-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pw81NZQm/Ek1vbHORee/WdTPrgiDLRO6oExzrfCNpV6MDpBJG5F5lmceawZY7by7 At16oSYVm010WwDrv8DX/g== 0000892569-97-002786.txt : 19971009 0000892569-97-002786.hdr.sgml : 19971009 ACCESSION NUMBER: 0000892569-97-002786 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 37 FILED AS OF DATE: 19971008 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICAL SCIENCE SYSTEMS INC CENTRAL INDEX KEY: 0001037649 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 943123681 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-37441 FILM NUMBER: 97692581 BUSINESS ADDRESS: STREET 1: 4400 MACARTHUR BLVD STREET 2: STE 980 CITY: NEWPORT BEACH STATE: CA ZIP: 92660-2031 BUSINESS PHONE: 7144409730 MAIL ADDRESS: STREET 1: 4400 MACARTHUR BLVD STREET 2: STE 980 CITY: NEWPORT BEACH STATE: CA ZIP: 92660-2031 SB-2 1 FORM SB-2 AS FILED ON OCTOBER 8, 1997 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1997 REGISTRATION NO. 33- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 MEDICAL SCIENCE SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 8099 94-3123681 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER) INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
4400 MACARTHUR BOULEVARD, SUITE 980 NEWPORT BEACH, CALIFORNIA 92660 (714) 440-9730 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES) PAUL J. WHITE PRESIDENT AND CHIEF EXECUTIVE OFFICER MEDICAL SCIENCE SYSTEMS, INC. 4400 MACARTHUR BOULEVARD, SUITE 980 NEWPORT BEACH, CALIFORNIA 92660 (714) 440-9730 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE OF PROCESS) THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATION TO: CHRISTOPHER A. WILSON, ESQ. DANIEL J. TANGEMAN, ESQ. JEFFERS, WILSON, SHAFF & FALK, LLP 18881 VON KARMAN AVENUE, SUITE 1400 IRVINE, CALIFORNIA 92612 (714) 660-7700 WILLIAM M. PRIFTI, ESQ. LYNNFIELD WOODS OFFICE PARK 220 BROADWAY SUITE 204 LYNNFIELD, MASSACHUSETTS 01940 (781) 593-4525 APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: NOVEMBER 15, 1997 If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please 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. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE ============================================================================================================ PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED SHARE PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------ Common Stock, no par value..................... 1,500,000 $ 9.00 $13,500,000 $4,091 Underwriter's Warrants(2)... 150,000 $ .001 $ 150 $ 0(3) Common Stock, no par value(4).................. 150,000 $12.15 $ 1,822,500 $ 552 Common Stock, no par value(5) 225,000 $ 9.00 $ 2,025,000 $ 614 Total.............. $5,257 ============================================================================================================
(1) Estimated solely for purposes of calculating the registration fee, pursuant to rule 457(a) and (g) under the Securities Act. (2) To be sold to the Representatives of the Underwriter. (3) None pursuant to Rule 457(g). (4) Issuable upon exercise of the Underwriter's Warrants. (5) Issuable upon exercise of the Underwriter's option to purchase to cover over-allotments, if any. 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. ================================================================================ 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. SUBJECT TO COMPLETION, DATED OCTOBER 8, 1997 Medical Science Systems, Inc. 4400 MacArthur Boulevard Suite 980 Newport Beach, California 92660 (714) 440-9730 1,500,000 Shares Common Stock $8 to $9 per Share NASDAQ/AMEX: The Securities and Exchange Commission (SEC) and state securities regulators have not approved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense and should be reported immediately to the SEC by calling 1-800-SEC-0330. Initial Public Offering October , 1997 [MEDICAL SCIENCE SYSTEMS LOGO] Underwriters: - - Nutmeg Securities, Inc. - - 3 [Pictorial Depiction of Biological and Behavioral Risk Factors Contributing to Disease Progression] This Prospectus includes the names and marks of companies other than Medical Science Systems, Inc. Upon the effective date of the Registration Statement, of which this Prospectus is a part, our company will become a reporting company. Thereafter, we intend to distribute to our shareholders annual reports containing audited financial statements. We will also make available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. 4 MEDICAL SCIENCE SYSTEMS, INC. INTRODUCTION Please read this prospectus carefully. It describes our company, finances and products. Federal and state securities laws require that we include in this prospectus all the important information that investors will need to make an investment decision. You should rely only on the information contained in this prospectus to make your investment decision. We have not authorized anyone to provide you with information that is different from what is contained in this prospectus. PROSPECTUS TABLE OF CONTENTS Summary..................................... 1 Risk Factors................................ 7 The Company................................. 15 Use of Proceeds............................. 16 Dividend Policy............................. 17 Capitalization.............................. 18 Dilution.................................... 19 Selected Financial Data..................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 21 Business.................................... 23 Management.................................. 43 Certain Relationships and Related Party Transactions.............................. 48 Principal Shareholders...................... 50 Description of Securities................... 51 Shares Eligible for Future Sale............. 52 Underwriting................................ 54 Legal Matters............................... 55 Experts..................................... 55 Additional Information...................... 55 Index to Financial Statements............... F-1
5 Medical Science Systems, Inc. Summary About Our Company Our company has developed genetic susceptibility testing services for common diseases which are treatable and preventable. We have focused on four diseases initially: periodontitis (gum disease), osteoporosis (bone disease), coronary artery disease (heart disease) and diabetic retinopathy (blindness associated with diabetes). We have identified several genetic markers which, if present in a patient, increase the probability that such patient will be affected by the disease or that the disease will be more severe. Moreover, we are the only company that we know of that has brought to market a test (our periodontal susceptibility test) that identifies a genetic marker which indicates a greater susceptibility to a disease which is treatable and preventable. Our company's ability to identify genetic markers related to common diseases is enhanced by a strategic alliance with Sheffield University. Sheffield University provides us with access to critical biotechnology research in molecular genetics. This arrangement helps provide for the development of additional genetic testing products in the future and reduces our capital costs relative to biotechnology firms that support large in-house research programs. See "Competitive Advantages" at page 39. We have presently filed a total of eleven (11) patent applications including applications covering each of our four genetic susceptibility tests. In June 1997, a Notice of Allowance was issued by the United States Patent and Trademark Office with respect to both our periodontal and osteoporosis susceptibility tests. See "Intellectual Property" at page 37. Mission Our mission is to improve patient care and treatment outcomes by incorporating genetic information about a patient's susceptibility to disease into overall risk assessment and treatment planning. We believe that doctors and dentists will use our genetic susceptibility tests to assess the risk involved for any particular patient and to adopt appropriate treatments or therapy, including preventive measures. Products and Services Periodontal Susceptibility Test - Description. Our periodontal susceptibility test is a genetic test capable of detecting individuals with an increased susceptibility to developing severe gum disease (periodontitis). Periodontitis is a bacterially-induced chronic inflammation that destroys the collagen fibers and bone that support the teeth -- ultimately resulting in tooth loss. - Market. According to industry data, in the United States alone, an estimated one-third of all adults, or 67 million people, suffer from some form of periodontitis. Approximately 13 million people seek professional treatment annually for periodontal disease, resulting in over 17 million periodontal procedures and annual expenditures of approximately $6 billion. 1 6 Summary (con't) - Launch. On October 3, 1997, we commercially launched our periodontal susceptibility test at the American Academy of Periodontology's Annual Meeting in San Diego, California. Osteoporosis Susceptibility Test - Description. Our osteoporosis susceptibility test is a genetic test capable of detecting individuals with an increased susceptibility to developing osteoporosis. Osteoporosis is a disease which causes a decrease in the amount of normal bone, making the affected individual more susceptible to fractures. - Market. According to industry data, in the United States alone, an estimated 28 million people, suffer from osteoporosis. Post-menopausal osteoporosis, stemming from the loss of estrogen, affects more than one-half of all women over 65 years of age and has been detected in as many as 90% of the women over age 75. Osteoporosis is responsible for a majority of the 1.5 million bone fractures each year and leads to disabilities costing more than $10 billion in medical, social and nursing home costs. Coronary Artery Disease Susceptibility Test - Description. Our coronary artery disease susceptibility test is a genetic test capable of detecting individuals with an increased susceptibility to developing coronary artery disease (or "CAD"). CAD is a condition where the arteries that supply blood to the heart have become partially obstructed by plaque accumulation. CAD results in heart attacks due to damage to the heart muscle when blood supply (and therefore oxygen) is cut off and heart muscle cells die. An individual testing positive under our CAD susceptibility test has between a 2.4 to 5.4 times greater change of developing coronary artery disease than the general population. - Market. More than one in four Americans, or about 60 million, now have some form of cardiovascular disease. Cardiovascular diseases kill nearly one million Americans every year. Every year since 1919, cardiovascular disease has been the number one cause of death in the U.S. Approximately 13.5 million Americans suffer from coronary artery disease, and approximately half a million Americans die each year from this disease. Diabetic Retinopathy Susceptibility Test - Description. Our diabetic retinopathy susceptibility test is a genetic test capable of detecting diabetic individuals who have an increased susceptibility to developing sight-threatening retinopathy. Diabetic retinopathy refers to diabetic complications affecting the retina that predictably lead to severe vision loss or even blindness. - Market. In the United States there are approximately 16 million people suffering from diabetes. It is estimated that only one-half of this number have been diagnosed. Diabetic retinopathy is one of the most common complications of diabetes. It is the fourth leading cause of legal blindness in the U.S. and the 2 7 Summary (con't) leading cause of blindness in people ages 20 to 74. Each year 15,000 to 39,000 people lose their sight from diabetic retinopathy. Cost of Products and Services We have recently commercially launched our periodontal susceptibility test and are marketing the test at $210 per test. Although we cannot be certain, we anticipate that the remainder of our genetic susceptibility tests will be marketed at a price between $200 and $250. Final pricing of these other tests will be determined at the time of commercial launch. We anticipate our direct cost (exclusive of sales and marketing) on a per test basis to be between $45-$80 depending primarily upon volume considerations. Status of Clinical Trials And Commercial Launch Dates The current trial status and the actual/anticipated commercial launch date of each of our four genetic susceptibility tests is depicted below. A more detailed discussion of this chart is found under "Pre-Marketing Trials/Status of Susceptibility Tests" at pages 33 and 34.
INITIAL PROOF ACTUAL/ANTICIPATED (PRIOR TO CONFIRMATORY CLINICAL COMMERCIAL PATENT FILING) TRIAL UTILITY LAUNCH -------------- ------------ ---------------- ------------------ Periodontal Disease......... Completed Completed Completed October 1997 Osteoporosis................ Completed Completed Underway Late 1998 Coronary Artery Disease..... Completed Completed Underway 1999 Diabetic Retinopathy........ Completed Underway Not Yet Started 1999
Risks of Investing An investment in our company is subject to many risks. We summarize some of the most serious risks below. A more detailed list of the risk factors is found under "Risk Factors" at page 7. You should read and understand all risk factors before making your decision to invest. - Uncertainty of Market Acceptance for Genetic Susceptibility Tests. Consumers may not accept our current genetic susceptibility tests or others in development or may accept the tests much later than we anticipate. - New Business Venture. Our genetic susceptibility testing business is relatively new and may be affected significantly by unknown economic and market conditions over which we have no control. - History of Operating Losses; Accumulated Deficit; Uncertainty of Future Profitability. Our company incurred a net loss of $788,546 in 1996 and anticipates a net loss of approximately $3.6 million in 1997. As of June 30, 1997, our accumulated deficit was approximately $2.71 million. It is uncertain when we will become profitable. - Intense Competition. Our company faces intense competition related to the discovery and use of disease predisposing genes and genetic markers. Even after our discovery of the genetic markers, our competition may find and patent the same markers before we do or may find other markers for the same diseases. Additionally, our competitors may have greater resources enabling them to more effectively market their discoveries. 3 8 Summary (con't) - Difficulty of Developing Genetic Susceptibility Tests. It is uncertain whether we will be successful in bringing our complete portfolio of tests to market. Even after identifying a genetic marker, many additional trials must be run in order to verify and confirm the test's accuracy and utility. Any delay in clinical trials or negative clinical results could slow or prevent our ability to successfully market our tests. - Uncertainty of Third Party Reimbursement. It is uncertain whether third-party payors will elect to reimburse patients for the cost of the genetic susceptibility tests. If third-party payors elect not to reimburse patients, it is uncertain whether individuals will elect to pay directly for our tests. - Reliance on Collaborative Partners. We have a collaborative research relationship, evidenced by an exclusive worldwide agreement, with the Section of Molecular Medicine at Sheffield University. If this agreement were terminated, we would need to enter into additional collaborative arrangements in order to continue to build a future pipeline of new products. - Uncertain Ability to Protect Proprietary Technology. The patent position of biotechnology companies generally is highly uncertain and involves complex legal and factual questions. Although initial approvals have been granted by the Patent and Trademark Office with respect to some of our tests, certain of our patent applications may be rejected. Even when patents are issued, the claims of any issued patents may not provide meaningful protection for our technology or products. In addition, there can be no assurance that any patents issued to us will not be challenged, and subsequently narrowed, invalidated or circumvented. - Technological Changes Resulting in Product Obsolescence. It is possible that our competitors will develop technologies more effective than those contained or used in our products. Our competitors could develop new products which make our products less competitive or obsolete. - Limited Marketing or Sales Experience. We have limited experience in developing and commercially marketing our genetic susceptibility testing services. 4 9 Summary (con't) Past Financial History The following graph depicts our revenues and net income or loss for each of the last three fiscal years. Our financial results are described in more detail under "Management's Discussion and Analysis of Financial Condition and Results of Operations" at page 21. Audited financial statements are included beginning at page F-1. [NET INCOME AND REVENUES GRAPH] 5 10 Medical Science Systems, Inc. Summary (con't) KEY FACTS SHARES OFFERED TO THE PUBLIC: 1,500,000 Shares OVER-ALLOTMENT OPTION: Up to 225,000 Shares (not included in 1,500,000) TOTAL SHARES OUTSTANDING PRIOR TO OFFERING: 3,738,007 Shares TOTAL SHARES OUTSTANDING AFTER OFFERING: 5,238,007 Shares (assuming no exercise of the over-allotment option) TOTAL SHARES OUTSTANDING AFTER OFFERING AND EXERCISE OF ALL OPTIONS/WARRANTS: 6,545,131 Shares PRICE PER SHARE TO PUBLIC: $9.00 per share TOTAL PROCEEDS RAISED BY OFFERING: $13,500,000 USE OF PROCEEDS: Marketing, sales, customer service and commercialization expenses; research and development activities; capital investment; repayment of bridge loans; and working capital and general corporate purposes. UNDERWRITER'S FEES: $1,080,000/8% of the total proceeds plus a 3% non-accountable expense allowance EXPENSES OF THE OFFERING: $355,000 NET PROCEEDS: $11,660,000 UNDERWRITER'S WARRANTS: Underwriters shall be issued five (5) year warrants to purchase 150,000 Shares at an exercise price of $12.15. AVERAGE PRICE PER SHARE PAID BY CURRENT SHAREHOLDERS(1): $0.59 NET TANGIBLE BOOK VALUE(1): $(694,796) NET TANGIBLE BOOK VALUE PER SHARE BEFORE DILUTION(1): $(0.19) NET TANGIBLE BOOK VALUE PER SHARE AFTER DILUTION: $2.09 MARKET: Nasdaq/AMEX ( ) DIVIDEND POLICY: No Dividends Expected UNDERWRITING: Firm Commitment (1) After giving effect to 108,060 shares of Common Stock sold after June 30, 1997. 6 11 RISK FACTORS The shares of Common Stock offered by this Prospectus are speculative and involve a high degree of risk of loss. Prior to making an investment, you should carefully read this entire Prospectus and consider the following risk and speculative factors: UNCERTAINTY OF MARKET ACCEPTANCE FOR GENETIC SUSCEPTIBILITY TESTS The commercial success of our genetic susceptibility tests and those that we may develop will depend upon their acceptance as medically useful and cost-effective by patients, physicians, dentists, other members of the medical and dental community and third-party payors. Broad market acceptance can be achieved only with substantial education about the benefits and limitations of such tests. We expect to expend substantial financial resources to effectively promote the benefits of our genetic susceptibility tests and those that we may develop. We intend to expend significant resources on educating medical and dental caregivers, policymakers, patients, third-party payors and others. It is uncertain whether current genetic susceptibility tests or others that we may develop will gain market acceptance on a timely basis. If patients, dentists and physicians do not accept our tests, or take a longer time to accept than we anticipate, then our revenues and profit margins may be reduced and may result in losses. See "Uncertainty of Third Party Reimbursement" at page 8. NEW BUSINESS VENTURE The securities being offered by us are subject to the risks inherent in any new business venture. Although we have operated as a contract research firm since 1986, we have limited experience and a short history of operations with respect to marketing and selling susceptibility tests or therapeutics. We have had only minimal revenues related to the sale of our genetic susceptibility testing services. With the exception of our periodontal susceptibility test, the genetic susceptibility tests anticipated to be sold by us have not yet been finally designed, developed, tested or marketed. Therefore, there can be no assurance that we will be able to complete these genetic susceptibility tests, that those tests will be accepted in the marketplace, or that the tests can be sold at a profit. Our business may also be affected significantly by economic and market conditions over which we have no control. Consequently, an investment in our Common Stock is highly speculative. We do not guarantee any return on an investment in our Common Stock. HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE PROFITABILITY We incurred a net operating loss of $788,546 in fiscal year 1996. We anticipate a net loss of approximately $3.6 million in 1997. As of June 30, 1997, our accumulated deficit was $2,705,153. Our losses have resulted principally from expenses incurred in research and development and from selling, general and administrative expenses. These expenses have exceeded our revenues. We have yet to generate any significant revenues from the sale of our genetic susceptibility testing services and there can be no assurance that we will be able to generate significant revenues in the future. We expect our operating losses to continue for the near future as our research and development, sales and marketing activities and operations continue. Our ability to achieve profitability depends on our ability to develop our sales and marketing capacity and our ability to successfully market and sell our products and services. It is uncertain when we will become profitable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" at page 21. INTENSE COMPETITION Research in the field of disease predisposing genes and genetic markers is intense and highly competitive. Genetic research is characterized by rapid technological change. Our competitors in the United States and abroad are numerous and include, among others, major pharmaceutical and diagnostic companies, specialized biotechnology firms, universities and other research institutions (including those receiving funding from the Human Genome Project). Many of our potential competitors have considerably greater financial, technical, marketing and other resources than us. These greater resources may allow our competitors to discover important genes or genetic markers before us. If we, in conjunction with the Department of 7 12 Molecular and Genetic Medicine at the University of Sheffield, U.K., do not discover disease predisposing genes or genetic markers associated with increased disease severity, characterize their function, develop susceptibility tests and related information services based on such discoveries, obtain regulatory and other approvals, if needed, and launch such services or products before competitors, then our revenues and earnings will be reduced or eliminated. In addition, any of the susceptibility tests that we may develop, including our periodontal susceptibility test, could be made obsolete by less expensive or more effective tests or methods which may be developed in the future. We expect competition to intensify in our industry as technical advances are made and become more widely known. See "Uncertain Ability to Protect Proprietary Technology" at page 9, "Competition" at page 39 and "Intellectual Property" at page 37. DIFFICULTY OF DEVELOPING GENETIC SUSCEPTIBILITY TESTS It is uncertain whether we will be successful in developing and bringing to market our current portfolio or future tests based on the genetic discoveries made by us and our collaborators. Even when we discover a genetic marker (i.e., a genetic variation or polymorphism associated with increased disease incidence or severity), additional clinical trials need to be conducted to confirm the initial scientific discovery and to support the scientific discovery's clinical utility in the marketplace. The results of a clinical trial could delay, reduce the test's acceptance or cause our company to cancel a program. Such delays, reduced acceptance or cancellations would reduce revenues and may result in losses. UNCERTAINTY OF THIRD PARTY REIMBURSEMENT Our ability to successfully commercialize existing genetic susceptibility tests and others that we may develop depends in part on obtaining adequate reimbursement for such testing services and related treatments from government and private health care insurers (including health maintenance organizations) and other third-party payors. Physicians' and dentists' decisions to recommend genetic susceptibility tests, as well as patients' elections to pursue testing, are likely to be heavily influenced by the scope and extent of reimbursement for such tests by third-party payors. Government and private third-party payors are increasingly attempting to contain health care costs by limiting both the extent of coverage and the reimbursement rate for new testing and treatment products and services. In particular, services which are determined to be investigational in nature or which are not considered "reasonable and necessary" for diagnosis or treatment may be denied reimbursement coverage. To date, few third-party payors have agreed to reimburse patients for genetic susceptibility tests. As a result, we initially expect to bill patients directly for the genetic susceptibility tests. It remains uncertain whether third-party payors will elect to provide full reimbursement coverage for the genetic susceptibility tests in the near future. If adequate reimbursement coverage is not available from third-party payors, it is uncertain whether individuals will elect to directly pay for the test. If both third-party payors and individuals are unwilling to pay for the test, then the number of tests performed will be significantly decreased. Such a scenario would result in reduced revenues and possible losses. RELIANCE ON COLLABORATIVE PARTNERS In 1994 we entered into a strategic alliance with the Section of Molecular Medicine at Sheffield University, a world leader in the genetic aspects of common diseases with an inflammatory component. In 1996 we formalized our relationship by entering into an exclusive worldwide agreement (the "Master Agreement"). Under the terms of the Master Agreement, we will undertake the development and commercialization of any discoveries resulting from the research of Section of Molecular Medicine at Sheffield University. In exchange, Sheffield University will receive a share of the resultant net profits, with the percentage of net profits for us and Sheffield University to be agreed upon separately under project agreements related to each test (each a "Project Agreement"). The Master Agreement may be terminated with or without cause by either party upon six-months notice. Although termination does not affect any existing Project Agreements, any termination would limit or eliminate our access to future Sheffield University genetic discoveries that fall outside of the scope of our existing Project Agreements. If the Master 8 13 Agreement were terminated, we would need to enter into additional collaborative arrangements in order to continue to build a future pipeline of products. In the future we may, in order to facilitate the sale of our testing services and/or products, enter into collaborative selling arrangements with one or more other persons. It is uncertain whether we will be able to negotiate acceptable collaborative arrangements in the future or that such collaborative arrangements will be successful. If we are unable to identify collaborative partners to sell certain of our services and/or products, we may be forced to develop an internal sales force to market and sell our services and/or products in markets where we are not intending on developing a direct selling presence. Such a process would take more time and potentially cost more. As a result, our revenues and earnings would be reduced. If we do enter into collaborative selling arrangements, our success will depend upon the efforts of others and may be beyond our control. Failure of any collaborative selling arrangement could result in reduced revenues and possible losses. UNCERTAIN ABILITY TO PROTECT PROPRIETARY TECHNOLOGY Our success will partly depend on our ability to obtain patent protection, both in the United States and in other countries, for our products and services. In addition, our success will also depend upon our ability to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. We have presently filed a total of eleven (11) patent applications including applications covering each of our four genetic susceptibility tests. In June 1997, a Notice of Allowance was issued by the United States Patent and Trademark Office with respect to the patent applications for both our periodontal and osteoporosis susceptibility tests. However, there can be no assurance that our patent applications will ever be issued as patents or that the claims of any issued patents will afford meaningful protection for our technology or products. In addition, there can be no assurance that any patents issued to us will not be challenged, and subsequently narrowed, invalidated or circumvented. Our testing services and/or products may also conflict with patents which have been or may be granted to others. As the biotechnology industry expands and more patents are filed and issued, the risk increases that our products may give rise to a declaration of interference by the Patent and Trademark Office, or to claims of patent infringement by other companies, institutions or individuals. Such entities or persons could bring legal proceedings against us seeking damages or seeking to enjoin us from testing, manufacturing or marketing our products. Patent litigation is costly, and even if we prevail, the cost of such litigation could have an adverse effect on us. If the other parties in any such actions are successful, in addition to any liability for damages, we could be required to cease the infringing activity or obtain a license. It is uncertain whether any license required would be available to us on acceptable terms, if at all. Failure by us to obtain a license to any technology that we may require to commercialize our products could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, there is considerable pressure on academic institutions and other entities to publish discoveries in the genetic field. Such a publication by an academic institution or other entity, prior to our filing of a patent application on such discovery, may compromise our ability to obtain U.S. and foreign patent protection for the discovery. We also rely upon unpatented proprietary technologies. We rely on confidentiality agreements with our employees, consultants and collaborative partners to protect such proprietary technology. There can be no assurance that we can adequately protect our rights in such unpatented proprietary technologies, that others will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to our proprietary technologies or disclose such technologies. See "Intellectual Property" at page 37. The United States Patent and Trademark Office issued new Utility Guidelines in July 1995 that address the requirements for demonstrating utility, particularly in inventions relating to human therapeutics. While the guidelines do not require clinical efficacy data for issuance of patents for human therapeutics, there can be no assurance that the Patent and Trademark Office's interpretations of such guidelines, and any chances to such interpretations will not delay or adversely affect our or our collaborators' ability to obtain patent protection. The biotechnology patent situation outside the United States is even more uncertain and is currently undergoing review and revision in many countries. 9 14 TECHNOLOGICAL CHANGES RESULTING IN PRODUCT OBSOLESCENCE Market acceptance and sales of our testing services could also be adversely affected by technological change. It is uncertain whether our competitors will succeed in developing genetic susceptibility tests that circumvent or are more effective than our technologies or services. Further, it is uncertain whether such developments would render our or our collaborators' technology or services less competitive or obsolete. Further, our testing services could be rendered obsolete as a result of future innovations in the treatment of gum disease, osteoporosis, coronary artery disease or diabetes retinopathy, which could have a significant negative impact on our company's ability to market our services effectively. See "Uncertain Ability to Protect Proprietary Technology" at page 9, "Competition" at page 39 and "Intellectual Property" at page 37. LIMITED MARKETING OR SALES EXPERIENCE Our business strategy is to provide genetic susceptibility testing services aimed at common diseases that are treatable and preventable. The commercial introduction of the periodontal susceptibility test at the beginning of October 1997 represents our first such effort. In preparation for the launch of the periodontal susceptibility test, we have devoted substantial human and financial resources to the establishment and staffing of a customer service support facility and the building of a sales and marketing infrastructure. However, we have limited experience in developing and commercially marketing susceptibility testing services. It is uncertain whether our customer service support facilities and sales and marketing program will achieve efficient, effective or successful operations. Failure to successfully market such tests could reduce our revenues and may result in losses. See "Competition" at page 39 and "Government Regulation" at pages 10 and 41. GOVERNMENT REGULATION The sampling of blood, saliva or cheek scrapings from patients and subsequent analysis in a clinical laboratory does not, at the present time, require FDA or regulatory authority approval outside the U.S. for either the sampling procedure or the analysis itself. The samples are taken in the healthcare provider's office, using standard materials previously approved as medical devices, such as sterile lancets and swabs. The testing procedure itself is performed in one or more registered, certified clinical laboratories under the auspices of the Clinical Laboratory Improvement Amendments of 1988 ("CLIA"), administered by the Health Care Financing Administration. In general, the federal regulations governing approval of the laboratory facilities and applicable state and local regulations governing the operation of clinical laboratories apply to the laboratory but not to our company. However, changes in the scope of the services offered by our company (e.g., establishing an in-house clinical laboratory) would subject our company to applicable regulations. Additionally, changes in existing regulations could require advance regulatory approval of genetic susceptibility tests which may result in a substantial curtailment or even prohibition of our activities without regulatory approval. If our tests ever require regulatory approval, the costs of introduction will increase and marketing and sales may be significantly delayed. Further, eighteen months ago the FDA proposed to regulate as medical devices the "active ingredients" (known as "analyte specific reagents" or "ASRs") of certain tests developed by, or in conjunction with, clinical laboratories. Currently, a final rule has not been issued. The FDA has specifically stated that it is not proposing a comprehensive regulatory scheme over the final tests, but rather the active ingredients (ASRs) provided to the laboratories that perform them. According to the FDA, any contemplated additional controls (e.g. submission for Pre-Market Approval applications) over the tests themselves would likely involve those tests which identify genes associated with cancer or diseases associated with dementia. If the FDA requires Pre-Market Approval of our genetic susceptibility test, our company may be required to conduct pre-clinical studies, obtain an investigational device exemption to conduct clinical tests, file a Pre-Market Approval application, and obtain FDA approval. There can be no assurance such approval would be received on a timely basis, if at all. The failure to receive such approval could require us to develop alternative testing methods or utilize approved ASRs, which could result in the delay or stop the use of such tests. Such a delay or termination could result in reduced revenues or losses. 10 15 Although our primary business is to develop genetic susceptibility testing services, we may also develop or assist others to develop, drugs or other treatments for the diseases related to our tests. The FDA and comparable agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the manufacturing and marketing of drug products such as those potentially to be developed by our company or any partner. The process of obtaining FDA and other required regulatory approvals is lengthy and expensive. The time required for FDA approvals is uncertain and typically takes a number of years, depending on the type, complexity and novelty of the product. We may encounter significant delays or excessive costs in our efforts to secure necessary approvals or licenses. Because certain of the products likely to result from our research and development programs involve the application of new technologies and will be based on new approaches, such products may be subject to substantial additional review by various governmental regulatory authorities and as a result, regulatory approvals may be obtained more slowly than for products using more conventional technologies. There can be no assurance that FDA approvals will be obtained in a timely manner, if at all. Any delay in obtaining, or the failure to obtain, such approvals would adversely affect our ability to generate product or product sales. Even if FDA approvals are obtained, the marketing and manufacturing of drug products are subject to continuing FDA and other regulatory review, and later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on the product or manufacturer, including withdrawal of the product from the market. Additional governmental regulations may be promulgated which could delay regulatory approval of our potential products. We cannot predict the impact of adverse governmental regulation which might arise from future legislative or administrative action. We intend to generate product revenues from sales outside of the United States. Distribution of our testing services or products outside the United States may be subject to extensive government regulation. These regulations, including the requirements for approvals or clearance to market, the time required for regulatory review and the sanctions imposed for violations, vary by country. It is uncertain whether we will obtain regulatory approvals in such countries or that we will be required to incur significant costs in obtaining or maintaining our foreign regulatory approvals. Failure to obtain necessary regulatory approvals or any other failure to comply with regulatory requirements could result in reduced revenues and earnings. See "Products and Services" at page 25 and "Government Regulation" at page 41. PRODUCT LIABILITY EXPOSURE Our business exposes us to potential liability risks inherent in the testing and marketing of medical and dental related services or products. It is uncertain whether liability claims will be asserted against us. We have product and professional liability insurance which we believe provides coverage for the testing and commercial introduction of our genetic susceptibility tests. It is uncertain whether we will be able to maintain such insurance on acceptable terms. Any insurance obtained may not provide adequate coverage against potential liabilities. A liability claim, even one without merit, could result in significant legal defense costs thereby increasing our expenses, lowering our earnings and even resulting in losses. DEPENDENCE ON CLINICAL LABORATORY The clinical laboratory operated by Baylor University currently performs all of our genetics tests. Our company is not licensed as a clinical laboratory and cannot perform genetic tests. Although we believe other clinical laboratories are readily available if we cannot use Baylor University, the loss of Baylor University may result in delays in the performance of genetic tests or may increase the costs of performing genetic tests. ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENETIC SUSCEPTIBILITY TESTING The prospect of broadly available genetic susceptibility testing has raised issues which are currently being widely discussed by the medical and scientific communities, as well as other interested groups and organizations, regarding the appropriate utilization and the confidentiality of information provided by such testing. The recent movement towards discovery and commercialization of susceptibility tests for assessing a person's likelihood of developing a chronic disease has also focused public and legislative attention on the need to protect the privacy of genetic assessment medical information. With the progression towards more 11 16 comprehensive record keeping by health insurers and managed care firms, this need has led to a number of legal initiatives. The recently enacted federal health insurance reform law (Kassebaum-Kennedy of 1996) recognizes the comparability of information obtained by genetic means to other types of personal medical information. The law prohibits insurance companies from refusing health insurance coverage to individuals on the basis of their medical history, including "genetic information." This legislation also prohibits employees from discrimination in hiring practices on the same basis. This legislation indicates a trend to protect the privacy of patients while allowing them to be screened for conditions which, can be prevented, reduced in severity or cured. In the most extreme scenario, governmental authorities could, for social or other purposes, limit the use of genetic testing or prohibit testing for genetic susceptibility to certain conditions. For these reasons, we could experience a delay or reduction in test acceptance. Such a delay or reduction could reduce our revenues or result in losses. We are taking a proactive stance in the ethical arena. We have hired Dr. Philip Reilly, who is both an M.D. (certified specialist in clinical genetics) and an attorney, to advise us in the area of genetic testing and its ethical, legal and clinical utility ramifications. Additionally, we are currently advising doctors who administer our genetic susceptibility tests to take special efforts to maintain the confidentiality of the test results. Our intent is to avoid information about test results being disclosed to insurers until issues regarding insurability have been fully analyzed and acted upon by the appropriate legislative bodies. DEPENDENCE ON KEY PERSONNEL AND CONSULTANTS Because of the specialized scientific nature of our business, we are highly dependent upon our ability to attract and retain qualified management, scientific and technical personnel. Our company will also be dependent upon the ability to hire qualified marketing and sales personnel. Competition for scientific, marketing and sales personnel is intense. Loss of the services of Mr. White, Dr. Kornman or Dr. Newman could adversely affect our research and development programs and susceptibility testing service business and could impede the achievement of our business objectives. We do not maintain key man life insurance on any of our personnel. CONTROL BY EXISTING SHAREHOLDERS Following completion of this offering, our directors, executive officers and certain of their affiliates, will beneficially own approximately 66.86% of our outstanding Common Stock. Accordingly, these shareholders, individually and as a group, may be able to influence the outcome of shareholder votes, including votes concerning the election of directors, the adoption or amendment of provisions in our Amended and Restated Articles of Incorporation or Amended and Restated By-Laws and the approval of certain mergers and other significant corporate transactions, including a sale of substantially all of our assets. Such control by existing shareholders could have the effect of delaying, deferring or preventing a change in control. See "Principal Shareholders" at page 50. DILUTION; ABSENCE OF DIVIDENDS Purchasers in the offering will experience immediate and substantial dilution in the net tangible book value of the Common Stock from the public offering price. Additional dilution is likely to occur upon the exercise of any options or warrants that we have granted. See "Dilution" at page 19. We have never paid dividends and do not intend to pay any dividends in the foreseeable future. See "Description of Securities" at page 51. SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market following this offering could lower the market price of the Common Stock. Of the 5,238,007 shares of Common Stock to be outstanding after this offering (assuming no exercise of outstanding options, warrants or the overallotment option), 1,500,000 shares will be freely tradeable without restriction. Upon expiration of the lock-up agreements entered into by the officers and directors of our company, an additional 3,258,053 shares will become eligible for sale one year 12 17 from the closing of this offering, subject to the provisions of Rule 144. See "Shares Eligible for Future Sale" at page 52. Of the remaining 479,954 shares of Common Stock, 5,000 shares will be eligible for resale under Rule 144 following this offering. The remaining 474,954 shares will have been held for less than one year and will become eligible for sale at various dates as the one-year holding period under Rule 144 is satisfied. In addition, we intend to file a registration statement on Form S-8 with respect to the shares of Common Stock issuable upon exercise of options under the 1996 Equity Incentive Plan (the "Plan"). The Plan authorizes the issuance of options relating to up to 1,000,000 shares of Common Stock. Currently, there are 800,579 options that have been issued under the Plan which generally vest over three years. See "1996 Equity Incentive Plan" at page 47. Upon filing of such registration statement, the holders of such options may, subject to vesting requirements, exercise and sell their shares immediately without restriction, except affiliates who are subject to certain volume limitations and manner of sale requirements of Rule 144. See "Shares Eligible for Future Sale" at page 52. Holders of 356,545 warrants to purchase shares are entitled to certain registration rights with respect to such shares. Upon registration, such shares may be sold in the market without limitation. See "Registration Rights" at page 52. Sales of such shares may decrease the market price for our Common Stock. See "Underwriting" at page 54. IMPACT UPON FUTURE NET INCOME OR LOSS OF THE COMPANY BY CURRENT ACCOUNTING FOR DEBT ISSUANCE COSTS From August 1, 1997 through October 6, 1997, the Company issued Bridge Loans to investors in the aggregate amount of $1,780,000. In connection with the issuance of these Bridge Loans, the Company also issued 356,545 warrants to purchase the Company's Common Stock for $5.50 per share. The Company has determined that additional financing expense of $356,545 needs to be recognized in connection with the issuance of these warrants. The $356,545 of additional financing cost is currently being amortized over fourteen months, the terms of the Bridge Loans. However, upon completion of the initial public offering, the $1,780,000 Bridge Loans will be repaid and the unamortized amount of the additional financing costs will be charged to earnings as an extraordinary loss on debt extinguishment and will significantly impact the net income or loss of the Company in the quarter in which the initial public offering is completed. ARBITRARY OFFERING PRICE OF THE COMMON STOCK; POSSIBLE VOLATILITY OF COMMON STOCK PRICE The initial public offering price of the Common Stock has been determined by negotiations between our company and the Underwriter. The initial public offering price bears no relationship to earnings, asset values, book value or any other recognized criteria of value. See "Underwriting" at page 54. The market prices for securities of emerging health care companies have been highly volatile. Announcements may have a significant impact on the market price of the Common Stock. Such announcements may include biological or medical discoveries, technological innovations or new commercial services by us or our competitors, developments concerning proprietary rights, including patents and litigation matters, regulatory developments in both the United States and foreign countries, public concern as to the safety of new technologies, general market conditions as well as quarterly fluctuations in our revenues and financial results and other factors. The stock market has from time to time experienced extreme price and volume fluctuations which have particularly affected the market prices for emerging and biotechnology companies and which have often been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of our Common Stock. In the past, following periods of volatility in the market price of a company's stock, securities class action litigation has occurred against the issuing company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on our revenues and earnings. Any adverse determination in such litigation could also subject us to significant liabilities. EFFECT OF PREFERRED STOCK AND DIRECTOR REMOVAL PROVISIONS Our Board of Directors is authorized to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, 13 18 the rights of the holders of any shares of Preferred Stock that may be issued in the future. While we have no present intention to issue shares of Preferred Stock, such issuance, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, such Preferred Stock may have other rights, including economic rights, senior to the Common Stock. As a result, the issuance of Preferred Stock could decrease the market value of the Common Stock. Our Amended and Restated Articles of Incorporation provide that members of the Board of Directors may be removed only for cause upon the affirmative vote of holders of at least a majority of the shares of our outstanding capital stock entitled to vote. Certain other provisions of our Amended and Restated Articles of Incorporation could also have the effect of delaying or preventing changes of control or in management. Such a delay or preventive effect could adversely affect the price of our Common Stock. 14 19 THE COMPANY Drs. Kenneth S. Kornman and Michael G. Newman founded the Company in 1986 to develop and introduce new methods, tools and technology for dental practitioners that would better predict treatment outcomes in patients. We derived our initial revenue primarily from contract research to pharmaceutical companies and others. In early 1992, we expanded our contract research program to include both medical and dental research. In 1994, we implemented an internal product discovery program. We then used profits generated from our contract research programs to fund our own product research and development. We originally operated under two separate Texas corporations, known as Oral Science Systems and Oral Science Technologies. In August 1995, Oral Science Systems was merged into Oral Science Technologies which changed its corporate name to Medical Science Systems, Inc. ("MSS"). MSS continued to function as a Subchapter S corporation until September 30, 1996, when it became a C corporation. MSS' principal executive office is located at 4400 MacArthur Boulevard, Suite 980, Newport Beach, California 92660, and may be reached by telephone at (714) 550-9730. 15 20 USE OF PROCEEDS If all 1,500,000 shares of Common Stock offered by this Prospectus are sold, we will receive net proceeds of approximately $11,660,000 (assuming the public offering price is $9.00, and assuming the over-allotment option is not exercised). If the Underwriters exercise the over-allotment option, our company would receive an additional $1,802,250. Net proceeds are determined after deduction of all commissions, discounts and expenses paid to the Underwriters (estimated to be $1,485,000) and after all expenses of the offering (estimated to be $355,000). We intend, in the following order of priority, to use the net proceeds from this offering to:
PERCENTAGE AMOUNT NET PROCEEDS ------------ ------------- Marketing, sales, customer service and commercialization expenses.................................................. $ 5,200,000 44.60% -- Expenses for sales and marketing in conjunction with the market introduction of each susceptibility test. Such expenses include market research studies, marketing collateral materials, trade show participation, public relations, advertising expenses and sales and marketing personnel. Research and development activities......................... 1,450,000 12.43% -- Continuation of clinical trials for genetic susceptibility tests under development, to provide clinical utility data, amortization of capitalized patent expense beginning when each patent issued and salaries of research and development personnel. Capital Investments......................................... 300,000 2.57% -- Expenditures for computer equipment, furniture and fixtures primarily related to increases in personnel. Repayment of bridge loans................................... 1,780,000 15.27% Working capital and general corporate purposes.............. 2,930,000 25.13% ----------- ----- TOTAL............................................. $ 11,660,000 100.00% =========== =====
We may also use a portion of the net proceeds of the offering to acquire businesses, technologies, or products complementary to our business. We do not currently have any commitments or agreements for, and are not involved in any negotiations for, any such acquisition. There can be no assurance that any such acquisitions will be made. The amount and timing of working capital expenditures may vary significantly depending upon numerous factors, including the progress of our research, discovery and development programs, the timing and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, competing technological and market developments, payments received under collaborative agreements, changes in collaborative research relationships, the costs associated with potential commercialization of our products, including the development of marketing and sales capabilities, the cost and availability of third-party financing for capital expenditures and administrative and legal expenses. We believe that our available cash and existing sources of funding, together with the proceeds of this offering and interest earned thereon, will be adequate to maintain our current and planned operations for at least the next 18 months. Until used, we intend to invest the net proceeds of this offering in interest-bearing, investment-grade securities. While the net proceeds are so invested, the interest earned by us on such proceeds will be limited by available market rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" at page 21. We intend to invest and use such proceeds so as not to be considered an "investment company" under the Investment Company Act of 1940, as amended. 16 21 DIVIDEND POLICY Holders of shares of Common Stock are entitled to dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. We have not yet paid any dividends and do not expect to do so in the foreseeable future. We intend to use all retained earnings for working capital and to finance the anticipated growth and expansion of our business. 17 22 CAPITALIZATION The following table sets forth our capitalization (i) as of June 30, 1997; (ii) on a pro forma basis after giving effect to the sale of 108,060 shares of Common Stock sold pursuant to our private placements and the issuance of $1,780,000 in Bridge Loans subsequent to June 30, 1997 as if the sale of Common Stock and issuance of Bridge Loans occurred on June 30, 1997; and (iii) on a pro forma basis as adjusted to give effect to the receipt of net proceeds from the sale of 1,500,000 shares of Common Stock offered hereby after deducting underwriting discounts and commissions and estimated offering expenses:
JUNE 30, 1997 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) Long term debt and obligations under capital leases, less current portion(1), and Bridge Loans....................... $ 565 $ 2,345 $ 565 ------- --------- ----------- Shareholders' equity: Preferred Stock, 5,000,000 shares authorized; none issued and outstanding actual, pro forma or pro forma as adjusted................................................ -0- -0- -0- Common Stock, no par value, 10,000,000 shares authorized; 3,629,947 shares issued and outstanding; 3,738,007 shares issued and outstanding pro forma; 5,238,007 shares issued and outstanding pro forma as adjusted(2)............................................. 1,691 2,232 14,248 Accumulated deficit........................................ (2,705) (2,705) (3,062) ------- --------- ----------- Total shareholders' equity.............................. (1,014) (473) 11,186 ------- --------- ----------- Total capitalization.................................. $ (449) $ 1,872 $11,751 ======= ======== =========
- --------------- (1) As of June 30, 1997, the current portion of obligations under long term debt and capital leases was approximately $155,359. (2) Excludes (i) 356,545 shares of Common Stock subject to Bridge Warrants, exercisable at $5.50 per share; (ii) 800,579 shares of Common Stock subject to outstanding options under our 1996 Equity Incentive Plan, exercisable at $3.70 or $5.00 per share; (iii) 199,421 shares of Common Stock reserved for issuance pursuant to our 1996 Equity Incentive Plan; (iv) the exercise of the Underwriter's over-allotment option; and (v) 150,000 shares of Common Stock subject to Underwriter's Warrants, exercisable at one hundred thirty-five percent (135%) of the initial public offering price of the Common Stock. See "Description of Securities" at page 51. 18 23 DILUTION As of June 30, 1997, there were 3,738,007 shares of our Common Stock outstanding, having a negative net tangible book value per share of approximately $(0.19) adjusted on a pro forma basis to reflect the sale of 108,060 shares of Common Stock from July 1997 through September 1997. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of our Common Stock outstanding. After giving effect to the sale of the 1,500,000 shares of Common Stock under this offering at a price of $9.00 per share and the application of the net proceeds therefrom (but assuming none of the options or warrants are exercised), there would be a total of 5,238,007 shares of our Common Stock outstanding with a net tangible book value of approximately $2.09 per share. This would represent an immediate increase in pro forma net tangible book value of $2.28 per share to existing shareholders and an immediate dilution of $6.91 per share to new investors. Dilution is determined by subtracting net tangible book value per share after the offering from the amount paid by new investors per share of Common Stock. The following table illustrates the per share dilution: Initial public offering price per share.............................. $9.00 Pro forma net tangible book value per share as of June 30, 1997.... (0.19) Increase attributable to new investors............................. 2.28 Adjusted pro forma net tangible book value per share after this offering........................................................... 2.09 ----- Dilution per share to new investors.................................. $6.91 =====
The following table summarizes, on a pro forma basis, as of June 30, 1997, the difference between the existing shareholders and the new investors with respect to the number of shares of Common Stock purchased from our company, the total consideration paid and the average price per share:
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ----------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- ------------- Existing shareholders....... 3,738,007 71.36% $ 2,190,600 13.96% $0.59 New investors............... 1,500,000 28.64% 13,500,000 86.04% $9.00 --------- ------ ----------- ------ Total....................... 5,238,007 100.00% $15,690,600 100.00% ========= ====== =========== ======
The foregoing table assumes (i) no exercise of the Underwriter's over-allotment option; (ii) no exercise of the 150,000 Underwriter's Warrants; (iii) no exercise of the 356,545 Bridge Warrants, exercisable at $5.50 per share; and (iv) no exercise of stock options outstanding after August 31, 1997. As of August 31, 1997, there were options outstanding to purchase a total of 800,579 shares of Common Stock under our 1996 Equity Incentive Plan, at a weighted average exercise price of $4.37 per share. To the extent that any of the shares of Common Stock are issued on exercise of any of these warrants, options or additional options granted after August 31, 1997, there will be further dilution to new investors. See "Description of Securities" at page 51. 19 24 SELECTED FINANCIAL DATA We are providing the following selected financial data to aid you in your analysis of this potential investment. This information was derived from: (1) our 1995 and 1996 historical financial statements; and (2) from our internally prepared unaudited financial statements for the six-month periods ended June 30, 1996 and 1997. Our financial statements as of December 31, 1995 and 1996 with the notes thereto and the related reports of Singer Lewak Greenbaum & Goldstein LLP, independent public accountants, together with our internally prepared unaudited financial statements for the six-month periods ended June 30, 1996 and 1997 are included elsewhere in this Prospectus. Our unaudited financial statements, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of our financial position and results of operations for the unaudited interim periods. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" at page 21 and our financial statements and related notes thereto included elsewhere in this Prospectus.
YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997 ----------------- ---------------- ---------------- YEAR ENDED DECEMBER 31, 1995 (AUDITED) (UNAUDITED) (UNAUDITED) ----------------- (AUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenues....................... $ 1,873 $ 1,919 $ 1,864 $ 100 Cost of sales.................. 368 548 477 104 ---------- ---------- ---------- ---------- Gross profit (loss)............ 1,505 1,371 1,387 (4) Expenses: Research and development..... 582 958 429 419 Selling, general and administrative............ 756 1,163 434 1,380 ---------- ---------- ---------- ---------- Total expenses............ 1,338 2,121 863 1,799 ---------- ---------- ---------- ---------- Operating income (loss)........ 167 (750) 524 (1,803) Other income (expense), net.... (14) (33) (4) (31) Provision for income taxes..... (3) (6) -0- -0- Net income (loss).............. $ 150 $ (789) $ 520 $ (1,834) ========== ========== ========== ========== Earnings (loss) per share...... $ .03 $ (.18) $ .12 $ (.43) ========== ========== ========== ========== Shares used in computing earnings (loss) per share(1)..................... 4,288,436 4,288,436 4,288,436 4,288,436 ========== ========== ========== ==========
- --------------- (1) Includes all shares issuable upon the exercise of options and warrants granted within one year prior to the date of this Prospectus.
JUNE 30, 1997 ------------------------------------------------ (UNAUDITED) (IN THOUSANDS) PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED(2) ------ -------------- -------------- BALANCE SHEET DATA: Cash and cash equivalents.......................... 30 2,350 12,230 Working capital.................................... (793) (253) 11,407 Total assets....................................... 415 2,735 12,615 Total shareholders' equity......................... (1,014) (473) 11,186
- --------------- (1) On a pro forma basis after giving effect to the sale of 108,060 shares of Common Stock sold pursuant to our private placements and the issuance of $1,780,000 in Bridge Loans subsequent to June 30, 1997 as if the sale of Common Stock and issuance of Bridge Loans occurred on June 30, 1997. (2) On a pro forma as adjusted basis to give effect to the receipt of net proceeds from the sale of 1,500,000 shares of Common Stock offered hereby after deducting underwriting discounts and commissions and estimated offering expenses. 20 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Financial Statements and related Notes contained elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" at page 7. OVERVIEW Since inception, we have devoted substantially all of our resources to maintaining our research and development programs and supporting contract research agreements. To date, we have received limited revenues from the sale of our periodontal susceptibility test. Revenues received by us have historically been payments pursuant to contract research agreements. For the fiscal year ended December 31, 1996, we had a net loss of $789,000 and as of December 31, 1996 had a shareholder deficit of $700,000. We had two research contracts with Alpharma, Inc. ("Alpharma") for the clinical investigation of Alpharma's proprietary periodontitis antibiotic product. These contracts and the payments associated therewith ended in June 1996. We intend to enter into additional contract research agreements to assist in the funding of our own internal research projects. There can be no assurance that we will be able to enter into additional contract research agreements on terms acceptable to us. We could incur losses for at least the next several years, primarily due to expansion of our research and development programs, increasing staffing costs and expansion of our facilities. Additionally, we expect to incur substantial sales, marketing and other expenses in connection with launching our genetic susceptibility testing business. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. We devoted significant resources during the last fiscal year to the beta testing and validation of our genetic susceptibility test related to periodontitis, as well as building our sales and marketing force in preparation for the commercial launch of the periodontal susceptibility test. Additional outlays have been expended on the hiring of additional customer service personnel and the associated increase in use of test materials and commercial laboratory charges. We also incurred increased development expenses during the year related to work on developing our genetic susceptibility tests for osteoporosis, coronary artery disease and diabetic retinopathy. We expect research and development expenses to continue to increase as personnel and research and development facilities are expanded. Selling, general and administrative expenses for the year ended December 31, 1996 increased $407,000 from the year ended December 31, 1995. The increase was attributable to sales and marketing expenses related to the upcoming launch of our periodontal susceptibility test and salaries and benefits paid to existing and newly hired sales and marketing employees. We recently commercially launched our periodontal susceptibility test on October 3, 1997. Additionally, we expect that our general and administrative expenses will continue to increase in support of our research and development efforts and the anticipated growth of our genetic susceptibility testing business. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 AND 1996. Revenues for the six months ended June 30, 1997 decreased by $1,764,000 due to the decrease in contract research agreements. Research and development expenses of $419,000 for the six months ended June 30, 1997 were comparable to the $429,000 for the same period in 1996. The research and development expenses are attributed to development expenses during the period related to work on developing our genetic susceptibility tests for periodontitis, osteoporosis, coronary artery disease and diabetic retinopathy. Selling, general and administrative expenses increased by $946,000 for the six month period ended June 30, 1997 compared with the same period in 1996. The increase in 1997 was primarily due to the hiring of additional 21 26 sales and marketing personnel and costs related to the pre-commercial launch of our periodontal susceptibility test. Interest income for the six months ended June 30, 1997 decreased by $4,000 primarily due to decreased funds available for investment. Interest expense for the six months ended June 30, 1997, amounted to $31,000, was an increase of $23,000 over the same period in 1996. The increase was due primarily to an increased working capital line of credit and a long term loan with Bank of America. The net income for the six months ended June 30, 1996 was $520,000 compared to a net loss of $1,834,000 for the six months ended June 30, 1997. The difference is a result of the increased research and development expenses, increased selling, general and administrative expenses and the decrease in research contract revenues. YEARS ENDED DECEMBER 31, 1996 AND 1995. Revenues for the year ended December 31, 1996 increased by $46,000. Research and development expenses increased to $958,000 for the year ended December 31, 1996 from $582,000 for the year ended December 31, 1995. The increase in research and development expenses is attributed to development expenses during the period related to work on developing our genetic susceptibility tests for periodontitis, osteoporosis, coronary artery disease and diabetic retinopathy. Selling, general and administrative expenses increased to $1,163,000 for the year ended December 31, 1996 from $756,000 for the year ended December 31, 1995. The increase in 1996 was primarily due to the hiring of additional personnel and costs related to the pre-commercial launch of our periodontal susceptibility test. Interest income for the year ended December 31, 1996 increased to $9,000 from $0 for the prior year, due to the increased funds available for investment. These funds were raised in our private placement of common stock in starting in November 1996 and through our contract research agreements with various companies. Interest expense for the year ended December 31,1996, amounting to $34,000, was due entirely to a working capital line of credit and a long term loan with Bank of America. The net income for the year ended December 31, 1995 was $150,000 compared to a net loss of $789,000 for the year ended December 31, 1996. The difference is a result of the increase in research and development expense, the increase in selling, general and administrative expenses and the decrease in research contract revenues. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations from inception through contract research revenues and more recently through sales of common stock and borrowings. Since June 30, 1997 we have received $540,000 in net proceeds from private placements of our Common Stock. We raised an additional $1,780,000 through a debt/warrant offering from August 1, 1997 through October 6, 1997. We have also, for working capital purposes, entered into term loans with a bank to effect borrowings originally in the amounts of $500,000 and $250,000. As of September 30, 1997, our borrowings under the term loans were $483,000 and $185,000, respectively. As of September 30, 1997, our company had $879,000 in cash and cash equivalents. During the six months ended June 30, 1997 and 1996, and the fiscal years ended December 31, 1996 and 1995, our cash provided by (used in) operations used in was $(1,394,000), $536,000, $(435,000) and $112,000, respectively. The cash used for operations was primarily to fund research and development and sales and marketing expenses related to the introduction and support of our genetic susceptibility tests. We expect to use a portion of the net proceeds of this offering for expanding sales and marketing efforts, funding of clinical studies, increasing production or commercialization capacity, customer service and funding research and development, the repayment of the investor Bridge Loans, as well as for working capital and general corporate purposes. A portion of the proceeds may also be used for investments in or acquisitions of complementary businesses, products or technologies. See "Use of Proceeds" at page 16. 22 27 BUSINESS GENERAL DESCRIPTION We provide genetic susceptibility testing services for common diseases that are treatable and preventable. We have focused on four diseases initially: periodontitis (gum disease), osteoporosis (bone disease), coronary artery disease (heart disease) and diabetic retinopathy (blindness associated with diabetes). Our tests identify genetic markers which, if present in a patient, increase the probability that such patient will be affected by the disease or that the disease will progress more rapidly and become more severe. Doctors and dentists will use our genetic susceptibility tests to assess the risk involved for individual patients and to adopt appropriate treatments or therapy, including preventive measures. Our genetic tests will allow early determination of genetic predisposition to these four diseases with the following potential benefits: (1) Patients with genetic predisposition to a disease may adopt health care and lifestyle changes that will delay or prevent onset of the disease or reduce disease severity; (2) Early detection of genetic predisposition will allow doctors and dentists to select the most appropriate a) preventive strategy where no disease symptoms are present or b) course of treatment once the patient develops the disease; and (3) Earlier and better treatment selection will motivate patients and improve outcomes. Our tests assist doctors in the development of better preventive treatment strategies, aid patients in making more informed decisions, and help payers to target healthcare investments where they make the biggest difference. We believe that this will contribute to a better quality of life, while directing healthcare resources to individuals who derive the greatest benefit. Accordingly, our mission is to improve patient care and treatment outcomes by incorporating genetic information regarding disease susceptibility into overall risk assessment and treatment planning. SCIENTIFIC BACKGROUND Genetic Testing. For many years it was well accepted that genetics influenced much of our health and behavior. Scientists frequently noted that certain diseases "ran in families." The clear genetic influence on disease was only known, however, for a few uncommon or rare conditions such as Down's Syndrome or Tay-Sachs Disease. Such conditions involve either a major abnormality in a chromosome or a genetic defect that is strong enough by itself to cause a clinical problem. Both types of genetic abnormalities are so powerful that they are usually evident in childhood. Some diseases, such as Down's Syndrome, are essentially entirely genetic. Others are essentially entirely environmental, such as an infected cut. The purely genetic conditions tend to be rare, or at least uncommon. For example, the defects in the gene associated with breast cancer are involved in only 5% to 10% of all breast cancers. Accordingly, 90% to 95% of all breast cancers are caused by some other factor or factors. Most of the common chronic diseases that cause the greatest debilitation and cost for adults are diseases in which genetics interact with other factors, such as lifestyle or environmental challenges to the body. We refer to such diseases as "multi-factorial" because numerous factors contribute to the disease (Figure 1). For example, while it has been demonstrated that there is a genetic influence on the susceptibility to periodontitis, research has also shown that periodontitis is influenced by factors such as smoking and oral hygiene. 23 28 FIGURE 1 [CHART DEPICTING BIOLOGICAL AND BEHAVORIAL RISK FACTORS CONTRIBUTING TO DISEASE PROGRESSION] Source: Chart developed by Medical Science Systems, Inc. Copyright Medical Science Systems, Inc. In multi-factorial diseases the genetic influence is not due to a "genetic defect" but a normal variation within the population. For example, for a specific gene, 20% to 30% of the population may have a slight variation in the genetic code that alters the function of that gene just enough under certain environmental challenges that a specific disease is accelerated (Figure 1). Since these variations are multiple forms of the same gene, they are called genetic polymorphisms or genetic markers. If the genetic polymorphisms associated with a common disease can be identified, it is possible to predict those at high risk for disease and alter the individual's lifestyle or provide early medication to prevent clinical disease. If the polymorphism can be shown to actually be involved functionally in accelerating the disease, then that information may be used to develop innovative new treatments or preventive agents. For example, it is well established that two proteins, interleukin-1 ("IL-1") and tumor necrosis factor ("TNF") play a central role in many chronic diseases that have inflammatory components. We have discovered specific genetic variations that influence how much IL-1 and TNF are produced in the body. Our findings in periodontal disease provide an example of how this works. Normally, the body produces IL-1 and TNF in responses to a bacterial infection to help activate the inflammatory and immune responses that will fight the infection. This happens without producing any longlasting tissue damage. In a person where a certain genetic variation exists, excessive levels of IL-1 or TNF are produced. This causes an inflammatory response that may lead to tissue damage. Our research revealed that individuals with two specific polymorphisms in the IL-1 genes were predisposed to more severe periodontitis. Our periodontal susceptibility test determines whether an individual has such a genetic predisposition. In general, it may be said that the early detection of a predisposition to genetic diseases presents the best opportunity for medical intervention. Early genetic diagnosis may improve the prognosis for a patient through supervision and early intervention before the clinically detectable disorder occurs. 24 29 PRODUCTS AND SERVICES Genetic Susceptibility Test for Periodontal Disease (Patent Pending). DESCRIPTION OF PERIODONTAL DISEASE TEST. Our first genetic susceptibility test detects a genetic susceptibility to severe gum disease (periodontitis). Periodontitis is a bacterially-induced chronic inflammation that destroys the collagen fibers and bone that surround and support the teeth. Untreated, periodontitis will eventually result in tooth loss. Periodontitis results from a complex interplay of bacterial infection with the patient which can often be modified through behavioral factors. The fact that periodontal disease is both preventable and treatable makes predicting the host response (or one's susceptibility to the development of periodontal disease) "wanted information" for the patient and health care provider. Periodontists have attempted for years to understand why patients with similar plaque levels and oral bacterial profiles often show remarkably different clinical characteristics. It is now possible to integrate genetics into overall risk assessment so clinicians can identify that subset of patients who are highly susceptible to rapid disease progression and severe periodontitis. This discovery allows individual patients to be managed in a more targeted and proactive way. FIGURE 2 [BAR GRAPH DEPICTING DIFFERING SUSCEPTIBILITY TO PERIODONTITIS IN ADULTS] Source: K. Kornman et al., Journal of Clinical Periodontology, January 1997. 25 30 FIGURE 3 [BAR GRAPH DEPICTING DIFFERING BLEEDING RESPONSE ON PROBING IN ADULTS] Source: Unpublished data analysis based on data developed under the study reported by K. Kornman et. al, Journal of Clinical Periodontology, January 1997. Our periodontal susceptibility test is the result of a scientific breakthrough in which an association was discovered between a specific IL-1 genotype and severe periodontal disease (Figure 2). IL-1 is a cytokine or protein that is known to play a role in inflammation and the expression of periodontal disease. Patients with this specific genotype have been found to progress more rapidly towards severe periodontal disease and show increased bleeding on probing (Figure 3). It has also been determined that cells with this genotype produce as much as four times more IL-1 in response to the same bacterial challenge. Since IL-1 in high concentrations is known to be destructive to tissues, this may explain the more rapid progression of periodontal disease experienced by patients with this specific IL-1 genotype when faced with a bacterial challenge. Prevention or therapeutic intervention aimed at reducing the bacterial challenge should decrease the stimulus for IL-1 production and thereby protect the patient against the potentially destructive effects of this genotype. It is estimated that approximately 30% of the population will test positive for this genotype. We have developed our periodontal susceptibility test and continue to be governed by a project agreement between our company and Sheffield University. See "Competitive Advantages" at page 39. A patent application related to the detection of genetic predisposition to periodontal disease has been filed and assigned to us from Sheffield University, Dr. Gordon Duff and Dr. Kenneth Kornman. We have received a Notice of Allowance from the U.S. Patent and Trademark Office related to the patent's anticipated issuance. MARKET FOR PERIODONTAL SUSCEPTIBILITY TEST. The American Academy of Periodontology estimates that: "$5 billion was spent in 1990 to treat gingivitis and periodontal disease, more than $10 billion is spent annually for the replacement of teeth lost to periodontal disease, that 80% of all employed American adults have some stage of periodontal disease and that periodontal disease is the primary cause of tooth loss in adults 35 years and older." 26 31 In general, population based studies indicate that gingivitis (that is, mild gum disease) affects 50% of the adult population. Studies also show that periodontitis affects between 30% to 35% of U.S. adults and increases with age after 35. Many of the affected individuals have mild clinical disease, but it appears that 20% of the adult population have a level of periodontitis which requires professional treatment. The early identification of those individuals susceptible to severe periodontal disease would allow for more aggressive prevention and treatment of the disease. Early intervention is the key to preventing or stopping the progression of the disease in order to minimize permanent loss of bone that supports the teeth. Most periodontal disease is currently diagnosed only after significant damage has already occurred. The patient is frequently referred to a specialist if the patient does not respond to conventional cleaning therapy and continues to experience substantial additional bone loss. The current dilemma is the inability to differentiate between those patients likely to respond to the normal conservative approaches such as scaling and root planing, oral hygiene improvement and more regular dental visits, and those which will likely go rapidly downhill despite customary therapy. Those who have periodontal disease and are susceptible to the severe form of periodontitis need more aggressive care such as more frequent monitoring and periodontal cleanings, earlier treatment with drugs or even early surgical intervention in severe cases. Early identification of patients at high risk for periodontitis will allow general practitioner dentists, as well as periodontists, to better focus resources and confidently choose the most cost-effective therapy. Moreover, use of our periodontal susceptibility test will allow payors to better monitor resource utilization and to better design dental insurance plans. We commercially launched our periodontal susceptibility test on October 3, 1997. Genetic Susceptibility Test for Osteoporosis (Patent Pending). DESCRIPTION OF OSTEOPOROSIS SUSCEPTIBILITY TEST. The second genetic test we are currently developing is a test for susceptibility to osteoporosis. Osteoporosis, the most common bone disease, resulting in a decrease in the amount of normal bone which leaves the affected individual more susceptible to fractures. We have identified a genetic marker that in clinical trials was associated with a more severe loss of bone through osteoporosis. The osteoporosis susceptibility test is a genetic test capable of indicating a greater susceptibility to severe osteoporosis in postmenopausal women. This susceptibility appears to involve a more rapid loss of bone as estrogen levels decrease and menopause occurs. 27 32 We have completed three clinical trials of the osteoporosis susceptibility test. The first trial focused on the relationship of the genetic test to bone-mineral density ("BMD") in post-menopausal women with a history of bone fractures. All three trials confirmed the association between the specific genetic marker and the onset of osteoporosis (Figure 4). FIGURE 4 [BAR GRAPH DEPICTING SUSCEPTIBILITY TO POST - MENOPAUSAL OSTEOPOROSIS] Source: R. Eastell, G. Russell, G. W. Duff and co-workers, unpublished data on file, Medical Science Systems, Inc. Our test provides data that will allow practitioners to practice preventive medicine. Ideally, all females should be tested for this genetic trait by adolescence so that they are encouraged to develop healthy lifestyles to attain peak bone mass prior to the onset of menopause. These lifestyles include avoiding smoking, increasing the intake of calcium, and participating in regular weight-bearing exercise. Results of this test will also assist women who are approaching menopause in deciding whether to start treatment. On introduction into the marketplace, this test will be targeted at all women in their mid-thirties, the point in their lives when the estrogen level begins to decrease. This will enable counseling at a sufficiently early stage in the process that significant bone loss can be avoided through lifestyle modification and/or drug/hormone therapy. A patent application related to the method of testing for genetic predisposition to osteoporosis has been filed and assigned to Sheffield University. Sheffield University, has in turn, granted to us an exclusive worldwide license to utilize the underlying patent. Under the terms of our Project Agreement with Sheffield University, upon our commercialization of the osteoporosis susceptibility test, Sheffield University is obligated to assign the patent to us in its entirety. The U.S. Patent and Trademark Office has recently issued a Notice of Allowance with respect to the aforementioned patent. MARKET FOR OSTEOPOROSIS SUSCEPTIBILITY TEST. Twenty-eight million Americans suffer from osteoporosis, of which 85% are women. Post-menopausal osteoporosis, stemming from the loss of estrogen, affects more than one-half of all women over 65 years of age and has been detected in as many as 90% of women over age 75. Osteoporosis is responsible for a majority of the 1.5 million bone fractures each year, leading to disabilities costing more than $10 billion in medical, social and nursing home costs. In 1991, one out of three 28 33 American women were 50 years of age or older. The "baby boomer" generation began to enter this age group in 1996. In the past, a diagnosis of osteoporosis was made only after an elderly individual had suffered a bone fracture. The current definition requires that the individual has lost enough bone to put them at increased risk for fractures. Since the strength of bones is largely determined by the mineral density of the bones, an assessment of bone mineral density is currently the most reliable method for determining whether one has osteoporosis. The diagnosis may therefore be made by bone densitometry measurements that allow the calculation of the density of bone relative to normal individuals. The key problem with this approach is that it is directed at Those individuals who already have the disease and have manifested symptoms. Although new therapies reverse some bone loss, their primary benefit is in retarding future bone loss. Given that little can be done to reverse damage that has already occurred, it appears that the best management of osteoporosis will involve early detection and prevention. By identifying at-risk individuals before symptoms appear, the individual can be counseled to make appropriate life style changes or institute other treatments. For example, calcium supplements and exercise have been shown to be valuable preventive factors if used during a critical early age window. Hormone replacement therapy has also been used successfully to combat osteoporosis occurring after menopause. Hormone replacement therapy may be of greatest benefit if used early in the disease process before major bone loss has occurred. New treatment alternatives for osteoporosis include a class of drugs that has recently been approved called bisphosphonates. Didronel(TM), a bisphosphonate manufactured by Procter and Gamble Pharmaceuticals, is available in much of Europe. Fosamax(TM), another new bisphosphonate produced by Merck, has recently received FDA approval and is now marketed in the U.S. Historically, it has been very difficult to reliably identify those women who are at greater risk for developing severe osteoporosis. Although various risk factors are strongly associated with osteoporosis, assessment of risk factors in patients by means of questionnaires has not been a reliable means of identifying women with low bone density. New urine or blood tests can detect special chemical markers when the bone is actively being destroyed. However, these chemical markers, like the bone density measurements, primarily provide diagnostic information only after significant amounts of bone have been lost. Unfortunately, the opportunity for increasing bone density by nutrition or exercise occurs far before osteoporosis is detectable by such means. Since our marker is genetic, we may test patients at an early age and identify their risk. This provides the opportunity for disease prevention in the form of lifestyle changes early enough to make a difference. This test may also be valuable in selecting patients for early drug intervention to stop osteoporosis. Such drugs include earlier supplementation with estrogen or a preemptive use of a bisphosphonate-class drug such as Fosamax(TM). We anticipate initiating marketing efforts related to a pre-commercial phase for the osteoporosis susceptibility test in late 1997. See "Market Development Strategy for Other Susceptibility Tests" at page 37. The full commercial launch is anticipated to begin sometime in late 1998. Genetic Susceptibility Test for Coronary Artery Disease (Patent Pending). DESCRIPTION OF CAD TEST. The third genetic susceptibility test we are developing is the coronary artery disease test (the "CAD test"). The CAD test is a genetic test capable of detecting those individuals with a significantly higher level of susceptibility to coronary artery disease. When an individual has one copy of this specific genetic marker (i.e., is heterozygous) there is a 2.4 times greater chance of his developing coronary artery disease than the general population. An individual who has two copies of the genetic marker (i.e., is homozygous) has a 5.4 times greater chance of developing coronary artery disease than the general population. It follows that being homozygous for this particular genetic marker indicates a greater risk for coronary artery disease than any other single risk factor (Figure 5). 29 34 FIGURE 5 THE NEWLY IDENTIFIED GENETIC POLYMORPHISM IS A STRONG RISK-MARKER FOR CORONARY ARTERY DISEASE
INCREASED RISK RISK FACTOR/MARKER FOR CAD ------------------------------------ -------------- Smoking 1 pack/day 2.4 Sedentary lifestyle 1.9 Severe obesity 3.3 Hypertension 2.1 High cholesterol (>240) 2.4 1 copy of new marker 2.4 2 copies of new marker 5.4
