senior
Debt").
3. The Subordinated Creditor will not demand or receive from the
Borrower (and the Borrower will not pay to the Subordinated Creditor) all or any
part of the Subordinated Debt, by way of payment, prepayment, setoff, lawsuit or
otherwise, nor will the Subordinated Creditor exercise any remedy with respect
to the Collateral, nor will the Subordinated Creditor commence, or cause to
commence, prosecute or participate in any administrative, legal or equitable
action against the Borrower, for so long as any portion of the Senior Debt
remains outstanding. The foregoing notwithstanding, the Subordinated Creditor
shall be entitled (i) to receive each regularly scheduled payment of interest
that constitutes Subordinated Debt or (ii) to credit the principal amount of
amounts due and owing under the Fruth Note to the option exercise price of stock
options held and exercised by John D. Fruth as provided under the Fruth Note,
provided that an Event of Default, as defined in the Credit Agreement, has not
occurred and is not continuing and would not exist immediately after such
payment.
4. The Subordinated Creditor shall promptly deliver to the Lender in
the form received (except for endorsement or assignment by the Subordinated
Creditor where required by the Lender) for application to the Senior Debt any
payment, distribution, security or proceeds received by the Subordinated
Creditor with respect to the Subordinated Debt other than in accordance with
this Agreement.
5. In the event of the Borrower's insolvency, reorganization or any
case or proceeding under any bankruptcy or insolvency law or laws relating to
the relief of debtors, these provisions shall remain in full force and effect,
and the Lender's claims against the Borrower and the estate of the Borrower
shall be paid in full before any payment is made to the Subordinated Creditor.
6. For so long as any of the Senior Debt remains unpaid, the
Subordinated Creditor irrevocably appoints the Lender as the Subordinated
Creditor's attorney-in-fact, and grants to the Lender a power of attorney with
full power of substitution, in the name of the Subordinated Creditor or in the
name of the Lender, for the use and benefit of the Lender, with subsequent
notice as soon as reasonably practical to the Subordinated Creditor, to perform
at the Lender's option the following acts in any bankruptcy, insolvency or
similar proceeding involving the Borrower:
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(i) To file the appropriate claim or claims in respect of the
Subordinated Debt on behalf of the Subordinated Creditor if the Subordinated
Creditor does not do so prior to 30 days before the expiration of the time to
file claims in such proceeding and if the Lender elects, in its sole discretion,
to file such claim or claims; and
(ii) In the event that the Subordinated Creditor does not
comply with Section 7 herein, to accept or reject any plan of reorganization or
arrangement on behalf of the Subordinated Creditor and to otherwise vote the
Subordinated Creditor's claims in respect of any Subordinated Debt in any manner
that the Lender deems appropriate for the enforcement of its rights hereunder;
7. The Subordinated Creditor shall not vote to accept a plan of
reorganization, propose a plan of reorganization or arrangement or otherwise act
or vote the Subordinated Creditor's claim in respect of any Subordinated Debt in
any manner that furthers or supports a plan of reorganization that does not
provide that the Lender will be paid all Senior Debt either (i) in cash in full
at the time of the confirmation of such plan or (ii) under the specific terms
(including, but not limited to, payment and interest rate terms) provided in the
Credit Agreement.
8. The Subordinated Creditor shall immediately affix a legend to the
instruments evidencing the Subordinated Debt stating that the instruments are
subject to the terms of this Agreement. No amendment of the documents evidencing
or relating to the Subordinated Debt shall directly or indirectly modify the
provisions of this Agreement in any manner which might terminate or impair the
subordination of the Subordinated Debt or the subordination of the security
interest or lien that the Subordinated Creditor may have in any property of the
Borrower. By way of example, such instruments shall not be amended to (i)
increase the rate of interest with respect to the Subordinated Debt, or (ii)
accelerate the payment of the principal or interest or any other portion of the
Subordinated Debt.
9. This Agreement shall remain effective for so long as the Borrower
owes any amounts to the Lender under the Credit Agreement or otherwise. If, at
any time after payment in full of the Senior Debt any payments of the Senior
Debt must be disgorged by the Lender for any reason (including, without
limitation, the bankruptcy of the Borrower), this Agreement and the relative
rights and priorities set forth herein shall be reinstated as to all such
disgorged payments as though such payments had not been made and the
Subordinated Creditor shall immediately pay over to the Lender all payments
received with respect to the Subordinated Debt to the extent that such payments
would have been prohibited hereunder. At any time and from time to time, without
notice to the Subordinated Creditor, the Lender may take such actions with
respect to the Senior Debt as the Lender, in its sole discretion, may deem
appropriate, including, without limitation, terminating advances to the
Borrower, increasing the principal amount, extending the time of payment,
increasing applicable interest rates, renewing, compromising or otherwise
amending the terms of any documents affecting the Senior Debt and any collateral
securing the Senior Debt, and enforcing or failing to enforce any rights against
the Borrower or any other person. No such action or inaction shall impair or
otherwise affect the Lender's rights hereunder. The Subordinated Creditor waives
the benefits, if any, of Civil Code Sections 2809, 2810, 2819,
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<PAGE> 138
2845, 2847, 2848, 2849, 2850, 2899 and 3433.
10. This Agreement shall bind any successors or assignees of the
Subordinated Creditor and shall benefit any successors or assigns of the Lender.
This Agreement is solely for the benefit of the Subordinated Creditor and the
Lender and not for the benefit of the Borrower or any other party.
11. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall constitute one
instrument.
12. This Agreement shall be governed by and construed in accordance
with the laws of the State of California, without giving effect to conflicts of
laws principles. The Subordinated Creditor and the Lender submit to the
exclusive jurisdiction of the state and federal courts located in Santa Clara
County, California. THE SUBORDINATED CREDITOR AND THE LENDER WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN.
13. This Agreement represents the entire agreement with respect to the
subject matter hereof, and supersedes all prior negotiations, agreements and
commitments. The Subordinated Creditor is not relying on any representations by
the Lender or the Borrower in entering into this Agreement, and the Subordinated
Creditor has kept and will continue to keep itself fully apprised of the
financial and other condition of the Borrower. This Agreement may be amended
only by written instrument signed by the Subordinated Creditor and the Lender.
14. In the event of any legal action to enforce the rights of a party
under this Agreement, the party prevailing in such action shall be entitled, in
addition to such other relief as may be granted, all reasonable costs and
expenses, including reasonable attorneys' fees, incurred in such action.
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<PAGE> 139
15. In the event that any of the terms of this Agreement conflict with
or are inconsistent with any of the terms of the Fruth Note, the terms of this
Agreement shall control.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
"Lender"
__________________________________ COMERICA BANK-CALIFORNIA
John D. Fruth
By: ___________________________________
Title: ________________________________
The undersigned approves of the terms of this Agreement.
"Borrower"
O.S.I. CORPORATION
By: ___________________________________
Title: ________________________________
5
<PAGE> 140
INTERCREDITOR AGREEMENT
This Intercreditor Agreement (the "Agreement") is made as of October
30, 1996 by and between COMERICA BANK-CALIFORNIA, a California chartered bank,
as Lender ("Comerica") and BANCO BILBAO VIZCAYA PUERTO RICO, a commercial
banking institution organized and created pursuant to the laws of the
Commonwealth of Puerto Rico ("Bilbao").
RECITALS
A. O.S.I. Puerto Rico Corporation ("OSI-PR") has borrowed or may borrow
funds in the principal amount of up to $5,800,000 (the "Loan") from Bilbao
pursuant to a Loan Agreement by and between OSI-PR and Bilbao dated November 17,
1995 (as amended from time to time, the "Bilbao Credit Agreement"). The Loan is
evidenced by a Term Note executed by OSI-PR dated November 17, 1995 in the
principal amount of $5,800,000.
B. The Bilbao Credit Agreement is secured by a grant of a security
interest in certain assets of OSI-PR, as evidenced by certain provisions of the
Bilbao Credit Agreement and a Chattel Mortgage by and between OSI-PR and Bilbao
dated November 17, 1995 and certain other documents, agreements and instruments
evidencing, perfecting or otherwise pertaining to such security interests.
C. Payment of certain amounts under the Bilbao Credit Agreement are
guaranteed by O.S.I. Corporation d/b/a Ocular Sciences/American Hydron ("OSI")
pursuant to a Guaranty by and between OSI and Bilbao dated as of November 17,
1995 (the "Guaranty").
D. OSI and Comerica desire to enter into a Credit Agreement (as amended
from time to time, the "Comerica Credit Agreement") pursuant to which OSI
desires to borrow certain funds from Comerica. OSI and Comerica also desire that
payment of outstanding amounts under the Comerica Credit Agreement shall be
guaranteed by OSI-PR pursuant to a Subsidiary Guaranty by and between OSI-PR and
Comerica (the "OSI-PR Guaranty").
E. It is a condition to entering into the Comerica Credit Agreement
that Comerica and Bilbao enter into this Agreement providing that Bilbao will
provide notice to Comerica prior to enforcing the Guaranty.
NOW, THEREFORE, in consideration of the foregoing and in order to
induce Comerica to extend credit under the Comerica Credit Agreement, the
parties agree as follows:
AGREEMENT
1. Notice Before Enforcement of Guaranty. In the event of a default
under the Bilbao Credit Agreement or any other loan document between Bilbao and
OSI-PR, Bilbao
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shall provide ten (10) business days prior written notice to Comerica before
taking any action to enforce the Guaranty.
2. Notices of Default. Bilbao and Comerica agree to use their best
efforts to give to the other copies of any written notice of the occurrence or
existence of an event of default sent to OSI-PR or OSI, simultaneously with the
sending of such notice to OSI-PR or OSI but the failure to do so shall not
affect the validity of such notice or create a cause of action against or
liability on the part of the party failing to give such notice, nor shall it
create any claim or right on behalf of the other party, OSI-PR, OSI or any third
party. The sending of such notice shall not give the recipient the obligation to
cure such default or event of default.
3. Waiver of Jury Trial. Bilbao and Comerica each hereby waive the
right to trial by jury in any action or proceeding based upon, arising out of,
or in any way relating to: (i) this Agreement; or (ii) any other present or
future instrument or agreement between Bilbao and Comerica relating to OSI or
OSI-PR; or (iii) any conduct, acts or omissions of Bilbao and Comerica or any of
their directors, officers, employees, agents, attorneys or any other persons
affiliated with Bilbao and Comerica, relating to OSI or OSI-PR, in each of the
foregoing cases, whether sounding in contract or tort or otherwise.
4. Notices. Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Comerica or to Bilbao, as the case may be, at
its address set forth below:
If to Comerica: Comerica Bank-California
333 West Santa Clara Street
San Jose, CA 95113
Attn: Ms. Lori Edwards
FAX: (408) 556-5292
If to Bilbao: Banco Bilbao Vizcaya Puerto Rico
G.P.O. Box 364745
San Juan PR 00936-4745
Attn: Ramon A. Santiago Choperena
FAX:
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
5. General. Bilbao and Comerica are not in any manner to be construed
to be partners or joint venturers or to have any other legal relationship other
than as expressly set forth in written agreements between them. Bilbao and
Comerica each agrees to execute all such documents and instruments and take all
such actions as the other shall reasonably request in
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<PAGE> 142
order to carry out the purposes of this Agreement, (but this Agreement shall
remain fully effective notwithstanding any failure to execute any additional
documents, instruments, or amendments). This Agreement is solely for the benefit
of Comerica and Bilbao and their successors and assigns, and OSI, OSI-PR or any
other person shall not have any right, benefit, priority or interest under, or
because of the existence of, this Agreement. This Agreement sets forth in full
the terms of agreement between Bilbao and Comerica with respect to the subject
matter hereof, and may not be modified or amended, nor may any rights hereunder
be waived, except in a writing signed by Bilbao and Comerica. In the event of
any litigation between the parties based upon or arising out of this Agreement,
the prevailing party shall be entitled to recover all of its costs and expenses
(including without limitation attorneys' fees) from the non-prevailing party.
This Agreement shall be binding upon the parties hereto and their respective
successors and assigns, and shall be construed in accordance with, and governed
by, the laws of the State of California. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which shall constitute the same instrument.
6. OSI-PR Guaranty. Bilbao hereby consents to the execution and
delivery by OSI-PR of the OSI-PR Guaranty, a copy of which is attached hereto as
Annex A.
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<PAGE> 143
IN WITNESS WHEREOF, the undersigned have executed this Intercreditor
Agreement as of October 30, 1996.
COMERICA BANK-CALIFORNIA
By: __________________________________
Title: _______________________________
BANCO BILBAO VIZCAYA PUERTO
RICO
By: __________________________________
Title: _______________________________
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<PAGE> 144
ANNEX A
FORM OF
SUBSIDIARY GUARANTY
This SUBSIDIARY GUARANTY, dated as of October 30, 1996, is made by each
entity that is identified on the signature pages hereof or that hereafter
executes and delivers a Subsidiary Joinder in substantially the form set forth
as Annex 1 hereto (each such entity, a "Guarantor") in favor of Comerica
Bank-California (the "Lender").
RECITALS
A. The Lender has entered into that certain Credit Agreement,
dated as of October 30, 1996 (as amended, supplemented or otherwise modified
from time to time, the "Credit Agreement"), by and between O.S.I. Corporation
(the "Borrower") and Lender.
B. Each Guarantor is a direct or indirect subsidiary of the
Borrower and expects to derive substantial direct and indirect benefit from the
transactions contemplated by the Credit Agreement.
C. It is a condition precedent to the extension of credit
under the Credit Agreement that each Guarantor shall have guaranteed payment of
each and all the Obligations (as that term is defined in the Credit Agreement)
and all other debts, liabilities and obligations of the Borrower and each other
Subsidiary of the Borrower under the Loan Documents, on the terms set forth
herein.
D. The Borrower has agreed, in the Credit Agreement, to cause
all future Material Subsidiaries of the Borrower to become party to this
Guaranty, as a Guarantor hereunder.
NOW, THEREFORE, in consideration of the foregoing and in order
to induce the Lender to extend credit to the Borrower under the Credit
Agreement, each Guarantor hereby agrees as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1 General Definitions. Except as otherwise
specifically provided herein, the terms that are defined in Section 1.1 of the
Credit Agreement shall have the same meanings when used in this Guaranty and the
provisions of Sections 1.2 and 1.3 of the Credit Agreement shall apply to this
Guaranty.
SECTION 1.2 Certain Defined Terms. As used in this Guaranty,
the following
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terms shall have the following meanings:
"Bankruptcy Code" means Title 11 of the United States Code, as
from time to time amended.
"Guaranteed Obligations" is defined in Section 2.1(a).
"Guaranty" means this Subsidiary Guaranty, dated as of October
30, 1996, made by the Guarantors for the benefit of the Lender.
"Guaranty Taxes" is defined in Section 3.8(a).
"Subordinated Liabilities" is defined in Section 2.8(a).
"Subsidiary Joinder" means an instrument substantially in the
form of Annex 1 hereto.
ARTICLE II
GUARANTY AND RELATED PROVISIONS
SECTION II.1 Guaranty. Each Guarantor hereby unconditionally:
(a) guarantees the punctual payment when due, whether at
stated maturity, by acceleration or otherwise, of (i) all Obligations
now outstanding or hereafter arising under or in connection with the
Credit Agreement or any other Loan Document, whether for principal,
interest, fees, taxes, additional compensation, expense reimbursements,
indemnification or otherwise, and (ii) all liabilities of each
Guarantor now outstanding or hereafter arising under the Guaranty and
any Subsidiary Joinder, and (iii) each other debt, liability or
obligation of the Borrower or any Subsidiary of the Borrower now
outstanding or hereafter arising under any of the Loan Documents (such
Obligations, liabilities and other debts, liabilities and obligations,
collectively, are the "Guaranteed Obligations"), and
(b) agrees to pay on demand (i) all Disallowed
Post-Commencement Interest and Expenses, to the Person entitled to
payment thereof if the claim therefor had been allowed in any
Bankruptcy, Insolvency or Liquidation Proceeding, and (ii) all costs
and expenses (including, without limitation, reasonable attorneys' fees
and legal expenses) incurred by the Lender in enforcing this Guaranty.
SECTION II.2 Acceleration of Payment. If (i) the Advances
become immediately due and payable pursuant to Section 6.1 of the Credit
Agreement, (ii) any Bankruptcy, Insolvency or Liquidation Proceeding is
commenced voluntarily by any Guarantor, or (iii) any Bankruptcy, Insolvency or
Liquidation Proceeding is commenced involuntarily against any Guarantor and
either (x) remains pending for more than 30 days or (y) an order for
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relief is granted or consented to by the Borrower or by the debtor therein, then
all liability of each Guarantor under this Guaranty in respect of any Guaranteed
Obligation that is not then due and payable shall thereupon become and be
immediately due and payable, without notice or demand.
SECTION II.3 Guaranty Absolute and Unconditional. Each
Guarantor guarantees that the Guaranteed Obligations will be paid in accordance
with the terms of the Credit Agreement and the other Loan Documents, regardless
of any law, regulation or order now or hereafter in effect in any jurisdiction
affecting any of such terms or the rights and claims of the Lender against the
Borrower or any Subsidiary of the Borrower with respect thereto and even if any
such rights or claims are modified, reduced or discharged in a Bankruptcy,
Insolvency or Liquidation Proceeding or otherwise. The obligations of each
Guarantor under this Guaranty are independent of the Guaranteed Obligations, and
a separate action or actions may be brought and prosecuted against each
Guarantor to enforce this Guaranty, whether or not any action is brought against
the Borrower or any other Guarantor and whether or not the Borrower or any other
Guarantor is joined in any such action or actions. The liability of each
Guarantor under this Guaranty shall be absolute and unconditional irrespective
of: (i) any lack of validity or enforceability of the Credit Agreement or any
other Loan Document or any other agreement or instrument relating thereto; (ii)
any change in the time, manner or place of payment of, or in any other term of,
any of the Guaranteed Obligations, or any other amendment or waiver of or any
consent to departure from the Credit Agreement or any other Loan Document,
including, without limitation, any increase in the Guaranteed Obligations
resulting from the extension of additional credit to the Borrower or any of its
Subsidiaries or otherwise; (iii) any taking, exchange, release or non-perfection
of any Lien securing, or any taking, release or amendment or waiver of or
consent to departure from any other guaranty of, any of the Guaranteed
Obligations; (iv) any manner or order of sale or other enforcement of any Lien
securing any or all of the Guaranteed Obligations or any manner or order of
application of the proceeds of any such Lien to the payment of the Guaranteed
Obligations or any failure to enforce any Lien or to apply any proceeds thereof;
(v) any change, restructuring or termination of the corporate structure or
existence of the Borrower or any of its Subsidiaries; or (vi) any other
circumstance which might otherwise constitute a defense (except the defense of
payment) available to, or a discharge of, a surety or guarantor.
SECTION II.4 Guaranty Irrevocable and Continuing. This
Guaranty is an irrevocable and continuing offer and agreement guaranteeing
payment of any and all Guaranteed Obligations and shall extend to all Guaranteed
Obligations now outstanding or created or incurred at any future time, whether
or not created or incurred pursuant to any agreement presently in effect or
hereafter made, until all obligations of the Lender to extend credit to the
Borrower have expired or been terminated and all Guaranteed Obligations have
been fully, finally and indefeasibly paid. To the extent any contingent
Obligation survives the expiration or termination of the Credit Agreement and
the repayment of the Advances, each Guarantor's liability under this Guaranty
shall likewise survive. This Guaranty may be released only in writing except,
with respect to a given Guarantor, as provided for in Section 2.10.
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SECTION 2.5 Reinstatement. If at any time any payment on any
Guaranteed Obligation is set aside, avoided or rescinded or must otherwise be
restored or returned, this Guaranty and the liability of each Guarantor under
this Guaranty shall remain in full force and effect and, if previously released
or terminated, shall be automatically and fully reinstated, without any
necessity for any act, consent or agreement of any Guarantor, as fully as if
such payment had never been made and as fully as if any such release or
termination had never become effective.
SECTION 2.6 Waiver. Guarantor hereby waives and relinquishes
all rights, remedies and defenses accorded by applicable law to sureties or
guarantors and agrees not to assert or take advantage of any such rights,
remedies or defenses, including without limitation:
(a) any right to require the Lender to proceed against
Borrower or any other Person or to proceed against or exhaust any
security held by the Lender at any time or to pursue any other remedy
in the power of the Lender before proceeding against Guarantor;
(b) the defense of the statute of limitations in any action
hereunder or in any action for the collection or performance of any
Guaranteed Obligations;
(c) any defense that may arise by reason of the incapacity,
lack of authority, death or disability of any other Person or the
failure of the Lender to file or enforce a claim against the estate (in
administration, bankruptcy or any other proceeding) of any other
Person;
(d) demand, presentment, protest and notice of any kind,
including without limitation notice of the existence, creation or
incurring of any new or additional indebtedness or obligation or of any
action or non-action on the part of Borrower, Lender, any endorser or
creditor of Borrower or Guarantor or on the part of any other Person
under this or any other instrument in connection with any obligation or
evidence of indebtedness held by Lender as Collateral or in connection
with any Guaranteed Obligations;
(e) any defense based upon an election of remedies by the
Lender (including without limitation an election to proceed by
non-judicial rather than judicial foreclosure) irrespective of whether
such election destroys or otherwise impairs any subrogation rights of
Guarantor, the right of Guarantor to proceed against Borrower for
reimbursement, or both (it being understood that as a consequence of
the waiver set forth in this Section 2.6(e), Guarantor is waiving,
among other things, any defense that Guarantor might be able to invoke
under California law based upon the argument (as enunciated in, among
other cases, Union Bank v. Gradsky, 265 Cal. App. 2d 40 (1968), and
Cathay Bank v. Lee, 93 Los Angeles Daily Journal D.A.R. 4871 (1993)),
that an election by a lender to foreclose non-judicially under a deed
of trust effects a release of the Guarantor from any obligation to pay,
under its guaranty, any portion of the guaranteed obligation remaining
unpaid after the non-judicial foreclosure since the non-judicial
foreclosure could destroy
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or impair Guarantor's subrogation or other rights to obtain any
reimbursement from the Borrower for such payments);
(f) any defense based upon any statute or rule of law which
provides that the obligation of a surety must be neither larger in
amount nor in other respects more burdensome than that of the
principal;
(g) any duty on the part of the Lender to disclose to
Guarantor any facts the Lender may now or hereafter know about
Borrower, regardless of whether the Lender has reason to believe that
any such facts materially increase the risk beyond that which Guarantor
intends to assume, or has reason to believe that such facts are unknown
to Guarantor, or has a reasonable opportunity to communicate such facts
to Guarantor, since Guarantor acknowledges that Guarantor is fully
responsible for being and keeping informed of the financial condition
of Borrower and of all circumstances bearing on the risk of non-payment
of any Guaranteed Obligations;
(h) any defense arising because of the election by the Lender,
in any proceeding instituted under the Bankruptcy Code, of the
application of Section 1111(b)(2) of the Bankruptcy Code; and
(i) any defense based upon any borrowing or grant of a
security interest under Section 364 of the Federal Bankruptcy Code.
Without limiting the generality of the foregoing, Guarantor
hereby expressly waives any and all benefits which might otherwise be available
to Guarantor under California Civil Code Sections 2809, 2810, 2819, 2839, 2845
through 2850, 2899 and 3433, California Code of Civil Procedure Sections 580(a),
580(b), 580(d) and 726, and California Commercial Code Section 3606(1).
SECTION II.7 Subrogation. Each Guarantor hereby represents,
warrants and agrees, in respect of any and all present and future rights of
subrogation, recourse, reimbursement, indemnity, exoneration, contribution and
other claims that such Guarantor at any time may have against the Borrower, any
other Guarantor or any other Person liable for the payment of any of the
Guaranteed Obligations (including, without limitation, the owner of any interest
in collateral subject to a Lien securing any of the Guaranteed Obligations) as a
result of or in connection with this Guaranty or any payment hereunder, that:
(a) No Agreement. Such Guarantor has not entered into, and
agrees that it will not enter into, any agreement providing, directly
or indirectly, for any such right or claim against the Borrower or,
except as set forth in Section 2.10, against any other Subsidiary of
the Borrower, and each such agreement now existing or hereafter entered
into (except as provided for in Section 2.10) is and shall be void;
(b) Release. Such Guarantor waives and releases any such
right or claim
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against the Borrower, any other Guarantor or any other such Person
until the Guaranteed Obligations have been paid in full;
(c) Capital Contribution. Neither the execution and delivery
of this Guaranty by such Guarantor nor any payment by such Guarantor
under this Guaranty shall give rise to any claim (as that term is
defined in the Bankruptcy Code) in favor of such Guarantor against the
Borrower until the Guaranteed Obligations have been paid in full; and
(d) Subordination of Contribution Rights. Such Guarantor
reserves, as against each other Guarantor, its right of contribution
under Section 2.10 but agrees that all such contribution rights shall
be included among the Subordinated Liabilities.
SECTION II.8 Subordination Provisions.
(a) Subordination. Any and all present and future debts,
liabilities and obligations of every type and description (whether for
money borrowed, on intercompany accounts, for provision of goods or
services, under tax sharing or contribution agreements or on account of
any other transaction, agreement, occurrence or event and whether
absolute or contingent, direct or indirect, matured or unmatured,
liquidated or unliquidated, created directly or acquired from another,
or sole, joint, several or joint and several) of the Borrower or any
Subsidiary of the Borrower now outstanding or hereafter incurred or
owed to any Guarantor (the "Subordinated Liabilities") shall be, and
hereby are, subordinated to full and final payment of the Guaranteed
Obligations.