Source: S. Francis, D. Crossman, G. W. Duff and co-workers. Submitted for publication, 1997. Data on file at Medical Science Systems, Inc. The availability of our CAD test will provide practitioners with a means of truly practicing preventive medicine with respect to coronary artery disease. The CAD test can be given to all individuals early in life because genetic risk factors do not change over time. Individuals who test positive for the genotype can be treated with more aggressive approaches to risk factor reduction. As these individual age, they can be provided with more regular: (1) monitoring of cholesterol levels; (2) blood pressure testing; and (3) early intervention to alter the level of blood lipids (i.e., fats). Such an approach allows for truly preventive medicine through early risk factor reduction and appropriate monitoring for early detection of any problems. A patent application related to the method of testing for genetic predisposition to coronary artery disease has been filed and assigned to the Sheffield University. Sheffield University, has in turn, granted to us an exclusive worldwide license to utilize the underlying patent. Under the terms of our Project Agreement with Sheffield University, upon our commercialization of the CAD test, Sheffield University is obligated to assign the patent to us in its entirety. MARKET FOR CAD TEST. More than one in four Americans, or about 60 million, have some form of cardiovascular disease. Cardiovascular diseases kill nearly one million Americans every year -- more than all forms of cancer (about 500,000), accidents (about 85,000), and AIDS (about 38,000) combined. Since 1900, cardiovascular disease has been the number one cause of death in the U.S. every year except 1918 (when there was a world-wide flu epidemic). If all forms of cardiovascular disease were eliminated, life expectancy would rise by 7.78 years. Atherosclerosis (or arteriosclerosis) refers to the progressive blockage of arteries by plaque accumulation. Atherosclerosis is the principle cause of heart attack, stroke and gangrene of the extremities. It is responsible for 50% of all deaths in the U.S., Europe and Japan. If atherosclerosis occurs in the arteries that supply blood to the heart, then the disease is often referred to as coronary artery disease ("CAD"). CAD results in heart attacks (myocardial infarctions) due to damage to the heart muscle when blood supply (and therefore oxygen) is cut off and heart muscle cells die. Approximately 13.5 million Americans suffer from coronary artery disease, and approximately half a million Americans die each year from this disease. Although many theories exist, the causes and mechanisms of this build-up are not completely understood. Because of this lack of understanding, prediction, diagnosis, and treatment of atherosclerosis has centered on the development of a set of risk factors that help to identify those individuals who are most at 30 35 risk. The primary approach to treatment for atherosclerosis, once diagnosed, centers on controlling these risk factors. Unfortunately, many of the classic risk factors, such as smoking, high cholesterol levels, and high blood pressure, only account for about half of the incidence of CAD. Because CAD is the leading cause of death among people in the U.S., a tremendous amount of research over the past four decades has been directed at CAD. Initially, serum lipids (e.g., triglycerides and total cholesterol) were linked with CAD during the 1940s and 1950s These observations have been refined to focus on high and low density lipoproteins (i.e., "HDLs" and "LDLs") as potential factors in the cause of the disease and as potential markers of the disease. Preventive treatment, including lifestyle changes and drug therapy, is directed primarily at reducing the risk factors. Treatment strategies usually involve coronary artery by-pass surgery or angioplasty (i.e., expansion of the blood vessel), both of which only treat the result and not the root cause(s) of the disease. Though an increasingly large number of risk factors have been identified, they still only account for slightly over half of the cases of atherosclerosis. The genetic susceptibility test that we are developing may offer a potential solution to this dilemma. The CAD test is based on a genetic marker that is associated with an increased susceptibility to coronary artery disease that substantially exceeded the increased risk of other commonly associated factors, such as smoking or high cholesterol. We anticipate initiating marketing efforts related to a pre-commercial phase for the CAD test in late 1998. See "Market Development Strategy for Other Susceptibility Tests" at page 37. The full commercial launch is anticipated to begin in 1999. Genetic Susceptibility Test for Retinopathy in Diabetics (Patent Pending). DESCRIPTION OF THE DIABETIC RETINOPATHY TEST. The fourth genetic susceptibility test we are developing is a test to determine the susceptibility to sight-threatening retinopathy in diabetics. This susceptibility involves a continued and increased risk of losing vision when an individual has been diagnosed with diabetes. The data from our first clinical trial involving over 500 diabetics is shown below (Figure 6). Of the individuals who did not have the specific genetic marker (genotype negative), approximately 10% developed sight-threatening retinopathy. The risk for this group remained low and relatively constant for many years. For genotype positive individuals, however, the risk continued to increase dramatically until nearly 50% ultimately developed sight-threatening diabetic retinopathy. 31 36 FIGURE 6 [GRAPH DEPICTING SUSCEPTIBILITY TO DIABETIC RETINOPATHY] Source: P. Richardson, I. Rennie, G. W. Duff and co-workers. Submitted for publication, 1997. Data on file at Medical Science Systems, Inc. Sight-threatening diabetic retinopathy refers to diabetic complications affecting the retina that predictably lead to severe loss of vision. Retinal disease is one of numerous problems related to diabetes. Retinal disease is primarily the result of the disruption of small blood vessels in the retina due to: (1) capillary leakage; and/or (2) destruction or obstruction of capillaries causing damage to the tissues of the retina and the uncontrolled growth of new blood vessels. Such retinal changes are a leading cause of blindness in the western world. A patent application related to the method of testing for the genetic predisposition to retinopathy in patients with diabetes has been filed and assigned to Sheffield University. Sheffield University, in turn, has granted us an exclusive, worldwide license to utilize the underlying patent. Under the terms of our Project Agreement with Sheffield University, upon our commercialization of the diabetic retinopathy susceptibility test, Sheffield University is obligated to assign the patent to us in its entirety. MARKET FOR DIABETIC RETINOPATHY TEST. In the United States there are approximately 16 million people suffering from diabetes mellitus (or are diabetic). It is estimated that only half of this number have been diagnosed. There are two general categories of diabetes mellitus. Type I diabetes, or insulin-dependent diabetes mellitus, generally appears in patients under 20 years of age and is marked by severe insulin deficiency. Type I diabetes is generally detected at its onset and requires insulin treatment to control. Type II diabetes, or non-insulindependent diabetes mellitus, emerges in patients over 20, may remain undetected for years, and is marked by insulin resistance and an insulin deficiency. Dietary changes may be able to control Type II diabetes, however, insulin supplements (that is, injections) are often required. Ninety percent of all diabetics have Type II diabetes. Patients with either form of diabetes mellitus are at risk of developing complications such as problems with their nervous system, kidneys, vision and heart. Studies have shown that the duration of diabetes is 32 37 associated with the increasing incidence of diabetic complications. Accordingly, the longer an individual has diabetes, the greater his or her chances of developing complications. These complications are a major clinical burden in diabetes, but the origination and development of the disease are not well understood. Diabetic retinopathy is one of the most common complications of diabetes. It is the fourth leading cause of legal blindness in the U.S. and the leading cause of blindness in people ages 20 to 74. Each year 15,000 to 39,000 people lose their sight from diabetic retinopathy. Early detection of retinopathy is critical to the prevention of vision loss. The early stage of this disease is known as nonproliferative retinopathy. Nonproliferative retinopathy is somewhat difficult to detect but responds well to treatment. Nonproliferative retinopathy, if untreated, can deteriorate with a resultant loss of vision. Although treatment may arrest the condition, it will not restore lost vision. Proliferative retinopathy is the final state of the disease. At this point, the disease involves the production or growth of new tissue in and around the retina. These types of growths can lead to serious vision loss including blindness. Satisfactory treatment is difficult in advanced proliferative retinopathy. Surgical procedures used at this stage will themselves result in a loss of patient vision four percent of the time. Clearly, early treatment of diabetic retinopathy is desirable. We have identified a genetic marker that is correlated with an increased risk of developing diabetic retinopathy in patients who have diabetes. This correlation seems to indicate an earlier onset of retinopathy in patients who have diabetes thus putting such individuals at risk of losing their sight at an earlier age. The availability of such a test would allow practitioners to assess a patient's risk of losing his or her sight due to diabetes at the time that he or she is diagnosed with the disease. Preventive treatment would allow doctors to practice truly preventive medicine, providing a means of identifying susceptible patients early in the disease process. Enhanced assessment and monitoring can then be initiated from the start, allowing early detection of problems and preemptive treatment that will ultimately reduce the incidence of diabetes related vision loss. This would translate into improvements in patient quality of life and cost savings. Confirmatory clinical studies of the diabetic retinopathy susceptibility test are scheduled for completion in mid-1998. We anticipate initiating marketing efforts related to a pre-commercial phase for the diabetic retinopathy susceptibility test sometime in 1998. See "Market Development Strategy for Other Susceptibility Tests" at page 37. The full commercial launch is anticipated to begin sometime in 1999. Testing Procedure. Each of our four genetic susceptibility tests will require that the following single procedure be utilized. To conduct a genetic susceptibility test, the doctor will draw a blood sample and submit it to our customer service department. We will log in the sample and submit sample batches to the testing laboratory. The laboratory will perform the test following our specific protocol and inform us of the results. We, in turn, will advise the doctor of the results, who informs the patient and determines the appropriate course of action. At the time results are provided to the doctor, our billing service (which we presently "outsource") will invoice the patient directly for the test. The doctor will then invoice the patient for his or her professional services related to administration of the test. We are currently using Baylor University as our commercial laboratory. We will continue to use one or more sophisticated, certified, and fully validated laboratories, such as the Baylor facility, capable of providing consistent and high quality analysis. Customer service is handled via our toll free "888" numbers by our own staff who are knowledgeable about our genetic susceptibility tests, the procedural requirements of the testing system and the related diseases. Pre-Marketing Trials/Status of Susceptibility Tests. As an internal procedural standard, we conduct three categories of clinical trials in conjunction with our genetic susceptibility tests. The first trial is called a proof of principle trial, used to prove a laboratory finding. The results of this trial are utilized to support the initial patent application and therefore need to be completed before the patent application can be filed. The second trial is a confirmatory trial. The purpose of the confirmatory trial is to independently confirm the results of the proof of principle trial. The third category of trial relates to clinical utility. The clinical utility trial is conducted to learn what is the most effective utilization of the test in actual clinical practice. The 33 38 current trial status and actual and anticipated commercial launch date of each of our four genetic susceptibility tests is depicted below: STATUS OF CLINICAL TRIALS AND LAUNCH DATES RELATED TO MSS' GENETIC SUSCEPTIBILITY TESTS
INITIAL PROOF ACTUAL/ANTICIPATED (PRIOR TO CONFIRMATORY COMMERCIAL PATENT FILING) TRIAL CLINICAL UTILITY LAUNCH -------------- ------------ ---------------- ------------------ Periodontal Disease................ Completed Completed Completed October 1997 Osteoporosis....................... Completed Completed Underway Late 1998 Coronary Artery Disease............ Completed Completed Underway 1999 Diabetic Retinopathy............... Completed Underway Not Yet Started 1999
Following confirmatory studies, additional trials are completed on larger populations to help develop broad scientific evidence supporting the clinical utility of each of our tests. Such additional trials not only strengthen the support for each tests' known use (i.e., detecting genetic susceptibility) but also lead to additional practical uses of the susceptibility tests (e.g., use of the susceptibility tests to determine a patient's responsiveness to a given drug). Product Development. Beyond our current four genetic susceptibility tests, we have on-going research to continue to identify other genetic markers that appear to be associated with certain other common diseases. We plan on filing additional patent applications to cover these discoveries. It is our intent to bring these discoveries to market in the form of additional genetic susceptibility tests. We have also come upon certain genetic markers that might be likely candidates to serve as therapeutic targets -- or in other words, be susceptible to influence by drug agents. We are considering certain collaborative long term relationships with pharmaceutical companies as a method to provide for either the licensing of our discoveries or to assist in the research and development of future products. There may be additional applications of either our testing services or the underlying technology that we use to develop and support our genetic testing services. We will seek to exploit opportunities to develop such additional applications in conjunction with other companies so long as our company's focus remains on genetic susceptibility testing. For example, we have recently granted a worldwide, nonexclusive, nontransferable license to Digisphere, LLC to market customized versions of our computer modeling technology to pharmaceutical companies. Previously, we had only used our computer modeling technology for the internal development of our genetic testing services. Digisphere, LLC was formed on August 1, 1997 and represents a joint venture between our company and Nelson Communications Inc. ("NCI"). NCI is one of the largest providers of health care marketing services to pharmaceutical companies in the United States. This joint venture will involve our company acting as the information/technology partner and NCI functioning as the marketing partner. The joint venture involves providing doctors and patients with a medical education tool regarding disease progression. As of September 30, 1997, we have not received any revenues from this joint venture. MARKET AND SELLING STRATEGIES General Strategy. Our strategy is to build a commercial operation based on the delivery of our genetic susceptibility testing services on a worldwide basis. Our testing services are aimed at multi-factorial diseases which are treatable and preventable. Our strategy assumes that genetic tests revealing susceptibility to preventable diseases will ultimately be highly valued by the public, by clinicians involved in prevention and treatment planning, by industries involved in clinical trials and by healthcare payers and administrators who need to direct limited resources where they will make the biggest difference. We intend to utilize a sales and marketing approach which will aim to improve patient care and treatment outcomes by incorporating genetic information regarding disease susceptibility into overall risk assessment and treatment planning. We hope to accomplish this through educating doctors, managed care organizations, 34 39 industry and the public about the value of targeting healthcare investments based on an individual's tendency to develop a specific disease. We will seek to influence attitudes and mindsets through clearly articulating the benefit for our customers and adopting a missionary sales approach in partnership with crusaders in the field. Emphasis will be placed on building strong relationships with key decision-makers and educators who will work with us to overcome the obstacles and influence the acceptance of genetic testing, especially testing that reveals wanted information, as part of the medical standard of care. Our initial goal will be to establish genetic tests such as our periodontal susceptibility test into overall risk assessment and treatment planning for patients. Ultimately, we envision these tests being used more broadly by healthcare administrators and practitioners as a screening tool to direct limited resources in a more targeted and proactive way. Market Strategy for Specific Tests. MARKET STRATEGY FOR PERIODONTAL SUSCEPTIBILITY TEST. We plan to develop the worldwide market for our periodontal susceptibility test directly through a number of centrally-driven tactics and thereby establish an environment in which locally appropriate, focused selling efforts will be most likely to succeed. The worldwide market will be segmented according to geography and customer groups, with appropriate emphasis being given to specific segments as the business grows. Wherever possible, we will initially sell our periodontal susceptibility test directly, anticipating that once demand has been created we may elect to work in partnership with other selling organizations that offer significantly greater access to the market and/or a better competitive position. GEOGRAPHIC SEGMENTATION PLAN. Initial emphasis will be placed on sales of our periodontal susceptibility test in North America. North America represents at least half of the worldwide opportunity for our periodontal susceptibility test. We intend to market directly in the U.S. and Canada, focusing on specific customer segments as outlined below. In a parallel effort, we will also begin to develop a sales program in Europe, in partnership with local sales organizations familiar with the periodontal market. Emphasis will be placed on Italy, since momentum and a customer base have already been established during our pre-commercial phase. In the meantime, European customers who want access to our periodontal susceptibility test are being serviced directly out of the U.S. The same is true for Asia and South America. It is anticipated that partners will be sought for sales efforts in these regions as well. CUSTOMER SEGMENTATION PLAN. There are several potential customers for our periodontal susceptibility test who need to be targeted in a specific order and with appropriate emphasis over time. Our study of the value-chain involved in making or influencing a purchasing decision for our periodontal susceptibility test revealed that some of the key players involved include: specialists (primarily periodontists), general dentists, hygienists, reimbursement groups (i.e., insurance companies, managed care organizations, etc.) and, of course, the individuals (and their families) who are being tested. The degree to which each of these groups embrace our periodontal susceptibility test will be influenced by how others in the value-chain view the value of the information. For example, initial feedback indicates that patients will be strongly influenced by their doctors. Whereas, generalists may be influenced by how specialists view the value of the test. Managed care organizations are likely to be influenced by how attractive the test is to their current or potential members. The influence diagram for the decision to purchase the test reveals a high degree of interdependence between all of the groups. For this reason, it is critical to develop the market in the right order and with the appropriate selling message for the specific group being targeted. It is important not to skip a step in the process or believe that, just because resistance to change in a specific segment may be great, such segment may be ignored. The initial segmentation plan we have developed will allow us to focus resources on the group most likely to generate early sales growth, while at the same time ensuring long-term sustainability and opportunity for growth. In light of the foregoing, we will be targeting four customer groups: (1) Periodontists/ periodontally-oriented GPs; (2) General Practitioners; (3) Managed Care/Buying Groups; and (4) Oral Care Companies with Dental Research Programs. Periodontist/Periodontally-oriented GPs. During the launch period and early adoption phase, emphasis will be placed on this segment in both North America and Europe. From a market development standpoint, 35 40 we recognize that it is critical that our periodontal susceptibility test be understood and accepted by "periodontists" for it to gain broad acceptance in the other segments. Relationships with opinion leaders and professional organizations are already well established in this segment. Key opinion leaders have their own data to present, which can be further supported with educational materials that we have developed. Speakers will be engaged who can interpret the scientific message and translate the breakthrough and effectively convey its clinical value to others. Our goal is to be highly visible at major periodontal meetings (international, national and "large" regional) the first year, with educational information on our periodontal susceptibility test either incorporated into the main program, or as part of an associated continuing education program wherever possible. Our periodontal susceptibility test was recently featured at the last general session of the American Academy of Periodontology meeting in October of 1997. From a selling standpoint, periodontists can be reached with a relatively small organization through attending their major meetings and sending targeted mail/fax communications. We initially expect periodontists to be our major source of revenue transitioning to dental general practitioners ("GPs") over the course of the first year. We will seek to convince/motivate periodontists, in addition to testing their own patients, to take the "genetic susceptibility testing/risk assessment message" to referring GPs, and in some cases, directly to patients to help build their practices. As such, we see periodontists as important multipliers and an integral part of the "selling effort." Support materials, such as updated referral slide shows and general dentist's brochures, patient brochures, "informatics" and press release packets, are already being provided to help periodontists to be more effective in this role. General Practitioners. We intend on developing this segment in a parallel manner, with emphasis switching from periodontists to GPs as the business grows. From a market development standpoint, we are working closely with leaders in the American Dental Association to help them understand the benefits of our periodontal susceptibility test to GPs, and to motivate then to educate their membership. Our periodontal susceptibility test is already scheduled to be presented at the American Dental Association's major fall meeting in Washington, D.C., where the test will also be included in an exhibit on dental innovations at the Smithsonian. Emphasis will be placed on translating the clinical value as it relates to a general practice, with appropriate opinion leaders from their own "camps" being identified for this purpose. GPs will be the target of mass mailings and advertising campaigns to increase brand recognition for our periodontal susceptibility test. In addition, we will seek to use periodontists as "advocates" to reach their GP referral base. As the need for additional sales activities within this segment grows, we will evaluate using a "co-marketing" arrangement with a large GP-oriented sales organization. Managed Care/Buying Groups. Initially, we expect most genetic tests to be paid for by the consumer, not insurance companies or other payors. Our contracted billing service will directly bill the patient who has utilized the test. We realize, however, that successful commercialization of our products and services may depend in part upon the availability of reimbursement or funding from third-party health care payors such as federal and state governmental agencies, private insurance plans and health maintenance organizations. Thus, In the longer term, we intend to target this managed care/buying group segment by building a sales and marketing organization aimed at understanding the value of genetic testing and risk assessment to large buying groups (including managed care organizations of all forms and governments in some countries) and "selling" through negotiating contracts with the decision makers (and gate keepers). This is clearly the trend in organized healthcare and presents an opportunity for susceptibility tests such our periodontal susceptibility test. As we grow, this capability should also generalize to other genetic tests. From a market development standpoint, we intend to better understand the needs of this segment, and tailor claim support studies/educational activities to satisfy these needs. Our periodontal susceptibility test is already scheduled to be featured at the next meeting of the National Association of Dental Plans. Oral Care Companies with Dental Research Programs. An additional segment that we intend to target involves companies with clinical research programs. We have already sold some of our periodontal susceptibility tests to companies that are interested in having patients in their clinical studies genotyped. Due to the clear benefit of including this information in large clinical studies and our strong preexisting 36 41 relationships with many of the companies in this segment, we view this as an opportunity to generate additional sales during the first year with a limited selling effort. However, there can be no assurance that future sales will be effected or that such sales will result in net income. Public Awareness/PR Plan. Initially most of our sales and marketing effort aimed at the general public will be indirect, primarily in the form of brochures and other tools that a doctor can use to explain the tests and their value to patients. We have initiated some public relations activities in order to increase public awareness of our specific tests and genetic susceptibility testing more generally through the popular media. For example, with our periodontal susceptibility test, we have initiated some publications in cooperation with a professional organization known as the American Association of Periodontology, which has its own vested interest in increasing public awareness about the disease and featuring significant discoveries that help validate the importance of the profession. We will begin to use PR in coordination with our other selling efforts aimed at each customer segment we approach. With the commercial introduction of the periodontal susceptibility test at the upcoming American Academy of Periodontology meeting this October, we will begin a campaign aimed at reaching the periodontal and general dentists. Ultimately, we plan on marketing directly to the public in order to create consumer demand for our tests. Educational and Promotional Materials. As with any change of behavior product, we anticipate the sales and promotional effort for our genetic susceptibility test to be highly education-intensive and are planning to develop several materials to support this effort. In addition, some promotional materials will be developed that are primarily aimed at increasing brand/logo/company recognition and creating a "high tech/ high value" image for ourselves. Market Development Strategy for Other Susceptibility Tests. We are also preparing market development plans to implement the "pre-commercial phase" for our osteoporosis tests. We intend to implement a similar strategy as is currently being utilized with our periodontal susceptibility test. We will initially involve the current academic and research "thought leaders" in the development and verification of our tests results and clinical utility. We will then develop a speaker circuit where these thought leaders will begin to convey the clinical utility and importance of our tests to specialists within each testing area (e.g., cardiologist for the CAD test). As the thought leaders begin to reach and influence the specialists we will then begin to target generalists, who presumably will be or have been influenced by the specialists. At this point direct marketing can be introduced to complete the progression, resulting in consumer demand. This segmentation strategy has been proven to be effective with other medical devices and is already being implemented with respect to our periodontal susceptibility test. SELLING METHODS Direct Sales. We plan to build demand for our susceptibility tests using a small direct consultative sales organization specializing in genetic testing, risk assessment and change of behavior. We do not plan on building a large sales force capability in any specific market; however, when the need for additional sales force activity increases within a particular segment, we will consider "co-marketing" or other business arrangements with companies with a large sales organization in the field. Our direct sales capability will focus on the profession segment initially, then shift to institutional and large buying group sales. After a sales partner has been brought on, we will focus on sales partner support and trade/professional association meetings. We will thereafter continue to seek to establish corporate partnerships which will produce revenues, credibility and a market presence for our other services and products. Professional and Industry Meetings/Trade Associations. Initially, we will be present and market our products and services at all national and selected regional associations and meetings where a genetic susceptibility test has applicability to the professionals in attendance. Over time, we anticipate our partners playing an increasingly important role in the specific disease markets where our tests are used. INTELLECTUAL PROPERTY Our commercial success will be dependent in part on our ability to obtain patent protection on genes, genetic sequences and/or their relationship to common diseases, or products or methods based on the 37 42 association between particular genes and diseases, discovered by us and Sheffield University. We have presently filed a total of eleven patent applications including applications covering each of our four genetic susceptibility tests. In June 1997, a Notice of Allowance was issued by the United States Patent and Trademark Office with respect to both our periodontal and osteoporosis susceptibility tests. We have filed and will continue to file foreign counterparts of our U.S. applications within the appropriate time frames. Where we have originally filed in another country, we plan to file U.S. and other foreign counterparts within the appropriate time frame. These applications seek to protect these gene markers and corresponding use of gene markers, and products derived therefrom and uses therefor. Some of these applications also identify possible biological functions for the genes and gene fragments based in part on a comparison to genes or gene fragments included in public databases but do not contain any laboratory or clinical data with respect to such biological functions. We own the patent covering the genetic marker related to our periodontal susceptibility test. However, with each of the other tests, the Section of Molecular Medicine at Sheffield University holds the patent application but has granted us an exclusive worldwide, irrevocable, transferable license to make, have made, use, offer to sell, license and otherwise transfer products created under the applicable patents. Sheffield University has retained the right to carry on internal research related to the underlying patents. However, under the terms of our Project Agreements with Sheffield University, upon the commercialization of each test, Sheffield University is obligated to assign the patent to us in its entirety. We have filed three patents related to our computer modeling software technology, two of which are still pending and one of which has issued. We are continuing to identify and develop applications related to additional genetic markers. We have also applied for trademark protection for the name of our periodontal susceptibility test. Our proprietary technology is subject to numerous risks. See "Uncertain Ability to Protect Proprietary Technology" at page 9. ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENETIC SUSCEPTIBILITY TESTING The prospect of broadly available genetic susceptibility testing has raised issues which are currently being widely discussed by the medical and scientific communities, as well as other interested groups and organizations, regarding the appropriate utilization and the confidentiality of information provided by such testing. The recent movement towards discovery and commercialization of susceptibility tests for screening a person's likelihood of developing one or more chronic conditions has also focused public and legislative attention on the need to protect the privacy of genetic screening medical information. With the progression towards more comprehensive record keeping by health insurers and managed care firms, this need has led to a number of legal initiatives. The recently enacted federal health insurance reform law (Kassebaum-Kennedy of 1996) recognizes the comparability of information obtained by genetic means to other types of personal medical information. The law prohibits insurance companies from refusing health insurance coverage to individuals on the basis of their medical history, including "genetic information." This legislation also prohibits employees from discrimination in hiring practices on the same basis. This should serve as an example of a trend to protect the privacy of patients, while allowing them to be screened for conditions which, as medicine progresses, can be prevented, reduced in severity, or cured. Although the current trend is pro-genetic testing, governmental authorities could, for social or other purposes, limit the use of genetic testing or prohibit testing for genetic susceptibility to certain conditions. We have attempted to take a proactive stance in the ethical arena. We have engaged Dr. Philip Reilly, who is both an M.D. (board certified specialist in clinical genetics) and an attorney to advise us in the area of genetic testing and its ethical, legal and clinical utility ramifications. Additionally, we are currently advising doctors who administer our genetic susceptibility tests to take special efforts to maintain the confidentiality of the test results. Our intent is to avoid information about test results being disclosed to insurers until issues regarding insurability have been fully analyzed and acted upon by the appropriate legislative bodies. 38 43 COMPETITION Although testing for major genetic defects, such as Down's Syndrome, has been available for years, genetic susceptibility testing for multi-factorial diseases is a newly emerging growth segment. Despite this segment's relatively young age, companies other than ours do exist have research programs seeking disease related genes for therapeutic and susceptibility testing purposes, including some that involve treatable/ preventable disease. Other companies with research programs include OncorMed, Inc. ("OncorMed"), Myriad Genetics, Inc. ("Myriad"), Genome Therapeutics Corp. ("GTC") and Sequana Therapeutics, Inc. ("Sequana"). Both GTC and Sequana have announced that they have research programs focusing on osteoporosis. Myriad has a test for breast cancer and has announced research programs for osteoporosis and coronary artery disease. OncorMed, while engaged in the development of genetic susceptibility tests, is focused solely on cancer. Additionally, some of our competitors receive data and funding from the Human Genome Project. The Human Genome Program is a federally funded program focused on sequencing the human DNA and enriching the sequence data with information about its biological function. To the extent our competitors receive data and funding from the Human Genome Project at no cost to them, they may have a competitive advantage over our company. Each of the above noted company's involvement with genetic susceptibility testing, together with large market capitalizations as public companies, validates this newly emerging market. In the case of newly introduced products requiring "change of behavior," (such as genetic susceptibility tests) multiple competitors may accelerate market acceptance and penetration through increasing awareness. Moreover, two different genetic susceptibility tests for the same disease may in fact test or measure different components, and thus actually be complementary when given in parallel as an overall assessment of risk, rather than being competitive with each other. Furthermore, with the exception of OncorMed, the primary focus of each of the above-referenced companies is performing gene-identifying research for pharmaceutical companies for therapeutic purposes, with genetic susceptibility testing being a secondary goal. On the other hand, our company's primary business focus is developing and commercializing genetic susceptibility tests for common diseases, with only an ancillary drug discovery program. Factors which further differentiate us from other companies are discussed below in "Competitive Advantages" at page 39. COMPETITIVE ADVANTAGES Other companies have entered the market for genetic testing as medical research has increasingly recognized the advantages provided by early detection of genetic predisposition. Although many of these competitors have greater financial and other resources than us (see "Competition" at page 39), we believe that our company has many competitive advantages, including: (1) Alliance with The University of Sheffield, U.K. Our efforts in the genetic discovery and development process are complemented by a strategic alliance with the Section of Molecular Medicine at The University of Sheffield, U.K. Sheffield University is one of the world's leaders in genetic aspects of common diseases with an inflammatory component. Sheffield University's research is targeted around identifying and discovering genes and genetic markers which appear to correlate with a patient's susceptibility to common diseases. Our relationship with Sheffield University offers another significant advantage over our competitors in reducing the cost of genetics research. The gene discovery process uses and generates vast amounts of information. Such research is time consuming, costly, heavily dependent upon advanced computer technology and unpredictable. Sheffield University has an integrated genetics program consisting of approximately 45 M.D. and Ph.D. scientists and researchers focusing on molecular genetics. Sheffield University performs gene-identifying research for us, thereby reducing our costs and allowing us to focus our attention on developing and commercializing known genetic markers. Many of our competitors' primary focus and capital is spent on performing gene-identifying research. 39 44 In exchange for Sheffield University's providing us with research and discoveries, the company has agreed to pay Sheffield University a share of the resultant net profits, with the percentage of net profits for our company and Sheffield University to be agreed upon separately under project agreements related to each test (each a "Project Agreement"). Net profits will be paid out to Sheffield University only after we have recovered the cost of goods sold, all marketing and sales costs and all operational costs related to each of the separate tests. (2) Identified Genetic Markers. While many of our competitors are currently seeking to identify diseaserelated genes, we have already identified four genetic markers that indicate a patient's genetic predisposition to certain diseases. Additionally, we are continuing to identify other genetic markers and intend to file patent applications related to the same. (3) Focus on Diseases that are Treatable and Preventable. We are one of the few companies that we know of that is focusing on genetic susceptibility testing services for diseases that are treatable and preventable. Most of our competitors have not focused on treatable/preventable diseases but have instead focused on drug development with a secondary emphasis on genetic testing. Other companies, such as Myriad and OncorMed are developing tests for breast cancer for which there is no known preventive treatment (except mastectomy). The value of this information is, as a result, often times "unwanted" by the patient. Our tests, on the other hand, when used in overall risk assessment, provide doctors and patients with information regarding a patient's risk for developing a potential future disease. Since the disease is treatable and preventable, this information is "wanted." Doctors and patients may use this wanted information to take preventive measures to slow down or avoid disease progression and develop treatment plans based on a patient's future risk for disease progression. (4) Focus on Developing and Commercializing Genetic Susceptibility Testing Services. Our company's primary business focus is to develop and commercialize genetic susceptibility testing services. We are committed to becoming one of the world's leaders in marketing and selling genetic susceptibility tests. We believe that broad market acceptance of genetic susceptibility testing, and any particular test, can be achieved only by educating consumers and professionals about the benefits of genetic testing and demonstrating how genetic testing can improve patient risk assessment and treatment. In order to commercialize our own products and prepare the markets we are entering, we have built and continue to expand a team with significant experience in the commercialization process and marketing high technology medical and dental products which require a change of behavior. We have developed a focused marketing and sales strategy for our initial product that includes segmentation, thought leader development, educational marketing and consultative selling. See "Marketing and Selling Strategies" at page 34. (5) First to Market with a Genetic Susceptibility Test for a Disease That is Treatable and Preventable. We are the only company that we know of that has brought to market a test (our periodontal susceptibility test) that identifies a genetic marker which indicates a greater susceptibility to a disease which is treatable and preventable. As a result, we believe that we are well-positioned to become a market leader in the periodontal market and potentially in each of the other areas in which we have developed or are developing tests. (6) Computer Modeling Technology. We have developed a computer modeling technology that simulates the biology of specific diseases. These simulations include basic genetic, cellular and subcellular interactions, as well as systems-level information about the clinical symptoms involved in the disease process. They allow a comprehensive integration of gene-expression data, basic biochemistry, and cell biology such that disease-associated genetic findings may be linked to the clinical outcomes. These simulations give us a competitive advantage by allowing us to more accurately and efficiently: (1) evaluate the combined effects of genetic markers and other risk factors in order to establish risk assessment; (2) link risk assessment profiles to treatment regimes; (3) identify new candidate genes or genetic markers; and 40 45 (4) design clinical trials more effectively. (7) Integrated Risk Assessment and Treatment Planning Approach to Multi-Factorial Diseases. While we recognize the importance of our genetic susceptibility tests, we also acknowledge the reality of other risk factors contributing to the development of disease. Thus certain diseases are often referred to as "multi-factorial" given that several factors contribute to their causation. See "Genetic Testing" at page 23. We have attempted to take a holistic approach toward analyzing the disease process. Therefore our risk assessment strategy includes not only the results of our genetic susceptibility tests, but also other known risk factors. By combining our test results together with present risk factors we are able to develop a more accurate risk assessment tool. We then link patient testing criteria to possible treatment suggestions. We package this data together with our genetic susceptibility tests to enhance our tests' practical utility to clinicians actually administering the tests. (8) Experienced in Structuring Clinical Trials to Evaluate Discoveries. We have extensive experience in product development, including designing and conducting clinical trials to evaluate genetic and drug discoveries. In the past, we provided clinical research services to pharmaceutical and medical/dental device companies. We have performed contract research for many of the world's leading health care and pharmaceutical companies. Some of our representative clients have included: Proctor & Gamble; Alpharma/Dumex; Implant Innovations, Inc.; W. L. Gore & Associates; Teledyne WaterPik; and Oral B. Commencing in 1994, our research team has increasingly focused on the development of our own products. Our research capability expedites the development process and increases our knowledge about target diseases. Moreover, we have already successfully completed our initial proof trials on all four of our genetic susceptibility test and confirmatory trials on three out of four of these tests. See "Pre-Marketing Trials/Status of Susceptibility Tests" at page 33. (9) Cost Effective Commercialization Process. Because we are focusing primarily on genetic susceptibility testing services and intend to develop at least four genetic susceptibility tests initially, with more tests in the future, we have designed our current product distribution and customer service operation in such a way that it can process, perform, track, bill and collect large volumes of genetic tests with appropriate quality and customer service support. We have carefully designed our product distribution and customer service operations to allow for multi-test or product capabilities. The design and functionality of our product distribution and customer service operations has been created in such a way as to enable us to easily move from a company currently selling only one genetic susceptibility test to a company distributing a portfolio of four or more such tests in multiple markets on a worldwide basis. Further, our operations have the capability of processing additional tests or products at even greater volumes with little or no modifications or increases in capital outlays. Moreover, as each test or product is added into our distribution stream, the cost per test to us decreases allowing for increased profitability. GOVERNMENT REGULATION The sampling of blood, saliva or cheek scrapings from patients and subsequent analysis in a clinical laboratory does not, at the present time, require Federal Drug Administration ("FDA") or regulatory authority approval inside the U.S. for either the sampling procedure or the analysis itself. The samples are taken in the healthcare provider's office, using standard materials previously approved as medical devices, such as sterile lancets and swabs. The testing procedure itself is performed in one or more registered, certified clinical laboratories under the auspices of the Clinical Laboratory Improvement Amendments of 1988, administered by the Health Care Financing Administration. The federal regulations governing approval of the laboratory facilities and applicable state and local regulations governing the operation of clinical laboratories would also apply. Changes in such regulatory schemes could require advance regulatory approval of genetic susceptibility tests sometime in the future could have a material adverse effect on our business. In addition, while our main focus is on genetic susceptibility testing, we may, in the future, endeavor to partner with pharmaceutical companies in the area of drug development. Any drug products developed by us or our future collaborative partners, prior to marketing in the United States, would be required to undergo an extensive regulatory approval process by the FDA. The regulatory process, which includes preclinical testing 41 46 and clinical trials of each therapeutic product in order to establish its safety and efficacy, can take many years and requires the expenditure of substantial resources. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory agency approval. In addition, delays or rejections may be encountered during the period of therapeutic development, including delays during the period of review of any application. Delays in obtaining regulatory approvals could adversely affect the marketing of any therapeutics developed by us or our collaborative partners, impose costly procedures upon us and our collaborative partners' activities, diminish any competitive advantages that we or our collaborative partners may attain and adversely affect our ability to receive royalties. Once regulatory approval of a product is granted, such approval may impose limitations on the indicated uses for which it may be marketed. Further, even if such regulatory approval is obtained, a marketed product and its manufacturer are subject to continuing review. The discovery of previously unknown problems with a product or manufacturer may result in restrictions on such product or manufacturer. Such restriction could include withdrawal of the product from the market. FACILITIES Our company has offices in the following locations: Flagstaff, Arizona; San Antonio, Texas; and Newport Beach, California. Flagstaff, Arizona is the site of our global commercial operations, including our marketing, sales and customer service organization. The San Antonio Research Center is the principal site of our research and development and employs teams of top medical, dental and computer scientists. Newport Beach is the site of our corporate headquarters. Our commercial operations office located at 3100 N. West Street, Bldg. A, Flagstaff, Arizona, contains 6,000 square feet and is held under a three-year lease which expires in September 2000. Our research and development office, located at 100 N.E. Loop 410, San Antonio, Texas, contains 1,961 usable square feet and is held under a five-year lease that will convert into a month to month tenancy on December 1, 2000 unless either party gives a prior 30 day notice. Our corporate headquarters, located at 4400 MacArthur Boulevard, Suite 980, Newport Beach, California, contains 1,798 usable square feet and is held under a five-year lease which expires in April of 2001. We believe that our current facilities are adequate for the foreseeable future and that alternate facilities are readily available. EMPLOYEES As of September 30, 1997, we had 27 full-time employees. Most of our employees are engaged directly in the development and commercialization of our tests. We believe that the success of our business will depend, in part, on our ability to attract and retain qualified personnel. Our employees are not covered by a collective bargaining agreement, and we consider our relations with our employees to be good. LEGAL PROCEEDINGS We are not a party to, nor is our property the subject of, any pending legal proceeding. 42 47 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of our company are:
NAME AGE POSITION SINCE - ------------------------------- --- --------------------------------------------- ----- Paul J. White, J.D., L.L.M.(1) 41 President, Chief Executive Officer and 1994 Chairman of the Board of Directors Kenneth S. Kornman, DDS, Ph.D. 50 Chief Scientific Officer and Director 1986 Michael G. Newman, DDS 50 Executive Vice President, Secretary and 1986 Director U. Spencer Allen, MS, MBA 55 Chief Financial Officer and Treasurer 1997 Jeanne Ambruster 40 Vice President, Global Business Operations 1997 Thomas A. Moore(1,2) 46 Director 1997 To be determined(1,2) -- Independent Director 1997(3)
- --------------- (1) Member of Compensation Committee. (2) Member of Audit Committee. (3) To be determined. Directors are elected to serve until the next annual meeting of shareholders. Directors serve without cash compensation or other remuneration. See "Principal Shareholders" at page 50. Officers are elected by the Board of Directors and serve until their successors are appointed by the Board of Directors. Biographical resumes of each officer and director are set forth below. Paul J. White, J.D., L.L.M. Mr. White joined the Company as President in 1994. Prior to joining our company, Mr. White was managing partner of White & Resnick, Irvine, California, a mid-size law firm servicing emerging companies. Mr. White was a business and corporate attorney and consultant to emerging health care companies for 15 years. Mr. White holds a B.A. (History/Political Science) from State University of New York at Brockport, a J.D. from Southwestern University and an L.L.M. (Taxation) from the University of San Diego. Kenneth S. Kornman, D.D.S., Ph.D. Dr. Kornman is a co-founder, officer and director of our company and currently serves as Chief Scientific Officer and Director. Prior to founding our company in 1986, he was a Department Chair and Professor at The University of Texas Health Science Center at San Antonio. He has also been a consultant and scientific researcher for many of the major oral care and pharmaceutical companies. Dr. Kornman currently holds academic appointments at The University of Texas Health Science Center and Harvard University. Dr. Kornman holds six patents in the pharmaceutical area, has published two books and more than 100 articles and abstracts and has lectured and consulted worldwide on the transfer of technology to clinical practice. Dr. Kornman holds a B.A. in Economics from Duke University. He obtained a D.D.S. from Emory University. Dr. Kornman also holds an M.S. (Periodontics) and a Ph.D. (Microbiology) from the University of Michigan. Michael G. Newman, D.D.S. Dr. Newman is a co-founder, officer and director of our company and currently serves as Executive Vice President, Secretary and Director. Prior to founding the Company in 1986, he was an adjunct Professor and former Director of the Periodontal Microbiology Laboratory at the University of California at Los Angeles (UCLA) and was president of the American Academy of Periodontology. Dr. Newman is currently a member of the American College of Dentists. Dr. Newman currently holds an academic appointment at UCLA. Dr. Newman has published more than 200 articles and abstracts and is the co-author of four books on microbiology, periodontitis and oral infections. Dr. Newman holds a B.A. and a D.D.S. from the University of California at Los Angeles. U. Spencer Allen, M.S., M.B.A. Mr. Allen joined the Company as Chief Financial Officer in January 1997. From September 1996 to January 1997, Mr. Allen functioned as an independent financial consultant. From August 1995 to August 1996, Mr. Allen was the Vice President (Finance) and Chief 43 48 Financial Officer of Promart Industries, Inc., a houseware products manufacturer. Mr. Allen worked as a self-employed financial consultant from January 1994 to August 1995. Prior to that time, Mr. Allen functioned as general manager of Slow Waltz Imports, Inc., a potpourri manufacturer. Mr. Allen holds B.S. (Engineering Science) from the U.S. Air Force Academy, an M.S. (Electrical Engineering) from the University of Southern California and an M.B.A. (Finance) from George Washington University. Jeanne Ambruster. Ms. Ambruster joined as Vice President, Global Business Operations in February 1997. Prior to joining our company, Ms. Ambruster served as Senior Manager of the Medical and Dental Technologies Business Division for 16 years with W.L. Gore & Associates. At W.L. Gore & Associates, she played a key role in the growth of this division and was the senior business leader responsible for building the company's dental product business. Ms. Ambruster holds a B.A. (Biology and Chemistry) from Pitzer College. Thomas A. Moore. Mr. Moore became a director of our company in 1997. Mr. Moore is the Chief Executive Officer and President of Nelson Communications Inc., one of the largest providers of health care marketing services in the United States. Prior to joining NCI as President in 1996, Mr. Moore was President of Procter & Gamble's $3 billion worldwide prescription and over-the-counter health care business and Group Vice President of the Procter & Gamble Company. He joined Procter & Gamble in 1973 and held positions of increasing responsibility in the company's cleaning products, beauty care, Richardson-Vicks and personal care divisions. He is Chairman of the American Health Foundation -- a nonprofit organization that researched the nutritional and environmental factors in cancer and other diseases. Mr. Moore holds a B.A. (History) from Princeton University. KEY EMPLOYEES Pamela K. Fink, Ph.D., Executive Director, Biologic Modeling Group. Dr. Fink has operational responsibility for our company's computer technology development. Dr. Fink is an expert in knowledge acquisition and simulation of complex systems. Dr. Fink joined the Company as Executive Director, Biologic Modeling Group in July 1994. She was formerly with the Southwest Research Institute for 10 years as a Section Manager and Staff Scientist. Dr. Fink holds a B.A. (Mathematics and Philosophy of Language) from Eckerd College and an M.A. and Ph.D. in Computer Science from Duke University. Debra J. Moore, M.S., Vice President, Product Development. Ms. Moore joined the Company as the Vice President, Product Development in September 1990. Ms. Moore has 19 years practical experience in identification and development of new health care products. Prior to joining us, Ms. Moore spent 13 years at Procter & Gamble Health Care where she was a Senior Manager in the Oral Care Product Development and Professional Relations Division. Ms. Moore was a leader in the research, development, manufacture and FDA approval of such products as Tartar Control Crest and Peridex, the first prescription drug approved by the FDA for the treatment of periodontal disease. Ms. Moore holds a B.S. (Chemistry) from Central Michigan University and an M.S. (Organic Chemistry) from the University of Wisconsin, Madison. Evan B. Siegel, M.Phil, Ph.D., Vice President, Regulatory Affairs. Dr. Siegel joined our company as Vice President of Regulatory Affairs in August 1996. From January 1994 to July 1996, Dr. Siegel was employed by Quintiles, Inc., a multinational contract research organization, where he held positions as Director, Regulatory Services, Director, Regulatory Consulting, and Principal Regulatory Scientist. From November 1991 until February 1994, he held senior management positions at Astra Pharmaceutical Products, Inc. Previously, Dr. Siegel was Director, OTC Regulatory Affairs at Syntex, USA, Inc. and Chief of Special Services and Supervising Toxicologist at the California Food and Drug Branch and a reviewer at the U.S. Food and Drug Administration. Dr. Siegel holds a B.S. (Physics) from Bucknell University, an M.S. (Radiological Health), an M.Phil. (Virology) and a Ph.D. (Virology) from Rutgers University. Todd D. Snowden, Director of Worldwide Sales. Mr. Snowden joined our company as Director of Worldwide Sales, in April 1997. From 1986 until joining us, Mr. Snowden worked in the Regenerative Technologies division at W. L. Gore & Associates, selling surgical devices and regenerative materials and as a product manager with responsibility for all aspects of their products. Mr. Snowden holds a B.S. (Biomedical Engineering) from Catholic University of America. 44 49 Nancy Whitley, Director of Market Development & Commercialization. Ms. Whitley is involved in transitioning products in the development phase into the marketplace, including leading pre and post-commercial product launches. Ms. Whitley has been the Director of Market Development & Commercialization for our company since February 1997. Prior to joining us, Ms. Whitley was a Senior Manager in the Medical and Dental Technologies Business Division of W. L. Gore & Associates where she worked for 19 years. Ms. Whitley holds a B.A. (Education) from Northern Arizona University. SCIENTIFIC EXPERTS We have engaged a number of scientific experts to render services. With the exception of one expert, we either (1) have entered into written agreements with the expert, each of which provides that we are the sole and exclusive owner of all proprietary rights to all genetic discoveries and related technology, whether developed by us or our consultant; or (2) receive services from the consultant underneath existing agreements between our company and Sheffield University. We currently have no written agreement in place with Dr. Bailit. Some of our scientific experts are engaged on a project basis while others are kept on a retainer and utilized in accordance with our current needs. Set forth below is a brief description of each scientific expert's background. PROFESSOR GORDON W. DUFF, M.A., PH.D., FRCP Lord Florey Chair and Director of the Division of Molecular and Genetic Medicine The University of Sheffield, U.K. Professor Duff is internationally recognized as a leader and innovator in the genetic aspects of cytokines and the immuno-inflammatory response. He is a fellow of the Royal College of Physicians, Edinburgh. Professor Duff holds a B.A. (Animal Physiology), an M.A. (Physiology) and a B.M., B.Ch., all from the University of Oxford and a Ph.D. in Medicine from the University of London. FRANCESCO S. DI GIOVINE, M.D., PH.D. Head of the Section of Molecular Medicine in the Department of Molecular and Genetic Medicine The University of Sheffield, U.K. Dr. di Giovine is a molecular geneticist managing the Sheffield University Molecular Medicine research and development laboratory. Dr. di Giovine holds a M.D. from the University of Florence, Italy and a Ph.D. (Molecular Immunology) from the University of Edinburgh, U.K. PROFESSOR GRAHAM RUSSELL, M.B., CH.B, D.M., PH.D Director of Division of Biochemical and Musculoskeletal Sciences Professor of Human Metabolism and Clinical Biochemistry The University of Sheffield, U.K. Professor Russell is an internationally recognized researcher in the field of osteoporosis. Professor Russell holds a B.A. (Biochemistry), an M.A. (Biochemistry) and an M.B., Ch.B. (Pharmacology, Therapeutics and Toxicology) from Cambridge University. Dr. Russell also holds a Ph.D. (Chemical Pathology) from Leeds University, as well as a Doctor of Medicine (D.M.) from Oxford University. PHILIP R. REILLY M.D., J.D. Eunice Shriver Center Dr. Reilly is an expert in the area of genetic testing and its ethical, legal and clinical utility ramifications. Dr. Reilly is a board certified specialist in clinical genetics and an attorney. Dr. Reilly holds a B.A. (Government) from Cornell University, a J.D. from Columbia University and a M.D. from Yale University. HOWARD L. BAILIT, D.M.D., PH.D. University of Connecticut Health Center Dr. Bailit is a former senior vice president of Medical Policies and Programs for Aetna Health Plans and was responsible for the assessment and acceptance of new medical technology. Dr. Bailit assists with the 45 50 assessment of new product opportunities with understanding of third-party payor issues. Dr. Bailit holds a D.M.D. from Tufts Dental School, an M.A. (Anthropology) and a Ph.D. (Anthropology) from Harvard University. EXECUTIVE COMPENSATION The following table sets forth total compensation for the year ended December 31, 1996 for the Chief Executive Officer, and each of the other executive officers of our company for each of the last three fiscal years (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------------------------- AWARDS ANNUAL COMPENSATION --------------------- PAYOUTS --------------------------------- RESTRICTED SECURITIES ------- OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION POSITION YEAR ($) ($) ($) ($) SARS (#) ($) ($) - ------------------------ ---- ------- ----- ------------- ---------- -------- ------- ------------ Paul J. White 1996 138,332 -0- -0- -0- -0- -0- -0- CEO, President 1995 102,226 -0- -0- -0- -0- -0- -0- 1994 60,607 -0- -0- -0- -0- -0- -0- - ------------------------------------------------------------------------------------------------------------------ Kenneth S. Kornman 1996 154,886 -0- -0- -0- -0- -0- -0- Chief Scientific Officer 1995 103,735 -0- 23,797* -0- -0- -0- -0- 1994 217,629 -0- 30,000* -0- -0- -0- -0- - ------------------------------------------------------------------------------------------------------------------ Michael G. Newman 1996 141,695 -0- -0- -0- -0- -0- -0- Executive Vice President 1995 121,536 -0- 23,797* -0- -0- -0- -0- Secretary 1994 274,146 -0- 30,000* -0- -0- -0- -0-
- --------------- * These amounts reflect contributions made to our profit sharing plan. OPTION GRANTS IN LAST FISCAL YEAR The following table provides information concerning each grant of options to purchase our Common Stock made during the year ended December 31, 1996 to the Named Executive Officers: OPTION/SAR GRANTS IN LAST FISCAL YEAR (INDIVIDUAL GRANTS)
NUMBER OF SECURITIES PERCENT OF TOTAL UNDERLYING OPTIONS/SARS OPTIONS/SARS GRANTED GRANTED TO EMPLOYEES EXERCISE OR BASE EXPIRATION NAME (#) IN FISCAL YEAR PRICE ($/SH) DATE - ----------------------------- -------------------- -------------------- ---------------- ---------- Paul J. White -0-* -0- -0- N/A Kenneth S. Kornman -0-** -0- -0- N/A Michael G. Newman -0-*** -0- -0- N/A
- --------------- * Does not reflect 25,000 stock options issued in 1997. Does not reflect 20,000 warrants purchased as part of a debt/warrant offering in 1997. See "Debt/Warrant Offering" at page 49. ** Does not reflect 22,000 stock options issued in 1997. Does not reflect 20,000 warrants purchased as part of a debt/warrant offering in 1997. See "Debt/Warrant Offering" at page 49. *** Does not reflect 35,125 stock options issued in 1997. Does not reflect 20,000 warrants purchased as part of a debt/warrant offering in 1997. See "Debt/Warrant Offering" at page 49. 46 51 1996 EQUITY INCENTIVE PLAN Our 1996 Equity Incentive Plan (the "Plan") was adopted by the Board of Directors and approved by the shareholders in June 1996. A total of 750,000 shares of Common Stock were originally reserved for issuance under the Plan. The Plan was later amended by vote of both the Board of Directors and the shareholders in May 1997 to increase the number of shares of Common Stock reserved for issuance under the Plan to 1,000,000. The Plan provides for grants of incentive stock options to employees (including officers and employee directors), nonstatutory stock options to employees (including officers and employee directors) and consultants (including non-employee directors), stock appreciation rights ("SARs"), stock awards and stock bonuses. The Plan allows for administration by either the Board of Directors or a committee thereunder, which determines optionees and the terms of options granted, including the exercise price, number of shares subject to the option and the exercisability thereof. The terms of options granted under the Plan generally may not exceed 10 years. The exercise price of options granted under the Plan is determined by the Board of Directors, but, in the case of an incentive stock option, cannot be less than 100% of the fair market value of the Common Stock on the date of grant. The exercise price of all nonstatutory stock options must equal at least 85% of the fair market value of the Common Stock on the date of grant. The exercise price of any stock option granted to an optionee who owns stock possessing more than 10% of the voting power of all classes of stock of our company must equal at least 110% of the fair market value of the Common Stock on the date of grant. The exercise price may be paid in such consideration as determined by the Board of Directors or a committee of the Board, including cash and promissory notes. Options granted under the Plan to employees and consultants have generally not been immediately exercisable and have vested over a thirty-six (36) month period (at the rate of 16.66% of the shares subject to the option at the end of six (6) months and 2.777% at the end of every full month thereafter). No option may be transferred by the optionee other than by will or the laws of descent or distribution. An optionee whose relationship with us or any related corporation ceases for any reason (other than by death or permanent and total disability) may exercise options in the three (3) month period following such cessation (unless such options terminate or expire sooner by their terms) or in such longer period determined by the Board of Directors, provided a period of five (5) years is not exceeded. Shares subject to options granted under the Plan which have lapsed or terminated may again be subject to options granted under the Plan. Furthermore, the Board of Directors may offer to exchange new options for existing options, with the shares subject to the existing options again becoming available for grant under the Plan. Upon any merger or consolidation in which we are not the surviving corporation, all outstanding options shall either be assumed or substituted by the surviving entity. If the surviving entity determines not to assume or substitute such options, the options terminate as of the closing of the merger or consolidation. As of June 30, 1997, no shares of Common Stock had been issued upon the exercise of options granted under the Plan, options to purchase 800,579 shares of Common Stock at a weighted average exercise price of $4.37 per share were outstanding and 199,421 shares remained available for future options grants. Prior to this offering, no SARs or restricted stock awards had been given to our employees and consultants. The Plan will terminate in June 2006, unless terminated sooner by the Board of Directors. EMPLOYMENT AGREEMENTS In January 1996, we entered into employment contracts with all three of the Named Executive Officers. Mr. Paul J. White, the Chief Executive Officer and President, currently receives an annual base salary of $140,000 a year, which will increase to $170,000 for 1998. Drs. Kenneth S. Kornman and Michael G. Newman each currently receive an annual base salary of $135,000, which will increase to $165,000 for 1998. Each Named Executive Officer's employment contract has a five year term (beginning in January 1996) which is automatically renewed for an additional twelve months unless six-months prior written notice is given by either party. Each of the Named Executive Officers is also receiving a $600 a month automobile allowance. 47 52 INDEMNIFICATION OF OFFICERS AND DIRECTORS Our company's Amended and Restated Articles of Incorporation eliminates the liability of directors for monetary damages for an act or omission in the director's capacity as a director, except for: (1) a breach of a director's duty of loyalty to our company or our shareholders; (2) an act or omission not in good faith that constitutes a breach of duty of that director to our Company or an act or omission that involves intentional misconduct or a knowing violation of the law; (3) a transaction from which a director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; or (4) an act or omission for which the liability of a director is expressly provided for by an applicable statute. If the Texas Miscellaneous Corporation Laws Act or the Texas Business Corporation Act is amended to authorize action further eliminating or limiting the personal liability of directors, then the liability of a director of our company shall be eliminated or limited to the fullest extent permitted by such statutes, as so amended. Any amendment, repeal or modification of such provision shall be prospective only and shall not adversely affect any right or protection of a director of our company existing at the time of such amendment, repeal or modification. Additionally, it is the position of the Securities and Exchange Commission that indemnification of directors and officers for liabilities arising under the Securities Act of 1933 is against public policy and unenforceable pursuant to Section 14 of the Securities Act of 1933. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS We believe that the transactions set forth below were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. All future transactions, including loans, between us and our officers, directors, principal shareholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors, and will continue to be on terms no less favorable to us than could be obtained from unaffiliated third parties. PRIVATE PLACEMENT OF SECURITIES Between November 1996 and January 1997, we sold 189,188 shares of our Common Stock in a private placement at a price of $3.70 per share. Between March 1997 and September 1997, we sold 292,060 shares of our Common Stock in a second private placement transaction at a price of $5.00 per share. Except for Thomas Moore, who subsequently became one of our directors, all investors in both such private placements were unrelated third party investors who purchased in arms'-length transactions. DEBT/WARRANT OFFERING From August 1, 1997 through October 6, 1997, we borrowed an aggregate of $1,780,000 from a group of lenders evidenced by promissory notes bearing interest at 10% interest rate and due the earlier of fourteen months from the date of the notes or the closing date of an initial public offering (the "Bridge Loans"). As additional consideration for the Bridge Loans, we issued one warrant for each $5.00 loaned to the Company for a total of 356,545 warrants (the "Bridge Warrants"). Each Bridge Warrant entitles the holder to purchase one share of Common Stock at $5.50 per share for a period of five years from the date of issuance. The following officers and directors subscribed to the Bridge Loans in the principal amount indicated after their names: Paul J. White ($100,000/20,000 Bridge Warrants); Kenneth S. Kornman ($100,000/20,000 Bridge Warrants); Michael G. Newman ($100,000/20,000 Bridge Warrants); U. Spencer Allen ($50,000/10,000 Bridge Warrants); Jeanne Ambruster ($50,000/10,000 Bridge Warrants); and Thomas A. Moore ($75,000/15,000 Bridge Warrants). TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS Our shareholders have elected Thomas A. Moore to serve as a director. Mr. Moore is also the CEO and President of Nelson Communications, Inc. ("NCI"). We have recently formed a joint venture with NCI. This joint venture is expected to provide medical education and relationship marketing information services 48 53 using our computer modeling technology and patient information generated from the susceptibility testing business. Under the terms of the joint venture, we will be acting as the technology partner and NCI will be functioning as the marketing partner. See "Product Development" at page 34. We believe that the terms of the joint venture are at least as favorable to us as would be available from a company other than NCI in an arm's length transaction. The disinterested members of the Board of Directors have unanimously approved the execution of this agreement. EMPLOYEE SALARY REDUCTION PLAN In May 1997, in order to reduce our overhead and as an additional incentive to our employees, we instituted a voluntary salary reduction plan where our employees could choose to receive stock options instead of salary. Employees were offered options to purchase 600 shares of Common Stock for every $1,000 their salary was reduced. Most of our employees participated, including all of our officers. A total of 267,079 options to purchase Common Stock at an exercise price of $5.00 or $5.50 per share were issued to employees. 49 54 PRINCIPAL SHAREHOLDERS As of September 30, 1997, we have issued 3,738,007 shares of Common Stock to 72 holders of record. The following table sets forth certain information regarding the beneficial ownership of shares of our Common Stock as of September 30, 1997 by (i) each of our company's directors and executive officers, (ii) each person who beneficially owns more than 5% of the outstanding shares of Common Stock, and (iii) all directors and officers of our company as a group. Unless otherwise indicated, the shareholders listed below may be reached at 4400 MacArthur Boulevard, Suite 980, Newport Beach, California 92660.
PERCENTAGE BENEFICIALLY OWNED(1) SHARES --------------------------------- NAME BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING - ---------------------------------------------------- ------------------ --------------- -------------- Kenneth S. Kornman(2)............................... 1,131,235 30.26% 21.60% 100 N.E. Loop 410 San Antonio, Texas Paul J. White(3).................................... 1,121,110 29.99% 21.40% Michael G. Newman(4)................................ 1,072,110 28.68% 20.47% U. Spencer Allen(5)................................. 62,783 1.68% 1.20% Jeanne Ambruster(6)................................. 38,999 1.04% * 3100 N. West St., Bldg. A Flagstaff, Arizona 86004 Thomas A. Moore(7).................................. 75,998 2.03% 1.45% 41 Madison Avenue, Ste. 27 New York, NY 10010 All Officers and Directors as a Group (6 persons)(8)....................................... 3,502,235 93.69% 66.86%
- --------------- * Less than one percent. (1) Percentage of ownership for each holder is based on 3,738,007 shares of Common Stock outstanding on September 30, 1997 together with applicable options and warrants for such shareholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes shares over which the holder has voting or investment power, subject to community property laws. Shares of Common Stock subject to options and warrants that are currently exercisable or exercisable within 60 days are deemed to be beneficially owned by the person holding the option or warrants for computing such person's percentage, but are not treated as outstanding for computing the percentage of any other person. (2) Includes 983,333 shares held in Rocklyn, Ltd., a Texas limited partnership created for the benefit of the Kornman family, including Mr. Kornman. Includes 27,902 shares issuable pursuant to options exercisable within 60 days of September 30, 1997 and 20,000 shares issuable pursuant to warrants which are immediately exercisable. (3) Mr. Paul J. White and Mrs. Suzette White, as trustees of the White Family Trust, have voting power over 1,022,333 of such shares. The White Family Trust was established for the benefit of members of the White family, including Mr. White. Includes 60,000 shares held in irrevocable trusts created for the benefit of the White's children. Mr. White disclaims beneficial ownership of such shares. Includes 17,777 shares issuable pursuant to options exercisable within 60 days of September 30, 1997 and 20,000 shares pursuant to warrants which are immediately exercisable. (4) Mr. Michael G. Newman and Mrs. Susan L. Newman, as trustees of the Newman Family Trust, have voting power over 806,556 of such shares. The Newman Family Trust was created for the benefit of the family of Michael G. Newman and Mrs. Susan L. Newman. Mr. and Mrs. Newman, as general partners of The Michael and Susan Newman Family L.P., a Delaware limited partnership, have voting power over 196,000 shares included therein. Mr. Newman disclaims beneficial ownership of such shares. Includes 14,777 shares issuable pursuant to options exercisable within 60 days of September 30, 1997 and 20,000 shares issuable pursuant to warrants which are immediately exercisable. 50 55 (5) Includes 52,783 shares issuable pursuant to options which are exercisable within 60 days of September 30, 1997 and 10,000 shares issuable pursuant to warrants which are immediately exercisable. (6) Includes 28,999 shares issuable pursuant to options which are exercisable within 60 days of September 30, 1997 and 10,000 shares issuable pursuant to warrants which are immediately exercisable. (7) Includes 6,944 shares issuable pursuant to options which are exercisable within 60 days of September 30, 1997 and 15,000 shares issuable pursuant to warrants which are immediately exercisable. (8) Includes all shares deposited in trust by the officers and directors of our company, in which shares such officers and directors disclaim any beneficial ownership interest. DESCRIPTION OF SECURITIES We are authorized to issue up to 10,000,000 shares of no par value Common Stock and 5,000,000 shares of Preferred Stock. As of September 30, 1997, there were outstanding 3,738,007 shares of Common Stock held of record by 72 persons. No shares of Preferred Stock were issued or outstanding. COMMON STOCK Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor. Upon the liquidation, dissolution, or winding up of our company, the holders of Common Stock are entitled to share ratably in all of our assets which are legally available for distribution, after payment of all debts and other liabilities and the liquidation preference of any outstanding Common Stock. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of Common Stock are, and the shares being sold by us in this offering will be, when issued and delivered, validly issued, fully paid and nonassessable. Based upon the number of shares outstanding as of that date, and after giving effect to the sale of the Common Stock offered hereby, there will be 5,238,007 shares of Common Stock outstanding (assuming no exercise of outstanding options, warrants or the Underwriter's over-allotment option). PREFERRED STOCK Our company is authorized to issue up to 5,000,000 shares of Preferred Stock. No shares of Preferred Stock are outstanding. The Board has the authority without any further action by our shareholders to issue any or all of the authorized shares of Preferred Stock in one or more series and to establish the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series. The issuance of Preferred Stock could adversely affect the holders of Common Stock and could have the effect of delaying, deferring or preventing a change in our control. We have no present plans to issue any shares of Preferred Stock. See "Effect of Preferred Stock and Director Removal Provisions" at page 13. OPTIONS AND WARRANTS Options. As of September 30, 1997, 800,579 options to purchase our Common Stock had been issued under our 1996 Equity Incentive Plan. These options vest over time and have a per share exercise price from $3.70 to $5.00. See "1996 Equity Incentive Plan" at page 47. Underwriter's Warrants. Upon completion of this offering, we will have warrants (the "Underwriter's Warrants") outstanding to purchase 150,000 shares of Common stock. The Underwriter's Warrants are exercisable at a price per share equal to 135% of the initial public offering price for a period of four years commencing at the second year from the date of issuance. The Underwriter's Warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the Underwriter's Warrants upon the occurrence of certain events, including any recapitalization, reclassification, 51 56 stock dividend, stock split, stock combination or similar transaction. The Underwriter's Warrants grant to the holders thereof certain registration rights which are described below. See "Registration Rights" at page 52 and "Underwriting" at page 54. Bridge Warrants. From August 1, 1997 through October 6, 1997, we borrowed an aggregate of $1,780,000 from a group of lenders evidenced by promissory notes bearing interest at 10% interest rate and due the earlier of fourteen months from the date of the notes or the closing date an initial public offering (the "Bridge Loans"). The Bridge Loans are subordinate to the prior payment in full of all of our secured obligations currently existing or those created in the future. As additional consideration for the Bridge Loans, we issued one warrant for each $5.00 loaned to the Company for a total of 356,545 warrants (the "Bridge Warrants"). Each Bridge Warrant entitles the holder to purchase one share of Common Stock at $5.50 per share for a period of five years from the date of issuance. We can call the Bridge Warrants if the Common Stock is listed on a national market or NASDAQ system and has had a closing price of at least $12.00 per share for thirty (30) consecutive trading days. REGISTRATION RIGHTS In connection with the Underwriter's Warrants, the holders of the Common Stock issuable upon exercise of the Underwriter's Warrants have the right to notice and inclusion in any registration statement filed by us for a period of six (6) years commencing one year after our initial public offering closes solely at our expense (but excluding fees and expenses of the holder's counsel and any underwriting or selling commissions). Additionally, we agreed to allow one demand registration for a period of four years from the effective date of the registration statement, upon written demand of holder(s) representing a majority of the outstanding Underwriter's Warrants, solely at our expense (but excluding fees and expenses of the holder's counsel and any underwriting or selling commissions). Additionally, the Bridge Warrant holders are permitted one (1) S-3 demand registration upon request of holders of fifty percent (50%) of the outstanding Bridge Warrants. TRANSFER AGENT AND REGISTRAR U.S. Stock Transfer Corporation will act as transfer agent and registrar for our Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, we will have 5,238,007 outstanding shares of Common Stock (assuming no exercise of outstanding options, warrants or Underwriter's over-allotment option). Of these shares, the 1,500,000 shares sold to the public in this offering will be freely tradeable without restrictions or further registration under the Securities Act, except for any shares purchased by our "affiliates" within the meaning of the Securities Act, which will be subject to the resale limitations of Rule 144. The remaining 3,738,007 shares held by existing shareholders were issued by us in private transactions in reliance upon one or more exemptions under the Securities Act, are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act. Such restricted securities may be sold in compliance with such Rule, pursuant to registration under the Securities Act or pursuant to an exemption therefrom. Generally, under Rule 144, each person holding restricted securities for a period of one year may, every three months after such one year holding period, sell in ordinary brokerage transactions or to market makers an amount of shares equal to the greater of one percent of our then outstanding Common Stock or the average weekly trading volume during the four weeks prior to the proposed sale. In addition, sales under Rule 144 may be made only through unsolicited "broker's transactions" or to a "market maker" and are subject to various other conditions. The limitation on the number of shares which may be sold under Rule 144 and the "broker's transaction" requirement do not apply to restricted securities sold for the account of a person who is not and has not been our "affiliate" (as that term is defined in the Act) during the three months prior to the proposed sale and who has beneficially owned the securities for at least two years. Prior to the offering, there has been no market for the Common Stock, and no predictions can be made as to the effect, if any, that sales of shares under Rule 144 or the availability of shares for sale will have on the market prices prevailing from time to time. Sales of substantial amounts of Common Stock in the public 52 57 market following this offering could lower the market price of the Common Stock. Of the 5,238,007 shares of Common Stock to be outstanding after this offering (assuming no exercise of outstanding options, warrants or the overallotment option), 1,500,000 shares will be freely tradeable without restriction. Upon expiration of the lock-up agreements entered into by the officers and directors of our company, an additional 3,258,053 shares will become eligible for sale one year from the close of this offering, subject to the provisions of Rule 144. Of the remaining 479,954 shares of Common Stock, 5,000 shares will be eligible for resale under Rule 144 following this offering. The remaining 474,954 shares will have been held for less than one year and will become eligible for sale at various dates as the one-year holding period under Rule 144 is satisfied. In addition, we intend to file a registration statement on Form S-8 with respect to the shares of Common Stock issuable upon exercise of options under the 1996 Equity Incentive Plan (the "Plan"). The Plan authorizes the issuance of options relating to up to 1,000,000 shares of Common Stock. Currently, there are 800,579 options that have been issued under the Plan which generally vest over three years. See "1996 Equity Incentive Plan" at page 47. Upon filing of such registration statement, the holders of such options may, subject to vesting requirements, exercise and sell their shares immediately without restriction, except affiliates who are subject to certain volume limitations and manner of sale requirements of Rule 144. Holders of 356,545 warrants to purchase shares are entitled to certain registration rights with respect to such shares. Upon registration, such shares may be sold in the market without limitation. See "Registration Rights" at page 52. Sales of such shares may decrease the market price for our Common Stock. See "Underwriting" at page 54 and "Arbitrary Offering Price of the Common Stock; Possible Volatility of Common Stock Price" at page 13. 53 58 UNDERWRITING Subject to the terms and conditions set forth in the underwriting agreement (the "Underwriting Agreement"), we have agreed to sell to each of the underwriters named below (the "Underwriters"), and each of the Underwriters, for whom Nutmeg Securities, Ltd. is acting as representative (the "Representative"), has severally agreed to purchase, the number of shares of Common Stock set forth opposite its name below. Under certain circumstances, the commitments of nondefaulting Underwriters may be increased as set forth in the Agreement Among Underwriters.
NUMBER UNDERWRITER OF SHARES ------------------------------------------------------------------ ---------- Nutmeg Securities, Ltd............................................ Total........................................................ 1,500,000 =========
The Underwriting Agreement provides that the obligations of the Underwriter thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriter's obligations is such that it is committed to purchase and pay for all of the above shares of Common Stock if any are purchased. The Underwriter proposes to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus. We have granted to the Underwriter a 45-day over-allotment option to purchase up to 225,000 additional shares of Common Stock at the public offering price less the underwriting discount. The Underwriter may exercise such option only to cover over-allotments made in connection with the sale of the shares of Common Stock offered hereby. We have also agreed to sell to the Underwriter, for nominal consideration, warrants (the "Underwriter's Warrants") to purchase the number of shares of our Common Stock equal to 10% of the total number of shares of Common Stock sold in this offering at a price per share equal to 135% of the initial public offering price of the Common Stock. The Underwriter's Warrants will be exercisable for a period of four years commencing one year following the closing of this offering and will contain certain demand and "piggyback" registration rights with respect to the Common Stock issuable upon the exercise of the Underwriter's Warrants. The Underwriter's Warrants are not transferable (except to certain employees and affiliates of the Underwriter). The exercise price and the number of shares issuable upon exercise may, under certain circumstances, be subject to adjustment pursuant to antidilution provisions. We have agreed to allow the Underwriter a commission of eight percent (8%) of the public offering price of the shares of Common Stock. Additionally, we will be paying the Underwriter, following the closing of this offering, a nonaccountable expense allowance equal to three percent (3%) of the aggregate public offering price of the shares of Common Stock, less any applicable deposits. We have further agreed to indemnify the Underwriter against certain liabilities, losses and expenses, including liabilities under the Securities Act, or to contribute to payments that the Underwriter may be required to make in respect thereof. We also have agreed to reimburse the Underwriter for certain out-of-pocket expenses incurred in connection with the offering. The Underwriter has advised us that it does not intend to make sales to discretionary accounts. Our officers and directors who in the aggregate beneficially own 3,258,053 shares of Common Stock have agreed not to, directly or indirectly, sell, offer, contract to sell, make any short sale, pledge or otherwise dispose of such shares for a period of 12 months after the date of the closing of this offering. 54 59 LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the Common Stock offered hereby will be passed upon for us by Jeffers, Wilson, Shaff & Falk, LLP, Irvine, California. Certain legal matters in connection with the offering will be passed upon for the Underwriter by William M. Prifti, Esq., Lynnfield, Massachusetts. EXPERTS The audited consolidated financial statements included in this Prospectus and elsewhere in the Registration Statement have been audited by Singer Lewak Greenbaum & Goldstein LLP, Los Angeles, California, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (the "Registration Statement") under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to us and this offering, reference is made to the Registration Statement, including the exhibits and schedules filed therewith, copies of which may be obtained at prescribed rates from the Commission at its principal office at 450 Fifth Street N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: 75 Park Place, New York 10007, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400 Chicago, Illinois 60604. In addition, the Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other documents filed electronically with the Commission, including the Registration Statement. Descriptions contained in this Prospectus as to the contents of any agreement or other documents filed as an exhibit to the Registration Statement are not necessarily complete and each such description is qualified by reference to such agreement or document. We intend to furnish to our shareholders annual reports containing financial statements audited and reported upon by our independent public accountants. 55 60 INDEX TO FINANCIAL STATEMENTS OF MEDICAL SCIENCE SYSTEMS, INC.