(b) Prohibited Payments. If any Event of Default or Potential
Default occurs, then for so long as such Event of Default or Potential
Default may be continuing, no Guarantor will demand, sue for, accept or
receive, or cause or permit any other Person to make, any payment on or
transfer of property on account of any Subordinated Liabilities.
(c) No Liens or Transfers. Each Guarantor agrees that (i) it
will not demand, accept or hold any Lien upon any real or personal
property of the Borrower or any of its Subsidiaries as security for any
of the Subordinated Liabilities and (ii) any such Lien shall be void.
(d) Insolvency Proceedings. In any Bankruptcy, Insolvency or
Liquidation Proceeding, the Lender shall be entitled to receive payment
in full of all amounts due or to become due on or in respect of the
Guaranteed Obligations, or provision shall be made for such payment in
money or money's worth, before any Guarantor is entitled to receive any
payment or distribution of any kind or character, whether in cash,
property or securities, on account of any of the Subordinated
Liabilities, and to that end the Lender shall be entitled to receive,
for application to the payment thereof, all payments and distributions
of any kind or character, whether in cash, property or securities
(including any such payment or distribution which may be payable or
deliverable by reason of the payment of any other debt or liability of
the Borrower or any Subsidiary of the Borrower
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being subordinated to the payment of the Subordinated Liabilities),
which may be payable or deliverable in respect of the Subordinated
Liabilities in any such Bankruptcy, Insolvency or Liquidation
Proceeding.
(e) Disallowed Post-Commencement Interest and Expenses. If in
any Bankruptcy, Insolvency or Liquidation Proceeding (i) any payment or
distribution of any kind or character, whether in cash, property or
securities (including any such payment or distribution which may be
payable or deliverable by reason of the payment of any other debt or
liability of the Borrower or any Subsidiary of the Borrower being
subordinated to the payment of the Subordinated Liabilities) is payable
or deliverable in respect of the Subordinated Liabilities, and (ii) the
Lender is not otherwise entitled to receive such payment or
distribution pursuant to Section 2.8(d), and (iii) any amount remains
unpaid to the Lender on account of any Disallowed Post- Commencement
Interest and Expenses, then the Lender shall be entitled to receive
payment of all such unpaid Disallowed Post-Commencement Interest and
Expenses from and out of any and all such payments and distributions in
respect of the Subordinated Liabilities.
(f) Held in Trust. If any payment, transfer or distribution is
made to any Guarantor upon any Subordinated Liabilities that is not
permitted to be made under this Section 2.8 or that the Lender is
entitled to receive under this Section 2.8, such Guarantor shall
receive and hold the same in trust, as trustee for the benefit of the
Lender, and shall forthwith transfer and deliver the same to the
Lender, in precisely the form received (except for any required
endorsement), for application to the payment of Guaranteed Obligations
or any unpaid Disallowed Post-Commencement Interest and Expenses.
(g) Claims in Bankruptcy. Each Guarantor will file all claims
against the Borrower or any Subsidiary of the Borrower in any
Bankruptcy, Insolvency or Liquidation Proceeding in which the filing of
claims is required or permitted by law upon any of the Subordinated
Liabilities and will assign to the Lender, all rights of such Guarantor
thereunder. If any Guarantor does not file any such claim at least 30
days prior to any applicable claims bar date, the Lender is hereby
authorized (but shall not be obligated), as attorney-in-fact for such
Guarantor with full power of substitution, either to file such claim or
proof thereof in the name of such Guarantor or, at the option of the
Lender, to assign the claim and cause the claim or proof thereof to be
filed by an agent or nominee. The Lender and its agents and nominees
shall have the sole right, but no obligation, to accept or reject any
plan proposed in such Bankruptcy, Insolvency or Liquidation Proceeding
and to cast any votes and to take any other action with respect to all
claims upon any of the Subordinated Liabilities.
(h) Subordination Effective and not Impaired. This Section 2.8
shall remain effective for so long as this Guaranty is continuing and
thereafter for so long as any Guaranteed Obligation is outstanding.
Each Guarantor's obligations under this Section 2.8: (i) shall be
absolute and unconditional as set forth in Section 2.3, irrevocable and
continuing as set forth in Section 2.4, subject to reinstatement as set
forth in Section 2.5
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and not be affected or impaired by any of the matters waived in Section
2.6; (ii) shall be subject to the provisions of Article III; and (iii)
shall otherwise be as equally enduring and free from defenses as such
Guarantor's liability under this Guaranty.
SECTION II.9 Fraudulent Transfer Limitation. If, in any action
to enforce this Guaranty or any proceeding to allow or adjudicate a claim under
this Guaranty, a court of competent jurisdiction determines that enforcement of
this Guaranty against any Guarantor for the full amount of the Guaranteed
Obligations is not lawful under, or would be subject to avoidance under, Section
548 of the Bankruptcy Code or any applicable provision of comparable state law,
the liability of such Guarantor under this Guaranty shall be limited to the
maximum amount lawful and not subject to avoidance under such law.
SECTION II.10 Contribution among Guarantors. The Guarantors
desire to allocate among themselves, in a fair and equitable manner, their
rights of contribution from each other when any payment is made by one of the
Guarantors under this Guaranty. Accordingly, if any payment is made by a
Guarantor under this Guaranty (a "Funding Guarantor") that exceeds its Fair
Share, the Funding Guarantor shall be entitled to a contribution from each other
Guarantor in the amount of such other Guarantor's Fair Share Shortfall, so that
all such contributions shall cause each Guarantor's Aggregate Payments to equal
its Fair Share. For these purposes:
(a) "Fair Share" means, with respect to a Guarantor as of any
date of determination, an amount equal to (i) the ratio of (x) the
Adjusted Maximum Amount of such Guarantor to (y) the aggregate Adjusted
Maximum Amounts of all Guarantors, multiplied by (ii) the aggregate
amount paid on or before such date by all Funding Guarantors under this
Guaranty.
(b) "Fair Share Shortfall" means, with respect to a Guarantor
as of any date of determination, the excess, if any, of the Fair Share
of such Guarantor over the Aggregate Payments of such Guarantor.
(c) "Adjusted Maximum Amount" means, with respect to a
Guarantor as of any date of determination, the maximum aggregate amount
of the liability of such Guarantor under this Guaranty, limited to the
extent required under Section 2.9 (except that, for purposes solely of
this calculation, any assets or liabilities arising by virtue of any
rights to or obligations of contribution under this Section 2.10 shall
not be counted as assets or liabilities of such Guarantor).
(d) "Aggregate Payments" means, with respect to a Guarantor as
of any date of determination, the aggregate net amount of all payments
made on or before such date by such Guarantor under this Guaranty
(including, without limitation, under this Section 2.10).
The amounts payable as contributions hereunder shall be determined by the
Funding Guarantor
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as of the date on which the related payment or distribution is made by the
Funding Guarantor, and such determination shall be binding on the other
Guarantors absent manifest error. The allocation and right of contribution among
the Guarantors set forth in this Section 2.10 shall not be construed to limit in
any way the liability of any Guarantor under this Guaranty to the Lender.
SECTION II.11 Joint and Several Obligation. This Guaranty and
all liabilities of each Guarantor hereunder shall be the joint and several
obligation of each Guarantor and may be freely enforced against each Guarantor,
for the full amount of the Guaranteed Obligations (subject to Section 2.9),
without regard to whether enforcement is sought or available against any other
Guarantor.
ARTICLE III
MISCELLANEOUS PROVISIONS
SECTION III.1 Condition of the Borrower. Each Guarantor is
fully aware of the financial condition of the Borrower and its Subsidiaries and
is executing and delivering this Guaranty based solely upon such Guarantor's own
independent investigation of all matters pertinent hereto and is not relying in
any manner upon any representation or statement by the Lender. Each Guarantor
represents and warrants that it is in a position to obtain, and each Guarantor
hereby assumes full responsibility for obtaining, any additional information
concerning the financial condition of the Borrower and each of its Subsidiaries
and any other matter pertinent hereto as such Guarantor may desire, and such
Guarantor is not relying upon or expecting the Lender to furnish to such
Guarantor any information now or hereafter in the possession of the Lender
concerning the same or any other matter. By executing this Guaranty, each
Guarantor knowingly accepts the full range of risks encompassed within a
contract of this type, which risks each Guarantor acknowledges. No Guarantor
shall have the right to require the Lender to obtain or disclose any information
with respect to the Guaranteed Obligations, the financial condition or prospects
of the Borrower or any Subsidiary of the Borrower, the ability of the Borrower
or any Subsidiary of the Borrower to pay or perform the Guaranteed Obligations,
the existence, perfection, priority or enforceability of any collateral security
for any or all of the Guaranteed Obligations, the existence or enforceability of
any other guaranties of all or any part of the Guaranteed Obligations, any
action or non-action on the part of the Lender, the Borrower, any Subsidiary of
the Borrower or any other Person, or any other event, occurrence, condition or
circumstance whatsoever.
SECTION III.2 Amendments.
(a) Amendment to Guaranty. No amendment or waiver of any
provision of this Guaranty, no consent to any departure by any
Guarantor herefrom, shall in any event be effective unless the same
shall be in writing and signed by the Lender, and then such waiver or
consent shall be effective only in the specific instance and for the
specific purpose for which given, except that no amendment, waiver or
consent shall, unless in writing and signed by the Lender, (i) reduce
or discharge the liability of any Guarantor
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hereunder, or (ii) postpone any date fixed for payment hereunder.
(b) Amendment or Modification of Other Loan Documents. The
other Loan Documents may be amended, modified or supplemented in
accordance with their terms without notice to or consent or agreement
by any Guarantor, including, without limitation, so as to (i) alter,
compromise, modify, accelerate, extend, renew, refinance or change the
time or manner for making of Advances, provision of other financial
accommodations, or the payment or performance of all or any portion of
the Guaranteed Obligations, (ii) increase or reduce the rate of
interest or amount of principal payable on the Guaranteed Obligations,
(iii) release or discharge the Borrower, any other Loan Party or any
other Person as to all or any portion of the Guaranteed Obligations, or
(iv) release, substitute or add any one or more guarantors or
endorsers, accept additional or substituted security for payment or
performance of the Guaranteed Obligations, or release or subordinate
any security therefor.
SECTION III.3 Notices. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic,
telex or cable communication) and mailed, telecopied, telegraphed, telexed,
cabled or delivered, if to any Guarantor, c/o O.S.I. Corporation, 475 Eccles
Avenue, South San Francisco, California 94080, Attention: Treasurer, with a copy
to the General Counsel at the same address, and if to the Lender, at its address
specified in the Credit Agreement, or, as to any party, at such other address as
shall be designated by such party in a written notice to each other party. All
such notices and other communications shall, when mailed, telecopied,
telegraphed, telexed or cabled, be effective when deposited in the mails,
telecopied, delivered to the telegraph company, confirmed by telex answerback or
delivered to the cable company, respectively.
SECTION III.4 Right of Set off. If any Advances become
immediately due and payable pursuant to Section 6.1 of the Credit Agreement, the
Lender shall have the right at any time, and from time to time thereafter, to
the fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other liability at any time owing by Lender to or for the credit or the account
of any Guarantor against any and all liability of such Guarantor under this
Guaranty, whether or not Lender shall have made any demand under this Guaranty
and even though such deposit or liability may then be unmatured. Lender agrees
to promptly notify the affected Guarantor after any such set-off and application
made by Lender, but the failure to give such notice shall not affect the
validity of such set-off and application. The rights of the Lender under this
Section 3.4 are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which Lender may have.
SECTION III.5 Successors and Assigns. This Guaranty is binding
upon and enforceable against each Guarantor, its successors and assigns, and
shall inure to the benefit of, and be enforceable by, the Lender and its
representatives, successors and assigns.
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SECTION III.6 No Inquiry. The Lender may rely, without further
inquiry, on the power and authority of each Guarantor, the Borrower and each of
its Subsidiaries and on the authority of all officers, directors and agents
acting or purporting to act on their behalf.
SECTION III.7 Involuntary Proceedings. So long as the Lender
is obligated to extend credit under the Credit Agreement or any Guaranteed
Obligations are outstanding, no Guarantor will, without the prior written
consent of the Lender, commence or join with any other Person in commencing any
Bankruptcy, Insolvency or Liquidation Proceeding against the Borrower or any of
its Subsidiaries.
SECTION III.8 Payments Free and Clear of Taxes.
(a) Payment. Each Guarantor agrees to pay any and all present
or future taxes, levies, imposts, deductions, charges or withholdings,
and all liabilities with respect thereto which arise from any payment
made hereunder or from the execution, delivery or registration of, or
otherwise with respect to, this Guaranty, excluding, with respect to
the Lender, taxes imposed on its net income (collectively, the
"Guaranty Taxes").