PAGE ----------- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS............................... F-2 FINANCIAL STATEMENTS Balance Sheets................................................................. F-3 Statements of Operations....................................................... F-4 Statements of Shareholders' Deficit............................................ F-5 Statements of Cash Flows....................................................... F-6 Notes to Financial Statements.................................................. F-7 - F-16
F-1 61 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders Medical Science Systems, Inc. We have audited the accompanying balance sheet of Medical Science Systems, Inc. as of December 31, 1996 and the related statements of operations, shareholders' deficit, and cash flows for each of the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Medical Science Systems, Inc. as of December 31, 1996, and the results of its operations and its cash flows, for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California September 26, 1997 F-2 62 MEDICAL SCIENCE SYSTEMS, INC. BALANCE SHEETS AS OF DECEMBER 31, 1996 AND JUNE 30, 1997 (UNAUDITED) ASSETS (Note 3)
DECEMBER 31, JUNE 30, 1996 1997 ------------- ----------- (UNAUDITED) Current assets Cash and cash equivalents....................................... $ 55,966 $ 29,982 Accounts receivable............................................. 12,359 40,434 Due from shareholder............................................ 6,565 -- ---------- ---------- Total current assets......................................... 74,890 70,416 Furniture and equipment, net (Note 2)............................. 82,877 91,901 Patents........................................................... 154,195 221,200 Deferred offering costs........................................... -- 31,081 ---------- ---------- Total assets............................................ $ 311,962 $ 414,598 ========== ========== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Revolving line of credit (Note 3)............................... $ 353,723 $ -- Accounts payable................................................ 219,669 446,478 Accrued expenses................................................ 44,384 173,713 Accrued officer compensation (Note 9)........................... 127,500 75,000 Deferred rent................................................... 12,703 12,703 Current portion of long-term debt (Note 3)...................... 44,489 146,560 Current portion of capitalized lease obligations (Note 8)....... 8,408 8,799 ---------- ---------- Total current liabilities.................................... 810,876 863,253 Long-term debt, less current portion (Note 3)..................... 173,798 553,073 Capitalized lease obligations, less current portion (Note 8)...... 27,036 12,168 ---------- ---------- Total liabilities............................................ 1,011,710 1,428,494 ---------- ---------- Commitments and contingencies (Note 8) Shareholders' deficit (Notes 5 and 7) Preferred stock, no par value 5,000,000 shares authorized none issued and outstanding... -- -- Common stock, no par value 10,000,000 shares authorized; 3,295,539 and 3,629,947 (unaudited) shares issued and outstanding.................................................. 171,500 1,691,257 Accumulated deficit............................................. (871,248) (2,705,153) ---------- ---------- Total shareholders' deficit.................................. (699,748) (1,013,896) ---------- ---------- Total liabilities and shareholders' deficit............. $ 311,962 $ 414,598 ========== ==========
The accompanying notes are an integral part of these financial statements. F-3 63 MEDICAL SCIENCE SYSTEMS, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------------ -------------------------- 1996 1995 1997 1996 ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) Sales....................................... $1,918,879 $1,872,932 $ 100,289 $ 1,864,526 Cost of sales............................... 547,766 367,520 104,596 477,330 ---------- ---------- ----------- ----------- Gross profit (loss)......................... 1,371,113 1,505,412 (4,307) 1,387,196 ---------- ---------- ----------- ----------- Expenses Research and development.................. 958,249 582,595 419,335 429,494 Selling, general, and administrative...... 1,162,768 755,785 1,379,611 433,924 ---------- ---------- ----------- ----------- Total expenses......................... 2,121,017 1,338,380 1,798,946 863,418 ---------- ---------- ----------- ----------- Income (loss) from operations............... (749,904) 167,032 (1,803,253) 523,778 ---------- ---------- ----------- ----------- Other income (expense) Interest income........................... 8,561 35 38 4,078 Interest expense.......................... (34,229) (14,300) (30,690) (8,236) Loss on disposal of assets................ (6,934) -- -- -- ---------- ---------- ----------- ----------- Total other income (expense)........... (32,602) (14,265) (30,652) (4,158) ---------- ---------- ----------- ----------- Income (loss) before provision for income taxes..................................... (782,506) 152,767 (1,833,905) 519,620 Provision for income taxes.................. 6,040 2,755 -- -- ---------- ---------- ----------- ----------- Net income (loss)........................... $ (788,546) $ 150,012 $(1,833,905) $ 519,620 ========== ========== =========== =========== Earnings (loss) per common share............ $ (.18) $ .03 $ (.43) $ .12 ========== ========== =========== =========== Weighted average common shares outstanding............................... 4,288,436 4,288,436 4,288,436 4,288,436 ========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-4 64 MEDICAL SCIENCE SYSTEMS, INC. STATEMENTS OF SHAREHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
COMMON STOCK ----------------------- ACCUMULATED SHARES AMOUNT DEFICIT TOTAL --------- ---------- ----------- ----------- Balance, December 31, 1994.................. 3,249,999 $ 3,000 $ (100,714) $ (97,714) Distribution to shareholders................ (132,000) (132,000) Net income.................................. 150,012 150,012 --------- ---------- ----------- ----------- Balance, December 31, 1995.................. 3,249,999 3,000 (82,702) (79,702) Sale of common stock (Note 5)............... 40,540 150,000 150,000 Common stock issued for services rendered... 5,000 18,500 18,500 Net loss.................................... (788,546) (788,546) --------- ---------- ----------- ----------- Balance, December 31, 1996.................. 3,295,539 171,500 (871,248) (699,748) Sale of common stock (unaudited) (Note 5)... 148,648 550,000 550,000 Sale of common stock (unaudited) (Note 5)... 185,760 928,800 928,800 Offering costs (unaudited) (Note 5)......... (107,420) (107,420) Stock options issued for reduction in salary (unaudited) (Note 7)...................... 148,377 148,377 Net loss (unaudited)........................ (1,833,905) (1,833,905) --------- ---------- ----------- ----------- Balance, June 30, 1997 (unaudited).......... 3,629,947 $1,691,257 $(2,705,153) $(1,013,896) ========= ========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-5 65 MEDICAL SCIENCE SYSTEMS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED DECEMBER 31, JUNE 30, --------------------- -------------------------- 1996 1995 1997 1996 --------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)..................................... $(788,546) $150,012 $(1,833,905) $ 519,620 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Loss on sale of assets............................. 6,934 -- -- -- Depreciation and amortization...................... 27,330 14,118 15,999 12,731 Issuance of common stock for services.............. 18,500 -- -- -- Issuance of stock options in exchange for a reduction in salary.............................. -- -- 148,377 -- (Increase) decrease in Accounts receivable................................ 315,241 (324,376) (28,075) 326,270 Prepaid expenses................................... -- 900 -- (6,329) Increase (decrease) in Accounts payable................................... 198,090 (69,143) 226,809 47,785 Accrued expenses................................... 140,323 (25,497) 76,829 2,400 Unearned revenues.................................. (366,051) 366,051 -- (366,051) Deferred rent...................................... 12,703 -- -- -- --------- --------- ----------- --------- Net cash provided by (used in) operating activities..... (435,476) 112,065 (1,393,966) 536,426 --------- --------- ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of furniture and equipment................... (31,942) (35,743) (25,023) (3,473) (Increase) decrease in due from shareholder........... (6,565) 394 6,565 -- Increase in patents................................... (128,559) (25,636) (67,005) (37,500) Proceeds from sale of assets.......................... 13,000 -- -- -- --------- --------- ----------- --------- Net cash used in investing activities................... (154,066) (60,985) (85,463) (40,973) --------- --------- ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Sale of common stock.................................. $ 150,000 $ -- $ 1,371,380 $ -- Increase in deferred offering costs................... -- -- (31,081) -- Distribution to shareholders.......................... -- (132,000) -- -- Proceeds from note payable............................ 250,000 -- -- 250,000 Principal payments on long-term debt.................. (31,713) -- (18,654) (11,070) Borrowings on line of credit, net..................... 209,723 144,000 146,277 (144,000) Principal payments on capital lease obligations....... (5,120) -- (14,477) (784) --------- -------- ----------- ----------- Net cash provided by financing activities............... 572,890 12,000 1,453,445 94,146 --------- -------- ----------- ----------- Net increase (decrease) in cash......................... (16,652) 63,080 (25,984) 589,599 Cash and cash equivalents, beginning of period.......... 72,618 9,538 55,966 72,618 --------- -------- ----------- ----------- Cash and cash equivalents, end of period................ $ 55,966 $ 72,618 $ 29,982 $ 662,217 ========= ======== ========== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid......................................... $ 29,549 $ 14,300 $ 30,690 $ 8,236 ========= ======== ========== ========= Income taxes paid..................................... $ 6,040 $ 2,755 $ -- $ -- ========= ======== ========== =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES During the year ended December 31, 1996 and the six months ended June 30, 1996, the Company acquired furniture and equipment of $40,564 and $14,266 (unaudited) under capitalized lease obligations. The accompanying notes are an integral part of these financial statements. F-6 66 MEDICAL SCIENCE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED.) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Line of Business Medical Science Systems, Inc., a Texas corporation, (the "Company") originally operated under two separate corporations, known as Oral Science Systems and Oral Science Technologies. In 1995 Oral Science Systems was merged into Oral Science Technologies and Oral Science Technologies was renamed Medical Science Systems, Inc. The merger was accounted for in a manner similar to a pooling of interest, accordingly, the results of operations for the year ended December 31, 1995 include Oral Science Systems from January 1, 1995 to the date of the merger. The Company is currently developing a line of genetic susceptibility tests and therapeutic targets for common diseases. As of December 31, 1996, the Company has commercially introduced one such product and is in various stages of development for several others. The Company also provides clinical trials and research services under contract to pharmaceutical companies, and such services generated substantially all of the Company's revenues for the years ended December 31, 1996 and 1995. Interim Financial Information The unaudited financial information furnished herein reflects all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are necessary to fairly state the Company's financial position, the results of its operations, and cash flows for the periods present. The results of operations for the six months ended June 30, 1997 are not necessarily indicative of results for the entire fiscal year ending December 31, 1997. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. Fair Value of Financial Instruments The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of the Company's financial instruments including cash, accounts receivable, accounts payable, accrued expenses, and accrued officer compensation, the carrying amounts approximate fair value due to their short maturities. The amounts shown for line of credit, long-term debt, and capital lease obligations also approximate fair value because current interest rates and terms offered to the Company for similar debt and lease agreements are substantially the same. F-7 67 MEDICAL SCIENCE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED.) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Furniture and Equipment Furniture and equipment, including equipment under capital leases, are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of three to five years as follows: Computer equipment.................................. 3 years Furniture and fixtures.............................. 5 years Computer software................................... 3 years Equipment under capital leases...................... 3 years
Betterments, renewals, and extraordinary repairs that extend the life of the asset are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to assets retired are removed from the accounts, and the gain or loss on disposition is recognized in the statement of operations. Patents The cost of acquiring patents is being amortized using the straight-line method of their useful lives of ten years beginning from the time the patents are awarded. The Company was issued a patent in August 1997 and currently has ten patents pending; accordingly, the Company had not recognized any amortization related to these patents as of June 30, 1997. Deferred Offering Costs Amounts paid for costs associated with an anticipated initial public offering ("IPO") are capitalized and will be recorded as a reduction to common stock upon the completion of the IPO. In the event that the IPO is not successful, the deferred offering costs will be charged to expense. Revenue Recognition Contract revenues are recognized ratably as services are provided based on a fixed contract price or on negotiated hourly rates. The Company has no unbilled accounts receivable under any contracts at December 31, 1996 and June 30, 1997 (unaudited). Provision for anticipated losses on fixed-price contracts is made in the period such losses are identified. Revenue from genetic susceptibility tests is recognized when the tests have been completed and the results reported to the doctors. Concentrations of Credit Risk The Company sells products and provides contract services for customers primarily in the United States and extends credit based on an evaluation of the customer's financial condition, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. During the year ended December 31, 1996, the Company did business with three customers whose sales comprised approximately 99% of revenues. Amounts due from these customers represented 100% of accounts receivable at December 31, 1996. F-8 68 MEDICAL SCIENCE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED.) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) During the year ended December 31, 1995, the Company did business with two customers whose sales comprised approximately 85% of revenues. During the six months ended June 30, 1996, the Company did business with three customers whose sales comprised approximately 100% of revenues. Research and Development Research and development costs related to the development of new products are expensed as incurred. Income Taxes Prior to September 30, 1996, the Company had elected to be treated as an "S" corporation for federal and state tax purposes. Effective September 30, 1996, the Company terminated such election and became taxable as a "C" corporation. The Company will not realize any future tax benefits of net operating losses incurred prior to September 30, 1996. The Company accounts for income taxes under the liability method required by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities reflect the expected future tax consequences of events that have been included in the financial statements and tax returns. Deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities, using the enacted tax rates in effect for the year in which the differences are expected to reverse. The Company has not recorded any deferred tax assets related to operating loss carryforwards generated subsequent to September 30, 1996 due to the uncertainty of the Company's ability to ultimately recognize the benefits of such carryforwards. Net Income (Loss) Per Share Net income (loss) per share is based on the weighted average number of common and common equivalent shares outstanding during the period. In connection with the Company's IPO, common stock issued for consideration below the IPO per share price (assuming an IPO price of $9.00) during the twelve months before the filing of the registration statement, plus options and warrants to purchase the Company's common stock issued for consideration below the IPO per share price during the same period (using the treasury stock method), have been included in the calculation of common shares outstanding as if they had been outstanding for all periods presented. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly-liquid investments purchased with original maturities of three months or less to be cash equivalents. Risks and Uncertainties Commercial success of genetic susceptibility tests will depend upon their acceptance as medically useful and cost-effective by patients, physicians, dentists, other members of the medical and dental community, and third-party payers. The Company plans to expend substantial financial resources to promote the benefits of F-9 69 MEDICAL SCIENCE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED.) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the Company's susceptibility tests. It is uncertain whether current genetic susceptibility tests or others that the Company may develop will gain acceptance on a timely basis. Research in the field of disease predisposing genes and genetic markers is intense and highly competitive. The Company has many competitors in the United States and abroad which have considerably greater financial, technical, marketing, and other resources available. If the Company does not discover disease predisposing genes or genetic markers and develop susceptibility tests and launch such services or products before their competitors, then sales and earnings will be reduced or eliminated. The Company's ability to successfully commercialize genetic susceptibility tests depends on obtaining adequate reimbursement for such products and related treatment from government and private health care insurers and other third-party payers. Doctors' decisions to recommend genetic susceptibility tests will be influenced by the scope and reimbursement for such tests by third-party payors. If both third-party payors and individuals are unwilling to pay for the test, then the number of tests performed will significantly decrease, therefore resulting in a reduction of revenues. The Company entered into an agreement with Sheffield University, whereby the Company will undertake the development and commercialization of any discoveries resulting from Sheffield University's research. The agreement may be terminated with or without cause by either party upon six months notice. If Sheffield University terminated the agreement, such termination could make the discovery and commercial introduction of new products more difficult or unlikely. Recently Issued Accounting Pronouncement The Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share," which is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. SFAS No. 128 requires public companies to present basic earnings per share and, if applicable, diluted earnings per share instead of primary and fully-diluted earnings per share. The Company does not believe that diluted earnings per share in accordance with SFAS No. 128 will be materially different from the earnings per share previously reported. SFAS No. 129, "Disclosure of Information about Capital Structures," issued by FASB is effective for financial statements ending after December 15, 1997. The new standard reinstates various securities disclosure requirements previously in effect under Accounting Principles Board ("APB") Opinion No. 15, "Computing Earnings per Share," which has been superseded by SFAS No. 128. The Company does not expect adoption of SFAS No. 129 to have a material effect, if any, on its financial position or results of operations. SFAS No. 130, "Reporting Comprehensive Income," issued by FASB is effective for financial statements with fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company does not expect adoption of SFAS No. 130 to have a material effect, if any, on its financial position or results of operations. F-10 70 MEDICAL SCIENCE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED.) NOTE 2 -- FURNITURE AND EQUIPMENT Furniture and equipment consisted of the following:
DECEMBER 31, JUNE 30, 1996 1997 ------------ ----------- (UNAUDITED) Computer equipment.................................. $113,470 $ 128,994 Furniture and fixtures.............................. 9,053 13,993 Computer software................................... 20,531 25,090 Equipment under capitalized leases.................. 40,564 40,564 -------- -------- 183,618 208,641 Less accumulated depreciation and amortization...... 100,741 116,740 -------- -------- Total..................................... $ 82,877 $ 91,901 ======== ========
NOTE 3 -- NOTES PAYABLE AND REVOLVING LINE OF CREDIT WITH BANK In March 1996, the Company entered into a revolving line of credit agreement with a bank to borrow up to $250,000, and a note payable of $250,000, for working capital purposes and to repay the outstanding borrowings under certain promissory notes. In October 1996, the line of credit was increased to provide for total borrowings of up to $500,000. The line of credit originally matured in March 1997 and was extended to June 1997 at which time all outstanding principal was converted into a five-year note payable, payable in sixty monthly installments of $8,334 (unaudited) plus interest. The line of credit bore interest at the bank's prime rate plus 1.75% (effectively 10% at December 31, 1996) which was payable monthly in arrears. At December 31, 1996, the Company had outstanding borrowings of $353,723 under the revolving line of credit and at June 30, 1997 had outstanding borrowings of $699,633 (unaudited) under the notes payable. The $250,000 note payable matures in March 2001 and requires monthly payments of principal and interest of $5,222. The $250,000 note payable bears interest at a fixed rate of 9.125% per annum. Required principal payments under the $250,000 note payable are as follows:
YEAR ENDING DECEMBER 31, -------------------------------------------------- 1997............................................ $ 44,489 1998............................................ 48,724 1999............................................ 53,361 2000............................................ 58,439 2001............................................ 13,274 -------- 218,287 Less current portion.............................. 44,489 -------- Long-term portion............................ $ 173,798 ========
Both the notes payable and the revolving line of credit are secured by substantially all of the Company's assets and accounts receivable. In addition, three of the Company's officers have personally guaranteed the Company's obligations under the notes payable and the revolving line of credit. The agreements also include certain covenants which restrict, among other things, the occurrence of new indebtedness. F-11 71 MEDICAL SCIENCE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED.) NOTE 4 -- INCOME TAXES Prior to September 30, 1996, the Company elected to be taxed as an "S" corporation for federal and state income tax purposes; the Company's income or loss for such periods was allocated among its shareholders. Consequently, the Company has not recorded any tax provision for any period prior to such date. Effective September 30, 1996, the Company terminated such election and became taxable as a "C" corporation. The Company has not recorded a current or deferred provision for federal income taxes for the period from October 1, 1996 to December 31, 1996 due to losses incurred during that period. The provision for income taxes represents the minimum required for state franchise taxes. To reconcile from the federal statutory tax rate of 34% to the Company's effective tax rate of approximately 1%, the deferred tax asset valuation reserve is deducted. At December 31, 1996, the Company had net operating loss carryforwards of approximately $590,000 and $295,000 for federal and state income tax purposes, respectively, expiring in varying amounts through the year 2012, which are available to offset future federal and state taxable income. The Company also had a research tax credit of $14,400 at December 31, 1996 that expires in 2012. The ability of the Company to utilize the federal and state net operating loss carryforwards may be subject to annual limitations under certain provisions of the Internal Revenue Code as a result of the private placements of common stock and issuance of stock options. Deferred tax assets (liabilities) consisted of the following:
YEAR ENDED DECEMBER 31, 1996 ------------ Deferred tax assets Net operating loss carryforwards............ $219,900 Research tax credit carryforwards............................. 14,400 Accrual to cash adjustments................................... 82,900 Accrued payroll related costs................................. 71,800 -------- Total deferred tax assets............................. 389,000 Valuation allowance for deferred tax assets..................... 327,300 -------- 61,700 Deferred tax liabilities Patents................................ 61,700 -------- Net deferred tax assets............................... $ -- ========
The valuation allowance increased by $276,900 from September 30, 1996 (the date the Company elected to be taxed as a "C" corporation) to December 31, 1996. NOTE 5 -- CAPITAL STOCK Stock Split In June 1996, the Company's shareholders approved a 1,083.333 for 1 stock split which was completed in July 1996. All references in the financial statements to numbers of common shares and per common share amounts have been restated to reflect the stock split. All disclosures related to sales of common stock, warrants, employee stock plans, and other common stock transactions for all periods presented have also been restated to reflect the stock split. F-12 72 MEDICAL SCIENCE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED.) NOTE 5 -- CAPITAL STOCK (CONTINUED) Private Placements of Common Stock In September 1996, the Company's Board of Directors authorized the private offering of shares of the Company's common stock at $3.70 per share up to an aggregate of $5,250,000. For the year ended December 31, 1996 and the six months ended June 30, 1997, the Company sold 40,540 and 148,648 (unaudited) shares, respectively, of its common stock in private placement transactions at a price of $3.70 per share. The gross proceeds of the sale were approximately $150,000 and $550,000 (unaudited), respectively. During the six months ended June 30, 1997, the Company sold 185,760 (unaudited) shares of the Company's common stock at $5.00 (unaudited) per share in a private placement. Gross proceeds from the sale were $928,800 (unaudited). NOTE 6 -- EMPLOYEE BENEFIT PLAN In 1988, the Company adopted a profit sharing plan covering substantially all of its employees. Under the profit sharing plan, the Company may, at the discretion of the Board of Directors, contribute a portion of the Company's current or accumulated earnings. Company contributions, if any, are credited to participant accounts and are immediately vested. During the years ended December 31, 1996 and 1995 and the six months ended June 30, 1997 (unaudited) and 1996 (unaudited), no contributions were made to the profit sharing plan. NOTE 7 -- STOCK OPTION PLAN In June 1996, the Company's shareholders approved the adoption of the Medical Science Systems, Inc. 1996 Equity Incentive Plan (the "Plan"). The Plan provides for the award of nonqualified and incentive stock options, restricted stock, and stock bonuses to employees, directors, officers, and consultants of the Company. The Plan provides for the grant of nonqualified and incentive stock options to all directors, officers, and employees of the Company. A total of 1,000,000 shares of the Company's common stock have been reserved for award under the amended Plan. Nonqualified and incentive stock options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. One-sixth of the options are generally available for exercise at the end of six months which the remainder of the grant is exercisable ratably over the next thirty-month period provided the optionee remains in service to the Company. The Company may also award share appreciation rights ("SARs") either in tandem with stock options or independently. At December 31, 1996 and June 30, 1997 (unaudited), no SARs has been awarded under the Plan. The Company has adopted only the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." It applies Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans other than for restricted stock and options issued to outside third parties. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under this plan consistent with the methodology prescribed by F-13 73 MEDICAL SCIENCE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED.) NOTE 7 -- STOCK OPTION PLAN (CONTINUED) SFAS 123, the Company's net loss and loss per share would be reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, 1996 ------------ Net loss As reported................................... $ (788,546) Pro forma..................................... $ (894,437) Loss per common share As reported................................... $ (0.18) Pro forma..................................... $ (0.21)
The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the years ended December 31, 1996: dividend yields of 0%; expected volatility of 70%; risk-free interest rates of 6.0%; and expected life of 3 years. The weighted average fair value of options granted during the year ended December 31, 1996 was $1.87, and the weighted average exercise price was $3.70. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
WEIGHTED AVERAGE NUMBER GRANTED PRICE OF SHARES PER SHARE --------- ---------------- Outstanding, December 31, 1995..................... -- $ -- Granted.......................................... 142,500 $ 3.70 Exercised........................................ -- $ -- Canceled......................................... -- $ -- ------- Outstanding, December 31, 1996..................... 142,500 $ 3.70 Granted (unaudited).............................. 658,079 $ 4.52 Exercised (unaudited)............................ -- $ -- Canceled (unaudited)............................. -- $ -- ------- Outstanding, June 30, 1997 (unaudited)............. 800,579 $ 4.37 =======
The weighted average remaining contractual life of options outstanding issued under the Plan is ten years at December 31, 1996. The Plan also provides for the award of restricted stock to eligible persons. Such awards may be at prices not less than 85% of the fair market value of the Company's common stock as determined by the Board of Directors. In addition, stock bonuses may be awarded to certain employees or officers of the Company at the F-14 74 MEDICAL SCIENCE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED.) NOTE 7 -- STOCK OPTION PLAN (CONTINUED) discretion of the Board of Directors. In September 1996, the Company's Board of Directors issued a stock bonus of 5,000 shares to a consultant of the Company. The estimated fair value of such shares at the date of the award was charged to expanse in 1996. As of June 30, 1997, the Company has not awarded any restricted stock awards. In May 1997, the Company offered to its employees the opportunity to receive stock options to acquire shares of the Company's common stock at $5.00 to $5.50 per share in an exchange for a reduction of salary. Employees elected to reduce their salaries up to 50% for the period from May 1997 to October 1997 in exchange for 600 stock options for each $1,000 of salary reduction. As a result the Company issued 267,079 stock options in exchange for salary reductions of $445,132. The Company will record an expense relating to the issuance of these stock option in the amount of $74,189 per month for each of the six months from May 1997 to October 1997. NOTE 8 -- COMMITMENTS AND CONTINGENCIES The Company leases its office space under non-cancelable operating leases expiring through April 2001. The Company also leases certain office furniture and equipment under capitalized lease obligations. Future minimum rental commitments under lease agreements with initial or remaining terms of one year or more at December 31, 1996 are as follows:
YEAR ENDING OPERATING CAPITAL DECEMBER 31, LEASES LEASES ------------------------------------------------------ -------- ------- 1997................................................ $ 86,316 $11,376 1998................................................ 151,116 11,376 1999................................................ 151,116 11,376 2000................................................ 129,516 8,121 2001................................................ 9,440 891 -------- ------- $527,504 43,140 ======== Less amount representing interest..................... 7,696 ------- 35,444 Less current portion.................................. 8,408 ------- Long-term portion................................ $27,036 =======
Included in furniture and equipment are capitalized leased equipment of $40,564 and $40,564 (unaudited) with accumulated depreciation of $7,615 and $14,376 (unaudited) at December 31, 1996 and June 30, 1997, respectively. Rent expense was $59,594 and $30,943 for the years ended December 31, 1996 and 1995, respectively, and $50,004 (unaudited) and $23,531 (unaudited) for the six months ended June 30, 1997 and 1996, respectively. Employment Agreements The Company entered into employment agreements with certain key employees of the Company which range from one to five years. F-15 75 MEDICAL SCIENCE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED.) NOTE 8 -- COMMITMENTS AND CONTINGENCIES (CONTINUED) Sheffield University Master Agreement In July 1996, the Company entered into a ten-year, exclusive agreement with Sheffield University, whereby the Company will take the lead in the development and commercialization of any discoveries resulting from Sheffield University's research. The proceeds distributed to Sheffield University from the sale or license of products or technologies developed or commercialized under this agreement will be determined on a case-by-case basis. Either party may terminate the agreement with no less than six-months notice. NOTE 9 -- RELATED PARTIES During 1996, three officers of the Company agreed to defer a portion of their salaries totaling $127,500. The Company intends to pay such amounts of deferred compensation in 1997, and accordingly, they are presented as current liabilities in the accompanying balance sheet as of December 31, 1996. Unaudited During the six months ended June 30, 1997, the Company paid a portion of the deferred salaries; therefore, as of June 30, 1997, the remaining balance was $75,000. NOTE 10 -- SUBSEQUENT EVENTS (UNAUDITED) In July and August, 1997, the Company sold 108,060 shares of common stock at $5.00 per share in a private placement for a total consideration of $540,300. From August 1, 1997 through October 6, 1997, the Company entered into several subscription agreements to sell subordinated Promissory Notes ("Notes"). In addition, the Company granted one warrant to purchase common stock at an exercise price of $5.50 per share for each $5.00 loaned. The Company issued Notes in the amount of $1,780,000 and issued 356,545 warrants to purchase the Company's common stock. The Notes accrue interest at 10% per annum, and all unpaid principal and interest are due the earlier of fourteen months from the date of issuance or the sale of equity securities which results in gross proceeds in excess of $6,000,000. The warrants expire the earlier of five years from the date of issuance or upon the occurrence of the Company's common stock traded on a national or regional stock exchange and the closing price of the common stock equals or exceeds $12.00 per share for thirty consecutive trading days. In connection with the issuance of such warrants, the Company will recognize additional financing costs of $356,545 over the fourteen month term of the Notes with the unamortized portion at the closing of the Company's IPO being expensed immediately as an extraordinary loss on the extinguishment of debt. F-16 76 ====================================================== No dealer, salesman or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer made by this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any of the Underwriters. This Prospectus does not constitute an offer to sell or the solicitation of any offer to buy any security other than the shares of Common Stock offered by this Prospectus, nor does it constitute an offer to sell or a solicitation of any offer to buy the shares of Common Stock by anyone in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that information contained herein is correct as of any time subsequent to the date hereof. ------------------------ TABLE OF CONTENTS PROSPECTUS
PAGE ---- Summary............................... 1 Risk Factors.......................... 7 The Company........................... 15 Use of Proceeds....................... 16 Dividend Policy....................... 17 Capitalization........................ 18 Dilution.............................. 19 Selected Financial Data............... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 21 Business.............................. 23 Management............................ 43 Certain Relationships and Related Party Transactions.................. 48 Principal Shareholders................ 50 Description of Securities............. 51 Shares Eligible for Future Sale....... 52 Underwriting.......................... 54 Legal Matters......................... 55 Experts............................... 55 Additional Information................ 55 Index to Financial Statements......... F-1
UNTIL , 199 , ALL DEALERS THAT BUY, SELL OR TRADE THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== INITIAL PUBLIC OFFERING OCTOBER , 1997 [MEDICAL SCIENCE LOGO] 1,500,000 SHARES COMMON STOCK $8 TO $9 PER SHARE NASDAQ/AMEX: ------------------------ PROSPECTUS ------------------------ UNDERWRITERS: NUTMEG SECURITIES, INC. 495 POST ROAD EAST WESTPORT, CT 06880 (203) 226-1857 ====================================================== 77 PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Our company's Amended and Restated Articles of Incorporation eliminates the liability of directors for monetary damages for an act or omission in the director's capacity as a director, except for: (1) a breach of a director's duty of loyalty to our company or our shareholders; (2) an act or omission not in good faith that constitutes a breach of duty of that director to our company or an act or omission that involves intentional misconduct or a knowing violation of the law; (3) a transaction from which a director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; or (4) an act or omission for which the liability of a director is expressly provided for by an applicable statute. If the Texas Miscellaneous Corporation Laws Act or the Texas Business Corporation Act is amended to authorize action further eliminating or limiting the personal liability of directors, then the liability of a director of our company shall be eliminated or limited to the fullest extent permitted by such statutes, as so amended. Any amendment, repeal or modification of such provision shall be prospective only and shall not adversely affect any right or protection of a director of our company existing at the time of such amendment, repeal or modification. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses in connection with this Registration Statement. All of such expenses are estimates, other than the filing fees payable to the Securities and Exchange Commission. Filing Fee -- Securities and Exchange Commission................ $ 5,257.00 Exchange Listing Fee............................................ 35,000.00 Fees and Expenses of Accountants................................ 45,000.00 Fees and Expenses of Counsel.................................... 120,000.00 Printing and Engraving Expenses................................. 75,000.00 Blue Sky Fees and Expenses...................................... 20,000.00 Transfer Agent Fees............................................. 4,000.00 Miscellaneous Expenses.......................................... 50,743.00 ----------- Total................................................. $ 355,000.00 ===========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES 1. Between November 1996 and January 1997, we sold 189,188 shares of our Common Stock to seven (7) investors in a private placement at a price of $3.70 per share. No commissions or finder's fees were paid. 2. Between March 1997 and September 1997, we sold 292,060 shares of our Common Stock to forty-six (46) investors in a second private placement transaction at a price of $5.00 per share. We issued 1,760 shares of our Common Stock as a finder's fee with respect to such private placement. 3. From December 1996 through May 1997, our company has issued a total of 800,579 incentive and non-qualifying stock options to thirty-seven (37) employees and consultants under our 1996 Equity Incentive Plan. Of the total issued, 533,500 were issued in exchange for services rendered to our company. These options generally vest over thirty-six months and have a per share exercise price from $3.70 to $5.00. The balance of the options (267,079) were issued in May 1997. In order to reduce our overhead and as an additional incentive to our employees, we instituted a voluntary salary reduction plan where our employees could choose to receive stock options instead of salary. Employees were offered options to purchase 600 shares of Common Stock for every $1,000 their salary was reduced. Most of our employees participated, including all of our officers. A total of 267,079 options to purchase Common Stock at an exercise price of $5.00 or $5.50 per share were issued. These options vested immediately. 4. From August 1, 1997 through October 6, 1997, we borrowed an aggregate of $1,780,000 from twenty-eight (28) lenders evidenced by promissory notes bearing interest at 10% interest rate and due the earlier of II-1 78 fourteen months from the date of the notes or the closing date of an initial public offering (the "Bridge Loans"). As additional consideration for the Bridge Loans, we issued one warrant for each $5.00 loaned to the Company for a total of 356,000 warrants (the "Bridge Warrants"). Each Bridge Warrant entitles the holder to purchase one share of Common Stock at $5.50 per share for a period of five years from the date of issuance. An additional 545 Bridge Warrants were issued as a finder's fee. The following officers and directors subscribed to the Bridge Loans in the principal amount indicated after their names: Paul J. White ($100,000/20,000 Bridge Warrants); Kenneth S. Kornman ($100,000/20,000 Bridge Warrants); Michael G. Newman ($100,000/20,000 Bridge Warrants); U. Spencer Allen ($50,000/10,000 Bridge Warrants); Jeanne Ambruster ($50,000/10,000 Bridge Warrants); and Thomas A. Moore ($75,000/15,000 Bridge Warrants). The other twenty-one investors were outside private parties. Other than the 545 Bridge Warrants referenced above, no commissions or finder's fees were paid by the Company. No underwriter was involved in any of the above issuances of securities. All of the above securities were issued in reliance upon the exemptions set forth in Section 4(2) of the Securities Act (including, in certain instances Regulation D promulgated thereunder) on the basis that they were issued under circumstances not involving a public offering, or, in the case of certain options and warrants to purchase Common Stock, Rule 701 of the Securities Act. ITEM 27. EXHIBITS. 1.1 Form of Underwriting Agreement. 1.2 Form of Agreement Among Underwriters. 1.3 Form of Selected Dealers Agreement. 3.1 Amended and Restated Articles of Incorporation. 3.2 Articles of Amendment to the Amended and Restated Articles of Incorporation. 3.3 Amended and Restated Bylaws of the Company. 3.4 Amendment to the Amended and Restated Bylaws. 4.1 Form of Stock Certificate [to be filed by amendment]. 4.2 Form of Underwriter's Warrant. 4.3 Form of Subordinated Promissory Note. 4.4 Form of Security Agreement. 4.5 Form of Warrant Agreement. 4.6 Form of Warrant Certificate. 4.7 $500,000 Term Loan with Bank of America. 4.8 $250,000 Term Loan with Bank of America. 5.1 Opinion of Jeffers, Wilson, Shaff & Falk, LLP [to be filed by amendment]. 10.1 Master Agreement for Technology Evaluation, Sheffield University.* 10.2 Research Support Agreement and Amendments to Various Existing Project Agreements, Sheffield University.* 10.3 Development and Commercialization Project Agreement (Atherosclerosis including Coronary Artery Disease), Sheffield University.* 10.4 Development and Commercialization Project Agreement (Eye Disease Among Diabetics), Sheffield University.* 10.5 Development and Commercialization Project Agreement (Osteoporosis), Sheffield University.* 10.6 Joint Project Agreement Between Gordon Duff and Medical Science Systems, Inc. Governing the Periodontal Susceptibility Test. * 10.7 Employment Agreement with Paul J. White. 10.8 Amendment of Employment Agreement with Paul J. White. 10.9 Employment Agreement with Kenneth S. Kornman. 10.10 Amendment of Employment Agreement with Kenneth S. Kornman. 10.11 Employment Agreement with Michael G. Newman.
II-2 79 10.12 Amendment of Employment Agreement with Michael G. Newman. 10.13 Service Agreement Relating to Laboratory Services with Baylor University. * 10.14 Lease Agreement dated March 21, 1996 between Koll Center Newport Number 9 and Company. 10.15 Lease Agreement dated March 31, 1997 between Jim Jamison and Richard Henderson and Company. 10.16 Lease Agreement dated October 23, 1995 between Diamond Shamrock Leasing, Inc. and Company. 10.17 1996 Equity Incentive Plan. 10.18 Amendment to the 1996 Equity Incentive Plan. 10.19 Form of Stock Option Agreement. 10.20 Stock Option Exercise Agreement. 23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP. 23.2 Consent of Counsel (previously filed under Exhibit 5.1). 24.1 Power of Attorney (included in signature page). 27.1 Financial Data Schedule.
- --------------- * Confidential treatment requested. ITEM 28. UNDERTAKINGS. The undersigned small business issuer hereby undertakes: (1) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 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, we will, unless in the opinion of our 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 Act and will be governed by the final adjudication of such issue. (2) The undersigned registrant hereby undertakes that: (i) For purposes of determining any liability under the Securities Act of 1933, 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. (ii) For the purpose of determining any liability under the Securities Act of 1933, 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-3 80 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that is has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Newport Beach, State of California, on October 8, 1997. MEDICAL SCIENCE SYSTEMS, INC. By: /s/ PAUL J. WHITE ------------------------------------ Paul J. White, President and Chief Executive Officer POWER OF ATTORNEY We, the undersigned directors and officers of Medical Science Systems, Inc. do hereby constitute and appoint Paul J. White and U. Spencer Allen, or either of them, acting individually, our true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents, or any one of them, may deem necessary or advisable to enable said corporation to comply with the Securities Act of 1933, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but without limitation, power and authority to sign for us or any of us in our names and in the capacities indicated below, any and all amendments (including post-effective amendments) hereof; and we do hereby ratify and confirm all that the said attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement was signed by the following persons in the capacities and on the dates stated.
NAME TITLE DATE - --------------------------------------------- ---------------------------- ----------------- /s/ PAUL J. WHITE President, Chief Executive October 8, 1997 - --------------------------------------------- Officer and Director Paul J. White /s/ U. SPENCER ALLEN Chief Financial Officer October 8, 1997 - --------------------------------------------- and Treasurer U. Spencer Allen /s/ KENNETH S. KORNMAN Chief Scientific Officer October 8, 1997 - --------------------------------------------- and Director Kenneth S. Kornman /s/ MICHAEL G. NEWMAN Executive Vice President, October 8, 1997 - --------------------------------------------- Secretary and Director Michael G. Newman /s/ THOMAS A. MOORE Director October 8, 1997 - --------------------------------------------- Thomas A. Moore
II-4 81 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------ ------------------------------------------------------------------------------ 1.1 Form of Underwriting Agreement. 1.2 Form of Agreement Among Underwriters. 1.3 Form of Selected Dealers Agreement. 3.1 Amended and Restated Articles of Incorporation. 3.2 Articles of Amendment to the Amended and Restated Articles of Incorporation. 3.3 Amended and Restated Bylaws of the Company. 3.4 Amendment to the Amended and Restated Bylaws. Form of Stock Certificate [to be filed by amendment]. 4.2 Form of Underwriter's Warrant. 4.3 Form of Subordinated Promissory Note. 4.4 Form of Security Agreement. 4.5 Form of Warrant Agreement. 4.6 Form of Warrant Certificate. 4.7 $500,000 Term Loan with Bank of America. 4.8 $250,000 Term Loan with Bank of America. Opinion of Jeffers, Wilson, Shaff & Falk, LLP [to be filed by amendment]. 10.1 Master Agreement for Technology Evaluation, Sheffield University. * 10.2 Research Support Agreement and Amendments to Various Existing Project Agreements, Sheffield University. * 10.3 Development and Commercialization Project Agreement (Atherosclerosis including Coronary Artery Disease), Sheffield University. * 10.4 Development and Commercialization Project Agreement (Eye Disease Among Diabetics), Sheffield University. * 10.5 Development and Commercialization Project Agreement (Osteoporosis), Sheffield University. * 10.6 Joint Project Agreement Between Gordon Duff and Medical Science Systems, Inc. Governing the Periodontal Susceptibility Test. * 10.7 Employment Agreement with Paul J. White. 10.8 Amendment of Employment Agreement with Paul J. White. 10.9 Employment Agreement with Kenneth S. Kornman. 10.10 Amendment of Employment Agreement with Kenneth S. Kornman. 10.11 Employment Agreement with Michael G. Newman. 10.12 Amendment of Employment Agreement with Michael G. Newman. 10.13 Service Agreement Relating to Laboratory Services with Baylor University.* 10.14 Lease Agreement dated March 21, 1996 between Koll Center Newport Number 9 and Company. 10.15 Lease Agreement dated March 31, 1997 between Jim Jamison and Richard Henderson and Company. 10.16 Lease Agreement dated October 23, 1995 between Diamond Shamrock Leasing, Inc. and Company. 10.17 1996 Equity Incentive Plan. 10.18 Amendment to the 1996 Equity Incentive Plan. 10.19 Form of Stock Option Agreement. 10.20 Stock Option Exercise Agreement. 23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP. 27.1 Financial Data Schedule.
- --------------- * Confidential treatment requested. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 MEDICAL SCIENCE SYSTEMS, INC. 1,500,000 SHARES OF COMMON STOCK UNDERWRITING AGREEMENT , 19 Nutmeg Securities ,Ltd. 495 Post Road East Westport, CT 06880 DEAR SIRS: Medical Science Systems, Inc.. a Texas corporation (the "Company"), proposes to issue and sell to the several Underwriters named in Schedule I hereto (the "Underwriters"), two million shares of common stock of the Company (the "Securities"). The Company hereby confirms the agreement made by it with respect to the purchase of the Securities by the Underwriter, which Securities are more fully described in the Registration Statement referred to below. Nutmeg Securities, Ltd. is referred to herein as the "Underwriter" or the "Representative." You have advised the Company that the Underwriters desire to act on a firm commitment basis to publicly offer and sell the Securities for the Company and that you are authorized to execute this Agreement. The Company confirms the agreement made by it with respect to the relationship with the Underwriters as follows: 1. Filing of Registration Statement with S.E.C. and Definitions. A Registration Statement and Prospectus on Form SB-2 (File No. ) with respect to the Securities has been carefully and accurately prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the published rules and regulations (the "Rules and Regulations") thereunder or under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and has been filed with the Securities and Exchange Commission (the "Commission") and such other states that the Underwriter deems necessary in its discretion to so file to permit a public offering and trading thereunder. Such registration statement, including the prospectus, Part II, and all financial schedules and exhibits thereto, as amended at the time when it shall become effective, is herein referred to as the "Registration Statement," and the prospectus included as part of the Registration Statement on file with the Commission that discloses all the information that was omitted from the prospectus on the effective date pursuant to Rule 430A of the Rules and Regulations with any changes contained in any prospectus filed with the Commission by the Company with the Underwriters consent after the effective date of the Registration Statement, is herein referred to as the "Final Prospectus." The prospectus included as part of the Registration Statement of the Company and in any amendments thereto prior to the effective date of the Registration Statement is referred to herein as a "Preliminary Prospectus." 2. Discount, Delivery, and Sale of the Securities (a) Subject to the terms and conditions of this Agreement, and on the basis of the representations, warranties, and agreements herein contained, the Company agrees to sell to, and the Underwriters agree to buy from the Company at a purchase price of $ per share before any underwriter expense allowances, an aggregate of 1,500,000 shares of Common Stock, on a firm commitment basis the "Initial Securities." It is understood that the Underwriters propose to offer the Securities to be purchased hereunder to the public upon the terms and conditions set forth in the Registration Statement, after the Registration Statement becomes effective. 1 2 (b) Delivery of the Securities against payment of the purchase price therefor by certified or official bank check or checks or wire transfer in next-day funds, payable to the order of the Company shall take place at the offices of the clearing broker for the Underwriter at New York City, within three (3) business days after the Securities are first traded (or such other place as may be designated by agreement between you and the Company) at 11:00 A.M., New York time or such time and date as you and the Company may agree upon in writing, such time and date of payment and delivery for the Securities being herein called the "Initial Closing Date." The Company will make the certificates for the shares of Common Stock and Redeemable Warrants to be purchased by the Underwriters hereunder available to the Underwriter for inspection and packaging at least two (2) full business days prior to the Initial Closing Date. The certificates shall be in such names and denominations as the Underwriter may request to the Company in writing at least two (2) full business days prior to any Closing Date. (c) In addition, subject to the terms and conditions of this Agreement and on the basis of the representations, warranties and agreements herein contained, the Company grants an option to the Underwriters to purchase up to an additional 225,000 shares of Common Stock ("Option Securities") at the same terms as the Underwriters shall pay for the Initial Securities being sold by the Company pursuant to the provisions of Section 2(a) hereof. This option may be exercised from time to time, for the purpose of covering overallotments, within forty-five (45) days after (i) the effective date of the Registration Statement if the Company has elected not to rely on Rule 430A under the Rules and Regulations or (ii) the date of this Agreement if the Company has elected to rely upon Rule 430A under the Rules and Regulations, upon written notice by the Underwriter setting forth the number of Option Securities as to which the Underwriter is exercising the option and the time and date at which such certificates are to be delivered. Such time and date shall be determined by the Underwriter but shall not be earlier than four (4) nor later than ten (10) full business days after the date of the exercise of said option. Nothing herein shall obligate the Underwriter to make any overallotment. (d) Definitive certificates in negotiable form for the Securities to be purchased by the Underwriter hereunder will be delivered at the closing by the Company to the Underwriters against payment of the purchase price by the Underwriters by certified or bank cashier's checks or wire transfer in next day funds payable to the order of the Company. (e) The information set forth under "Underwriting" in any preliminary prospectus and Prospectus relating to the Securities and the information set forth in the last paragraph on the front cover page, under the last paragraph on page 2 concerning stabilization and over-allotment by the Underwriters, and (insofar as such information relates to the Underwriters) constitutes the only information furnished by the Underwriter to the Company for inclusion therein, and you represent and warrant to the Company that the statements made therein are correct. (f) On the Initial Closing Date, the Company shall issue and sell to the Representative, warrants (the "Representative's Warrants") at a purchase price of $.001 per Representative's Warrant, which shall entitle the holders thereof to purchase an aggregate of 150,000 shares of Common Stock. The shares of common stock issuable upon the exercise of the Representative's Warrants are hereafter referred to as the "Representative's Securities" or "Representative's Warrants." The shares of common stock issuable upon exercise of the redeemable warrants are hereinafter referred to collectively as the "Warrant Shares". The Representative's Warrants shall be exercisable for a period of four (4) years commencing one (1) year from the effective date of the Registration Statement at a price equaling one hundred thirty five percent (135%) of the initial public offering price of the Securities. The form of Representative's Warrant Certificate shall be substantially in the form filed as an Exhibit to the Registration Statement. Payment for the Representative's Warrant shall be made on the Initial Closing Date. 2 3 3. Representations and Warranties of the Company. (a) The Company represents and warrants to you as follows: (i) The Company has prepared and filed with the Commission a registration statement, and an amendment or amendments thereto, on Form SB-2 (No. ), including any related preliminary prospectus ("Preliminary Prospectus"), for the registration of the Securities, the Representative's Warrant and the Warrant Shares (sometimes referred to herein collectively as the "Registered Securities"), under the Act, which registration statement and amendment or amendments have been prepared by the Company in conformity with the requirements of the Act, and the Rules and Regulations. The Company will promptly file a further amendment to said registration statement in the form heretofore delivered to the Underwriter and will not file any other amendment thereto to which the Underwriter shall have objected verbally or in writing after having been furnished with a copy thereof. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, any schedules, exhibits and all other documents filed as a part thereof or that may be incorporated therein (including, but not limited to those documents or information incorporated by reference therein) and all information deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the Rules and Regulations), is hereinafter called the "Registration Statement," and the form of prospectus in the form first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations, is hereinafter called the "Prospectus." (ii) Neither the Commission nor any state regulatory authority has issued any order preventing or suspending the use of any Prospectus or the Registration Statement and no proceeding for an order suspending the effectiveness of the Registration Statement or any of the Company's securities has been instituted or is pending or threatened. Each such Prospectus and/or any supplement thereto has conformed in all material respects with the requirements of the Act and the Rules and Regulations and on its date did not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, in light of the circumstances under which they were made and (i) the Prospectus and/or any supplement thereto will contain all statements which are required to be stated therein by the Act and Rules and Regulations, and (ii) the Prospectus and/or any supplement thereto will not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in light of the circumstances under which they were made; provided, however, that no representations, warranties or agreements are made hereunder as to information contained in or omitted from the Prospectus in reliance upon, and in conformity with, the written information furnished to the Company by you as set forth in Section 2(e) above. (iii) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the state of its incorporation, with full power and authority (corporate and other) to own its properties and conduct its businesses as described in the Prospectus and is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which the nature of its business or the character or location of its properties requires such qualification, except where the failure to so qualify would not have a material adverse effect on the business, properties or operations of the Company and the subsidiaries as a whole. (iv) The Company has full legal right, power and authority to authorize, issue, deliver and sell the Securities, the Option Securities and the Representative's Securities and to enter into this Agreement, the Representative's Warrant dated as of the initial closing date to be exercised and delivered by the Company to the Representative (the "Representative's Warrant Agreement"), and to consummate the transactions provided for in such agreements, and each of such agreements has been duly and properly authorized, and on the Initial Closing Date will be duly and properly executed and delivered by the Company. This Agreement constitutes and on the Initial Closing Date the Representative's Warrant Agreement will then constitute valid and binding agreements, enforceable in accordance with their respective terms (except as the enforceability thereof may be limited by bankruptcy or other similar laws affecting the rights of creditors generally or by general equitable principles and except as the enforcement of indemnification provisions may be limited by federal or state securities laws). (v) Except as disclosed in the Prospectus, the Company is not in violation of its respective certificate or articles of incorporation or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness or in any material contract, indenture, mortgage, loan agreement, lease, joint venture, partnership or other agreement or 3 4 instrument to which the Company is a party or by which it may be bound or is not in material violation of any law, order, rule, regulation, writ, injunction or decree of any governmental instrumentality or court, domestic or foreign; and the execution and delivery of this Agreement, the Representative's Warrant Agreement ;and the consummation of the transactions contemplated therein and in the Prospectus and compliance with the terms of each such agreement will not conflict with, or result in a material breach of any of the terms, conditions or provisions of, or constitute a material default under, or result in the imposition of any material lien, charge or encumbrance upon any of the property or assets of the Company pursuant to, any material bond, debenture, note or other evidence of indebtedness or any material contract, indenture, mortgage, loan agreement, lease, joint venture, partnership or other agreement or instrument to which the Company is a party nor will such action result in the material violation by the Company of any of the provisions of its respective certificate or articles of incorporation or bylaws or any law, order, rule, regulation, writ, injunction, decree of any government, governmental instrumentality or court, domestic or foreign, except where such violation will not have a material adverse effect on the financial condition of the Company. (vi) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus and the Company will have the adjusted capitalization set forth therein on the Initial Closing Date; all of the shares of issued and outstanding capital stock of the Company set forth therein have been duly authorized, validly issued and are fully paid and nonassessable; the holders thereof do not have any rights of rescission with respect therefor and are not subject to personal liability for any obligations of the Company by reason of being stockholders under the laws of the State in which the Company is incorporated; none of such outstanding capital stock is subject to or was issued in violation of any preemptive or similar rights of any stockholder of the Company; and such capital stock (including the Securities, the Option Securities and the Representative's Securities) conforms in all material respects to all statements relating thereto contained in the Prospectus. (vii) The Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement or as described in the Prospectus. The Securities, the Option Securities and the Representative's Securities are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof, will be validly issued, fully paid and non-assessable and will conform to the respective descriptions thereof contained in the Prospectus; except for payment of the applicable purchase price paid upon exercise of the options or warrants, as the case may be the holders thereof will not be subject to any liability solely as such holders; all corporate action required to be taken for the authorization, issue and sale of the Securities, the Option Securities and the Representative's Securities has been duly and validly taken; and the certificates representing the Securities, the Option Securities and the Representative's Securities will be in due and proper form. Upon the issuance and delivery pursuant to the terms hereof of the Securities, the Option Securities and the Representative's Securities to be sold by the Company hereunder, the Underwriter will acquire good and marketable title to such Securities, Option Securities and Representative's Securities free and clear of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction of any kind whatsoever other than restrictions as may be imposed under the securities laws. (viii) The Company has good and marketable title to all properties and assets described in the Prospectus as owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as are described or referred to in the Prospectus or which are not materially significant or important in relation to its business or which have been incurred in the ordinary course of business; except as described in the Prospectus all of the leases and subleases under which the Company holds properties or assets as lessee or sublessee as described in the Prospectus are in full force and effect, and the Company is not in material default in respect of any of the terms or provisions of any of such leases or subleases, and no claim has been asserted by anyone adverse to the Company's rights as lessor, sublessor, lessee or sublessee under any of the leases or subleases mentioned above or affecting or questioning the Company's right to the continued possession of the leased or subleased premises or assets under any such lease or sublease; and the Company owns or leases all such properties as are necessary to its operations as now conducted and as contemplated to be conducted, except as otherwise stated in the Prospectus. (ix) The financial statements, together with related notes, set forth in the Prospectus fairly present the financial position and results of operations of the Company at the respective dates and for the respective periods to which they apply. Said statements and related notes have been prepared in accordance with generally accepted 4 5 accounting principles applied on a basis which is consistent in all material respects during the periods involved but any stub period has not been audited by an independent accounting firm. There has been no material adverse change or material development involving a prospective change in the condition, financial or otherwise, or in the prospects, value, operation, properties, business or results of operations of the Company whether or not arising in the ordinary course of business, since the date of the financial statements included in the Registration Statement and the Prospectus. (x) Subsequent to the respective dates as of which information is given in the Prospectus as it may be amended or supplemented, and except as described in the Prospectus, the Company has not, directly or indirectly, incurred any liabilities or obligations, direct or contingent, not in the ordinary course of business or entered into any transactions not in the ordinary course of business, which are material to the business of the Company as a whole and there has not been any change in the capital stock of, or any incurrence of long term debts by, the Company or any issuance of options, warrants or rights to purchase the capital stock of the Company or declaration or payment of any dividend on the capital stock of the Company or any material adverse change in the condition (financial or other), net worth or results of operations of the Company as a whole and the Company has not become a party to, any material litigation whether or not in the ordinary course of business. (xi) To the knowledge of the Company, there is no pending or threatened, action, suit or proceeding to which the Company is a party before or by any court or governmental agency or body, which might result in any material adverse change in the condition (financial or other), business or prospects of the Company as a whole or might materially and adversely affect the properties or assets of the Company as a whole nor are there any actions, suits or proceedings against the Company related to environmental matters or related to discrimination on the basis of age, sex, religion or race which might be expected to materially and adversely affect the conduct of the business, property, operations, financial condition or earnings of the Company as a whole; and no labor disturbance by the employees of the Company individually exists or is, to the knowledge of the Company, imminent which might be expected to materially and adversely affect the conduct of the business, property, operations, financial condition or earnings of the Company as a whole. (xii) Except as may be disclosed in the Prospectus, the Company has properly prepared and filed all necessary federal, state, local and foreign income and franchise tax returns, has paid all taxes shown as due thereon, has established adequate reserves for such taxes which are not yet due and payable, and does not have any tax deficiency or claims outstanding, proposed or assessed against it. (xiii) The Company has sufficient licenses, permits, right to use trade or service marks and other governmental authorizations currently required for the conduct of its business as now being conducted and as contemplated to be conducted and the Company is in all material respects complying therewith. Except as set forth in the Prospectus, the expiration of any such licenses, permits, or other governmental authorizations would not materially affect the Company's operations. To its knowledge, none of the activities or businesses of the Company are in material violation of, or cause the Company to materially violate any law, rule, regulations, or order of the United States, any state, county or locality, or of any agency or body of the United States or of any state, county or locality. (xiv) The Company has not at any time (i) made any contributions to any candidate for political office in violation of law, or failed to disclose fully any such contribution, or (ii) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi public duties, other than payments required or allowed by applicable law. (xv) Except as set forth in the Prospectus the Company knows of no outstanding claims for services either in the nature of a finder's fee, brokerage fee or otherwise with respect to this financing for which the Company or the Underwriters may be responsible, or which may affect the Underwriter's compensation as determined by the National Association of Securities Dealers, Inc. ("NASD") except as otherwise disclosed in the Prospectus or known by the Underwriters. 5 6 (xvi) The Company has its property adequately insured against loss or damage by fire and maintains such other insurance as is customarily maintained by companies in the same or similar business. (xvii) The Representative's Warrants herein described are duly and validly authorized and upon delivery to the Representative in accordance herewith will be duly issued and legal, valid and binding obligations of the Company, except as the enforceability thereof may be limited by bankruptcy or other similar laws affecting the rights of creditors generally or by equitable principles, and except as the enforcement of indemnification provisions may be limited by federal or state securities laws. The Representative's Securities issuable upon exercise of any of the Representative's Warrants have been duly authorized, and when issued upon payment of the exercise price therefor, will be validly issued, fully paid and nonassessable. (xviii) Except as set forth in the Prospectus, no default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, installment sale agreement, lease, deed of trust, voting trust agreement, stockholders agreement, note, loan or credit agreement, purchase order, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which the property or assets (tangible or intangible) of the Company is subject or affected. (xix) To the best of the Company's knowledge it has generally enjoyed a satisfactory employer-employee relationship with its employees and, to the best of its knowledge, is in substantial compliance in all material respects with all federal, state, local, and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours. To the best of the Company's knowledge, there are no pending investigations involving the Company, by the U.S. Department of Labor, or any other governmental agency responsible for the enforcement of such federal, state, local, or foreign laws and regulations. To the best of the Company's knowledge, there is no unfair labor practice charge or complaint against the Company pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened against or to its knowledge involving the Company, or any predecessor entity, and none has ever occurred. To the best of the Company's knowledge, no representation question is pending respecting the employees of the Company, and no collective bargaining agreement or modification thereof is currently being negotiated by the Company. To the best of the Company's knowledge, no grievance or arbitration proceeding is pending or to its knowledge threatened under any expired or existing collective bargaining agreements of the Company. No labor dispute with the employees of the Company is pending, or, to its knowledge is imminent; and the Company is not aware of any pending or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors which may result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs, position, prospects, value, operation, properties, business or results of operations of the Company. (xx) Except as may be set forth in the Registration Statement, the Company does not maintain, sponsor or contribute to any program or arrangement that is an "employee pension benefit plan," an "employee welfare benefit plan," or a "multiemployer plan" as such terms are defined in Sections 3(2), 3(l) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute, now or at any time previously, to a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code (the "Code"), which could subject the Company to any tax penalty on prohibited transactions and which has not adequately been corrected. Each ERISA Plan is in compliance with all material reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan. Determination letters have been received from the Internal Revenue Service with respect to each ERISA Plan which is intended to comply with Code Section 401 (a), stating that such ERISA Plan and the attendant trust are qualified thereunder. The Company has never completely or partially withdrawn from a "multiemployer plan." 6 7 (xxi) None of the Company, or any of its employees, directors, stockholders, or affiliates (within the meaning of the Rules and Regulations) has taken or will take, directly or indirectly, any action designed to or which has constituted or which might be expected to cause or result in, under the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities, Option Securities, Representative's Securities or otherwise. (xxii) None of the patents, patent applications, trademarks, service marks, trade names, copyrights, and licenses and rights to the foregoing presently owned or held by the Company, are in dispute or, to the best knowledge of the Company's management are in any conflict with the right of any other person or entity. The Company (i) except as disclosed in the Prospectus owns or has the right to use, all patents, trademarks, service marks, trade names and copyrights, technology and licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted or proposed to be conducted without infringing upon or otherwise acting adversely to the right or claimed right of any person, corporation or other entity under or with respect to any of the foregoing, and except as set forth in the Prospectus or otherwise disclosed to the Underwriter in writing, to the best knowledge of the Company's management is not obligated or under any liability whatsoever to make any material payments by way of royalties, fees or otherwise to any owner or licensee of, or other claimant to, any patent, trademark, service mark, trade name, copyright, know-how, technology or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise. (xxiii) Except as disclosed in the Prospectus the Company owns and has adequate right to use to the best knowledge of the Company's management all trade secrets, know-how (including all other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), inventions, designs, processes, works of authorship, computer programs and technical data and information (collectively herein "intellectual property") required for or incident to the development, manufacture, operation and sale of all products and services sold or proposed to be sold by the Company. The Company is not aware of any such development of similar or identical trade secrets or technical information by others. The Company has valid and binding confidentiality agreements with all of its officers, covering its intellectual property (subject to the equitable powers of any court), which agreements have remaining terms of at least two years from the effective date of the Registration Statement except where the failure to have such agreements would not materially and adversely effect the Company's business taken as a whole. The Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus, to be owned or leased by it free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects, or other restrictions or equities of any kind whatsoever, other than those referred to in the Prospectus and liens for taxes not yet due and payable. (xxiv) Singer Lewak Greenbaum & Goldstein, LLP, whose reports are filed with the Commission as a part of the Registration Statement, are independent certified public accountants as required by the Act and the Rules and Regulations. (xxv) The Company has agreed to cause to be duly executed agreements pursuant to which each of the Company's officers and directors and shareholders and any person or entity deemed to be an affiliate of the Company pursuant to the Rules and Regulations has agreed not to, directly or indirectly, sell, assign, transfer, or otherwise dispose of any shares of Common Stock or securities convertible into, exercisable or exchangeable for or evidencing any right to purchase or subscribe for any shares of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or otherwise) for a period of not less than eighteen (18) months following such effective date without the prior written consent of the Underwriter. The Company will cause the Transfer Agent, as defined below, to mark an appropriate legend on the face of stock certificates representing all of such securities and to place "stop transfer" orders on the Company's stock ledgers. In addition the Company shall also obtain from all other shareholders of the Company, written commitments restricting the sale of 100% of the common shares of stock outstanding for thirteen (13) months after the closing. (xxvi) The Registered Securities have been approved for listing on NASDAQ or an Exchange. 7 8 (xxvii) Except as set forth in the Prospectus or disclosed in writing to the Underwriter (which writing specifically refers to this Section), no officer or director of the Company, holder of 5% or more of securities of the Company or any "affiliate" or "associate" (as these terms are defined in Rule 405 promulgated under the Rules and Regulations) of any of the foregoing persons or entities has or has had, either directly or indirectly, (i) an interest in any person or entity which (A) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company, or (B) purchases from or sells or furnishes to the Company any goods or services, or (ii) a beneficiary interest in any contract or agreement to which the Company is a party or by which it may be bound or affected. Except as set forth in the Prospectus under "Certain Transactions" or disclosed in writing to the Underwriter (which writing specifically refers to this Section) there are no existing agreements, arrangements, understandings or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company, and any officer, director, principal stockholder of the Company, or any partner, affiliate or associate of any of the foregoing persons or entities. (xxviii) Any certificate signed by any officer of the Company, and delivered to the Underwriter or to the Underwriter's counsel (as defined herein) shall be deemed a representation and warranty by the Company to the Underwriter as to the matters covered thereby. (xxix) Each of the minute books of the Company has been made available to the Underwriter and contains a complete summary of all meetings and actions of the directors and stockholders of the Company, since the time of its incorporation and reflect all transactions referred to in such minutes accurately in all respects. (xxx)Intentionally left blank. (xxxi) Except and only to the extent described in the Prospectus or disclosed in writing to the Underwriter (which writing specifically refers to this Section), no holders of any securities of the Company or of any options, warrants or other convertible or exchangeable securities of the Company have the right to include any securities issued by the Company in the Registration Statement or any registration statement to be filed by the Company or to require the Company to file a registration statement under the Act and no person or entity holds any anti-dilution rights with respect to any securities of the Company. Except as disclosed in the Prospectus, all rights so described or disclosed have been waived or have not been triggered with respect to the transactions contemplated by this Agreement and the Representative's Warrant Agreement (including the warrants issuable thereunder). (xxxii) The Company has not entered into any employment agreements with its executive officers, except as disclosed in the Prospectus. (xxxiii) No consent, approval, authorization or order of, and no filing with, any court, regulatory body, government agency or other body, domestic or foreign, is required for the issuance of the Registered Securities pursuant to the Prospectus and the Registration Statement, the issuance of the Underwriter's Warrants, the performance of this Agreement, the Representative's Warrant Agreement, and the transactions contemplated hereby and thereby, including without limitation, any waiver of any preemptive, first refusal or other rights that any entity or person may have for the issue and/or sale of any of the Securities, the Option Securities and the Underwriter's Securities, except such as have been or may be obtained under the Act, otherwise or may be required under state securities or blue sky laws in connection with the Underwriter's purchase and distribution of the Securities, the Option Securities, the Representative's Securities and the Underwriter's Warrants to be sold by the Company hereunder or may be required by the Rules of the National Association of Securities Dealer, Inc. ("NASD"). (xxxiv) All executed agreements, contracts or other documents or copies of executed agreements, contracts or other documents filed as exhibits to the Registration Statement to which the Company is a party or by which it may be bound or to which its assets, properties or businesses may be subject have been duly and validly authorized, executed and delivered by the Company and constitute the legal, valid and binding agreements of the Company, enforceable against the Company, in accordance with their respective terms. The descriptions in the Registration Statement of agreements, contracts and other documents are accurate and fairly present the information required to be 8 9 shown with respect thereto by Form SB-2, and there are no contracts or other documents which are required by the Act to be described in the Registration Statement or filed as exhibits to the Registration Statement which are not described or filed as required, and the exhibits which have been filed are complete and correct copies of the documents of which they purport to be copies. (xxxv) Within the past five (5) years, none of the Company's independent public accountants has brought to the attention of the Company's management any "material weakness" as defined in the Statement of Auditing Standard No. 60 in any of the Company's internal controls. 4. Covenants of the Company. The Company covenants and agrees with you that: (a) It will cooperate in all respects in making the Prospectus effective and will not at any time, whether before or after the effective date, file any amendment to or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you or your counsel shall have reasonably objected or which is not in material compliance with the Act and the Rules and Regulations or applicable state law. As soon as the Company is advised thereof, the Company will advise you, and confirm the advice in writing, of the receipt of any comments of the Commission or any state securities department, when the Registration Statement becomes effective if the provisions of Rule 430A promulgated under the Act will be relied upon, when the Prospectus has been filed in accordance with said Rule 430A, of the effectiveness of any posteffective amendment to the Registration Statement or Prospectus, or the filing of any supplement to the Prospectus or any amended Prospectus, of any request made by the Commission or any state securities department for amendment of the Prospectus or for supplementing of the Prospectus or for additional information with respect thereto, of the issuance of any stop order suspending the effectiveness of the Prospectus or any order preventing or suspending the use of any Prospectus or any order suspending trading in the Common Stock of the Company, or of the suspension of the qualification of the Securities, the Option Securities or the Representatives Securities for offering in any jurisdiction, or of the institution of any proceedings for any such purposes, and will use its best efforts to prevent the issuance of any such order and, if issued, to obtain as soon as possible the lifting or dismissal thereof. The Company has caused to be delivered to you copies of such Prospectus, and the Company has consented and hereby consents to the use of such copies for the purposes permitted by law. The Company authorizes you and the dealers to use the Prospectus and such copies of the Prospectus in connection with the sale of the Securities, the Option Securities and the Representative's Securities for such period as in the opinion of your counsel and our counsel the use thereof is required to comply with the applicable provisions of the Act and the Rules and Regulations. The Company will prepare and file with the states, promptly upon your request, any such amendments or supplements to the Prospectus, and take any other action, as, in the opinion of your counsel, may be necessary or advisable in connection with the initial sale of the Securities, the Option Securities and the Underwriter's Securities and will use its best efforts to cause the same to become effective as promptly as possible. The Company shall file the Prospectus (in form and substance satisfactory to the Underwriter) or transmit the Prospectus by a means reasonably calculated to result in filing with the Commission pursuant to rule 424(b)(1) or pursuant to Rule 424(b)(3) not later than the Commission's close of business on the earlier of (i) the second business day following the execution and delivery of this Agreement, and (ii) the fifth business day after the effective date of the Registration Statement. In case of the happening, at any time within such period as a Prospectus is required under the Act to be delivered in connection with the initial sale of the Securities, the Option Securities and the Representative's Securities of any event of which the Company has knowledge and which materially affects the Company, or the securities thereof, and which should be set forth in an amendment of or a supplement to the Prospectus in order to make the statements therein not then misleading, in light of the circumstances existing at the time the Prospectus is required under the Act to be delivered, or in case it shall be necessary to amend or supplement the Prospectus to comply with the Act, the Rules and Regulations or any other law, the Company will forthwith prepare and furnish to you copies of such 9 10 amended Prospectus or of such supplement to be attached to the Prospectus, in such quantities as you may reasonably request, in order that the Prospectus, as so amended or supplemented, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they are made. The preparation and furnishing of any such amendment or supplement to the Prospectus or supplement to be attached to the Prospectus shall be without expense to you. The Company will to the best of its ability comply with the Act, the Exchange Act and applicable state securities laws so as to permit the initial offer and sales of the Securities, the Option Securities and the Representatives Securities under the Act, the Rules and Regulations, and applicable state securities laws. (b) It will cooperate to qualify the Securities and the Option Securities and the Representative's Securities for initial sale under the securities laws of such jurisdictions as you may designate and will make such applications and furnish such information as may be required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or a dealer in securities. The Company will, from time to time, prepare and file such statements and reports as are or may be required to continue such qualification in effect for so long as the Underwriter may reasonably request. (c) So long as any of the Securities, the Option Securities or the Representative's Securities remain outstanding in the hands of the public, the Company, at its expense, will annually furnish to its shareholders a report of its operations to include financial statements audited by independent public accountants, and will furnish to the Underwriter as soon as practicable after the end of each fiscal year, a balance sheet of the Company as at the end of such fiscal year, together with statements of operations, shareholders' equity, and changes in cash flow of the Company for such fiscal year, all in reasonable detail and accompanied by a copy of the certificate or report thereon of independent public accountants. (d) It will deliver to you at or before the Initial Closing Date three signed copies of the Registration Statement including all financial statements and exhibits filed therewith, whether or not incorporated by reference. The Company will deliver to you, from time to time until the effective date of the Prospectus, as many copies of the Prospectus as you may reasonably request. The Company will deliver to you on the effective date of the Prospectus and thereafter for so long as a Prospectus is required to be delivered under the Act and the Rules and Regulations as many copies of the Prospectus, in final form, or as thereafter amended or supplemented, as you may from time to time reasonably request. (e) The Company will apply the net proceeds from the sale of the Securities and the Option Securities substantially in the manner set forth under "Use of Proceeds" in the Prospectus. No portion of the proceeds shall be used, directly or indirectly, to acquire any securities issued by the Company, without the prior written consent of the Underwriter. (f) As soon as it is practicable, but in any event not later than the first (lst) day of the fifteenth (15th) full calendar month following the effective date of the Registration Statement, the Company will make available to its security holders and the Underwriter an earnings statement (which need not be audited) covering a period of at least twelve (12) consecutive months beginning after the effective date of the Registration Statement, which shall satisfy the requirements of Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations. (g) Non-Accountable Expense Allowance and other Costs and Expenses. The Company shall pay to the Underwriter at each closing date, and to be deducted from the purchase price for the Securities and the Option Securities, an amount equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Securities and the Option Securities at such closing date less in the case of the Initial Closing Date, the sum of $50,000 previously paid by the Company. If the sale of the Securities by the Underwriter is not consummated for any reason not attributable to the Underwriter, or if (i) the Company withdraws the Registration Statement from the Commission or does not proceed with the public offering, or (ii) the representations in Section 3 hereof are not correct or the covenants cannot be complied with, or (iii) there has been a 10 11 materially adverse change in the condition, prospects or obligations of the Company or a materially adverse change in stock market conditions from current conditions, all as determined by the Underwriter, then the Company shall reimburse the Underwriter for its out of pocket expenses including without limitation, its legal fees and disbursements all on an accountable basis but not to exceed $75,000 (less the $50,000 previously paid by the Company), and if any excess remains from the advance previously paid, such excess will be returned to the Company. Costs and Expenses. Subject to the provisions above the Company will pay all costs and expenses incident to the performance of this Agreement by the Company including, but not limited to, the fees and expenses of counsel to the Company and of the Company's accountants; the costs and expenses incident to the preparation, printing, filing and distribution under the Act of the Registration Statement and Prospectus (including the fee of the Commission, any securities exchange and the NASD in connection with the filing required by the NASD relating to the offering of the Securities contemplated hereby); all expenses, including fees of counsel, which shall be due and payable on the Closing Date in connection with the qualification of the Securities under the state securities or blue sky laws; the cost of furnishing to you copies of the Prospectus, this Agreement, the cost of printing the certificates representing the Securities and of preparing and photocopying the Underwriting Agreement and related Underwriting documents, the cost of three underwriter's bound volumes, any advertising costs and expenses, including but not limited to the Company's expenses on "road show" information meetings and presentations, prospectus memorabilia, issue and transfer taxes, if any. The Company will also pay all costs and expenses incident to the furnishing of any amended Prospectus of or any supplement to be attached to the Prospectus. (h) As a condition of the closing, the Company shall obtain from its officers and directors of the Company written commitments restricting the sale of 100% of their common stock for (12) months after the closing. (i) During a date five years after the date hereof, the Company will make available to its shareholders, as soon as practicable, and deliver to the Underwriter: (1) as soon as they are available, copies of all reports (financial or other) mailed to shareholders; (2) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, the NASD or any securities exchange; (3) every press release and every material news item or article of interest to the financial community in respect of the Company or its affairs which was prepared and released by or on behalf of the Company; and (4) any additional information of a public nature concerning the Company (and any future subsidiaries) or its businesses which the Underwriter may request. During such five-year period, if the Company has active subsidiaries, the foregoing financial statements will be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and will be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (j) The Company will maintain a Transfer Agent and, if necessary under the jurisdiction of incorporation of the Company, a Registrar (which may be the same entity as the Transfer Agent) for its Common Stock. (k) The Company will furnish to the Underwriter or on the Underwriter's order, without charge, at such place as the Underwriter may designate, copies of each Preliminary Prospectus, the Final Prospectus the Registration Statement and any pre-effective or post-effective amendments thereto (two of which copies will be signed and will include all financial statements and exhibits), the Prospectus, and all amendments and supplements thereto, including any prospectus prepared after the effective date of the Registration Statement, in each case as soon as available and in such quantities as the Underwriter may request. 11 12 (1) Neither the Company nor any of its officers, directors, stockholders or any of its affiliates will take, directly or indirectly, any action designed to, or which might in the future reasonably be expected to cause or result in stabilization or manipulation of the price of any of the Company's securities. (m) The Company shall timely file all such reports, forms or other documents as may be required from time to time, under the Act, the Exchange Act, and the Rules and Regulations, and all such reports, forms and documents filed will comply as to form and substance with the applicable requirements under the Act, the Exchange Act, and the Rules and Regulations. (n) The Company shall cause the Securities to be listed on the NASDAQ Small Cap Market or on an exchange for a period of five (5) years from the date hereof, and use its best efforts to maintain the listing of the Securities to the extent they are outstanding. (o) As soon as practicable, (i) before the effective date of the Registration Statement, file a Form 8-A with the Commission providing for the registration under the Exchange Act of the Securities and (ii) but in no event more than 30 days from the effective date of the Registration Statement, take all necessary and appropriate actions to be included in Standard and Poor's Corporation Descriptions and/or Moody's OTC Manual and to continue such inclusion for a period of not less than five years if the securities are not listed on an exchange. (p) Until the completion of the distribution of the Securities, the Company shall not without the prior written consent of the Underwriter and its counsel which consent shall not be unreasonably withheld or delayed, issue, directly or indirectly, any press release or other communication or hold any press conference with respect to the Company or its activities or the offering contemplated hereby, other than trade releases issued in 'the ordinary course of the Company's business consistent with past practices with respect to the Company's operations. (q) Until the earlier of (i) five (5) years from the date hereof or (ii) the sale to the public of the Warrant Shares, the Company will not take any action or actions which may prevent or disqualify the Company's use of Form SB-2 (or other appropriate form) for the registration under the Act of the Warrant Shares and the Representative's Securities. 5. Conditions of the Underwriter's Obligations. The obligation of the Underwriters to offer and sell the Securities and the Option Securities is subject to the accuracy (as of the date hereof, and as of the Closing Dates) of and compliance with the representations and warranties of the Company to the performance by it of its agreement and obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective as and when cleared by the Commission, and you shall have received notice thereof, on or prior to any closing date no stop order suspending the effectiveness of the Prospectus shall have been issued and no proceedings for that or similar purpose shall have been instituted or shall be pending, or, to your knowledge or to the knowledge of the Company, shall be contemplated by the Commission; any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriter; and qualification, under the securities laws of such states as you may designate, of the issue and sale of the Securities upon the terms and conditions herein set forth or contemplated and containing no provision unacceptable to you shall have been secured, and no stop order shall be in effect denying or suspending effectiveness of such qualification nor shall any stop order proceedings with respect thereto be instituted or pending or threatened under such law. (b) On any closing date and, with respect to the letter referred to in subparagraph (iii), as of the date hereof, you shall have received: (i) the opinion, together with such number of signed or photostatic copies of such opinion as you may reasonably request, addressed to you by Jeffers, Wilson, Shaff & Falk,LLP, Esqs., counsel for the Company, in form 12 13 and substance reasonably satisfactory to the Underwriter and William M. Prifti, Esq., counsel to the Underwriter, dated each such closing date, to the effect that: (A) The Company has been duly incorporated and is a validly existing corporation in good standing under the laws of the jurisdiction in which it is incorporated and has all necessary corporate power and authority to carry on its business as described in the Prospectus. (B) The Company is qualified to do business in each jurisdiction in which conducting its business requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Company's business or assets. (C) The Company has the full corporate power and authority to enter into this Agreement, the Representative's Warrant Agreement and to consummate the transactions provided for therein and each such Agreement has been duly and validly authorized, executed and delivered by the Company. Each of this Agreement and the Representative's Warrant Agreement, assuming due authorization, execution and delivery by each other party thereto, constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency or similar laws governing the rights of creditors and to general equitable principles, and provided that no opinion need be given as to the enforceability of any indemnification or contribution provisions, and none of the Company's execution or delivery of this Agreement, or the Representative's Warrant Agreement, its performance hereunder or thereunder, its consummation of the transactions contemplated herein or therein, or the conduct of its business as described in the Registration Statement, the Prospectus, and any amendments or supplements thereto, conflicts with or will conflict with or results or will result in any material breach or violation of any of the terms or provisions of, or constitutes or will constitute a material default under, or result in the creation or imposition of any material lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company pursuant to the terms of (A) the articles of incorporation or by-laws of the Company, (B) to the knowledge of such counsel, any material license, contract, indenture, mortgage, deed of trust, voting trust agreement, stockholders' agreement, note, loan or credit agreement or any other agreement or instrument to which the Company is a party or by which it is or may be bound, or (C) to the knowledge of such counsel, any statute, judgment, decree, order, rule or regulation applicable to the Company, whether domestic or foreign. (D) The Company had authorized and outstanding capital stock as set forth in the Prospectus under the heading "Capitalization" as of the date set forth therein, and all of such issued and outstanding shares of capital stock have been duly and validly authorized and issued, and to the knowledge of such counsel are fully paid and nonassessable, and to the knowledge of such counsel no stockholder of the Company is entitled to any preemptive rights to subscribe for, or purchase shares of the capital stock and to the knowledge of such counsel none of such securities were issued in violation of the preemptive rights of any holders of any securities of the Company. (E) To the knowledge of such counsel, the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the Representative's Warrant Agreement, and except as described in the Prospectus. The Common Stock, the Warrants and the Representative's Warrants each conforms in all material respects to the respective descriptions thereof contained in the Prospectus. The outstanding shares of Common Stock, the Redeemable Warrant and the Warrant Stock and the Representative's Warrant Stock, upon issuance and delivery and payment therefore in the manner described herein, the Warrant Agreement and the Representative Agreement, as the case may be, will be, duly authorized, validly issued, fully paid and nonassessable. There are no preemptive or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of Common Stock pursuant to the Company's articles of incorporation, by-laws, other governing documents or any agreement or other instrument known to such counsel to which the Company is a party or by which it is bound. (F) The certificates representing the Securities comprising the Common Stock are in due and proper form and and the Representative's Warrant has been duly authorized and reserved for issuance and when issued and delivered 13 14 in accordance with the respective terms of the Warrant Agreement and Representative's Warrant Agreement, respectively, will duly and validly issued, fully paid and nonassessable. (G) To the knowledge of such counsel, there are no claims, suits or other legal proceedings pending or threatened against the Company in any court or before or by any governmental body which might materially affect the business of the Company or the financial condition of the Company as a whole, except as set forth in or contemplated by the Prospectus. (H) Based on oral and/or written advice from the staff of the Commission, the Registration Statement has become effective and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Prospectus is in effect and no proceedings for that purpose are pending before, or threatened by, federal or by a state securities administrator. (I) To the knowledge of such counsel, there are no legal or governmental proceedings, actions, arbitrations, investigations, inquiries or the like pending or threatened against the Company of a character required to be disclosed in the Prospectus which have not been so disclosed, questions the validity of the capital stock of the Company or this Agreement or the Representative's Warrant Agreement or might adversely affect the condition, financial or otherwise, or the prospects of the Company or which could adversely affect the Company's ability to perform any of its obligations under this Agreement, or the Representative's Warrant Agreement. (J) To such counsel's knowledge, there are no material agreements, contracts or other documents known to such counsel required by the Act to be described in the Registration Statement and the Prospectus and filed as exhibits to the Registration Statement other than those described in the Registration Statement and the Prospectus and filed as exhibits thereto, and to such counsel's knowledge (A) the exhibits which have been filed are correct copies of the documents of which they purport to be copies; (B) the descriptions in the Registration Statement and the Prospectus and any supplement or amendment thereto of contracts and other documents to which the Company is a party or by which it is bound, including any document to which the Company is a party or by which it is bound incorporated by reference into the Prospectus and any supplement or amendment thereto, are accurate in all material respects and fairly represent the information required to be shown by Form SB-2. (K) No consent, approval, order or authorization from any regulatory board, agency or instrumentality having jurisdiction over the Company, or its properties (other than registration under the Act or qualification under state or foreign securities law or approval by the NASD) is required for the valid authorization, issuance, sale and delivery of the Securities, the Option Securities or the Representative's Warrant. (L) The statements in the Prospectus under "Risk Factors- Dependence on Key Personnel and Consultants,Control by Existing Stockholders," "Management-Limitation of Liability" "Description of the Securities," and "Shares Eligible For Future Sale" have been reviewed by such counsel, and insofar as they refer to statements of law, descriptions of statutes, licenses, rules or regulations or legal conclusions, are correct in all material respects. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not certified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, the Registration Statement and any amendment or supplement, when such documents became effective or were filed with the Commission (other than the financial 14 15 statements including the notes thereto and supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) 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, or at the Closing Date or any later date on which the Option Shares are to be purchased, as the case may be, the Prospectus and any amendment or supplement thereto (other than the financial statements including the notes thereto and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such opinion shall also cover such other matters incident to the transactions contemplated hereby and the offering Prospectus as you or counsel to the Underwriter shall reasonably request. In rendering such opinion, to the extent deemed reasonable by them, such counsel may rely upon certificates of any officer of the Company or public officials as to matters of fact of which the maker of such certificate has knowledge. (ii) a certificate, signed by the Chief Executive Officer and the Principal Financial or Accounting Officer of the Company dated the Closing Date, to the effect that with regard to the Company, each of the conditions set forth in Section 5(d) have been satisfied. (iii) a letter, addressed to the Underwriter and in form and substance satisfactory to the Underwriter in all respects (including the nonmaterial nature of the changes or decreases, if any, referred to in clause (D) below), from, Singer Lewak Greenbaum & Goldstein, LLP dated, respectively, as of the effective date of the Registration Statement and as of the Closing Date, as the case may be: (A) Confirming that they are independent public accountants with respect to the Company and its consolidated subsidiaries, if any, within the meaning of the Act and the applicable published Rules and Regulations. (B) Stating that, in their opinion, the financial statements, related notes and schedules of the Company and its consolidated subsidiaries, if any, included in the Registration Statement examined by them comply as to form in all material respects with the applicable accounting requirements of the Act and the published Rules and Regulations thereunder. (C) Stating that, with respect to the period from December 31, 1996, to a specified date (the specified date") not earlier than five (5) business days prior to the date of such letter, they have read the minutes of meetings of the stockholders and board of directors (and various committees thereof) of the Company and its consolidated subsidiaries, if any, for the period from December 31, 1996 through the specified date, and made inquiries of officers of the Company and its consolidated subsidiaries, if any, responsible for financial and accounting matters and, especially as to whether there was any decrease in sales, income before extraordinary items or net income as compared with the corresponding period in the preceding year; or any change in the capital stock of the Company or any change in the longterm debt or any increase in the short-term bank borrowings or any decrease in net current assets or net assets of the Company or of any of its consolidated subsidiaries, if any, and further stating that while such procedures and inquiries do not constitute an examination made in accordance with generally accepted auditing standards, nothing came to their attention which caused them to believe that during the period from December 31, 1996, through the specified date there were any decreases as compared with the corresponding period in the preceding year in sales, income before extraordinary items or net income; or any change in the capital stock of the Company or consolidated subsidiary, if any, or any change in the long term debt or any increase in the short-term bank borrowings (other than any increase in short-term bank borrowings in the ordinary course of business) of the Company or any consolidated subsidiary, if any, or any decrease in the net current assets or net assets of the Company or any consolidated subsidiary, if any; and (D) Stating that they have carried out certain specified procedures (specifically set forth in such letter or letters) as specified by the Underwriter (after consultations with Singer Lewak Greenbaum & Goldstein, ,LLP relating to such procedures), not constituting an audit, with respect to certain tables, statistics and other financial data in the Prospectus specified by the Underwriter and such financial data not included in the Prospectus but from which information in the Prospectus is derived, and which have been obtained from the general accounting records of the Company or consolidated subsidiaries, if any, or from such accounting records by analysis or computation, and having compared such financial data with the accounting records of the Company or the consolidated subsidiaries, if any, stating that they have found such financial data to agree with the accounting records of the Company. 15 16 (c) All corporate proceedings and other legal matters relating to this Agreement, the Prospectus and other related matters shall be satisfactory to or approved by counsel to the Underwriter and you shall have received from Jeffers, Wilson, Shaff & Falk, LLP a signed opinion dated as of each closing date, with respect to the incorporation of the Company, the validity of the Securities, the form of the Prospectus, (other than the financial statements together with related notes and other financial and statistical data contained in the Prospectus or omitted therefrom, as to which such counsel need express no opinion), the execution of this Agreement and other related matters as you may reasonably require. (d) At each closing date, (i) the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects with the same effect as if made on and as of such closing date; (ii) the Prospectus and any amendments or supplements thereto shall contain all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations and in all material respects conform to the requirements thereof, and neither the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary, in light of the circumstances under which they were made, in order to make the statements therein not misleading; (iii) there shall have been since the respective dates as of which information is given no material adverse change in the business, properties or condition (financial or otherwise), results of operations, capital stock, longterm debt or general affairs of the Company from that set forth in the Prospectus, except changes which the Prospectus indicates might occur after the effective date of the Prospectus, and the Company shall not have incurred any material liabilities or material obligations, direct or contingent, or entered into any material transaction, contract or agreement not in the ordinary course of business other than as referred to in the Prospectus and which would be required to be set forth in the Prospectus; and (iv) except as set forth in the Prospectus, no action, suit or proceeding at law or in equity shall be pending or threatened against the Company which would be required to be set forth in the Prospectus, and no proceedings shall be pending or threatened against the Company or any subsidiary before or by any commission, board or administrative agency in the United States or elsewhere, wherein an unfavorable decision, ruling or finding would materially and adversely affect the business, property, condition (financial or otherwise), results of operations or general affairs of the Company. (e) On the Initial Closing Date, the Company shall have executed and delivered to the Underwriter, (i) the Representatives' Warrant Agreement substantially in the form filed as an Exhibit to the Registration Statement in final form and substance satisfactory to the Underwriter, and (ii) the Representative's Warrants in such denominations and to such designees as shall have been provided to the Company. (f) On or before the Initial Closing Date, the Securities shall have been duly approved for listing on an exchange or on NASDAQ, Small Cap Market. (g) On or before the Initial Closing Date, there shall have been delivered to the Underwriter all of the Lock-up Agreements required to be delivered pursuant to Section 3(a)(xxv) and 4(h), in form and substance satisfactory to the Underwriter and Underwriter's counsel. If any condition to the Underwriter's obligations hereunder to be fulfilled prior to or at the Closing Date or the relevant Option Closing Date, as the case may be, is not so fulfilled, the Underwriter may terminate this Agreement or, if the Underwriter so elects, it may waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 6. Conditions of the Company's Obligations. The obligation of the Company to sell and deliver the Securities is subject to the following: (a) The provisions regarding the effective date, as described in Section 10. (b) At the Initial Closing Date, no stop order suspending the effectiveness of the Prospectus shall have been issued under the Act or any proceedings therefor initiated or threatened by the Commission or by any state securities department. (c) Tender of payment by the Underwriter in accord with Section 2 hereof. 16 17 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and its employees and each person, if any, who controls you within the meaning of the Act, against any losses, claims, damages or liabilities, joint or several (which shall, for any purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which each Underwriter or such controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission made in the Prospectus, or such amendment or supplement to state a material fact required to be stated therein or necessary to make the statements therein not misleading, which is in reliance upon and in conformity with written information furnished by the Company to you specifically for use in the preparation thereof, and provided further that the indemnity agreement contained in this subsection (a) shall not inure to the benefit of you with respect to any person asserting any such loss, claim, damage or liability who has purchased the Securities which are the subject thereof if you or any participants failed to send or give a copy of the Prospectus to such person at or prior to the written confirmation of the sale of such Securities to such person and except that, with respect to any untrue statement or omission or any alleged untrue statement or omission, made in any Pre-Effective Prospectus, the indemnity agreement contained in this subsection (a) shall not inure to the benefit of any Underwriter ( or to any person controlling any such underwriter) from whom the person asserting any such loss, claim, damage or liability purchased the securities concerned to the extent that such untrue statement or omission, or alleged untrue statement or omission, has been corrected in a later Pre-Effective Prospectus or in the Final Prospectus unless the Underwriter circulated a later Pre-Effective Prospectus or the Final Prospectus to such person (b) Each Underwriter will indemnify and hold harmless the Company, each of its directors, each of its officers, each person, if any, who controls the Company within the meaning of the Act against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such director, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission was made in the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by you specifically for use in the preparation thereof. This indemnity will be in addition to any liability which any Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party, similarly notified, to assume the defense thereof, subject to the provisions herein stated, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that, if the indemnified party is you or a person who controls you, the fees and expenses of such 17 18 counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party or (ii) the named parties to any such action (including any impleaded parties) include both you or such controlling person and the indemnifying party and you or such controlling person shall have been advised by such counsel that there is a conflict of interest which would prevent counsel for the indemnifying party from representing the indemnifying party and you or such controlling person (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of you or such controlling person, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction or which are consolidated into the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys for you and all such controlling persons, which firm shall be designated in writing by you). No settlement of any action against an indemnified party shall be made without the consent of the indemnified party, which shall not be unreasonably withheld in light of all factors of importance to such indemnified party. 8. Contribution. In order to provide for just and equitable contribution tinder the Act in any case in which (i) the indemnifying party makes a claim for indemnification pursuant to Section 7 hereof but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of Section 7 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of the Underwriters, then the Company and the Underwriters in the aggregate shall contribute to the aggregate losses, claims, damages, or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) in either such case (after contribution from others) in such proportions that the Underwriters are responsible in the aggregate for that portion of such losses, claims, damages or liabilities determined by multiplying the total amount of such losses, claims, damages or liabilities times the difference between the public offering price and the commission to the Underwriter and dividing the product thereof by the public offering price, and the Company, if applicable, shall be responsible for that portion of such losses, claims, damages or liabilities times the commission to the Underwriters and dividing the product thereof by the public offering price; provided, however, that the Underwriters shall not be required to so contribute any amount in excess of the underwriting discount applicable to the Securities purchased by the Underwriters hereunder if such allocation is not permitted by applicable law, then the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such damages and other relevant equitable considerations shall also be considered. No person guilty of a fraudulent misrepresentation (within the meaning of Section 12(2) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The foregoing contribution agreement shall in no way affect the contribution liabilities of any person having liability under Section 12 of the Act other than the Company and the Underwriter. As used in this paragraph, the term "Underwriters" includes any person who controls the Underwriters within the meaning of Section 15 of the Act. If the full amount of the contribution specified in this paragraph is not permitted by law, then any Underwriter and each person who controls any Underwriter shall be entitled to contribution from the Company, to the full extent permitted by law. 9. Effective Date. This Agreement shall become effective at 10:00 a.m. New York time on the next full business day following the effective date of the Registration Statement, or at such other time after the effective date of the Prospectus as you in your discretion shall first commence the public offering of any of the Securities covered thereby, provided, however, that at all times the provisions of Sections 7, 8, 9 and 11 shall be effective. 10. Termination. (a) This Agreement, may be terminated at any time prior to the Closing Date by you if in your judgment it is impracticable to offer for sale or to enforce contracts made by you for the sale of the Securities agreed to be sold hereunder by reason of (i) the Company as a whole having sustained a material loss, whether or not insured, by reason of fire, earthquake, flood, accident or other calamity, or from any labor dispute or court or government action, order or decree, (ii) trading in securities of the Company having been suspended by a state securities administrator or by the Commission, (iii) material governmental restrictions having been imposed on trading in 18 19 securities generally (not in force and effect on the date hereof) or trading on the New York Stock Exchange, American Stock Exchange, or in the over-the-counter market shall have been suspended, (iv) a banking moratorium having been declared by federal or New York State authorities, (v) an outbreak or escalation of hostilities or other national or international calamity having occurred, (vi) the passage by the Congress of the United States or by any state legislative body, of any act or measure, or the adoption of any orders, rules or regulations by any governmental body or any authoritative accounting institute or board, or any governmental executive, which is believed likely by you to have a material impact on the business, financial condition or financial statements of the Company; or (vii) any material adverse change having occurred, since the respective dates as of which information is given in the Prospectus, in the condition, financial or otherwise, of the Company as a whole, whether or not arising in the ordinary course of business, (viii) Paul J. White, Kenneth S. Kornman and Michael G. Newman cease to be employed by the Company in his present capacity; (ix) the Securities are not listed the American Stock Exchange or any other exchange or on NASDAQ. (b) If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 10 or in Section 9, the Company shall be promptly notified by you, by telephone or telegram, confirmed by letter. 11. Representations, Warrants and Agreements to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company (or its officers) and the Underwriter set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Underwriter, the Company, or any of their officers or directors and will survive delivery of and payment for the Securities. 12. Notices. All communications hereunder will be in writing and, except as otherwise expressly provided herein, if sent to you, will be mailed, delivered or telephoned and confirmed to you at, Nutmeg Securities,Ltd., 495 Post Road East, Westport, Ct 06880 Attn: Daniel T. Guilfoile,Director, Investment Banking Division; to the Company at 4400 MacArthur Boulevard, Suite 980, Newport Beach, CA 92660 13. Parties in Interest. This Agreement is made solely for the benefit of the Underwriter(s), and the Company, and their respective controlling persons, directors and officers, and their respective successors, assigns, executors and administrators. No other person shall acquire or have any right under or by virtue of this Agreement. 14. Headings. The Section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement. 15. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without giving effect to conflict of law principles. 16. Counterparts. This Agreement may be executed in any number of counterparts, each of which together shall constitute one and the same instrument. 19 20 If the foregoing correctly sets forth the understanding between the Company and you, as Representative of the several underwriters, please so indicate in the space provided below for such purpose, whereupon this letter and your acceptance shall constitute a binding agreement between us. Very truly yours, Medical Science Systems,Inc. By: ------------------------ (Authorized Officer) Paul J. White, President Accepted as of the date first above written: Nutmeg Securities, Ltd. As Representative of the several Underwriters By: -------------------------------------- (Authorized Officer) (Vice) President Director, Investment Banking Division 20 21 EXHIBIT A SCHEDULE I UNDERWRITERS Shares of Underwriter Common Stock - ----------- ------------ Nutmeg Securities,Ltd.. --------- TOTAL 1,500,000 ========= 21 EX-1.2 3 FORM OF AGREEMENT AMONG UNDERWRITERS 1 EXHIBIT 1.2 MEDICAL SCIENCE SYSTEMS, INC. 1,500,000 SHARES OF COMMON STOCK AGREEMENT AMONG UNDERWRITERS , 19 Nutmeg Securities, Ltd 495 Post Road East Westport, Ct 06880 as Representative GENTLEMEN: We wish to confirm as follows the agreement among you, the undersigned and the other members of the Underwriting Group named in Schedule I to the Underwriting Agreement, as it is to be executed (all such parties being herein called the "Underwriters"), with respect to the purchase by the Underwriters severally from Medical Science Systems, Inc.. ("Company") of 1,500,000 shares of Common Stock ("Securities") set forth in Schedule I to the Underwriting Agreement. The number of Securities to be purchased by each Underwriter from the Company shall be determined in accordance with Section 2 of the Underwriting Agreement. It is understood that changes may be made in those who are to be Underwriters and in the respective numbers of Securities to be purchased by them, but that the Underwriting Agreement will not be changed without our consent, except as provided herein, and in the Underwriting Agreement. The obligations of the Underwriters to purchase the number of Securities set opposite their respective names in Schedule I to the Underwriting Agreement, are herein called their "underwriting obligations." The number of Securities set opposite our name in said Schedule I, are herein called "our Securities." For purposes of this Agreement the following definitions shall be applicable: (a) "Manager's Concession" shall be the compensation to you for acting as Manager as provided in Paragraph 1 of not less than percent ( %) of the underwriting discount. The Manager's Concession shall include the right to a portion of the warrants to be issued pursuant to the Underwriting Agreement and, the right to the nonaccountable expenses to be paid pursuant to the Underwriting Agreement. (b) "Underwriting Group Concession" shall mean compensation to members of the Underwriting Group for assuming the underwriting risk and shall be not less than percent ( %) of the underwriting discount. (c) "Dealer's Concession" shall mean compensation to Dealers, who are members of the Selling Group and shall, as to Dealers who have executed an agreement with you, be not less than percent ( %) of the underwriting discount. (d) "Dealer's Reallowance Concession" shall mean the compensation allowed Dealers by Underwriters other than you and shall be one-half (1/2) of the Dealer's Concession. (e) It is contemplated that the underwriting discount will be ten percent (10%) of the offering price. You, in your absolute discretion, shall determine, within the foregoing limitations, the precise allocation of the underwriting discount and shall notify us of same at least twenty-four (24) hours prior to the execution of the Underwriting Agreement. 1. Authority and Compensation of Representative. We hereby authorize you, as our Representative and on our behalf, (a) to enter into an agreement with the Company substantially in the form attached hereto as Exhibit A ("Underwriting Agreement"), but with such changes therein as in your judgment are not materially adverse to the Underwriters, (b) to exercise all the authority and discretion vested in the Underwriters and in you by the provisions 1 2 of the Underwriting Agreement, and (c) to take all such action as you, in your discretion, may deem necessary or advisable in order to carry out the provisions of the Underwriting Agreement and this Agreement and the sale and distribution of the Securities, provided, however, that the time within which the Registration Statement is required to become effective pursuant to the Underwriting Agreement will not be extended more than forty-eight (48) hours without the approval of a majority in interest of the Underwriters (including you). We authorize you, in executing the Underwriting Agreement on our behalf, to set forth in Schedule I of the Underwriting Agreement as our commitment to purchase the number of Securities (which shall not be substantially in excess of the number of Securities included in your invitation to participate unless we have agreed otherwise) included in a wire, telex, or similar means of communication transmitted by you to us at least twenty-four (24) hours prior to the commencement of the offering as our finalized underwriting participation. As our share of the compensation for your services hereunder, we will pay you, and we authorize you to charge to our account, a sum equal to the Manager's Concession. 2. Public Offering. A public offering of the Securities is to be made, as herein provided, as soon after the Registration Statement relating thereto shall become effective as in your judgment is advisable. The Securities shall be initially offered to the public at the public offering price of $ per share. You will advise us by telegraph or telephone when the Securities shall be released for offering. We authorize you as Representative of the Underwriters, after the initial public offering, to vary the public offering price, in your sole discretion, by reason of changes in general market conditions or otherwise. The public offering price of the Securities at any time in effect is herein called the "Offering Price." We hereby agree to deliver all preliminary and final Prospectuses as required for compliance with the provisions of Rule 15c2-8 under the Securities Exchange Act of 1934 and Section 5(b) of the Securities Act of 1933. You have heretofore delivered to us such preliminary Prospectuses as have been requested by us, receipt of which is hereby acknowledged, and will deliver such final Prospectuses as will be requested by us. 3. Offering to Dealers and Group Sales. We authorize you to reserve for offering and sale, and on our behalf to sell, to institutions or other retail purchasers (such sales being herein called "Group Sales") and to dealers selected by you (such dealers being herein called the "Dealers") all or any part of our Securities as you may determine. Such sales of Securities, if any, shall be made (i) in the case of Group Sales, at the Offering Price, and (ii) in the case of sales to Dealers, at -the Offering Price less the Dealer's Concession. Any Group Sales shall be as nearly as practicable in proportion to the underwriting obligations of the respective Underwriters. Any sales to Dealers made for our account shall be as nearly as practicable in the ratio that the Securities reserved for our account for offering to Dealers bears to the aggregate of all Securities of all Underwriters, including you, so reserved. On any Group Sales or sales to Dealers made by you on our behalf, we shall be entitled to receive only the Underwriter's Concession. You agree to notify us not less than twenty-four (24) hours prior to the commencement of the public offering as to the number of Securities, if any, which we may retain for direct sale. Prior to the termination of this Agreement, you may reserve for offering and sale, as herein before provided, any Securities remaining unsold theretofore retained by us and we may, with your consent, retain any Securities remaining unsold theretofore reserved by you. Sales to Dealers shall be made under a Selected Dealers Agreement, attached hereto as Exhibit B and by this reference incorporated herein. We authorize you to determine the form and manner of any communications with Dealers, and to make such changes in the Selected Dealers Agreement, as you may deem appropriate. In the event that there shall be any such agreements with Dealers, you are authorized to act as managers thereunder, and we agree, in such event, to be governed by the terms and conditions of such agreements. Each Underwriter agrees that it will not offer any of the Securities for sale at a price below the Offering Price or allow any concession therefrom, except as herein otherwise provided. We, as to our Securities, may enter into agreements with Dealers, but any Dealer's Reallowance Concession shall not exceed half of the Dealer's Concession. It is understood that any person to whom an offer may be made, as herein before provided, shall be a member of the National Association of Securities Dealers, Inc. ("NASD") or dealers or institutions with their principal place of 2 3 business located outside of the United States, its territories or possessions, and who are not eligible for membership under Section 1 of the Bylaws of the NASD who agree to make no sales within the United States, its territories or possessions, or to persons who are nationals thereof, or residents therein, and, in making sales, to comply with the NASD's Rules of Fair Practice. We authorize you to determine the form and manner of any public advertisement of the Securities. Nothing in this Agreement contained shall be deemed to restrict our right, subject to the provisions of this Section 3, to offer our Securities prior to the effective date of the Registration Statement, provided, however, that any such offer shall be made in compliance with any applicable requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules and regulations of the Securities and Exchange Commission thereunder and of any applicable state securities laws. 4. Repurchases in the Open Market. Any Securities sold by us (otherwise than through you) which, prior to the termination of this Agreement, or such earlier date as you may determine, shall be contracted for or purchased in the open market by you on behalf of any Underwriter or Underwriters, shall be repurchased by us on demand at a price equal to the cost of such purchase plus commissions and taxes, if any, on redelivery. Any Securities delivered on such repurchase need not be the identical Securities originally sold by us. In lieu of delivery of such Securities to us, you may (i) sell such Securities in any manner for our account and charge us with the amount of any loss or expense, or credit us with the amount of any profit, less any expense, resulting from such sale, or (ii) charge our account with an amount not in excess of the concession to Dealers on such Securities. 5. Delivery and Payment. We agree to deliver to you, at or before 9:00 A.M., New York, New York Time, on the Closing Date referred to in the Underwriting Agreement, at your office, a certified or bank cashier's check payable to your order for the offering price of the Securities less Dealer's Concession of the Securities which we retained for direct sale by us, the proceeds of which check shall be delivered to you, in the manner provided in the Underwriting Agreement, to or for the account of the Company against delivery of certificates for such Securities to you for our account. You are authorized to accept such delivery and to give receipts therefor. You may advance funds for Securities which have been sold or reserved for sale to retail purchasers or Dealers for our account. If we fail (whether or not such failure shall constitute a default hereunder) to deliver to you, or you fail to receive, our check and/or payment for sales made by you for our account for the Securities which we have agreed to purchase, you, individually and not as Representative of the Underwriters, are authorized (but shall not be obligated) to make payment, in the manner provided in the Underwriting Agreement, to or for the account of the Company for such Securities for our account, but any such payment by you shall not relieve us of any of our obligations under the Underwriting Agreement or under this Agreement and we agree to repay you on demand the amount so advanced for our account. We also agree on demand to take up and pay for or to deliver to you funds sufficient to pay for at cost any Securities of the Company purchased by you for our account pursuant to the provisions of Section 9 hereof, and to deliver to you on demand any Securities sold by you for our account, pursuant to any provision of this Agreement. We authorize you to deliver our Securities, and any other Securities purchased by you for our account pursuant to the provisions of Section 9 hereof, against sales made by you for our account pursuant to any provision of this Agreement. Upon receipt by you of payment for the Securities sold by us and/or through you for our account, you will remit to us promptly an amount equal to the Underwriter's Concession on such Securities. You agree to cause to be delivered to us, as soon as practicable after the Closing Date referred to in the Underwriting Agreement, such part of our Securities purchased on such Closing Date as shall not have been sold or reserved for sale by your for our account. In case any Securities reserved for sale in Group Sales or to Dealers shall not be purchased and paid for in due course as contemplated hereby, we agree to accept delivery when tendered by you of any Securities so reserved for our account and not so purchased and pay you the offering price less the Dealer's and Underwriter's Concessions. 3 4 6. Authority to Borrow. We authorize you to advance your funds for our account (charging current interest rates) and to arrange loans for our account for the purpose of carrying out this Agreement, and in connection therewith to execute and deliver any notes or other instruments, and to hold, or pledge as security therefor, all or any part of our Securities of the Company purchased hereunder for our account. Any lending bank is hereby authorized to accept your instructions as Representative in all matters relating to such loans. Any part of our Securities held by you, may be delivered to us for carrying purposes, and if so delivered, will be redelivered to you upon demand. 7. Allocation of Expense and Liability. We authorize you to charge our account with, and we agree to pay (a) all transfer taxes on sales made by you for our account, except as herein otherwise provided, and (b) our proportionate share (based on our underwriting obligations) of all expenses in excess of those reimbursed by the Company incurred by you in connection with the purchase, carrying and distribution, or proposed purchase and distribution, of the Securities and all other expenses arising under the terms of the Underwriting Agreement or this Agreement. Your determination of all such expenses and your allocation thereof shall be final and conclusive. Funds for our account at any time in your hands as our Representative may be held in your general funds without accountability for interest. As soon as practicable after the termination of this Agreement, the net credit or debit balance in our account, after proper charge and credit for all interim payments and receipts, shall be paid to or paid by us, provided, however, that you, in your discretion, may reserve from distribution an amount to cover possible additional expenses chargeable to the several Underwriters. 8. Liability for Future Claims. Neither any statement by you, as Representative of the Underwriters, of any credit or debit balance in our account nor any reservation from distribution to cover possible additional expenses relating to the Securities shall constitute any representation by you as to the existence or nonexistence of possible unforeseen expenses or liabilities of or charges against the several Underwriters. Notwithstanding the distribution of any net credit balance to us or the termination of this Agreement, or both, we shall be and remain liable for, and will pay on demand, (a) our proportionate share (based on our underwriting obligations) of all expenses and liabilities which may be incurred by, or for the accounts of the Underwriters, including any liability which may be incurred by the Underwriters or any of them, and (b) any transfer taxes paid after such settlement on account of any sale or transfer for our account. 9. Stabilization. We authorize you, until the termination of this Agreement, (a) to make purchases and sales of the Securities, in the open market or otherwise, for long or short account, and on such terms, and at such prices as you in your discretion may deem desirable, (b) in arranging for sales of Securities, to overallot, and (c) either before or after the termination of this Agreement, to cover any short position incurred pursuant to this Section 9; subject, however, to the applicable rules and regulations of the Securities and Exchange Commission under the Securities Exchange Act of 1934. All such purchases, sales and overallotments shall be made for the accounts of the several Underwriters as nearly as practicable in proportion to their respective underwriting obligations; provided, however, that our net position resulting from such purchases and sales and overallotments shall not at any time exceed, either for long or short account, fifteen percent (15%) of the number of Securities agreed to be purchased by us. If you engage in any stabilizing transactions as representative of the underwriters, you shall promptly notify us of that fact and in like manner you agree to promptly notify and file with us any stabilizing transaction in accordance with the requirements of Rule 17a-2(d) under the Securities Exchange Act of 1934. We agree to advise you from time to time, upon request, until the settlement of accounts hereunder, of the number of Securities at the time retained by us unsold, and we will upon request sell to you, for the accounts of one or more of the several Underwriters, such number of our unsold Securities as you may designate, at the Offering Price less such amount, not in excess of the concession to Dealers, as you may determine. 10. Open Market Transactions. We agree that, except with your consent and except as herein provided upon advice from you, we will not make purchases or sales on the open market or otherwise, or attempt to induce others to make purchases or sales, either before or after the purchase of the Securities, and prior to the completion (as defined in Regulation M of the Securities Exchange Act of 1934) of our participation in the distribution, we will otherwise 4 5 comply with Regulation M. Nothing in this Section 10 contained shall prohibit us from acting as broker or agent in the execution of unsolicited orders of customers for the purchase or sale of any securities of the Company. 11. Blue Sky. Prior to the initial offering by the Underwriters, you will inform us as to the states under the respective securities or Blue Sky laws of which it is believed that the Securities have been qualified or are exempt for sale, but you do not assume any responsibility or obligation as to the accuracy of such information or as to the right of any Underwriter or Dealer to sell the Securities in any jurisdiction. We will not sell any Securities in any other state or jurisdiction and we will not sell Securities in any state or jurisdiction unless we are qualified or licensed to sell securities in such state or jurisdiction. We authorize you, if you deem it inadvisable in arranging sales of Securities for our account hereunder, to sell any of our Securities to any particular Dealer, or other buyer, because of the securities or Blue Sky laws of any jurisdiction, to sell our Securities to one or more other Underwriters at the Offering Price less, in the case of a sale to any Dealer, such amount, not in excess of the concession to Dealers thereon, as you may determine. The transfer tax on any such sales among Underwriters shall be treated as an expense and charged to the respective accounts of the several Underwriters, in proportion to their respective underwriting obligations. 12. Default by Underwriters. Default by one or more Underwriters, in respect to their obligations under the Underwriting Agreement shall not release us from any of our obligations. In case of such default by one or more Underwriters, you are authorized to increase, pro rata, with the other nondefaulting Underwriters, the number of defaulted Securities which we shall be obligated to purchase from the Company, provided, however, that the aggregate amount of all such increases for all Underwriters shall not exceed ten percent (10%) of such Securities, and, if the aggregate number of the Securities not taken up by such defaulting Underwriters exceeds such ten percent (10%), you are further authorized, but shall not be obligated, to arrange for the purchase by other persons, who may include yourselves, of all or a portion of the Securities not taken up by such Underwriters. In the event any such increases or arrangements are made, the respective numbers of Securities to be purchased by the nondefaulting Underwriters and by any such other person or persons shall be taken as the basis for the underwriting obligations under this Agreement, but this shall not in any way affect the liability of any defaulting Underwriters to the other Underwriters for damages resulting from such default. In the event of default by one or more Underwriters in respect of their obligations under this Agreement to take up and pay for any Securities purchased by your for their respective accounts, pursuant to Section 9 hereof, or to deliver any such Securities sold or overallotted by you for their respective accounts pursuant to any provisions of this Agreement, and to the extent that arrangements shall not have been made by you for other persons to assume the obligations of such defaulting Underwriter or Underwriters, each nondefaulting Underwriter shall assume its proportionate share of the aforesaid obligations of each such defaulting Underwriter without relieving any such Underwriter of its liability therefor. 13. Termination of Agreement. Unless earlier terminated by you, the provisions of Sections 2, 3, 4, 6, 9 and 10 of this Agreement shall, except as otherwise provided therein, terminate thirty (30) full business days after the effective date of the Registration Statement herein referred to, but may be extended by you for an additional period or periods not exceeding thirty (30) full business days in the aggregate. You may, however, terminate this Agreement, or any provisions hereof, at any time by written or telegraphic notice to us. 14. General Position of the Representative. In taking action under this Agreement, you shall act only as agent of the several Underwriters. Your authority as Representative of the several Underwriters shall include the taking of such action as you may deem advisable in respect of all matters pertaining to any and all offers and sales of the Securities, including the right to make any modifications which you consider necessary or desirable in the arrangements with Dealers or others. You shall be under no liability for or in respect of the value of the Securities or the validity or the form thereof, the Registration Statement, the Prospectus, the Underwriting Agreement, or other instruments executed by the Company or others of any agreement on its or their part; nor shall you, as such Representative or otherwise, be liable under any of the provisions hereof, or for any matters connected herewith, except for want of good faith, and except for any liability arising under the Securities Act of 1933; and no obligation not expressly assumed by you as such Representative herein shall be implied from this Agreement. In representing the Underwriters hereunder, you shall act as the representative of each of them respectively. Nothing herein contained shall constitute the several Underwriters partners with you or with each other, or render any Underwriter 5 6 liable for the commitments of any other Underwriter, except as otherwise provided in Section 12 hereof. The commitments and liabilities of each of the several Underwriters are several in accordance with their respective underwriting obligations and are not joint. 15. Acknowledgment of Registration Statement, etc. We hereby confirm that we have examined the Registration Statement (including all amendments thereto) relating to the Securities as heretofore filed with the Securities and Exchange Commission, that we are familiar with the amendment(s) to the Registration Statement and the final form of Prospectus proposed to be filed, that we are willing to accept the responsibilities of an underwriter thereunder, and that we are willing to proceed as therein contemplated. We further confirm that the statements made under the heading "Underwriting" in such proposed final form of Prospectus are correct and we authorize you so to advise the Company on our behalf. We understand that the aforementioned documents are subject to further change and that we will be supplied with copies of any amendment or amendments to the Registration Statement and of any amended Prospectus promptly, if and when received by you, but the making of such changes and amendments shall not release us or affect our obligations hereunder or under the Underwriting Agreement. 16. Indemnification. Each Underwriter, including you, agrees to indemnify and hold harmless each other Underwriter and each person who controls any other Underwriter within the meaning of Section 15 of the Securities Act of 1933, as amended, to the extent of their several commitments under the Underwriting Agreement and upon the terms that such Underwriter agrees to indemnify and hold harmless the Company as set forth in Section 7 of the Underwriting Agreement. The Agreement contained in this Section 16 shall survive any termination of this Agreement Among Underwriters. 17. Capital Requirements. We confirm that our ratio of aggregate indebtedness to net capital is such that we may, in accordance with and pursuant to Rule 15c3-1, promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, agree to purchase the number of Securities we may be obligated to purchase under any provision of the Underwriting Agreement or this Agreement. 18. Miscellaneous. We have transmitted herewith a completed Underwriters' Questionnaire on the form thereof supplied by you. Any notice hereunder from you to us or from us to you shall be deemed to have been duly give if sent by registered mail, telegram, teletype, telex, telecopier, graphic scan, or other written form of telecommunication to us at our address as set forth in the Underwriting Agreement, or to you at the address set forth on the first page of this Agreement. You hereby confirm that you are registered as a broker-dealer with the United States Securities and Exchange Commission and that you are a member of the NASD and we confirm that we are either a member of the NASD or a foreign broker-dealer not eligible for membership under Section I of the Bylaws of the NASD, who agrees to make no sales within the United States, its territories or possessions, or to persons who are nationals thereof or residents therein, and, in making sales, to comply with the requirements of the NASD's Interpretation with Respect to Free Riding and Withholding, and with Sections 2730, 2740 and 2420 to the extent applicable to foreign nonmember brokers or dealers, and Section 2750 of the NASD's Rules of Fair Practice. We will comply with all applicable federal laws, the laws of the states or other jurisdictions concerned and the Rules and Regulations of the NASD, including, but not limited to, Section 2740 of the Rules of Fair Practice. This instrument may be signed by the Underwriters in various counterparts which together shall constitute one and the same agreement among all the Underwriters and shall become effective as between us at such time as you shall have confirmed same by returning an executed copy to us, and thereafter, as to us and the other Underwriters, upon execution by them of counterparts which are confirmed by you. In no event, however, shall we have any liability under this Agreement if the Underwriting Agreement is not executed. 6 7 Please confirm that the foregoing correctly states the understanding between us by signing and returning to us a counterpart hereof. Very truly yours, By --------------------------------- Attorney-in-Fact for the several Underwriters named in Schedule I to the Underwriting Agreement Confirmed as of the date first above written. NUTMEG SECURITIES,LTD. As Representative By ---------------------------------------- President or Director Investment Banking 7 EX-1.3 4 FORM OF SELECTED DEALERS AGREEMENT 1 EXHIBIT 1.3 EXHIBIT B A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. NO OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND, AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE. YOUR EXECUTION HEREOF WELL INVOLVE NO OBLIGATION OR COMMITMENT OF ANY KIND UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE. MEDICAL SCIENCE SYSTEMS, INC. SELECTED DEALERS AGREEMENT , 19 Dear Sirs: 1. Nutmeg Securities ,Ltd.. named as the Underwriter ("Underwriter") in the enclosed preliminary Prospectus, proposes to offer on a firm commitment basis, subject to the terms and conditions and execution of the Underwriting Agreement, 1,500,000 Shares of Common Stock at $ per share ("Securities") of the above Company. The Securities are more particularly described in the enclosed preliminary Prospectus, additional copies of which will be supplied in reasonable quantities upon request. Copies of the definitive Prospectus will be supplied after the effective date of the Registration Statement. 2. The Underwriter is soliciting offers to buy, upon the terms and conditions hereof, a part of the Securities from Selected Dealers, including you who are to act as principal and who are (i) registered with the Securities and Exchange Commission ("Commission") as broker-dealers under the Securities Exchange Act of 1934, as amended ("1934 Act"), and members in good standing with the National Association of Securities Dealers, Inc. ("NASD"), or (ii) dealers or institutions with their principal place of business located outside the United States, its territories and possessions who are not eligible for membership in the NASD and who agree to make no sales within the United States, its territories or possessions or to persons who are nationals thereof or residents therein and, in making sales, to comply with the NASD's Interpretation with Respect to FreeRiding and Withholding and with Sections 2730, 2740, 2420, to the extent applicable to foreign nonmember brokers or dealers, and Section 2750 of the NASD's Rules of Fair Practice. The Securities are to be offered at a public price of $ per share of Common Stock. Selected Dealers will be allowed a concession of not less than $ per share, except as provided below. You will be notified of the precise amount of such concession prior to the effective date of the Registration Statement. You may reallow not in excess of $ per share to dealers who meet the requirements set forth in this Section 2. This offer is solicited subject to the issuance and delivery of the Securities and their acceptance by the Underwriter, to the approval of legal matters by counsel and to the terms and conditions as herein set forth. 3. Your offer to purchase may be revoked in whole or in part without obligation or commitment of any kind by you and any time prior to acceptance and no offer may be accepted by us and no sale can be made until after the registration statement covering the Securities has become effective with the Commission. Subject to the foregoing, upon execution by you of the Offer to Purchase below and the return of same to us, you shall be deemed to have offered to purchase the number of Securities set forth in your offer on the basis set forth in paragraph 2 above. 1 2 Any oral notice by us of acceptance of your offer shall be immediately followed by written or telegraphic confirmation preceded or accompanied by a copy of the Prospectus. If a contractual commitment arises hereunder, all the terms of this Selected Dealers Agreement shall be applicable. We may also make available to you an allotment to purchase Securities, but such allotment shall be subject to modification or termination upon notice from us any time prior to an exchange of confirmations reflecting completed transactions. All references hereafter in this Agreement to the purchase and sale of Securities assume and are applicable only if contractual commitments to purchase are completed in accordance with the foregoing. 4. You agree that in reoffering said Securities, if your offer is accepted after the effective date, you will make a bona fide public distribution of same. You will advise us upon request of Securities purchased by you remaining unsold and we shall have the right to repurchase such Securities upon demand at the public offering price without paying the concession with respect to any Securities so repurchased. Any of the Securities purchased by you pursuant to this Agreement are to be subject to the terms hereof. Securities shall not be offered or sold by you below the public offering price before the termination of this Agreement. 5. Payment for Securities which you purchase hereunder shall be made by you on or before three (3) business days after the date of each confirmation by certified or bank cashier's check payable to the Underwriter. Certificates for the Securities shall be delivered as soon as practicable after delivery instructions are received by the Underwriter. 6. A registration statement covering the offering has been filed with the Securities and Exchange Commission in respect to the Securities. You will be promptly advised when the registration statement becomes effective. Each Selected Dealer in selling Securities pursuant hereto agrees (which agreement shall also be for the benefit of the Company) that it will comply with the applicable requirements of the Securities Act of 1933 and of the Securities Exchange Act of 1934 and any applicable rules and regulations issued under said Acts. No person is authorized by the Company or by the Underwriter to give any information or to make any representations other than those contained in the Prospectus in connection with the sale of the Securities. Nothing contained herein shall render the Selected Dealers a member of the Underwriting Group or partners with the Underwriter or with one another. 7. You will be informed by us as to the states in which we have been advised by counsel the Securities have been qualified for sale or are exempt under the respective securities or blue sky laws of such states, but we have not assumed and will not assume any obligation or responsibility as to the right of any Selected Dealer to sell Securities in any state. You agree not to sell Securities in any other state or jurisdiction and to not sell Securities in any state or jurisdiction unless you are qualified or licensed to sell securities in such state or jurisdiction. 8. The Underwriter shall have full authority to take such action as it may deem advisable in respect of all matters pertaining to the offering or arising thereunder. The Underwriter shall not be under any liability to you, except such as may be incurred under the Securities Act of 1933 and the rules and regulations thereunder, except for lack of good faith and except for obligations assumed by us in this Agreement, and no obligation on our part shall be implied or inferred herefrom. 9. Selected Dealers will be governed by the conditions herein set forth until this Agreement is terminated. This Agreement will terminate when the offering is completed. Nothing herein contained shall be deemed a commitment on our part to sell you any Securities; such contractual commitment can only be made in accordance with the provisions of paragraph 3 hereof. 10. You represent that you are a member in good standing of the NASD and registered as a broker-dealer with the Commission, or that you are a foreign broker-dealer not eligible for membership under Section 1 of the Bylaws of the NASD who agrees to make no sales within the United States, its territories or possessions or to persons who are nationals thereof or residents therein and, in making sales, to comply with the NASD's interpretation with Respect to FreeRiding and Withholding and with Sections 2730, 2740, 2420 to the extent applicable to foreign nonmember brokers and dealers, and Section 2750 of the NASD's Rules of Fair Practice. Your attention is called to and you agree to comply with the following: (a) Article III, Section 1 of the Rules of Fair Practice of the NASD and the interpretations of said Section promulgated by the Board of Governors of the NASD including Section 24 and the 2 3 interpretation with respect to "Free-Riding and Withholding;" (b) Section 10(b) of the 1934 Act and Regulation M and Rule 10b-10 of the general rules and regulations promulgated under the 1934 Act; and (c) Rule 15c2-8 of the general rules and regulations promulgated under the 1934 Act requiring the distribution of a preliminary Prospectus to all persons reasonably expected to be purchasers of the Securities from you at least 48 hours prior to the time you expect to mail confirmations. You, as a member of the NASD, by signing this Agreement, acknowledge that you are familiar with the cited laws and rules and agree that you will not directly and/or indirectly violate any provisions of applicable law in connection with your participation in the distribution of the Securities. 11. In addition to compliance with the provisions of paragraph 10 hereof, you will not, until advised by us in writing or by wire that the entire offering has been distributed and closed, bid for or purchase Securities in the open market or otherwise make a market in the Securities or otherwise attempt to induce others to purchase the Securities in the open market. Nothing contained in this paragraph 11 shall, however, preclude you from acting as agent in the execution of unsolicited orders of customers in transactions effectuated for them through a market maker. 12. You understand that the Underwriter may in connection with the offering engage in stabilizing transactions. If the Underwriter contracts for or purchases in the open market in connection with such stabilization any Securities sold to you hereunder and not effectively placed by you, the Underwriter may charge you the Selected Dealer's concession originally allowed you on the Securities so purchased and you agree to pay such amount to us on demand. 13. By submitting an Offer to Purchase you confirm that you may, in accordance with Rule 15c3-1 adopted under the 1934 Act, agree to purchase the number of Securities you may become obligated to purchase under the provisions of this Agreement. 14. All communications from you should be directed to us at 495 Post Road East, Westport, CT 06880 Attn: Daniel T. Guilfoile, Director Investment Banking Division (203-226-1857) and fax (203-226-5343). All communications from us to you shall be directed to the address to which this letter is mailed. Very truly yours, Nutmeg Securities, Ltd. By -------------------------------- (Authorized Officer) 3 4 OFFER TO PURCHASE The undersigned does hereby offer to purchase (subject to the right to revoke as set forth in paragraph 3) ___________________* Securities in accordance with the terms and conditions set forth above. We hereby acknowledge receipt of the Prospectus referred to in the first paragraph thereof relating to such Securities. We further state that in purchasing such Securities we have relied upon such Prospectus and upon no other statement whatsoever, written or oral. - ------------------------------------ By --------------------------------- (Authorized Officer) - --------------- * If a number appears here which does not correspond with what you wish to offer to purchase, you may change the number by crossing out the number, inserting a different number and initializing the change. 4 EX-3.1 5 AMENDED & RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF MEDICAL SCIENCE SYSTEMS, INC. ARTICLE ONE Medical Science Systems, Inc., a Texas corporation (the "Corporation"), pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act, hereby adopts these Amended and Restated Articles of Incorporation, which accurately copy the Articles of Incorporation of the Corporation, as amended through, and in effect on the date hereof, as further amended by these Amended and Restated Articles of Incorporation as hereinafter set forth, and contain no other change in any provisions thereof. ARTICLE TWO The Articles of Incorporation, as amended, of the Corporation are amended by these Amended and Restated Articles of Incorporation as follows: The amendments made by these Amended and Restated Articles of Incorporation (the "Amendments") alter or change Articles ONE through EIGHT of the Articles of Incorporation and add Articles NINE, TEN and ELEVEN. The full text of each provision altered or added is as set forth in Article FIVE hereof. The Amendments confirm the reclassification and split effected pursuant to the Articles of Amendment dated July 29, 1996 to the Articles of Incorporation of the Company filed with the Secretary of State of Texas on August 2, 1996 (the "First Amendment"), whereby simultaneously with the effective date of the First Amendment, each issued and outstanding share of previously authorized Class A Common Voting Stock, no par value, of the Corporation, was thereby and thereupon reclassified, changed and split up into 1,083.333 validly issued, fully paid and nonassessable shares of common shares, no par value, of the Corporation. Upon the filing of these Amended and Restated Articles of Incorporation, all issued and outstanding shares of previously authorized common shares of the Corporation shall remain outstanding without any change thereto, but such shares and all other authorized shares of common shares shall thereafter be designated as shares of common stock. -1- 2 ARTICLE THREE The Amendments have been effected in conformity with the provisions of the Texas Business Corporation Act, and the Amended and Restated Articles of Incorporation were duly adopted by all of the shareholders of the Corporation pursuant to a consent dated September 27, 1996. ARTICLE FOUR On that date there were 3,254,999 common shares of the Corporation outstanding, all of which were entitled to vote on the Amendments. All 3,254,999 shares of the Corporation were voted in favor of the Amendments. ARTICLE FIVE The Articles of Incorporation of the Corporation filed with the Secretary of State of the State of Texas on August 2, 1996 are hereby superseded by the following Amended and Restated Articles of Incorporation, which accurately copy the entire text thereof as amended hereby: AMENDED AND RESTATED ARTICLES OF INCORPORATION OF MEDICAL SCIENCE SYSTEMS, INC. ARTICLE ONE The name of the Corporation is Medical Science Systems, Inc. ARTICLE TWO The period of its duration is perpetual. ARTICLE THREE The purpose or purposes for which the Corporation is organized is the transaction of all lawful business for which a corporation may be incorporated under the corporation laws of the State of Texas. -2- 3 ARTICLE FOUR The aggregate number of shares that the Corporation shall have the authority to issue is 15,000,000 shares, consisting of 10,000,000 shares of common stock, no par value per share (the "Common Stock"), and 5,000,000 shares of preferred stock, no par value per share (the "Preferred Stock"). The descriptions of the different classes of capital stock of the Corporation and the preferences, designations, relative rights, privileges and powers, and the restrictions, limitations and qualifications thereof, of said classes of stock are as follows: Division A The shares of Preferred Stock may be divided into and issued in one or more series, the relative rights and preferences of which series may vary in any and all respects. The board of directors of the Corporation is hereby vested with the authority to establish series of Preferred Stock by fixing and determining all the preferences, limitations and relative rights of the shares of any series so established, to the extent not provided for in these Amended and Restated Articles of Incorporation or any amendment hereto, and with the authority to increase or decrease the number of shares within each such series; provided, however, that the board of directors may not decrease the number of shares within a series below the number of shares within such series that is then issued. The authority of the board of directors with respect to each such series shall include, but not be limited to, determination of the following: 1. the distinctive designation and number of shares of that series; 2. the rate of dividend (or the method of calculation thereof) payable with respect to shares of that series, the dates, terms and other conditions upon which such dividends shall be payable, and the relative rights of priority of such dividends to dividends payable on any other class or series of capital stock of the Corporation; 3. the nature of the dividend payable with respect to shares of that series as cumulative, noncumulative or partially cumulative, and if cumulative or partially cumulative, from which date or dates and under what circumstances; 4. whether shares of that series shall be subject to redemption, and, if made subject to redemption, the times, prices, rates, adjustments and other terms and conditions of such redemption (including the manner of selecting shares of that series for redemption if fewer than all shares of such series are to be redeemed); 5. the rights of the holders of shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation (which rights may be different if such action is voluntary than if it is involuntary), including the relative -3- 4 rights of priority in such event as to the rights of the holders of any other class or series of capital stock of the Corporation; 6. the terms, amounts and other conditions of any sinking or similar purchase or other fund provided for the purchase or redemption of shares of that series; 7. whether shares of that series shall be convertible into or exchangeable for shares of capital stock or other securities of the Corporation or of any other corporation or entity, and, if provision be made for conversion or exchange, the times, prices, rates, adjustments and other terms and conditions of such conversion or exchange; 8. the extent, if any, to which the holders of shares of that series shall be entitled (in addition to any voting rights provided by law) to vote as a class or otherwise with respect to the election of directors or otherwise; 9. the restrictions and conditions, if any, upon the issue or reissue of any additional Preferred Stock ranking on a parity with or prior to shares of that series as to dividends or upon liquidation, dissolution or winding up; 10. any other repurchase obligations of the Corporation, subject to any limitations of applicable law; and 11. notwithstanding their failure to be included in (1) through (10) above, any other designations, preferences, limitations or relative rights of shares of that series. Any of the designations, preferences, limitations or relative rights (including the voting rights) of any series of Preferred Stock may be dependent on facts ascertainable outside these Amended and Restated Articles of Incorporation. Shares of any series of Preferred Stock shall have no voting rights except as required by law or as provided in the preferences, limitations and relative rights of such series. Division B 1. Dividends. Dividends may be paid on the Common Stock out of any assets of the Corporation available for such dividends subject to the rights of all outstanding shares of capital stock ranking senior to the Common Stock in respect of dividends. 2. Distribution of Assets. In the event of any liquidation, dissolution or winding up of the Corporation, after there shall have been paid to or set aside for the holders of capital stock ranking senior to the Common Stock in respect of rights upon liquidation, dissolution or winding up the full preferential amounts to which they are respectively entitled, the holders of -4- 5 the Common Stock shall be entitled to receive, pro rata, all of the remaining assets of the Corporation available for distribution to its shareholders. 3. Voting Rights. The holders of the Common Stock shall be entitled to one vote per share for all purposes upon which such holders are entitled to vote. Division C 1. No Preemptive Rights. No shareholder of the Corporation shall by reason of his holding shares of any class have any preemptive or preferential right to acquire or subscribe for any additional, unissued or treasury shares of any class of the Corporation now or hereafter to be authorized, or any notes, debentures, bonds or other securities convertible into or carrying any right, option or warrant to subscribe to or acquire shares of any class now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividends or voting or other rights of such shareholder, and the board of directors may issue or authorize the issuance of shares of any class, or any notes, debentures, bonds or other securities convertible into or carrying rights, options or warrants to subscribe to or acquire shares of any class, without offering any such shares of any class, either in whole or in part, to the existing shareholders of any class. 2. Share Dividends. Subject to any restrictions in favor of any series of Preferred Stock provided in the relative rights and preferences of such series, the Corporation may pay a share dividend in shares of any class or series of capital stock of the Corporation to the holders of shares of any class or series of capital stock of the Corporation. 3. No Cumulative Voting. Cumulative voting for the election of directors is expressly prohibited as to all shares of any class or series. ARTICLE FIVE The Corporation will not commence business until it has received for the issuance of its shares consideration of at least the value of One Thousand Dollars ($1,000.00), consisting of money, labor done or property actually received. ARTICLE SIX The address of the Corporation's registered office is 100 N.E. Loop 410, Suite 1350, San Antonio, Texas 78216, and the name of its registered agent at such address is Medical Science Systems, Inc., c/o Dr. Kenneth S. Kornman. -5- 6 ARTICLE SEVEN 1. Number and Terms of Directors. The number of directors of the Corporation shall be fixed by, or in the manner provided in, the Amended and Restated Bylaws of the Corporation; provided that the maximum number of directors shall be nine (9). The number of directors constituting the current board of directors is three (3), and the name and address of the persons who are to serve as directors until their successors are elected and qualified are: Paul J. White 4400 MacArthur Blvd., Suite 980 Newport Beach, CA 92660 Michael G. Newman 4400 MacArthur Blvd., Suite 980 Newport Beach, CA 92660 Kenneth S. Kornman 100 N.E. Loop 410, Suite 1350 San Antonio, Texas 78216 2. Removal of Directors. No director of the Corporation shall be removed from such office by vote or other action of the shareholders of the Corporation or otherwise, except by the affirmative vote of holders of at least a majority of the then outstanding Voting Stock (as defined below), voting together as a single class. The term "Voting Stock" shall mean all outstanding shares of all classes and series of capital stock of the Corporation entitled to vote generally in the election of directors of the Corporation, considered as one class; and, if the Corporation shall have shares of Voting Stock entitled to more or less than one vote for any such share, each reference in the Amended and Restated Articles of Incorporation to a proportion or percentage of Voting Stock shall be calculated by reference to the portion or percentage of votes entitled to be cast by holders of such shares generally in the election of directors of the Corporation. Prior to the first date (the "Public Status Date") on which the Corporation has outstanding a class of equity securities registered under the Securities Exchange Act of 1934, as may be amended from time to time (the "Exchange Act"), any such removal of a director of the Corporation may be with or without cause. On and after the Public Status Date, no director of the Corporation shall be removed from such office by vote or other action of the shareholders of the Corporation or otherwise, except for cause, which shall be deemed to exist only if: (i) such director has been convicted, or such director is granted immunity to testify where another has been convicted, of a felony by a court of competent jurisdiction (and such conviction is no longer subject to direct appeal); (ii) such director has been found by a court of competent jurisdiction (and such finding is no longer subject to direct appeal) or by the affirmative vote of at least a majority of the Whole Board (as defined below) at any regular or special meeting of the board of directors called for such purpose to have been grossly negligent or guilty of willful -6- 7 misconduct in the performance of his duties to the Corporation in a matter of substantial importance to the Corporation; (iii) such director has been adjudicated by a court of competent jurisdiction to be mentally incompetent, which mental incompetency directly affects his ability to perform as a director of the Corporation; (iv) such director has been found by a court of competent jurisdiction (and such finding is no longer subject to direct appeal) or by the affirmative vote of at least a majority of the Whole Board at any regular or special meeting of the board of directors called for such purpose to have breached such director's duty of loyalty to the Corporation or its shareholders or to have engaged in any transaction with the Corporation from which such director derived an improper personal benefit; or (v) "cause" for removal otherwise exists under Article 2.32.A. of the Texas Business Corporation Act (the "TBCA"). No director of the Corporation so removed may be nominated, re-elected or reinstated as a director of the Corporation so long as the cause for removal continues to exist. The term "Whole Board" shall mean the total number of authorized directors of the Corporation whether or not there exist any vacancies in previously authorized directorships. This paragraph shall be subject to the rights, if any, of holders of any class or series of stock to elect directors and remove directors elected by them. ARTICLE EIGHT No director of the Corporation shall be liable to the Corporation or its shareholders for monetary damages for an act or omission in the director's capacity as a director, except that this article does not eliminate or limit the liability of a director for: (1) a breach of a director's duty of loyalty to the Corporation or its shareholders; (2) an act or omission not in good faith that constitutes a breach of duty of that director to the Corporation or an act or omission that involves intentional misconduct or a knowing violation of the law; (3) a transaction from which a director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; or (4) an act or omission for which the liability of a director is expressly provided for by an applicable statute. If the Texas Miscellaneous Corporation Laws Act or the Texas Business Corporation Act ("TBCA") is amended to authorize action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by such statutes, as so amended. Any amendment, repeal or modification of this Article EIGHT shall be prospective only and shall not adversely affect any right or protection of a director of the Corporation existing at the time of such amendment, repeal or modification. ARTICLE NINE On and after the Public Status Date, the vote of shareholders required for approval of (1) any plan of merger, consolidation, or exchange for which the TBCA requires a shareholder vote, (2) any disposition of assets for which the TBCA requires a shareholder vote, (3) any dissolution of the corporation for which the TBCA requires a shareholder vote, and (4) any amendment of the Restated Articles of Incorporation of the Corporation for which the TBCA requires a shareholder vote, shall be (in lieu of any greater vote required by the TBCA) the -7- 8 affirmative vote of the holders of a majority of the outstanding Voting Stock entitled to vote thereon, unless any class or series of shares is entitled to vote as a class thereon, in which event the vote required shall be the affirmative vote of the holders of a majority of the outstanding shares within each class or series of shares entitled to vote thereon as a class and at least a majority of the outstanding Voting Stock otherwise entitled to vote thereon. ARTICLE TEN Special meetings of shareholders may be called by the Corporation's chairman of the board, the president or the board of directors. Subject to the provisions of the Corporation's Amended and Restated Bylaws governing special meetings, holders of not less than (1) prior to the Public Status Date, 10% and (2) on and after the Public Status Date, 50% of the outstanding shares of stock entitled to vote at the proposed special meeting may also call a special meeting of shareholders by furnishing the Corporation a written request which states the purpose or purposes of the proposed meeting in the manner set forth in the Amended and Restated Bylaws. ARTICLE ELEVEN Prior to the Public Status Date, any action required or permitted to be taken at any annual or special meeting of shareholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent or counterpart consents in writing, setting forth the action so taken, shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those shareholders who did not consent in writing to the action. -8- 9 EXECUTED AND EFFECTIVE this 27th day of September, 1996. MEDICAL SCIENCE SYSTEMS, INC. By: /s/ PAUL J. WHITE -------------------------------- Paul J. White President -9- EX-3.2 6 ARTICLES OF AMENDMENT 1 EXHIBIT 3.2 ARTICLES OF AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF MEDICAL SCIENCE SYSTEMS, INC. --------------------------------------- Pursuant to the provisions of Art. 4.04 of the Texas Business Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Amended and Restated Articles of Incorporation: ARTICLE ONE. The name of the corporation is Medical Science Systems, Inc. ARTICLE TWO. The following amendment to the Amended and Restated Articles of Incorporation was adopted by the shareholders of the corporation on May 5, 1997. ARTICLE TEN of the Amended and Restated Articles of Incorporation is hereby amended to read as follows: "ARTICLE TEN Special meetings of shareholders may be called by the Corporation's chairman of the board, the president or the board of directors. Subject to the provisions of the Corporation's Amended and Restated Bylaws governing special meetings, holders of not less than 50% of the outstanding shares of stock entitled to vote at the proposed special meeting may also call a special meeting of shareholders by furnishing the Corporation with a written request which states the purpose or purposes of the proposed meeting in the manner set forth in the Amended and Restated Bylaws." ARTICLE THREE. The number of shares of the corporation outstanding at the time of such adoption was 3,444,187 and the number of shares entitled to vote thereon was 3,444,187. Articles of Amendment Page 1 2 The number of shares of each class entitled to vote thereon as a class voted for and against such amendment, respectively, was:
Number of Shares Voted --------------------------- Class For Against ----- --------- ------- Class A Common Voting 3,376,620 -0-
Dated May 6, 1997 MEDICAL SCIENCE SYSTEMS, INC. By: /s/ Paul J. White ------------------------- Paul J. White Its: President Articles of Amendment Page 2 EX-3.3 7 AMENDED & RESTATED BYLAWS OF THE COMPANY 1 EXHIBIT 3.3 AMENDED AND RESTATED BYLAWS OF MEDICAL SCIENCE SYSTEMS, INC. Adopted and Effective as of September 27, 1996 2 AMENDED AND RESTATED BYLAWS OF MEDICAL SCIENCE SYSTEMS, INC. The following Amended and Restated Bylaws, adopted by the Board of Directors of Medical Science Systems, Inc. (the "Corporation") as of September 27, 1996, shall govern the business of the Corporation, except as the same may be afterwards amended: ARTICLE I CAPITAL STOCK Section 1. Certificates Representing Shares. The Corporation shall deliver certificates representing all shares to which shareholders are entitled. Such certificates shall be signed by the Chairman of the Board, Chief Executive Officer, the President or a Vice President and either the Secretary or any Assistant Secretary or such other officer or officers as the board of directors shall designate, and shall bear the seal of the Corporation or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its issuance. Section 2. Shareholders of Record. The Board of Directors of the Corporation may appoint one or more transfer agents or registrars of any class of stock of the Corporation. Unless and until such appointment is made, the Secretary of the Corporation shall maintain among other records a stock transfer book, the stubs in which shall set forth the names and addresses of the holders of all issued shares of the Corporation, the number of shares held by each, the certificate numbers representing such shares, the date of issue of the certificates representing such shares, and whether or not such shares originate from original issues or from transfer. The names and addresses of shareholders as they appear on the stock transfer book shall be the official list of shareholders of record of the Corporation for all purposes. The Corporation shall be entitled to treat the holder of record of any shares of the Corporation as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such shares or any rights deriving from such shares, on the part of any other person, including (but without limitation) a purchaser, assignee or transferee, unless and until such other person becomes the holder of record of such shares, whether or not the Corporation shall have either actual or constructive notice of the interest of such other person. -2- 3 Section 3. Transfer of Shares. The shares of the Corporation shall be transferable on the stock transfer books of the Corporation by the holder of record thereof, or his duly authorized attorney or legal representative, upon endorsement and surrender for cancellation of the certificates for such shares. All certificates surrendered for transfer shall be cancelled, and no new certificate shall be issued until a former certificate or certificates for a like number of shares shall have been surrendered and cancelled, except that in the case of a lost, destroyed or mutilated certificate, a new certificate may be issued therefor upon such conditions for the protection of the Corporation and any transfer agent or registrar as the Board of Directors or the Secretary or any other officer may prescribe. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. Place of Meetings. All meetings of shareholders shall be held at the registered office of the Corporation, or at such other place within or without the State of Texas as may be designated by the Board of Directors or officer calling the meeting. Section 2. Annual Meetings. The annual meeting of the shareholders of the Corporation shall be held on such date, within 180 days of the end of each prior fiscal year, as shall be designated by the Board of Directors and stated in the notice of the meeting, and on any subsequent day or days to which such meeting may be adjourned, for the purposes of electing directors and of transacting such other business as may properly come before the meeting. The Board of Directors shall designate the place and time for the holding of such meeting. Failure to designate a time for the annual meeting or to hold the annual meeting at the designated time shall not work a dissolution of the Corporation. Section 3. Special Meetings. Special meetings of the shareholders may be called by the Chairman of the Board, the President or the Board of Directors. Special meetings of shareholders shall be called by the Secretary upon the written request of the holders of shares entitled to cast not less than the following specified percentages of all the votes entitled to be cast at such meeting: (a) prior to the first date (the "Public Status Date") on which the Corporation has outstanding a class of equity securities registered under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), 10% and (b) on and after the Public Status Date, 50%. Such request shall state the purpose or purposes of such meeting and the matters proposed to be acted on thereat. Upon receipt of such request and any notice required by Sections 8 and/or 9 of Article II, the Board of Directors shall set a date for the special meeting, set a record date in accordance with Article II, Section 5, and shall cause an appropriate officer of the Corporation to give the notice required under Article II, Section 4. -3- 4 Section 4. Notice of Meetings. Written notice of all meetings stating the place, day and hour of the meeting and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 60 days before the meeting to the shareholders of record entitled to vote at such meeting unless the Board of Directors is seeking shareholder approval of a plan of merger or exchange, in which case notice shall be delivered not less than 20 nor more than 60 days before the meeting to all shareholders whether or not entitled to vote. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. Any notice required to be given to any shareholder under any provision of the Texas Business Corporation Act or any successor statutory provision, as from time to time amended (the "TBCA") or the Amended and Restated Articles of Incorporation or these Amended and Restated Bylaws need not be given to the shareholder if (1) notice of two consecutive annual meetings and all notices of meetings held during the period between those annual meetings, if any, or (2) all (but in no event less than two) payments (if sent by first class mail) of distributions or interest on securities during a 12-month period have been mailed to that person, addressed at his address as shown on the records of the Corporation, and have been returned undeliverable. Any action or meeting taken or held without notice to such a person shall have the same force and effect as if the notice had been duly given. If such a person delivers to the Corporation a written notice setting forth his then current address, the requirement that notice be given to that person shall be reinstated. Section 5. Closing of Transfer Books and Fixing of Record Date. The Board of Directors may fix, in advance, a date as the record date for the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive a distribution by the Corporation (other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or a share dividend, or in order to make a determination of shareholders for any other proper purpose. Such date, in any case, shall be not more than 60 days, and in the case of a meeting of shareholders not less than 10 days (20 days if voting on a plan of merger or exchange), prior to the date on which the particular action requiring such determination of shareholders is to be taken. In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period not to exceed, in any case, 60 days. If the stock transfer books are closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least 10 days immediately preceding such meeting. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the mailing is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof except where the determination has been made through the closing of the stock transfer books and the stated period of closing has expired. -4- 5 Section 6. Voting List. The officer or agent having charge of the stock transfer books of the Corporation shall make, at least 10 days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of 10 days prior to such meeting, shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Failure to comply with any requirements of this Section 6 shall not affect the validity of any action taken at such meeting. Section 7. Voting. Except to the extent otherwise provided in the Amended and Restated Articles of Incorporation, each holder of shares of the Corporation entitled to vote shall be entitled to one (1) vote for each such share, either in person or by proxy executed in writing by him or by his duly authorized attorney-in-fact. No proxy shall be valid after 11 months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless the proxy form conspicuously states that the proxy is irrevocable and the proxy is coupled with an interest. Section 8. Nomination of Directors. (a) The provisions of subsection (b) hereof shall become effective upon (and, notwithstanding any other provision of these Amended and Restated Bylaws, shall not be effective with respect to any action specified in subsection (b) hereof to be taken on any date prior to) the Public Status Date. (b) Subject to the rights of holders of any class or series of stock having a preference over Common Stock of the Corporation as to dividends or upon liquidation to elect directors under specified circumstances, nominations of persons for election to the Board of Directors may be made only (a) by the Board of Directors or a committee appointed by the Board of Directors or (b) by any shareholder who is a shareholder of record at the time of giving of the shareholder's notice provided for in this Section 8, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 8. A shareholder wishing to nominate one or more individuals to stand for election in the election of members of the Board of Directors at an annual or special meeting must provide written notice thereof to the Board of Directors not less than 80 days in advance of such meeting; provided, however, that in the event that the date of the meeting was not publicly announced by the Corporation by a mailing to shareholders, a press release or a filing with the Securities and Exchange Commission pursuant to Section 13(a) or 14(a) of the Exchange Act more than 90 days prior to the meeting, such notice, to be timely, must be delivered to the Board of Directors not later than the close of business on the tenth day following the day on which the date of the meeting was publicly announced. A shareholder's notice shall set forth (i) the name and address, as they appear on the Corporation's books, -5- 6 of the shareholder making the nomination or nominations; (ii) such information regarding the nominee(s) proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee(s) been nominated or intended to be nominated by the Board of Directors; (iii) a representation of the shareholder as to the class and number of shares of capital stock of the Corporation that are beneficially owned by such shareholder, and the shareholder's intent to appear in person or by proxy at the meeting to propose such nomination; and (iv) the written consent of the nominee(s) to serve as a member of the Board of Directors if so elected. No shareholder nomination shall be effective unless made in accordance with the procedures set forth in this Section 8. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a shareholder nomination was not made in accordance with the provisions of the Amended and Restated Bylaws, and if the chairman should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 9. Proposals of Shareholders. (a) The provisions of subsection (b) hereof shall become effective upon (and, notwithstanding any other provision of these Amended and Restated Bylaws, shall not be effective with respect to any action specified in subsection (b) hereof to be taken on any date prior to) the Public Status Date. (b) At any meeting of shareholders, there shall be conducted only such business as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any shareholder of the Corporation who is a shareholder of record at the time of giving of the shareholder's notice provided for in this Section 9, who shall be entitled to vote at such meeting and who complies with the notice procedure set forth in this Section 9. For business to be properly brought before a meeting of shareholders by a shareholder, the shareholder shall have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 80 days in advance of such meeting; provided, however, that in the event that the date of the meeting was not publicly announced by the Corporation by a mailing to shareholders, a press release or a filing with the Securities and Exchange Commission pursuant to Section 13(a) or 14(a) of the Exchange Act more than 90 days prior to the meeting, such notice, to be timely, must be delivered to the Board of Directors not later than the close of business on the tenth day following the day on which the date of the meeting was first so publicly announced. A shareholder's notice shall set forth as to each matter proposed to be brought before the meeting: (1) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and, in the event that such business includes a proposal regarding the amendment of either the Amended and Restated Articles of Incorporation or Amended and Restated Bylaws of the Corporation, the -6- 7 language of the proposed amendment; (2) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business; (3) a representation of the shareholder as to the class and number of shares of capital stock of the Corporation that are beneficially owned by such shareholder, and the shareholder's intent to appear in person or by proxy at the meeting to propose such business; and (4) any material interest of such shareholder in such proposal or business. Notwithstanding anything in these Amended and Restated Bylaws to the contrary, no business shall be conducted at a shareholders meeting unless brought before the meeting in accordance with the procedure set forth in this Section 9. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of the Amended and Restated Bylaws, and if the chairman should so determine, the chairman shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 10. Quorum and Voting of Shareholders. The holders of a majority of shares entitled to vote on a matter, represented in person or by proxy, shall constitute a quorum as to that matter at a meeting of shareholders, but, if a quorum is not present or represented, a majority in interest of those present or represented may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. With respect to any matter, other than a matter for which the affirmative vote of the holders of a specified portion of the shares entitled to vote is required by law, the Amended and Restated Articles of Incorporation, or these Amended and Restated Bylaws, the vote of the holders of a majority of the shares entitled to vote on that matter and represented in person or by proxy at a meeting at which a quorum is present or represented shall be the act of the shareholders' meeting. Section 11. Officers. The Chairman of the Board, if there is one, or the Chief Executive Officer, if there is one, or otherwise the President, shall, if present, preside at and be the chairman of, and the Secretary shall keep the records of, each meeting of shareholders. In the absence of either such officer, his duties shall be performed by another officer of the Corporation appointed by the Board of Directors or appointed at the meeting. Section 12. Conduct of Meetings. The chairman of a meeting of shareholders shall have the power to appoint inspectors of election and to establish and interpret rules for the conduct of the meeting. Section 13. Consent of Shareholders in Lieu of Meeting. Prior to the Public Status Date, any action required or permitted to be taken at any annual or special meeting of shareholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent or counterpart consents in writing, setting forth the action so taken, shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. Prompt notice of the taking of the corporate action without a meeting -7- 8 by less than unanimous written consent shall be given to those shareholders who did not consent in writing to the action. ARTICLE III DIRECTORS Section 1. Number and Tenure. The business and affairs of the Corporation shall be managed by a Board of Directors initially consisting of 3 directors. Subject to any limitations contained in the Amended and Restated Articles of Incorporation, the number of directors may be increased or decreased from time to time by resolution of the Board of Directors or by due election of that number of directors by the shareholders, but no decrease by the Board of Directors shall have the effect of shortening the term of any incumbent director. Unless sooner removed in accordance with these Amended and Restated Bylaws, members of the Board of Directors shall hold office until the next annual meeting of shareholders and until their successors shall have been elected and qualified. Section 2. Qualifications. Directors need not be shareholders of the Corporation. Section 3. Vacancies. Any vacancy occurring in the Board of Directors or any directorship to be filled by reason of an increase in the number of directors may be filled by election at an annual or special meeting of shareholders called for that purpose or by the affirmative vote of a majority of the remaining directors, though less than a quorum of the entire Board; provided, however, that any directorship to be filled by the Board of Directors by reason of an increase in the number of directors may be filled for a term of office continuing only until the next election of one or more directors by the shareholders; and provided, further, that the Board of Directors may not fill more than two directorships to be filled by reason of an increase in the number of directors during the period between any two successive annual meetings of shareholders. Subject to the foregoing, a director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Section 4. Place of Meeting. Meetings of the Board of Directors may be held either within or without the State of Texas, at whatever place is specified by the officer calling the meeting. In the absence of specific designation, the meetings shall be held at the principal office of the Corporation. Section 5. Regular Meetings. The Board of Directors shall meet each year immediately following the annual meeting of the shareholders, at the place of such meeting, for the transaction of such business as may properly be brought before it. No notice of annual meetings need be given to either existing or newly elected members of the Board of Directors. Regular meetings may be held at such other times as shall be designated by the Board of Directors. -8- 9 Section 6. Special Meetings. Special meetings of the Board of Directors may be held at any time upon the call of the Chairman of the Board, the President or any two directors of the Corporation. Notice of special meetings shall be given to each director, and may be given by any of the following methods: (a) by mail or telegram sent to the last known business or residence address of such director at least four days before the meeting, (b) by facsimile to the last known business or residence facsimile number of such director transmitted at least two days before the meeting or (c) orally at least one day before the meeting. For purposes of the foregoing sentence, notice shall be deemed given (i) by mail, when deposited in the U.S. mail, postage prepaid, or by telegram, when the telegram is delivered to the telegraph company for transmittal, (ii) by facsimile, when transmittal is confirmed by the sending facsimile machine and (iii) orally, when communicated in person or by telephone to the director or to a person at the business or residence of the director who may reasonably be expected to communicate it to the director. In calculating the number of days' notice received by a director, the date the notice is given by any of the foregoing methods shall be counted, but the date of the meeting to which the notice relates shall not be counted. Notice of the time, place and purpose of a special meeting may be waived in writing before or after such meeting, and shall be equivalent to the giving of notice. Attendance of a director at such meeting shall also constitute a waiver of notice thereof, except where the director attends for the announced purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Except as otherwise herein provided, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 7. Quorum. One-half of the number of directors fixed in the manner provided in these Amended and Restated Bylaws as from time to time amended shall constitute a quorum for the transaction of business, but a smaller number may adjourn from time to time until they can secure the attendance of a quorum. The act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. Any regular or special directors' meeting may be adjourned from time to time by those present, whether a quorum is present or not. Section 8. Committees. The Board of Directors, by resolution or resolutions passed by a majority of the whole Board of Directors, may designate one or more members of the Board of Directors to constitute an Executive Committee and one or more other committees, which shall in each case consist of such number of directors as the Board of Directors may determine. The Executive Committee shall have and may exercise, subject to such restrictions as may be contained in the Amended and Restated Articles of Incorporation or that may be imposed by law, all of the authority of the Board of Directors, including without limitation the power and authority to declare a dividend and to authorize the issuance of shares of the Corporation. Each other committee shall have and may exercise such powers of the Board in the management of the business and affairs of the Corporation, including without limitation the power and authority to declare a dividend and to authorize the issuance of shares of the Corporation, as the Board of Directors may determine by resolution and specify in the respective resolutions appointing them, subject to such restrictions as may be contained in the Amended and Restated Articles of Incorporation or that may be imposed by law. Such committee or committees shall -9- 10 have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. A majority of all the members of any such committee may fix its rules of procedure, determine its action and fix the time and place, whether within or without the State of Texas, of its meetings and specify what notice thereof, if any, shall be given, unless the Board of Directors shall provide otherwise by resolution. The Board of Directors shall have power to change the membership of any such committee at any time, to fill vacancies therein and to disband any such committee, either with or without cause, at any time. Each committee shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. Section 9. Compensation. Directors may be paid their expenses, if any, of attendance at each regular or special meeting of the Board of the Directors or any committee thereof, and a salary as director as may be fixed by the Board of Directors from time to time; provided, that nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 10. Removal. No director of the Corporation shall be removed from such office by vote or other action of the shareholders of the Corporation or otherwise, except by the affirmative vote of holders of at least a majority of the then outstanding Voting Stock (as defined below), voting together as a single class. The term "Voting Stock" shall mean all outstanding shares of all classes and series of capital stock of the Corporation entitled to vote generally in the election of directors of the Corporation, considered as one class; and, if the Corporation shall have shares of Voting Stock entitled to more or less than one vote for any such share, each reference in the Amended and Restated Articles of Incorporation to a proportion or percentage in voting power of Voting Stock shall be calculated by reference to the portion or percentage of votes entitled to be cast by holders of such shares generally in the election of directors of the Corporation. Prior to the Public Status Date, any such removal of a director of the Corporation may be with or without cause. On and after the Public Status Date, no director of the Corporation shall be removed from such office by vote or other action of the shareholders of the Corporation or otherwise, except for cause, which shall be deemed to exist only if: (i) such director has been convicted, or such director is granted immunity to testify where another has been convicted, of a felony by a court of competent jurisdiction (and such conviction is no longer subject to direct appeal); (ii) such director has been found by a court of competent jurisdiction (and such finding is no longer subject to direct appeal) or by the affirmative vote of at least a majority of the Whole Board (as defined below) at any regular or special meeting of the board of directors called for such purpose to have been grossly negligent or guilty of willful misconduct in the performance of his duties to the Corporation in a matter of substantial importance to the Corporation; (iii) such director has been adjudicated by a court of competent jurisdiction to be mentally incompetent, which mental incompetency directly affects his ability to perform as a director of the Corporation; (iv) such director has been found by a court of competent jurisdiction (and such finding is no longer subject to direct appeal) or by the affirmative vote of at least a majority of the Whole Board at any regular or special meeting of the board of directors called for such purpose to have breached such director's duty of loyalty to the Corporation or its shareholders or to have engaged in any transaction with the Corporation from which such director derived an improper personal benefit; or (v) "cause" for removal otherwise exists under Article 2.32.A. of the TBCA. No director of the Corporation so removed may be nominated, re-elected or reinstated as a director of the Corporation so long as the cause for removal continues to -10- 11 exist. The term "Whole Board" shall mean the total number of authorized directors of the Corporation whether or not there exist any vacancies in previously authorized directorships. This paragraph shall be subject to the rights, if any, of holders of any class or series of stock to elect directors and remove directors elected by them. Section 11. Action Without a Meeting. Any action required or permitted to be taken at a meeting of directors or any committee may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors or members of the committee, as the case may be, and such consent shall have the same force and effect as a unanimous vote at a meeting. ARTICLE IV OFFICERS Section 1. Officers. The officers of the Corporation shall be elected by the Board of Directors, and shall consist of a President and a Secretary. The Board of Directors, in its discretion, may also elect a Chairman of the Board (who must be a director), a Chief Executive Officer, a Chief Financial Officer, a Chief Operating Officer, one or more Vice Presidents, a Treasurer and such other officers as the Board of Directors may from time to time designate, all of whom shall hold office until their successors are elected and qualified. Any two or more offices may be held by the same person. The Board of Directors may designate which of such officers are to be treated as executive officers for purposes of these Amended and Restated Bylaws or for any other purpose. The salaries of the officers shall be determined by the Board of Directors, and may be altered by the Board of Directors from time to time except as otherwise provided by contract. All officers shall be entitled to be paid or reimbursed for all costs and expenditures incurred in the Corporation's business. Section 2. Vacancies. Whenever any vacancies shall occur in any office by death, resignation, increase in the number of officers of the Corporation, or otherwise, the same shall be filled by the Board of Directors, and the officer so elected shall hold office until his successor is chosen and qualified. Section 3. Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Section 4. Chairman of the Board. The Chairman of the Board, if there is one, shall, if present, preside at all meetings of the shareholders and of the Board of Directors. If so designated by the Board of Directors, the Chairman of the Board shall be the chief executive officer of the Corporation. The Chairman of the Board may sign, with the Secretary or any other proper -11- 12 officer of the Corporation thereunto authorized by the Board of Directors, certificates for shares of the Corporation, any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Amended and Restated Bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise signed and executed; and in general shall perform all duties incident to the office of Chairman of the Board and such other duties as may be prescribed by the Board of Directors from time to time. Section 5. Chief Executive Officer. The Chief Executive Officer, if there is one, shall be subject to the control of the Board of Directors, and shall in general supervise and control all business and affairs of the Corporation. The Chief Executive Officer may sign, with the Secretary or any other proper officer of the Corporation thereunto authorized by the Board of Directors, certificates for shares of the Corporation, any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Amended and Restated Bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise signed and executed; and in general shall perform all duties incident to the office of Chief Executive Officer and such other duties as may be prescribed by the Board of Directors from time to time. In the absence of the Chairman, or if the directors neglect or fail to elect a Chairman, then the Chief Executive Officer of the Corporation, if he is a member of the Board of Directors, shall automatically serve as Chairman of the Board of Directors. Section 6. President. In the absence of the Chief Executive Officer, or in the event of his death or inability to act or refusal to act, the President shall perform the duties of the Chief Executive Officer and when so acting shall have all of the powers of and be subject to all of the restrictions upon the Chief Executive Officer. In general, he shall perform all duties incident to the office of President and such other duties as may be prescribed by the Chief Executive Officer or the Board of Directors from time to time. Section 7. Vice President. Any Vice President may perform the usual and customary duties that pertain to such office (but no unusual or extraordinary duties or powers conferred by the Board of Directors upon the President) and, under the direction and subject to the control of the Board of Directors, such other duties as may be assigned to a Vice President. Section 8. Secretary. It shall be the duty of the Secretary to attend all meetings of the shareholders and Board of Directors and record correctly the proceedings had at such meetings in a book suitable for that purpose. It shall also be the duty of the Secretary to attest with his signature and the seal of the Corporation all stock certificates issued by the Corporation and to keep a stock ledger in which shall be correctly recorded all transactions pertaining to the capital stock of the Corporation. The Secretary shall also attest with his signature and the seal of the Corporation all deeds, conveyances or other instruments requiring the seal of the Corporation. The person holding the office of Secretary shall also perform, under the direction and subject to the control of the Board of Directors, such other duties as may be assigned to the Secretary. The duties of the Secretary may also be performed by any Assistant Secretary. -12- 13 Section 9. Treasurer. The Treasurer shall keep such moneys of the Corporation as may be entrusted to his keeping and account for the same. The Treasurer shall be prepared at all times to give information as to the condition of the Corporation and shall make a detailed annual report of the entire business and financial condition of the Corporation. The person holding the office of Treasurer shall also perform, under the direction and subject to the control of the Board of Directors, such other duties as may be assigned to the Treasurer. The duties of the Treasurer may also be performed by any Assistant Treasurer. Section 10. Other Officers. Assistant Secretaries, if any, and Assistant Treasurers, if any, shall have the duties set forth in Sections 8 and 9, respectively, of this Article IV. Any other officer whose duties are not set forth in Sections 4 through 9 of this Article IV shall have such duties as the Board of Directors, the Chief Executive Officer or the President may prescribe. Section 11. Delegation of Authority. In the case of any absence of any officer of the Corporation or for any other reason that the Board may deem sufficient, the Board of Directors may delegate some or all of the powers or duties of such officer to any other officer or to any director, employee, shareholder or agent for whatever period of time seems desirable. ARTICLE V INDEMNITY Section 1. Indemnification of Directors and Executive Officers. Each person who at any time shall serve, or shall have served, as a director or executive officer of the Corporation, or any person who, while a director or executive officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise (each such person referred to herein as an "Indemnitee"), shall be entitled to indemnification as and to the fullest extent permitted by Article 2.02-1 of the TBCA. The foregoing right of indemnification shall not be deemed exclusive of any other rights to which those to be indemnified may be entitled as a matter of law or under any agreement, other provision of these Amended and Restated Bylaws, vote of shareholders or directors, or other arrangement. The Corporation may enter into indemnification agreements with its officers and directors that contractually provide to them the benefits of the provisions of this Article V and include related provisions meant to facilitate the Indemnitees' receipt of such benefits and such other indemnification protections as may be deemed appropriate. Section 2. Advancement or Reimbursement of Expenses. The rights of Indemnitee provided under the preceding section shall include, but not be limited to, the right to be indemnified and to have expenses advanced in all proceedings to the fullest extent permitted by Article 2.02-1 of the TBCA. In the event that an Indemnitee is not wholly successful, on the merits or otherwise, in a proceeding but is successful, on the merits or otherwise, as to any claim in such proceeding, the Corporation shall indemnify Indemnitee against all expenses actually and reasonably incurred by him or on his behalf relating to each claim. The termination of a claim in a proceeding -13- 14 by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim. In addition, to the extent an Indemnitee is, by reason of his corporate status, a witness or otherwise participates in any proceeding at a time when he is not named a defendant or respondent in the proceeding, he shall be indemnified against all expenses actually and reasonably incurred by him or on his behalf in connection therewith. The Corporation shall pay all reasonable expenses incurred by or on behalf of Indemnitee in connection with any proceeding or claim, whether brought by the Corporation or otherwise, in advance of any determination respecting entitlement to indemnification pursuant to this Article V within 10 days after the receipt by the Corporation of a written request from Indemnitee reasonably evidencing such expenses and requesting such payment or payments from time to time, whether prior to or after final disposition of such proceeding or claim; provided that the Indemnitee undertakes and agrees in writing that he will reimburse and repay the Corporation for any expenses so advanced to the extent that it shall ultimately be determined by a court, in a final adjudication from which there is no further right of appeal, that Indemnitee is not entitled to be indemnified against such expenses. Section 3. Determination of Request. Upon written request to the Corporation by an Indemnitee for indemnification pursuant to these Amended and Restated Bylaws, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in accordance with Article 2.02-1 of the TBCA, provided, however, that, notwithstanding the foregoing, if a Change in Control shall have occurred, such determination shall be made by Independent Counsel selected by the Indemnitee, unless the Indemnitee shall request that such determination be made in accordance with Article 2.02-1F (1) or (2). The Corporation shall pay any and all reasonable fees and expenses of Independent Counsel (as defined below) incurred in connection with any such determination. If a Change in Control (as defined below) shall have occurred, the Indemnitee shall be presumed (except as otherwise expressly provided in this Article V) to be entitled to indemnification under this Article V upon submission of a request to the Corporation for indemnification, and thereafter the Corporation shall have the burden of proof in overcoming that presumption in reaching a determination contrary to that presumption. The presumption shall be used by Independent Counsel, or such other person or persons determining entitlement to indemnification, as a basis for a determination of entitlement to indemnification unless the Corporation provides information sufficient to overcome such presumption by clear and convincing evidence or the investigation, review and analysis of Independent Counsel or such other person or persons convinces him or them by clear and convincing evidence that the presumption should not apply. Section 4. Effect of Certain Proceedings. The termination of any proceeding or of any claim in a proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Article) by itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did conduct himself in good faith and in a manner that he reasonably believed in the case of conduct in his official capacity, that was in the best interests of the Corporation or, in all other cases, that was not opposed to the best interests of the Corporation or, with respect to any criminal proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful and Indemnitee shall be deemed to have been found liable in respect of any claim only after he shall have been so adjudged by a court of competent jurisdiction after exhaustion of all appeals therefrom. -14- 15 Section 5. Expenses of Enforcement of Article. In the event that Indemnitee, pursuant to this Article V, seeks a judicial adjudication to enforce his rights under, or to recover damages for breach of, rights created under or pursuant to this Article V, Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any and all expenses actually and reasonably incurred by him in such judicial adjudication but only if he prevails therein. If it shall be determined in said judicial adjudication that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication shall be reasonably prorated in good faith by counsel for Indemnitee. Notwithstanding the foregoing, if a Change in Control shall have occurred, Indemnitee shall be entitled to indemnification under this Article V, Section 5 regardless of whether Indemnitee ultimately prevails in such judicial adjudication. Section 6. Indemnification of Other Officers, Employees and Agents. The Corporation, by adoption of a resolution of the Board of Directors, may indemnify and advance expenses to an officer who is not an executive officer, an employee or agent of the Corporation to the same extent and subject to the same conditions (or to such lesser extent and/or with such other conditions as the Board of Directors may determine) under which it may indemnify and advance expenses to an Indemnitee under this Article V; and the Corporation may indemnify and advance expenses to persons who are not or were not directors, officers, employees or agents of the Corporation, but who are or were serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person to the same extent and subject to the same conditions (or to such lesser extent and/or with such other conditions as the Board of Directors may determine) that it may indemnify and advance expenses to Indemnitees under this Article V. Section 7. Insurance and Self-Insurance Arrangements. The Corporation may procure or maintain insurance or other similar arrangements, at its expense, to protect itself and any Indemnitee against any expense, liability or loss asserted against or incurred by such person, incurred by him in such a capacity or arising out of his status as such a person, whether or not the Corporation would have the power to indemnify such person against such expense or liability. In considering the cost and availability of such insurance, the Corporation, (through the exercise of the business judgment of its directors and officers), may from time to time, purchase insurance which provides for any and all of (i) deductibles, (ii) limits on payments required to be made by the insurer, or (iii) exclusions from insurance coverage for certain matters. The Corporation may also, from time to time, determine not to purchase insurance coverage that is or would be available to the Corporation, but which the officers or directors of the Corporation determine is inadvisable for the Corporation to purchase, given the cost involved. The purchase of insurance with deductibles, limits on payments and coverage exclusions and the decision to decline or not to seek available coverage will be deemed to be in the best interest of the Corporation but may not be in the best interest of certain of the persons that are covered thereby or would be covered, if such insurance had been purchased. As to the Corporation, purchasing such insurance with deductibles, limits on payments, and coverage exclusions or declining or not seeking such coverage is similar to the Corporation's -15- 16 practice of self-insurance in other areas. In order to protect the Indemnitees who would otherwise be more fully or entirely covered under such policies, the Corporation shall indemnify and hold each of them harmless as provided in Section 1 of this Article V, without regard to whether the Corporation would otherwise be entitled to indemnify such officer or director under the other provisions of this Article V, or under any law, agreement, vote of shareholders or directors or other arrangement, to the extent (i) of such deductibles, (ii) of amounts exceeding payments required to be made by an insurer, (iii) amounts in respect of exclusions from such coverage or (iv) amounts covered under policies of officer's and director's liability insurance that are available, were available or which become available to the Corporation or which are generally available to companies comparable to the Corporation but which the officers or directors of the Corporation determine is inadvisable for the Corporation to purchase, given the cost involved. Notwithstanding the foregoing provision of this Article V, Section 7, no Indemnitee shall be entitled to indemnification for the results of such person's conduct that is intentionally adverse to the interests of the Corporation. This Article V, Section 7 is authorized by Section 2.02-1(R) of the TBCA as in effect on the date of adoption of these Amended and Restated Bylaws, and further, is intended to establish an arrangement of self-insurance pursuant to that section. Section 8. Severability. If any provision or provisions of this Article shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby; and, to the fullest extent possible, the provisions of this Article shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. Section 9. Definitions. The following terms are used herein as follows: "Change in Control" means a change in control of the Corporation occurring after the date of adoption of these Amended and Restated Bylaws of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Corporation is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if at any time after the date of adoption of these Amended and Restated Bylaws (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 40% or more of the combined voting power of the Corporation's then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) the Corporation is a party to a merger, consolidation, share exchange, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) during any 15-month period, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds of the directors then -16- 17 still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. "corporate status" means the status of a person who is or was a director, officer, partner, employee, agent or fiduciary of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Corporation. "Disinterested Director" means a director of the Corporation who is not a named defendant or respondent to the proceeding or subject to a claim in respect of which indemnification is sought by Indemnitee. "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither contemporaneously is, nor in the five years theretofore has been, retained to represent: (a) the Corporation or Indemnitee in any matter material to either such party; (b) any other party to the proceeding giving rise to a claim for indemnification hereunder; or (c) the beneficial owner, directly or indirectly, of securities of the Corporation representing 40% or more of the combined voting power of the Corporation's then outstanding voting securities. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or Indemnitee in an action to determine Indemnitee's rights to indemnification under these Amended and Restated Bylaws. ARTICLE VI MISCELLANEOUS PROVISIONS Section 1. Amendments. These Amended and Restated Bylaws may be amended or repealed, or new bylaws adopted, (a) by the Board of Directors, unless the shareholders in amending, repealing or adopting a particular bylaw expressly provide that the Board of Directors may not amend or repeal that bylaw or unless the Amended and Restated Articles of Incorporation or the Texas Business Corporation Act reserves the power to take such action to the shareholders in whole or part or (b) by the shareholders, unless the Amended and Restated Articles of Incorporation or a bylaw adopted by the shareholders provides otherwise as to all or some portion of the Amended and Restated Bylaws; provided that after the Public Status Date any amendment or repeal of the Amended and Restated Bylaws by the shareholders may only be effected at a shareholders meeting for which notice has been given pursuant to Article II, Section 9 of these Amended and Restated Bylaws. Section 2. Waiver. Whenever any notice is required to be given to any shareholder, director or committee member under the provisions of any law, the Amended and Restated Articles of Incorporation or these Amended and Restated Bylaws, a waiver thereof in -17- 18 writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Section 3. Conference Telephone Meetings. Meetings of shareholders, directors, or any committee thereof, may be held by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this Article VI, Section 3 shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 4. Offices. The principal office of the Corporation shall be located in Houston, Texas, unless and until changed by resolution of the Board of Directors. The Corporation may also have offices at such other places as the Board of Directors may from time to time designate, or as the business of the Corporation may require. Section 5. Resignations. Any director or officer may resign at any time. Such resignations shall be made in writing and shall take effect at the time specified therein, or, if no time be specified, at the time of its receipt by the Chief Executive Officer, President or Secretary. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. Section 6. Seal. The seal of the Corporation shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Texas" , or shall be in such other form as may be fixed by resolution of the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Section 7. Fiscal Year. The fiscal year of the Corporation shall be as fixed by resolution of the Board of Directors. -18- EX-3.4 8 AMENDMENT TO THE AMENDED & RESTATED BYLAWS 1 EXHIBIT 3.4 AMENDMENT TO THE AMENDED AND RESTATED BYLAWS OF MEDICAL SCIENCE SYSTEMS, INC. --------------------------------------- Pursuant to the provisions of Art. 2.23 of the Texas Business Corporation Act, the undersigned corporation adopts, following a majority shareholder vote at the annual meeting, the following Amendment to its Amended and Restated Bylaws: 1. ARTICLE II of the Amended and Restated Bylaws is hereby amended to read as follows: "ARTICLE II MEETING OF SHAREHOLDERS . . . Section 3. Special Meetings. Special meetings of the shareholders may be called by the Chairman of the Board, the President or the Board of Directors. Special meetings of shareholders shall be called by the Secretary upon the written request of the holders of shares entitled to cast not less than 50% of all the votes entitled to be cast at such a meeting. Such request shall state the purpose or purposes of such meeting and the matters proposed to be acted on thereat. Upon receipt of such request and any notice required by Sections 8 and/or 9 of Article II, the Board of Directors shall set a date for the special meeting, set a record date in accordance with Article II, Section 5, and shall cause an appropriate officer of the Corporation to give the notice required under Article II, Section 4. . . . Section 8. Nomination of Directors. . . . (b) Subject to the rights of holders of any class or series of stock having a preference over Common Stock of the Corporation as to dividends or upon liquidation Amendment to Amended and Restated Bylaws Page 1 2 to elect directors under specified circumstance, nominations of persons for election to the Board of Directors may be made only (a) by the Board of Directors or a committee appointed by the Board of Directors or (b) by any shareholder who is a shareholder of record at the time of giving of the shareholder's notice provided for in this Section 8, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 8. A shareholder wishing to nominate one or more individuals to stand for election in the election of members of the Board of Directors at an annual or special meeting must provide written notice thereof to the Board of Directors no more than one hundred twenty (120) days and no fewer than sixty (60) days before the annual or special meeting called to effect the election. A shareholder's notice shall set forth (i) the name and address, as they appear on the Corporation's books, of the shareholder making the nomination or nominations; (ii) such information regarding the nominee(s) proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee(s) been nominated or intended to be nominated by the Board of Directors; (iii) a representation of the shareholder as to the class and number of shares of capital stock of the Corporation that are beneficially owned by such shareholder, and the shareholder's intent to appear in person or by proxy at the meeting to propose such nomination; and (iv) the written consent of the nominee(s) to serve as a member of the Board of Directors if so elected. No shareholder nomination shall be effective unless made in accordance with the procedures set forth in this Section 8. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a shareholder nomination was not made in accordance with the provisions of the Amended and Restated Bylaws, and if the chairman should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 9. Proposals of Shareholders. (b) At any meeting of shareholders, there shall be conducted only such business as shall have been brought before the meeting (a) by or at the discretion of the Board of Directors or (b) by any shareholder of the Corporation who is a shareholder of record at the time of giving of the shareholder's notice provided for in this Section 9, who shall be entitled to vote at such meeting and who complies with the notice procedure set forth in this Section 9. For business to be properly brought before a meeting of shareholders by a shareholder, the shareholder shall have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation no more than one hundred twenty (120) days and no fewer than sixty (60) days before such a meeting. A shareholder's notice shall set forth as to each matter proposed to be brought before the meeting: (1) a brief description of the business desired to be brought before the meeting, the reasons for conducting such Amendment to Amended and Restated Bylaws Page 2 3 business at the meeting and, in the event that such business includes a proposal regarding the amendment of either the Amended and Restated Articles of Incorporation or Amended and Restated Bylaws of the Corporation, the language of the proposed amendment; (2) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business; (3) a representation of the shareholder as to the class and number of shares of capital stock of the Corporation that are beneficially owned by such shareholder, and the shareholder's intent to appear in person or by proxy at the meeting to propose such business; and (4) any material interest of such shareholder in such proposal or business. Notwithstanding anything in these Amended and Restated Bylaws to the contrary, no business shall be conducted at a shareholders meeting unless brought before the meeting in accordance with the procedure set forth in this Section 9. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meting and in accordance with the provisions of the Amended and Restated Bylaws, and if the chairman should so determine, the chairman shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted." Dated May 6, 1997 MEDICAL SCIENCE SYSTEMS, INC. By: ------------------------------- Paul J. White Its: President Amendment to Amended and Restated Bylaws Page 3 EX-4.2 9 FORM OF UNDERWRITER'S WARRANT 1 EXHIBIT 4.2 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF ANY EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES FILED UNDER THE ACT, OR AN EXEMPTION FROM REGISTRATION, AND COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. THE ISSUER MAY REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER HEREOF THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT SUCH LAWS ARE COMPLIED WITH. VOID AFTER 3:30 P.M., EASTERN TIME, ON , 2002. MEDICAL SCIENCE SYSTEMS, INC. UNDERWRITER'S WARRANT TO PURCHASE SHARES OF COMMON STOCK This is to Certify That, FOR VALUE RECEIVED, ____________________________ (the "Holder") is entitled to purchase, subject to the provisions of this Warrant, from Medical Science Systems, Inc. ("Company"), a Texas corporation, at any time on or after , 1998, and not later than 3:30 p.m., Eastern Time, on 2002, Shares of Common Stock of the Company ("Securities") exercisable at a purchase price for the shares of Common Stock which is 135% of the public offering price of the Common Stock ($ ). The number of Securities to be received upon the exercise of this Warrant and the price to be paid for the Securities may be adjusted from time to time as hereinafter set forth. The purchase price of a share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." This Warrant is or may be one of a series of Warrants identical in form issued by the Company to purchase an aggregate of 150,000 shares of Common Stock. The shares of Common Stock, as adjusted from time to time underlying the Warrants are hereinafter sometimes referred to as "Warrant Stock". The Common Stock issuable upon the exercise hereof are in all respects identical to the Common Stock being purchased by the Underwriter for resale to the public pursuant to the terms and conditions of the Underwriting Agreement. (a) Exercise of Warrant. Subject to the provisions of Section (g) hereof, this Warrant may be exercised in whole or in part at anytime or from time to time on or after , 1998, but not later than 3:30 p.m., Eastern Time on , 2002, or if , 2002, is a day on which banking institutions are authorized by law to close, then on the next succeeding day which shall not be such a day, by presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, with the Purchase Form annexed hereto duly executed and accompanied by payment of the Exercise Price for the number of shares specified in such Form, together with all federal and state taxes applicable upon such exercise. The Company agrees to provide notice to the Holder that any tender offer is being made for the Company's shares of Common Stock no later than the day the Company becomes aware that any tender offer is being made for the Company's shares of Common Stock. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the right of the Holder to purchase the balance of the shares purchasable hereunder along with any additional Redeemable Warrants not exercised. Upon receipt by the Company of this Warrant at the office of the Company or at the office of the Company's stock transfer agent, in proper form for exercise and accompanied by the total Exercise Price, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Holder. (b) Reservation of Securities. The Company hereby agrees that at all times there shall be reserved for issuance and/or delivery upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance or delivery upon exercise of this Warrant. The Company covenants and agrees that, upon exercise of the 1 2 Warrants and payment of the Exercise Price therefor, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable .-and not subject to the preemptive rights of any stockholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Warrants to be listed (subject to official notice of issuance) on all securities exchanges on which the Common Stock issued to the public in connection herewith may then be listed and/or quoted on NASDAQ. (c) Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of such fractional share, determined as follows: (1) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange, the current value shall be the last reported sale price of the Common Stock on such exchange on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average of the closing bid and asked prices for such day on such exchange; or (2) If the Common Stock is not so listed or admitted to unlisted trading privileges, the current value shall be the mean of the last reported bid and asked prices reported by the National Association of Securities Dealers Automated Quotation System (or, if not so quoted on NASDAQ or by the National Quotation Bureau, Inc.) on the last business day prior to the date of the exercise of this Warrant; or (3) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current value shall be an amount, not less than book value, determined in such reasonable manner as may be prescribed by the Board of Directors of the Company, such determination to be final and binding on the Holder. (d) Exchange, Assignment or Loss of Warrant. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other Warrants of different denominations entitling the Holder thereof to purchase (under the same terms and conditions as provided by this Warrant) in the aggregate the same number of shares of Common Stock purchasable hereunder. This Warrant may not be sold, transferred, assigned, or hypothecated until after one year from the effective date of the registration statement except that it may be (i) assigned in whole or in part to the officers of the "Underwriter", and (ii)transferred to any successor to the business of the "Underwriter." Any such assignment shall be made by surrender of this Warrant to the Company, or at the office of its stock transfer agent, if any, with the Assignment Form annexed hereto duly executed and with funds sufficient to pay any transfer tax; whereupon the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in-such instrument of assignment, and this Warrant shall promptly be canceled. This Warrant may be divided or combined with other Warrants which carry the same rights upon presentation hereof at the office of the Company or at the office of its stock transfer agent, if any, together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof. The term "Warrant" as used herein includes any Warrants issued in substitution for or replacement of this Warrant, or into which this Warrant may be divided or exchanged. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone. (e) Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in the Warrant and are not enforceable against the Company except to the extent set forth herein. 2 3 (f) Notices to Warrant Holders. So long as this Warrant shall be outstanding and unexercised (i) if the Company shall make any stock distribution upon the Common Stock, or (ii) if the Company shall offer to the holders of Common Stock for subscription or purchase by them any shares of stock of any class or any other rights, or (iii) if any capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then, in any such case, the Company shall cause to be delivered to the Holder, at least ten (10) days prior to the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any, is to be fixed, as of which the holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for equivalent securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. (g) Adjustment of Exercise Price and Number of Shares of Common Stock Deliverable. (A)(i) Except as hereinafter provided, in the event the Company shall, at any time or from time to time after the date hereof, issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or subdivide or combine the outstanding shares of Common Stock into a greater or lesser number of shares (any such issuance, subdivision or combination being herein call a "Change of Shares"), then, and thereafter upon each further Change of Shares, the Exercise Price for the Warrants (whether or not the same shall be issued and outstanding) in effect immediately prior to such Change of Shares shall be changed to a price (including any applicable fraction of a cent to the nearest cent) determined by dividing (i) the sum of (a) the total number of shares of Common Stock outstanding immediately prior to such Change of Shares, multiplied by the Exercise Price in effect immediately prior to such Change of Shares, and (b) the consideration, if any, received by the Company upon such issuance, subdivision or combination by (ii) the total number of shares of Common Stock outstanding immediately after such Change of Shares; provided, however, that in no event shall the Exercise Price be adjusted pursuant to this computation to an amount in excess of the Exercise Price in effect immediately prior to such computation, except in the case of a combination of outstanding shares of Common Stock. For the purposes of any adjustment to be made in accordance with this Section (g) the following provisions shall be applicable: (I) Shares of Common Stock issuable by way of dividend or other distribution on any capital stock of the Company shall be deemed to have been issued immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such dividend or other distribution and shall be deemed to have been issued without consideration. (II) The number of shares of Common Stock at any one time outstanding shall not be deemed to include the number of shares issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of options, rights or warrants and upon the conversion or exchange of convertible or exchangeable securities. (ii) Upon each adjustment of the Exercise Price pursuant to this Section (g), the number of shares of Common Stock purchasable upon the exercise of each Warrant shall be the number derived by multiplying the number of shares of Common Stock purchasable immediately prior to such adjustment by the Exercise Price in effect prior to such adjustment and dividing the product so obtained by the applicable adjusted Exercise Price. (B) In case of any reclassification or change of outstanding shares of Common Stock issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination), or in case of any consolidation or merger of the Company with or into another corporation other than a merger with a "Subsidiary" (which shall mean any corporation or corporations, as the 3 4 case may be, of which capital stock having ordinary power to elect a majority of the Board of Directors of such corporation (regardless of whether or not at the time capital stock of any other class or classes of such corporation shall have or may have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company or by one or more Subsidiaries) or by the Company and one or more Subsidiaries in which merger the Company is the continuing corporation and which does not result in any reclassification or change of the then outstanding shares of Common Stock or other capital stock issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of subdivision or combination) or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, then, as a condition of such reclassification, change, consolidation, merger, sale or conveyance, the Company, or such successor or purchasing corporation, as the case may be, shall make lawful and adequate provision whereby the Holder of each Warrant then outstanding shall have the right thereafter to receive on exercise of such Warrant the kind and amount of securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of securities issuable upon exercise of such Warrant immediately prior to such reclassification, change, consolidation, merger, sale or conveyance and shall forthwith file at the principal office of the Company a statement signed by its President or a Vice President and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary evidencing such provision. Such provisions shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section (g)(A). The above provisions of this Section (g)(B) shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (C) Irrespective of any adjustments or changes in the Exercise Pi ice or the number of shares of Common Stock purchasable upon exercise of the Warrants, the Warrant Certificates theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrant Certificates pursuant hereto, continue to express the Exercise Price per share and the number of shares purchasable thereunder as the Exercise Price per share and the number of shares purchasable thereunder as expressed in the Warrant Certificates when the same were originally issued. (D) After each adjustment of the Exercise Price pursuant to this Section (g), the Company will promptly prepare a certificate signed by the Chairman or President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company setting forth: (i) the Exercise Price as so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of each Warrant, after such adjustment, and (iii' a brief statement of the facts accounting for such adjustment. The Company will promptly file such certificate in the Company's minute books and cause a brief summary thereof to be sent by ordinary first class mail to each Holder at his last address as it shall appear on the registry books of the Company. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity thereof except as to the holder to whom the Company failed to mail such notice, or except as to the holder whose notice was defective. The affidavit of an officer or the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (E) No adjustment of the Exercise Price shall be made as a result of or in connection with the issuance or sale of shares of Common Stock if the amount of said adjustment shall be less than $.10, provided, however, that in such case, any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment that shall amount, together with any adjustment so carried forward, to at least $.10. In addition, Holders shall not be entitled to cash dividends paid by the Company prior to the exercise of any Warrant or Warrants held by them. (F) In the event that the Company shall at any time prior to the exercise of all Warrants declare a dividend consisting solely of shares of Common Stock or otherwise distribute to its stockholders any assets, property, rights, evidences of indebtedness, the Holders of the unexercised Warrants shall thereafter be entitled, in addition to the shares of Common Stock or other securities and property receivable upon the exercise thereof, to receive, upon the exercise of such Warrants, the same property, assets, rights, evidences of indebtedness, that they would have been 4 5 entitled to receive at the time of such dividend or distribution as if the Warrants had been exercised immediately prior to such dividend or distribution. At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this Section (g). (h) Piggyback Registration. If, at any time commencing one year from the date hereof and expiring six (6) years thereafter, the Company proposes to register any of its securities under the Securities Act of 1933, as amended (the "Act") (other than in connection with a merger or pursuant to Form S-8, S-4 or other comparable registration statement) it will give written notice by registered mail, at least thirty (30) days prior to the filing of each such registration statement, to the Underwriter and to all other Holders of the Warrants and/or the Warrant Stock of its intention to do so. If the Underwriter or other Holders of the Warrants and/or Warrant Stock notify the Company within twenty (20) days after receipt of any such notice of its or their desire to include any such securities in such proposed registration statement, the Company shall afford each of the Underwriter and such Holders of the Warrants and/or Warrant Stock the opportunity to have any such Warrant Stock registered under such registration statement. Notwithstanding the provisions of this Section, the Company shall have the right at any time after it shall have given written notice pursuant to this Section (irrespective of whether a written request for inclusion of any such securities shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. (i) Demand Registration. (1) At any time commencing one year from the date hereof and expiring four (4) years thereafter, the Holders of the Representative's Warrants and/or Warrant Stock representing a "Majority" (as hereinafter defined) of such securities (assuming the exercise of all of the Underwriter's Warrants) shall have the right (which right is in addition to the registration rights under Section (i) hereof), exercisable by written notice to the Company, to have the Company prepare and file with the Securities and Exchange Commission (the "Commission"), on one occasion, a registration statement and such other documents, including a prospectus, as may be necessary in the opinion of both counsel for the Company and counsel for the Underwriter and Holders, in order to comply with the provisions of the Act, so as to permit a public offering and sale of their respective Warrant Stock for nine (9) consecutive months by such Holders and any other holders of the Representative's Warrants and/or Warrant Stock who notify the Company within ten (10) days after receiving notice from the Company of such request. (2) The Company covenants and agrees to give written notice of any registration request under this Section (i) by any Holder or Holders to all other registered Holders of the Representative's Warrants and the Warrant Stock within ten (10) days from the date of the receipt of any such registration request. (3) In addition to the registration rights under this Section (i) at any time commencing one year after the date hereof and expiring four (4) years thereafter, the Holders of Representative's Warrants and/or Warrant Stock shall have the right, exercisable by written request to the Company, to have the Company prepare and file, on one occasion, with the Commission a registration statement so as to permit a public offering and sale for nine (9) consecutive months by such Holders of its Warrant Stock; provided, however, that the provisions of Section (i)(2) hereof shall not apply to any such registration request and registration and all costs incident thereto shall be at the expense of the Holder or Holders making such request. (4) The Company shall include such Underwriter's Warrants in the Registration Statement relating to this offering and shall keep such Registration Statement current at least until the expiration of such Underwriter's Warrants or shall bear all of the costs of a new registration statement in the event the Underwriter"s Warrants are to be exercised. In the event the Company grants the public investors any benefits upon the exercise of the Public Redeemable Warrants not set forth in the terms thereof, then the Underwriter shall be entitled to receive the identical benefits in the event it elects to exercise any of its Underwriter's Warrant (j) Covenants of the Company With Respect to Registration. In connection with any registration under Section (h) or (i) hereof, the Company covenants and agrees as follows: 5 6 (i) The Company shall use its best efforts to file a registration statement within sixty (60) days of receipt of any demand therefor, shall use its best efforts to have any registration statement declared effective at the earliest possible time, and shall furnish each Holder desiring to sell Warrant Stock such number of prospectuses as shall reasonably be requested. (ii) The Company shall pay all costs (excluding fees and expenses of Holder(s)' counsel and any underwriting or selling commissions), fees and expenses in connection with all registration statements filed pursuant to Sections (h), (i) and 0) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses. If the Company shall fail to comply with the provisions of Section (j)(i), the Company shall, in addition to any other equitable or other relief available to the Holder(s), extend the Exercise Period by such number of days as shall equal the delay caused by the Company's failure. (iii) The Company will take all necessary action which may be required in qualifying or registering the Warrant Stock included in a registration statement for offering and sale under the securities or blue sky laws of such states as reasonably are requested by the Holder(s), provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (iv) The Company shall indemnify the Holder(s) of the Warrant Stock to be sold pursuant to any registration statement and each person, if any, who controls such Holders within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), from and against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriter contained in Section 7 of the Underwriting Agreement. (v) The Holder(s) of the Warrant Stock to be sold pursuant to a registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, for specific inclusion in such registration statement to the same extent with the same effect as the provisions contained in Section 7 of the Underwriting Agreement pursuant to which the Underwriter has agreed to indemnify the Company. (vi) The Holder(s) shall exercise their Warrants prior to the initial filing of any registration statement or the effectiveness thereof. (vii) The Company shall not permit the inclusion of any securities other than the Warrant Stock to be included in any registration statement filed pursuant to Section (i) hereof, or permit any other registration statement to be or remain effective during the effectiveness of a registration statement filed pursuant to Section (i) hereof, other than a secondary offering of equity securities by the Company, without the prior written consent of the Holders of the Warrants and Warrant Stock representing a Majority of such securities (assuming an exercise of all the Warrants underlying the Warrants). (viii) The Company shall furnish to each Holder participating in the offering and to each underwriter, if any, a signed counterpart, addressed to such Holder or underwriter, of (x) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and (y) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, 6 7 in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (ix) The Company shall as soon as practicable after the effective date of the registration statement, and in any event within 15 months thereafter, make "generally available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section 11(a) of the Act and covering a period of at least 12 consecutive months beginning after the effective date of the registration statement. (x) The Company shall deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriters, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. ("NASD"). Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as any such Holder or underwriter shall reasonably request. (xi) The Company shall enter into an underwriting agreement with the managing underwriters, which may be the Underwriter. Such agreement shall be satisfactory in form and substance to the Company, and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter; provided however, that no Holder shall be required to make any representations, warranties or covenants or grant any indemnity to which it shall object in any such underwriting agreement. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Warrant Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders and their intended methods of distribution. (xii) For purposes of this Agreement, the term "Majority" in reference to the Holders of Warrants or Warrant Stock, shall mean in excess of fifty (50%) of the then outstanding Warrants or Warrant Stock that (i) are not held by the Company, an affiliate, officer, creditor, employee or agent thereof or any of their respective affiliates, members of their family, persons acting as nominees or in conjunction therewith or (ii) have not been resold to the public pursuant to a registration statement filed with the Commission under the Act. (k) The Company's obligation under Section 6) hereof shall be conditioned as to each such public offering, upon a timely receipt by the Company in writing of: (A) Information as to the terms of such public offering furnished by or on behalf of the Holders making a public distribution of their Warrant Stock; and (B) Such other information as the Company may reasonably require from such Holder, or any underwriter for any of them, for inclusion in such registration statement or offering statement or post-effective amendment. (C) An agreement by the Holder to sell his Warrants and Warrant Stock on the basis provided in the Underwriting Agreement. (l) The Company's agreements with respect to the Warrant Stock in this Warrant will continue in effect regardless of the exercise or surrender of this Warrant. 7 8 (m) Any notices or certificates by the Company to the Holder and by the Holder to the Company shall be deemed delivered if in writing and delivered personally or sent by certified mail, to the Holder, addressed to him or sent to Nutmeg Securities, Ltd., 495 Post Road East, Westport, CT 06880, or, if the Holder has designated, by notice in writing to the Company, any other address, to such other address, and, if to the Company, addressed to it at 4400 MacArthur boulevard, Suite 980, Newport Beach, CA 92660. The Company may change its address by written notice to Nutmeg Securities, Ltd. (n) Limited Transferability. This Warrant Certificate and the Warrant may not be sold, transferred, assigned or hypothecated for a one-year period after the effective date of the Registration Statement except to underwriters of the Offering referred to in the Underwriting Agreement or to individuals who are either partners or officers and shareholder of such an underwriter or by will or by operation of law. The Warrant may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates evidencing the same aggregate number of Warrants. The Warrant may not be offered, sold, transferred, pledged or hypothecated in the absence of any effective registration statement as to such Warrant filed under the Act, or an exemption from the requirement of such registration, and compliance with the applicable state securities laws. The Company may require an opinion of counsel satisfactory to the Company that such registration is not required and that such laws are complied with. The Company may treat the registered holder of this Warrant as he or it appears on the Company's book at any time as the Holder for all purposes. The Company shall permit the Holder or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. (o) Transfer to Comply With the Securities Act of 1933. The Company may cause the following legend, or one similar thereto, to be set forth on the Warrants and on each certificate representing Warrant Stock, or any other security issued or issuable upon exercise of this Warrant not theretofore distributed to the public or sold to underwriters for distribution to the public pursuant to Sections (h) or (i) hereof; unless counsel satisfactory to the Company is of the opinion as to any such certificate that such legend, or one similar thereto, is unnecessary: "The warrants represented by this certificate may not be offered for sale, sold or otherwise transferred except pursuant to an opinion of counsel satisfactory to the Company is obtained stating that such offer or sale is in compliance wrath state and federal securities law. (p) Applicable Law. This Warrant shall be governed by, and construed in accordance with, the laws of the State of Connecticut , without giving effect to conflict of law principles. (q) This Warrant may not be extended except in a writing signed by each Holder and the Company. (r) The indemnification provisions of this Warrant shall survive until , 2005. 8 9 Medical Science Systems, Inc. a Texas corporation By ------------------------------ Paul J. White, President Date: -------------------------- S E A L Attest: - -------------------------------- Secretary 9 10 PURCHASE FORM Dated , 19 ---------------- --- The undersigned hereby irrevocably elects to exercise the Warrant to the extent of purchasing _______ shares of Common Stock and hereby makes payment of $________ in payment of the actual exercise price thereof. INSTRUCTIONS FOR REGISTRATION OF STOCK Name ___________________________________________________________________________ (please typewrite or print in block letters) Address ________________________________________________________________________ Signature ______________________________________________________________________ ASSIGNMENT FORM FOR VALUE RECEIVED, ____________________________________________________________ hereby sells, assigns and transfers unto Name ___________________________________________________________________________ (please typewrite or print in block letters) Address ________________________________________________________________________ the right to purchase Common Stock as represented by this Warrant to the extent of ____________ shares as to which such right is exercisable and does hereby irrevocably constitute and appoint, ___________________________, attorney, to transfer the same on the books of the Company with full power of substitution in the premises. Signature ______________________________________________________________________ Dated: _______________________, 19___ 10 EX-4.3 10 FORM OF SUBORDINATED PROMISSORY NOTE 1 EXHIBIT 4.3 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR REGISTERED OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS AND THEREFORE THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT REGISTRATION THEREUNDER OR PURSUANT TO AN EXEMPTION FROM REGISTRATION. UPON THE OCCURRENCE OF CERTAIN EVENTS, PAYMENT OF THE INDEBTEDNESS EVIDENCED BY THIS INSTRUMENT IS SUBORDINATED TO THE PRIOR PAYMENT IN FULL OF THE SENIOR OBLIGATIONS (AS DEFINED HEREIN). MEDICAL SCIENCE SYSTEMS, INC. SUBORDINATED PROMISSORY NOTE $___________ Dated: August 19, 1997 FOR VALUE RECEIVED, the undersigned, MEDICAL SCIENCE SYSTEMS, INC., a Texas corporation (the "Company"), hereby promises to pay to the order of ___________________________ ("Lender"), at the offices of the Company in Newport Beach, California, or at such other place as Lender may designate and so notify the Company, the principal sum of ____________ ($____________), with interest thereon from the date hereof at the rate per annum equal to ten percent (10%), principal and interest payable as described herein. 1. Payment of Principal and Interest. Except as otherwise specifically provided below, interest will accrue at the rate of ten percent (10%) per annum, simple interest, on the unpaid principal amount of this Note. All principal of and interest accrued on this Note shall be payable on the earlier of (i) October 18, 1998, fourteen (14) months from the date of issuance, or (ii) the closing of any sale of equity securities of the Company which results in the receipt by the Company of gross proceeds in excess of $6,000,000. Any payment pursuant hereto shall first be applied to interest due and owing at the date of such payment, and whatever remains after the amount of such interest is deducted from such payment shall be applied to the principal balance due hereunder, and the interest upon the portion of principal so credited shall thereupon cease. Subject to the provisions of the following paragraph, the Company shall have the right, without penalty, to prepay the indebtedness represented hereby in part or in full at any time or times during the term hereof. Any prepayment pursuant hereto shall first be applied to interest due and owing at the date of such payment, and whatever remains after the amount of such interest is deducted from such prepayment shall be applied to the principal balance due hereunder, and the interest upon the portion of principal so credited shall thereupon cease. 2. Events of Default. (a) Definition. For purposes of this Note, the occurrence of any of the following events shall be an event of default ("Event of Default"): (i) the Company fails to pay when due the full amount of interest then accrued on this Note, or fails to pay when due the full amount of any principal payment on this Note, and (in either case) such nonpayment continues for ten (10) days; (ii) the Company fails to perform or observe any other material provision contained in this Note, or any other agreement executed in connection with the transactions contemplated by this Note, and such default continues for a period of thirty (30) days after receipt of written notice thereof; (iii) any representation or warranty made in any of the Agreements, or in any writing furnished by the Company to the Lender, is false or misleading (taken as a whole) in any materially adverse respect on the date made or furnished; or 2 (iv) the Company makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts as they become due; or an order, judgment or decree is entered adjudicating the Company to be bankrupt or insolvent is entered under the federal Bankruptcy Code; or the Company petitions or applies for the appointment of a custodian, trustee, receiver or liquidator of the Company, or any substantial parts of the assets of the Company; or commences any proceeding relating to the Company under any bankruptcy reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; or any such petition or application is filed, or any such proceeding commenced, against the Company and either (A) the Company by any act indicates its approval thereof or (B) such petition, application or proceeding is not dismissed within 60 days. (b) Consequences of Events of Default. (i) If any Event of Default has occurred, subject to the rights of Senior Lenders under Section 3 below, the Lender may demand (by written notice delivered to the Company) immediate payment of all or any portion of the outstanding principal amount of this Note, plus all interest accrued thereon to date. (ii) Subject to the rights of Senior Lenders under Section 3 below, the Lender may exercise or enforce any of the other rights that Lender may have under applicable law. 3. Subordination Provisions. (a) Agreement to Subordinate. The Lender agrees that the indebtedness of the Company to the Lender evidenced by this Note, and interest and premiums, if any, thereon and other amounts payable in respect thereof or in connection therewith, and any other amounts payable subsequent to the date hereof pursuant to, in respect of or in connection with this Note (the "Subordinated Debt") is and shall be subordinate, to the extent and in the manner hereinafter set forth, to the prior payment in full of all obligations of the Company now or hereafter existing under any secured borrowings by the Company, whether such borrowings be in the form of a loan, equipment lease financing or pursuant to any other financing arrangement with a bank, equipment lease company or other financial institution, or individual or entity providing bridge financing to the Company, whether for principal, interest (including, without limitation, interest accruing after the filing of a petition initiating any proceeding referred to below, whether or not such interest accrues after the filing of such petition for purposes of the Federal Bankruptcy Code or is an allowed claim in such proceeding), fees, expenses or otherwise (such obligations being the "Senior Obligations"). For the purposes of this Note, the Senior Obligations shall not be deemed to have been paid in full unless and until the lenders thereunder (the "Senior Lenders") shall have received payment of the Senior Obligations in full in cash. (b) Events of Subordination. (i) In the event of any dissolution, winding up, liquidation, arrangement, reorganization, adjustment, protection, relief or composition of the Company or its debts, whether voluntary or involuntary, in any bankruptcy, insolvency, arrangement, reorganization, receivership, relief or other similar case or proceeding under any Federal or State bankruptcy or similar law or upon an assignment for the benefit of creditors or any other marshaling of the assets and liabilities of the Company or otherwise, the Senior Lenders shall be entitled to receive payment in full of the Senior Obligations before the Lender is entitled to receive any payment of all or any of the Subordinated Debt, and any further payment or distribution of any kind (whether in cash, property or securities) that otherwise would be payable or deliverable upon or with respect to the Subordinated Debt in any such case, proceeding, assignment, marshaling or otherwise shall be paid or delivered directly to the Senior Lenders for application (in the case of cash) to, or as collateral (in the case of non-cash property or securities) for, the payment or prepayment of the Senior Obligations until the Senior Obligations shall have been paid in full. 3 (ii) The Lender shall not take or receive from the Company, directly or indirectly, in cash or other property or by set-off or in any other manner, including, without limitation, from or by way of collateral, payment of all or any of the Subordinated Debt unless (A) on the date as of which the calculation of such payment there is no existing or continuing event of default under the Senior Obligations (a "Senior Default") or any event which with the giving of notice or passage of time, or both, would constitute a Senior Default, (B) on the date on which payment is to be made there is no existing or continuing Senior Default or any event which with the giving of notice or passage of time, or both, would constitute a Senior Default, and (C) the payment of the Subordinated Debt does not create a Senior Default or any event which with the giving of notice or passage of time, or both, would constitute a Senior Default. If the conditions set forth in clauses (A) and (B) above are satisfied, the Company shall pay to the Lender the amount of the Subordinate Debt to the extent that such payment does not create a Senior Default. Any cure or waiver of a Senior Default shall in no way prevent the occurrence of an additional Senior Default or any event which with the giving of notice or passage of time, or both, would constitute a Senior Default under the Senior Obligations. In addition, unless each of the three payment conditions set forth above in clauses (A) through (C) is fulfilled, the Subordinated Debt may not be accelerated (either by the action of any person or by its terms) and no holder of any Subordinated Debt may commence any suits or actions, make any claims or take any other act to obtain payment under or respect of the Subordinated Debt. (iii) In the event that any Subordinated Debt is declared due and payable before its stated maturity, the Senior Lenders shall be entitled to receive payment in full of all amounts due or to become due on or in respect of all Senior Obligations before the Lender is entitled to receive any payment by the Company on account of the Subordinated Debt. (iv) Upon obtaining actual knowledge that any Senior Default or any event which with the giving of notice or passage of time, or both, would constitute a Senior Default under the Senior Obligation shall have occurred or that any such Senior Default or any event which with the giving of notice or passage of time, or both, would constitute a Senior Default shall have been cured, the Senior Lenders (as the case may be) shall give notice thereof to the Company; provided, however, that in no event shall a delay in giving, or the failure to give, such notice in any way affect the enforceability or validity of the subordination provisions of this Note. (c) In Furtherance of Subordination. So long as any amount of Subordinated Debt remains payable under this Note, each Lender agrees as follows: (i) If any bankruptcy of similar proceeding is commenced by or against the Company, the Senior Lenders are hereby irrevocably authorized and empowered (in their own name or in the name of the Lender or otherwise), but shall have no obligation, to demand, sue for, collect and receive every payment or distribution referred to in Section 3(a) and give acquittance therefor and to file claims and proofs of claim and take such other action (including, without limitation, enforcing any security interest or other lien securing payment of the Subordinated Debt) as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of the Senior Lenders hereunder. (ii) Except as set forth in this Section 3(c), all payments or distributions upon or with respect to the Subordinated Debt which are received by the Lender contrary to the provisions of Section 3 of this Note shall be received in trust for the benefit of the Senior Lenders, shall be segregated from other funds and property held by the Lender and shall be forthwith paid over to the Senior Lenders in the same form as so received (with any necessary endorsement) to be applied (in the case of cash) to, or held as collateral (in the case of non-cash property or securities) for, the payment or prepayment of the Obligations in accordance with the terms of the Senior Obligations. (iii) The Lender hereby irrevocably waives any defense based on the adequacy of a remedy at law, which might be asserted as a bar to such remedy of specific performance. 4 (d) No Commencement of Any Proceeding. The Lender agrees that, so long as payments or distributions for or on account of the Subordinated Debt are not permitted pursuant to Section 3(b), the Lender will not take, sue for, ask or demand from the Company payment of all or any of the Subordinated Debt, or commence, or join with any creditor other than the Senior Lenders in commencing, directly or indirectly cause the Company to commence, or assist the Company in commencing, any bankruptcy or similar proceeding. (e) Rights of Subrogation. The Lender agrees that no payment or distribution to the Senior Lenders pursuant to the provisions of this Note shall entitle the Lender to exercise any right of subrogation in respect thereof until the Senior Obligations shall have been paid in full. (f) Subordination Legend; Further Assurances. The Company will cause each Note to be endorsed with the following legend: UPON THE OCCURRENCE OF CERTAIN EVENTS, PAYMENT OF THE INDEBTEDNESS EVIDENCED BY THIS INSTRUMENT IS SUBORDINATED TO THE PRIOR PAYMENT IN FULL OF THE SENIOR OBLIGATIONS (AS HEREINAFTER DEFINED). The Company and the Lender will, in the case of any Subordinated Debt which is not evidenced by any instrument, upon the Company's request, cause such Subordinated Debt to be evidenced by an appropriate instrument or instruments endorsed with the above legend. The Company and the Lender each will, at the Company's expense and at any time and from time to time, promptly execute and deliver all further instruments and documents, and take all further action, that may be reasonably necessary for the Senior Lenders in order to protect any right or interest granted hereby or to enable the Senior Lenders to exercise and enforce their respective rights and remedies hereunder. (g) Notes in Respect of Subordinated Debt. (i) The Lender agrees that it will not: A. Convert or exchange any of the Subordinated Debt into or for any other indebtedness of the Company; B. Sell, assign, pledge, encumber or otherwise dispose of any of the Subordinated Debt unless such sale, assignment, pledge, encumbrance or disposition (1) is to a person or entity other than the Company or any subsidiary of the Company and (2) is made expressly subject to this Section 3; or C. Permit the terms of any of the Subordinated Debt to be changed in such a manner as to have an adverse effect upon the rights or interests of the Senior Lenders hereunder. (ii) The Lender shall, to the extent the Lender has knowledge thereof, promptly notify the Company of the occurrence of any Event of Default under the Note. 5 (iii) The Company agrees that it will notify the Lender of any Senior Default or any event which with the giving of notice or passage of time, or both, would constitute a Senior Default under the Senior Obligations of which it has knowledge; provided, however, that in no event shall any delay in giving, or any failure to give, any such notice in any way affect the enforceability or validity of this Note. (h) Actions by Company. The Company agrees that it will not make any payment of any of the Subordinated Debt, or take any other action, in contravention of the provisions of this Note. (i) Waiver. The Lender by acceptance of this Note, and the Company, by execution of this Note, for the benefit of the Senior Lender, each hereby waives promptness of notice, diligence, notice of acceptance and any other notice (except notice of any Senior Default or any event which with the giving of notice or passage of time, or both, would constitute a Senior Default) with respect to any of the Senior Obligations and any requirement that the Senior Lenders protect, secure, perfect or insure any security interest or lien or any property subject thereto or exhaust any right or take any action against the Company or any other person or entity or any collateral. (j) Amendments, Etc. No amendment or waiver of any provision of this Note, and no consent to any departure by the Lender or the Company herefrom, shall in any event be effective unless the same shall be in writing and signed by the Senior Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. (k) Continuing Note; Assignments. The provisions of this Note constitute a continuing Note and shall (A) remain in full force and effect until the payment in full of the Subordinated Debt, (B) inure to the benefit of and be binding upon the Lender, the Company and their respective successors and assigns, and (C) inure to the benefit of, be binding upon, and be enforceable by, the Senior Lenders and their respective successors, transferees and assigns. Without limiting the generality of the foregoing clause (C), the Senior Lenders may assign or otherwise transfer all or any portion of its rights and obligations under the Senior Obligations to any other person or entity, and such other person or entity shall thereupon become vested with all the rights in respect thereof. 4. Amendment and Waiver. Except as otherwise expressly provided herein, the provisions of this Note shall not be amended and the Company shall not take any action herein prohibited, or omit to perform any act herein required to be performed by it, unless the Company has received written consent from the Lender. 5. Attorneys' Fees. In the event any judicial proceedings are instituted to enforce or interpret the rights and obligations of the Company and the Lender under this Note, the prevailing party in such proceeding shall be entitled to reasonable attorneys' fees and costs. 6. Governing Law. This Note and all transactions hereunder and/or evidenced hereby shall be governed by, construed under, and enforced in accordance with the laws of the State of California, without regard to any choice of law or conflict of law provisions thereof. 7. Severability. Should any provision of this Note be declared or be determined by any court to be invalid, illegal or unenforceable, such provision shall be severable from the remainder of this Note, and the legality, validity and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 8. Notices. All notices, requests and other communications required or permitted under this Note shall be in writing and may be delivered personally or sent by first class mail, postage prepaid and addressed as follows: To Debtor: MEDICAL SCIENCE SYSTEMS, INC. 4400 MacArthur Blvd., Suite 980 Newport Beach, California 92660 Attention: Paul J. White 6 To Lender: -------------------------------- -------------------------------- -------------------------------- Any notice, request or other communication under this Note shall be effective when received by the addressee, but if sent by registered or certified mail postage prepaid and addressed as provided above, it shall be effective exactly three (3) business days after deposit in the United States Mail anywhere in the United States. The parties may change their addresses as listed above by giving notice of the new address to the other party in conformity with this section. IN WITNESS WHEREOF, the Company has caused a duly authorized officer to execute and deliver this Note as of the date first written above. MEDICAL SCIENCE SYSTEMS, INC. (the "Company") By: -------------------------------- Paul J. White LENDER ------------------------------------ Signature ------------------------------------ Printed Name EX-4.4 11 FORM OF SECURITY AGREEMENT 1 EXHIBIT 4.4 SECURITY AGREEMENT THIS SECURITY AGREEMENT is entered into as of the 19th day of August, 1997 by and between Medical Science Systems, Inc., a Texas corporation (the "Borrower") and (the "Secured Party"). 1. Creation of Security Interest. In consideration of one or more loans, advances, or other financial accommodations at any time before, at or after the date hereof made or extended by the Secured Party to or for the account of the Borrower, directly or indirectly, as principal, guarantor or otherwise, at the sole discretion of the Secured Party in each instance, including without limitation the loan and other accommodations incident to those certain Subordinated Promissory Notes dated August 19, 1997 in the principal amount of ________________________________Dollars ($ ) between the Borrower and the Secured Party (the "Note"), the Borrower hereby grants to Secured Party a continuing security interest in and a right of setoff against, and the Borrower hereby assigns to the Secured Party, the Collateral described in Section 2, to secure the prompt payment, performance and observance of any and all indebtedness, liabilities, obligations and agreements of any kind of the Borrower to Secured Party, however, evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, original, renewed or extended, whether arising under any guarantee, endorsement or undertaking which the Borrower may make or issue to others for the Secured Party's account, whether arising directly or acquired from others, and of all agreements, documents and instruments evidencing any of the foregoing or under which any of the foregoing may have been issued, created assumed or guaranteed, including without limitation, charges, commissions, interests, expenses, fees, costs and reasonable attorneys' fees chargeable to Secured Party in connection with any or all of the foregoing (all of the foregoing being herein referred to, jointly and severally, as the "Obligations"). 2. Description of Collateral. The Collateral is described as follows: (a) All equipment in all forms, wherever located, now or hereafter existing, including but not limited to all office equipment and furniture, all machinery, and all parts thereof and accession thereto; (b) All inventory in all of its forms, wherever located, now or hereafter existing, including but not limited to (i) raw materials and work in progress, finished goods and materials used or consumed in the manufacture or production, (ii) goods in which the Borrower has an interest in mass or a joint or other interest or right of any kind, and (iii) goods which are returned to or repossessed by the Borrower; (c) All accounts, contract rights, chattel paper, instruments, general intangibles and other obligations of any kind now or hereafter existing arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights now or hereafter existing in and to all security agreements, leases and other contract rights securing or relating to such accounts, contract rights, chattel paper, instruments, general intangibles or obligations; (d) All vehicles; and (e) All proceeds of any kind of any and all of the foregoing and, to the extent not otherwise included, all payments under insurance, or any indemnity, warranty or guaranty, payable by reason of loss of or damage to any of the foregoing. 3. Term of Security Agreement. This Agreement shall continue, and Secured Party shall retain its security interest in the Collateral, until (a) payment in full of all amounts due under or by virtue of the Notes and any provision of this Agreement, and (b) the full performance and discharge of all Obligations. 2 4. Subordinated Debt. The Secured Party acknowledges that the indebtedness that this Agreement secures is and shall be subordinate, to the extent and in the manner hereinafter set forth in Section 3 of the Note, to the prior payment in full of all obligations of the Borrower now or hereafter existing under any secured borrowings by the Borrower, whether such borrowings be in the form of a loan, equipment lease financing or pursuant to any other financing arrangement with a bank, equipment lease company or other financial institution, whether for principal, interest (including, without limitation, interest accruing after the filing of a petition initiating any proceeding referred to below, whether or not such interest accrues after the filing of such petition for purposes of the Federal Bankruptcy Code or is an allowed claim in such proceeding), fees, expenses or otherwise (such obligations being the "Senior Obligations"). For the purposes of this Agreement, the Senior Obligations shall not be deemed to have been paid in full unless and until the lenders thereunder (the "Senior Lenders") shall have received payment of the Senior Obligations in full in cash. 5. Default. The occurrence of any one of the following events or conditions shall constitute a default under this Agreement: (a) the Borrower fails to pay when due the full amount of interest then accrued on the Note, or fails to pay when due the full amount of any principal payment on the Note, and (in either case) such nonpayment continues for ten (10) days; (b) the Borrower fails to perform or observe any other material provision contained in the Note, or any other agreement executed in connection with the transactions contemplated by the Note, and such default continues for a period of thirty (30) days after receipt of written notice thereof; (c) any representation or warranty made in this Agreement, or in any writing furnished by the Borrower to the Secured Party, is false or misleading (taken as a whole) in any materially adverse respect on the date made or furnished; or (d) the Borrower makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts as they become due; or an order, judgment or decree is entered adjudicating the Borrower to be bankrupt or insolvent is entered under the federal Bankruptcy Code; or the Borrower petitions or applies for the appointment of a custodian, trustee, receiver or liquidator of the Borrower, or any substantial parts of the assets of the Borrower; or commences any proceeding relating to the Borrower under any bankruptcy reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; or any such petition or application is filed, or any such proceeding commenced, against the Borrower and either (A) the Borrower by any act indicates its approval thereof or (B) such petition, application or proceeding is not dismissed within 60 days. 6. Secured Party's Remedies. Upon default as specified in section 5, Secured Party may, at its option, exercise any one or more of the following rights, subject to the rights of Senior Lenders set forth in Section 3 of the Note: (a) declare all unpaid principal and accrued interest under the Notes immediately due and payable; (b) exercise its rights and remedies under the California Commercial Code as a secured creditor having a security interest in the Collateral, and in particular, sell all or any part of the Collateral at one or more public or private sales to be conducted in California, on at least thirty (30) days' prior notice and otherwise in a commercially reasonable manner and upon reasonable terms and conditions, taking into account all the circumstances; and (c) exercise any and all further rights or remedies of Secured Party under the California Commercial Code or other applicable law. To the extent permitted by law, Debtor hereby waives all requirements for the exercise of any of Secured Party's remedies other than those provided in this Agreement. Secured Party shall be entitled to enforce any of the 2 3 remedies in this section successively or concurrently. The enforcement of any remedy provided in this section shall not prejudice the right of Secured Party to pursue any other or further remedy which it may have. 7. Disposition of Proceeds of Sale of Collateral. Secured Party may retain from the proceeds of any sale of the Collateral provided for in Section 6 an amount sufficient to pay any and all amounts due Secured Party under the Notes or this Agreement, together with all costs and expenses of preparing for, promoting, conducting and closing the sale, including reasonable attorneys' fees. Secured Party shall then pay any balance of the proceeds to the Borrower, except as otherwise provided by law, subject to the rights of the holder of any then existing lien of which Secured Party has notice. 8. Estoppel or Waiver. In addition to the specific provisions of Section 6, Secured Party shall have the right to exercise or to refrain from exercising any rights, powers or remedies under the Notes or this Agreement successively or concurrently, and this shall not operate to estop or prevent Secured Party from exercising any further or additional right, power or remedy it may have. No act or failure to act on the part of Secured Party under this Agreement shall be deemed or construed to be a waiver of or an election with respect to any right, power or remedy Secured Party have under this Agreement or the Notes, or that may otherwise be available to Secured Party. 9. Further Cooperation. The Borrower agrees that upon reasonable request by Secured Party, the Borrower will promptly execute and deliver any documents, and take all additional actions reasonably deemed necessary or desirable by Secured Party to effect the purposes of this Agreement. 10. Personal Property. The parties hereby agree that the Collateral is, and shall remain during the term of this Agreement, personal property. At no time shall the Collateral, or any portion thereof, be fixtures, trade or otherwise, even though attached or appurtenant to any building or real estate. 11. Financing Statement. (a) Concurrently with the execution and delivery of this Agreement, the Borrower shall execute and deliver a financing statement on Form UCC-1 with respect to the Collateral and shall cause said financing statement to be filed with the Uniform Commercial Code Division of the Office of the California Secretary of State. From time to time, as reasonably requested by Secured Party, the Borrower shall execute and deliver to Secured Party such additional documents and instruments as may be necessary to perfect and maintain Secured Party's security interest in the Collateral. (b) Upon termination of the security interest provided for herein, each Secured Party shall promptly execute and deliver to the Borrower any and all documents (including a termination statement in a form suitable for filing under the Uniform Commercial Code of the State of California) which the Borrower may deem to be necessary or appropriate in order to adequately evidence the termination of such security interest. 12. Severability. If any provision of this Agreement is determined to be invalid or unenforceable, all of its other provisions shall nevertheless remain in full force and effect. 3 4 13. Notices. All notices, requests and other communications required or permitted under this Agreement shall be in writing and may be delivered personally or sent by first class mail, postage prepaid and addressed as follows: To the Borrower: Medical Science Systems, Inc. 4400 MacArthur Blvd., Suite 980 Newport Beach, California 92660 Attention: Paul J. White Secured Party: ------------------------------- ------------------------------- ------------------------------- Any notice, request or other communication under this Agreement shall be effective when received by the addressee, but if sent by registered or certified mail postage prepaid and addressed as provided above, it shall be effective exactly three (3) business days after deposit in the United States Mail anywhere in the United States. The parties may change their addresses as listed above by giving notice of the new address to the other party in conformity with this Section. 14. Binding Upon Successors. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties. 15. Entire Agreement. This Agreement, together with the Notes and any financing statement executed in connection with this Agreement, is intended by the parties as the final, complete and exclusive expression of the terms and conditions of their agreement, and supersedes all prior agreements and representations. 16. Captions. The captions accompanying each Section of this Agreement are for convenience only and shall not be deemed part of the context of this Agreement. 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 18. Counterparts. This Agreement may be executed in counterparts, including electronically transmitted counterparts, each of which shall be deemed to be an original and shall be binding on any person who has signed it. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. SECURED PARTY MEDICAL SCIENCE SYSTEMS, INC. By: By: -------------------------- -------------------------- Paul J. White, President -------------------------- 4 EX-4.5 12 FORM OF WARRANT AGREEMENT 1 EXHIBIT 4.5 MEDICAL SCIENCE SYSTEMS, INC. WARRANT AGREEMENT THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS AN EXEMPTION THEREFROM IS AVAILABLE. This Warrant (the "Warrant") is entered into by and between Medical Science Systems, Inc., a Texas corporation (the "Company"), and _________________ ("Holder") as of the 19th day of August, 1997. RECITALS -------- WHEREAS, the Company has issued and sold to Holder a subordinated promissory note in the principal amount of $____________ (the "Note"); WHEREAS, in consideration for the loan to the Company pursuant to the Note, the Company desires to grant to Holder warrants (the "Warrants") to purchase 10,000 shares of Common Stock for each $50,000 principal amount of the Note; and WHEREAS, the Company desires to evidence such Warrants by executing and delivering this Warrant Agreement (the "Agreement"). NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the adequacy and receipt of which are irrevocably acknowledged, the parties hereto agree as follow. 1. DESCRIPTION; EXECUTION: REGISTRATION. (a) This certifies that, for value received, the Holder is hereby granted warrants to purchase _________ shares of the Company's common stock, (the "Common Stock") at the exercise price and on the terms set forth below. The Company shall cause to be issued to the Holder a certificate in the form attached hereto, as soon as practicable after the execution of the Agreement (the "Warrant Certificate"). (b) This Agreement shall be executed on behalf of the Company by its President. Upon delivery of this Warrant to the Holder, this Agreement shall be binding upon the Company, and the Holder shall be entitled to all the benefits set forth herein. 2. TERM OF WARRANTS. (a) This Warrant shall remain exercisable as provided in Section 3 until the close of business on the earlier of (i) the date five (5) years from the date first written above or (ii) the Call Date, as defined in paragraph (b) below (the "Expiration Date"). (b) Upon the occurrence of the shares of the Company's Common Stock being traded on any national or regional stock exchange or on the automated quotation system of the National Association of Securities Dealers, Inc. ("NASDAQ") and the closing price of the Common Stock equals or exceeds $12.00 per share for a period of thirty (30) consecutive trading days, then the Company may, at the option of the Board of Directors, establish a date on or before which all of the Warrants must be exercised (the "Call Date"). Notwithstanding anything herein to the contrary, any Warrants which are not exercised in the manner provided in Section 3 on or before the Call Date shall automatically and without further action by the Company expire and terminate. The Company shall give each holder of Warrant written notice of the Call Date at least sixty (60) days in advance. 2 3. EXERCISE OF WARRANT. (a) The Warrant shall be immediately exercisable. At any time until the Expiration Date, the Holder shall have the right to purchase from the Company (and the Company shall promptly issue to the Holder) up to __________ shares of Common Stock at the Exercise Price (as defined below) by surrendering the appropriate Warrant Certificate and the Subscription Form attached hereto to the Company at its executive offices and paying the aggregate Exercise Price for the shares of Common Stock to be purchased, in cash or by check or by the delivery of the shares of Common Stock having a current fair market value equal to the exercise price, which shares may be the shares underlying the warrants. (b) The Warrants may be exercised in whole and in part, but not in increments of less than 100 shares. In case of a partial exercise, the Warrant Certificate shall be surrendered and a new Warrant Certificate of the same tenor and for the purchase of the number of shares not purchased upon such partial exercise shall be issued by the Company to the Holder hereof. Warrants shall be deemed to have been exercised immediately prior to the close of business on the date of their surrender for exercise as provided above, and the person or entity entitled to receive the shares of Common Stock issuable upon the exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. Prior to any such exercise, neither the Holder nor any person entitled to receive shares of Common Stock issuable upon exercise shall be or have any of the rights of a shareholder of the Company. No adjustment shall be made for dividends or other shareholder rights for which the record date is prior to the date of exercise. As soon as practicable on or after such date, the Company shall issue in the name of, and deliver to the person or persons entitled to receive, a certificate or certificates for the full number of shares of Common Stock issuable upon such exercise. 4. EXERCISE PRICE; ADJUSTMENT. 4.1 Exercise Price. The initial Exercise Price for each Share issuable pursuant to the Warrants shall be Five Dollars and Fifty Cents ($5.50), adjusted as provided below. 5. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and kind of securities purchasable upon the exercise of the Warrants and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events, as follows: 5.1 Adjustments. The number of shares of Common Stock purchasable upon the exercise of each Warrant and the Exercise Price thereof shall be subject to adjustment as follows: (a) In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its shares of Common Stock, or (iv) issue, by reclassification of its shares of Common Stock, other securities of the Company, the number of shares of Common Stock purchasable upon exercise of the Warrant immediately prior thereto shall be adjusted so that the holder of the Warrant shall be entitled to receive the kind and number of shares of Common Stock or other securities of the Company which such holder would have owned or would have been entitled to receive immediately after the happening of any of the events described above, had the Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. Any adjustment made pursuant to this Subsection 5.1(a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) In case the Company shall distribute to all or substantially all holders of its shares of Common Stock, evidences of its indebtedness or assets (excluding cash dividends or distributions out of earnings) or rights, options, warrants or convertible securities containing the right to subscribe for or purchase shares of Common Stock, then in each case the number of shares of Common Stock thereafter 2 3 purchasable upon the exercise of the Warrant shall be determined by multiplying the number of shares of Common Stock theretofore purchasable upon exercise of such Warrant by a fraction, of which the numerator shall be the then Current Market Price (as defined in Section 7.1) on the date of such distribution, and of which the denominator shall be such Current Market Price on such date minus the then fair value (determined by the Company's Board of Directors) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options, warrants or convertible securities applicable to one Unit. Such adjustment shall be made whenever any such distribution is made and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. (c) No adjustment in the number of shares of Common Stock purchasable pursuant to the Warrants shall be required unless such adjustment would require an increase or decrease of at least one percent in the number of shares of Common Stock then purchasable upon the exercise of the Warrant or, if the Warrant is not then exercisable, the number of shares of Common Stock purchasable upon the exercise of the Warrants on the first date thereafter that the Warrant become exercisable; provided, however, that any adjustments which by reason of this Subsection 5.1(c) are not required to be made immediately shall be carried forward and taken into account in any subsequent adjustment. (d) Whenever the number of shares of Common Stock purchasable upon the exercise of a Warrant is adjusted as herein provided, the Exercise Price payable upon exercise of the Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of shares of Common Stock purchasable upon the exercise of such Warrant immediately prior to such adjustment, and of which the denominator shall be the number of shares of Common Stock so purchasable immediately thereafter. (e) Whenever the number of shares of Common Stock purchasable upon the exercise of a Warrant or the Exercise Price is adjusted as herein provided, the Company shall cause to be promptly mailed to the Holder by first class mail, postage prepaid, notice of such adjustment or adjustments. (f) For the purpose of this Section 5, the term "shares of Common Stock" shall mean (i) the class of shares of Common Stock designated as Common Stock of the Company at the date of this Agreement, or (ii) any other class of stock resulting from successive changes or reclassification of such shares of Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. 5.2 No Adjustment for Dividends. Except as provided in Section 5.1 hereof, no adjustment in respect of any dividends or distributions out of earnings shall be made during the term of a Warrant or upon the exercise of a Warrant. 5.3 No Adjustment in Certain Cases. No adjustments shall be made pursuant to Section 5 hereof in connection with the grant or exercise of presently authorized or outstanding options to purchase shares of Common Stock under the Company's existing stock option plan or the exercise of presently outstanding warrants to purchase shares of Common Stock. 5.4 Preservation of Purchase Rights upon Reclassification, Consolidation, etc. In case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale or conveyance to another corporation of the property, assets or business of the Company as an entirety or substantially as an entirety, the Company or such successor or purchasing corporation, as the case may be, shall execute with the Holder an agreement that the Holder shall have the right thereafter, upon payment of the Exercise Price in effect immediately prior to such action, to purchase, upon exercise of each Warrant, the kind and amount of shares of Common Stock and other securities and property which it would have owned or have been entitled to receive after the happening of such consolidation, merger, sale or 3 4 conveyance had each Warrant been exercised immediately prior to such action. In the event of a merger described in Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended, in which the Company is the surviving corporation, the right to purchase shares of Common Stock under the Warrant shall terminate on the date of such merger and thereupon the Warrant shall become null and void, but only if the controlling corporation shall agree to substitute for the Warrant its warrant which entitle the holders thereof to purchase upon their exercise the kind and amount of shares of Common Stock and other securities and property which they would have owned or been entitled to receive had the Warrant been exercised immediately prior to such merger. Any such agreements referred to in this Subsection 5.4 shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 5 hereof. The provisions of this Subsection 5.4 shall similarly apply to successive consolidations, mergers, sales or conveyances. 6. REGISTRATION RIGHTS The shares of Common Stock that Holder will hold upon exercise of the Warrant(s) (the "Registrable Securities"), will be subject to the following registration rights: (a) Demand Registration On Form S-3. After its initial public offering, the Company shall use its best efforts to qualify for registration on Form S-3 or any comparable successor form. After the Company has qualified for the use of Form S-3, Holders of Registrable Securities shall have the right to demand one (1) registration on Form S-3 (such demand shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such Holder or Holders), provided however, that the Company shall be obligated to effect registration only if the Holders of at least fifty percent (50%) of the then outstanding Registrable Securities have joined in the demand. (b) Notification of Demand. The Company shall, upon receipt of demand brought by Holders of at least fifty percent (50%) of the then outstanding Registrable Securities, notify the other Holders of Registrable Securities who are not listed in the demand. Said Holders shall have twenty (20) calendar days in which to respond to the Company and indicate whether or not they choose to join in the demand. Holders not so responding shall be deemed to have elected not to join in the demand. (c) Restriction on Sales. Notwithstanding anything herein to the contrary, each of the holders of Registrable Securities hereby agrees, upon the request of any regulatory agency having jurisdiction over the Company, not to sell, transfer or otherwise dispose of the Registrable Securities for a period of one year after the initial public offering. Each holder shall execute and deliver to the Company any agreements, documents or instruments as may be required by the Company or any governmental agency to evidence such one year restriction on sales, transfers and dispositions. 7. FRACTIONAL SHARES OF COMMON STOCK; ISSUANCE OF SHARES OF COMMON STOCK; LEGENDS. 7.1 Fractional Shares of Common Stock. The Company shall not be required to issue fractional shares of Common Stock on the exercise of the Warrant. If any fraction of a Unit would, except for the provisions of this Section 7.1, be issuable on the exercise of a Warrant (or specified portion thereof), the Company shall in lieu thereof pay an amount in cash equal to the then Current Market Price, multiplied by such fraction. For purposes of this Agreement, the term "Current Market Price" shall mean (i) if the shares of Common Stock are traded in the over-the-counter market and not in the NASDAQ National Market System nor on any national securities exchange, the average of the per Unit closing bid price of the shares of Common Stock on the thirty (30) consecutive trading days immediately preceding the date in question, as reported by NASDAQ or an equivalent generally accepted reporting service, or (ii) if the shares of Common Stock are traded in the NASDAQ National Market System or on a national securities exchange, the average for the thirty (30) consecutive trading days immediately preceding the date in question of the daily per Unit closing prices of the shares of Common Stock in the NASDAQ National Market System or on the principal stock exchange on which it is listed, as the case may be. For purposes of clause (i) above, if trading in the shares of Common Stock is not reported by NASDAQ, the bid price referred to in said clause 4 5 shall be the lowest bid price as reported in the "pink sheets" published by National Quotation Bureau, Incorporated. The closing price referred to in clause (ii) above shall be the last reported sale price or, in the case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, in either case in the NASDAQ National Market System or on the national securities exchange on which the shares of Common Stock are then listed. 7.2 Issuance of Shares of Common Stock. All shares of Common Stock issued upon exercise of the Warrant will be duly authorized, validly issued, fully paid and nonassessable. 7.3 Legends. If the shares of Common Stock to be issued upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended, then the certificates representing such shares of Common Stock shall bear a legend substantially in the following form: THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR APPLICABLE STATE SECURITIES LAWS AND ARE RESTRICTED SECURITIES. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT AND STATE SECURITIES LAWS. 5 6 8. TRANSFERABILITY. The Warrant may not be transferred, sold or otherwise disposed of, except by will or devise and by the laws of descent. Any attempt to transfer, sell or otherwise dispose of this Warrant (except as provided above) shall be void and shall not convey any rights or privileges to the transferee. 9. MISCELLANEOUS. 9.1 Notices. All notices, requests, demands and other communications required or permitted to be given hereunder shall be deemed to have been duly given if in writing and delivered personally, given by prepaid telegram, or mailed first class, postage prepaid, registered or certified mail, return receipt requested, to the following addresses: If to the Company: Medical Science Systems, Inc. 4400 MacArthur Blvd., Suite 980 Newport Beach, California 92660 Attn: Paul J. White With a copy to: Jeffers, Wilson, Shaff & Falk, LLP 18881 Von Karman Avenue, Suite 1400 Irvine, California 92612 Attention: Christopher A. Wilson, Esq. If to the Holder: Any party may change the address to which such communications are to be directed to it by giving written notice to the other party. Except as otherwise provided in this Warrant, all notices shall be deemed to be given when delivered in person, or if placed in the mail as aforesaid, then two (2) days thereafter. 9.2 Modifications. The parties may, by mutual consent, amend, modify, supplement and waive any right under this Warrant in any manner agreed by them in writing at any time. 9.3 Entire Agreement. This Agreement and any documents, instruments or agreements specifically referred to herein, set forth the entire agreement and understanding of the parties with respect to the transactions contemplated hereby and supersede all prior agreements, arrangements and understandings relating to the subject matter hereof. 9.4 Headings. The section and paragraph headings contained in this Warrant are for convenient reference only, and shall not in any way affect the meaning or interpretation hereof. 9.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without any regard to the choice of law provisions thereof. 6 7 9.6 Severability. If any provision of this Agreement shall be held to be invalid, illegal or unenforceable, it shall be deemed severable from the remaining provisions of this Agreement which shall remain in full force and effect. 9.7 Waiver. No waiver of any provision of this Agreement or any breach thereof shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) or any other breach hereunder nor shall such waiver constitute a continuing waiver. Either party may waive performance of any provision of this Agreement, the non-performance of which would otherwise constitute a breach of this Agreement, including but not limited to the non-performance of any condition precedent to such party's performance, without affecting the enforceability of this Agreement or the provisions contained herein. 9.8 Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. The Company may not assign this Agreement without the prior written consent of the Holder. Holders may transfer and assign the Warrant only as provided in Section 8. Any assignment by either party in violation of the foregoing shall be void. 9.9 Attorneys' Fees. If any legal action is instituted to enforce or interpret the terms of this Warrant, the prevailing party in such action shall be entitled to actual attorneys' fees in addition to any other relief to which the party is entitled. IN WITNESS WHEREOF, the parties have executed this instrument as of the date first written above. MEDICAL SCIENCE SYSTEMS, INC. A TEXAS CORPORATION By: ------------------------------- Paul J. White, President HOLDER ----------------------------------- Signature ----------------------------------- Printed Name 7 8 WARRANT SUBSCRIPTION FORM (To be executed only upon exercise of Warrant) The undersigned Holder of this Warrant hereby irrevocably exercises this Warrant for the purchase of that number of shares of Common Stock of MEDICAL SCIENCE SYSTEMS, INC. set forth below, up to a maximum of ______________ shares of Common Stock (or such other number of shares of Common Stock as may be issuable upon the exercise of this Warrant pursuant to the adjustment provisions hereof), and hereby makes payment of the aggregate Exercise Price therefor which is also set forth below, all on the terms and subject to the conditions specified in this Warrant. Number of Shares of Common Stock: ------- x $5.50 Aggregate Purchase Price paid: $ ------- Dated: --------------------- HOLDER: ----------------------------------- (Signature) ----------------------------------- (Please print) ACCEPTED: MEDICAL SCIENCE SYSTEMS, INC. a Texas corporation By: ------------------------- Title: ---------------------- EX-4.6 13 FORM OF WARRANT CERTIFICATE 1 EXHIBIT 4.6 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS AN EXEMPTION THEREFROM IS AVAILABLE. Warrant No._______ WARRANT CERTIFICATE WARRANT TO PURCHASE _______________ SHARES OF COMMON STOCK VOID AFTER 5:00 P.M., CALIFORNIA TIME, ON _____________ ___, _____ (UNLESS EARLIER CALLED BY COMPANY) This certifies that, for value received, _________________________, the registered holder hereof or assigns (the "Holder"), is entitled to purchase from MEDICAL SCIENCE SYSTEMS, INC., a Texas corporation (the "Company"), at any time before the earlier of (i) 5:00 p.m. California Time, on July __, 2002 (the date five (5) years after the date of this Warrant Certificate) and (ii) the "Call Date" (as defined in the Warrant Agreement) at the exercise price per share of $5.50 (the "Exercise Price"), ____________ shares of Common Stock (the "Shares"). The number of Shares purchasable upon exercise of the Warrant evidenced hereby and the Exercise Price per Share shall be subject to adjustment from time to time as set forth in the Warrant Agreement referred to below. The Warrants evidenced hereby may be exercised in whole or in part by presentation of this Warrant Certificate with the Subscription Form attached hereto duly executed and simultaneous payment of the Exercise Price (subject to adjustment) at the principal office of the Company in Newport Beach, California. Payment of such price shall be made at the option of the Holder in cash or by certified check or bank draft, or by the delivery of shares of Common Stock having a value equal to the Exercise Price, all as provided in the Warrant Agreement. Upon any partial exercise of the Warrants evidenced hereby, there shall be issued to the Holder a new Warrant certificate in respect of the Shares evidenced hereby which shall not have been exercised. This Warrant certificate may be exchanged at the office of the Company by surrender of this Warrant certificate properly endorsed either separately or in combination with one or more other Warrants for one or more new Warrants to purchase the same aggregate number of Shares as here evidenced by the Warrant or Warrants exchanged. No fractional Shares will be issued upon the exercise of rights to purchase hereunder, but the Company shall pay the cash value of any fraction upon the exercise of one or more Warrants. The Warrants evidenced hereby are not transferable except in the manner and subject to the limitations set forth in the Warrant Agreement. The number of Shares issuable upon exercise of this Warrant to acquire the Shares shall be subject to adjustment as provided in Section 5 of the Warrant Agreement. The Holder hereof may be treated by the Company and all other persons dealing with this Warrant Certificate as the absolute owner hereof for all purposes and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding, and until such transfer is entered on such books, the Company may treat the Holder hereof as the owner for all purposes. MEDICAL SCIENCE SYSTEMS, INC. Dated: , 1997 --------------------------------- -------------- Paul J. White, President EX-4.7 14 $500,000 TERM LOAN WITH BANK OF AMERICA 1 EXHIBIT 4.7 [BANK OF AMERICA LOGO] =============================================================================== [ ] Business Line [X] Business Loan Agreement Secured TO: Bank of America National Trust and Savings Association Business Lending Services #1738 101 S. Marengo Avenue, 3rd Floor Pasadena, CA 91122 - ----------------------------- ----------------------- ------------------------ CUSTOMER NAME LINE OF CREDIT/LOAN NO. CREDIT LIMITATION AMOUNT MEDICAL SCIENCE SYSTEMS, INC. 0740829-9002 $500,000 .00 - ----------------------------- ----------------------- ------------------------ - --------------- -------------------------------- BRANCH NO. DEPOSIT ACCOUNT NO. ("ACCOUNTS") 6155 06940-18831 - --------------- -------------------------------- INTRODUCTION. This Agreement dated as of June 27, 1997, is entered into between MEDICAL SCIENCE SYSTEMS, INC. _________________________________________________ _______________________________________________________________________________ (the "Borrower") and Bank of America National Trust and Savings Association (the "Bank") concerning the Borrowing Business Loan credit facility with the Bank. In consideration of, and to induce the Bank to make available to the Borrower the Credit facility described herein, the Borrower agrees and warrants as follows: - ------------------------------------------------------------------------------- [ ] I. THE LINE OF CREDIT - ------------------------------------------------------------------------------- A. NATURE OF THE LINE. If the box above is checked, the Bank has made available to the Borrower a revolving line of credit ("Line") in the principal amount shown above as "Credit Limit" subject to the terms and conditions of this Agreement. This means that the Borrower, or any person provided for in Section I.C. and I.D. below, may request an advance of all or a part of the Line at any time while the Line is available. Any amount repaid by the Borrower becomes available for the Borrower to reborrow after the expiration of a hold period for payments by personal checks of up to eleven business days. If the Bank delays the availability of funds, it will mail to the Borrower a notice within one business day. B. ADVANCES. Advances under the Line may be in any amount not to exceed the Credit Limit remaining available. Advances may be made by writing a credit line check or by telephone authorization deposited into the Borrower's account listed above, if any, or such other of the Borrower's accounts with the Bank as designated by the Borrower in writing (the "Account"). C. TELEPHONE AUTHORIZATION. The Bank may honor telephone instructions for advances or repayments given by any one of the individuals who signed the application for this Line on the Borrower's behalf, or any other individual designated by any one of such authorized individuals. Repayments authorized by telephone shall be withdrawn from the Borrower's Account. The Borrower indemnifies and excuses the Bank (including its officers, employees, and agents) from all liability, loss, and costs in connection with any act resulting from telephone instructions it reasonably believes are made by any individual authorized by the Borrower to give such instructions. This indemnity and excuse will survive this Agreement's termination. D. CREDIT LINE CHECKS. The Bank will issue checks to the Borrower at no cost. The Borrower may borrow money under the Line (up to the Credit Limit remaining available) by writing checks. The Borrower agrees not to write checks in an amount less than $300, and not to write more than five checks in any one billing cycle. The Bank may charge a fee for any checks written for a lesser amount, or if more than the permitted number of checks are written. Each paid check will be charged to the Line. checks may be signed by any one individual who signed the application for credit. Only one signature shall be required on any check. E. OVERDRAFT PROTECTION. [ ] If the box to the left is checked, the following paragraph applies: the Line has been linked for overdraft protection to the following business checking account with the Bank: N/A. If the business checking account is overdrawn, the Bank will transfer funds from the Line to cover the overdraft in multiples of $50 as long as there is sufficient available credit on the Line. Overdraft protection is not accessible by in-branch transaction, ATM withdrawal or transfer through your home or office computer. F. DEFAULT. The Bank may, in its sole discretion, refuse to make advances or pay checks hereunder if an Event of Default has occurred (as defined in Section IX, below). G. AVAILABILITY OF THE LINE. Advances under the Line will be available until the earlier of the following (the "Termination Date"): (1) _____________________; or (2) the date the Bank terminates the Line because of an Event of Default pursuant to Section IX; or (3) the date the Line is cancelled by the Borrower pursuant to Section IV.A. On the Termination Date, no further advances will be available to the Borrower. The entire outstanding principal balance of the Line, together with all accrued and unpaid interest thereon, and fees and charges owing in connection therewith, shall be due and payable in full on the Termination Date. H. CREDIT LIMIT. A credit limit has been set on the Line and is shown above as "Credit Limit". The Borrower agrees not to allow the principal amount which the Borrower owes at any one time under this Agreement to exceed the Credit Limit. The Bank does not have to honor any request for an advance or credit line check which, when added to the unpaid balance, would exceed the Credit Limit. - ------------------------------------------------------------------------------- [X] II. THE LOAN - ------------------------------------------------------------------------------- A. AMOUNT. If the box above is checked, the Bank has made available to the Borrower a term loan ("Loan") in the principal amount shown above as "Loan Amount" subject to the terms and conditions of this Agreement. - ------------------------------------------------------------------------------- [ ] III. PAYMENTS, INTEREST AND FEES - ------------------------------------------------------------------------------- A. PAYMENTS. 