(b) Indemnity. Each Guarantor hereby indemnifies the Lender
for the full amount of Guaranty Taxes (including, without limitation,
any Guaranty Taxes imposed by any jurisdiction on amounts payable under
this Section 3.8) paid by the Lender and any liability (including
penalties, interest and expenses) arising therefrom or with respect
thereto (plus interest on any amounts not paid within thirty days from
the date written demand is made therefor at a rate equal to the rate
payable under the Credit Agreement on Base Rate Advances during the
continuance of a default in the repayment of Advances), whether or not
such Guaranty Taxes were correctly or legally asserted; provided,
however, that if the Lender subsequently recoups all or any part of
such amount from the relevant taxation authority or other authority,
then the Lender shall identify and remit the amount of the recoupment
to such Guarantor within five Business Days after it receives the
recoupment.
(c) Survival. Without prejudice to the survival of any other
agreement of any Guarantor hereunder, the agreements and obligations of
each Guarantor contained in this Section 3.8 shall survive the full and
final payment and performance of the Guaranteed Obligations.
(d) Receipt. Within 30 days after the date of any payment of
Guaranty Taxes by any Guarantor, such Guarantor shall furnish to the
Lender a receipt for any Guaranty Taxes paid by such Guarantor pursuant
to this Section 3.8.
SECTION III.9 No Waiver; Remedies. No failure on the part of
the Lender to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof, and no single or partial exercise of any right
hereunder shall preclude any other or further exercise of
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any other right or of the same right as to any other matter or on a subsequent
occasion.
SECTION III.10 Remedies Cumulative. All rights, powers and
remedies of the Lender under this Guaranty, under any other agreement now or at
any time hereafter in effect between the Lender and any Guarantor (whether
relating to the Guaranteed Obligations or otherwise) or now or hereafter
existing at law or in equity or by statute or otherwise, shall be cumulative and
concurrent and not alternative and each such right, power and remedy may be
exercised independently of, and in addition to, each other such right, power or
remedy.
SECTION III.11 Severally Enforceable. This Guaranty may be
enforced severally and successively by the Lender in one or more actions,
whether independent, concurrent, joint, successive or otherwise.
SECTION III.12 Counterparts. This Guaranty may be executed in
counterparts, and each such counterpart for all purposes shall be deemed an
original and all such counterparts together shall constitute but one and the
same agreement.
SECTION III.13 Severability. If any provision hereof or the
application thereof in any particular circumstance is held to be unlawful or
unenforceable in any respect, all other provisions hereof and such provision in
all other applications shall nevertheless remain effective and enforceable to
the maximum extent lawful.
SECTION III.14 Integration. This Guaranty and the other Loan
Documents to which any Guarantor is party are intended as an integrated and
final expression of the entire agreement of such Guarantor with respect to the
subject matter hereof and thereof. No representation, understanding, promise or
condition concerning the subject matter hereof and thereof shall be binding upon
the Lender unless expressed herein or therein, and no course of prior dealing or
usage of trade, and no parol or extrinsic evidence of any nature, shall be
admissible to supplement, modify or vary any of the terms hereof or thereof.
Acceptance of or acquiescence in a course of performance rendered under this
Guaranty or any other dealings between any Guarantor and the Lender shall not be
relevant to determine the meaning of this Guaranty even though the accepting or
acquiescing party had knowledge of the nature of the performance and opportunity
for objection.
SECTION III.15 GOVERNING LAW; SUBMISSION TO JURISDICTION;
WAIVER OF JURY TRIAL; WAIVER OF DAMAGES.
(a) GOVERNING LAW. THIS GUARANTY SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
(b) SUBMISSION TO JURISDICTION. ANY LEGAL ACTION OR PROCEEDING
WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE
STATE OF CALIFORNIA OR OF THE UNITED STATES
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FOR THE NORTHERN DISTRICT OR THE CENTRAL DISTRICT OF CALIFORNIA, AND BY
EXECUTION AND DELIVERY OF THIS GUARANTY, EACH PARTY HERETO CONSENTS,
FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE JURISDICTION OF THOSE
COURTS. EACH PARTY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY
OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON
CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY
ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS GUARANTY
OR ANY DOCUMENT RELATED HERETO. SERVICE OF ANY SUMMONS, COMPLAINT OR
OTHER PROCESS MAY BE MADE BY ANY MEANS PERMITTED BY CALIFORNIA LAW.
(c) WAIVER OF JURY TRIAL. EACH PARTY HERETO WAIVES ALL RIGHTS
TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF OR RELATED TO THIS GUARANTY, THE OTHER LOAN DOCUMENTS OR
THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE
PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO
CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE, AND AGREES THAT ANY SUCH
CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A
JURY. WITHOUT LIMITING THE FOREGOING, EACH PARTY FURTHER AGREES THAT
ITS RIGHT TO A TRIAL BY JURY IS HEREBY WAIVED AS TO ANY ACTION,
COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO
CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS GUARANTY OR ANY OTHER
LOAN DOCUMENT OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL
APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS GUARANTY AND THE OTHER LOAN DOCUMENTS.
(d) LIMITATION OF LIABILITY. NO CLAIM MAY BE MADE BY ANY
GUARANTOR AGAINST THE LENDER OR ANY OF ITS AFFILIATES, DIRECTORS,
OFFICERS, EMPLOYEES, ATTORNEYS OR AGENTS FOR ANY SPECIAL, INDIRECT,
CONSEQUENTIAL OR PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM (WHETHER
BASED UPON ANY BREACH OF CONTRACT, TORT, BREACH OF STATUTORY DUTY OR
ANY OTHER THEORY OF LIABILITY) ARISING OUT OF OR RELATED TO THE
TRANSACTIONS CONTEMPLATED BY THIS GUARANTY, OR ANY ACT, OMISSION OR
EVENT OCCURRING IN CONNECTION THEREWITH, AND EACH GUARANTOR HEREBY
WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR ANY SUCH
DAMAGES, WHETHER OR NOT NOW ACCRUED AND WHETHER OR NOT KNOWN OR
SUSPECTED TO EXIST IN ITS FAVOR.
SECTION III.16 Acceptance and Notice. Each Guarantor
acknowledges
17
<PAGE> 157
acceptance hereof and reliance hereon by the Lender and waives, irrevocably and
forever, all notice thereof.
18
<PAGE> 158
IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to
be duly executed and delivered by its officer thereunto duly authorized as of
the date first above written.
By: ________________________________
Name:
Title:
B-1-S-1
<PAGE> 159
Annex 1
Form of Subsidiary Joinder
AGREEMENT TO BE BOUND BY GUARANTY
This Agreement to be Bound by Guaranty (this "Agreement") is
executed as of the _____ day of _________, ____, by [NAME OF NEW SUBSIDIARY] , a
____________ [corporation] [partnership] [etc.] (the "New Subsidiary").
RECITALS
A. On or about October 30, 1996, O.S.I. Corporation, a
California corporation (the "Borrower") executed that certain Credit Agreement,
dated as of October 30, 1996 (as amended to date, the "Credit Agreement"), by
and between the Borrower and Comerica Bank-California (the "Lender"). Terms not
defined herein are used as defined in the Credit Agreement.
B. As a condition to the execution of the Credit Agreement by
the Lender, all of the Material Subsidiaries of the Borrower (other than the
Foreign Subsidiaries) executed that certain Subsidiary Guaranty, dated as of
October 30, 1996 (as amended to date, the "Guaranty"), by and among the entities
listed in the signature pages thereof in favor of the Lender.
C. Section 5.2(e) of the Credit Agreement provides that when
the Borrower acquires or forms a new Material Subsidiary or when a Subsidiary
becomes a Material Subsidiary, the Borrower will cause such Subsidiary to
deliver an executed counterpart to the Guaranty and such Subsidiary shall become
a party to the Guaranty.
D. On [Insert Date] , the New Subsidiary [Describe
acquisition/formation of New Subsidiary, or growth of Material Subsidiary] . The
New Subsidiary will benefit from the funds available to the Borrower under the
Credit Agreement, and in recognition of this benefit and in order to comply with
the Credit Agreement, the New Subsidiary is willing to enter into this
Agreement.
AGREEMENT
NOW, THEREFORE, the New Subsidiary agrees as follows:
1. Representations and Warranties. On and as of the date of
this Agreement (the "Effective Date") and for the benefit of the Lender, the New
Subsidiary hereby makes each of the representations and warranties contained in
the Guaranty.
2. Agreement to be Bound. The New Subsidiary agrees that, on
and as of the Effective Date, it shall become a Guarantor under the Guaranty and
shall be bound by all the provisions of the Guaranty the same as if the New
Subsidiary had executed the Guaranty on the
B-1-Annex-1
<PAGE> 160
Closing Date.
3. Waiver. Without limiting the generality of the waivers in
the Guaranty, the New Subsidiary specifically agrees to be bound by the Guaranty
and waives any right to notice of acceptance of its execution of this Agreement
and of its agreement to be bound by the Guaranty.
4. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
IN WITNESS WHEREOF, the New Subsidiary has caused this
Agreement to be Bound by Guaranty to be executed by its duly authorized officer.
[NAME OF NEW SUBSIDIARY]
By: ___________________________
Name:
Title:
B-1-Annex-2
<PAGE> 161
October 30, 1996
Comerica Bank - California
333 West Santa Clara Street
San Jose, CA 95113
Re: O.S.I. Corporation
Ladies and Gentlemen:
This opinion is delivered to you in connection with that certain Credit
Agreement between O.S.I. Corporation, a California corporation (the "BORROWER"),
and Comerica Bank - California (the "LENDER") dated as of October 30, 1996 (the
"CREDIT AGREEMENT"). Capitalized terms used in this opinion that are not defined
herein shall have the same meanings given to those terms in the Credit
Agreement.
In order to render this opinion, we have examined the following (the
"REVIEWED DOCUMENTS"):
(a) the Amended and Restated Articles of Incorporation of the Borrower
as certified by the Secretary of State of California as of October 18, 1996, and
the Bylaws of the Borrower certified by the Assistant Secretary of the Borrower
on the date hereof;
(b) the Certificate of Incorporation of O.S.I. Puerto Rico Corporation
("O.S.I. Puerto Rico"), as certified by the Secretary of State of Delaware as of
October 19, 1996, and the Bylaws of O.S.I. Puerto Rico certified by the
Assistant Secretary of O.S.I. Puerto Rico on the date hereof;
(c) the Credit Agreement;
(d) the Borrower Pledge and Security Agreement dated as of October 30,
1996 between the Borrower and the Lender (the "PLEDGE AND SECURITY AGREEMENT");
(e) the Intellectual Property Security Agreement dated as of October
30, 1996 between the Borrower and the Lender (the "INTELLECTUAL PROPERTY
SECURITY AGREEMENT");
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(f) the Guaranty dated as of October 30, 1996 by O.S.I. Puerto Rico in
favor of the Lender ("the Guaranty");
(g) copies of resolutions adopted by the Board of Directors of the
Borrower by unanimous written consent dated October 24, 1996 relating to the
Credit Agreement, the Pledge and Security Agreement and the Intellectual
Property Security Agreement (the "LOAN DOCUMENTS");
(h) copies of resolutions adopted by the Board of Directors of O.S.I.
Puerto Rico by written consent of the sole Director dated October 24, 1996
relating to the Guaranty;
(i) UCC-1 financing statement for filing with the Secretary of State of
California naming Borrower as debtor and Lender as secured party (the "Financing
Statement);
(j) a Certificate of Status regarding the Borrower issued by the
Secretary of State of the State of California dated October 23, 1996;
(k) a letter from the California Franchise Tax Board dated October 25,
1996, to the effect that the Borrower is in good standing with respect to its
California franchise tax filings and has no known unpaid franchise tax
liability;
(l) a certificate of good standing regarding the Borrower issued by the
Secretary of State of the Commonwealth of Pennsylvania dated October 24, 1996;
(m) a certificate of good standing regarding O.S.I. Puerto Rico issued
by the Secretary of State of the State of Delaware dated October 25, 1996;
(n) Management Certificates addressed to us and dated of even date
herewith executed by the Borrower and O.S.I. Puerto Rico (the "MANAGEMENT
CERTIFICATES");
(o) incumbency certificates executed by officers of the Borrower and
O.S.I. Puerto Rico dated October 30, 1996; and
(p) copies of the contracts, instruments, documents and agreements of
the Borrower and O.S.I. Puerto Rico that are listed on Exhibit A attached hereto
(the "MATERIAL AGREEMENTS"), which contracts, instruments, documents and
agreements the Borrower and O.S.I. Puerto Rico, respectively, have represented
to us to be the only material agreements to which they are a party or by which
their assets are bound.
In connection with this opinion we have not examined, and we express no
opinion with respect to, any documents other than the Reviewed Documents
expressly referred to above and have not made any other independent factual
investigation. We have assumed, based solely upon the representations made to us
by the Borrower and O.S.I. Puerto Rico
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in the Management Certificates, that, neither the Borrower or O.S.I. Puerto Rico
nor either of their assets, is a party to, bound by or subject to any agreement
or instrument that would change any conclusion stated in this opinion.