1. AMOUNT. The Borrower promises to pay to the Bank principal and/or interest payments as indicated by the box checked below. [ ] a. INTEREST ONLY. The minimum payment due each month .... be the amount of accrued interest. [ ] b. PRINCIPAL AND INTEREST. Principal and interest in .......... monthly installments of ______________________________________. _______________________________ Dollars ($____________________ [X] c. PRINCIPAL PLUS INTEREST. Principal in 60 monthly installments of Eight Thousand Three Hundred Thirty Four and 00/100 Dollars ($8,334.00) plus interest. In addition, the Borrower must pay any amounts past due an amount that exceeds the Credit Limit, if applicable, and any other charges assessed as described in this Agreement. 2. PAYMENT DATE. The payments shall be due and payable monthly on the 1st day of each month, beginning August 1, 1997 and continuing until July 1, 2002, on which date any unpaid principal and interest shall be paid in full. If the payment date falls on a Saturday or Sunday, or on a holiday on which the Bank is closed, the payment shall be due on the next business day. If this is a Loan, the principal and interest may also at the Bank's option be due and payable in full upon an Event of Default in accordance with Section IX, herein. 3. PAYMENT ALLOCATION. All sums received from the Borrower for application to the Line or Loan shall be applied to the Borrower... obligation under the Line or Loan in such order as determine by the Bank. 4. PREPAYMENT. The Borrower can pay the balance of the credit outstanding under this Agreement in full or part at any time without premium or penalty. The Bank may accept partial payments, whether or not marked "paid in full" without losing the Bank's rights under this Agreement. 5. PAYMENT ADDRESS. Payments should be made to: Bank of America National Trust and Savings Association Business Lending Services #1738 P.O. Box 6012 Pasadena, CA 91102-6012 6. CREDITING THE PAYMENT. If the Bank receives the payment at the above address by 9:00 a.m. on any business day, except Saturday or Sunday, the Bank will credit the payment to the amount outstanding under this Agreement as of that day. Payments may also be made at any of the Bank's California branches. Payments received at a branch after 4 p.m. (7 p.m. on Fridays) or on a Saturday, Sunday or holiday will be posted the following business day. 7. AUTOMATIC REPAYMENT. [X] If the box to the left is checked, the following paragraphs apply. a. AUTOMATIC PAYMENT SERVICE. The Borrower hereby chooses to have its principal and interest payments made pursuant to the Bank's Automatic Payment Service, and authorizes the Bank to collect all sums due hereunder by charging the full amount hereof to the Borrower's Account. Should there be insufficient funds in the Account to pay when due all or any portion of the amount due, the full amount of such deficiency shall be immediately due and payable by the Borrower. b. TERMINATION. If, for any reason during the term of this Agreement, this Automatic Payment Service is terminated by the Borrower or the Bank, the interest rate under this Agreement will increase by one (1) percentage point, the amount of each payment will be increased accordingly, and the Borrower agrees to pay a documentation fee of $75. 2 B. Interest Rate 1. Interest Rate Options. The principal balance outstanding under this Agreement shall bear interest per annum equal to: /x/ a. Variable Rate. The Bank's Reference Rate plus 1,750 percentage points, as said Reference rate may change from time to time. The Reference Rate is the rate of interest publicly announced from time to time by the Bank in San Francisco, California as its Reference Rate. The Reference Rate is set by the Bank based on various factors, including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above, or below the Reference Rate. Any change in the Reference Rate shall take effect at the opening of business on the day specified in the public announcement of a change in the Bank's Reference Rate. / / b. Fixed Rate. A fixed rate of N/A percentage points. 2. Computation of Interest and Fees. All computations of interest and fees made or called for hereunder shall be calculated on the basis of: /x/ a. 360 day year. A 360 day year and the actual number of days elapsed. This results in more interest or a higher fee than if a 365 day year is used. / / b. 365 day year. An actual 365/366 day year and the actual number of days elapsed. 3. Default Rate. Upon the occurrence and during the continuation of any default under this Agreement, amounts outstanding under this Agreement will at the option of the Bank bear interest at a rate per annum which is five (5) percentage points higher than the rate of interest otherwise provided under this Agreement. This will not constitute a waiver of any default. C. Fees 1. Promise to Pay Fees and Costs. The Borrower promises to pay according to the terms of this Agreement, all amounts outstanding and fees and costs which may be assessed under this Agreement including reasonable attorney's fees (which may include the allocated costs of in-house counsel), court costs, and collection costs. 2. Loan Fee. Upon the date of this Agreement, the Borrower will pay a nonrefundable loan fee of $5,000.00. If this is a Line, this fee may be paid by check, charged to the Account, or treated as an advance. The advance will be subject to all the terms of this Agreement. 3. Overdraft Transfer Fee. Each overdraft advance shall be subject to an overdraft transfer fee equal to 2 percent (2%) of the amount of the advance, subject to a minimum of $3 and a maximum of $15. 4. Late Fees. A late charge of 6% of the unpaid portion of the payment amount, with a minimum fee of $6.00 and a maximum fee of $15.00, may be assessed if payment is not received within fifteen days after the date the payment is due. This fee may be charged by the Bank at its option. 5. Overlimit Fees. An overlimit fee may be assessed each time the Borrower exceeds the Credit Limit, regardless of whether the Bank permits the Borrower to exceed the Credit Limit. 6. Returned Item Fee. The Borrower may be charged a returned item fee each time a payment is returned or if there are insufficient funds in the Account when a payment is attempted through Automatic Payment Service. IV. OTHER TERMS A. Cancellation by the Borrower. The Borrower may cancel this Agreement by written notice to the Bank. The Borrower's request will take effect at the time it is received by the Bank. If there is more than one Borrower, the Bank may treat a request by one of them under this paragraph as a request by all of them. At the time of cancellation, the outstanding balance will be immediately due and payable. B. Statement Copies. A fee may be charged for each statement copy requested, plus an hourly charge for any necessary research time. C. Stop Payments on Credit Line Checks. The Borrower may stop payment on a check as long as the request is received by the Bank prior to the time the check is posted to the Line. The request must include the information which the Bank requires. The Borrower may be charged a fee to place or renew a stop payment order. A stop payment shall be effective for 180 days. The Borrower must renew the stop payment if it wishes the stop payment to be effective for a longer period. In some cases, the Bank may pay a check even if a stop payment is in effect. For example, if a branch of the Bank or another person or entity becomes a "holder in due course" of a check, the Bank may still pay the check and post the amount to the Line. D. Check Certification. The Bank will not certify checks. E. Lost or Stolen Checks. The Borrower must notify the Bank immediately at the Bank of America Address shown at the top of the Agreement if any checks are lost or stolen. F. Cancelled Checks. The Bank will not return the cancelled checks to the Borrower, but will retain photocopies for eight (8) years. The Borrower agrees to examine the monthly billing statement on the Account promptly in order to identify improper or unauthorized transactions. If the Borrower requests a copy of a check, the Borrower must write a letter to the Bank, including the Account Check posted to the billing statement. The Bank may charge a fee for providing a copy of checks. G. Authorized Use. The Checks issued to the Borrower must be used only by the Borrower. If the Borrower permits anyone else to use its checks without the Bank's consent, the Borrower will be obligated to pay for any advances obtained by that person plus any interest and other charges attributable to such advances. H. Return of Checks. At the Bank's request, the Borrower will return to the Bank any unused checks if the Account is terminated. If any such event occurs, the Bank may return unpaid any checks presented against the Account. V. SECURITY A. Security. As security for payment of this Line or Loan and all obligations provided for herein, the Borrower grants to the Bank a security interest in the property described below. The Borrower also grants to the Bank a security interest in all renewals of this property, other property substituted for it, and proceeds. ACCOUNTS RECEIVABLE & INVENTORY O VIN - MISCELLANEOUS EQUIPMENT B. Stock/Bonds. 1. Margin Call. If at any time the Credit Limit, if a Line, or the outstanding balance, if a Loan, to collateral value ratio exceeds 60% for a Line or Loan secured partially or completely by stock, or 65% for a Line or Loan secured only by bonds, the Bank may determine collateral value using any reasonable method. If the additional collateral is not received within the time given in the notice, the Borrower will be in default and the Bank may terminate the Line or Loan as provided in Section IX. 2. Restriction on Use of Funds. The Borrower agrees not to use the Line or Loan to finance the purchase of margin stock (as defined by Regulation U) or to pay obligations incurred in the purchase of such securities. C. Insurance. The Borrower agrees to maintain all risk property damage insurance policies covering the tangible property comprising the security. Each insurance policy must be in an amount acceptable to the Bank. The insurance must be issued by an insurance company acceptable to the Bank and must include a lender's loss payable endorsement in favor of the Bank in a form acceptable to the Bank. If the Borrower fails to maintain insurance on the security described in Paragraph A, above, the Bank may, in its sole discretion, obtain such insurance and the cost of the premiums shall be payable on demand with interest at the interest rate herein. VI. CONDITIONS The Bank must receive the following items in form and content acceptable to the Bank before it is required to extend any credit to the Borrower under this Agreement. A. Authorization. Evidence that the execution, delivery and performance by the Borrower of this Agreement and any instrument or agreement required under this Agreement have been duly authorized. B. Guaranties. Guaranties signed by those persons and in the amounts as required. C. Security Agreement. Signed original security agreement, financing statements and fixture filings (together with collateral in which the Bank requires a possessory security interest), which the Bank requires. D. Evidence of Priority. Evidence that security interests and liens in favor of the Bank are valid, enforceable, and prior to all others' rights and interests, except those the Bank consents to in writing. VII. FINANCIAL STATEMENTS The Borrower represents and warrants that: A. Statements and data submitted in writing by the Borrower to the Bank in connection with this request for credit are true and correct, and said statements truly present the financial condition of the Borrower as of the date thereof and the results of the operations of the Borrower for the period covered thereby, and have been prepared on a consistently maintained basis, in accordance with generally accepted accounting principles or another basis acceptable to the Bank. Since such date there have been no material adverse changes in the ordinary course of business. The Borrower has no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said statements, and the Borrower has not entered into any special commitments or substantial contracts which are not reflected in said statements, other than in the ordinary and normal course of its business, which may have a materially adverse effect upon its financial condition, operations or business as now conducted. B. The representation and warranty contained in Section VII.A. above shall apply to each financial statement submitted pursuant to Section VIII.B. herein and shall be continuous and shall be automatically restated for each such financial statement as of the date of such statement. N-2362-CA 12/96 Page 2 of 4 Classification: Confidential 3 VIII. COVENANTS The Borrower agrees that so long as credit is available under this Agreement and until the Bank is repaid in full, it will, unless the Bank shall otherwise consent in writing: A. INSURANCE. Maintain public liability, property damage and worker's compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses. B. RECORDS AND REPORTS. Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles or another basis acceptable to the Bank on a basis consistently maintained; permit Bank's representative to have access to and to examine its properties, books and records at all reasonable times; and furnish the Bank; (1) Promptly, a notice in writing of the occurrence of any event of default hereunder or of any event which would become an event of default hereunder upon giving of notice, lapse of time, or both; and (2) The following financial information and statements by one year from the date of this Agreement and annually thereafter, and such other information relating to the affairs of the Borrower as the Bank may request from time to time: a. BORROWER'S FINANCIAL STATEMENT. The Borrower's annual financial statements compiled by a Certified Public Accountant ("CPA") acceptable to the Bank; b. BORROWER'S TAX RETURN. The Borrower's federal income tax return (with all K-1 forms attached), together with a statement of any contributions made by the Borrower to any subchapter S corporation or trust, and copies of any extensions of the filing date; c. GUARANTOR'S FINANCIAL STATEMENT. Each guarantor's annual financial statement in form satisfactory to the Bank; and d. GUARANTOR'S TAX RETURN. Copies of each guarantor's federal income tax return (with all K-1 forms attached), together with a statement of any contributions made by the guarantor to any subchapter S corporation or trust, and copies of any extensions of the filing date. C. TYPE OF BUSINESS. Not make any substantial change in the character of its business. D. PURPOSE. Use the proceeds of this loan solely for business purposes. E. OUTSIDE INDEBTEDNESS. Not create, incur, assume or permit to exist any indebtedness for borrowed money other than loans from the Bank except obligations now existing as shown on the credit application or the personal financial statement or data submitted with such application pursuant to Section VII.A, herein; or sell or transfer, either with or without recourse, any accounts or notes receivable or any money due or to become due. F. LIENS AND ENCUMBRANCES. Not create, incur, assume or permit to exist any mortgage, deed of trust, security interest (whether possessory or nonpossessory) or other encumbrance of any kind (including without limitation, the charge upon property purchased under conditional sale or other title retention agreement) upon or on any of its property or assets, or sell, assign, pledge or otherwise transfer for security any of its accounts, contract rights, general intangibles, or chattel paper with or without recourse, whether now owned or hereafter acquired (hereinafter collectively called "Liens"), other than (1) Liens for taxes not delinquent or being contested in good faith in appropriate proceedings; (2) Liens in connection with worker's compensation, unemployment insurance or social security obligations; (3) Mechanics', workmens', materialmens', landlords', carriers', or other like liens arising in the ordinary and normal course of business with respect to obligations which are not due or which are being contested in good faith; (4) Liens on margin stock as declined within Regulation U of the Board of Governors of the Federal Reserve System, as amended from time to time, and (5) Liens in favor of the Bank. G. LOANS, SECONDARY LIABILITIES. Not make any loans or advances to any person or other entity other than in the ordinary and normal course of its business as now conducted; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of its business. H. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Not purchase or otherwise acquire the assets of business of any person or other entity, or liquidate, dissolve, merge or consolidate, or commence any proceedings therefor; or sell any assets except in the ordinary and normal course of its business as now conducted, or sell, lease, assign, or transfer any substantial part of its business or fixed assets, or any property or other assets necessary for the continuance of its business as now conducted, including without limitation the selling of any property or other asset accompanied by the leasing back of the same. I. COMPLIANCE WITH LAWS. Comply with the laws, regulations and orders of any government body with authority over the Borrower's business. J. TRUSTS. Not transfer any of the Borrower's assets to a trust. IX. EVENTS OF DEFAULT The occurrence of any of the following events of default shall, at the Bank's option, terminate the Bank's obligation to extend credit under this Agreement, and make all sums of principal and interest immediately due and payable, all without demand, presentment or notice, all of which are hereby expressly waived and the Bank may exercise all its rights against the Borrower, any guarantor and any collateral as provided by law. A. FAILURE TO PAY INDEBTEDNESS. Failure to pay when due any obligation of the Borrower to the Bank. B. OTHER DEFAULTS. The occurrence of any event of default whether or not waived by the obligee under any other indebtedness extended by any institution or individual to the Borrower. C. BREACH OF COVENANT. Failure of the Borrower to perform any other term or condition of this Agreement binding upon the Borrower. D. BREACH OF WARRANTY. Any of the Borrower's representations or warranties made herein or any statement or certificate at any time given pursuant hereto or in connection herewith shall be false or misleading in any material respect. E. INSOLVENCY; RECEIVER OR TRUSTEE. The Borrower, any guarantor or the indebtedness of the Borrower to the Bank or general partner of the Borrower shall become insolvent; or admit its inability to pay its debts as they mature, or make an assignment for the benefit of creditors; or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business?-?-? F. JUDGMENTS, ATTACHMENTS. Any money judgment, writ, or warrant of attachment, or similar process shall be entered or filed against the Borrower or any guarantor of any of the Borrower's obligations to the Bank or any of its assets and shall remain unvacated, unbonded or unstayed for a period of 10 days or in any event later than 5 days prior to the date of any proposed sale thereunder. G. BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower, any guarantor of the indebtedness of the Borrower to the Bank or general partner of the Borrower. H. MATERIAL ADVERSE CHANGE. A material adverse change occurs in the Borrower's financial condition or the financial condition of any guarantor of the Borrower's obligations to the Bank, which, in the opinion of the Bank, would affect the ability of the Borrower to repay any advances made by the Bank hereunder or any other of the Borrower's obligations hereunder, or of such guarantor to perform under its guaranty. I. GUARANTY. Any guaranty of the indebtedness of the Borrower to the Bank, at any time after the execution and delivery of such guaranty and for any reason other than satisfaction in full of all indebtedness incurred hereunder, ceases to be in full force and effect or is declared to be null and void; or the validity or enforceability thereof is contested in a judicial proceedings; or any guarantor denies that it has any further liability under such guaranty; or any guarantor defaults in any provision of any guaranty; or any financial information provided by any guarantor is false or misleading in any material respect. J. DEATH. The Borrower of any guarantor dies; if the Borrower is a sole proprietorship, any owner dies, if the Borrower is a trust, a trustor dies; if the Borrower is a partnership, any general partner dies; or if the Borrower is a corporation, any principal officer or majority stockholder dies. K. GOVERNMENT ACTION. Any government authority takes action the Bank believes materially adversely affects the Borrower's or any guarantor's financial condition or ability to repay. L. DEFAULT IN SECURITY DOCUMENTS. A default shall occur in any document or instrument provided by the Borrower to the Bank in connection with the security provided the Bank pursuant to Section V.A. herein. M. COLLATERAL VALUE. The Credit Limit, if a Line, or the principal balance, if a Loan, equals or exceeds the collateral value. N. LIEN PRIORITY. The Bank fails to have an enforceable first lien (except for any prior liens to which the Bank has consented in writing) on or security interest in any property given as security for this Line or Loan. If the Borrower is in default the Bank may also without prior notice, do any one or more of the following: (a) exercise any remedies available to a secured party under the Uniform Commercial Code or any other applicable law; (b) proceed in the foreclosure of its security interest in the property described in the paragraph entitled "Security"; (c) sell or otherwise dispose of the property at public or private sale, upon terms and in such manner as it may determine and it may purchase same at such sale; (d) refrain from disposing of the property and continue to maintain possession of the property for such time as it deems appropriate and the Borrower takes the risk of any depreciation to the value of the property pending disposition; or (e) transfer any of the property into the name of the Bank or the Bank's nominee. X. MISCELLANEOUS PROVISIONS A. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Bank, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. B. OTHER AGREEMENTS. Nothing herein shall in any way limit the effect of the conditions set forth in any security or other agreement executed by the Borrower, but each and every condition hereof shall be in addition hereto. 4 C. GOVERNING LAW AND WAIVER. The Borrower understands and agrees that (1) this Agreement will be governed by and interpreted in accordance with the laws of the State of the State of California; and (2) the Borrower waives its right, under Section 1808.21 of the California Vehicle Code, to the confidentiality of its residence address in the records of the Department of Motor Vehicles, and the Borrower authorizes the Bank to request its residence address from the Department of Motor Vehicles if required by the Bank enforcing this Agreement. D. SEVERABILITY. If any provision of this Agreement is held to be unenforceable, such determination shall not affect the validity of the remaining provisions of this Agreement. E. SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and the Bank's successors and assigns. The Borrower agrees that it may not assign this Agreement without the Bank's prior consent. F. HAZARDOUS WASTE INDEMNIFICATION. The Borrower will indemnify and hold harmless the Bank from any loss or liability directly or indirectly arising out of the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence of a hazardous substance. This indemnity will apply whether the hazardous substance is on, under or about the Borrower's property or operations of property leased to the Borrower. The indemnity includes but is not limited to attorney's fees (including the reasonable estimate of the allocated cost to in-house counsel and staff. The indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys and assigns. For these purposes, the term "hazardous substances" means any substance which is or becomes designated as "hazardous" or "toxic" under any federal, state or local law. This indemnity will survive repayment of the Borrower's obligations to the Bank. G. MULTIPLE BORROWERS. If there are two or more Borrowers under this Agreement, each will individually obligated to repay the Bank in full, and all will be obligated to repay the Bank in full, and all will be obligated together. The Bank may terminate the availability of credit under this Agreement if the Bank receives conflicting instructions from the Borrowers. H. ONE AGREEMENT. This Agreement and any related security or other agreements required by this Agreement collectively: (1) represent the sum of the understandings and agreements between the Bank and the Borrower concerning this credit; and (2) replace any prior oral or written agreements between the Bank and the Borrower concerning this credit; and (3) are intended by the Bank and the Borrower as the final, complete and exclusive statement of the terms agreed to by them. In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail. I. CHANGE OF TERMS. The Bank may change any term or condition of this Agreement, to the extent permitted by law, by providing written notice to the Borrower. Any such change shall apply to any unpaid balance outstanding under this Agreement as well as any future transactions under this Agreement. J. NOTICE. AS required herein, notice to the Bank shall be sent to the address shown on the Borrower's latest billing statement, to be effective when received. Any written notice to the Borrower shall be sent to the Borrower's address in the Bank's records, to be effective when deposited in the U.S. mail, postage prepaid, unless otherwise stated in the notice. The Borrower agrees to notify the Bank promptly in writing of a change in the Borrower's mailing address. K. COSTS. If the Bank incurs any expense in connection with administering or enforcing this Agreement, of if the Bank takes collection action under this Agreement, it is entitled to costs and reasonable attorney's fees, including any allocated costs of in-house counsel. At the Bank's option, the Bank may add these costs to the principal amount outstanding under this Agreement. L. ATTORNEY'S FEES. In the event of a lawsuit or arbitration proceeding, the prevailing party is entitled to recover costs and reasonable attorney's fees (including any allocated costs of in-house counsel) incurred in connection with the lawsuit or arbitration proceeding, as determined by the court or arbitrator. M. TELEPHONE MONITORING. To the extent not prohibited by law, the Bank's personnel may listen to telephone calls between the Borrower and the Bank's employees for the purpose of monitoring the quality of service the Borrower receives. N. ARBITRATION. 1. This paragraph concerns the resolution of any controversies or claims between the Borrower and the Bank, including but not limited to those that arise from: (a) This Agreement (including any renewals, extensions of modifications of this Agreement); (b) Any document, agreement or procedure related to or delivered in connection with this Agreement; (c) Any violation of this Agreement; or (d) Any claims for damages resulting from any business conducted between the Borrower and the Bank, including claims for injury to persons, property or business interests (torts). 2. At the request of the Borrower or the Bank, any such controversies or claims will be settled by arbitration in accordance with the United States Arbitration Act. The United States Arbitration Act will apply despite the provisions of paragraph C., "Governing Law and Waiver," above. 3. Arbitration proceeding will be administered by the American Arbitration Association and will be subject to its commercial rules of arbitration. 4. For purposes of the application of the statute of limitations the filing of an arbitration pursuant to this paragraph is the equivalent of the filing of a lawsuit, and any claim or controversy which may be arbitrated under this paragraph is subject to any applicable statute of limitations. The arbitrators will have the authority to decide whether any such claim or controversy is barred by the statute of limitations and, if so, to dismiss the arbitration on that basis. 5. If there is a dispute as to whether an issue is arbitrable, the arbitrators will have the authority to resolve any such dispute. 6. The decision that results from an arbitration proceeding may be submitted to any authorized court of law to be confirmed and enforced. 7. This provision does not limit the right of the Borrower or the Bank to: (a) exercise self-help remedies such as setoff; (b) foreclose against or sell any real or personal property collateral; or (c) act in a court of law, before, during or after the arbitration proceeding to obtain (i) an interim remedy; and/or (iii) additional or supplementary remedies. 8. The pursuit of or a successful action for interim, additional or supplemental remedies, or the filing of a court action, does not constitute a waiver of the right of the Borrower or the Bank, including the suing party, to submit the controversy of claim to arbitration if the other party contests the lawsuit. This Agreement is effective as of the date stated at the top of the first page. MEDICAL SCIENCE SYSTEMS, INC. By /s/ PAUL J. WHITE ----------------------------------------------- Paul J. White, CEO By /s/ KENNETH S. KORMAN ----------------------------------------------- Kenneth S. Korman DDS, Chief Scientific Officer By /s/ MICHAEL G. NEWMAN ----------------------------------------------- Michael G. Newman DDS, Secretary By ----------------------------------------------- EX-4.8 15 $250,000 TERM LOAN WITH BANK OF AMERICA 1 EXHIBIT 4.8 [LOGO] BANK OF AMERICA =============================================================================== TO: Bank of America National Trust and Savings Association BUSINESS LOAN AGREEMENT-FIXED RATE Unit No. 1737 SECURED BY PERSONAL PROPERTY - -------------------------------- 141 MISSION FALLS LANE - -------------------------------- FREMONT, CA 94539 - -------------------------------- - ------------------------------------------- ----------------------------------- CUSTOMER NAME LOAN NO LOAN AMOUNT MEDICAL SCIENCE SYSTEMS, INC. 0740829-9001 $250,000.00 - ------------------------------------------- ----------------------------------- - ------------------ -------------------------------- BANKING OFFICE NO. CHECKING ACCOUNT NO. ("ACCOUNT") 06940 18831 - ------------------ -------------------------------- INTRODUCTION. This Agreement dated as of March 01, 1996 between MEDICAL SCIENCE SYSTEMS, INC. (herein collectively and individually called "Borrower") and Bank of America National Trust and Savings Association (herein called "Bank") governs Borrower's Bank of America National Trust and Savings Association Business Loan ("Loan"). The words Borrower, "you" or "your" mean Borrower. The words "we," "us," or Bank, mean Bank. In consideration of, and to induce the Bank to make available to the Borrower the credit facility described herein, the Borrower agrees and warrants as follows: I. THE LOAN A. AMOUNT. The Bank has made available to the Borrower a term loan ("Loan") in the principal amount of $250,000.00 subject to the terms and conditions of this Agreement. B. INTEREST RATE. 1. Unless modified in accordance with Section 1.B.3 the outstanding principal balance shall bear interest at a fixed rate. The Interest Rate is 9.125 per year. 2. Computation of Interest and Fees. All computations of interest and fees made or called for hereunder shall be calculated on the basis of a 360 day year and the actual number of days elapsed. This results in more interest or a higher fee than if a 365 day year is used. 3. If, for any reason during the term of the loan, the Automatic Repayment service mentioned in I.D.2. is terminated by the Borrower or the Bank, the Interest Rate on the loan will increase by 1% (one percent), the amount of each payment will be increased accordingly, and the borrower agrees to pay a documentation fee of $75. 4. At the Bank's sole option in each instance, any amount not paid when due under this Agreement (including interest) shall bear interest from the due date at the interest rate shown above in paragraph (1). C. SECURITY. As security for payment of this loan and all obligations provided for herein, you grant to us a security interest in the property described below. You also grant to us a security interest in all renewals of this property, other property substituted for it, and proceeds. (1) ACCOUNTS REC & INVENTORY D. PRINCIPAL AND INTEREST PAYMENTS 1. Borrower hereby promises to pay to the Bank principal including interest on the Loan in installments of Five Thousand Two Hundred Twenty One And 77/100 ********************************* Dollars, each payable on the 1st day of each month beginning April 01, 1996, and continuing until March 01, 2001, on which date all unpaid principal and interest shall be paid in the full. The principal and interest on the Loan may also at the Bank's option be due and payable in full upon an event of Default in accordance with Section V herein. 2. Borrower hereby chooses to have the principal and interest payments made pursuant to the Bank's Automatic Repayment service, and authorizes Bank to collect all sums due hereunder by charging the Account the full amount thereof. Should there be insufficient funds in the Account to pay when due all or any portion of the interest due, the full amount of such deficiency shall be immediately due and payable by Borrower. All sums received from Borrower for application to the Loan shall be applied first, to Interest then due, second, to the outstanding principal balance and third, to any fees and charges outstanding. This applies to payments initiated by Borrower and to any sums collected by Bank by charges to the Account. 3. You can pay the outstanding balance on your Loan in full or in part. E. PROMISE TO PAY FEES AND COSTS. For value received, you promise to pay according to the terms of this Agreement, all fees and costs which may be assessed on your Loan including reasonable attorney's fees, court costs and collection costs. F. FEES. Upon execution of this Agreement you will pay a nonrefundable loan fee of $1,875.00. G. CHANGE OF ADDRESS. You agree to notify us promptly in writing of a change in your mailing address. H. LOANS SECURED BY STOCKS/BONDS. 1. Margin Call. If at any time the loan to collateral value ratio exceeds 60% for loans secured partially or completely by stock, or 65% for loans secured only by bonds, we may send you notice requesting additional collateral. If the additional collateral is not received with the time given in the notice, you will be in default. 2. Restrictions on Use of Funds. You agree not to use your Loan to finance the purchase of margin stock (as defined by Regulation U) or to pay obligations incurred in the purchase of such securities. II. CONDITIONS. The Bank must receive the following items in form and content acceptable to the Bank, before it is required to extend any credit to the Borrower under this Agreement. A. AUTHORIZATIONS. Evidence that the execution, delivery and performance by the Borrower of this agreement and any instrument or agreement required under this agreement have been duly authorized. B. GUARANTIES. Guaranties signed by those persons and in the amounts as required. C. SECURITY AGREEMENTS. Signed original security agreements, deeds of trust, financing statements and fixture filings (together with collateral in which the Bank requires a possessory security interest), which the Bank requires. D. EVIDENCE OF PRIORITY. Evidence that security interests and liens in favor of the Bank are valid, enforceable, and prior to all others' rights and interests, except those the Bank consents to in writing. III. FINANCIAL STATEMENTS Borrower represents and warrants that: A. Statements and data submitted in writing by Borrower to Bank in connection with this request for credit are true and correct, and said statements truly present the financial condition of Borrower as on the date thereof and the results of the operations of Borrower for the period covered thereby, and have been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date there have been no material adverse changes in the ordinary course of business. Borrower has no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said statements, and Borrower has not entered into any special commitments or substantial contracts which are not reflected in said statements, other than in the ordinary and normal course of its business, which may have materially adverse effect upon its financial condition, operations or business as now conducted. B. The representation and warranty contained in Section III.A. above shall apply to each financial statement submitted pursuant to Section IV.B herein and shall be continuous and shall be automatically restated for each such financial statement as of the date of such statement. IV. COVENANTS Borrower agrees that so long as Bank may have any commitment to lend or it is indebted to Bank, it will, unless Bank shall otherwise consent to writing: A. INSURANCE. Maintain public liability, property damage and worker's compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses. If the Borrower Page 1 of 3 2 fails to maintain insurance on the security described in Section 1.C. herein, the Bank may, in its sole discretion, obtain such insurance and the cost of premiums shall be payable on demand with interest at the Interest Rate herein. To maintain all risk property damage insurance policies covering the tangible property comprising the collateral. Each insurance policy must be in an amount acceptable to the Bank. The insurance must be issued by an insurance company acceptable to the Bank and must include a lender's loss payable endorsement in favor of the Bank in a form acceptable to the Bank. B. RECORDS AND REPORTS. Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's representatives to have access to and to examine its properties, books and records at all reasonable times; and furnish Bank: (1) promptly, a notice in writing of the occurrence of any event of default hereunder or of any event which would become an event of default hereunder upon giving of notice, lapse of time, or both, and (2) the following financial information and statements and such additional information as requested by the Bank from time to time: (a) by one year from the Agreement date and annually thereafter, the Borrower's annual financial statements, (These financial statements must be complied by a Certified Public Accountant ("CPA") acceptable to the Bank); (b) by one year from the Agreement date and annually thereafter, the Borrower's federal income tax return (with all forms K-1 attached), together with a statement of any contributions made by the Borrower to any subchapter S corporation or trust, and copies of any extensions of the filing date; (c) each guarantor's annual financial statement in form satisfactory to the Bank by one year from the Agreement date and annually thereafter; and (d) copies of each guarantor's federal income tax return (with all forms K-1 attached) by one year from the Agreement date and annually thereafter, together with a statement of any contributions made by the guarantor to any subchapter S corporation or trust, and copies of any extensions of the filing date. C. TYPE OF BUSINESS. Not make any substantial change in the character of its business. D. PURPOSE. The proceeds of this loan shall be used solely for business purposes. E. LOANS, SECONDARY LIABILITIES. Not make any loans or advances to any person or other entity other than in the ordinary and normal course of its business as now conducted; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of its business. F. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Not purchase or otherwise acquire the assets or business of any person or other entity, or liquidate, dissolve, merge or consolidate, or commence any proceedings therefor; or sell any assets except in the ordinary and normal course of its business as now conducted, or sell, lease, assign, or transfer any substantial part of its business or fixed assets, or any property or other assets necessary for the continuance of its business as now conducted, including without limitation the selling of any property or other asset accompanied by the leasing back of the same. G. LIENS AND ENCUMBRANCES. Not create, incur, assume or permit to exist any mortgage, deed of trust, security interest (whether possessory or nonpossessory) or other encumbrance of any kind including without limitation the charge upon property purchased under conditional sale or other title retention agreement upon or otherwise transfer for security any of its accounts contract rights, general intangibles, or chattel paper with or without recourse, whether now owned or hereafter acquired (hereinafter collectively called "Liens"), other than (1) Liens for taxes not delinquent or being contested in good faith in appropriate proceedings; (2) Liens in connection with worker's compensation, unemployment insurance or social security obligations; (3) Mechanics', workmen's materialmen's, landlords', carrier's', or other like liens arising in the ordinary and normal course of business with respect to obligations which are not due or which are being contested in good faith; (4) Liens on margin stock as defined within Regulation U of the Board of Governors of the Federal Reserve System, as amended from time to time, and (5) Liens in favor of Bank. H. OUTSIDE INDEBTEDNESS. Not create, incur, assume or permit to exist any indebtedness for borrowed moneys other than loans from Bank except obligations now existing as shown on the credit application or the personal financial statement or data submitted with such applications pursuant to Section III.A. herein; or sell or transfer either with or without recourse, any accounts or notes receivables or any moneys due or to become due. I. COMPLIANCE WITH LAWS. Comply with the laws regulations and orders of any government body with authority over the Borrower's business. V. EVENTS OF DEFAULT The occurrence of any of the following events of default shall, at Bank's option, make all sums of principal and interest immediately due and payable, all without demand, presentment or notice, all of which are hereby expressly waived and the Bank may exercise all its rights against the Borrower, any guarantor and any collateral as provided by law. A. FAILURE TO PAY INDEBTEDNESS. Failure to pay any installments of interest on any indebtedness of Borrower to Bank. B. OTHER DEFAULTS. The occurrence of any event of default whether or not waived by the obligee under any other indebtedness extended by any institution or individual shall constitute an event of default hereunder. C. BREACH OF COVENANT. Failure of Borrower to perform any other term or conditions of this Agreement binding upon Borrower. D. BREACH OF WARRANTY. Any of Borrower's representations or warranties made herein or any statement or certificate at any time given in writing pursuant hereto or in connection herewith shall be false or misleading in any material respect. E. INSOLVENCY; RECEIVER OR TRUSTEE. Borrower, any guarantor of the indebtedness of Borrower to the Bank or general partner of Borrower shall become insolvent; or admit its inability to pay its debts as they mature; or make an assignment for the benefit of creditors; or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business. F. JUDGMENTS, ATTACHMENTS. Any money judgment, writ, or warrant of attachment, or similar process shall be entered or filed against Borrower or any guarantor of any of Borrower's obligations to Bank or any of its assets and shall remain unvacated, unbonded or unstayed for a period of 10 days or in any event later than five days prior to the date of any proposed sale thereunder. G. BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Borrower, any guarantor of the indebtedness of Borrower to the Bank or general partner of Borrower, and, if instituted against it, shall be consented to. H. DEFAULT IN SECURITY DOCUMENTS. A default shall occur in any document or instrument provided by the Borrower to the Bank in connection with the security provided the Bank pursuant to Paragraph I.C. herein. I. MATERIAL ADVERSE CHANGE. Should a material adverse change occur in Borrower's financial condition or the financial condition of any guarantor of the Borrower's obligations to Bank, which, in the opinion of the Bank, would affect the ability of the Borrower to repay any advances made by Bank hereunder or any other of the Borrower's obligations hereunder, or of such guarantor to perform under its guaranty. J. LOAN BALANCE. If the loan to collateral value reaches 100%. K. GUARANTY. Any guaranty of the indebtedness of the Borrower to the Bank, at any time after the execution and delivery of such guaranty and for any reason other than satisfaction if full of all indebtedness incurred hereunder, ceases to be in full force and effect or is declared to be null and void; or the validity or enforceability thereof is contested in a judicial proceeding; or any guarantor denies that it has any further liability under such guaranty; or should any guarantor default in any provision of any guaranty. L. LIEN PRIORITY. The Bank fails to have an enforceable first lien (except for any prior liens to which the Bank has consented in writing) on or security interest in any property given as security for this loan. M. DEATH. The Borrower or any guarantor dies (if the Borrower is a sole proprietorship, any owner dies; if the Borrower is a trust, a trustor dies; if the Borrower is a partnership, any general partner dies; or if the Borrower is a corporation any principal officer or majority stockholder dies). N. GOVERNMENT ACTION. Any government authority takes action that the Bank believes materially adversely affects the Borrower's or any guarantor's financial condition or ability to repay. If the Borrower is in default the Bank may also without prior notice, do any one or more of the following: (1) exercise any remedies available to a secured party under the Uniform Commercial Code or any other applicable law; (2) proceed in the foreclosure of its security interest in the property described in the paragraph entitled "Security"; (3) sell or otherwise dispose of the property at public or private sale, upon terms and in such manner as it may determine and it may purchase same at such sale; (4) refrain from disposing of the property and continue to maintain possession of the property for such time as it deems appropriate, and Borrower takes the risk of any depreciation in the value of the property pending disposition, or (5) transfer any of the property into the name of Bank or Bank's nominee. VI. MISCELLANEOUS PROVISIONS A. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Bank, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. B. OTHER AGREEMENTS. Nothing herein shall in any way limit the effect of the conditions set forth in any security or other agreement executed by the Borrower, but each and every condition hereof shall be in addition thereto. Page 2 of 3 3 C. GOVERNING LAW. This Agreement will be governed and interpreted in accordance with the laws of the State of California. D. SEVERABILITY. If any provision of this Agreement is held to be unenforceable, such determination shall not affect the validity of the remaining provisions of the Agreement. E. SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and the Bank's successors and assignees. The Borrower agrees that it may not assign this agreement without the Bank's prior consent. F. ARBITRATION. 1. This paragraph concerns the resolution of any controversies or claims between the Borrower and the Bank, including but not limited to those that arise from: (a) This Agreement (including any renewals, extensions or modifications of this Agreement); (b) Any document, agreement or procedure related to or delivered in connection with this Agreement; (c) Any violation of this Agreement; or (d) Any claims for damages resulting from any business conducted between the Borrower and the Bank, including claims for injury to persons, property or business interest (torts). 2. At the request of the Borrower or the Bank any such controversies or claims will be settled by arbitration in accordance with the United States Arbitration Act. The United States Arbitration Act will apply even though this Agreement provides that it is governed by California law. 3. Arbitration proceedings will be administered by the American Arbitration Association and will be subject to its commercial rules of arbitration. 4. For purposes of the application of the statute of limitations, the filing of an arbitration pursuant to this paragraph is the equivalent of the filing of a lawsuit, and any claim or controversy which may be arbitrated under this paragraph is subject to any applicable statute of limitations. The arbitrators will have the authority to decide whether any such claim or controversy is barred by the statute of limitations and, if so, to dismiss the arbitration on that basis. 5. If there is a dispute as to whether an issue is arbitrable, the arbitrators will have the authority to resolve any such disputes. 6. The decision that results from an arbitration proceeding may be submitted to any authorized court of law to be confirmed and enforced. 7. The procedure described above will not apply if the controversy or claim, at the time of the proposed submission to arbitration, arises from or relates to an obligation to the Bank secured by real property located in California. In this case, both the Borrower and the Bank must consent to submission of the claim or controversy to arbitration. If both parties do not consent to arbitration, the controversy or claim will be settled as follows: (a) The Borrower and the Bank will designate a referee (or panel of referees) selected under the auspices of the American Arbitration Association in the same manner as arbitrations are selected in Association-sponsored proceedings; (b) The designated referee (or panel of referees) will be appointed by a court as provided in California Code of Civil Procedure Section 638 and the following related sections; (c) The referee (or the presiding referee of the panel) will be an active attorney or a retired judge; and (d) The award that results from the decision of the referee (or the panel) will be entered as a judgment in the court that appointed the referee in accordance with the provisions of California Code of Civil Procedure Sections 644 and 645. 8. This provision does not limit the right of the Borrower or the Bank to: (a) exercise self-help remedies such as setoff; (b) foreclosure against or sell any real or personal property collateral; or (c) act in a court of law, before, during or after the arbitration proceeding to obtain (i) an interim remedy; and/or (ii) additional or supplementary remedies. 9. The pursuit of or a successful action for interim, additional or supplementary remedies, or the filing of a court action, does not constitute a waiver of the right of the Borrower or the Bank, including the suing party, to submit the controversy or claim to arbitration if the other party contests the lawsuit. However, if the controversy or claim arises from or relates to an obligation to the Bank which is secured by real property located in California at the time of the proposed submission to arbitration, this right is limited according to the provision above requiring the consent of both the Borrower and the Bank to seek resolution through arbitration. 10. If the Bank forecloses against any real property securing this Agreement, the Bank has the option to exercise the power of sale under the deed of trust or mortgage, or to proceed by judicial foreclosure. G. HAZARDOUS WASTE INDEMNIFICATION. The Borrower will indemnify and hold harmless the Bank, for any loss or liability directly or indirectly arising out of the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence of a hazardous substance. This indemnity will apply whether the hazardous substance is on, under or about the Borrower's property or operations or property leased to the Borrower. The Indemnity includes but is not limited to attorneys' fees (including the reasonable estimate of the allocated cost of in-house counsel and staff). The indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys and assigns. For these purposes, the term "hazardous substances" means any substance which is or becomes designated as "hazardous" or "toxic" under any federal, state or local law. This indemnity will survive repayment of the Borrower's obligations to the Bank. H. MULTIPLE BORROWERS. If two or more Borrowers sign this Agreement, each will be individually obligated to repay the Bank in full, and all will be obligated together. I. ONE AGREEMENT. This Agreement and any related security or other agreements required by this Agreement, collectively; (1) represent the sum of the understandings and agreements between the Bank and the Borrower concerning this credit; and (2) replace any prior oral or written agreements between the Bank and the Borrower concerning this credit; and (3) are intended by the Bank and the Borrower as the final complete and exclusive statement of the terms agreed to by them. In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail. J. NOTICE. As required herein, notice to the Bank shall be sent to the address shown on your latest billing statement, to be effective when received. Notice to you shall be sent to you at your address in our records, to be effective when deposited in the U.S. mail, postage prepaid, unless otherwise stated in the notice. This Agreement is executed as of the date stated at the top of the first page. MEDICAL SCIENCE SYSTEMS, INC. By: /s/ PAUL J. WHITE -------------------------------------------------- Paul J. White, Chief Executive Officer By: /s/ KENNETH S. KORMAN -------------------------------------------------- Kenneth S. Korman, D.D.S. Chief Scientific Officer By: /s/ MICHAEL G. NEWMAN -------------------------------------------------- Michael G. Newman D.D.S., Secretary Page 3 of 3 EX-10.1 16 MASTER AGREEMENT FOR TECHNOLOGY EVALUATION 1 EXHIBIT 10.1 MASTER AGREEMENT FOR TECHNOLOGY EVALUATION This Agreement, effective as of _____________, 1996 (the "Effective Date"), is entered into between The University of Sheffield, Western Bank, Sheffield S10 2TN, England ("University") and Medical Science Systems, Inc., 4400 MacArthur Blvd., Suite 980, Newport Beach, California 92660 ("MSS"). RECITALS A. The University possesses scientific expertise in genetics and other scientific disciplines, and has laboratories and other facilities, staff and clinical investigators for creating and developing proprietary information and technologies in such disciplines. B. MSS has experience in product discovery and development and technology transfer, including evaluation of market and clinical utility of technologies, patent and regulatory strategy, design, implementation, management and monitoring of clinical trials, identification of and negotiation with product development partners and the use of proprietarty research systems and technologies supporting product discovery and development, and scientific expertise in microbiology, periodontitis, inflammatory diseases and other scientific disciplines. C. The University and MSS desire to establish a joint cooperative relationship pursuant to which various technologies can be developed and products based thereon can be commercialized. It is expected that University will take the lead in conducting fundamental discovery research and laboratory development of such technologies, and MSS will take the lead in commercializing products based upon such technologies and related product development. D. The parties desire to establish in this Agreement a procedure pursuant to which either party may submit ideas, inventions and proposed products to the other for evaluation for potential joint development and commercialization. If, based on such evaluation procedure, the parties mutually agree to embark on a project to develop and commercialize particular technologies and/or products, the parties will enter into a specific project agreement defining their respective obligations and rights with respect to such project. This Agreement is intended to define the basic structure that the specific project agreements will take. NOW, THEREFORE, in consideration of the foregoing premises and of the covenants and conditions set forth herein, the parties agree as follows: 1. DEFINITIONS 1.1 "Confidential Information" consists of (i) any information designated by a disclosing party as confidential, (ii) information contained in or disclosed in connection with an Evaluation Proposal submitted by one of the parties hereunder, and (iii) any non-public information relating to the product plans, product designs, product costs, product prices, product - --------- * Confidential Treatment requested. 2 names, finances, marketing plans, business opportunities, personnel, industry contacts, research, development or know-how of University or MSS (as the case may be). "Confidential Information" shall not include, however, any information that (i) is already rightfully known to the receiving party at the time of disclosure by the disclosing party, (ii) has become publicly known through no wrongful act of the receiving party, (iii) has been rightfully received from a third party authorized to make such disclosure without restriction, (iv) has been independently developed by the receiving party or (v) has been approved for release by written authorization of the disclosing party. 1.2 "Department" means any department at the University. 1.3 "Evaluation Proposal" means a written confidential proposal for the potential joint development and/or commercialization of one or more Technologies and/or one or more Products based thereon which is submitted by one party to the other pursuant to the provisions of Section 2 below. 1.4 "Products" means commercial products based upon one or more Technologies developed pursuant to a Project Agreement. 1.5 "Project" means a project for the joint development and/or commercialization of one or more Technologies and/or one or more Products based thereon that the parties mutually agree to undertake after submission and evaluation of an Evaluation Proposal in accordance with the procedures set forth in Section 2 below. 1.6 "Project Agreement" means a separate written agreement between the parties that defines the precise scope of a Project and the respective obligations and rights of the parties with respect thereto. 1.7 "SMM" means The Section of Molecular Medicine of the University's Department of Medicine and Pharmacology. 1.8 "Summary Proposal" means a written confidential memorandum describing the general nature and subject matter of an Evaluation Proposal that one party proposes to submit to the other for full evaluation pursuant to the provisions of Section 2 below. 1.9 "Technologies" means ideas, inventions, apparatus, systems, data, discoveries, methods, processes, test procedures, diagnostic procedures, therapeutic procedures and works of authorship. 2. SUBMISSION AND EVALUATION PROCEDURES 2.1 Notice of a Proposed Project. If MSS or any Section of the University desires to propose a Project to the other party, it will notify the other party of its intention, and the other party will have fourteen (14) days to decide whether it wishes to first receive a Summary Proposal of the proposed Project on a confidential basis. If so, the proposing party (the 3 "Submitter") will then submit a Summary Proposal of the proposed Project to the other party (the "Recipient"). The Recipient will notify the Submitter within ten (10) business days of receipt of the Summary Proposal whether the Recipient wishes to receive an Evaluation Proposal with respect to such Project. All Projects submitted by or to any Section of the University hereunder will be processed through the SMM under the supervision and direction of Professor Gordon Duff. 2.2 Inital Review of Evaluation Proposal. A Recipient will have a period of one (1) month to conduct an initial review of an Evaluation Proposal for a proposed Project submitted by the other party hereunder, during which time the Submitter agrees to provide reasonable information regarding the proposed Project and any Technologies associated therewith. The Recipient will notify the Submitter on or before expiration of the initial review period whether or not it wishes to engage in a formal evaluation of the proposed Project. If the Recipient does not notify the Submitter of its desire to proceed with a formal evaluation of the proposed Project, then the Recipient will be deemed to have decided not to proceed with a formal evaluation. If the Recipient decides not to proceed with a formal evaluation, the Submitter will be free to publish, develop, commercialize, and submit the proposed Project to other third parties. 2.3 Formal Evaluation of a Proposed Project. If the Recipient decides to conduct a formal evaluation of a proposed Project, it will use all good faith and reasonable efforts to complete the evaluation as efficiently and expeditiously as possible. Unless otherwise agreed, such formal evaluation will be completed within three (3) months of Recipient's determination to conduct the formal evaluation. The Submitter agrees to provide all reasonable information, cooperation and consultation with respect to the proposed Project at its cost to assist the Recipient's evaluation. At the conclusion of the Recipient's formal evaluation of the proposed Project, the Recipient will notify the Submitter in writing of its decision to accept or reject the proposed Project for further development and/or commercialization. If the Recipient does not notify the Submitter of its desire to proceed with the proposed Project before the expiration of the formal evaluation period, then the Recipient will be deemed to have decided not to proceed with the proposed Project. If the Recipient decides not to proceed with the proposed Project, the Submitter will be free to publish, develop, commercialize, and submit the Project to other third parties. If the Recipient decides to proceed with the proposed Project, the parties will negotiate in good faith a Project Agreement for the Project, and will use all good faith reasonable efforts to enter into such a Project Agreement within two (2) months after the Recipient's decision to proceed with the proposed Project. The Project Agreement will incorporate at a minimum the structure and provisions described in Section 3 below. 2.4 Exclusivity. (a) Right of First Offer. MSS agrees that it will submit any proposed Project with respect to which research and/or development could be adequately performed on a timely and cost effective basis with sufficient qualified faculty and staff within the laboratories and other facilities of The Section of Molecular Medicine at the University under the supervision and direction of Prof. Gordon Duff (a "Qualified Project") to SMM first for evaluation in accordance with the procedures of this Section 2 before offering any such proposed Project to any other third party. SMM agrees that it will submit any proposed Project for the commercialization of and/or 4 development and marketing of Products based upon one or more Technologies developed by SMM to MSS first for evaluation in accordance with the procedures of this Section 2 before offering any such proposed Project to any other third party. Notwithstanding the preceding two sentences, neither party will have an obligation to submit any proposed Project to the other (i) which would create a conflict of interest with a preexisting client or business partner or (ii) which comprises or would require use of research funded by a third party, the data or results of which the proposing party hereunder does not own or have license rights sufficient to utilize in a Project with the other party hereunder. Each party shall be free to determine in its sole discretion whether or not to submit to the other party any proposed Project that is not a Qualified Project. (b) Forbearance During the Evaluation Period. In order to provide the Recipient sufficient incentive to devote its resources to review and evaluation of proposed Projects, the Submitter agrees not to publish, license or assign any Technologies associated therewith, or enter into any agreements with third parties for the development or commercialization thereof, unless and until the Recipient determines not to proceed with the proposed Project. (c) Exclusivity With Respect to the Scope of the Project. Upon mutual determination to proceed with a Project, the Project Agreement will provide that the parties' relationship with respect to the research and development and/or commercialization of Products within the scope of the Project defined in the Project Agreement will be exclusive, unless otherwise mutually agreed by the parties. 3. STRUCTURE OF PROJECT AGREEMENTS 3.1 Responsibilities and Schedule. Project responsibilities and initial milestones will be set forth in the applicable Project Agreement. 3.2 Cost and Expenses. Costs and expenses to be incurred by the parties in connection with their responsibilities under a Project will be allocated in the Project Agreement on a case-by-case basis, and will be a factor in determining the appropriate allocation of proceeds from commercialization. Unless otherwise mutually agreed, each party will be responsible for its costs of any travel incurred in connection with a Project, and the parties will share the legal fees incurred in connection with a business transaction with a commercial partner, and all legal fees and costs (including filing fees and translation costs) associated with international patent filings and prosecution. 3.3 Research Funding. All research funding provided by third parties relating to a Project or the results thereof will be allocated between the parties in proportion to the allocation of responsibilities for such research. Where allocation of responsibilities is not determinable, funds will be divided using the same allocation as applies to proceeds from sale, license or other disposition of Products. 3.4 Status Reports. The Project Agreement will provide for a Steering Committee which will manage and make joint decisions for the Project. In addition, there will be at least 5 two in-person meetings between the parties regarding Project status annually, which could be combined with or incorporate the Steering Committee meetings set forth in any Project. 3.5 Proceeds/Net Profits of Commercialization. The distribution of proceeds/net profits from the sale, license or other disposition of Products or Technologies developed or commercialized under a Project Agreement will be determined on a case-by-case basis using the following factors: (a) relative development efforts preceding the Project Agreement; (b) anticipated research and development responsibilities for the Project; (c) anticipated commercialization responsibility; and (d) source and nature of original submission. Each party will be responsible for allocation and distribution of its portion of the proceeds to its faculty, employees or other persons or entities to which it may be obligated, provided, however, that a Project Agreement may provide that MSS may pay directly to [ * ] any portion of the University's share of such proceeds/net profits to which [ * ] is entitled. Each Project Agreement may contain a change of scope clause providing that the distribution of the proceeds/net profits from the sale, license or other disposition of Products or Technologies may chage in the event the scope of one party's responsibilities under the Project change. 4. INTELLECTUAL PROPERTY 4.1 Pre-existing and Individually-Developed Technology. During the period of evaluation of a proposed Project, each party will retain all rights in pre-existing or independently-developed Technologies. 4.2 Ownership of Technologies and Products. Upon mutual agreement to proceed with the Project for further development and/or commercialization, the parties will, as part of the Project Agreement, define their respective rights with respect to ownership and exploitation of Technologies and Products within the scope of the Project. 4.3 Patent Prosecution and Enforcement of Intellectual Property Rights. The Project Agreement will specify and allocate responsibility for prosecution of patents and enforcement of intellectual property rights with respect to Technologies and Products within the scope of the Project. 4.4 Personnel. The Project Agreement will provide that each party will cause its respective employees, faculty, consultants and staff to execute such agreements, assignments, applications and other documents as necessary to perfect and protect each party's rights in the Technologies and Products within the scope of the Project. 5. CONFIDENTIALITY 5.1 Confidential Information. Each party shall use Confidential Information of the other solely for implementing its respective rights and obligations under this Agreement or any Project Agreement. Neither party will use or disclose Confidential Information of the other except as expressly permitted under this Agreement or any Project Agreement. Any such 6 Confidential Information shall be protected by the recipient from disclosure to others with at least the same degree of care as that which is accorded to its own proprietary information, but in no event with less than reasonable care. The obligations of this Section 5.1 will survive for a period of five (5) years from disclosure (or, with respect to Confidential Information relating to a Project Agreement, the later of such time or two (2) years from termination of such Project Agreement), notwithstanding any earlier termination or expiration of this Agreement or any Project Agreement. 5.2 Publication. (a) Each party recognizes that publication of research results is an important part of the mission of the University and is important to scientific researchers at the University and at MSS. However, the parties acknowledge the intent of this Agreement is to maximize the commercialization potential of Project Technologies and Products, and that publication should not unduly interfere with that goal. Consequently, the parties agree that publication issues will be determined mutually in good faith in recognition of these interests. In particular, the parties will submit in advance and review jointly proposals for publishing any information relating to any Project Technologies or Products and determine whether in each instance publication is in the best interests of the parties and the scope, authorship (e.g., individual or joint) and timing of such publication. The Project Agreements may further define procedures for the clearance of such publications with respect to any particular Project. Neither party, nor any person who participated in the development of Project Technologies or Products shall submit for publication, submit abstracts of, publish or present at any academic seminar, professional society meeting or similar event any Project Technologies or Products unless it has complied with the provisions of this Section 5.2 and any applicable provisions in the relevant Project Agreement. (b) Assuming publication has been agreed to by the parties, all publications and presentations at meetings will, unless otherwise agreed in a particular Project Agreement, comply with the following procedures. All persons wishing to publish an article shall provide to a designated person of the other party advance copies of all abstracts and articles proposed to be submitted for publication at least ninety (90) days prior to intended publication or disclosure. For presentations at meetings where written papers will not be available, the person intending to make such presentation will inform a designated person of the other party of such intent and the contents of the intended presentation in writing at least ninety (90) days prior to the presentation. Each party will use its reasonable best efforts to review such information within thirty (30) days after submission to the designated person of such party and provide the person intending to make such publication or disclosure comments on such disclosure based on the protection of intellectual property rights in the information to be published or disclosed and the maximization of commercialization potential of Project Technologies and Products. The parties will agree in good faith on appropriate modifications, if any, to be made. In addition, each party will use its reasonable best efforts to cooperate with the other in the filing of any patent applications prior to the date of actual publication or disclosure. Each party will ensure that its faculty, staff, students, employees and consultants comply with the requirements of this Section 5.2 6. TERM AND TERMINATION 7 6.1 Term. This Agreement will continue in effect for a period of ten (10) years from the Effective Date, unless terminated earlier in accordance with this section. 6.2 Termination for Cause. Either party may terminate this Agreement upon written notice in the event: (a) the other party breaches a material term of the Agreement, and fails to cure such breach within thirty (30) days following notice of such breach from the non-breaching party; or (b) the other party ceases to do business in the ordinary course, or files or has filed against it a petition for bankruptcy, and such petition is not dismissed within sixty (60) days of filing. 6.3 Termination Without Cause. Either party may terminate this Agreement at any time with or without cause on not less than six (6) months notice. Such termination, however, shall not apply to, and the Agreement will continue with respect to, any proposed Projects which are, as of the effective date of termination, under review or evaluation or approved for development and/or commercialization. 6.4 Effect of Termination. In the event of any expiration or termination of this Agreement, each party shall retain all of its rights in pre-existing or independently developed Technologies not yet subject to a Project Agreement. Rights with respect to Technologies and/or Products that are the subject of a Project Agreement shall survive as provided in the applicable Project Agreement. Termination or expiration of this Agreement will not affect the continued enforceability of any Project Agreement or any rights governing Technologies and/or Products subject to such Project Agreement. The provisions of Sections 5.1, 6.4, 7 and 8 of this Agreement will survive any termination or expiration. 7. DISCLAIMERS OF WARRANTY AND LIABILITY 7.1 Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN A PROJECT AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, RELATING TO THIS AGREEMENT, ANY PROJECT AGREEMENT OR ANY TECHNOLOGIES OR PRODUCTS, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT. 7.2 Limitation of Liability. EXCEPT FOR ANY WILLFUL BREACH OF SECTION 5, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING OUT OF THIS AGREEMENT OR ANY PROJECT AGREEMENT. 8. GENERAL PROVISIONS 8 8.1 Governing Law. This Agreement and any Project Agreement will be governed by and construed in accordance with the substantive laws of the United States and the State of California, without regard to or application of choice of law rules or principles. 8.2 Waiver and Modification. Failure by either party to enforce any provision of this Agreement or any Project Agreement will not be deemed a waiver of future enforcement of that or any other provision. Any waiver, amendment or other modification of any provision of this Agreement or any Project Agreement will be effective only if in writing and signed by the parties. 8.3 Severability. If for any reason a court of competent jurisdiction finds any provision or portion of this Agreement or any Project Agreement to be unenforceable, that provision of the Agreement or Project Agreement will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement or Project Agreement will continue in full force and effect. 8.4 Notices. All notices required or permitted under this Agreement or any Project Agreement will be in writing, will reference this Agreement or Project Agreement and will be deemed given: (i) when sent by confirmed facsimile; (ii) ten (10) working days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iii) five (5) working day after deposit with a commercial overnight carrier, with written verification of receipt. All communications will be sent to the addresses set forth below or to such other address as may be designated by a party by giving written notice to the other party pursuant to this section: To MSS: Paul J. White President and CEO Medical Science Systems, Inc. 4400 McArthur Blvd., Suite 980 Newport Beach, CA 92660 U.S.A. To the University: [ * ] with a copy to: 9 [ * ] 10 [ * ] 8.5 Delays Beyond Control. Neither party will be liable to the other party for any failure or delay in performance caused by reasons beyond such party's reasonable control, and such failure or delay will not constitute a material breach of this Agreement or any Project Agreement. 8.6 Assignment. Neither party may assign its rights or obligations hereunder or under any Project Agreement, by operation of law or otherwise, without express written consent of the other party, which consent will not be unreasonably withheld. Any attempted assignment without such consent shall be void. Subject to the foregoing, this Agreement and any Project Agreement will benefit and bind the successors and assigns of the parties. 8.7 No Third Party Beneficiaries; No Agency. Except as expressly provided herein to the contrary, no provision of this Agreement or any Project Agreement, express or implied, is intended or will be construed to confer rights, remedies or other benefits to any third party under or by reason of this Agreement or any Project Agreement. This Agreement or any Project Agreement will not be construed as creating an agency, partnership or any other form of legal association (other than as expressly set forth herein) between the parties. 8.8 Entire Agreement. This Agreement, including all exhibits, constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes and replaces all prior or contemporaneous understandings or agreements, written or oral, regarding such subject matter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement through their duly authorized representatives as set forth below. THE UNIVERSITY OF SHEFFIELD MEDICAL SCIENCE SYSTEMS, INC. By: By: ----------------------------- ---------------------------------- Printed Name: Printed Name: ------------------- ------------------------ Title: Title: -------------------------- ------------------------------- EX-10.2 17 RESEARCH SUPPORT AGREEMENT & AMENDMENTS 1 EXHIBIT 10.2 MEDICAL SCIENCE SYSTEMS RESEARCH SUPPORT AGREEMENT AND AMENDMENTS TO VARIOUS EXISTING PROJECT AGREEMENTS This Research Support Agreement and Amendment to Various Existing Project Agreements (this "Agreement") is entered into and made effective as of this 1st day of July, 1997 by and between The University of Sheffield, Western Bank, Sheffield S10 2TN, England ("University"), acting through The Department of Molecular & Genetic Medicine, and Medical Science Systems Incorporated, 4400 MacArthur Blvd., Suite 980, Newport Beach, California 92660 ("MSS"). RECITALS A. The University and MSS are parties to a Master Agreement for Technology Evaluation dated July 1, 1996, as amended (the "Master Agreement"), under which the parties established a joint cooperative relationship pursuant to which various technologies can be developed and products based thereon can be commercialized. Under the Master Agreement, it is expected that the University will take the lead in conducting fundamental discovery research and laboratory development of such technologies, and MSS will take the lead in commercializing products based upon such technologies and related product development. B. The Master Agreement establishes a procedure pursuant to which either party may submit ideas, inventions and proposed products to the other for evaluation for potential joint development and commercialization. If, based on such evaluation procedure, the parties mutually agree to embark on one or more projects to develop and commercialize particular technologies and/or products, the Master Agreement contemplates that the parties will enter into one or more specific project agreements (the "Project Agreements") defining their respective obligations and rights with respect to such projects. C. Pursuant to the procedures set forth in the Master Agreement, MSS and the University have before the date of this Agreement entered into the following Project Agreements (which shall be referred to collectively herein as the "Existing Project Agreements"): - "Development and Commercialization Project Agreement (Atherosclerosis Including Coronary Artery Disease)" dated Sept. 1, 1996 (the "Atherosclerosis Project Agreement"); - "Development and Commercialization Project Agreement (Eye Diseases Among Diabetics)" dated Sept. 1, 1996 (the "Eye Diseases Project Agreement"); - "Development and Commercialization Project Agreement (Osteoporosis)" dated Sept. 1, 1996 (the "Osteoporosis Project Agreement"). D. Since the Existing Project Agreements were executed, the Steering Committee has determined that MSS will itself market and commercialize the initial genetic tests for screening - ---------- * Confidential Treatment requested. 2 patients for predisposition to atherosclerosis (including coronary artery disease), eye diseases among diabetics, periodontal disease, and osteoporosis, either directly and/or through co-promotion/distribution/agency relationships. The Steering Committee has also determined that MSS will assume responsibility and funding for all of the clinical utility studies and marketing enhancement studies under the Atherosclerosis Project Agreement and the Eye Diseases Project Agreement, and for any remaining clinical utility studies and marketing enhancement studies under the Osteoporosis Project. Based on these responsibilities on the part of MSS, the parties desire to amend the Existing Project Agreements to provide for a reallocation of Net Proceeds between MSS and the University. E. MSS desires to provide funding to the University to support an investigator employed by the University who will assist the University in performing its obligations under various Project Agreements entered into by the parties related to diagnostic and/or monitoring genetic tests. MSS further desires to provide funding to the Research Consultancy Unit of the University to support the work of the Research Consultancy Unit on such Project Agreements. MSS and the University desire to set forth the terms and conditions on which MSS will provide such funding. NOW, THEREFORE, in consideration of the foregoing premises and of the provisions of this Agreement, the parties agree as follows: 1. DEFINITIONS Capitalized terms not otherwise defined in this Agreement shall have the meaning given those terms in the Master Agreement and the various applicable Project Agreements. In addition, the following terms shall have the following meanings: 1.1 "Consultancy Agreement" means any agreement between MSS and personnel of the University (other than a Project Agreement), whether existing as of the effective date of this Agreement or entered into after the effective date of this Agreement, pursuant to which MSS funds such personnel to render services to or on behalf of MSS. 1.2 "Contract Period" means a one year period commencing upon the execution of this Agreement, which period will be automatically extended by one year increments unless either party elects not to renew this Agreement pursuant to Section 5.1 below. 1.3 "Investigator" means a post-doctoral researcher to be employed by the University, for whom MSS shall provide funding to the University hereunder to assist the University in performing its obligations under various Project Agreements between the parties. 2. PAYMENTS BY MSS TO THE UNIVERSITY 2.1 Payments by MSS. During the Contract Period, MSS agrees to provide the University the following amounts annually: 3 (a) Research Grant: A research grant to The Department of Molecular & Genetic Medicine, commencing on July 1, 1997, of forty thousand dollars ($40,000) per year, payable monthly, which the University will use to fund the efforts of the Investigator, who will devote his full time efforts during the Contract Period solely to assisting the University in performing its obligations under those Project Agreements between the parties to which the parties have agreed the Investigator should devote his efforts. (b) RCU Funding: A grant to the Research Consultancy Unit ("RCU") of the University, commencing on October 1, 1997, in the amount of twenty five thousand dollars ($25,000) per year, payable monthly, to support the work of the RCU on various Project Agreements. 2.2 Possible Funding of Additional Investigators. The parties acknowledge that as additional Project Agreements are executed, it may be desirable to fund one or more additional investigators to support the University in performing its obligations under the Project Agreements. The parties will discuss the need for such additional support and, if they agree such additional support is necessary or desirable, will mutually agree to the amount of any such additional research grant that MSS will provide to the University and the duration of the same. 2.3 Credit Against Net Proceeds Payable to the University. All amounts paid by MSS pursuant to this Section 2 and to any University personnel pursuant to Consultancy Agreements shall be fully creditable by MSS against any portion of Net Proceeds payable to the University by MSS under any Project Agreement from the commercialization of any Product or technology developed and marketed under a Project Agreement. 2.4 Stock Options in MSS. In addition to the payments described in Sections 2.1 and 2.2 above, the University has been granted twenty-five thousand (25,000) stock options in MSS, pursuant to and governed by the terms and conditions of one or more separate written agreements between the parties. 3. TERMS GOVERNING WORK BY THE INVESTIGATOR Any work performed by the Investigator with respect to a particular Project shall be governed by the terms and conditions of the relevant Project Agreement, as amended by Section 4 below of this Agreement, and any applicable provisions of the Master Agreement. Without limiting the generality of the preceding sentence, the ownership, pursuit of protection of Intellectual Property Rights, and use of any Innovations and Joint Innovations created in whole or in part out of the Investigator's work on a Project shall be governed by the relevant provisions of the pertinent Project Agreement. Similarly, publication of research results or other information resulting from the work of the Investigator on a Project will be governed by the procedures set forth in Section 5 of the Master Agreement. 4 4. AMENDMENTS TO EXISTING PROJECT AGREEMENTS 4.1 Amendments Applicable to All Existing Project Agreements. In view of the decisions of the Steering Committee reflected in Recital D above and of other agreements reached between the parties, MSS and the University agree that all Existing Project Agreements are hereby amended as follows: (a) Revision of Definition of "Innovations". The definition of "Innovations" in Section 1 of each of the Existing Project Agreements is replaced with the following: "Innovations" means all ideas, inventions, apparatus, systems, data, discoveries, methods, processes, improvements, works of authorship and other innovations of any kind within the Project Scope, whether or not they are eligible for patent, copyright, trademark, service mark, trade dress, trade secret or other legal protection. Examples of Innovations include: [ * ] "Innovations" does not include any computer information technology or products (including but not limited to MSS' Biofusion(TM) or other software products and technology), and the usage of any such technology or products shall not be deemed to be within the Project Scope. (b) Revision of Definition of "Intellectual Property Rights". The definition of "Intellectual Property Rights" in Section 1 of each of the Existing Project Agreements is replaced with the following: "Intellectual Property Rights" means patent applications, patents, design rights or other similar invention rights, rights of priority, copyrights, trademarks, service marks, trade dress, trade secret rights and other intangible rights, whether existing under statutory or common law, in any country in the world. (c) Revision of Definition of "Joint Innovations". The definition of "Joint Innovations" in Section 1 of each of the Existing Project Agreements is replaced with the following: "Joint Innovations" means all inventions, improvements, works of authorship and other innovations of any kind within the Project Scope that may be made, conceived, developed or reduced to practice jointly by MSS and by SMM and their respective employees, consultants, faculty, technicians, visiting scientists, students, and/or post-doctoral associates in the course of this Agreement, whether or not they are eligible for patent, copyright, trademark, service mark, trade dress, trade secret or other legal protection. Examples of Joint Innovations include but are not limited to: [ * ]. 5 (d) Revision of Definition of "Licensed Patents". The definition of "Licensed Patents" in Section 1 of each of the Existing Project Agreements is replaced with the following: "Licensed Patents" means (i) any United States patents that may issue to the University during the term of this Agreement covering any test developed by or on behalf of the University and all divisionals, continuations, continuations-in-part, reissues, extensions, and reexaminations thereof that may issue in the United States during the term of this Agreement, (ii) any corresponding foreign patents that may issue to the University during the term of this Agreement with respect to any of the preceding patents, and all divisionals, continuations, continuations-in-part, reissues, extensions, and reexaminations thereof, and (iii) any other patents that may issue to the University during the term of this Agreement, and all divisionals, continuations, continuations-in-part, reissues, extensions, and reexaminations thereof, to the extent they cover any Innovations within the Project Scope. (e) Revision of Definition of "Net Proceeds". The definition of "Net Proceeds" in Section 1 of each of the Existing Project Agreements is replaced with the following: "Net Proceeds" means all gross revenue to MSS from the commercial distribution of a Product or payments related to a Product (whether for sales agency rights or distribution rights, license fees, development costs or other monies payable by a Third Party), minus the following: (i) all promotional, trade, quantity, and cash discounts actually allowed, and credits and allowances actually granted on account of rejections, returns or billing errors; (ii) the cost of goods sold (COGS), including but not limited to all mailing, delivery or other transportation charges and taxes imposed on the commercial distribution of a Product, any charges by an Approved Lab incurred with respect to such Product (including an Approved Lab operated in-house by MSS or by a Third Party), Test Sampling Materials and labor, and commissions, royalties, or other fees paid related to the Product; (iii) all marketing and sales costs, including but not limited to trade shows, educational programs, thought leader development, marketing materials, market enhancement clinical studies, marketing, sales and administrative personnel and consultants related to the commercial distribution of the Product; (iv) all operational costs, including but not limited to supplies, customer service, billing and collection, production, quality assurance personnel and consultants related to the commercial distribution of the Product; (v) all costs to sponsor and monitor clinical utility trials which MSS is responsible for; 6 (vi) all facility costs (including facilities used for an in-house Approved Lab and commercial service centers that support the marketing, distribution and collection of test materials, laboratory routing, results reporting, invoicing and collection), including but not limited to rent, directly related to the commercial distribution of the Product; (vii) all equipment and other capital expenditures and any related depreciation; (viii) legal fees incurred in engaging a Third Party; (ix) all costs associated with the preparation, filing and prosecution of all patent applications other than the initial patent application filed in either the United Kingdom or the United States for a Product, including but not limited to filing fees, translation costs and legal fees (but not including any internal staff of MSS and overhead costs incurred with respect to any patent applications that MSS has responsibility for hereunder); (x) regulatory costs, if any, including but not limited to filing fees and legal fees; and (xi) all other costs that may be incurred with respect to the commercialization of the Product, such as patent litigation costs, indemnities and warranties to a Third Party or to end users of Products, and any insurance premiums to insure against potential liability. In computing Net Proceeds, all revenue, costs and deductions will be accounted for using generally accepted accounting principles consistently applied. Losses, if any, from previous quarters will be carried forward and revenues which become bad debt will be reconciled quarterly. The parties recognize that, depending upon the specific responsibilities assumed by each of the parties with respect to the commercialization of a particular Product, the costs and expenses to be deducted in computing Net Proceeds may be incurred by either MSS or the University. The parties recognize that as multiple Products are commercialized, some of the costs and expenses to be deducted in computing Net Proceeds would be amortized over multiple Products or over products within the scope of other project agreements between the parties, all as determined by the Steering Committee. (f) Costs of Carrying Out Responsibilities. Section 3.4 of each of the Existing Project Agreements is replaced with the following: 3.4 Costs of Carrying Out Responsibilities; Sinking Fund. (a) Costs to be Borne by the Parties Individually. Subject to the deduction of costs in computing Net Proceeds as set forth in the definition of "Net 7 Proceeds" in Section 1 above, each party will carry out the activities for which it is responsible at its own expense, including the costs of any research and development, commercialization costs, internal staff and overhead costs, consultants and other outside contractors assisting a party in performing its duties. (b) Sinking Fund. After a Commercialization Event occurs with respect to a Product and Net Proceeds are being generated, the Steering Committee will determine a percentage of the Net Proceeds that will be directed into an MSS sinking fund out of which future costs that are deductible in computing Net Proceeds in accordance with the definition of "Net Proceeds" in Section 1 above and any liabilities incurred will be paid. (g) Deletion of Section 5.2. Section 5.2 of each of the Existing Project Agreements is deleted and Section 5.3 is renumbered to be Section 5.2. 4.2 Amendments Applicable to the Atherosclerosis Project Agreement. In view of the decisions of the Steering Committee reflected in Recital D above and of other agreements reached between the parties, MSS and the University agree that the Atherosclerosis Project Agreement is hereby amended as follows: (a) Revision of Definition of "Products". The definition of "Products" in Section 1.14 is replaced with the following: 1.14 "Products" means any products or services related to the Project (such as the Initial Coronary Artery Disease Test or new diagnostic and/or monitoring genetic tests, diagnostics, therapeutics, or related services) based upon any University Innovation, MSS Innovation, or Joint Innovation within the Project Scope. (b) Revision of Definition of "Project Scope". Clause (ii) of the definition of "Project Scope" in Section 1.16 is replaced with the following: (ii) [ * ] (c) Test Standards. Section 3.2(iii) is amended to read as follows: (iii) Ensuring that all tests are run consistent with United States and European Community standards. MSS will monitor, audit, and assist the University with the proper paperwork required under United States standards. 8 (d) Revision of Definition of "Test Sampling Materials". The definition of "Test Sampling Materials" in Section 1.20 is replaced with the following: 1.20 "Test Sampling Materials" means the packaging, the clinical materials and accompanying instructional materials to be used to obtain a sample from a patient for delivery to an Approved Lab for performing the genetic analysis of an Atherosclerosis Test on such sample, and the subsequent materials reporting the results of the genetic analysis to a patient. (e) Division of "Net Proceeds". The second paragraph of Section 5.1 is deleted in its entirety. The word "new" in the first line of the third paragraph of Section 5.1 is deleted. The phrase "other type of" is inserted before the word "Product" in the second line of the first sentence of the first paragraph of Section 5.1, so that such sentence reads "The allocation of Net Proceeds between MSS and the University with respect to each other type of Product within the Project Scope ..." Insert the following sentence in front of the first sentence of the first paragraph of Section 5.1: Net Proceeds with respect to the Initial Coronary Artery Disease Test and all other diagnostic and/or monitoring genetic tests that are commercialized hereunder will be allocated [ * ] to MSS and [ * ] to the University. 4.3 Amendments Applicable to the Eye Diseases Project Agreement. In view of the decisions of the Steering Committee reflected in Recital D above and of other agreements reached between the parties, MSS and the University agree that the Eye Diseases Project Agreement is hereby amended as follows: (a) Revision of Definition of "Products". The definition of "Products" in Section 1.14 is replaced with the following: 1.14 "Products" means any products or services related to the Project (such as the Initial Eye Disease Test or new diagnostic and/or monitoring genetic tests, diagnostics, therapeutics, or related services) based upon any University Innovation, MSS Innovation, or Joint Innovation within the Project Scope. (b) Revision of Definition of "Project Scope". Clause (ii) of the definition of "Project Scope" in Section 1.16 is replaced with the following: (ii) [ * ] (c) Test Standards. Section 3.2(v) is amended to read as follows: 9 (iii) Ensuring that all tests are run consistent with United States and European Community standards. MSS will monitor, audit, and assist the University with the proper paperwork required under United States standards. (d) Revision of Definition of "Test Sampling Materials". The definition of "Test Sampling Materials" in Section 1.20 is replaced with the following: 1.20 "Test Sampling Materials" means the packaging, the clinical materials and accompanying instructional materials to be used to obtain a sample from a patient for delivery to an Approved Lab for performing the genetic analysis of an Eye Disease Test on such sample, and the subsequent materials reporting the results of the genetic analysis to a patient. (e) Division of "Net Proceeds". The second paragraph of Section 5.1 is deleted in its entirety. The word "new" in the first line of the third paragraph of Section 5.1 is deleted. The phrase "other type of" is inserted before the word "Product" in the second line of the first sentence of the first paragraph of Section 5.1, so that such sentence reads "The allocation of Net Proceeds between MSS and the University with respect to each other type of Product within the Project Scope ..." Insert the following sentence in front of the first sentence of the first paragraph of Section 5.1: Net Proceeds with respect to the Initial Eye Disease Test and all other diagnostic and/or monitoring genetic tests that are commercialized hereunder will be allocated [ * ] to MSS and [ * ] to the University. 4.4 Amendments Applicable to the Osteoporosis Project Agreement. In view of the decisions of the Steering Committee reflected in Recital D above and of other agreements reached between the parties, MSS and the University agree that the Osteoporosis Project Agreement is hereby amended as follows: (a) Revision of Definition of "Products". The definition of "Products" in Section 1.14 is replaced with the following: 1.14 "Products" means any products or services related to the Project (such as the Initial Osteoporosis Test or new diagnostic and/or monitoring genetic tests, diagnostics, therapeutics, or related services) based upon any University Innovation, MSS Innovation, or Joint Innovation within the Project Scope. (b) Revision of Definition of "Project Scope". Clause (ii) of the definition of "Project Scope" in Section 1.16 is replaced with the following: (ii) [ * ] 10 [ * ] 11 (c) Test Standards. Section 3.2(v) is amended to read as follows: (iii) Ensuring that all tests are run consistent with United States and European Community standards. MSS will monitor, audit, and assist the University with the proper paperwork required under United States standards. (d) Revision of Definition of "Test Sampling Materials". The definition of "Test Sampling Materials" in Section 1.20 is replaced with the following: 1.20 "Test Sampling Materials" means the packaging, the clinical materials and accompanying instructional materials to be used to obtain a sample from a patient for delivery to an Approved Lab for performing the genetic analysis of an Osteoporosis Test on such sample, and the subsequent materials reporting the results of the genetic analysis to a patient. (e) Division of "Net Proceeds". The second paragraph of Section 5.1 is deleted in its entirety. The word "new" in the first line of the third paragraph of Section 5.1 is deleted. The phrase "other type of" is inserted before the word "Product" in the second line of the first sentence of the first paragraph of Section 5.1, so that such sentence reads "The allocation of Net Proceeds between MSS and the University with respect to each other type of Product within the Project Scope ..." Insert the following sentence in front of the first sentence of the first paragraph of Section 5.1: Net Proceeds with respect to the Initial Osteoporosis Test will be allocated [ * ] to MSS and [ * ] to the University. Net Proceeds with respect to all other diagnostic and/or monitoring genetic tests that are commercialized hereunder will be allocated [ * ] to MSS and [ * ] to the University. 5. TERM AND TERMINATION 5.1 Term. Unless sooner terminated in accordance with the provisions of this Section 5, this Agreement shall continue in effect for an initial Contract Period of one year, which period will be automatically extended in one (1) year increments unless either party gives the other party written notice of its election not to renew this Agreement at least ninety (90) days in advance of the scheduled renewal date. 5.2 Termination for Breach. Either party may, upon sixty (60) days written notice to the other party, terminate this Agreement in the event of a material breach of this Agreement by the other party, if such breach is not cured during the sixty (60) day notice period. 5.3 Termination by MSS. MSS may terminate this Agreement at any time upon six (6) months written notice to the University; provided, however, that the budget allocated to support any particular Project on which the Investigator is working shall be appropriately prorated to allow for reasonable costs and to reimburse for all contractual commitments incurred 12 by the Investigator or the University in performance of this Agreement prior to such termination, if such contractual commitments cannot be canceled by the Investigator or the University. 5.4 Survival. The provisions of Section 2.3, all of Section 4, and this Section 5.4 shall survive the expiration or termination of this Agreement. 6. GENERAL 6.1 Independent Contractors. The University and the Investigator, on the one hand, and MSS, on the other hand, are independent contractors, and nothing in this Agreement or otherwise shall place MSS and the University in the relationship of partners, joint venturers or agents, nor shall the Investigator be deemed an employee of MSS or entitled to participate in any benefits of MSS offered to its employees. 6.2 Governing Law. This Agreement will be governed by and construed in accordance with the substantive laws of the United States and the State of California, without regard to or application of provisions relating to choice of law. 6.3 Waiver and Modification. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. Any waiver, amendment or other modification of any provision of this Agreement will be effective only if in writing and signed by the parties. 6.4 Severability. If for any reason a court of competent jurisdiction finds any provision or portion of this Agreement to be unenforceable, that provision will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement will continue in full force and effect. 6.5 Notices. All notices required or permitted under this Agreement will be in writing, will reference this Agreement and will be deemed given: (i) when sent by confirmed facsimile; (ii) ten (10) working days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iii) five (5) working days after deposit with a commercial overnight carrier, with written verification of receipt. All communications will be sent to the addresses set forth below or to such other address as may be designated by a party by giving written notice to the other party pursuant to this section: To MSS: Paul J. White President and CEO Medical Science Systems, Inc. 4400 McArthur Blvd., Suite 980 Newport Beach, CA 92660 U.S.A. 13 To the University: [ * ] 6.6 Delays Beyond Control. Neither party will be liable to the other party for any failure or delay in performance caused by reasons beyond such party's reasonable control, and such failure or delay will not constitute a material breach of this Agreement. 6.7 Assignment. Neither party may assign its rights or obligations hereunder, by operation of law or otherwise, without express written consent of the other party, which consent will not be unreasonably withheld. Any attempted assignment without such consent shall be void. Subject to the foregoing, this Agreement will benefit and bind the successors and assigns of the parties. 6.8 No Third Party Beneficiaries. Except as expressly provided herein to the contrary, no provision of this Agreement, express or implied, is intended or will be construed to confer rights, remedies or other benefits to any third party under or by reason of this Agreement. 6.9 Entire Agreement. This Agreement, the Master Agreement and the relevant Project Agreements, including all exhibits, constitute the entire agreement between the parties with respect to the subject matter hereof, and supersede and replace all prior or contemporaneous understandings or agreements, written or oral, regarding such subject matter. 14 6.10 Multiple Counterparts. This Agreement may be executed in multiple counterparts, each of which will be considered an original and all of which together will constitute one agreement. This Agreement may be executed by the attachment of signature pages which have been previously executed. 6.11 Cumulation. All rights and remedies enumerated in this Agreement will be cumulative and none will exclude any other right or remedy permitted herein or by law. 6.12 Headings. The headings contained in this Agreement are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement through their duly authorized representatives as set forth below: MEDICAL SCIENCE SYSTEMS, INC. THE UNIVERSITY OF SHEFFIELD By: By: ----------------------------- -------------------------------------- Printed Name: Printed Name: -------------------- ---------------------------- Title: Title: --------------------------- ----------------------------------- EX-10.3 18 DEVELOPMENT & COMMERCIALIZATION PROJECT AGREEMENT 1 EXHIBIT 10.3 MEDICAL SCIENCE SYSTEMS DEVELOPMENT AND COMMERCIALIZATION PROJECT AGREEMENT (ATHEROSCLEROSIS INCLUDING CORONARY ARTERY DISEASE) This Agreement is entered into and made effective as of this ___ day of ___________, 1996 (the "Effective Date") by and between Medical Science Systems, Inc. a Texas corporation having its principal place of business at 4400 MacArthur Blvd., Suite 980, Newport Beach, CA 92660 ("MSS") and The University of Sheffield, Western Bank, Sheffield S10 2TN, England ("University"), acting through The Section of Molecular Medicine of the University's Department of Medicine and Pharmacology ("SMM"). RECITALS A. University and MSS have entered into a Master Agreement for Technology Evaluation dated July 1, 1996 (the "Master Agreement"). Following the procedures set forth in the Master Agreement, the parties have agreed to work together on a project as defined herein to perform additional development and commercialization of certain technology relating to the association between genetics and coronary artery disease. B. This Agreement is intended to supplement the provisions set forth in the Master Agreement with respect to such technology, and sets forth additional terms and conditions agreed to by the parties with respect to the project. C. It is contemplated that MSS may locate and engage a third party to assist in the commercialization of products based upon the technology that is the subject of the project, or MSS may itself commercialize certain products based upon the technology. This Agreement is also intended to set forth the terms and conditions upon which MSS will locate and engage such third party or itself commercialize such products. NOW, THEREFORE, in consideration of the foregoing premises and of the terms and conditions of this Agreement, the parties agree as follows: 1. DEFINITIONS 1.1 "Approved Lab" means a laboratory (which may be an internal laboratory of the University and/or MSS or a third party laboratory) mutually approved by MSS and SMM pursuant to Section 3.5 below to conduct Test Administrations. 1.2 "Atherosclerosis Test" means [ * ]. - --------- * Confidential Treatment requested. 2 1.3 "Brand Name(s)" means the trademark(s), service mark(s) and/or logo(s) or other designations under which Products are marketed and promoted by MSS or a Third Party. 1.4 "Commercialization Event" means either of the following with respect to a Product: (i) entry into a business arrangement with a Third Party (whether through a license and/or development agreement, distribution agreement, joint venture, co-promotion, or other structure) for the further development, clinical testing, marketing and/or sale of such Product in one or more markets, or (ii) decision by the Steering Committee to engage MSS to commercially distribute such Product in one or more markets directly to end users or through distribution channels set up by MSS (rather than through a Third Party). 1.5 "Confidential Information" shall be as defined in Section 1 of the Master Agreement. 1.6 "Initial Coronary Artery Disease Test" means the [ * ]. 1.7 "Innovations" means all ideas, inventions, apparatus, systems, data, discoveries, methods, processes, improvements, works of authorship and other innovations of any kind within the Project Scope, whether or not they are eligible for patent, copyright, trademark, trade secret or other legal protection. Examples of Innovations include: [ * ]. "Innovations" does not include any preexisting MSS computer information technology or products (including but not limited to MSS' Biofusion(TM) and Medical Decision Explorer(TM) products and technology), and the usage of any such technology or products shall not be deemed to be within the Project Scope. 1.8 "Intellectual Property Rights" means patent applications, patents, design rights or other similar invention rights, rights of priority, copyrights, trademarks, trade secret rights and other intangible rights, whether existing under statutory or common law, in any country in the world. 1.9 "Joint Innovations" means all inventions, improvements, works of authorship and other innovations of any kind within the Project Scope that may be made, conceived, developed or reduced to practice jointly by MSS and by SMM and their respective employees, consultants, faculty, technicians, visiting scientists, students, and/or post-doctoral associates in the course of this Agreement, whether or not they are eligible for patent, copyright, trademark, trade secret or other legal protection. Examples of Joint Innovations include but are not limited to: [ * ]. 1.10 "Licensed Patents" means (i) any United States patents that may issue to the University during the term of this Agreement covering an Atherosclerosis Test (including the Initial Coronary Artery Disease Test) developed by or on behalf of the University and all 3 divisionals, reissues, and reexaminations thereof that may issue in the United States during the term of this Agreement, (ii) any corresponding foreign patents that may issue to the University during the term of this Agreement with respect to any of the preceding patents, and all divisionals, reissues, and reexaminations thereof, and (iii) any other patents that may issue to the University during the term of this Agreement, and all divisionals, reissues, and reexaminations thereof, to the extent they cover any Innovations within the Project Scope. 1.11 "Licensed Invention" means any apparatus, system, process, method or other invention claimed in any of the Licensed Patents, and any work of authorship, know how, trade secret and other technology within the Project Scope covered by any other Intellectual Property Right of the University. 1.12 "MSS Innovations" means all Innovations within the Project Scope that may be made, conceived, developed or reduced to practice solely by MSS and its employees, consultants, and technicians. 1.13 "Net Proceeds" means the following: (i) In the case of a Commercialization Event with a Third Party, all royalties, license fees, or other monies payable by such Third Party based upon the commercial distribution of a Product in one or more markets; and (ii) In the case of a decision by the Steering Committee to engage MSS to commercially distribute one or more Products in one or more markets directly to end users or through distribution channels set up by MSS, the gross amount actually received by MSS from the commercial distribution of a Product, less (i) any delivery or other transportation charges and taxes imposed on the transaction, (ii) any charges by an Approved Lab incurred with respect to such Product, (iii) the cost of goods sold (COGS), (iv) actual out of pocket costs for advertising, travel, trade shows, educational programs and other marketing and sales expenses (but not including salaries of personnel) directly related to the commercial distribution of the Product, (v) as determined by the Steering Committee, either a reasonable administrative and sales overhead charge, or the actual personnel costs for marketing, sales and administrative functions, with respect to the commercial distribution of the Product, all of the foregoing computed in accordance with generally accepted accounting principles, and (vi) carryover losses, if any, from a previous quarter. It is recognized by the parties that, depending upon the specific responsibilities assumed by each of the parties, the foregoing costs and expenses may be incurred by either MSS or the University. 1.14 "Products" means any products or services related to the Project (such as new tests, diagnostics, therapeutics, or related services) based upon any University Innovation, MSS Innovation, or Joint Innovation within the Project Scope. 1.15 "Project" means the development and commercialization activities to be undertaken by MSS, SMM and Third Parties (if any) pursuant to this Agreement within the Project Scope. 4 1.16 "Project Scope" means: (i) [ * ], and (ii) [ * ]. 1.17 "Steering Committee" shall be as defined in Section 2 below. 1.18 "Subsidiary" means a corporation, company or other entity more than fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, now or hereafter, owned or controlled, directly or indirectly, by a party to this Agreement; provided that any such corporation, company or other entity will be deemed to be a Subsidiary only so long as such ownership or control exists. 1.19 "Test Administration" means the performing of the genetic analysis of an Atherosclerosis Test by an Approved Lab based upon a sample gathered from a patient using Test Sampling Materials. 1.20 "Test Sampling Materials" means a container that will be used to transport a sample from a patient to an Approved Lab for performing the genetic analysis of an Atherosclerosis Test on such sample, and accompanying instructional materials. 1.21 "Third Party" means a third party entity engaged by MSS, with the approval of the Steering Committee, in accordance with this Agreement to assist in the further development, clinical testing, marketing and/or commercial distribution of one or more Products in one or more markets. 1.22 "University Innovations" means all Innovations within the Project Scope that may be made, conceived, developed or reduced to practice solely by SMM and its faculty, employees, consultants, technicians, visiting scientists, students and post doctoral associates. 2. STEERING COMMITTEE 2.1 General Responsibilities of the Steering Committee. A four-person steering committee, consisting initially of Paul White and Kenneth Kornman for MSS and [ * ] for the University (the "Steering Committee"), will make joint decisions 5 and provide high level management with respect to the Project. [ * ] will also serve on the Steering Committee as a representative of the employees, faculty, consultants and staff working on the Project. Each person on the Steering Committee will have one vote. Each party may nominate alternative or replacement members to serve on the Steering Committee with the consent of the other party, which consent will not be unreasonably withheld. The Steering Committee will meet on a regular basis as the committee members may determine to be necessary. Written minutes of the meetings of the Steering Committee will be kept and will be promptly circulated after each meeting to the committee members for approval. The Project will consist of an initial phase and any follow-on phases that the Steering Committee may determine to pursue. During the initial phase, the parties will, in accordance with their respective responsibilities set forth in Section 3 below, file and prosecute U.S. and international patents covering the Initial Coronary Artery Disease Test and any other Innovations that the Steering Committee may determine, conduct clinical studies to generate appropriate clinical data and, if such data demonstrates strong clinical utility of potential Products, identify and engage an appropriate Third Party. If the Steering Committee determines that the clinical data is not strong enough to seek a Third Party, the Steering Committee will determine the next step(s) that should be taken. After completion of the initial phase of the Project, the Steering Committee will review and make decisions as to the next step(s) that should be taken, which may include additional research and/or development and testing of Products, seeking of additional Third Parties, direct sales, or termination of the Project. 2.2 Determinations With Respect to Commercialization of Individual Products. The Steering Committee will determine with respect to each Product or class of Products to be commercialized pursuant to the Project, whether to engage a Third Party to assist in the further development, clinical testing, marketing and/or commercial distribution of such Product(s) in one or more markets, or whether to engage MSS to commercially distribute such Product(s) in one or more markets directly to end users or through distribution channels set up by MSS. In the event that the Steering Committee determines to engage a Third Party with respect to a particular Product, MSS will identify potential Third Parties and the Steering Committee will select one with which MSS will be authorized to negotiate an appropriate engagement with respect to such Product, or to extend a previous engagement to cover such Product. 3. RESPONSIBILITIES OF THE PARTIES This Section sets forth the responsibilities of the parties during the Project, including but not limited to the initial phase of the Project. 3.1 Responsibilities of MSS. Subject to the high level management and direction of the Steering Committee, MSS will have responsibility for the following activities: (i) Conducting overall management and oversight of the Project. (ii) Developing a patent strategy with respect to Innovations and Products and the determination of which countries patents should be filed in. 6 (iii) Preparing and filing in the United States the initial patent application with respect to the Initial Coronary Artery Disease Test and any other Innovations the Steering Committee may determine to file patents for during the Project. (iv) Preparing, filing, and prosecuting all international patent applications (subject to the shared cost obligations set forth in Section 3.4 below) that the Steering Committee determine to file during the Project, to the extent the foregoing is not handled by one or more Third Parties. (v) Developing an initial regulatory strategy with respect to Innovations and Products to be developed during the Project for markets in which the Steering Committee determines MSS should seek to establish Third Parties (but not including the actual preparation or filing of documentation for any regulatory approval or license, which will be handled by MSS or a Third Party as the Steering Committee may determine, subject to the shared cost obligations set forth in Section 3.4). (vii) Identifying potential Third Parties and preparing the business plans necessary to support the engagement of one or more Third Parties, conducting negotiations with respect to such engagement, and monitoring of any Third Parties engaged. (vii) Handling public relations with respect to Innovations to support the initial market development and the search for appropriate Third Parties. (viii) Handling public relations, with the input and consultation of the University, with respect to scientific breakthroughs and data embodied in or associated with Atherosclerosis Tests and other Products and their underlying scientific research; MSS will use reasonable efforts to perform its responsibilities set forth in this Section 3.1 in accordance with any timeline set by the Steering Committee. 3.2 Responsibilities of the University. Subject to the high level management and direction of the Steering Committee, the University will have responsibility for the following activities: (i) Conducting genetic laboratory analysis on such data and interpretation of the results for the Initial Coronary Artery Disease Test. (ii) Further technical development of Innovations and Products by seeking potential new gene sequences and running confirming genetic laboratory tests. (iii) Ensuring that all tests are run consistent with European Community standards. (iv) Ensuring that the employees, faculty, consultants and staff working on the Project maintain written documentation of their work (such as laboratory notebooks) sufficient to establish dates of invention, the substance of their work on the Project at various dates, and any 7 other information necessary or desirable for seeking patent protection and establishing priority of invention. (v) Providing assistance in validation of Approved Labs if necessary. (vi) Providing reasonable technical presentation support and assistance to MSS if requested by MSS. (vii) Participation in a reasonable number of educational programs with respect to Innovations and Products, if requested by MSS or a Third Party. The University will use reasonable efforts to perform its responsibilities set forth in this Section 3.2 in accordance with any timeline set by the Steering Committee. 3.3 Additional Responsibilities and Reallocation of Responsibilities. The parties recognize that with respect to the development, testing and commercialization of any particular Product (including the Initial Coronary Artery Disease Test), additional responsibilities not enumerated in Sections 3.1 and 3.2 above may need to be allocated to the parties, and it may further become desirable to reallocate some of the responsibilities enumerated in Sections 3.1 and 3.2 between the parties. In either case, the Steering Committee will have responsibility for making any such allocation or reallocation of responsibilities. 3.4 Costs of Carrying Out Responsibilities; Shared Costs. (a) Costs to be Borne by the Parties Individually. Subject to the shared cost obligations of this Section 3.4, each party will carry out the activities for which it is responsible at its own expense, including the costs of any research and development, internal staff and overhead costs, consultants and other outside contractors assisting a party in performing its duties, travel costs, initial U.S. patent filing and prosecution costs, locating and engaging Third Parties, and public relations. (b) Shared Costs. The parties recognize that there will be shared costs incurred under the Project, which will be borne by the parties in proportion to each party's share of Net Proceeds. Shared costs will include the following: legal fees incurred in engaging a Third Party; all costs associated with the preparation, filing and prosecution of international patent applications, including filing fees, translation costs and legal fees (although MSS will be responsible for its internal staff and overhead costs incurred with respect to any patent applications that it has responsibility for); regulatory costs, if any, including filing fees and legal fees; other costs that may be incurred with respect to the commercialization of Products, whether through MSS or a Third Party, such as patent litigation costs, indemnities and warranties to a Third Party or to end users of Products, and any insurance premiums to insure against potential liability; and any other costs approved by the Steering Committee to be shared costs. (c) Payment of Shared Costs. The parties will contribute to shared costs as they are incurred. After a Commercialization Event occurs with respect to a Product and Net Proceeds are being generated: (i) The Steering Committee will determine a percentage of the Net Proceeds that will be directed into a sinking fund out of which shared costs and any liabilities 8 incurred will be paid, and (ii) to the extent that the sinking fund contains insufficient funds to pay any shared costs incurred, MSS will have the option to require the University to contribute its share of the balance directly to MSS, or to pay such shared costs directly and to offset the University's share of such costs against the share of any Net Proceeds or development funds to which the University is entitled hereunder. 3.5 Selection of Approved Labs. MSS and the University will by mutual agreement establish one or more Approved Labs to conduct Test Administrations. Neither party will unreasonably withhold its consent to the establishment of a particular Approved Lab. Such Approved Labs must have the technical and professional capability to conduct Test Administrations in a competent, cost efficient and timely manner, must meet all applicable governmental regulatory requirements, and must be able to handle reasonable anticipated volumes. In the event that either party determines, in the exercise of good faith judgment, that an Approved Lab previously agreed to by the parties is unacceptable or undesirable, then the Steering Committee will determine whether a different Approved Lab should be established and, if so, will establish a replacement Approved Lab. 3.6 Use of Approved Labs. Each party agrees that it will conduct or cause to be conducted Test Administrations only through an Approved Lab, except that either party may at its option use other laboratories to conduct Test Administrations in conjunction with internal development of products outside the Project Scope. 4. GRANT OF LICENSES 4.1 Grant. Subject to the terms and conditions of this Agreement, the University hereby grants to MSS a worldwide, irrevocable, transferable license under the Licensed Patents and any other applicable Intellectual Property Rights owned by the University to make, have made, use, offer to sell, sell, license and otherwise transfer Products within the Project Scope and to conduct Test Administrations, and to sublicense Third Parties, distributors and Subsidiaries of MSS, and Approved Labs to do any of the foregoing, all subject to the approval of the Steering Committee in accordance with Section 2 above. 4.2 Exclusivity. The license granted in Section 4.1 shall be exclusive to MSS, except that the University retains the right to practice and use any Licensed Invention for its own internal research purposes and in carrying out any of its responsibilities under Section 3.2 above. 5. DIVISION OF NET PROCEEDS 5.1 Allocation of Net Proceeds With Respect to Products. The allocation of Net Proceeds between MSS and the University with respect to each Product within the Project Scope will be determined by the Steering Committee based on general guidelines to be generated by the Steering Committee for each type of Product to be developed and commercialized hereunder (the "General Guidelines"). The General Guidelines for a particular type of Product will contain a set of weights assigned to each responsibility that could potentially be allocated between the parties for the development and/or commercialization of a particular Product of that type. With respect 9 to each particular Product of a defined type, the parties will generate and execute a set of specific guidelines for that particular Product (the "Specific Guidelines"), which will list those of the responsibilities contained in the General Guidelines that are applicable to that particular Product, will allocate each such responsibility to one of the parties, and will credit to such party the weight associated with such responsibility in the General Guidelines. Each party's share of the Net Proceeds generated by such particular Product will then equal its percentage share of the total weights in the Specific Guidelines assigned to such party, subject to any minimum share such party may be entitled to as listed in the General Guidelines and/or the Specific Guidelines. If a responsibility listed in the General Guidelines for a type of Product is not relevant to a particular Product of that type, then the weight for that responsibility will be listed as zero in the Specific Guidelines for that particular Product. For example, if the total weights for all assigned responsibilities in the Specific Guidelines equals 80 and the weights associated with the responsibilities assigned to one party in the Specific Guidelines equals 30, then such party would be entitled to 37.5% of the Net Proceeds generated by that particular Product. Schedule 1 contains the General Guidelines for genetic test Products the parties have agreed to as of the Effective Date. Schedule 2 contains the Specific Guidelines the parties have agreed to as of the Effective Date for the Initial Coronary Artery Disease Test based upon the responsibilities for the Initial Coronary Artery Disease Test set forth in Section 3 above. In the event that the Steering Committee reallocates the responsibilities for the Initial Coronary Artery Disease Test, or adds new responsibilities to one or both of the parties, the Steering Committee will determine and execute a revised set of Specific Guidelines for the Initial Coronary Artery Disease Test based upon the reallocated responsibilities and the cost thereof. As new General Guidelines are generated by the Steering Committee for other Product types, the parties will set forth such General Guidelines in a new Schedule to this Agreement, and when executed by a majority of the members of the Steering Committee, such General Guidelines shall then become a part of this Agreement. Similarly, as Specific Guidelines for a particular Product of that type are generated, the parties will set forth such Specific Guidelines in a new Schedule to this Agreement, and when executed by a majority of the members of the Steering Committee, such Specific Guidelines shall then become a part of this Agreement. The Steering Committee may revise any General Guidelines or Specific Guidelines based upon a reallocation of responsibilities thereunder and the associated cost thereof and, upon doing so, shall set forth the revised guidelines in a new Schedule which, when executed by a majority of the members of the Steering Committee, shall become a part of this Agreement. 5.2 Development Funding from a Third Party. Any development funding received from a Third Party will be allocated by the Steering Committee between MSS and the University in proportion to the responsibilities each party undertakes that is covered by such funding and the effect such responsibilities may have on the division of Net Proceeds. 5.3 Payment Directly to [ * ]. MSS may pay directly to [ * ] any portion of the University's share of Net Proceeds to which [ * ] is entitled. 10 6. REPORTING AND DISTRIBUTION OF NET PROCEEDS 6.1 Reports and Payment. MSS will, within forty-five (45) days after the close of each calendar quarter during the term of this Agreement, issue a written report to the University reporting the Net Proceeds generated by MSS during such quarter, and a computation of the share thereof due each party hereunder. Full payment, net of any setoffs for shared costs to which MSS may be entitled under Section 3.4(c) above, of the University's share of such Net Proceeds for such calendar quarter will accompany such report. 6.2 Books and Records. MSS will keep, and will cause its distributors to keep, full, true, and accurate records with respect to Net Proceeds. MSS will give access to such records at reasonable times, no more than once per year, for three (3) years following the end of the calendar year to which they pertain, to a mutually acceptable independent certified public accountant retained by the University for the purpose of verifying the accuracy of the reports supplied to the University hereunder. The University will pay for the cost of such independent certified public accountant, except in the event that such inspection reveals that MSS has understated or underpaid the amounts due hereunder to the University in an average amount of five percent (5%) or more over a six (6) month period, then the MSS will pay or reimburse the University for the entire cost of such inspection. MSS agrees to pay the balance of such amounts due, together with the cost of the inspection, to the University within ten (10) days after written notice by the University of MSS's understatement or underpayment. 7. OWNERSHIP 7.1 MSS Innovations. MSS shall be the sole and exclusive owner of MSS Innovations, any Product based thereon after a Commercialization Event, the Brand Name(s), and all Intellectual Property Rights in the foregoing, subject to the University's right to share in Net Proceeds generated from the commercialization thereof in accordance with this Agreement. The University agrees to execute documents, including but not limited to assignment documents, as reasonably requested by MSS to establish, confirm and perfect MSS's rights in any of the foregoing. 7.2 University Innovations. The University shall be the sole and exclusive owner of University Innovations and of all Intellectual Property Rights therein, provided, however, that upon the occurrence of a Commercialization Event with respect to a University Innovation and/or a Product based thereon, the University agrees to assign to MSS all right and title to such University Innovation and/or Product and to all Intellectual Property Rights therein, subject to the University's right to share in Net Proceeds generated from the commercialization thereof in accordance with this Agreement. Each party agrees to execute documents, including but not limited to assignment documents, as reasonably requested by the other party to establish, confirm and perfect the other party's rights in accordance with the foregoing. 7.3 Joint Ownership. MSS and the University shall be joint owners of equal undivided interests in any Joint Innovations developed by them, provided, however, that (i) during the term of this Agreement, each party agrees to exploit its joint ownership rights consistent with MSS's exclusivity as defined in Section 4.2 above, and (ii) upon the occurrence of a Commercialization 11 Event with respect to a Joint Innovation and/or a Product based thereon, the University agrees to assign to MSS all right and title to such Joint Innovation and/or Product and to all Intellectual Property Rights therein, subject to the University's right to share in Net Proceeds generated from the commercialization thereof in accordance with this Agreement. After expiration or termination of this Agreement, each party shall be free to exploit, without the permission of the other party and without any duty of accounting, its joint ownership rights in any Joint Innovations that have not been assigned to MSS under this Section 7.3. 8. PUBLICATION Publication of research results or other information within the Project Scope will be governed by the procedures set forth in Section 5 of the Master Agreement. The Steering Committee will act as the "designated person" of each party as referenced in Section 5 of the Master Agreement, and will have the authority to determine the content and timing of any such publication. 9. TERM Unless earlier terminated in accordance with the terms of Section 10 below or by determination of the Steering Committee to abandon the Project and terminate this Agreement, this Agreement shall remain in effect from the Effective Date for a period of ten (10) years, and shall thereafter automatically renew for additional one (1) year periods, unless either party gives written notice to the other party at least six (6) months in advance of any renewal date that such party does not wish to renew this Agreement. 10. TERMINATION 10.1 Termination Upon Notice of Breach. In the event that either party breaches or defaults under any material term or condition of this Agreement, including but not limited to failure to make timely payment of monies due, and such breach or default is not cured within thirty (30) days of written notice of the same from the other party, the other party may, in addition to any other remedy that it may have at law or in equity or under this Agreement, terminate this Agreement. 10.2 Termination by the Steering Committee. The Steering Committee may at any time determine to abandon the Project and terminate this Agreement on a timeline as set by the Steering Committee. 10.3 Termination by MSS. MSS may at its option upon written notice to the University terminate this Agreement in the event that [ * ] is no longer an employee of the University or [ * ]. 12 10.4 Immediate Termination Upon Certain Events of Bankruptcy. Either party may at its option terminate this Agreement immediately upon written notice to the other party upon the occurrence of any of the following events: (a) In the event that the other party makes an assignment for the benefit of creditors; admits in writing its inability to pay its debts as they become due; files a voluntary petition in bankruptcy; is adjudicated to be bankrupt or insolvent; files a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statute, law or regulation, or files an answer or similar pleading admitting the material allegations of a petition filed against it in any such proceeding; or consents to or acquiesces in the appointment of, or has its business placed in the hands of, a trustee, receiver, assignee, or liquidator of it or any substantial part of its business, assets or properties, whether by voluntary act or otherwise; or (b) In the event that either party ceases doing business as a going concern, or it or its shareholders take any action in anticipation of or furtherance of dissolution or liquidation. 10.5 Effect of Termination. (a) Provisions Applying to All Terminations. In the event of any termination of this Agreement for any reason, the following provisions shall apply: (i) except as provided in this Section 10.5 or under Section 10.6 below, all further obligations of both parties under this Agreement will cease as of the date of termination of this Agreement; (ii) each party shall retain ownership (including joint ownership) of any Innovations and/or Products to which it had title in accordance with the provisions of this Agreement on the date of such termination, including but not limited to title by virtue of an assignment after a Commercialization Event; and (iii) with respect to any Product(s) for which a Commercialization Event has occurred as of the date of termination of this Agreement, the Steering Committee will determine how the division of Net Proceeds from such Product(s) should be reallocated between the parties, both immediately and over time, based upon the additional responsibilities with respect to such Product(s) that MSS will have to assume post termination of this Agreement, and MSS will be entitled to deduct its reasonable cost of all such additional responsibilities from the University's share of any such Net Proceeds, provided, however, that in no event shall the deduction of such costs cause the University's share of such Net Proceeds to fall below [ * ] in any given calendar quarter. (b) Provisions Applying to Specific Events of Termination. In addition to the provisions of subsection (a), the following provisions shall apply with respect to specific events of termination affecting Products for which no Commercialization Event has occurred: (i) Termination by MSS. In the event that MSS terminates this Agreement pursuant to Sections 10.1 or 10.4, or the University elects not to renew this 13 Agreement pursuant to Section 9, then with respect to any Product for which data exists or proof of principle studies are underway but no Commercialization Event has yet occurred as of the date of termination, the license rights granted by the University to MSS under Section 4 above shall continue, and MSS shall have the right to continue development of any such Product and to take such Product into commercial distribution (either itself or through a Third Party), provided that (1) if such Product is placed into commercial distribution, then the Steering Committee will determine how the Net Proceeds from such Product should be allocated between the parties, both immediately and over time, based upon the additional responsibilities that MSS assumes with respect to such Product post termination of this Agreement and (2) MSS will be entitled to deduct its reasonable cost of all such additional responsibilities from the University's share of any Net Proceeds generated by such Product, except that, unless otherwise determined by the Steering Committee, in no event shall the deduction of such costs cause the University's share of such Net Proceeds to fall below [ * ] in any given calendar quarter. (ii) Termination by the University. In the event that the University terminates this Agreement pursuant to Sections 10.1 or 10.4, or MSS elects not to renew this Agreement pursuant to Section 9, then, at the University's option, the University may either: (1) terminate all licenses granted by the University to MSS under this Agreement with respect to any Product(s) for which no Commercialization Event has yet occurred as of the date of termination, and elect to itself continue development of any such Product and to take such Product into commercial distribution (either itself or through a Third Party), provided that (x) if such Product is placed into commercial distribution, then the Steering Committee will determine how the Net Proceeds from such Product should be allocated between the parties, both immediately and over time, based upon the additional responsibilities that the University assumes with respect to such Product post termination of this Agreement and (y) the University will be entitled to deduct its reasonable cost of all such additional responsibilities from MSS's share of any Net Proceeds generated by such Product, except that, unless otherwise determined by the Steering Committee, in no event shall the deduction of such costs cause MSS's share of such Net Proceeds to fall below [ * ] in any given calendar quarter; or (2) allow the license rights granted by the University to MSS under Section 4 above to continue and allow MSS to continue development of any such Product and to take such Product into commercial distribution (either itself or through a Third Party), provided that (x) if such Product is placed into commercial distribution, then the Steering Committee will determine how the Net Proceeds from such Product should be allocated between the parties, both immediately and over time, based upon the additional responsibilities that MSS assumes with respect to such Product post termination of this Agreement and (y) MSS will be entitled to deduct its reasonable cost of all such additional responsibilities from the University's share of any Net Proceeds generated by such Product, except that, unless otherwise determined by the Steering Committee, in no event shall the deduction of such costs cause the University's share of such Net Proceeds to fall below [ * ] in any given calendar quarter. (iii) Termination by the Steering Committee or by MSS Under Section 10.3. In the event this Agreement is terminated by the Steering Committee pursuant to Section 10.2 or by MSS pursuant to Section 10.3, then the Steering Committee will decide whether MSS or the University (if any) should assume responsibility for continuing development of any 14 Product for which a Commercialization Event has not occurred as of the date of such termination, and in the event MSS assumes such responsibility, then any licenses granted by the University to MSS under this Agreement will survive termination of this Agreement. The Steering Committee will also determine how the Net Proceeds generated by any such Product should be allocated between the parties, based upon the additional responsibilities assumed by the party having responsibility for continuing development of such Product post termination of this Agreement, and the party assuming such responsibility will be entitled to deduct its reasonable cost of all such additional responsibilities from the other party's share of any Net Proceeds generated by such Product, except that, unless otherwise determined by the Steering Committee, in no event shall the deduction of such costs by one party cause the other party's share of such Net Proceeds to fall below [ * ] in any given calendar quarter. 10.6 Survival of Certain Provisions. The provisions of Sections 6.2, 7, 10.5, 10.6, 12, 13.1, 13.2, 14.3, 15, 17, and 18 of this Agreement will survive the expiration or termination of this Agreement. 11. PERSONNEL Each party will cause its respective employees, faculty, consultants and staff to execute such agreements, assignments, applications and other documents as necessary to perfect and protect each party's rights as defined in this Agreement with respect to Innovations and Products within the Project Scope. 12. SETTLEMENT OF DISPUTES 12.1 Basic Dispute Resolution Procedures. Any dispute between the parties either with respect to the interpretation of any provision of this Agreement or with respect to the performance of either party shall be resolved as specified in this Section. (a) Upon the written request of either party, each of the parties will appoint a designated representative who does not devote substantially all of his or her time to performance under this Agreement, whose task it will be to meet for the purpose of endeavoring to resolve such dispute. (b) The designated representatives shall meet as often as necessary during a fifteen (15) day period (or such other time as the parties may agree) to gather and furnish to the other all information with respect to the matter in issue which is appropriate and germane in connection with its resolution. (c) Such representatives shall discuss the problem and negotiate in good faith in an effort to resolve the dispute without the necessity of any formal proceeding relating thereto. (d) During the course of such negotiation, all reasonable requests made by one party to the other for nonprivileged information reasonably related to this Agreement, will be honored in order that each of the parties may be fully advised of the other's position. 15 (e) The specific format for such discussions will be left to the discretion of the designated representatives, but may include the preparation of agreed upon statements of fact or written statements of position furnished to the other party. 12.2 Escalation Procedures. If the designated representatives cannot resolve the dispute, then the dispute shall be escalated to a member of the Board of Directors or Trustees of each of the University and of MSS, for their review and resolution. If the dispute cannot be resolved by such persons, then the parties may initiate formal proceedings; however, formal proceedings for the resolution of any such dispute may not be commenced until the earlier of: (a) The designated representatives concluding in good faith that amicable resolution through continued negotiation of the matter in issue does not appear likely; or (b) Sixty (60) days after the initial request to negotiate such dispute (unless preliminary or temporary relief of an emergency nature is sought by one of the parties); or (c) Thirty (30) days before the statute of limitations governing any cause of action relating to such dispute would expire. 12.3 Arbitration of Monetary Disputes. (a) Procedures. Any monetary disputes between the parties concerning the amount of monies due or payable under this Agreement which the parties are unable to resolve pursuant to the provisions of Sections 12.1 and 12.2 above, will be settled by arbitration in Orange County, California (unless otherwise agreed) under the then-prevailing rules of American Arbitration Association. There will be one (1) arbitrator chosen by mutual agreement of the parties or, in the event the parties cannot agree within thirty (30) calendar days of issuance of a written demand for arbitration by either party, by the American Arbitration Association. All proceedings by the arbitrator shall be conducted in accordance with the rules of the American Arbitration Association, except to the extent the provisions of such rules are modified by this Agreement or the mutual agreement of the parties. Either party will have the right to discovery of evidence, but by the following methods only: requests for production of documents and depositions of no more than three (3) individuals. The arbitrator will supervise discovery and may, at the request of either party, limit expenses of discovery (including reasonable attorneys' fees) to the requesting party for good cause shown. All discovery will be completed, and the arbitration hearing will commence, within forty-five (45) days after appointment of the arbitrator. Subject to the foregoing, discovery matters will be governed by the Federal Rules of Civil Procedure as applicable to civil actions in the United States District Courts. The arbitration hearing will conclude within thirty (30) days after it commences. The award rendered in arbitration will be in writing and will be final and binding, and may be enforced in any court of competent jurisdiction. The fees and expenses of the arbitrator will be paid by the non-prevailing party. (b) Approval of One Substantive Position of the Parties. In all arbitration proceedings submitted under this Section 12.3, the arbitrator shall be required to agree upon and approve the substantive position advocated by either MSS or the University with respect to each 16 disputed item(s). Any decision rendered by the arbitrator that does not reflect a substantive position advocated by either MSS or the University shall be beyond the scope of authority granted to the arbitrator and shall be void. No decision of the arbitrator shall ever be construed as or have the effect of amending or altering this Agreement or the parties' rights and responsibilities with respect thereto. 12.4 Other Disputes. Except as provided in Section 12.3 above, the parties will have no obligation to arbitrate any other disputes, claims or controversies of any kind arising out of or related to this Agreement, including but not limited to any dispute, claim or controversy relating to the scope of the Project or the party's respective ownership rights to any Innovation or Product. In addition, any claim by one party against the other for injunctive or preliminary relief, whether or not related to this Agreement, may be litigated in a court of competent jurisdiction. 13. CONFIDENTIALITY AND PRESS RELEASE In addition to the provisions of Section 5 of the Master Agreement, the following confidentiality provisions shall apply: 13.1 Confidentiality of the Agreement. The parties agree to maintain all terms and conditions of this Agreement in confidence, except that (i) MSS may state that it has received a license from the University under this Agreement and may name the patents and Intellectual Property Rights to which such license rights apply; (ii) The University may state that it has licensed certain commercial exploitation rights within the Project Scope to MSS; (iii) this Agreement may be disclosed to either party's attorneys, accountants or other professional advisors in the course of seeking professional advice and to the extent required by applicable law or regulations or court order; and (iv) this Agreement may be disclosed by MSS to entities with which MSS is discussing a proposed sale of its stock, sale of all or substantially all of its assets, obtaining financing or entering into a partnering arrangement, provided that the entity to whom the terms of this Agreement is to be disclosed has executed a reasonable non-disclosure agreement. 13.2 Protection of Confidential Information. Each party agrees to keep all Confidential Information of the other party to which it has access hereunder strictly confidential, and agrees that it will not, except with the express permission of the other party or as required by applicable law or regulations or by court order, use such information except in the performance of this Agreement, or disclose any such Confidential Information to any person or entity other than its own employees, consultants, faculty, technicians, visiting scientists, students, and/or post-doctoral associates who have a need to know and who have been informed in advance of the receiving party's obligations with respect to such Confidential Information. 13.3 Press Release. The parties agree to issue a mutually agreeable joint press release with respect to this Agreement. Each party agrees that it will not issue a press release with respect to this Agreement until such joint press release has first been issued. 17 14. REPRESENTATIONS AND WARRANTIES 14.1 By the University. The University represents and warrants to MSS that: (a) Ownership. The University is the sole and exclusive owner of any Licensed Patents and any University Innovations supplied hereunder to MSS for commercial exploitation; (b) Authority. The University has the full right and power to grant the licenses to MSS set forth in this Agreement and to supply the University Innovations to MSS for commercialization hereunder; (c) Inconsistent Obligations. There are no outstanding agreements, licenses, assignments or encumbrances inconsistent with the provisions of such licenses or with any other provision of this Agreement; and (d) Infringement of Rights of Others. To the best of the University's knowledge as of the Effective Date, the University knows of no third parties' rights which would be infringed by practicing the inventions claimed in the Licensed Patents within the scope of the licenses granted to MSS hereunder or by the commercialization as contemplated hereunder of the University Innovations in existence as of the Effective Date. The University will promptly notify MSS in the event that it learns or has cause to believe at any time that any third parties' rights would or might be infringed by practicing the inventions claimed in any Licensed Patents or by any Product or Innovation being commercialized hereunder. In the event that a claim is made against MSS or a Third Party that the manufacture, use, sale, distribution or other commercial exploitation of a Product or Innovation infringes the Intellectual Property Rights of a third party, then MSS or the Third Party (as applicable) will fund the cost of any litigation resulting out of such claim, but will be entitled to recover up to two-thirds (or whatever other fraction of the Net Proceeds generated by such Product or Innovation the University is entitled to hereunder at the time such litigation commences) of its costs and any damages awarded against it out of the sinking fund established pursuant to Section 3.4 above and, to the extent the sinking fund contains insufficient funds, the University's current and future share of any Net Proceeds; provided that in the event MSS or the Third Party is found to have willfully infringed such third party's Intellectual Property Rights (and such willfulness was not caused by the University), then MSS or the Third Party shall not be entitled to recover any portion of any enhanced damages awarded based upon such willfulness, and provided further that the University will be entitled to have counsel of its own choosing participate in (but not control) any such litigation at the University's sole expense. 14.2 By MSS. MSS represents and warrants to the University that there are no outstanding agreements, licenses, assignments or encumbrances inconsistent with the provisions of such licenses or with any other provision of this Agreement. 14.3 No Other Warranties. EXCEPT AS SET FORTH IN THIS SECTION, NEITHER PARTY MAKES ANY OTHER WARRANTY, EXPRESS OR IMPLIED, RELATING TO THIS AGREEMENT OR ANY INNOVATION OR PRODUCT, AND EACH PARTY SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OR CONDITION OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 18 15. INDEMNITIES 15.1 By MSS. MSS agrees to defend, indemnify, and hold the University harmless from and against any and all third-party claims (other than claims for infringement of a third party's Intellectual Property Rights to the extent such claims fall within the provisions of Section 14 above), damages, actions, liabilities, costs and expenses arising out of or in connection with (i) any damage, including but not limited to damage to any property and personal injury or death, by whomever suffered arising out of or resulting from any negligent or willful act of MSS relating to the subject matter of this Agreement, and (ii) any breach or claimed breach of the warranties and representations set forth in Section 14.2 above. 15.2 By the University. The University agrees to defend, indemnify, and hold MSS harmless from and against any and all third-party claims, damages, actions, liabilities, costs and expenses arising out of or in connection with (i) any damage, including but not limited to damage to any property and personal injury or death, by whomever suffered arising out of or resulting from any negligent or willful act of the University relating to the subject matter of this Agreement, and (ii) any breach or claimed breach of the warranties and representations set forth in Section 14.1 above. 16. ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS In the event that either party becomes aware of an infringement or potential infringement of the Licensed Patents or of any other Intellectual Property Right of either the University or MSS within the Project Scope, such party will promptly notify the other party and provide the details known to it. The Steering Committee will then promptly confer about such infringement or potential infringement. Within ten (10) business days thereafter, each party will notify the other of its decision whether or not it wishes to participate in litigation against the infringer or potential infringer. Any such litigation will proceed as follows: (a) Both Parties Elect to Participate. In the event that both parties elect to participate in such litigation, the parties will mutually agree upon counsel to bring such litigation. The parties will share equally the costs (including the fees of attorneys and other professionals) of any such litigation. MSS may recover all or a portion of its share of any such costs from the sinking fund established pursuant to Section 3.4 above and, to the extent the sinking fund contains insufficient funds, as an offset to the University's share of Net Proceeds. All damages or lump sum settlement payments recovered from the prosecution or settlement of such litigation shall, after deduction of all reasonable costs and fees of attorneys and other professionals incurred in pursuing such litigation, be divided equally between the parties. Each party agrees to join such action as a named plaintiff to the extent necessary to obtain jurisdiction or if deemed a necessary party. (b) MSS Decides to Participate and the University Does Not. In the event that MSS elects to participate in such litigation and the University does not, then MSS may initiate and control such litigation at its own expense. In the event MSS institutes such litigation, (i) the 19 University may at its option have counsel of its choosing participate in such litigation provided such counsel does not interfere with MSS's control of such litigation, (ii) the University will join such action as a plaintiff to the extent necessary to obtain jurisdiction or if the University is deemed a necessary party, and (iii) if such litigation is based upon the Licensed Patents or any other Intellectual Property Rights of the University, MSS will not settle any such litigation without the express approval of the University to the terms and conditions of any such settlement. All damages or lump sum settlement payments recovered from the prosecution or settlement of such litigation shall be retained by MSS. (c) The University Decides to Participate and MSS Does Not. In the event that the University elects to participate in such litigation and MSS does not, then the University may institute and control such litigation at its own expense. In the event the University institutes such litigation, (i) MSS may at its option have counsel of its choosing participate in such litigation provided such counsel does not interfere with the University's control of such litigation, (ii) MSS will join such action as a plaintiff to the extent necessary to obtain jurisdiction or if MSS is deemed a necessary party, and (iii) if such litigation is based upon any Intellectual Property Right of MSS, the University will not settle any such litigation without the express approval of MSS to the terms and conditions of any such settlement. All damages or lump sum settlement payments recovered from the prosecution or settlement of such litigation shall be retained by the University. 17. LIMITATION OF LIABILITY EXCEPT FOR ANY WILLFUL BREACH OF SECTIONS 8 OR 13, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING OUT OF THIS AGREEMENT. 18. GENERAL 18.1 Governing Law. This Agreement will be governed by and construed in accordance with the substantive laws of the United States and the State of California, without regard to or application of provisions relating to choice of law. 18.2 Waiver and Modification. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. Any waiver, amendment or other modification of any provision of this Agreement will be effective only if in writing and signed by the parties. 18.3 Severability. If for any reason a court of competent jurisdiction finds any provision or portion of this Agreement to be unenforceable, that provision will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement will continue in full force and effect. 20 18.4 Notices. All notices required or permitted under this Agreement will be in writing, will reference this Agreement and will be deemed given: (i) when sent by confirmed facsimile; (ii) ten (10) working days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iii) five (5) working days after deposit with a commercial overnight carrier, with written verification of receipt. All communications will be sent to the addresses set forth below or to such other address as may be designated by a party by giving written notice to the other party pursuant to this section: To MSS: Paul J. White President and CEO Medical Science Systems, Inc. 4400 McArthur Blvd., Suite 980 Newport Beach, CA 92660 U.S.A. To the University: [ * ] with a copy to: [ * ] 18.5 Delays Beyond Control. Neither party will be liable to the other party for any failure or delay in performance caused by reasons beyond such party's reasonable control, and such failure or delay will not constitute a material breach of this Agreement. 21 18.6 Assignment. Neither party may assign its rights or obligations hereunder, by operation of law or otherwise, without express written consent of the other party, which consent will not be unreasonably withheld. Any attempted assignment without such consent shall be void. Subject to the foregoing, this Agreement will benefit and bind the successors and assigns of the parties. 18.7 No Third Party Beneficiaries; No Agency. Except as expressly provided herein to the contrary, no provision of this Agreement, express or implied, is intended or will be construed to confer rights, remedies or other benefits to any third party under or by reason of this Agreement. This Agreement will not be construed as creating an agency, partnership or any other form of legal association (other than as expressly set forth herein) between the parties. 18.8 Entire Agreement. This Agreement and the Master Agreement, including all exhibits, constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersede and replace all prior or contemporaneous understandings or agreements, written or oral, regarding such subject matter. 18.9 Multiple Counterparts. This Agreement may be executed in multiple counterparts, each of which will be considered an original and all of which together will constitute one agreement. This Agreement may be executed by the attachment of signature pages which have been previously executed. 18.10 Cumulation. All rights and remedies enumerated in this Agreement will be cumulative and none will exclude any other right or remedy permitted herein or by law. 18.11 Venue and Personal Jurisdiction. Any suit or other proceeding not subject to arbitration under Section 12 will be brought solely in the federal courts in the Central District of California, if jurisdiction in such court can be obtained, and otherwise in the state courts of California, and each party hereby irrevocably submits to, and waives any objections to, the exercise of personal jurisdiction thereof and venue therein. 18.12 Headings. The headings contained in this Agreement are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 18.13 Incorporation of the Master Agreement. Except as specifically provided in this Agreement, the relevant terms and conditions of the Master Agreement are hereby incorporated by reference into this Agreement. 22 IN WITNESS WHEREOF, the parties have executed this Agreement through their duly authorized representatives as set forth below: MEDICAL SCIENCE SYSTEMS, INC. THE UNIVERSITY OF SHEFFIELD By: By: ---------------------------- ---------------------------------- Printed Name: Printed Name: ------------------ ------------------------ Title: Title: ------------------------- ------------------------------- 23 SCHEDULE 1 GENERAL GUIDELINES FOR ALLOCATING NET PROCEEDS FOR GENETIC TEST PRODUCTS [ * ] 24 SCHEDULE 2 SPECIFIC GUIDELINES FOR ALLOCATING NET PROCEEDS FOR INITIAL CORONARY ARTERY DISEASE TEST [ * ] EX-10.4 19 DEVELOPEMENT & COMMERCIALIZATION PROJECT AGREEMENT 1 EXHIBIT 10.4 MEDICAL SCIENCE SYSTEMS DEVELOPMENT AND COMMERCIALIZATION PROJECT AGREEMENT (EYE DISEASES AMONG DIABETICS) This Agreement is entered into and made effective as of this ___ day of ___________, 1996 (the "Effective Date") by and between Medical Science Systems, Inc. a Texas corporation having its principal place of business at 4400 MacArthur Blvd., Suite 980, Newport Beach, CA 92660 ("MSS") and The University of Sheffield, Western Bank, Sheffield S10 2TN, England ("University"), acting through The Section of Molecular Medicine of the University's Department of Medicine and Pharmacology ("SMM"). RECITALS A. University and MSS have entered into a Master Agreement for Technology Evaluation dated July 1, 1996 (the "Master Agreement"). Following the procedures set forth in the Master Agreement, the parties have agreed to work together on a project as defined herein to perform additional development and commercialization of certain technology relating to the association between genetics and eye diseases among diabetics. B. This Agreement is intended to supplement the provisions set forth in the Master Agreement with respect to such technology, and sets forth additional terms and conditions agreed to by the parties with respect to the project. C. It is contemplated that MSS may locate and engage a third party to assist in the commercialization of products based upon the technology that is the subject of the project, or MSS may itself commercialize certain products based upon the technology. This Agreement is also intended to set forth the terms and conditions upon which MSS will locate and engage such third party or itself commercialize such products. NOW, THEREFORE, in consideration of the foregoing premises and of the terms and conditions of this Agreement, the parties agree as follows: 1. DEFINITIONS 1.1 "Approved Lab" means a laboratory (which may be an internal laboratory of the University and/or MSS or a third party laboratory) mutually approved by MSS and SMM pursuant to Section 3.5 below to conduct Test Administrations. 1.2 "Brand Name(s)" means the trademark(s), service mark(s) and/or logo(s) or other designations under which Products are marketed and promoted by MSS or a Third Party. 1.3 "Commercialization Event" means either of the following with respect to a Product: (i) entry into a business arrangement with a Third Party (whether through a license and/or - -------- * Confidential Treatment requested. 2 development agreement, distribution agreement, joint venture, co-promotion, or other structure) for the further development, clinical testing, marketing and/or sale of such Product in one or more markets, or (ii) decision by the Steering Committee to engage MSS to commercially distribute such Product in one or more markets directly to end users or through distribution channels set up by MSS (rather than through a Third Party). 1.4 "Confidential Information" shall be as defined in Section 1 of the Master Agreement. 1.5 "Eye Disease Test" means [ * ]. 1.6 "Initial Eye Disease Test" means [ * ]. 1.7 "Innovations" means all ideas, inventions, apparatus, systems, data, discoveries, methods, processes, improvements, works of authorship and other innovations of any kind within the Project Scope, whether or not they are eligible for patent, copyright, trademark, trade secret or other legal protection. Examples of Innovations include: [ * ]. "Innovations" does not include any preexisting MSS computer information technology or products (including but not limited to MSS' Biofusion(TM) and Medical Decision Explorer(TM) products and technology), and the usage of any such technology or products shall not be deemed to be within the Project Scope. 1.8 "Intellectual Property Rights" means patent applications, patents, design rights or other similar invention rights, rights of priority, copyrights, trademarks, trade secret rights and other intangible rights, whether existing under statutory or common law, in any country in the world. 1.9 "Joint Innovations" means all inventions, improvements, works of authorship and other innovations of any kind within the Project Scope that may be made, conceived, developed or reduced to practice jointly by MSS and by SMM and their respective employees, consultants, faculty, technicians, visiting scientists, students, and/or post-doctoral associates in the course of this Agreement, whether or not they are eligible for patent, copyright, trademark, trade secret or other legal protection. Examples of Joint Innovations include but are not limited to: genetic, biochemical, or chemical based therapeutic targets, new genes or gene sequences, DNA sequences, and improvements to any of the foregoing. 1.10 "Licensed Patents" means (i) any United States patents that may issue to the University during the term of this Agreement covering an Eye Disease Test (including the Initial Eye Disease Test) developed by or on behalf of the University and all divisionals, reissues, and 3 reexaminations thereof that may issue in the United States during the term of this Agreement, (ii) any corresponding foreign patents that may issue to the University during the term of this Agreement with respect to any of the preceding patents, and all divisionals, reissues, and reexaminations thereof, and (iii) any other patents that may issue to the University during the term of this Agreement, and all divisionals, reissues, and reexaminations thereof, to the extent they cover any Innovations within the Project Scope. 1.11 "Licensed Invention" means any apparatus, system, process, method or other invention claimed in any of the Licensed Patents, and any work of authorship, know how, trade secret and other technology within the Project Scope covered by any other Intellectual Property Right of the University. 1.12 "MSS Innovations" means all Innovations within the Project Scope that may be made, conceived, developed or reduced to practice solely by MSS and its employees, consultants, and technicians. 1.13 "Net Proceeds" means the following: (i) In the case of a Commercialization Event with a Third Party, all royalties, license fees, or other monies payable by such Third Party based upon the commercial distribution of a Product in one or more markets; and (ii) In the case of a decision by the Steering Committee to engage MSS to commercially distribute one or more Products in one or more markets directly to end users or through distribution channels set up by MSS, the gross amount actually received by MSS from the commercial distribution of a Product, less (i) any delivery or other transportation charges and taxes imposed on the transaction, (ii) any charges by an Approved Lab incurred with respect to such Product, (iii) the cost of goods sold (COGS), (iv) actual out of pocket costs for advertising, travel, trade shows, educational programs and other marketing and sales expenses (but not including salaries of personnel) directly related to the commercial distribution of the Product, (v) as determined by the Steering Committee, either a reasonable administrative and sales overhead charge, or the actual personnel costs for marketing, sales and administrative functions, with respect to the commercial distribution of the Product, all of the foregoing computed in accordance with generally accepted accounting principles, and (vi) carryover losses, if any, from a previous quarter. It is recognized by the parties that, depending upon the specific responsibilities assumed by each of the parties, the foregoing costs and expenses may be incurred by either MSS or the University. 1.14 "Products" means any products or services related to the Project (such as new tests, diagnostics, therapeutics, or related services) based upon any University Innovation, MSS Innovation, or Joint Innovation within the Project Scope. 1.15 "Project" means the development and commercialization activities to be undertaken by MSS, SMM and Third Parties (if any) pursuant to this Agreement within the Project Scope. 1.16 "Project Scope" means: 4 (i) [ * ], and (ii) [ * ]. 1.17 "Steering Committee" shall be as defined in Section 2 below. 1.18 "Subsidiary" means a corporation, company or other entity more than fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, now or hereafter, owned or controlled, directly or indirectly, by a party to this Agreement; provided that any such corporation, company or other entity will be deemed to be a Subsidiary only so long as such ownership or control exists. 1.19 "Test Administration" means the performing of the genetic analysis of an Eye Disease Test by an Approved Lab based upon a sample gathered from a patient using Test Sampling Materials. 1.20 "Test Sampling Materials" means a container that will be used to transport a sample from a patient to an Approved Lab for performing the genetic analysis of an Eye Disease Test on such sample, and accompanying instructional materials. 1.21 "Third Party" means a third party entity engaged by MSS, with the approval of the Steering Committee, in accordance with this Agreement to assist in the further development, clinical testing, marketing and/or commercial distribution of one or more Products in one or more markets. 1.22 "University Innovations" means all Innovations within the Project Scope that may be made, conceived, developed or reduced to practice solely by SMM and its faculty, employees, consultants, technicians, visiting scientists, students and post doctoral associates. 2. STEERING COMMITTEE 2.1 General Responsibilities of the Steering Committee. A four-person steering committee, consisting initially of Paul White and Kenneth Kornman for MSS and [ * ] for the University (the "Steering Committee"), will make joint decisions and provide high level management with respect to the Project. [ * ] will also serve on 5 the Steering Committee as a representative of the employees, faculty, consultants and staff working on the Project. Each person on the Steering Committee will have one vote. Each party may nominate alternative or replacement members to serve on the Steering Committee with the consent of the other party, which consent will not be unreasonably withheld. The Steering Committee will meet on a regular basis as the committee members may determine to be necessary. Written minutes of the meetings of the Steering Committee will be kept and will be promptly circulated after each meeting to the committee members for approval. The Project will consist of an initial phase and any follow-on phases that the Steering Committee may determine to pursue. During the initial phase, the parties will, in accordance with their respective responsibilities set forth in Section 3 below, file and prosecute U.S. and international patents covering the Initial Eye Disease Test and any other Innovations that the Steering Committee may determine, conduct clinical studies to generate appropriate clinical data and, if such data demonstrates strong clinical utility of potential Products, identify and engage an appropriate Third Party. If the Steering Committee determines that the clinical data is not strong enough to seek a Third Party, the Steering Committee will determine the next step(s) that should be taken. After completion of the initial phase of the Project, the Steering Committee will review and make decisions as to the next step(s) that should be taken, which may include additional research and/or development and testing of Products, seeking of additional Third Parties, direct sales, or termination of the Project. 2.2 Determinations With Respect to Commercialization of Individual Products. The Steering Committee will determine with respect to each Product or class of Products to be commercialized pursuant to the Project, whether to engage a Third Party to assist in the further development, clinical testing, marketing and/or commercial distribution of such Product(s) in one or more markets, or whether to engage MSS to commercially distribute such Product(s) in one or more markets directly to end users or through distribution channels set up by MSS. In the event that the Steering Committee determines to engage a Third Party with respect to a particular Product, MSS will identify potential Third Parties and the Steering Committee will select one with which MSS will be authorized to negotiate an appropriate engagement with respect to such Product, or to extend a previous engagement to cover such Product. 3. RESPONSIBILITIES OF THE PARTIES This Section sets forth the responsibilities of the parties during the Project, including but not limited to the initial phase of the Project. 3.1 Responsibilities of MSS. Subject to the high level management and direction of the Steering Committee, MSS will have responsibility for the following activities: (i) Conducting overall management and oversight of the Project. (ii) Providing assistance if needed with the design of confirmatory clinical trials to demonstrate clinical utility or to support other claims the University would like to make with respect to the results of research conducted for the Initial Eye Disease Test. 6 (iii) Providing assistance with data analysis and statistical support with respect to the confirmatory clinical trials for the Initial Eye Disease Test. (iv) Developing a patent strategy with respect to Innovations and Products and the determination of which countries patents should be filed in. (v) Preparing and filing in the United States the initial patent application with respect to the Initial Eye Disease Test and any other Innovations the Steering Committee may determine to file patents for during the Project. (vi) Preparing, filing, and prosecuting all international patent applications (subject to the shared cost obligations set forth in Section 3.4 below) that the Steering Committee determine to file during the Project, to the extent the foregoing is not handled by one or more Third Parties. (vii) Developing an initial regulatory strategy with respect to Innovations and Products to be developed during the Project for markets in which the Steering Committee determines MSS should seek to establish Third Parties (but not including the actual preparation or filing of documentation for any regulatory approval or license, which will be handled by MSS or a Third Party as the Steering Committee may determine, subject to the shared cost obligations set forth in Section 3.4). (viii) Identifying potential Third Parties and preparing the business plans necessary to support the engagement of one or more Third Parties, conducting negotiations with respect to such engagement, and monitoring of any Third Parties engaged. (ix) Handling public relations with respect to Innovations to support the initial market development and the search for appropriate Third Parties. (x) Handling public relations, with the input and consultation of the University, with respect to scientific breakthroughs and data embodied in or associated with Eye Disease Tests and other Products and their underlying scientific research; MSS will use reasonable efforts to perform its responsibilities set forth in this Section 3.1 in accordance with any timeline set by the Steering Committee. 3.2 Responsibilities of the University. Subject to the high level management and direction of the Steering Committee, the University will have responsibility for the following activities: (i) Expanding the data and running confirmatory clinical studies with respect to the Initial Eye Disease Test. (ii) Conducting data analysis and providing statistical support with respect to data being produced by the University for the Initial Eye Disease Test. 7 (iii) Conducting genetic laboratory analysis on all such data and interpretation of the results for the Initial Eye Disease Test. (iv) Further technical development of Innovations and Products by seeking potential new gene sequences and running confirming genetic laboratory tests. (v) Ensuring that all tests are run consistent with European Community standards. (vi) Ensuring that the employees, faculty, consultants and staff working on the Project maintain written documentation of their work (such as laboratory notebooks) sufficient to establish dates of invention, the substance of their work on the Project at various dates, and any other information necessary or desirable for seeking patent protection and establishing priority of invention. (vii) Providing assistance in validation of Approved Labs if necessary. (viii) Providing reasonable technical presentation support and assistance to MSS if requested by MSS. (ix) Participation in a reasonable number of educational programs with respect to Innovations and Products, if requested by MSS or a Third Party. The University will use reasonable efforts to perform its responsibilities set forth in this Section 3.2 in accordance with any timeline set by the Steering Committee. 3.3 Additional Responsibilities and Reallocation of Responsibilities. The parties recognize that with respect to the development, testing and commercialization of any particular Product (including the Initial Eye Disease Test), additional responsibilities not enumerated in Sections 3.1 and 3.2 above may need to be allocated to the parties, and it may further become desirable to reallocate some of the responsibilities enumerated in Sections 3.1 and 3.2 between the parties. In either case, the Steering Committee will have responsibility for making any such allocation or reallocation of responsibilities. 3.4 Costs of Carrying Out Responsibilities; Shared Costs. (a) Costs to be Borne by the Parties Individually. Subject to the shared cost obligations of this Section 3.4, each party will carry out the activities for which it is responsible at its own expense, including the costs of any research and development, internal staff and overhead costs, consultants and other outside contractors assisting a party in performing its duties, travel costs, initial U.S. patent filing and prosecution costs, locating and engaging Third Parties, and public relations. (b) Shared Costs. The parties recognize that there will be shared costs incurred under the Project, which will be borne by the parties in proportion to each party's share of Net Proceeds. Shared costs will include the following: legal fees incurred in engaging a Third Party; all costs associated with the preparation, filing and prosecution of international patent 8 applications, including filing fees, translation costs and legal fees (although MSS will be responsible for its internal staff and overhead costs incurred with respect to any patent applications that it has responsibility for); regulatory costs, if any, including filing fees and legal fees; other costs that may be incurred with respect to the commercialization of Products, whether through MSS or a Third Party, such as patent litigation costs, indemnities and warranties to a Third Party or to end users of Products, and any insurance premiums to insure against potential liability; and any other costs approved by the Steering Committee to be shared costs. (c) Payment of Shared Costs. The parties will contribute to shared costs as they are incurred. After a Commercialization Event occurs with respect to a Product and Net Proceeds are being generated: (i) The Steering Committee will determine a percentage of the Net Proceeds that will be directed into a sinking fund out of which shared costs and any liabilities incurred will be paid, and (ii) to the extent that the sinking fund contains insufficient funds to pay any shared costs incurred, MSS will have the option to require the University to contribute its share of the balance directly to MSS, or to pay such shared costs directly and to offset the University's share of such costs against the share of any Net Proceeds or development funds to which the University is entitled hereunder. 3.5 Selection of Approved Labs. MSS and the University will by mutual agreement establish one or more Approved Labs to conduct Test Administrations. Neither party will unreasonably withhold its consent to the establishment of a particular Approved Lab. Such Approved Labs must have the technical and professional capability to conduct Test Administrations in a competent, cost efficient and timely manner, must meet all applicable governmental regulatory requirements, and must be able to handle reasonable anticipated volumes. In the event that either party determines, in the exercise of good faith judgment, that an Approved Lab previously agreed to by the parties is unacceptable or undesirable, then the Steering Committee will determine whether a different Approved Lab should be established and, if so, will establish a replacement Approved Lab. 3.6 Use of Approved Labs. Each party agrees that it will conduct or cause to be conducted Test Administrations only through an Approved Lab, except that either party may at its option use other laboratories to conduct Test Administrations in conjunction with internal development of products outside the Project Scope. 4. GRANT OF LICENSES 4.1 Grant. Subject to the terms and conditions of this Agreement, the University hereby grants to MSS a worldwide, irrevocable, transferable license under the Licensed Patents and any other applicable Intellectual Property Rights owned by the University to make, have made, use, offer to sell, sell, license and otherwise transfer Products within the Project Scope and to conduct Test Administrations, and to sublicense Third Parties, distributors and Subsidiaries of MSS, and Approved Labs to do any of the foregoing, all subject to the approval of the Steering Committee in accordance with Section 2 above. 9 4.2 Exclusivity. The license granted in Section 4.1 shall be exclusive to MSS, except that the University retains the right to practice and use any Licensed Invention for its own internal research purposes and in carrying out any of its responsibilities under Section 3.2 above. 5. DIVISION OF NET PROCEEDS 5.1 Allocation of Net Proceeds With Respect to Products. The allocation of Net Proceeds between MSS and the University with respect to each Product within the Project Scope will be determined by the Steering Committee based on general guidelines to be generated by the Steering Committee for each type of Product to be developed and commercialized hereunder (the "General Guidelines"). The General Guidelines for a particular type of Product will contain a set of weights assigned to each responsibility that could potentially be allocated between the parties for the development and/or commercialization of a particular Product of that type. With respect to each particular Product of a defined type, the parties will generate and execute a set of specific guidelines for that particular Product (the "Specific Guidelines"), which will list those of the responsibilities contained in the General Guidelines that are applicable to that particular Product, will allocate each such responsibility to one of the parties, and will credit to such party the weight associated with such responsibility in the General Guidelines. Each party's share of the Net Proceeds generated by such particular Product will then equal its percentage share of the total weights in the Specific Guidelines assigned to such party, subject to any minimum share such party may be entitled to as listed in the General Guidelines and/or the Specific Guidelines. If a responsibility listed in the General Guidelines for a type of Product is not relevant to a particular Product of that type, then the weight for that responsibility will be listed as zero in the Specific Guidelines for that particular Product. For example, if the total weights for all assigned responsibilities in the Specific Guidelines equals 80 and the weights associated with the responsibilities assigned to one party in the Specific Guidelines equals 30, then such party would be entitled to 37.5% of the Net Proceeds generated by that particular Product. Schedule 1 contains the General Guidelines for genetic test Products the parties have agreed to as of the Effective Date. Schedule 2 contains the Specific Guidelines the parties have agreed to as of the Effective Date for the Initial Eye Disease Test based upon the responsibilities for the Initial Eye Disease Test set forth in Section 3 above. In the event that the Steering Committee reallocates the responsibilities for the Initial Eye Disease Test, or adds new responsibilities to one or both of the parties, the Steering Committee will determine and execute a revised set of Specific Guidelines for the Initial Eye Disease Test based upon the reallocated responsibilities and the cost thereof. As new General Guidelines are generated by the Steering Committee for other Product types, the parties will set forth such General Guidelines in a new Schedule to this Agreement, and when executed by a majority of the members of the Steering Committee, such General Guidelines shall then become a part of this Agreement. Similarly, as Specific Guidelines for a particular Product of that type are generated, the parties will set forth such Specific Guidelines in a new Schedule to this Agreement, and when executed by a majority of the members of the Steering Committee, such Specific Guidelines shall then become a part of this Agreement. The Steering Committee may revise any General Guidelines or Specific Guidelines based upon a 10 reallocation of responsibilities thereunder and the associated cost thereof and, upon doing so, shall set forth the revised guidelines in a new Schedule which, when executed by a majority of the members of the Steering Committee, shall become a part of this Agreement. 5.2 Development Funding from a Third Party. Any development funding received from a Third Party will be allocated by the Steering Committee between MSS and the University in proportion to the responsibilities each party undertakes that is covered by such funding and the effect such responsibilities may have on the division of Net Proceeds. 5.3 Payment Directly to [ * ]. MSS may pay directly to [ * ] any portion of the University's share of Net Proceeds to which [ * ] is entitled. 6. REPORTING AND DISTRIBUTION OF NET PROCEEDS 6.1 Reports and Payment. MSS will, within forty-five (45) days after the close of each calendar quarter during the term of this Agreement, issue a written report to the University reporting the Net Proceeds generated by MSS during such quarter, and a computation of the share thereof due each party hereunder. Full payment, net of any setoffs for shared costs to which MSS may be entitled under Section 3.4(c) above, of the University's share of such Net Proceeds for such calendar quarter will accompany such report. 6.2 Books and Records. MSS will keep, and will cause its distributors to keep, full, true, and accurate records with respect to Net Proceeds. MSS will give access to such records at reasonable times, no more than once per year, for three (3) years following the end of the calendar year to which they pertain, to a mutually acceptable independent certified public accountant retained by the University for the purpose of verifying the accuracy of the reports supplied to the University hereunder. The University will pay for the cost of such independent certified public accountant, except in the event that such inspection reveals that MSS has understated or underpaid the amounts due hereunder to the University in an average amount of five percent (5%) or more over a six (6) month period, then the MSS will pay or reimburse the University for the entire cost of such inspection. MSS agrees to pay the balance of such amounts due, together with the cost of the inspection, to the University within ten (10) days after written notice by the University of MSS's understatement or underpayment. 7. OWNERSHIP 7.1 MSS Innovations. MSS shall be the sole and exclusive owner of MSS Innovations, any Product based thereon after a Commercialization Event, the Brand Name(s), and all Intellectual Property Rights in the foregoing, subject to the University's right to share in Net Proceeds generated from the commercialization thereof in accordance with this Agreement. The University agrees to execute documents, including but not limited to assignment documents, as reasonably requested by MSS to establish, confirm and perfect MSS's rights in any of the foregoing. 11 7.2 University Innovations. The University shall be the sole and exclusive owner of University Innovations and of all Intellectual Property Rights therein, provided, however, that upon the occurrence of a Commercialization Event with respect to a University Innovation and/or a Product based thereon, the University agrees to assign to MSS all right and title to such University Innovation and/or Product and to all Intellectual Property Rights therein, subject to the University's right to share in Net Proceeds generated from the commercialization thereof in accordance with this Agreement. Each party agrees to execute documents, including but not limited to assignment documents, as reasonably requested by the other party to establish, confirm and perfect the other party's rights in accordance with the foregoing. 7.3 Joint Ownership. MSS and the University shall be joint owners of equal undivided interests in any Joint Innovations developed by them, provided, however, that (i) during the term of this Agreement, each party agrees to exploit its joint ownership rights consistent with MSS's exclusivity as defined in Section 4.2 above, and (ii) upon the occurrence of a Commercialization Event with respect to a Joint Innovation and/or a Product based thereon, the University agrees to assign to MSS all right and title to such Joint Innovation and/or Product and to all Intellectual Property Rights therein, subject to the University's right to share in Net Proceeds generated from the commercialization thereof in accordance with this Agreement. After expiration or termination of this Agreement, each party shall be free to exploit, without the permission of the other party and without any duty of accounting, its joint ownership rights in any Joint Innovations that have not been assigned to MSS under this Section 7.3. 8. PUBLICATION Publication of research results or other information within the Project Scope will be governed by the procedures set forth in Section 5 of the Master Agreement. The Steering Committee will act as the "designated person" of each party as referenced in Section 5 of the Master Agreement, and will have the authority to determine the content and timing of any such publication. 9. TERM Unless earlier terminated in accordance with the terms of Section 10 below or by determination of the Steering Committee to abandon the Project and terminate this Agreement, this Agreement shall remain in effect from the Effective Date for a period of ten (10) years, and shall thereafter automatically renew for additional one (1) year periods, unless either party gives written notice to the other party at least six (6) months in advance of any renewal date that such party does not wish to renew this Agreement. 10. TERMINATION 10.1 Termination Upon Notice of Breach. In the event that either party breaches or defaults under any material term or condition of this Agreement, including but not limited to 12 failure to make timely payment of monies due, and such breach or default is not cured within thirty (30) days of written notice of the same from the other party, the other party may, in addition to any other remedy that it may have at law or in equity or under this Agreement, terminate this Agreement. 10.2 Termination by the Steering Committee. The Steering Committee may at any time determine to abandon the Project and terminate this Agreement on a timeline as set by the Steering Committee. 10.3 Termination by MSS. MSS may at its option upon written notice to the University terminate this Agreement in the event that [ * ] is no longer an employee of the University or [ * ]. 10.4 Immediate Termination Upon Certain Events of Bankruptcy. Either party may at its option terminate this Agreement immediately upon written notice to the other party upon the occurrence of any of the following events: (a) In the event that the other party makes an assignment for the benefit of creditors; admits in writing its inability to pay its debts as they become due; files a voluntary petition in bankruptcy; is adjudicated to be bankrupt or insolvent; files a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statute, law or regulation, or files an answer or similar pleading admitting the material allegations of a petition filed against it in any such proceeding; or consents to or acquiesces in the appointment of, or has its business placed in the hands of, a trustee, receiver, assignee, or liquidator of it or any substantial part of its business, assets or properties, whether by voluntary act or otherwise; or (b) In the event that either party ceases doing business as a going concern, or it or its shareholders take any action in anticipation of or furtherance of dissolution or liquidation. 10.5 Effect of Termination. (a) Provisions Applying to All Terminations. In the event of any termination of this Agreement for any reason, the following provisions shall apply: (i) except as provided in this Section 10.5 or under Section 10.6 below, all further obligations of both parties under this Agreement will cease as of the date of termination of this Agreement; (ii) each party shall retain ownership (including joint ownership) of any Innovations and/or Products to which it had title in accordance with the provisions of this Agreement on the date of such termination, including but not limited to title by virtue of an assignment after a Commercialization Event; and (iii) with respect to any Product(s) for which a Commercialization Event has occurred as of the date of termination of this Agreement, the Steering Committee will 13 determine how the division of Net Proceeds from such Product(s) should be reallocated between the parties, both immediately and over time, based upon the additional responsibilities with respect to such Product(s) that MSS will have to assume post termination of this Agreement, and MSS will be entitled to deduct its reasonable cost of all such additional responsibilities from the University's share of any such Net Proceeds, provided, however, that in no event shall the deduction of such costs cause the University's share of such Net Proceeds to fall below [ * ] in any given calendar quarter. (b) Provisions Applying to Specific Events of Termination. In addition to the provisions of subsection (a), the following provisions shall apply with respect to specific events of termination affecting Products for which no Commercialization Event has occurred: (i) Termination by MSS. In the event that MSS terminates this Agreement pursuant to Sections 10.1 or 10.4, or the University elects not to renew this Agreement pursuant to Section 9, then with respect to any Product for which data exists or proof of principle studies are underway but no Commercialization Event has yet occurred as of the date of termination, the license rights granted by the University to MSS under Section 4 above shall continue, and MSS shall have the right to continue development of any such Product and to take such Product into commercial distribution (either itself or through a Third Party), provided that (1) if such Product is placed into commercial distribution, then the Steering Committee will determine how the Net Proceeds from such Product should be allocated between the parties, both immediately and over time, based upon the additional responsibilities that MSS assumes with respect to such Product post termination of this Agreement and (2) MSS will be entitled to deduct its reasonable cost of all such additional responsibilities from the University's share of any Net Proceeds generated by such Product, except that, unless otherwise determined by the Steering Committee, in no event shall the deduction of such costs cause the University's share of such Net Proceeds to fall below [ * ] in any given calendar quarter. (ii) Termination by the University. In the event that the University terminates this Agreement pursuant to Sections 10.1 or 10.4, or MSS elects not to renew this Agreement pursuant to Section 9, then, at the University's option, the University may either: (1) terminate all licenses granted by the University to MSS under this Agreement with respect to any Product(s) for which no Commercialization Event has yet occurred as of the date of termination, and elect to itself continue development of any such Product and to take such Product into commercial distribution (either itself or through a Third Party), provided that (x) if such Product is placed into commercial distribution, then the Steering Committee will determine how the Net Proceeds from such Product should be allocated between the parties, both immediately and over time, based upon the additional responsibilities that the University assumes with respect to such Product post termination of this Agreement and (y) the University will be entitled to deduct its reasonable cost of all such additional responsibilities from MSS's share of any Net Proceeds generated by such Product, except that, unless otherwise determined by the Steering Committee, in no event shall the deduction of such costs cause MSS's share of such Net Proceeds to fall below [ * ] in any given calendar quarter; or 14 (2) allow the license rights granted by the University to MSS under Section 4 above to continue and allow MSS to continue development of any such Product and to take such Product into commercial distribution (either itself or through a Third Party), provided that (x) if such Product is placed into commercial distribution, then the Steering Committee will determine how the Net Proceeds from such Product should be allocated between the parties, both immediately and over time, based upon the additional responsibilities that MSS assumes with respect to such Product post termination of this Agreement and (y) MSS will be entitled to deduct its reasonable cost of all such additional responsibilities from the University's share of any Net Proceeds generated by such Product, except that, unless otherwise determined by the Steering Committee, in no event shall the deduction of such costs cause the University's share of such Net Proceeds to fall below [ * ] in any given calendar quarter. (iii) Termination by the Steering Committee or by MSS Under Section 10.3. In the event this Agreement is terminated by the Steering Committee pursuant to Section 10.2 or by MSS pursuant to Section 10.3, then the Steering Committee will decide whether MSS or the University (if any) should assume responsibility for continuing development of any Product for which a Commercialization Event has not occurred as of the date of such termination, and in the event MSS assumes such responsibility, then any licenses granted by the University to MSS under this Agreement will survive termination of this Agreement. The Steering Committee will also determine how the Net Proceeds generated by any such Product should be allocated between the parties, based upon the additional responsibilities assumed by the party having responsibility for continuing development of such Product post termination of this Agreement, and the party assuming such responsibility will be entitled to deduct its reasonable cost of all such additional responsibilities from the other party's share of any Net Proceeds generated by such Product, except that, unless otherwise determined by the Steering Committee, in no event shall the deduction of such costs by one party cause the other party's share of such Net Proceeds to fall below [ * ] in any given calendar quarter. 10.6 Survival of Certain Provisions. The provisions of Sections 6.2, 7, 10.5, 10.6, 12, 13.1, 13.2, 14.3, 15, 17, and 18 of this Agreement will survive the expiration or termination of this Agreement. 11. PERSONNEL Each party will cause its respective employees, faculty, consultants and staff to execute such agreements, assignments, applications and other documents as necessary to perfect and protect each party's rights as defined in this Agreement with respect to Innovations and Products within the Project Scope. 12. SETTLEMENT OF DISPUTES 12.1 Basic Dispute Resolution Procedures. Any dispute between the parties either with respect to the interpretation of any provision of this Agreement or with respect to the performance of either party shall be resolved as specified in this Section. 15 (a) Upon the written request of either party, each of the parties will appoint a designated representative who does not devote substantially all of his or her time to performance under this Agreement, whose task it will be to meet for the purpose of endeavoring to resolve such dispute. (b) The designated representatives shall meet as often as necessary during a fifteen (15) day period (or such other time as the parties may agree) to gather and furnish to the other all information with respect to the matter in issue which is appropriate and germane in connection with its resolution. (c) Such representatives shall discuss the problem and negotiate in good faith in an effort to resolve the dispute without the necessity of any formal proceeding relating thereto. (d) During the course of such negotiation, all reasonable requests made by one party to the other for nonprivileged information reasonably related to this Agreement, will be honored in order that each of the parties may be fully advised of the other's position. (e) The specific format for such discussions will be left to the discretion of the designated representatives, but may include the preparation of agreed upon statements of fact or written statements of position furnished to the other party. 12.2 Escalation Procedures. If the designated representatives cannot resolve the dispute, then the dispute shall be escalated to a member of the Board of Directors or Trustees of each of the University and of MSS, for their review and resolution. If the dispute cannot be resolved by such persons, then the parties may initiate formal proceedings; however, formal proceedings for the resolution of any such dispute may not be commenced until the earlier of: (a) The designated representatives concluding in good faith that amicable resolution through continued negotiation of the matter in issue does not appear likely; or (b) Sixty (60) days after the initial request to negotiate such dispute (unless preliminary or temporary relief of an emergency nature is sought by one of the parties); or (c) Thirty (30) days before the statute of limitations governing any cause of action relating to such dispute would expire. 12.3 Arbitration of Monetary Disputes. (a) Procedures. Any monetary disputes between the parties concerning the amount of monies due or payable under this Agreement which the parties are unable to resolve pursuant to the provisions of Sections 12.1 and 12.2 above, will be settled by arbitration in Orange County, California (unless otherwise agreed) under the then-prevailing rules of American Arbitration Association. There will be one (1) arbitrator chosen by mutual agreement of the parties or, in the event the parties cannot agree within thirty (30) calendar days of issuance of a written demand for arbitration by either party, by the American Arbitration Association. All 16 proceedings by the arbitrator shall be conducted in accordance with the rules of the American Arbitration Association, except to the extent the provisions of such rules are modified by this Agreement or the mutual agreement of the parties. Either party will have the right to discovery of evidence, but by the following methods only: requests for production of documents and depositions of no more than three (3) individuals. The arbitrator will supervise discovery and may, at the request of either party, limit expenses of discovery (including reasonable attorneys' fees) to the requesting party for good cause shown. All discovery will be completed, and the arbitration hearing will commence, within forty-five (45) days after appointment of the arbitrator. Subject to the foregoing, discovery matters will be governed by the Federal Rules of Civil Procedure as applicable to civil actions in the United States District Courts. The arbitration hearing will conclude within thirty (30) days after it commences. The award rendered in arbitration will be in writing and will be final and binding, and may be enforced in any court of competent jurisdiction. The fees and expenses of the arbitrator will be paid by the non-prevailing party. (b) Approval of One Substantive Position of the Parties. In all arbitration proceedings submitted under this Section 12.3, the arbitrator shall be required to agree upon and approve the substantive position advocated by either MSS or the University with respect to each disputed item(s). Any decision rendered by the arbitrator that does not reflect a substantive position advocated by either MSS or the University shall be beyond the scope of authority granted to the arbitrator and shall be void. No decision of the arbitrator shall ever be construed as or have the effect of amending or altering this Agreement or the parties' rights and responsibilities with respect thereto. 12.4 Other Disputes. Except as provided in Section 12.3 above, the parties will have no obligation to arbitrate any other disputes, claims or controversies of any kind arising out of or related to this Agreement, including but not limited to any dispute, claim or controversy relating to the scope of the Project or the party's respective ownership rights to any Innovation or Product. In addition, any claim by one party against the other for injunctive or preliminary relief, whether or not related to this Agreement, may be litigated in a court of competent jurisdiction. 13. CONFIDENTIALITY AND PRESS RELEASE In addition to the provisions of Section 5 of the Master Agreement, the following confidentiality provisions shall apply: 13.1 Confidentiality of the Agreement. The parties agree to maintain all terms and conditions of this Agreement in confidence, except that (i) MSS may state that it has received a license from the University under this Agreement and may name the patents and Intellectual Property Rights to which such license rights apply; (ii) The University may state that it has licensed certain commercial exploitation rights within the Project Scope to MSS; (iii) this Agreement may be disclosed to either party's attorneys, accountants or other professional advisors in the course of seeking professional advice and to the extent required by applicable law or regulations or court order; and (iv) this Agreement may be disclosed by MSS to entities with which MSS is discussing a proposed sale of its stock, sale of all or substantially all of its assets, 17 obtaining financing or entering into a partnering arrangement, provided that the entity to whom the terms of this Agreement is to be disclosed has executed a reasonable non-disclosure agreement. 13.2 Protection of Confidential Information. Each party agrees to keep all Confidential Information of the other party to which it has access hereunder strictly confidential, and agrees that it will not, except with the express permission of the other party or as required by applicable law or regulations or by court order, use such information except in the performance of this Agreement, or disclose any such Confidential Information to any person or entity other than its own employees, consultants, faculty, technicians, visiting scientists, students, and/or post-doctoral associates who have a need to know and who have been informed in advance of the receiving party's obligations with respect to such Confidential Information. 13.3 Press Release. The parties agree to issue a mutually agreeable joint press release with respect to this Agreement. Each party agrees that it will not issue a press release with respect to this Agreement until such joint press release has first been issued. 14. REPRESENTATIONS AND WARRANTIES 14.1 By the University. The University represents and warrants to MSS that: (a) Ownership. The University is the sole and exclusive owner of any Licensed Patents and any University Innovations supplied hereunder to MSS for commercial exploitation; (b) Authority. The University has the full right and power to grant the licenses to MSS set forth in this Agreement and to supply the University Innovations to MSS for commercialization hereunder; (c) Inconsistent Obligations. There are no outstanding agreements, licenses, assignments or encumbrances inconsistent with the provisions of such licenses or with any other provision of this Agreement; and (d) Infringement of Rights of Others. To the best of the University's knowledge as of the Effective Date, the University knows of no third parties' rights which would be infringed by practicing the inventions claimed in the Licensed Patents within the scope of the licenses granted to MSS hereunder or by the commercialization as contemplated hereunder of the University Innovations in existence as of the Effective Date. The University will promptly notify MSS in the event that it learns or has cause to believe at any time that any third parties' rights would or might be infringed by practicing the inventions claimed in any Licensed Patents or by any Product or Innovation being commercialized hereunder. In the event that a claim is made against MSS or a Third Party that the manufacture, use, sale, distribution or other commercial exploitation of a Product or Innovation infringes the Intellectual Property Rights of a third party, then MSS or the Third Party (as applicable) will fund the cost of any litigation resulting out of such claim, but will be entitled to recover up to two-thirds (or whatever other fraction of the Net Proceeds generated by such Product or Innovation the University is entitled to hereunder at the 18 time such litigation commences) of its costs and any damages awarded against it out of the sinking fund established pursuant to Section 3.4 above and, to the extent the sinking fund contains insufficient funds, the University's current and future share of any Net Proceeds; provided that in the event MSS or the Third Party is found to have willfully infringed such third party's Intellectual Property Rights (and such willfulness was not caused by the University), then MSS or the Third Party shall not be entitled to recover any portion of any enhanced damages awarded based upon such willfulness, and provided further that the University will be entitled to have counsel of its own choosing participate in (but not control) any such litigation at the University's sole expense. 14.2 By MSS. MSS represents and warrants to the University that there are no outstanding agreements, licenses, assignments or encumbrances inconsistent with the provisions of such licenses or with any other provision of this Agreement. 14.3 No Other Warranties. EXCEPT AS SET FORTH IN THIS SECTION, NEITHER PARTY MAKES ANY OTHER WARRANTY, EXPRESS OR IMPLIED, RELATING TO THIS AGREEMENT OR ANY INNOVATION OR PRODUCT, AND EACH PARTY SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OR CONDITION OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 15. INDEMNITIES 15.1 By MSS. MSS agrees to defend, indemnify, and hold the University harmless from and against any and all third-party claims (other than claims for infringement of a third party's Intellectual Property Rights to the extent such claims fall within the provisions of Section 14 above), damages, actions, liabilities, costs and expenses arising out of or in connection with (i) any damage, including but not limited to damage to any property and personal injury or death, by whomever suffered arising out of or resulting from any negligent or willful act of MSS relating to the subject matter of this Agreement, and (ii) any breach or claimed breach of the warranties and representations set forth in Section 14.2 above. 15.2 By the University. The University agrees to defend, indemnify, and hold MSS harmless from and against any and all third-party claims, damages, actions, liabilities, costs and expenses arising out of or in connection with (i) any damage, including but not limited to damage to any property and personal injury or death, by whomever suffered arising out of or resulting from any negligent or willful act of the University relating to the subject matter of this Agreement, and (ii) any breach or claimed breach of the warranties and representations set forth in Section 14.1 above. 16. ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS In the event that either party becomes aware of an infringement or potential infringement of the Licensed Patents or of any other Intellectual Property Right of either the University or MSS within the Project Scope, such party will promptly notify the other party and provide the 19 details known to it. The Steering Committee will then promptly confer about such infringement or potential infringement. Within ten (10) business days thereafter, each party will notify the other of its decision whether or not it wishes to participate in litigation against the infringer or potential infringer. Any such litigation will proceed as follows: (a) Both Parties Elect to Participate. In the event that both parties elect to participate in such litigation, the parties will mutually agree upon counsel to bring such litigation. The parties will share equally the costs (including the fees of attorneys and other professionals) of any such litigation. MSS may recover all or a portion of its share of any such costs from the sinking fund established pursuant to Section 3.4 above and, to the extent the sinking fund contains insufficient funds, as an offset to the University's share of Net Proceeds. All damages or lump sum settlement payments recovered from the prosecution or settlement of such litigation shall, after deduction of all reasonable costs and fees of attorneys and other professionals incurred in pursuing such litigation, be divided equally between the parties. Each party agrees to join such action as a named plaintiff to the extent necessary to obtain jurisdiction or if deemed a necessary party. (b) MSS Decides to Participate and the University Does Not. In the event that MSS elects to participate in such litigation and the University does not, then MSS may initiate and control such litigation at its own expense. In the event MSS institutes such litigation, (i) the University may at its option have counsel of its choosing participate in such litigation provided such counsel does not interfere with MSS's control of such litigation, (ii) the University will join such action as a plaintiff to the extent necessary to obtain jurisdiction or if the University is deemed a necessary party, and (iii) if such litigation is based upon the Licensed Patents or any other Intellectual Property Rights of the University, MSS will not settle any such litigation without the express approval of the University to the terms and conditions of any such settlement. All damages or lump sum settlement payments recovered from the prosecution or settlement of such litigation shall be retained by MSS. (c) The University Decides to Participate and MSS Does Not. In the event that the University elects to participate in such litigation and MSS does not, then the University may institute and control such litigation at its own expense. In the event the University institutes such litigation, (i) MSS may at its option have counsel of its choosing participate in such litigation provided such counsel does not interfere with the University's control of such litigation, (ii) MSS will join such action as a plaintiff to the extent necessary to obtain jurisdiction or if MSS is deemed a necessary party, and (iii) if such litigation is based upon any Intellectual Property Right of MSS, the University will not settle any such litigation without the express approval of MSS to the terms and conditions of any such settlement. All damages or lump sum settlement payments recovered from the prosecution or settlement of such litigation shall be retained by the University. 17. LIMITATION OF LIABILITY EXCEPT FOR ANY WILLFUL BREACH OF SECTIONS 8 OR 13, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL 20 OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING OUT OF THIS AGREEMENT. 18. GENERAL 18.1 Governing Law. This Agreement will be governed by and construed in accordance with the substantive laws of the United States and the State of California, without regard to or application of provisions relating to choice of law. 18.2 Waiver and Modification. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. Any waiver, amendment or other modification of any provision of this Agreement will be effective only if in writing and signed by the parties. 18.3 Severability. If for any reason a court of competent jurisdiction finds any provision or portion of this Agreement to be unenforceable, that provision will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement will continue in full force and effect. 18.4 Notices. All notices required or permitted under this Agreement will be in writing, will reference this Agreement and will be deemed given: (i) when sent by confirmed facsimile; (ii) ten (10) working days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iii) five (5) working days after deposit with a commercial overnight carrier, with written verification of receipt. All communications will be sent to the addresses set forth below or to such other address as may be designated by a party by giving written notice to the other party pursuant to this section: To MSS: Paul J. White President and CEO Medical Science Systems, Inc. 4400 McArthur Blvd., Suite 980 Newport Beach, CA 92660 U.S.A. To the University: [ * ] 21 with a copy to: [ * ] 18.5 Delays Beyond Control. Neither party will be liable to the other party for any failure or delay in performance caused by reasons beyond such party's reasonable control, and such failure or delay will not constitute a material breach of this Agreement. 18.6 Assignment. Neither party may assign its rights or obligations hereunder, by operation of law or otherwise, without express written consent of the other party, which consent will not be unreasonably withheld. Any attempted assignment without such consent shall be void. Subject to the foregoing, this Agreement will benefit and bind the successors and assigns of the parties. 18.7 No Third Party Beneficiaries; No Agency. Except as expressly provided herein to the contrary, no provision of this Agreement, express or implied, is intended or will be construed to confer rights, remedies or other benefits to any third party under or by reason of this Agreement. This Agreement will not be construed as creating an agency, partnership or any other form of legal association (other than as expressly set forth herein) between the parties. 18.8 Entire Agreement. This Agreement and the Master Agreement, including all exhibits, constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersede and replace all prior or contemporaneous understandings or agreements, written or oral, regarding such subject matter. 18.9 Multiple Counterparts. This Agreement may be executed in multiple counterparts, each of which will be considered an original and all of which together will constitute one agreement. This Agreement may be executed by the attachment of signature pages which have been previously executed. 18.10 Cumulation. All rights and remedies enumerated in this Agreement will be cumulative and none will exclude any other right or remedy permitted herein or by law. 22 18.11 Venue and Personal Jurisdiction. Any suit or other proceeding not subject to arbitration under Section 12 will be brought solely in the federal courts in the Central District of California, if jurisdiction in such court can be obtained, and otherwise in the state courts of California, and each party hereby irrevocably submits to, and waives any objections to, the exercise of personal jurisdiction thereof and venue therein. 18.12 Headings. The headings contained in this Agreement are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 18.13 Incorporation of the Master Agreement. Except as specifically provided in this Agreement, the relevant terms and conditions of the Master Agreement are hereby incorporated by reference into this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement through their duly authorized representatives as set forth below: MEDICAL SCIENCE SYSTEMS, INC. THE UNIVERSITY OF SHEFFIELD By: By: --------------------------------- ------------------------------------- Printed Name: Printed Name: ----------------------- --------------------------- Title: Title: ------------------------------ ---------------------------------- 23 SCHEDULE 1 GENERAL GUIDELINES FOR ALLOCATING NET PROCEEDS FOR GENETIC TEST PRODUCTS