As to matters of fact relevant to this opinion, we have relied solely
upon our examination of the Reviewed Documents and representations and
warranties made by representatives of the Borrower and O.S.I. Puerto Rico to us,
including without limitation, those set forth in the Management Certificates,
and the representations and warranties made by the Borrower and the Lender in
the Loan Documents and by O.S.I. Puerto Rico and the Lender in the Guaranty. We
have made no independent investigation or other attempt to verify the accuracy
of any of such information, representations, warranties or other facts as
represented by the Borrower, O.S.I. Puerto Rico or the Lender or to verify the
existence or non-existence of any other factual matters. In particular, but not
by way of limitation, in rendering our opinion expressed in paragraph 6 below,
we have not caused the search of any docket of any court, tribunal, agency or
similar authority.
In our examination, we have assumed, without independent investigation,
and express no opinion as to (a) the authenticity and completeness of all
original documents submitted to us as originals, (b) the genuineness of all
signatures on such documents, (c) the completeness and conformity to originals
of all documents submitted to us as copies, (d) the legal competence of all
natural persons who are signatories of original documents, (e) the lack of any
undisclosed modifications, waivers or amendments to any agreements or other
documents examined by us, (f) the due execution and delivery of all documents by
all parties thereto (other than the Borrower and O.S.I. Puerto Rico) where due
execution and delivery are prerequisites to the effectiveness thereof, (g) the
accuracy, completeness and authenticity of certificates of public officials. For
the purposes of this opinion, we have also assumed, without independent
investigation, that: (i) the Loan Documents and Guaranty reflect the complete
understanding and agreement of the parties concerning the subject matter
thereof, (ii) the Loan Documents have been duly authorized, executed and
delivered by the Lender and are legal, valid and binding obligations of the
Lender, enforceable against the Lender in accordance with their respective
terms; (iii) the Borrower is not insolvent and by executing and delivering the
Loan Documents will not become insolvent; (iv) O.S.I. Puerto Rico is not
insolvent and by executing and delivering the Guaranty will not become
insolvent; (v) that the Lender qualifies for an exemption from the otherwise
applicable interest rate limitations of California law for loans or forbearances
contained in Article XV, Section 1 of the California Constitution; (vi) that all
loans under the Loan Documents will be made by the Lender for its own account or
for the account of another person or entity that qualifies for an exemption from
the interest rate limitations of California law; and (vii) there is no present
agreement or plan, express or implied, on the part of the Lender to sell
participations or any other interest in the loans to be made under the Loan
Documents to any person or entity other than a person or entity that also
qualifies for an exemption from the interest rate limitations of California law.
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A matter stated below to be "to our knowledge" or "known to us" refers
only to the actual knowledge of those attorneys currently in this firm who have
rendered legal services to the Borrower in connection with the Loan Documents,
and means that, while such attorneys have not been informed by the Borrower that
the matter stated is factually incorrect, we have made no independent factual
investigation with respect to such matter. No inference as to our knowledge of
any matters bearing on the accuracy of any such statement should be drawn from
the fact of our representation of the Borrower.
With respect to our opinion in paragraph 4 below, we have relied
solely upon copies, supplied to us by Borrower, of those contracts, instruments,
documents and agreements which have been identified to us by Borrower and O.S.I.
Puerto Rico in the Management Certificates as being all material contracts,
instruments, documents and agreements to which the Borrower or O.S.I. Puerto
Rico is a party or by which its assets are bound. Each of the foregoing are
listed as Material Agreements on Exhibit A hereto. We have not undertaken any
independent investigation of such matters.
We do not assume any responsibility for the accuracy, completeness or
fairness of any information, including, but not limited to, financial
information, furnished to you by the Borrower or O.S.I. Puerto Rico concerning
the business, assets or affairs of the Borrower or O.S.I. Puerto Rico or any
other information furnished to you by the Borrower or O.S.I. Puerto Rico or any
of their agents or representatives.
Where statements in this opinion are qualified by the term "material,"
those statements involve judgments and opinions as to the materiality or lack of
materiality of any matter to the Borrower or its business, assets or financial
condition, which are entirely those of the Borrower and its officers.
This opinion is subject to, and we render no opinion with respect to,
the limitations, qualifications and exceptions applicable to contracts and
obligations generally. Without limitation, this opinion is subject to, and we
render no opinion with respect to, the following:
(a) the effect of bankruptcy, insolvency, reorganization, arrangement,
moratorium, bulk sales, fraudulent conveyance and other similar laws now or
hereinafter in effect relating to or affecting the rights and remedies of
creditors generally;
(b) the effect of general principles of equity, including, without
limitation, concepts of materiality, reasonableness, good faith and fair dealing
and the possible unavailability of specific performance, injunctive relief or
other equitable remedies, regardless of whether considered in a proceeding in
equity or at law;
(c) the effect of limitations imposed by reason of generally applicable
public policy principles or considerations or limitations imposed by or
resulting from the exercise by any court of its discretion;
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(d) any implied duty or covenant of good faith and fair dealing to
which the Lender may have been or may be subject;
(e) the effect of Section 1670.5 of the California Civil Code and of
California court decisions, invoking statutes or principles of equity, which
have held that certain covenants and provisions of agreements are unenforceable
where (i) the breach of such covenants or provisions imposes restrictions or
burdens upon the other party and it cannot be demonstrated that the enforcement
of such restrictions or burdens is reasonably necessary for the protection of
the party seeking to enforce such provisions or (ii) the enforcement of such
covenants or provisions under the circumstances would violate the implied
covenant of good faith and fair dealing;
(f) The effect of California Civil Code Section 1698 and similar
statutes and federal laws and judicial decisions that provide, among other
things, (i) that oral modifications to a contract or waivers of contractual
provisions may be enforceable, if the modification was performed,
notwithstanding any express provision in the agreement that the agreement may
only be modified or an obligation thereunder waived in writing, or (ii) that an
implied agreement may be created from trade practices or course of conduct;
(g) The effect of California Civil Code Section 1717 and other
applicable statutes and judicial decisions which provide, among other things,
that a court may limit the granting of attorneys' fees to those attorneys' fees
which are determined by the court to be reasonable and that attorneys' fees may
be granted only to a prevailing party and that a contractual provision for
attorneys' fees is deemed to extend to both parties (notwithstanding that such
provision by its express terms benefits only one party);
(h) The effect of any California or federal law or court decisions that
requires a lender to enforce its remedies in a commercially reasonable manner;
(i) The enforceability of any provisions in the Loan Documents or
Guaranty releasing or exonerating a party from liability or providing for
indemnification or contribution;
(j) The enforceability under certain circumstances of contractual
provisions respecting self-help or summary remedies;
(k) The enforceability of any waiver of the Borrower's or O.S.I. Puerto
Rico's right to assert counterclaims or other claims or defenses;
(l) The enforceability of any provision in the Loan Documents or
Guaranty requiring the Borrower or O.S.I. Puerto Rico to execute, in the future,
additional instruments and documents;
(m) The enforceability of any waivers or releases of rights by the
Borrower in the Loan Documents or by O.S.I. Puerto Rico in the Guaranty, to the
extent any of such waivers or releases are not enforceable under applicable law,
including any provision in
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<PAGE> 166
the Loan Documents or Guaranty that purports to waive broadly or vaguely stated
rights or unknown future rights, or rights which may not be waived on statutory
or public policy grounds;
(n) The enforceability of any provision in the Loan Documents or
Guaranty stating that rights or remedies are not exclusive, that every right or
remedy is cumulative and may be exercised in addition to, or with any other
right or remedy, or that the election of some particular remedy or remedies does
not preclude recourse to one or more others;
(o) The enforceability of any consent to service, jurisdiction or forum
for any claim, suit, demand, action or cause of action arising under or related
to the Loan Documents or Guaranty, or the transactions contemplated therein, or
any provision providing for the exclusive jurisdiction of a particular court or
purporting to waive rights to trial by jury, service of process or objections to
the laying of venue or to forum on the basis of forum non conveniens in
connection with any litigation arising out of or pertaining to the Loan
Documents or Guaranty;
(p) The enforceability of any provision in the Loan Documents or
Guaranty purporting to appoint the Lender as attorney-in-fact for the Borrower
or O.S.I. Puerto Rico or to grant an irrevocable power of attorney to the
Lender;
(q) The enforceability of any provision in the Loan Documents or
Guaranty that would purport to permit or authorize the realization of, or
exercise of remedies pursuant to a security interest in personal property in any
manner inconsistent with the provisions and procedures set forth in Divisions 8
and 9 of the California Uniform Commercial Code;
(r) The enforceability of any provision in the Loan Documents or
Guaranty that permit or authorize the Lender to exercise remedies or impose
penalties or an increase in interest rate for late payment or other default if
it is determined that the default is not material, the remedies or penalties
bear no reasonable relation to the damage suffered by the Lender as a result of
the default or it cannot be demonstrated that the enforcement of the remedies or
penalties is reasonably necessary for the protection of the Lender;
(s) The enforceability of any provisions of the Loan Documents or
Guaranty that purport to limit the standards imposed upon the Lender for the
care of Collateral in the possession of the Lender to the extent such provisions
are inconsistent with applicable provisions of the California Uniform Commercial
Code (the "California UCC").
(t) The enforceability of any provisions of the Loan Documents
providing for rights to registration of any securities under the Securities Act
of 1933, as amended; and
(u) The enforceability of any provisions of the Loan Documents that
permit or authorize the Lender to vote, or direct the voting, of any shares of
capital stock of which it is not the registered holder.
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Additionally, we express no opinion with respect to the compliance or
noncompliance with any federal or state antifraud statutes, rules and
regulations applicable to the offer or sale of securities. Furthermore, we
express no opinion with respect to the enforceability of any provision in the
Guaranty specifying the governing law, and we assume that the Guaranty will be
governed by, and construed in accordance with, California law.
Our opinions in paragraphs 8 and 9 are also subject to the following
assumptions, exceptions, limitations and qualifications:
(i) we express no opinion as to the priority of any security interest
or lien;
(ii) we express no opinion as to the creation, validity or perfection
of any security interest that is not governed by, or that is excluded from
coverage by, Division 8 and Division 9 of the California UCC;
(iii) we have assumed that the Borrower has "rights" in the Collateral,
as contemplated by Section 9203 of the California UCC;
(iv) we have assumed that, as of the relevant times, "value" (as that
word is used in Section 9203(l)(b) of the California UCC) has been given by the
secured party;
(v) we express no opinion as to the accuracy or completeness of the
descriptions of the Collateral in any Loan Document or the Financing Statement;
(vi) we have assumed that none of the Collateral consists of consumer
goods, crops growing or to be grown, timber to be cut, minerals or the like
(including oil and gas) or accounts resulting from the sale of minerals or the
like at the wellhead or the mine head, beneficial interests in a trust or
decedent's estate, letters of credit, items which are subject to a statute or
treaty of the United States which provides for a national or international
registration or a national or international certificate of title or which
specifies a place of filing different from that specified in the California UCC
for filing of the security interest, or any other items excluding from the
coverage of the California UCC by Section 9104 thereof;
(vii) we call to your attention the fact that the perfection of a
security interest in "proceeds" (as defined in the California UCC) of collateral
is governed and restricted by Section 9306 of the California UCC;
(viii) we express no opinion as to whether the phrase "all personal
property" or similarly general phrases would be held to describe any particular
item or items of collateral;
(ix) we call to your attention the fact that under the California UCC,
with certain limited exceptions, the effectiveness of the Financing Statement
will lapse five years after the date of filing thereof and your security
interest will become unperfected,
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unless a continuation statement is filed within six months prior to the end of
such five-year period. We also call to your attention the fact that perfection
of security interests under the California UCC in any of the Collateral will be
terminated as to any Collateral acquired by the Company more than four (4)
months after the Company changes its name, identity or corporate structure to
such an extent as to make the Financing Statement seriously misleading, unless a
new appropriate financing statement or an appropriate amendment to the Financing
Statement indicating the new name, identity or corporate structure of the
Company is properly filed before the expiration of four (4) months after such
change;
(x) we express no opinion as to the perfection of any security interest
as against any claim or lien in favor of the United States or any State, or any
agency or instrumentality thereof, including, without limitation, liens for the
payment of federal or state taxes which are given priority by operation of law
and liens under Title IV of the Employee Retirement Income Security Act of 1974;
(xi) we have assumed that the Lender has taken possession of the
Pledged Shares in good faith and without prior notice of any adverse claim;
(xii) we have assumed that the Lender has not expressly or by
implication waived, subordinated or agreed to any modification of the perfection
of any security interest under the Loan Documents or agreed to any adverse
claim; and
(xiii) we call to your attention the fact that the security interest of
the Lender in the Pledged Shares may be subject to security interests in favor
of other persons that exist pursuant to Section 8-313(1)(i) or Section 8-321 of
the California UCC if on or within 21 days prior to the date of delivery of any
Pledged Shares to the Lender, the owner of such Pledged Shares shall have signed
in favor of any person other than the Lender a security agreement which contains
a description of such Pledged Shares and shall have received new value therefor
from such person.
We further advise you that:
a. The enforceability of the Guaranty against O.S.I. Puerto Rico may be
subject to California statutory provisions and case law to the effect that, in
certain circumstance, a guarantor may be exonerated if the beneficiary of the
Guaranty alters the original obligation of the principal without the consent of
the guarantor, fails to inform the guarantor of material information pertinent
to the principal or any collateral, elects remedies that may impair the
subrogation rights of the guarantor against the principal or that may impair the
value of the collateral, fails to accord the guarantor the protections afforded
a debtor under the California Uniform Commercial Code or otherwise takes any
action that materially prejudices the guarantor. While we believe that express
and specific waivers of a guarantor's right to be exonerated, such as those
contained in the Guaranty, should be generally enforceable under California law,
we express no opinion as to whether the Guaranty contains an express and
specific waiver of each exoneration a
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guarantor might assert in defense of a claim under a guaranty, or as to whether
each of the waivers contained in the Guaranty is fully enforceable. In addition,
we express no opinion with respect to the effect of (i) any modification to or
amendment of the obligations of the Borrower that materially increases such
obligations; (ii) any election of remedies by the Lender following the
occurrence of an event of default under the Credit Agreement; or (iii) any other
action by the Lender that materially prejudices O.S.I. Puerto Rico, if, in any
such instance, such modification, election, or action occurs without notice to
O.S.I. Puerto Rico and without granting O.S.I. Puerto Rico an opportunity to
cure any default by the Borrower.
b. It could be contended that the Guaranty has not been given for a
fair or reasonably equivalent consideration, that O.S.I. Puerto Rico is, or, by
executing the Guaranty may become, insolvent, and that the Guaranty may be
violable by creditors of O.S.I. Puerto Rico or by a trustee or receiver of
O.S.I. Puerto Rico in bankruptcy or similar proceedings pursuant to applicable
bankruptcy, fraudulent conveyance or similar laws. Because of these possible
contentions, our opinion set forth in paragraph 3 below is further limited by
and subject to the effect of such laws.
With respect to our opinion expressed in paragraph 1 below that the
Borrower is in good standing under the laws of the State of California, we have
relied solely upon the Certificate of Status (referred to above) of the
Secretary of State of the State of California dated October 23, 1996 to the
effect that the Borrower is duly incorporated and in good standing under the
laws of the State of California. With respect to our opinion expressed in
paragraph 1 below that the Borrower is duly qualified to do business in the
Commonwealth of Pennsylvania we have relied solely on the certificate of good
standing (referred to above) regarding the Borrower issued by the Pennsylvania
Secretary of State and dated October 24, 1996. With respect to our opinion
expressed in paragraph 1 below that O.S.I. Puerto Rico is in good standing under
the laws of the State of Delaware, we have relied solely upon the certificate
(referred to above) of the Secretary of State of the State of Delaware dated
October 25, 1996 to the effect that O.S.I. Puerto Rico is duly incorporated and
in good standing under the laws of the State of Delaware.
We are admitted to practice law in the State of California. The
opinions expressed herein are limited to the existing laws of the State of
California, the Delaware General Corporation Law as in effect on the date
hereof, and (except as expressly set forth below) the existing federal laws of
the United States of America, assuming that such laws apply to the matters
expressed herein. We disclaim any opinion as to the laws of any other
jurisdiction. We have not conducted any special investigation of statutes, laws,
rules, or regulations and our opinion is limited to such California and United
States statutes, laws, rules or regulations, and provisions of the Delaware
General Corporation Law, as in our experience are of general application to
transactions of the sort contemplated by the Loan Documents. We also call your
attention to the fact that under various reports published by committees of the
State Bar of California, certain assumptions, qualifications and exceptions are
implicit in opinions of lawyers. Although we have expressly set forth certain
assumptions, qualifications and exceptions herein, we are not limiting or
omitting
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any others set forth in the various reports or otherwise deemed standard by
practice for lawyers in California.
In rendering the opinions below, we are opining only as to the specific
legal issues expressly set forth herein, and no opinion shall be inferred as to
any other matters.
Based upon and subject to the foregoing, and subject to the
qualifications and exceptions contained herein, we are of the opinion that:
1 . The Borrower is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of California and has all
requisite corporate power and authority to carry on its business as it is
currently being conducted. O.S.I. Puerto Rico is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to carry on its
business as it is currently being conducted. The Borrower is duly qualified to
do business and is in good standing in the Commonwealth of Pennsylvania (which
the Borrower has represented in the Management Certificate to be the only
jurisdiction other than California in which the Borrower owns property, has
offices or employs employees).
2. The execution, delivery and performance by the Borrower of each Loan
Document has been duly authorized by all necessary corporate action on the part
of the Borrower, The execution, delivery and performance by O.S.I. Puerto Rico
of the Guaranty has been duly authorized by all necessary corporate action on
the part of O.S.I. Puerto.
3. The Loan Documents have been duly executed and delivered by
Borrower. The Guaranty has been duly executed and delivered by O.S.I. Puerto
Rico. The Loan Documents constitute legal, valid, and binding obligations of the
Borrower, enforceable against the Borrower in accordance with their respective
terms. The Guaranty constitutes a legal, valid, and binding obligation of O.S.I.
Puerto Rico, enforceable against O.S.I. Puerto Rico in accordance with its
terms.
4. To our knowledge, the execution and delivery of the Loan Documents
by the Borrower, and the execution and delivery of the Guaranty by O.S.I. Puerto
Rico, does not (i) result in a breach of or constitute a default under or
(except as contemplated in the Loan Documents) require the creation of any lien,
charge or encumbrance on any property or assets of the Borrower or O.S.I. Puerto
Rico, pursuant to the terms of any of the Material Agreements, or (ii) violate
any law, statute, rule, or governmental regulation of the State of California or
the United States of America presently in effect and applicable to the Borrower
or O.S.I. Puerto Rico, except in each case for violations, breaches or defaults
that would not reasonably be expected to have a material adverse effect on the
Borrower.
5. No authorization or approval or other action by, and no notice to or
filing with, any United States federal or California governmental authority is
required in
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connection with the execution and delivery of the Loan Documents by the Borrower
or the execution and delivery of the Guaranty by O.S.I. Puerto Rico, except for
filings required for the perfection of the liens and security interests granted
to the Lender under the Loan Documents.
6. To our knowledge, there are no actions or proceedings against the
Borrower pending before any court, governmental agency or arbitrator which could
reasonably be expected to have a material adverse effect on the business,
operations, property or condition (financial or otherwise) of the Borrower
(except the Galley Litigation, as to which we render no opinion) or which
contest the legality, validity or enforceability of any Loan Document.
7. Upon the proper filing and indexing of the Financing Statement in
the Office of the Secretary of State of California (assuming that the
representations made by Borrower with respect to the location of the Collateral,
its place of business and chief executive office are and remain true and
correct), the security interests granted by Borrower under the Pledge and
Security Agreement in and to such Collateral will constitute perfected security
interests therein to the extent that security interests in such Collateral may
be perfected by filing a financing statement under Division 9 of the California
Uniform Commercial Code.
8. Assuming the Lender takes possession of and holds the shares of
capital stock of O.S.I. Puerto Rico listed on Schedule A to the Pledge and
Security Agreement (the "Pledged Shares"), delivered to the Lender pursuant to
the Pledge and Security Agreement, with undated stock powers duly endorsed in
blank, in the State of California, the Pledge and Security Agreement creates a
valid and perfected security interest in favor of the Lender in the Pledged
Shares.
9. Neither Borrower nor O.S.I. Puerto Rico is an "investment company"
or a company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.
10. The making of the Advances to the Borrower and the application of
the proceeds thereof by the Borrower pursuant to and in accordance with the
terms of the Credit Agreement does not violate Regulation G, T, U or X of the
Board of Governors of the Federal Reserve System.
This opinion is intended solely for the benefit of the Lender for the
purpose of the financing contemplated by the Credit Agreement and is not to be
used by the Lender for any other purpose or made available to or relied upon by
any other person, firm or entity, without our prior written consent. We disclaim
any duty to update or advise the Lender of any fact, circumstance, event or
change in the law that may hereafter occur or be brought to our attention even
if it may affect or modify the opinions expressed herein.
Very truly yours,
-11-
<PAGE> 172
FENWICK & WEST LLP
-12-
<PAGE> 173
BIRD BIRD & HESTRES
LAW FIRM
202 GALLARDO BUILDING
301 RECINTO SUR STREET
SAN JUAN, PUERTO RICO 00902
ANTONIO M. BIRD (1915-1995) P.O. BOX 3128
ANTONIO M. BIRD, JR. SAN JUAN, P.R. 00902-3128
EUGENE F. HESTRESTELEPHONE: (809) 721-0190 TELECOPIER: (809) 724-5305
-----------
JOANNA BOCANEGRA OCASIO
GILOREN S. CARO PEREZ
October 30, 1996
Comerica Bank-California
c/o Gray Cary Ware & Freidenrich
400 Hamilton Avenue
Palo Alto, CA 94301-1825
Re: O.S.I. Puerto Rico Corporation
BBH No. 80.7
Gentlemen:
We have acted as counsel to O.S.I. Puerto Rico Corporation
('OSI-PR') in connection with the proposed financing by and between O.S.I.
Corporation d/b/a Ocular Sciences/American Hydron ('OSI') and Comerica
Bank-California ('Comerica'). This opinion is delivered to you pursuant to the
provisions of the Credit Agreement of even date herewith (the 'Comerica Credit
Agreement').
The opinions expressed herein are qualified to the extent that
the validity or enforceability of any of the agreements, documents or
obligations referred to herein may be subject to or affected by applicable
reorganization, moratorium, bankruptcy, insolvency, or other laws relating to or
affecting the rights of creditors generally. We do not express any opinion on
the availability of any equitable (whether in a proceeding at law or in equity)
or other specific remedy upon breach of any of the agreements, documents or
obligations referred to herein.
On the basis of and subject to the foregoing, it is our
opinion that:
1. A court in the Commonwealth of Puerto Rico would enforce
the choice of law provision (i.e., California Law) contained in the Guaranty
Agreement of OSI dated as of October 30, 1996 (the "Guaranty").
2. The United States District Court in the Commonwealth of
Puerto Rico would enforce a judgment against OSI obtained in a United States
federal court in California with respect to the Guaranty. In the case of a
judgment rendered by a California state court, for
<PAGE> 174
the judgment to be enforceable in the Commonwealth of Puerto Rico an exequatur
petition would have to be filed in the General Court of Justice of the
Commonwealth of Puerto Rico in order to give full faith and credit to the
California judgment.
3. The filing of annual corporate reports with the Department
of State of the Commonwealth of Puerto Rico are required in order for a
corporation to be in good standing under the General Corporation Law of Puerto
Rico. According to the records of the Department of State, OSI-PR's annual
reports for the years 1991, 1993, 1994 and 1995 are outstanding and the firm of
KPMG Peat Marwick has been engaged to file the outstanding reports. Upon the
filing of these reports, OSI-PR will be in good standing under the laws of the
Commonwealth of Puerto Rico.
This opinion is issued solely for your information in
connection with the transaction described above and should not be quoted in
whole or in part or otherwise referred to in any financial statement or other
document or furnished to any other party or agency without our prior written
consent and with the consent of OSI-PR.
I am a member of the bar of the Commonwealth of Puerto Rico.
In rendering the foregoing opinions I have made no independent investigation of
any laws other than the laws of the Commonwealth of Puerto Rico and the General
Corporation Law of the Commonwealth of Puerto Rico.
Very truly yours,
BIRD BIRD & HESTRES
<PAGE> 175
Our Ref: RPB.JEM. MOORE &
Your Ref: BLATCH
S O L I C I T O R S
October 30, 1996
Comerica Bank - California 11 The Avenue
333 West Santa Clara Street Southampton
San Jose SO17 IXF
CA 95113 Telephone: (01703) 636311
USA Fax: (01703) 332205
DX 38507 Southampton 3
Dear Sirs
OSI CORPORATION (OSI) - EQUITABLE PLEDGE OF SHARES OF OCULAR SCIENCES LIMITED
(THE COMPANY)
1 INTRODUCTION
We have been asked to give an opinion in connection with an equitable pledge
(the CHARGE) of, inter alia, 1,950,000 ordinary shares of pound sterling1 each
in the capital of the Company comprising 65 per cent of the issued share capital
of the Company (the CHARGED SHARES) pursuant to a borrower pledge and security
agreement dated 30 October 1996 (the BORROWER PLEDGE AGREEMENT) between OSI and
Comerica Bank - California (the BANK) as part security for a loan facility of up
to US $27,000,000 from the Bank to OSI pursuant to a credit agreement likewise
dated 30 October 1996 between OSI and the Bank (the CREDIT AGREEMENT).
In this Opinion, reference to the DOCUMENTS shall be construed as reference to
the Credit Agreement and the Borrower Pledge Agreement.
Words and expressions defined in the Documents will, unless otherwise defined
herein, have the same meaning when used herein.
This opinion is given only in respect of the matters stated as at 30 October
1996 and on the basis of the law as it existed at that date.
We have been acting as legal advisers in England to OSI and the Company in
connection with the Charge to the extent addressed in this Opinion.
2 DOCUMENTS
For the purpose of giving this Opinion we have examined the following documents:
<PAGE> 176
2.1 an executed copy of the Credit Agreement, but not the Exhibits or Schedules
thereto
2.2 an executed copy of the Borrower Pledge Agreement;
2.3 copies of the Memorandum of Association and the Articles of Association of
the Company, certified as being true and correct copies as at 29 October 1996 by
the Company Secretary of the Company;
2.4 a copy of the resolutions in writing of the members of the Company made
pursuant to Section 381A of the Companies Act 1985, dated on or before 30
October 1996 signed by each member of the Company resolving in the terms and
dealing with the matters referred to therein, duly certified by the Company
Secretary of the Company as a true and complete copy of the original thereof;
2.5 copies of the resolutions in writing of a majority of the directors of the
Company made pursuant to article 15 of the Articles of Association of the
Company, each dated on or before 30 October 1996 signed by a majority of the
directors of the Company resolving in the terms and dealing with the matters
referred to therein, duly certified by the Company Secretary of the Company as
true and complete copies of the originals thereof;
2.6 a copy of the unanimous written consent of the board of directors of OSI
held on or before 30 October 1996, signed by each director of the board of OSI,
resolving to approve the entry into the Documents and the other matters referred
to therein duly certified by the Company Secretary of OSI as a true and complete
copy of the original thereof;
2.7 our agent's report following their search on 28 October 1996 of the public
records of the Company on file which were available for inspection by the public
at the Companies Registry;
2.8 a certificate dated 29 October 1996 by the Company Secretary of the Company
as to the due appointment of the directors adopting the resolutions referred to
in paragraph 2.4 above;
2.9 a certificate dated 29 October 1996 by the Company Secretary of OSI, as to
the due appointment of the directors adopting the resolutions referred to in
paragraph 2.6 above, and as to the incumbency and signatures of the persons
named in those resolutions as being authorised to sign, execute and deliver the
Documents;
2.10 a copy of the undated stock transfer form in respect of the Charged Shares
executed by OSI in favour of the Bank;
2.11 copies of the share certificates dated on or before 30 October 1996 sealed
by the Company in favour of OSI in respect of the Charged Shares, duly certified
by the Company Secretary of the Company as true and complete copies of the
originals thereof;
and such other documents, records and papers as we think necessary or relevant
as a basis for our opinions herein contained.
- page 2 -
<PAGE> 177
3 ASSUMPTIONS
For the purpose of this Opinion, we have assumed (without making any
investigation thereof):
3.1 the authenticity of all documents or instruments submitted to us as
originals;
3.2 the completeness and the conformity to original documents or instruments or
all documents or instruments submitted to us as certified or other copies of
originals;
3.3 the genuineness of all signatures and seals on the documents and instruments
submitted to us;
3.4 that the Documents have been duly and properly executed by the persons
authorised to execute the Documents by resolutions of the board of directors of
OSI referred to in paragraph 2.6;
3.5 that there have been and will be no amendments to the Memorandum of
Association or the Articles of Association of the Company as examined by us and
certified as being true and correct copies by the Company Secretary of the
Company as referred to in paragraph 2.3;
3.6 that the resolutions of the members of the Company referred to in paragraph
2.4 have not been and will not be amended or rescinded and are in full force and
effect;
3.7 that the resolutions of the majority of the directors of the Company
referred to in paragraph 2.5 have not been and will not be amended or rescinded
and are in full force and effect and that due disclosure had been made by each
director of any interest he might have in the transactions to which the
Documents relate in accordance with the provisions of Section 317 of the
Companies Act 1985 and the Articles of Association of the Company and that no
director of the Company has any interest in the transactions to which the
Documents relate except to the extent permitted by the Articles of Association
of the Company;
3.8 that the Company has not passed and will not pass a voluntary winding-up
resolution, no petition has been or will be presented or order made by a Court
for the winding-up, dissolution or administration of the Company and no
receiver, trustee, administrator, administrative receiver or similar officer has
been or will be appointed in relation to the Company or any of its assets or
revenues;
3.9 that each of the Credit Agreement and the Borrower Pledge Agreement are
legal, valid, binding and enforceable under the laws of the State of California
and that the Bank has not breached and will not breach any of the terms of the
Documents;
3.10 that there is nothing in the Credit Agreement, the Borrower Pledge
Agreement or in any agreement referred to in the documents reviewed by us which
will affect the import of any of the statements made in this Opinion;
3.11 the capacity, power and authority of all parties to enter into, perform,
observe and comply with all the terms of, and the due execution and delivery by
such parties of, the Documents;
- page 3 -
<PAGE> 178
3.12 the accuracy and completeness of all factual representations contained or
referred to in the Documents and in the documents referred to in paragraph 2
(which representations we have not independently verified) and that there are no
other facts which were relevant as at 30 October 1996;
3.13 that on 30 October 1996, OSI was and will remain a duly organised and
validly existing corporation in good standing under the laws of the State of
California and had and has all corporate power and authority and full legal
right to own its properties (including the capital stock or shares of its
subsidiaries) and to carry on the businesses in which it was engaged on 30
October 1996 and proposed to be engaged thereafter.
3.14 that the Bank (pursuant to the Documents) is and will be a bona fide
purchaser or transferee for value of the Charged Shares and rights secured under
the Borrower Pledge Agreement without notice of any other concurrent or prior
transfer, charge, mortgage or other encumbrance or security interest of
whatsoever nature or claim in respect of the Charged Shares and rights at the
date on which monies were and are advanced under the Credit Agreement and at the
date of such purchase or transfer of the Charged Shares.
3.15 that no taxes or duties are payable in any jurisdiction outside England in
connection with the documents referred to in this paragraph 3 or, if any taxes
or duties are payable, that they will be fully paid in accordance with the law
of such jurisdiction(s);
3.16 that to the extent that any consents were or are have been or will be
required from any governmental or regulatory authority or agency or any third
party (including banks or other lenders) in any jurisdiction outside England or
from any third party (including banks or other lenders) in England all such
consents have been and will be obtained for the pledging of the Charged Shares
pursuant to the Borrower Pledge Agreement and the transfer of the Charged Shares
pursuant thereto;
3.17 that none of the parties is or will be seeking to achieve any purpose not
apparent from the Documents which might render any of the Documents illegal or
void; and
3.18 that there are no provisions of the laws of any jurisdiction outside
England which would have any implication on the opinions we express.
3.19 that the execution of the Borrower Pledge Agreement, the delivery of the
same together with the delivery of the share certificates referred to in
paragraph 2.11 and the stock transfer form referred to in paragraph 2.10 to the
Bank were done as security for the indebtedness of OSI pursuant to the Credit
Agreement;
3.20 that the terms set out in the Documents are not altered prior to the
Transfer (as defined in paragraph 3.21) of the Charged Shares to the Bank;
3.21 that any Transfer (as herein defined) of the Charged Shares to the Bank is
pursuant to the proper and valid exercise of an entitlement to do so on the part
of the Bank under the terms of the Borrower Pledge Agreement (whether as a
result of an Event of Default (as defined in the Borrower Pledge Agreement) or
otherwise). For the purposes of this Opinion Transfer means the
- page 4 -
<PAGE> 179
completion by the Bank of the stock transfer form referred to in paragraph 2.10
and the registration in the register of members of the Company of the Bank as a
member of the Company following the delivery by the Bank of such stock transfer
form, duly stamped and the share certificates referred to in paragraph 2.11 to
the Company for registration thereof.
We have made such examination of the laws of England as currently applied by
English Courts as in our judgement is necessary for the purpose of this opinion.
We do not however purport to be qualified to pass upon and express no opinion
herein as to the laws of any jurisdiction other than those of England. This
Opinion is governed by and shall be construed in accordance with English law.
4 OPINIONS
Based upon and subject to the foregoing and further subject to the assumptions
and qualifications in this Opinion and having regard to such legal
considerations as we have deemed relevant, we are of the opinion that: -
4.1 the Company is a company duly incorporated under the laws of England as a
private limited liability company and is validly existing thereunder. As at 17
October 1996, the Company was in Good Standing as herein define. By GOOD
STANDING (a phrase which has no recognised meaning under English law), we mean
that according to a certificate dated 17 October 1996 from the Registrar of
Companies, the Company has been in continuous and unbroken existence since the
date of its incorporation on 25 April 1985 and that there is no document on the
public file showing the institution of any proceedings for the winding up or
liquidation of the Company or that the Company is not still in operation.
4.2 the Charged Shares have been duly authorised for issuance by the Company and
have been issued to OSI fully paid up or credited as fully paid up.
4.3 Under the laws of England, there are no legal restrictions on the Transfer
of the Charged Shares pursuant to the proper and valid enforcement of the Charge
and the Transfer of the Charged Shares in manner aforesaid does not require any
governmental approval or authorization in England, and the Memorandum and
Articles of Association of the Company do not contain any restrictions on the
Transfer of the Charged Shares in manner aforesaid and do not require any
approval or other authorisation of the members of the Company in connection
therewith.
4.4 The execution by OSI of the Borrower Pledge Agreement and delivery of the
same together with the delivery of the share certificates referred to in
paragraph 2.11 and the stock transfer form referred to in paragraph 2.10 to the
Bank create a valid equitable pledge of the Charged Shares under the laws of
England, enforceable in England.
4.5 All actions of the Company and OSI required by the laws of England in
respect of the Charge to create a valid and enforceable equitable pledge under
the laws of England have been duly taken by the Company and OSI.
4.6 Until the occurrence of: -
- page 5 -
<PAGE> 180
4.6.1 any Event of Default (as defined in the Borrower Pledge Agreement);
4.6.2 any other event entitling the Bank to enforce the Charge; or
4.6.3 any Transfer of the Charged Shares to the Bank
the Charge will not result in the imposition upon the Bank of any liability
applicable to membership of the Company for capital contributions to the
Company, for funding any unfunded obligations of the Company or for any other
liability of the Company.
5 QUALIFICATIONS
The opinions expressed herein are subject to the following qualifications: -
5.1 the validity and enforcement of any of the Documents may be limited by
statutes of limitation, lapse of time and by laws relating to bankruptcy,
insolvency, liquidation, arrangement, moratorium, re-organisation or other laws
relating to or affecting generally the enforcement of the rights of creditors,
and claims may be or become subject to set-off or counterclaim;
5.2 equitable remedies, such as injunction and specific performance, are
discretionary and may not necessarily be awarded by the English Courts; in
particular, such remedies may not be available where damages are considered to
be an adequate and appropriate remedy;
5.3 a provision that a calculation, determination or certificate will be
conclusive and binding will not apply to a calculation, determination or
certificate which is given unreasonably, arbitrarily or without good faith or
which is fraudulent or manifestly inaccurate and will not necessarily prevent
judicial enquiry into the merits of any claim;
5.4 failure to exercise a right may operate as a waiver of that right
notwithstanding a provision such as section 8.5 of the Borrower Pledge
Agreement.
5.5 we express no opinion on the accuracy or completeness of any statements or
warranties of fact set out in the Documents, which statements and warranties we
have not independently verified;
5.6 we express no opinion on any provision in any of the Documents requiring
written amendments and waivers of such documents insofar as it suggests that
oral or other modifications, amendments or waivers could not be effectively
agreed upon or granted by or between the parties;
5.7 where any party to any of the Documents is vested with a discretion or may
determine a matter in its opinion, Courts in England may require that such a
discretion be exercised reasonably or that such an opinion be based on
reasonable grounds;
5.8 An English Court would determine in its discretion whether or not an
invalid, illegal or unenforceable provision may be severed or be partially
effective, notwithstanding a provision such as section 8.7 of the Borrower
Pledge Agreement;
- page 6 -
<PAGE> 181
5.9 the exercise by the Bank of the powers and remedies conferred on it by each
of the Documents or otherwise vested in it by law will be subject to general
equitable principles regarding the enforcement of security and the general
supervisory powers and discretion of the English Courts in the context thereof
and we express no opinion as to the efficacy of any powers conferred upon or the
Bank or any receiver, administrative receiver or similar officer appointed under
the Documents insofar as these powers go beyond those conferred by statute or by
common law;
5.10 an English Court may not award by way of costs all of the expenditure
incurred by a successful litigant in proceedings brought before the Court and an
undertaking by any party to the Documents to bear any indemnity in respect of
any taxes or duties might not be enforceable in respect of United Kingdom stamp
duties, pursuant to Section 117 of the Stamp Act 1891, if such were imposed in
the future;
5.11 the opinion expressed in paragraph 4.1 that the Company is a company duly
incorporated under English law is based on the assumption set out in paragraph
3.8, on our telephone enquiry made on 30 October 1996 confirming that no winding
up petition had been presented in respect of the Company but otherwise solely
upon the result of a search conducted by our agents at the Companies Registry on
28 October 1996. It should be noted that: -
5.11.1 a search at the Companies Registry is not capable of revealing whether or
not a winding-up petition or a petition for the making of an administration
order has been presented; and
5.11.2 notice of a winding-up order or resolution, notice of an administration
order and notice of the appointment of a receiver may not be filed at the
Companies Registry immediately and there may be delay in the relevant notice
appearing on the file of the relevant party;
5.12 we express no opinion as to:
5.12.1 the priority of any of the security created by the Borrower Pledge
Agreement;
5.12.2 the legality, validity, binding nature or enforceability of the payment
obligations contained in the Documents;
5.12.3 the efficacy of the Borrower Pledge Agreement in relation to any property
other than the Charged Shares;
5.13 unless and until the Charged Shares are registered in the register of
members of the Company in the name of the Bank the Charge will take effect as an
equitable charge and may be defeated by interests acquired by third parties
without notice of the Charge;
5.14 we express no opinion as to whether any provision in the Documents
conferring a right of set-off or similar right would be effective against a
liquidator, administrator or a creditor;
5.15 as regards the enforcement of a judgment of a foreign Court, the Courts of
England will not simply register and enforce such judgment. It would be
necessary to commence fresh
- page 7 -
<PAGE> 182
proceedings before the English Courts, in which the foreign judgment would be
evidence of liability, subject to satisfaction of the following criteria: -
5.15.1 the procedural rules for commencement and maintenance of proceedings
before the English Courts would need to be observed;
5.15.2 the foreign Court must properly have had jurisdiction to hear and
determine the matter;
5.15.3 the decision of the foreign Court must have been final and conclusive;
5.15.4 the decision of the foreign Court must have been for a fixed sum only;
5.15.5 the decision of the foreign Court must not have been obtained by fraud or
by a trick;
5.15.6 the decision of the foreign Court must not be contrary to public policy
or have been given in proceedings of a penal or revenue nature; and
5.15.7 the decision of the foreign Court must not be contrary to natural
justice;
5.16 the Transfer of the Charged Shares to the Bank will attract ad valorem
stamp duty at the rate of 50 pence for each pound sterling100 (or part thereof)
of consideration and accordingly the Bank will be required to submit the stock
transfer form referred to in paragraph 2.10 for stamping and pay the duty
thereon prior to being entitled to be registered as a member of the Company in
the register of members of the Company.
5.17 The Company's loan facility from Midland Bank Plc (MIDLAND) contains a
provision which would entitle Midland to withdraw the facility in the event of a
change of control of the Company. There is no definition of "control" in the
Midland loan documentation. However, it is likely that control would be deemed
to change if the Charged Shares were registered in the name of the Bank.
This Opinion is given for the sole benefit of the Bank in connection with the
transactions contemplated by the Credit Agreement. This Opinion is not to be
disclosed to any other person nor is it to be relied upon by any other person or
for any other purpose or quoted or referred to in any public document without
our prior written consent.
Yours faithfully
MOORE & BLATCH
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<PAGE> 183
EXHIBIT D-1
FORM OF COMPLIANCE CERTIFICATE
This Compliance Certificate is being delivered by the undersigned, an
Authorized Officer of O.S.I. Corporation (the "Borrower"), to Comerica Bank-
California (the "Lender") pursuant to Section 5.2(c) (vi) of the Credit
Agreement dated as of October 30, 1996 among the Borrower and the Lender (as
amended or modified from time to time, the "Agreement"). Capitalized terms used
herein and not otherwise defined herein shall have the same meanings as set
forth in the Agreement.
The undersigned hereby certifies and warrants to the Lender, on behalf
of the Borrower, as follows:
1. The representations and warranties contained in Article IV of the
Agreement and Article III of each Pledge and Security Agreement are true and
correct in all material respects on and as of the date of this Compliance
Certificate (or in the case of representations and warranties stated as having
been made only on the date of such Agreement, on the date of such Agreement).
2. No event has occurred and is continuing which constitutes an Event
of Default or a Potential Default.
3. Since December 31, 1995 there has been no Material Adverse Change.
4. The following is a true and correct computation of the ratios and
financial tests contained in the Agreement as of __________, 19___ (the
"Fiscal Quarter End Date"):
(a) Section 5.1(a) - Maximum Leverage Ratio
<TABLE>
<S> <C>
(i) Total liabilities of the Borrower and its
consolidated Subsidiaries as of the Fiscal
Quarter End Date determined in accordance
with GAAP: $
(ii) Subordinated Debt as of the Fiscal Quarter
End Date: $
(iii) Debt permitted under Section 5.3(d)(vii) as of
the Fiscal Quarter End Date: $
(iv) Consolidated Total Debt as of the Fiscal
Quarter End Date [Item 4(a)(i) minus Item
4(a)(ii) minus Item 4(a)(iii)]: $
(v) Consolidated Tangible Effective Net Worth as
of
</TABLE>
D-1-1
<PAGE> 184
<TABLE>
<S> <C>
the Fiscal Quarter End Date [Item 4(d)(x)
below]: $
(vi) Leverage Ratio as of the Fiscal Quarter End
Date [Item 4(a)(iv) divided by Item
4(a)(v)]: ____:1.00
(vii) The ratio in Item 4(a)(vi) may not be greater
than:
Fiscal Quarter End Date
Closing Date through 6/30/97 1.75:1.00
9/30/97 and thereafter 1.50:1.00
(b) Section 5.1(b) - Minimum Fixed Charge Coverage Ratio
(i) Net income of the Borrower and its
consolidated Subsidiaries for the four
consecutive Fiscal Quarters ending on the
Fiscal Quarter End Date determined in
accordance with GAAP: $
(ii) Litigation Adjustment (net of applicable
taxes) for the four consecutive Fiscal Quarters
ending on the Fiscal Quarter End Date: $
(iii) Consolidated Interest Expense for the four
consecutive Fiscal Quarters ending on the
Fiscal Quarter End Date: $
(iv) Depreciation and amortization expense of the
Borrower and its consolidated Subsidiaries for
the four consecutive Fiscal Quarters ending
on the Fiscal Quarter End Date: $
(v) Preferred stock dividends paid or payable by
the Borrower or any of its consolidated
Subsidiaries for the four consecutive Fiscal
Quarters ending on the Fiscal Quarter End
Date: $
(vi) Consolidated Capital Expenditures for the
four consecutive Fiscal Quarters ending on
the Fiscal Quarter End Date: $
(vii) Proceeds from Permitted Outside Funded Debt generated
for the four consecutive Fiscal Quarters ending on
the Fiscal Quarter End
Date: $
(viii) Cash Flow for the four consecutive Fiscal Quarters
</TABLE>
D-1-2
<PAGE> 185
<TABLE>
<S> <C>
ending on the Fiscal Quarter End Date [Item 4(b)(i)
plus Item 4(b)(ii) plus Item 4(b)(iii) plus Item
4(b)(iv) minus Item 4(b)(v),
minus Item 4(b)(vi) plus Item 4(b)(vii)]: $
(ix) Consolidated Interest Expense for the four
consecutive Fiscal Quarters ending on the
Fiscal Quarter End Date: $
(x) The aggregate of all principal payments with respect
to all indebtedness for borrowed money (including
Capital Leases and Facility B, but excluding Facility
A and Debt permitted under Section 5.3(d)(vii)) due
and payable or paid during the four consecutive
Fiscal Quarters ending on the Fiscal Quarter
End Date: $
(xi) Item 4(b)(ix) plus Item 4(b)(x): $
(xii) Fixed Charge Coverage Ratio as of the Fiscal
Quarter End Date [Item 4(b)(viii) divided by
Item 4(b)(xi)]: ____:1.00
(xiii) The ratio in Item 4(b)(xii) may not be less
than:
Fiscal Quarter End Date
Closing Date through 3/31/97 1.10:1.00
6/30/97 1.25:1.00
9/30/97 through 9/30/98 1.40:1.00
12/31/98 and thereafter 1.50:1.00
(c) Section 5.1(c) - Minimum Profitability
(i) Net income of the Borrower and its
consolidated Subsidiaries for the Fiscal
Quarter ending on the Fiscal Quarter End
Date determined in accordance with GAAP: $
(ii) Litigation Adjustment (net of applicable
taxes) during the Fiscal Quarter ending on the
Fiscal Quarter End Date: $
(iii) Consolidated Net Income [Item 4(c)(i) plus
Item 4(c)(ii)]: $
(iv) The amount set forth in Item 4(c)(iii) may not be
</TABLE>
D-1-3
<PAGE> 186
<TABLE>
<S> <C>
less than: $1
(d) Section 5.1(d) - Minimum Consolidated
Tangible Effective Net Worth
(i) Base amount: $18,750,000
(ii) Cumulative Consolidated Net Income (but without
taking into account any losses), commencing with the
Fiscal Quarter ending on September 30, 1996 and
ending with the Fiscal Quarter ending on the Fiscal
Quarter End Date, determined in accordance with
GAAP: $
(iii) 80% of Item 4(d)(ii): $
(iv) 100% of the Cash Proceeds from any Equity
Issuance after the Closing Date: $
(v) Item 4(d)(i) plus Item 4(d)(iii) plus Item
4(d)(iv): $
(vi) Net book value of all assets of the Borrower
and its consolidated Subsidiaries as of the
Fiscal Quarter End Date determined in
accordance with GAAP: $
(vii) Intangible Assets as of the Fiscal Quarter End
Date: $
(viii) Consolidated Total Debt as of the Fiscal
Quarter End Date [Item 4(a)(iv) above]: $
(ix) Litigation Adjustment (net of applicable
taxes) incurred after the Closing Date: $
(x) Consolidated Tangible Effective Net Worth as
of the Fiscal Quarter End Date [Item 4(d)(vi)
minus Item 4(d)(vii) minus Item 4(d)(viii)
plus Item 4(d)(ix)]: $
(xi) The amount in Item 4(d)(x) may not be less
than the amount in Item 4(d)(v).
</TABLE>
The undersigned has reviewed the terms of the Agreement and has made,
or caused to be made under his supervision, a review in reasonable detail of the
transactions and condition of the Borrower during the Fiscal Quarter covered by
this Compliance Certificate.
IN WITNESS WHEREOF, the Borrower has caused this Compliance Certificate
to be
D-1-4
<PAGE> 187
executed and delivered, and the certifications and warranties contained herein
to be made, as of this day of ___________, 19___.
O.S.I. CORPORATION
By ___________________________________
Its __________________________________
D-1-5
<PAGE> 1
EXHIBIT 23.02
The Board of Directors
Ocular Sciences, Inc.:
We consent to the use of our reports, dated February 14, 1997 except as to
Notes 1 and 16 of the Notes to the Consolidated Financial Statements which are
as of July 14, 1997, included herein and to the reference to our firm under the
headings "Selected Consolidated Financial Data" and "Experts" in the prospectus.
KPMG Peat Marwick LLP
July 31, 1997
San Francisco, California
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 AND JUNE 30, 1997 CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED
STATEMENTS OF NET INCOME, STOCKHOLDERS' EQUITY AND CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 1996 AND SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 JUN-30-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 5,541 4,473
<SECURITIES> 0 0
<RECEIVABLES> 17,473 15,515
<ALLOWANCES> 1,451 1,185
<INVENTORY> 12,956 13,615
<CURRENT-ASSETS> 36,265 35,873
<PP&E> 35,993 41,971
<DEPRECIATION> 9,531 12,357
<TOTAL-ASSETS> 63,503 74,409
<CURRENT-LIABILITIES> 21,147 31,916
<BONDS> 0 0
0 0
1 1
<COMMON> 8 16
<OTHER-SE> 23,880 30,470
<TOTAL-LIABILITY-AND-EQUITY> 63,503 74,409
<SALES> 90,509 52,969
<TOTAL-REVENUES> 90,509 52,969
<CGS> 36,553 20,420
<TOTAL-COSTS> 36,521 22,047
<OTHER-EXPENSES> 186 (104)
<LOSS-PROVISION> 193 496
<INTEREST-EXPENSE> 3,216 949
<INCOME-PRETAX> 14,165 9,657
<INCOME-TAX> 3,989 2,897
<INCOME-CONTINUING> 10,176 6,760
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,176 6,760
<EPS-PRIMARY> 1.05 .35
<EPS-DILUTED> 0 0
</TABLE>