[ * ]
24 SCHEDULE 2 SPECIFIC GUIDELINES FOR ALLOCATING NET PROCEEDS FOR INITIAL EYE DISEASE TEST
[ * ]
EX-10.5 20 DEVELOPMENT & COMMERCIALIZATION PROJECT AGREEMENT 1 EXHIBIT 10.5 MEDICAL SCIENCE SYSTEMS DEVELOPMENT AND COMMERCIALIZATION PROJECT AGREEMENT (OSTEOPOROSIS) This Agreement is entered into and made effective as of this ___ day of ___________, 1996 (the "Effective Date") by and between Medical Science Systems, Inc. a Texas corporation having its principal place of business at 4400 MacArthur Blvd., Suite 980, Newport Beach, CA 92660 ("MSS") and The University of Sheffield, Western Bank, Sheffield S10 2TN, England ("University"), acting through The Section of Molecular Medicine of the University's Department of Medicine and Pharmacology ("SMM"). RECITALS A. University and MSS have entered into a Master Agreement for Technology Evaluation dated July 1, 1996 (the "Master Agreement"). Following the procedures set forth in the Master Agreement, the parties have agreed to work together on a project as defined herein to perform additional development and commercialization of certain technology relating to the association between osteoporosis and genetics. B. This Agreement is intended to supplement the provisions set forth in the Master Agreement with respect to such technology, and sets forth additional terms and conditions agreed to by the parties with respect to the project. C. It is contemplated that MSS may locate and engage a third party to assist in the commercialization of products based upon the technology that is the subject of the project, or MSS may itself commercialize certain products based upon the technology. This Agreement is also intended to set forth the terms and conditions upon which MSS will locate and engage such third party or itself commercialize such products. NOW, THEREFORE, in consideration of the foregoing premises and of the terms and conditions of this Agreement, the parties agree as follows: 1. DEFINITIONS 1.1 "Approved Lab" means a laboratory (which may be an internal laboratory of the University and/or MSS or a third party laboratory) mutually approved by MSS and SMM pursuant to Section 3.5 below to conduct Test Administrations. 1.2 "Brand Name(s)" means the trademark(s), service mark(s) and/or logo(s) or other designations under which Products are marketed and promoted by MSS or a Third Party. 1.3 "Commercialization Event" means either of the following with respect to a Product: (i) entry into a business arrangement with a Third Party (whether through a license and/or development agreement, distribution agreement, joint venture, co-promotion, or other structure) - -------- * Confidential Treatment requested. 2 for the further development, clinical testing, marketing and/or sale of such Product in one or more markets, or (ii) decision by the Steering Committee to engage MSS to commercially distribute such Product in one or more markets directly to end users or through distribution channels set up by MSS (rather than through a Third Party). 1.4 "Confidential Information" shall be as defined in Section 1 of the Master Agreement. 1.5 "Initial Osteoporosis Test" means the [ * ]. 1.6 "Innovations" means all ideas, inventions, apparatus, systems, data, discoveries, methods, processes, improvements, works of authorship and other innovations of any kind within the Project Scope, whether or not they are eligible for patent, copyright, trademark, trade secret or other legal protection. Examples of Innovations include: [ * ]. "Innovations" does not include any preexisting MSS computer information technology or products (including but not limited to MSS' Biofusion(TM) and Medical Decision Explorer(TM) products and technology), and the usage of any such technology or products shall not be deemed to be within the Project Scope. 1.7 "Intellectual Property Rights" means patent applications, patents, design rights or other similar invention rights, rights of priority, copyrights, trademarks, trade secret rights and other intangible rights, whether existing under statutory or common law, in any country in the world. 1.8 "Joint Innovations" means all inventions, improvements, works of authorship and other innovations of any kind within the Project Scope that may be made, conceived, developed or reduced to practice jointly by MSS and by SMM and their respective employees, consultants, faculty, technicians, visiting scientists, students, and/or post-doctoral associates in the course of this Agreement, whether or not they are eligible for patent, copyright, trademark, trade secret or other legal protection. Examples of Joint Innovations include but are not limited to: [ * ]. 1.9 "Licensed Patents" means (i) any United States patents that may issue to the University during the term of this Agreement covering an Osteoporosis Test (including the Initial Osteoporosis Test) developed by or on behalf of the University and all divisionals, reissues, and reexaminations thereof that may issue in the United States during the term of this Agreement, (ii) any corresponding foreign patents that may issue to the University during the term of this Agreement with respect to any of the preceding patents, and all divisionals, reissues, and reexaminations thereof, and (iii) any other patents that may issue to the University during the 3 term of this Agreement, and all divisionals, reissues, and reexaminations thereof, to the extent they cover any Innovations within the Project Scope. 1.10 "Licensed Invention" means any apparatus, system, process, method or other invention claimed in any of the Licensed Patents, and any work of authorship, know how, trade secret and other technology within the Project Scope covered by any other Intellectual Property Right of the University. 1.11 "MSS Innovations" means all Innovations within the Project Scope that may be made, conceived, developed or reduced to practice solely by MSS and its employees, consultants, and technicians. 1.12 "Net Proceeds" means the following: (i) In the case of a Commercialization Event with a Third Party, all royalties, license fees, or other monies payable by such Third Party based upon the commercial distribution of a Product in one or more markets; and (ii) In the case of a decision by the Steering Committee to engage MSS to commercially distribute one or more Products in one or more markets directly to end users or through distribution channels set up by MSS, the gross amount actually received by MSS from the commercial distribution of a Product, less (i) any delivery or other transportation charges and taxes imposed on the transaction, (ii) any charges by an Approved Lab incurred with respect to such Product, (iii) the cost of goods sold (COGS), (iv) actual out of pocket costs for advertising, travel, trade shows, educational programs and other marketing and sales expenses (but not including salaries of personnel) directly related to the commercial distribution of the Product, (v) as determined by the Steering Committee, either a reasonable administrative and sales overhead charge, or the actual personnel costs for marketing, sales and administrative functions, with respect to the commercial distribution of the Product, all of the foregoing computed in accordance with generally accepted accounting principles, and (vi) carryover losses, if any, from a previous quarter. It is recognized by the parties that, depending upon the specific responsibilities assumed by each of the parties, the foregoing costs and expenses may be incurred by either MSS or the University. 1.13 "Osteoporosis Test" means [ * ]. 1.14 "Products" means any products or services related to the Project (such as new tests, diagnostics, therapeutics, or related services) based upon any University Innovation, MSS Innovation, or Joint Innovation within the Project Scope. 1.15 "Project" means the development and commercialization activities to be undertaken by MSS, SMM and Third Parties (if any) pursuant to this Agreement within the Project Scope. 1.16 "Project Scope" means: 4 (i) [ * ], and (ii) [ * ]. 1.17 "Steering Committee" shall be as defined in Section 2 below. 1.18 "Subsidiary" means a corporation, company or other entity more than fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, now or hereafter, owned or controlled, directly or indirectly, by a party to this Agreement; provided that any such corporation, company or other entity will be deemed to be a Subsidiary only so long as such ownership or control exists. 1.19 "Test Administration" means the performing of the genetic analysis of an Osteoporosis Test by an Approved Lab based upon a sample gathered from a patient using Test Sampling Materials. 1.20 "Test Sampling Materials" means a container that will be used to transport a sample from a patient to an Approved Lab for performing the genetic analysis of an Osteoporosis Test on such sample, and accompanying instructional materials. 1.21 "Third Party" means a third party entity engaged by MSS, with the approval of the Steering Committee, in accordance with this Agreement to assist in the further development, clinical testing, marketing and/or commercial distribution of one or more Products in one or more markets. 1.22 "University Innovations" means all Innovations within the Project Scope that may be made, conceived, developed or reduced to practice solely by SMM and its faculty, employees, consultants, technicians, visiting scientists, students and post doctoral associates. 2. STEERING COMMITTEE 2.1 General Responsibilities of the Steering Committee. A four-person steering committee, consisting initially of Paul White and Kenneth Kornman for MSS and [ * ] for the University (the "Steering Committee"), will make joint decisions and provide high level management with respect to the Project. [ * ] will also serve on the Steering Committee as a representative of the employees, faculty, consultants and staff 5 working on the Project. Each person on the Steering Committee will have one vote. Each party may nominate alternative or replacement members to serve on the Steering Committee with the consent of the other party, which consent will not be unreasonably withheld. The Steering Committee will meet on a regular basis as the committee members may determine to be necessary. Written minutes of the meetings of the Steering Committee will be kept and will be promptly circulated after each meeting to the committee members for approval. The Project will consist of an initial phase and any follow-on phases that the Steering Committee may determine to pursue. During the initial phase, the parties will, in accordance with their respective responsibilities set forth in Section 3 below, file and prosecute U.S. and international patents covering the Initial Osteoporosis Test and any other Innovations that the Steering Committee may determine, conduct clinical studies to generate appropriate clinical data and, if such data demonstrates strong clinical utility of potential Products, identify and engage an appropriate Third Party. If the Steering Committee determines that the clinical data is not strong enough to seek a Third Party, the Steering Committee will determine the next step(s) that should be taken. After completion of the initial phase of the Project, the Steering Committee will review and make decisions as to the next step(s) that should be taken, which may include additional research and/or development and testing of Products, seeking of additional Third Parties, direct sales, or termination of the Project. 2.2 Determinations With Respect to Commercialization of Individual Products. The Steering Committee will determine with respect to each Product or class of Products to be commercialized pursuant to the Project, whether to engage a Third Party to assist in the further development, clinical testing, marketing and/or commercial distribution of such Product(s) in one or more markets, or whether to engage MSS to commercially distribute such Product(s) in one or more markets directly to end users or through distribution channels set up by MSS. In the event that the Steering Committee determines to engage a Third Party with respect to a particular Product, MSS will identify potential Third Parties and the Steering Committee will select one with which MSS will be authorized to negotiate an appropriate engagement with respect to such Product, or to extend a previous engagement to cover such Product. 3. RESPONSIBILITIES OF THE PARTIES This Section sets forth the responsibilities of the parties during the Project, including but not limited to the initial phase of the Project. 3.1 Responsibilities of MSS. Subject to the high level management and direction of the Steering Committee, MSS will have responsibility for the following activities: (i) Conducting overall management and oversight of the Project. (ii) Providing assistance if needed with the design of confirmatory clinical trials to demonstrate clinical utility or to support other claims the University would like to make with respect to the results of research conducted for the Initial Osteoporosis Test. (iii) Providing assistance with data analysis and statistical support with respect to the confirmatory clinical trials for the Initial Osteoporosis Test. 6 (iv) Developing a patent strategy with respect to Innovations and Products and the determination of which countries patents should be filed in. (v) Preparing and filing in the United States the initial patent application with respect to the Initial Osteoporosis Test and any other Innovations the Steering Committee may determine to file patents for during the Project. (vi) Preparing, filing, and prosecuting all international patent applications (subject to the shared cost obligations set forth in Section 3.4 below) that the Steering Committee determine to file during the Project, to the extent the foregoing is not handled by one or more Third Parties. (vii) Developing an initial regulatory strategy with respect to Innovations and Products to be developed during the Project for markets in which the Steering Committee determines MSS should seek to establish Third Parties (but not including the actual preparation or filing of documentation for any regulatory approval or license, which will be handled by MSS or a Third Party as the Steering Committee may determine, subject to the shared cost obligations set forth in Section 3.4). (viii) Identifying potential Third Parties and preparing the business plans necessary to support the engagement of one or more Third Parties, conducting negotiations with respect to such engagement, and monitoring of any Third Parties engaged. (ix) Handling public relations with respect to Innovations to support the initial market development and the search for appropriate Third Parties. (x) Handling public relations, with the input and consultation of the University, with respect to scientific breakthroughs and data embodied in or associated with Osteoporosis Tests and other Products and their underlying scientific research; MSS will use reasonable efforts to perform its responsibilities set forth in this Section 3.1 in accordance with any timeline set by the Steering Committee. 3.2 Responsibilities of the University. Subject to the high level management and direction of the Steering Committee, the University will have responsibility for the following activities: (i) Expanding the data and running confirmatory clinical studies with respect to the Initial Osteoporosis Test. (ii) Conducting data analysis and providing statistical support with respect to data being produced by the University for the Initial Osteoporosis Test. (iii) Conducting genetic laboratory analysis on all such data and interpretation of the results for the Initial Osteoporosis Test. 7 (iv) Further technical development of Innovations and Products by seeking potential new gene sequences and running confirming genetic laboratory tests. (v) Ensuring that all tests are run consistent with European Community standards. (vi) Ensuring that the employees, faculty, consultants and staff working on the Project maintain written documentation of their work (such as laboratory notebooks) sufficient to establish dates of invention, the substance of their work on the Project at various dates, and any other information necessary or desirable for seeking patent protection and establishing priority of invention. (vii) Providing assistance in validation of Approved Labs if necessary. (viii) Providing reasonable technical presentation support and assistance to MSS if requested by MSS. (ix) Participation in a reasonable number of educational programs with respect to Innovations and Products, if requested by MSS or a Third Party. The University will use reasonable efforts to perform its responsibilities set forth in this Section 3.2 in accordance with any timeline set by the Steering Committee. 3.3 Additional Responsibilities and Reallocation of Responsibilities. The parties recognize that with respect to the development, testing and commercialization of any particular Product (including the Initial Osteoporosis Test), additional responsibilities not enumerated in Sections 3.1 and 3.2 above may need to be allocated to the parties, and it may further become desirable to reallocate some of the responsibilities enumerated in Sections 3.1 and 3.2 between the parties. In either case, the Steering Committee will have responsibility for making any such allocation or reallocation of responsibilities. 3.4 Costs of Carrying Out Responsibilities; Shared Costs. (a) Costs to be Borne by the Parties Individually. Subject to the shared cost obligations of this Section 3.4, each party will carry out the activities for which it is responsible at its own expense, including the costs of any research and development, internal staff and overhead costs, consultants and other outside contractors assisting a party in performing its duties, travel costs, initial U.S. patent filing and prosecution costs, locating and engaging Third Parties, and public relations. (b) Shared Costs. The parties recognize that there will be shared costs incurred under the Project, which will be borne by the parties in proportion to each party's share of Net Proceeds. Shared costs will include the following: legal fees incurred in engaging a Third Party; all costs associated with the preparation, filing and prosecution of international patent applications, including filing fees, translation costs and legal fees (although MSS will be responsible for its internal staff and overhead costs incurred with respect to any patent applications that it has responsibility for); regulatory costs, if any, including filing fees and legal fees; other costs that may be incurred with respect to the commercialization of Products, whether 8 through MSS or a Third Party, such as patent litigation costs, indemnities and warranties to a Third Party or to end users of Products, and any insurance premiums to insure against potential liability; and any other costs approved by the Steering Committee to be shared costs. (c) Payment of Shared Costs. The parties will contribute to shared costs as they are incurred. After a Commercialization Event occurs with respect to a Product and Net Proceeds are being generated: (i) The Steering Committee will determine a percentage of the Net Proceeds that will be directed into a sinking fund out of which shared costs and any liabilities incurred will be paid, and (ii) to the extent that the sinking fund contains insufficient funds to pay any shared costs incurred, MSS will have the option to require the University to contribute its share of the balance directly to MSS, or to pay such shared costs directly and to offset the University's share of such costs against the share of any Net Proceeds or development funds to which the University is entitled hereunder. 3.5 Selection of Approved Labs. MSS and the University will by mutual agreement establish one or more Approved Labs to conduct Test Administrations. Neither party will unreasonably withhold its consent to the establishment of a particular Approved Lab. Such Approved Labs must have the technical and professional capability to conduct Test Administrations in a competent, cost efficient and timely manner, must meet all applicable governmental regulatory requirements, and must be able to handle reasonable anticipated volumes. In the event that either party determines, in the exercise of good faith judgment, that an Approved Lab previously agreed to by the parties is unacceptable or undesirable, then the Steering Committee will determine whether a different Approved Lab should be established and, if so, will establish a replacement Approved Lab. 3.6 Use of Approved Labs. Each party agrees that it will conduct or cause to be conducted Test Administrations only through an Approved Lab, except that either party may at its option use other laboratories to conduct Test Administrations in conjunction with internal development of products outside the Project Scope. 4. GRANT OF LICENSES 4.1 Grant. Subject to the terms and conditions of this Agreement, the University hereby grants to MSS a worldwide, irrevocable, transferable license under the Licensed Patents and any other applicable Intellectual Property Rights owned by the University to make, have made, use, offer to sell, sell, license and otherwise transfer Products within the Project Scope and to conduct Test Administrations, and to sublicense Third Parties, distributors and Subsidiaries of MSS, and Approved Labs to do any of the foregoing, all subject to the approval of the Steering Committee in accordance with Section 2 above. 4.2 Exclusivity. The license granted in Section 4.1 shall be exclusive to MSS, except that the University retains the right to practice and use any Licensed Invention for its own internal research purposes and in carrying out any of its responsibilities under Section 3.2 above. 9 5. DIVISION OF NET PROCEEDS 5.1 Allocation of Net Proceeds With Respect to Products. The allocation of Net Proceeds between MSS and the University with respect to each Product within the Project Scope will be determined by the Steering Committee based on general guidelines to be generated by the Steering Committee for each type of Product to be developed and commercialized hereunder (the "General Guidelines"). The General Guidelines for a particular type of Product will contain a set of weights assigned to each responsibility that could potentially be allocated between the parties for the development and/or commercialization of a particular Product of that type. With respect to each particular Product of a defined type, the parties will generate and execute a set of specific guidelines for that particular Product (the "Specific Guidelines"), which will list those of the responsibilities contained in the General Guidelines that are applicable to that particular Product, will allocate each such responsibility to one of the parties, and will credit to such party the weight associated with such responsibility in the General Guidelines. Each party's share of the Net Proceeds generated by such particular Product will then equal its percentage share of the total weights in the Specific Guidelines assigned to such party, subject to any minimum share such party may be entitled to as listed in the General Guidelines and/or the Specific Guidelines. If a responsibility listed in the General Guidelines for a type of Product is not relevant to a particular Product of that type, then the weight for that responsibility will be listed as zero in the Specific Guidelines for that particular Product. For example, if the total weights for all assigned responsibilities in the Specific Guidelines equals 80 and the weights associated with the responsibilities assigned to one party in the Specific Guidelines equals 30, then such party would be entitled to 37.5% of the Net Proceeds generated by that particular Product. Schedule 1 contains the General Guidelines for genetic test Products the parties have agreed to as of the Effective Date. Schedule 2 contains the Specific Guidelines the parties have agreed to as of the Effective Date for the Initial Osteoporosis Test based upon the responsibilities for the Initial Osteoporosis Test set forth in Section 3 above. In the event that the Steering Committee reallocates the responsibilities for the Initial Osteoporosis Test, or adds new responsibilities to one or both of the parties, the Steering Committee will determine and execute a revised set of Specific Guidelines for the Initial Osteoporosis Test based upon the reallocated responsibilities and the cost thereof. As new General Guidelines are generated by the Steering Committee for other Product types, the parties will set forth such General Guidelines in a new Schedule to this Agreement, and when executed by a majority of the members of the Steering Committee, such General Guidelines shall then become a part of this Agreement. Similarly, as Specific Guidelines for a particular Product of that type are generated, the parties will set forth such Specific Guidelines in a new Schedule to this Agreement, and when executed by a majority of the members of the Steering Committee, such Specific Guidelines shall then become a part of this Agreement. The Steering Committee may revise any General Guidelines or Specific Guidelines based upon a reallocation of responsibilities thereunder and the associated cost thereof and, upon doing so, shall set forth the revised guidelines in a new Schedule which, when executed by a majority of the members of the Steering Committee, shall become a part of this Agreement. 5.2 Development Funding from a Third Party. Any development funding received from a Third Party will be allocated by the Steering Committee between MSS and the University in 10 proportion to the responsibilities each party undertakes that is covered by such funding and the effect such responsibilities may have on the division of Net Proceeds. 5.3 Payment Directly to [ * ]. MSS may pay directly to [ * ] any portion of the University's share of Net Proceeds to which [ * ] is entitled. 6. REPORTING AND DISTRIBUTION OF NET PROCEEDS 6.1 Reports and Payment. MSS will, within forty-five (45) days after the close of each calendar quarter during the term of this Agreement, issue a written report to the University reporting the Net Proceeds generated by MSS during such quarter, and a computation of the share thereof due each party hereunder. Full payment, net of any setoffs for shared costs to which MSS may be entitled under Section 3.4(c) above, of the University's share of such Net Proceeds for such calendar quarter will accompany such report. 6.2 Books and Records. MSS will keep, and will cause its distributors to keep, full, true, and accurate records with respect to Net Proceeds. MSS will give access to such records at reasonable times, no more than once per year, for three (3) years following the end of the calendar year to which they pertain, to a mutually acceptable independent certified public accountant retained by the University for the purpose of verifying the accuracy of the reports supplied to the University hereunder. The University will pay for the cost of such independent certified public accountant, except in the event that such inspection reveals that MSS has understated or underpaid the amounts due hereunder to the University in an average amount of five percent (5%) or more over a six (6) month period, then the MSS will pay or reimburse the University for the entire cost of such inspection. MSS agrees to pay the balance of such amounts due, together with the cost of the inspection, to the University within ten (10) days after written notice by the University of MSS's understatement or underpayment. 7. OWNERSHIP 7.1 MSS Innovations. MSS shall be the sole and exclusive owner of MSS Innovations, any Product based thereon after a Commercialization Event, the Brand Name(s), and all Intellectual Property Rights in the foregoing, subject to the University's right to share in Net Proceeds generated from the commercialization thereof in accordance with this Agreement. The University agrees to execute documents, including but not limited to assignment documents, as reasonably requested by MSS to establish, confirm and perfect MSS's rights in any of the foregoing. 7.2 University Innovations. The University shall be the sole and exclusive owner of University Innovations and of all Intellectual Property Rights therein, provided, however, that upon the occurrence of a Commercialization Event with respect to a University Innovation and/or a Product based thereon, the University agrees to assign to MSS all right and title to such University Innovation and/or Product and to all Intellectual Property Rights therein, subject to the University's right to share in Net Proceeds generated from the commercialization thereof in accordance with this Agreement. Each party agrees to execute documents, including but not 11 limited to assignment documents, as reasonably requested by the other party to establish, confirm and perfect the other party's rights in accordance with the foregoing. 7.3 Joint Ownership. MSS and the University shall be joint owners of equal undivided interests in any Joint Innovations developed by them, provided, however, that (i) during the term of this Agreement, each party agrees to exploit its joint ownership rights consistent with MSS's exclusivity as defined in Section 4.2 above, and (ii) upon the occurrence of a Commercialization Event with respect to a Joint Innovation and/or a Product based thereon, the University agrees to assign to MSS all right and title to such Joint Innovation and/or Product and to all Intellectual Property Rights therein, subject to the University's right to share in Net Proceeds generated from the commercialization thereof in accordance with this Agreement. After expiration or termination of this Agreement, each party shall be free to exploit, without the permission of the other party and without any duty of accounting, its joint ownership rights in any Joint Innovations that have not been assigned to MSS under this Section 7.3. 8. PUBLICATION Publication of research results or other information within the Project Scope will be governed by the procedures set forth in Section 5 of the Master Agreement. The Steering Committee will act as the "designated person" of each party as referenced in Section 5 of the Master Agreement, and will have the authority to determine the content and timing of any such publication. 9. TERM Unless earlier terminated in accordance with the terms of Section 10 below or by determination of the Steering Committee to abandon the Project and terminate this Agreement, this Agreement shall remain in effect from the Effective Date for a period of ten (10) years, and shall thereafter automatically renew for additional one (1) year periods, unless either party gives written notice to the other party at least six (6) months in advance of any renewal date that such party does not wish to renew this Agreement. 10. TERMINATION 10.1 Termination Upon Notice of Breach. In the event that either party breaches or defaults under any material term or condition of this Agreement, including but not limited to failure to make timely payment of monies due, and such breach or default is not cured within thirty (30) days of written notice of the same from the other party, the other party may, in addition to any other remedy that it may have at law or in equity or under this Agreement, terminate this Agreement. 12 10.2 Termination by the Steering Committee. The Steering Committee may at any time determine to abandon the Project and terminate this Agreement on a timeline as set by the Steering Committee. 10.3 Termination by MSS. MSS may at its option upon written notice to the University terminate this Agreement in the event that [ * ] is no longer an employee of the University or [ * ]. 10.4 Immediate Termination Upon Certain Events of Bankruptcy. Either party may at its option terminate this Agreement immediately upon written notice to the other party upon the occurrence of any of the following events: (a) In the event that the other party makes an assignment for the benefit of creditors; admits in writing its inability to pay its debts as they become due; files a voluntary petition in bankruptcy; is adjudicated to be bankrupt or insolvent; files a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statute, law or regulation, or files an answer or similar pleading admitting the material allegations of a petition filed against it in any such proceeding; or consents to or acquiesces in the appointment of, or has its business placed in the hands of, a trustee, receiver, assignee, or liquidator of it or any substantial part of its business, assets or properties, whether by voluntary act or otherwise; or (b) In the event that either party ceases doing business as a going concern, or it or its shareholders take any action in anticipation of or furtherance of dissolution or liquidation. 10.5 Effect of Termination. (a) Provisions Applying to All Terminations. In the event of any termination of this Agreement for any reason, the following provisions shall apply: (i) except as provided in this Section 10.5 or under Section 10.6 below, all further obligations of both parties under this Agreement will cease as of the date of termination of this Agreement; (ii) each party shall retain ownership (including joint ownership) of any Innovations and/or Products to which it had title in accordance with the provisions of this Agreement on the date of such termination, including but not limited to title by virtue of an assignment after a Commercialization Event; and (iii) with respect to any Product(s) for which a Commercialization Event has occurred as of the date of termination of this Agreement, the Steering Committee will determine how the division of Net Proceeds from such Product(s) should be reallocated between the parties, both immediately and over time, based upon the additional responsibilities with respect to such Product(s) that MSS will have to assume post termination of this Agreement, and MSS will be entitled to deduct its reasonable cost of all such additional responsibilities from the University's share of any such Net Proceeds, provided, however, that in no event shall the 13 deduction of such costs cause the University's share of such Net Proceeds to fall below [ * ] in any given calendar quarter. (b) Provisions Applying to Specific Events of Termination. In addition to the provisions of subsection (a), the following provisions shall apply with respect to specific events of termination affecting Products for which no Commercialization Event has occurred: (i) Termination by MSS. In the event that MSS terminates this Agreement pursuant to Sections 10.1 or 10.4, or the University elects not to renew this Agreement pursuant to Section 9, then with respect to any Product for which data exists or proof of principle studies are underway but no Commercialization Event has yet occurred as of the date of termination, the license rights granted by the University to MSS under Section 4 above shall continue, and MSS shall have the right to continue development of any such Product and to take such Product into commercial distribution (either itself or through a Third Party), provided that (1) if such Product is placed into commercial distribution, then the Steering Committee will determine how the Net Proceeds from such Product should be allocated between the parties, both immediately and over time, based upon the additional responsibilities that MSS assumes with respect to such Product post termination of this Agreement and (2) MSS will be entitled to deduct its reasonable cost of all such additional responsibilities from the University's share of any Net Proceeds generated by such Product, except that, unless otherwise determined by the Steering Committee, in no event shall the deduction of such costs cause the University's share of such Net Proceeds to fall below [ * ] in any given calendar quarter. (ii) Termination by the University. In the event that the University terminates this Agreement pursuant to Sections 10.1 or 10.4, or MSS elects not to renew this Agreement pursuant to Section 9, then, at the University's option, the University may either: (1) terminate all licenses granted by the University to MSS under this Agreement with respect to any Product(s) for which no Commercialization Event has yet occurred as of the date of termination, and elect to itself continue development of any such Product and to take such Product into commercial distribution (either itself or through a Third Party), provided that (x) if such Product is placed into commercial distribution, then the Steering Committee will determine how the Net Proceeds from such Product should be allocated between the parties, both immediately and over time, based upon the additional responsibilities that the University assumes with respect to such Product post termination of this Agreement and (y) the University will be entitled to deduct its reasonable cost of all such additional responsibilities from MSS's share of any Net Proceeds generated by such Product, except that, unless otherwise determined by the Steering Committee, in no event shall the deduction of such costs cause MSS's share of such Net Proceeds to fall below [ * ] in any given calendar quarter; or (2) allow the license rights granted by the University to MSS under Section 4 above to continue and allow MSS to continue development of any such Product and to take such Product into commercial distribution (either itself or through a Third Party), provided that (x) if such Product is placed into commercial distribution, then the Steering Committee will determine how the Net Proceeds from such Product should be allocated between the parties, both immediately and over time, based upon the additional responsibilities that MSS assumes with respect to such Product post termination of this Agreement and (y) MSS will be 14 entitled to deduct its reasonable cost of all such additional responsibilities from the University's share of any Net Proceeds generated by such Product, except that, unless otherwise determined by the Steering Committee, in no event shall the deduction of such costs cause the University's share of such Net Proceeds to fall below [ * ] in any given calendar quarter. (iii) Termination by the Steering Committee or by MSS Under Section 10.3. In the event this Agreement is terminated by the Steering Committee pursuant to Section 10.2 or by MSS pursuant to Section 10.3, then the Steering Committee will decide whether MSS or the University (if any) should assume responsibility for continuing development of any Product for which a Commercialization Event has not occurred as of the date of such termination, and in the event MSS assumes such responsibility, then any licenses granted by the University to MSS under this Agreement will survive termination of this Agreement. The Steering Committee will also determine how the Net Proceeds generated by any such Product should be allocated between the parties, based upon the additional responsibilities assumed by the party having responsibility for continuing development of such Product post termination of this Agreement, and the party assuming such responsibility will be entitled to deduct its reasonable cost of all such additional responsibilities from the other party's share of any Net Proceeds generated by such Product, except that, unless otherwise determined by the Steering Committee, in no event shall the deduction of such costs by one party cause the other party's share of such Net Proceeds to fall below [ * ] in any given calendar quarter. 10.6 Survival of Certain Provisions. The provisions of Sections 6.2, 7, 10.5, 10.6, 12, 13.1, 13.2, 14.3, 15, 17, and 18 of this Agreement will survive the expiration or termination of this Agreement. 11. PERSONNEL Each party will cause its respective employees, faculty, consultants and staff to execute such agreements, assignments, applications and other documents as necessary to perfect and protect each party's rights as defined in this Agreement with respect to Innovations and Products within the Project Scope. 12. SETTLEMENT OF DISPUTES 12.1 Basic Dispute Resolution Procedures. Any dispute between the parties either with respect to the interpretation of any provision of this Agreement or with respect to the performance of either party shall be resolved as specified in this Section. (a) Upon the written request of either party, each of the parties will appoint a designated representative who does not devote substantially all of his or her time to performance under this Agreement, whose task it will be to meet for the purpose of endeavoring to resolve such dispute. (b) The designated representatives shall meet as often as necessary during a fifteen (15) day period (or such other time as the parties may agree) to gather and furnish to the 15 other all information with respect to the matter in issue which is appropriate and germane in connection with its resolution. (c) Such representatives shall discuss the problem and negotiate in good faith in an effort to resolve the dispute without the necessity of any formal proceeding relating thereto. (d) During the course of such negotiation, all reasonable requests made by one party to the other for nonprivileged information reasonably related to this Agreement, will be honored in order that each of the parties may be fully advised of the other's position. (e) The specific format for such discussions will be left to the discretion of the designated representatives, but may include the preparation of agreed upon statements of fact or written statements of position furnished to the other party. 12.2 Escalation Procedures. If the designated representatives cannot resolve the dispute, then the dispute shall be escalated to a member of the Board of Directors or Trustees of each of the University and of MSS, for their review and resolution. If the dispute cannot be resolved by such persons, then the parties may initiate formal proceedings; however, formal proceedings for the resolution of any such dispute may not be commenced until the earlier of: (a) The designated representatives concluding in good faith that amicable resolution through continued negotiation of the matter in issue does not appear likely; or (b) Sixty (60) days after the initial request to negotiate such dispute (unless preliminary or temporary relief of an emergency nature is sought by one of the parties); or (c) Thirty (30) days before the statute of limitations governing any cause of action relating to such dispute would expire. 12.3 Arbitration of Monetary Disputes. (a) Procedures. Any monetary disputes between the parties concerning the amount of monies due or payable under this Agreement which the parties are unable to resolve pursuant to the provisions of Sections 12.1 and 12.2 above, will be settled by arbitration in Orange County, California (unless otherwise agreed) under the then-prevailing rules of American Arbitration Association. There will be one (1) arbitrator chosen by mutual agreement of the parties or, in the event the parties cannot agree within thirty (30) calendar days of issuance of a written demand for arbitration by either party, by the American Arbitration Association. All proceedings by the arbitrator shall be conducted in accordance with the rules of the American Arbitration Association, except to the extent the provisions of such rules are modified by this Agreement or the mutual agreement of the parties. Either party will have the right to discovery of evidence, but by the following methods only: requests for production of documents and depositions of no more than three (3) individuals. The arbitrator will supervise discovery and may, at the request of either party, limit expenses of discovery (including reasonable attorneys' fees) to the requesting party for good cause shown. All discovery will be completed, and the arbitration hearing will commence, within forty-five (45) days after appointment of the arbitrator. Subject to the foregoing, discovery matters will be governed by the Federal Rules of Civil 16 Procedure as applicable to civil actions in the United States District Courts. The arbitration hearing will conclude within thirty (30) days after it commences. The award rendered in arbitration will be in writing and will be final and binding, and may be enforced in any court of competent jurisdiction. The fees and expenses of the arbitrator will be paid by the non-prevailing party. (b) Approval of One Substantive Position of the Parties. In all arbitration proceedings submitted under this Section 12.3, the arbitrator shall be required to agree upon and approve the substantive position advocated by either MSS or the University with respect to each disputed item(s). Any decision rendered by the arbitrator that does not reflect a substantive position advocated by either MSS or the University shall be beyond the scope of authority granted to the arbitrator and shall be void. No decision of the arbitrator shall ever be construed as or have the effect of amending or altering this Agreement or the parties' rights and responsibilities with respect thereto. 12.4 Other Disputes. Except as provided in Section 12.3 above, the parties will have no obligation to arbitrate any other disputes, claims or controversies of any kind arising out of or related to this Agreement, including but not limited to any dispute, claim or controversy relating to the scope of the Project or the party's respective ownership rights to any Innovation or Product. In addition, any claim by one party against the other for injunctive or preliminary relief, whether or not related to this Agreement, may be litigated in a court of competent jurisdiction. 13. CONFIDENTIALITY AND PRESS RELEASE In addition to the provisions of Section 5 of the Master Agreement, the following confidentiality provisions shall apply: 13.1 Confidentiality of the Agreement. The parties agree to maintain all terms and conditions of this Agreement in confidence, except that (i) MSS may state that it has received a license from the University under this Agreement and may name the patents and Intellectual Property Rights to which such license rights apply; (ii) The University may state that it has licensed certain commercial exploitation rights within the Project Scope to MSS; (iii) this Agreement may be disclosed to either party's attorneys, accountants or other professional advisors in the course of seeking professional advice and to the extent required by applicable law or regulations or court order; and (iv) this Agreement may be disclosed by MSS to entities with which MSS is discussing a proposed sale of its stock, sale of all or substantially all of its assets, obtaining financing or entering into a partnering arrangement, provided that the entity to whom the terms of this Agreement is to be disclosed has executed a reasonable non-disclosure agreement. 13.2 Protection of Confidential Information. Each party agrees to keep all Confidential Information of the other party to which it has access hereunder strictly confidential, and agrees that it will not, except with the express permission of the other party or as required by applicable law or regulations or by court order, use such information except in the performance of this Agreement, or disclose any such Confidential Information to any person or entity other than its own employees, consultants, faculty, technicians, visiting scientists, students, and/or post- 17 doctoral associates who have a need to know and who have been informed in advance of the receiving party's obligations with respect to such Confidential Information. 13.3 Press Release. The parties agree to issue a mutually agreeable joint press release with respect to this Agreement. Each party agrees that it will not issue a press release with respect to this Agreement until such joint press release has first been issued. 14. REPRESENTATIONS AND WARRANTIES 14.1 By the University. The University represents and warrants to MSS that: (a) Ownership. The University is the sole and exclusive owner of any Licensed Patents and any University Innovations supplied hereunder to MSS for commercial exploitation; (b) Authority. The University has the full right and power to grant the licenses to MSS set forth in this Agreement and to supply the University Innovations to MSS for commercialization hereunder; (c) Inconsistent Obligations. There are no outstanding agreements, licenses, assignments or encumbrances inconsistent with the provisions of such licenses or with any other provision of this Agreement; and (d) Infringement of Rights of Others. To the best of the University's knowledge as of the Effective Date, the University knows of no third parties' rights which would be infringed by practicing the inventions claimed in the Licensed Patents within the scope of the licenses granted to MSS hereunder or by the commercialization as contemplated hereunder of the University Innovations in existence as of the Effective Date. The University will promptly notify MSS in the event that it learns or has cause to believe at any time that any third parties' rights would or might be infringed by practicing the inventions claimed in any Licensed Patents or by any Product or Innovation being commercialized hereunder. In the event that a claim is made against MSS or a Third Party that the manufacture, use, sale, distribution or other commercial exploitation of a Product or Innovation infringes the Intellectual Property Rights of a third party, then MSS or the Third Party (as applicable) will fund the cost of any litigation resulting out of such claim, but will be entitled to recover up to two-thirds (or whatever other fraction of the Net Proceeds generated by such Product or Innovation the University is entitled to hereunder at the time such litigation commences) of its costs and any damages awarded against it out of the sinking fund established pursuant to Section 3.4 above and, to the extent the sinking fund contains insufficient funds, the University's current and future share of any Net Proceeds; provided that in the event MSS or the Third Party is found to have willfully infringed such third party's Intellectual Property Rights (and such willfulness was not caused by the University), then MSS or the Third Party shall not be entitled to recover any portion of any enhanced damages awarded based upon such willfulness, and provided further that the University will be entitled to have counsel of its own choosing participate in (but not control) any such litigation at the University's sole expense. 18 14.2 By MSS. MSS represents and warrants to the University that there are no outstanding agreements, licenses, assignments or encumbrances inconsistent with the provisions of such licenses or with any other provision of this Agreement. 14.3 No Other Warranties. EXCEPT AS SET FORTH IN THIS SECTION, NEITHER PARTY MAKES ANY OTHER WARRANTY, EXPRESS OR IMPLIED, RELATING TO THIS AGREEMENT OR ANY INNOVATION OR PRODUCT, AND EACH PARTY SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OR CONDITION OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 15. INDEMNITIES 15.1 By MSS. MSS agrees to defend, indemnify, and hold the University harmless from and against any and all third-party claims (other than claims for infringement of a third party's Intellectual Property Rights to the extent such claims fall within the provisions of Section 14 above), damages, actions, liabilities, costs and expenses arising out of or in connection with (i) any damage, including but not limited to damage to any property and personal injury or death, by whomever suffered arising out of or resulting from any negligent or willful act of MSS relating to the subject matter of this Agreement, and (ii) any breach or claimed breach of the warranties and representations set forth in Section 14.2 above. 15.2 By the University. The University agrees to defend, indemnify, and hold MSS harmless from and against any and all third-party claims, damages, actions, liabilities, costs and expenses arising out of or in connection with (i) any damage, including but not limited to damage to any property and personal injury or death, by whomever suffered arising out of or resulting from any negligent or willful act of the University relating to the subject matter of this Agreement, and (ii) any breach or claimed breach of the warranties and representations set forth in Section 14.1 above. 16. ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS In the event that either party becomes aware of an infringement or potential infringement of the Licensed Patents or of any other Intellectual Property Right of either the University or MSS within the Project Scope, such party will promptly notify the other party and provide the details known to it. The Steering Committee will then promptly confer about such infringement or potential infringement. Within ten (10) business days thereafter, each party will notify the other of its decision whether or not it wishes to participate in litigation against the infringer or potential infringer. Any such litigation will proceed as follows: (a) Both Parties Elect to Participate. In the event that both parties elect to participate in such litigation, the parties will mutually agree upon counsel to bring such litigation. The parties will share equally the costs (including the fees of attorneys and other professionals) of any such litigation. MSS may recover all or a portion of its share of any such costs from the sinking fund established pursuant to Section 3.4 above and, to the extent the sinking fund contains insufficient funds, as an offset to the University's share of Net Proceeds. All damages or lump sum 19 settlement payments recovered from the prosecution or settlement of such litigation shall, after deduction of all reasonable costs and fees of attorneys and other professionals incurred in pursuing such litigation, be divided equally between the parties. Each party agrees to join such action as a named plaintiff to the extent necessary to obtain jurisdiction or if deemed a necessary party. (b) MSS Decides to Participate and the University Does Not. In the event that MSS elects to participate in such litigation and the University does not, then MSS may initiate and control such litigation at its own expense. In the event MSS institutes such litigation, (i) the University may at its option have counsel of its choosing participate in such litigation provided such counsel does not interfere with MSS's control of such litigation, (ii) the University will join such action as a plaintiff to the extent necessary to obtain jurisdiction or if the University is deemed a necessary party, and (iii) if such litigation is based upon the Licensed Patents or any other Intellectual Property Rights of the University, MSS will not settle any such litigation without the express approval of the University to the terms and conditions of any such settlement. All damages or lump sum settlement payments recovered from the prosecution or settlement of such litigation shall be retained by MSS. (c) The University Decides to Participate and MSS Does Not. In the event that the University elects to participate in such litigation and MSS does not, then the University may institute and control such litigation at its own expense. In the event the University institutes such litigation, (i) MSS may at its option have counsel of its choosing participate in such litigation provided such counsel does not interfere with the University's control of such litigation, (ii) MSS will join such action as a plaintiff to the extent necessary to obtain jurisdiction or if MSS is deemed a necessary party, and (iii) if such litigation is based upon any Intellectual Property Right of MSS, the University will not settle any such litigation without the express approval of MSS to the terms and conditions of any such settlement. All damages or lump sum settlement payments recovered from the prosecution or settlement of such litigation shall be retained by the University. 17. LIMITATION OF LIABILITY EXCEPT FOR ANY WILLFUL BREACH OF SECTIONS 8 OR 13, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING OUT OF THIS AGREEMENT. 18. GENERAL 18.1 Governing Law. This Agreement will be governed by and construed in accordance with the substantive laws of the United States and the State of California, without regard to or application of provisions relating to choice of law. 18.2 Waiver and Modification. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. 20 Any waiver, amendment or other modification of any provision of this Agreement will be effective only if in writing and signed by the parties. 18.3 Severability. If for any reason a court of competent jurisdiction finds any provision or portion of this Agreement to be unenforceable, that provision will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement will continue in full force and effect. 18.4 Notices. All notices required or permitted under this Agreement will be in writing, will reference this Agreement and will be deemed given: (i) when sent by confirmed facsimile; (ii) ten (10) working days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iii) five (5) working days after deposit with a commercial overnight carrier, with written verification of receipt. All communications will be sent to the addresses set forth below or to such other address as may be designated by a party by giving written notice to the other party pursuant to this section: To MSS: Paul J. White President and CEO Medical Science Systems, Inc. 4400 McArthur Blvd., Suite 980 Newport Beach, CA 92660 U.S.A. To the University: [ * ] with a copy to: [ * ] 21 [ * ] 18.5 Delays Beyond Control. Neither party will be liable to the other party for any failure or delay in performance caused by reasons beyond such party's reasonable control, and such failure or delay will not constitute a material breach of this Agreement. 18.6 Assignment. Neither party may assign its rights or obligations hereunder, by operation of law or otherwise, without express written consent of the other party, which consent will not be unreasonably withheld. Any attempted assignment without such consent shall be void. Subject to the foregoing, this Agreement will benefit and bind the successors and assigns of the parties. 18.7 No Third Party Beneficiaries; No Agency. Except as expressly provided herein to the contrary, no provision of this Agreement, express or implied, is intended or will be construed to confer rights, remedies or other benefits to any third party under or by reason of this Agreement. This Agreement will not be construed as creating an agency, partnership or any other form of legal association (other than as expressly set forth herein) between the parties. 18.8 Entire Agreement. This Agreement and the Master Agreement, including all exhibits, constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersede and replace all prior or contemporaneous understandings or agreements, written or oral, regarding such subject matter. 18.9 Multiple Counterparts. This Agreement may be executed in multiple counterparts, each of which will be considered an original and all of which together will constitute one agreement. This Agreement may be executed by the attachment of signature pages which have been previously executed. 18.10 Cumulation. All rights and remedies enumerated in this Agreement will be cumulative and none will exclude any other right or remedy permitted herein or by law. 18.11 Venue and Personal Jurisdiction. Any suit or other proceeding not subject to arbitration under Section 12 will be brought solely in the federal courts in the Central District of California, if jurisdiction in such court can be obtained, and otherwise in the state courts of California, and each party hereby irrevocably submits to, and waives any objections to, the exercise of personal jurisdiction thereof and venue therein. 18.12 Headings. The headings contained in this Agreement are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 22 18.13 Incorporation of the Master Agreement. Except as specifically provided in this Agreement, the relevant terms and conditions of the Master Agreement are hereby incorporated by reference into this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement through their duly authorized representatives as set forth below: MEDICAL SCIENCE SYSTEMS, INC. THE UNIVERSITY OF SHEFFIELD By: By: ------------------------------ -------------------------------------- Printed Name: Printed Name: -------------------- ---------------------------- Title: Title: --------------------------- ----------------------------------- 23 EXHIBIT A DESCRIPTION OF SMM GENETIC OSTEOPOROSIS PROJECT EXISTING AS OF THE EFFECTIVE DATE OF THIS AGREEMENT 24 SCHEDULE 1 GENERAL GUIDELINES FOR ALLOCATING NET PROCEEDS FOR GENETIC TEST PRODUCTS [ * ] 25 SCHEDULE 2 SPECIFIC GUIDELINES FOR ALLOCATING NET PROCEEDS FOR INITIAL OSTEOPOROSIS TEST [ * ] EX-10.6 21 JOINT PROJECT AGREEMENT 1 EXHIBIT 10.6 November 9, 1994 Gordon W. Duff, Ph.D., FRCP PERSONAL & CONFIDENTIAL Sheffield S10 3BZ Re: Joint Project Dear Professor Duff: The purpose of this letter is to outline the terms and conditions which our company and you will be working together. We each agree as follows: 1) The purpose of the project is set forth in Exhibit A to the Mutual Nondisclosure Agreement ("Nondisclosure Agreement") signed by us on October 19, 1994. Both parties agree to be bound by the terms and conditions of that agreement, and will not disclose the details without the prior written consent of the other party. The Nondisclosure Agreement is incorporated herein by this reference. 2) MSS has provided and will be responsible to handle and provide for the project, at its cost: (a) the research concept and product concept idea set forth in the Nondisclosure Agreement. (b) patent analysis and strategy (c) expertise in the selection of patients who are most likely to be valuable in the project and access to the patient population. (d) conducting a four month clinical trial for the collection of patient samples and clinical data on a minimum of 150 patients in three groups of 50 patients each; (e) conduct a Simulated Biology ("Sim Bio") discovery research project over a 4 month period to construct a computer biologic model to incorporate the genetic markers. - -------- * Confidential Treatment requested. 2 Gordon W. Duff, Ph.D., FRCP November 9, 1994 Page 2 (f) interpretation of how the resulting research data may apply to periodontal diseases; (g) handle all patent filings in the United States or Worldwide. (h) attempt to transfer the research findings into a practical diagnostic or other product; (i) at MSS election, testing of the potential diagnostic or other product in a small clinical trial to establish "proof of principle". (j) handle the negotiations and contracts for the sale, license, further development or other business arrangement with a company for product development, commercialization and/or marketing. You will be responsible to handle and provide for the project, at your cost: (a) Resources for the genetic analysis of the standard set of markers of our samples and in interpretation of the results. We would provide you with a minimum of fifty (50) patients in each of the three groups, so you would have a minimum of one hundred fifty (150) samples. The maximum number of samples that you will be required to analyze from each group is one hundred (100) samples per group or three hundred (300) total. The specifics will be set forth in Schedule A ; 3) The Project plan with relevant time tables and deliverable due dates for each of us are set forth in Schedule A. 4) The economic sharing on the project would be as follows: (a) [ * ]. 5) Our organization would handle the negotiations and sale, license, or other disposition of any inventions and discoveries. We would have the authority to negotiate and be bound both of us to a business arrangement that would bring a minimum of $500,000.00 paid 3 Gordon W. Duff, Ph.D., FRCP November 9, 1994 Page 3 over a 5 year period. If an offer came in that was below that amount, we would need to mutually agree on the arrangement. 6) As part of this arrangement, we will each be exchanging information that is either confidential and/or non-public information. We will each continue to own our respective separate data and we would agree not to use the other party's data without the permission of the party. All joint data and/or results and any insights derived, including insights into the use of the new data or results outside the scope of the current purpose of this project shall be documented during and at the end of the project. As to joint data or results coming from the clinical or laboratory analysis called for under this project, or insights derived during the collaboration, we would each have the right to use any such jointly developed data in any manner including another project, only with the written approval and agreement of the other party. Neither of us would publish or make presentations in any public forum as to joint data developed without the permission of the other. Both parties will be authors on any publications of the joint data. Primary authorship of joint data will be determined by mutual agreement depending upon the particular focus of the manuscript. Both of us recognize that this is a commercial venture and the need for secrecy is of paramount importance to secure legal protection of the data and results and device or product coming therefrom, and to secure a product development business arrangement. 7) The parties agree that this arrangement is a mutually exclusive arrangement so that neither of us would perform or be involved in any other genetic research in the oral care area during the project. Additionally, you agree not to conduct or be involved in any genetic research for periodontal disease or dental caries without MSS written consent for a period of 5 years from the date of this Agreement. 8) It is the intent of the parties to collaborate on future projects of oral manifestations of systemic conditions or in other disease areas where the application of our respective technologies and know-how can be applied in a commercial venture. The parties agree to negotiate in good faith the terms and conditions of such future venture(s) based upon tangible and intangible contributions to the project. 9) Termination of Agreement. This Agreement shall immediately be deemed terminated upon the occurrence of the following: (a) Mutual Consent: Upon the mutual agreement of all parties. (b) Death. Upon your death. 4 Gordon W. Duff, Ph.D., FRCP November 9, 1994 Page 4 (c) Cause. Should either party materially breach their obligations under this Agreement after a thirty (30) day notice and cure period. Notwithstanding termination of this Agreement, the provisions of Section 1, 4, 5, 6 and 7 shall survive the termination. 10) This letter is intended to constitute a binding letter agreement on all parties. All parties agree to cooperate with each other and execute any and all legal documents reasonably necessary or appropriate to carry out the intent of this agreement. 11) This agreement constitutes the entire understanding between the parties with respect to the subject matter hereof, superseding all negotiations, prior discussion and preliminary agreements, if any. 12) This agreement shall not be modified or amended except in writing signed by you and a duly empowered officer of the Company. 13) This agreement shall be construed under and governed in accordance with, the laws of the State of California. 14) Except as otherwise provided in this Agreement, the provisions hereof shall be binding upon and shall inure to the benefit of the parties hereto, their personal representatives, heirs, executives, administrators, successors and/or permitted assigns. 15) Neither this Agreement nor the rights, duties or obligations arising hereunder shall be assignable by either of us. Sincerely, MEDICAL SCIENCE SYSTEMS By: -------------------------------------- PAUL J. WHITE Chief Executive Officer THE UNDERSIGNED AGREES TO ALL TERMS AND CONDITIONS SET FORTH IN THIS LETTER 5 Gordon W. Duff, Ph.D., FRCP November 9, 1994 Page 5 Dated: _______________________________ Professor Gordon W. Duff 6 Gordon W. Duff, Ph.D., FRCP November 9, 1994 Page 6 SCHEDULE A ---------- [ * ] EX-10.7 22 EMPLOYMENT AGREEMENT WITH PAUL J. WHITE 1 EXHIBIT 10.7 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement"), by and between Medical Science Systems, Inc., a Texas Corporation (the "Corporation"), and Paul J. White ("Employee"), is effective this 1st day of January, 1996 ("Effective Date"). The Corporation and Employee are hereinafter sometimes referred to, individually and collectively, as a "Party" or the "Parties." 1 TERM. The term of employment of Employee hereunder shall commence as of the date hereof and shall continue in full force and effect until the fifth anniversary of the date hereof (the "Initial Term"), and shall automatically continue thereafter for successive 12 month periods unless terminated at the end of such Initial Term or any subsequent 12 month term after the Initial Term by either party hereto on not less than six months prior written notice to the other party (the "Employment Term"). The term of this Agreement shall be coincident with the Employment Term. 2 DUTIES. Employee shall serve as President and Chief Executive Officer of the Corporation or such other position as may be agreed between Employee and the Corporation, and shall perform such duties, services and responsibilities as are consistent with such position. Employee's duties, services and responsibilities will be performed under the overall supervision of, and consistent with the policies of, the Board of Directors of the Corporation (the "Board of Directors"). Employee shall also be entitled to serve as a director of the Corporation. During the Employment Term, Employee shall devote his full business time, attention and skill to the performance of such duties, services and responsibilities, and will use his reasonable efforts to promote the interests of the Corporation. Employee will not, without the prior written approval of the Board of Directors, engage in any other business activity which would interfere with the performance of his duties, services and responsibilities hereunder or which is in violation of policies established from time to time by the Corporation. Personal passive investments and personal business affairs not inconsistent with this Agreement shall not be prohibited. 3 COMPENSATION. In consideration of the performance by Employee of Employee's obligations during the Employment Term (including any services as an officer, director, employee, member of any committee 1 2 of the Corporation or any of its subsidiaries, or otherwise), the Corporation will pay Employee a salary (the "Salary") at an annual rate of $250,000 per year during the Employment Term. The Salary shall be payable in accordance with the normal payroll practices of the Corporation then in effect. The Salary, and all bonuses or other forms of compensation paid to Employee hereunder, shall be subject to all applicable taxes required to be withheld by the Corporation pursuant to federal, state or local law. Employee shall be solely responsible for income taxes imposed on Employee by reason of any cash or non-cash compensation and benefits provided hereunder. In addition to the payment of the Salary, Employee shall be entitled to participate in any employee benefit plans then in effect for similarly situated employees to the extent Employee meets the eligibility requirements for any such plan, including group insurance, retirement, supplemental pension, bonus plan, stock option or awards plans; provided, however, that the Corporation shall provide health or medical insurance benefits to Employee and his spouse or any dependent of Employee as provided by any health and medical insurance plans sponsored for employees of the Corporation in general without any eligibility requirements or waiting periods as permitted under those plans and provided further that, at Employee's option, Employee shall be entitled to maintain his current insurance policy and the Corporation shall reimburse or pay directly Employee's insurance premiums. Employee may switch to the Corporation's plan at any time. 4 WORKING CONDITIONS. Employee shall be provided with workspace, office equipment, plain paper fax machine, computer equipment, furniture, supplies, and such other facilities and services as determined by the Corporation as is reasonably necessary for the performance of his duties. 5 EXPENSES. The Corporation shall reimburse Employee for all normal and reasonable business expenses upon presentation of an approved expense report and related receipts ("Expense Report"). Such reimbursable expenses will include Employee's business airfare, travel, lodging, car rentals, automobile, meals, long-distance telephone expenses, subscription dues, car telephone, home business telephone, home facsimile, mobile telephone, facsimile expenses (or similar technology as it becomes available) and reasonable client entertainment. Employee shall be reimbursed for such reasonable business expenses upon the verification and approval of such expenses. The Corporation shall either approve or disapprove such expense report no later than thirty (30) days after the submission of such expense report by Employee, and such report 2 3 shall be deemed approved unless expressly disapproved by Corporation within the thirty (30) day period. The Corporation agrees that the accumulation of frequent flyer mileage benefits shall be credited to Employee personally. 6 MISCELLANEOUS. The Corporation agrees to purchase professional books, professional journals and publications in an amount that Employee and the Corporation reasonably agree, for use by Employee during the term of this Agreement. Such books, publications and journals shall be considered and shall remain the property of the Corporation. The Corporation shall also pay continuing education and certification fees of Employee. 7 LIFE INSURANCE. During the Employment Term, the Corporation shall pay the premium on a policy of life insurance with a value of $1,000,000, naming the Employee's spouse as beneficiary. At the end of the term of the Agreement all rights under such policy (including any cash surrender value) shall belong to Employee; prior thereto, they shall belong to the Corporation. 8 AUTOMOBILE REIMBURSEMENT. In recognition of Employee's need for an automobile for business purposes, the Corporation shall reimburse Employee Six Hundred Dollars ($600.00) per month for automobile expenses, including automobile payments, maintenance, gasoline and car telephone costs incident thereto. 9 VACATION. Employee shall be entitled to four (4) weeks vacation annually, without loss of compensation, during Employee's full time employment under the terms of this Agreement. The times for these vacation periods shall be those most convenient to the Corporation's business, as may be orally agreed upon by the Corporation. In the event Employee's total accrued vacation is in excess of twelve (12) weeks vacation at the end of any calendar year (December 31st), accrual of vacation shall cease. 10 LEAVE OF ABSENCE. Employee shall be entitled to take anunpaid leave of absence (no compensation or benefits under this Agreement) only if approved by the Corporation. 11 HOLIDAYS. Employee shall be entitled to all holidays designated by the Corporation, without loss of compensation. 12 TERMINATION OF AGREEMENT. 12.1 TERMINATION WITHOUT CAUSE. Employee's employment with the Corporation shall be terminated and, except as provided below, this Agreement shall terminate as follows: 12.1.1 Whenever the Corporation and Employee shall mutually agree, in writing, to termination; or 12.1.2 Upon the death of Employee; or 12.1.3 If (i) Employee is absent from work for 180 calendar days in any twelve month period by reason of illness or incapacity (whether physical or otherwise) or (ii) an independent 3 4 medical examiner reasonably determines that Employee is unable to perform his duties, services and responsibilities hereunder by reason of illness or incapacity (whether physical or otherwise) for a total of 180 calendar days in any twelve-month period during the employment Term ("Disability"), the Corporation shall not be obligated to pay Employee any compensation (Salary or bonus) for any period in excess of such days; furthermore, any such payments shall be reduced by any amount Employee is entitled to receive as a result of such disability under any plan provided through the Corporation or under state or federal law. If the independent medical examiner certifies that Employee can work part-time after the expiration of the 180 day period, the Corporation shall reasonably accommodate Employee to allow him to work part-time. Compensation will be reduced proportionately. All of Employee's non-compete obligations shall survive any period of disability. 12.1.4 The existence of a disabling mental or physical condition and the date upon which such condition preventing performance of such duties commenced shall be determined by an independent medical examiner. In the event either party requests to have an independent medical examiner determine whether Employee is disabled, then the Corporation and Employee agree to meet and confer in good faith with one another to mutually select an independent medical examiner. The Corporation or Employee, whichever elects to request an independent medical examiner, shall give written notice of that election to the other party. The parties, or their legal representatives, agree to meet, at the offices of the Corporation, within ten (10) days of the notice of election to select an independent medical examiner. In the event that after meeting and conferring in good faith, the Corporation and Employee are unable to agree on the selection of an independent medical examiner within five (5) days, one medical examiner shall be selected by the Corporation and one medical examiner shall be selected by Employee, which two (2) medical examiners shall select a third medical examiner, and the third medical examiner shall determine, within fifteen (15) days after his or her appointment, if Employee is disabled. In the event that Employee (or Employee's legal representative) refuses to meet promptly with the Corporation to confer in good faith, or Employee (or Employee's legal representative) fails to select a medical examiner within said five (5) day period, the Corporation's selection of a medical examiner shall be binding. In accordance with the foregoing, Employee (or Employee's legal representative) shall cooperate fully and comply with any requests made by the Corporation and/or the medical examiner in allowing said medical examiner to make a determination whether or not Employee is disabled and the estimated commencement date of 4 5 Disability. 12.2 TERMINATION FOR CAUSE. Notwithstanding anything herein set forth in this Agreement to the contrary, the Corporation may, at any time, terminate this Agreement for "cause." For purposes of this Agreement, "cause" shall include, but not be limited to, the occurrence of any of the following events: 12.2.1 Employee has committed an act of theft or embezzlement from or fraud on the Corporation; 12.2.2 Employee shall materially breach any of the terms, covenants and conditions of this Agreement, which shall include but not be limited to, any violation of the restrictions against competition contained in Section 14; 12.2.3 Employee shall have committed an act of sexual harassment or discrimination; 12.2.4 Employee shall have been convicted of a felony and sentenced to more than fourteen (14) days in jail; 12.2.5 Employee shall fail or refuse to abide by the lawful directions set by the Board of Directors. Notwithstanding the foregoing, in the event the Corporation decides to terminate Employee under this Paragraph 12.2.5, then the Corporation shall first give Employee written notice of the breach of this Agreement, specifying the details thereof and shall give Employee thirty (30) days to cure ("Cure Period") said conduct. If the conduct is not cured within said thirty (30) day period, the Corporation may terminate this Agreement at the expiration of the Cure Period. The Corporation may immediately terminate this Agreement for violation under Sections 12.2.1, 12.2.3 and 12.2.4. 12.3 CONTINUING OBLIGATIONS. Employee shall be only entitled to a pro-rata share of basic compensation and benefits, up to the Termination Date, based on the ratio that the number of days that Employee has performed in accordance with the terms and provisions of this Agreement in the relevant term year that bears to three hundred sixty-five (365). 13 EMPLOYEE'S DUTIES UPON TERMINATION. In the event of termination of working relationship with the Corporation, Employee agrees to deliver promptly to the Corporation all Corporation owned equipment, notebooks, documents, memoranda, reports, files, manuals, models, notes, logs, technical data, software, samples, books, correspondence, lists, or other written or graphic records, 5 6 keys, credit cards and the like, relating to the Corporation's business, which are or have been in his possession or under his control. 14 COMPETITIVE ACTIVITIES. During the Employment Period, Employee agrees that Employee will not, directly or indirectly, work for, provide consulting services on his own behalf for, own an interest in (excluding a passive investment in a public company where employee owns less than 5% of the stock of such company), operate, join, control, or participate in, or be connected as an officer, employee, agent, independent contractor, partner, shareholder, or principal of any corporation, partnership, proprietorship, firm, association, or person marketing products, goods, equipment, and/or services which directly or indirectly competes with the Corporation's services or products or the Corporation's business, without the prior written consent of Corporation. 15 NOTICES. Unless otherwise specifically provided, all notices and demands required to be given hereunder shall be deemed to be duly given at the time of delivery if such notice or demand is personally delivered, or forty-eight (48) hours after mailing if such notice or demand is deposited with the United States Postal Service, postage prepaid, for mailing via registered or certified mail, return receipt requested, to the Secretary of the Corporation and to Employee at the addresses set forth below. Such addresses may only be changed by giving written notice of such change to all of the other Parties hereto. To Corporation: Chairman, Board of Directors Medical Science Systems, Inc. A Texas Corporation 4400 MacArthur Boulevard, Suite 980 Newport Beach, California 92660 To Employee: Paul J. White 3 Malea Laguna Niguel, California 92677 Any notice so given by mail or delivery service shall be deemed effectively given on the date actually received. Any Party may by like written notice to the other specify a different address for notice purposes. 16 ENTIRE AGREEMENT. This Agreement and the Confidentiality Agreement described in Paragraph 16 contain the entire understanding between and among the Parties hereto, and supersedes any prior written or oral agreement or negotiations between or 6 7 among the Parties concerning the subject matter contained herein. There are no representations, agreements, arrangements, or understanding, oral or written, between or among the Partie hereto, relating to the subject matter contained in this Agreement, which are not fully expressed herein. 17 AMENDMENTS. This Agreement shall not be modified or amended except by a writing signed by Employee and a duly empowered officer of the Corporation. 18 BINDING EFFECT. Subject to the restrictions against transfer or assignment herein contained, the provisions of this Agreement shall inure to the benefit of and shall be binding upon the heirs and legatees, successors-in- interest, personal representatives, estates and assigns of each of the Parties hereto. 19 CAPTIONS. Captions at the beginning of each numbered section of this Agreement are solely for the convenience of the Parties and shall not be deemed part of the context of this Agreement. 20 DEFINITIONS. 20.1 GENDER. As used herein, the masculine, feminine and neuter gender, and the singular or plural number, shall each be deemed to include the others whenever the context so indicates. 20.2 LEGAL REPRESENTATIVE. As used herein, the term "legal representative" shall refer to the executor, administrator, attorney-in-fact, guardian or conservator of the estate of Employee, Employee's surviving spouse, if applicable, and any trustee or successor. 21 WAIVER. No waiver of any breach or default of this Agreement by any Party hereto shall be considered to be a waiver of any other breach or default of this Agreement. 22 FURTHER ACTS. Each Party hereto agrees to perform any further acts and to execute and deliver any further documents which may be reasonably necessary to carry out the provisions of this Agreement. 23 ATTORNEYS' FEES. Should any litigation or arbitration be commenced between the Parties hereto or their personal representatives concerning any provision of this Agreement or the rights and duties of any person in relation thereto, the Party substantially prevailing in such litigation or arbitration shall be entitled, in addition to such other relief that may be granted, to all costs, expenses, expert witness fees, etc. and reasonable 7 8 attorneys' fees. 24 CHOICE OF LAW; VENUE. This Agreement has bee construed under and governed in accordance with the laws of the State of California. Venue shall be in Orange County, California. 25 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but such counterparts, when taken together, shall constitute but one Agreement. 26 SEVERABILITY. Should any one or more of the provisions of this Agreement be determined to be illegal or unenforceable, all other provisions of this Agreement shall be given effect separately from the provisions so determined and the other provisions shall not be affected by the illegality or unenforceability. 27 BINDING ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof (whether arising out of contract, tort, statute or any legal or equitable theory, including, without limitation, the issue of arbitrability), shall be settled by binding arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, except as expressly modified in this Agreement, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The arbitration shall be conducted in Orange County, California. The parties shall have the right to conduct discovery as if the dispute were being litigated in the California Superior Court. Without limiting the generality of the foregoing, the limitations on discovery contained in Section 1283, 1283.50, and 1283.1 of the California Code of Civil Procedure shall not apply. The only exception to the preceding provisions of this paragraph 27 is that either party shall have the absolute right, at any time prior to the entry of the award by the arbitrator, to seek any provisional remedy including but not limited to temporary injunctive relief (without waiver of any other rights or remedies under this Agreement) against the other party or any third party from any court of competent jurisdiction on such grounds as would exist for the granting of such provisional remedy in the absence of this Agreement. 28 INDEMNITY. The Corporation shall hold harmless and indemnify Employee against any and all liabilities, costs, damages, expenses and attorney fees resulting from or attributable to any and all acts or omissions of Employee relating to or arising out of Employee's employment with the Corporation provided that Employee has acted in good faith and in a manner which Employee reasonably 8 9 believed to be in, or not opposed to, the best interests of the Corporation. Except as provided herein, Employee shall not be required to indemnify or reimburse the Corporation or any insurer for any such liabilities, costs, damages, expenses and attorneys' fees, relating to or arising out of actions of Employee undertaken in good faith and in a manner which Employee reasonably believed to be in, or not opposed to, the best interests of the Corporation. 29 SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Agreement, the provisions hereof shall be binding upon and shall inure to the benefit of the Parties hereto, their personal representatives, heirs, executives, administrators, successors and/or permitted assigns. 30 ASSIGNMENT. Neither this Agreement nor the rights, duties or obligations arising hereunder shall be assignable by Employee. 9 10 31 CONFIDENTIALITY AND INVENTION ASSIGNMENT AGREEMENT (the "CONFIDENTIALITY AGREEMENT"). Employee will be required to sign and abide by the Corporation's Confidentiality Agreement attached hereto, which the Corporation requires all of its employees to sign. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the day and year first above written. DATED: January 1, 1996 MEDICAL SCIENCE SYSTEMS, INC., A TEXAS CORPORATION By: _____________________________ Michael G. Newman Secretary By: _____________________________ Kenneth S. Kornman Chief Scientific Officer EMPLOYEE By: _____________________________ Paul J. White 10 EX-10.8 23 AMENDMENT OF EMPLOYMENT AGREEMENT WITH PAUL WHITE 1 EXHIBIT 10.8 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment"), by and between Medical Science Systems, Inc., a Texas corporation (the "Corporation"), and Paul J. White ("Employee"), is effective this 1st day of August, 1997. The Corporation and Employee are hereinafter sometimes referred to, individually and collectively, as a "Party" or the "Parties". WHEREAS, the Corporation and Employee have previously entered into that certain employment agreement dated January 1, 1996 (the "Agreement"); and WHEREAS, the Corporation and Employee desire to amend the terms and conditions of the Employee's employment with the Corporation. NOW THEREFORE, in consideration of the promises and of the mutual covenants and agreements set forth below, the Parties hereto agree to amend the Agreement as follows: The final clause of the first paragraph of section three (COMPENSATION) shall be changed to read ". . . , the Corporation will pay Employee a salary (the "Salary") at an annual rate of $140,000 per year during the five (5) month period from August through December of 1997, and at an annual rate of $170,000 for the one-year period from January 1, 1998 through December 31, 1998. For each fiscal year commencing after December 31, 1998, the Board of Directors (or a committee thereof) may increase (but not decrease) Employee's annual salary, award bonuses and stock awards based upon the compensation of comparable officers at similarly situated companies. This Amendment is intended to and shall only effect the change set forth in the preceding paragraph. No other change, amendment, waiver, discharge or termination shall be effected except by a subsequent written instrument. IN WITNESS WHEREOF, the Parties hereto have executed this Amendment on the day and year first above written. DATED: August 1, 1997 MEDICAL SCIENCE SYSTEMS, INC., a Texas corporation By: ------------------------------------ Paul J. White President EMPLOYEE By: ------------------------------------ Paul J. White EX-10.9 24 EMPLOYMENT AGREEMENT WITH KENNETH S. KORNMAN 1 EXHIBIT 10.9 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("AGREEMENT"), by and between Medical Science Systems, Inc., a Texas Corporation (the "CORPORATION"), and Kenneth S. Kornman ("EMPLOYEE"), is effective this 1st day of January, 1996 ("EFFECTIVE DATE"). The Corporation and Employee are hereinafter sometimes referred to, individually and collectively, as a "PARTY" or the "PARTIES." 1 TERM. The term of employment of Employee hereunder shall commence as of the date hereof and shall continue in full force and effect until the fifth anniversary of the date hereof (the "INITIAL TERM"), and shall automatically continue thereafter for successive 12 month periods unless terminated at the end of such Initial Term or any subsequent 12 month term after the Initial Term by either party hereto on not less than six months prior written notice to the other party (the "EMPLOYMENT TERM"). The term of this Agreement shall be coincident with the Employment Term. 2 DUTIES. Employee shall serve as Chief Scientific Officer of Product Discovery of the Corporation or such other position as may be agreed between Employee and the Corporation, and shall perform such duties, services and responsibilities as are consistent with such position. Employee's duties, services and responsibilities will be performed under the overall supervision of, the President of the Corporation. Employee shall also be entitled to serve as a director of the Corporation. During the Employment Term, Employee shall devote his full business time, attention and skill to the performance of such duties, services and responsibilities, and will use his reasonable efforts to promote the interests of the Corporation. Employee will not, without the prior written approval of the Board of Directors, engage in any other business activity which would interfere with the performance of his duties, services and responsibilities hereunder or which is in violation of policies established from time to time by the Corporation. Personal passive investments and personal business affairs not inconsistent with this Agreement shall not be prohibited. 3 COMPENSATION. In consideration of the performance by Employee of Employee's obligations during the Employment Term (including any services as an officer, director, employee, member of any committee 1 2 of the Corporation or any of its subsidiaries, or otherwise), the Corporation will pay Employee a salary (the "Salary") at an annual rate of $250,000 per year during the Employment Term. The Salary shall be payable in accordance with the normal payroll practices of the Corporation then in effect. The Salary, and all bonuses or other forms of compensation paid to Employee hereunder, shall be subject to all applicable taxes required to be withheld by the Corporation pursuant to federal, state or local law. Employee shall be solely responsible for income taxes imposed on Employee by reason of any cash or non-cash compensation and benefits provided hereunder. In addition to the payment of the Salary, Employee shall be entitled to participate in any employee benefit plans then in effect for similarly situated employees to the extent Employee meets the eligibility requirements for any such plan, including group insurance, retirement, supplemental pension, bonus plan, stock option or awards plans; provided, however, that the Corporation shall provide health or medical insurance benefits to Employee and his spouse or any dependent of Employee as provided by any health and medical insurance plans sponsored for employees of the Corporation in general without any eligibility requirements or waiting periods as permitted under those plans and provided further that, at Employee's option, Employee shall be entitled to maintain his current insurance policy and the Corporation shall reimburse or pay directly Employee's insurance premiums. Employee may switch to the Corporation's plan at any time. 4 WORKING CONDITIONS. Employee shall be provided with workspace, office equipment, plain paper fax machine, computer equipment, furniture, supplies, and such other facilities and services as determined by the Corporation as is reasonably necessary for the performance of his duties. 5 EXPENSES. The Corporation shall reimburse Employee for all normal and reasonable business expenses upon presentation of an approved expense report and related receipts ("Expense Report"). Such reimbursable expenses will include Employee's business airfare, travel, lodging, car rentals, automobile, meals, long-distance telephone expenses, subscription dues, car telephone, home business telephone, home facsimile, mobile telephone, facsimile expenses (or similar technology as it becomes available) and reasonable client entertainment. Employee shall be reimbursed for such reasonable business expenses upon the verification and approval of such expenses. The Corporation shall either approve or disapprove such expense report no later than thirty (30) days after the submission of such expense report by Employee, and such report 2 3 shall be deemed approved unless expressly disapproved by Corporation within the thirty (30) day period. The Corporation agrees that the accumulation of frequent flyer mileage benefits shall be credited to Employee personally. 6 MISCELLANEOUS. The Corporation agrees to purchase professional books, professional journals and publications in an amount that Employee and the Corporation reasonably agree, for use by Employee during the term of this Agreement. Such books, publications and journals shall be considered and shall remain the property of the Corporation. The Corporation shall also pay continuing education and certification fees of Employee. 7 LIFE INSURANCE. During the Employment Term, the Corporation shall pay the premium on a policy of life insurance with a value of $1,000,000, naming the Employee's spouse as beneficiary. At the end of the term of the Agreement all rights under such policy (including any cash surrender value) shall belong to Employee; prior thereto, they shall belong to the Corporation. 8 AUTOMOBILE REIMBURSEMENT. In recognition of Employee's need for an automobile for business purposes, the Corporation shall reimburse Employee Six Hundred Dollars ($600.00) per month for automobile expenses, including automobile payments, maintenance, gasoline and car telephone costs incident thereto. 9 VACATION. Employee shall be entitled to four (4) weeks vacation annually, without loss of compensation, during Employee's full time employment under the terms of this Agreement. The times for these vacation periods shall be those most convenient to the Corporation's business, as may be orally agreed upon by the Corporation. In the event Employee's total accrued vacation is in excess of twelve (12) weeks vacation at the end of any calendar year (December 31st), accrual of vacation shall cease. 10 LEAVE OF ABSENCE. Employee shall be entitled to take an unpaid leave of absence (no compensation or benefits under this Agreement) only if approved by the Corporation. 11 HOLIDAYS. Employee shall be entitled to all holidays designated by the Corporation, without loss of compensation. 12 TERMINATION OF AGREEMENT. 12.1 TERMINATION WITHOUT CAUSE. Employee's employment with the Corporation shall be terminated and, except as provided below, this Agreement shall terminate as follows: 12.1.1 Whenever the Corporation and Employee shall 3 4 mutually agree, in writing, to termination; or 12.1.2 Upon the death of Employee; or 12.1.3 If (i) Employee is absent from work for 180 calendar days in any twelve month period by reason of illness or incapacity (whether physical or otherwise) or (ii) an independent 4 5 medical examiner reasonably determines that Employee is unable to perform his duties, services and responsibilities hereunder by reason of illness or incapacity (whether physical or otherwise) for a total of 180 calendar days in any twelve-month period during the Employment Term ("Disability"), the Corporation shall not be obligated to pay Employee any compensation (Salary or bonus) for any period in excess of such days; furthermore, any such payments shall be reduced by any amount Employee is entitled to receive as a result of such disability under any plan provided through the Corporation or under state or federal law. If the independent medical examiner certifies that Employee can work part-time after the expiration of the 180 day period, the Corporation shall reasonably accommodate Employee to allow him to work part-time. Compensation will be reduced proportionately. All of Employee's non-compete obligations shall survive any period of disability. 12.1.4 The existence of a disabling mental or physical condition and the date upon which such condition preventing performance of such duties commenced shall be determined by an independent medical examiner. In the event either party requests to have an independent medical examiner determine whether Employee is disabled, then the Corporation and Employee agree to meet and confer in good faith with one another to mutually select an independent medical examiner. The Corporation or Employee, whichever elects to request an independent medical examiner, shall give written notice of that election to the other party. The parties, or their legal representatives, agree to meet, at the offices of the Corporation, within ten (10) days of the notice of election to select an independent medical examiner. In the event that after meeting and conferring in good faith, the Corporation and Employee are unable to agree on the selection of an independent medical examiner within five (5) days, one medical examiner shall be selected by the Corporation and one medical examiner shall be selected by Employee, which two (2) medical examiners shall select a third medical examiner, and the third medical examiner shall determine, within fifteen (15) days after his or her appointment, if Employee is disabled. In the event that Employee (or Employee's legal representative) refuses to meet promptly with the Corporation to confer in good faith, or Employee (or Employee's legal representative) fails to select a medical examiner within said five (5) day period, the Corporation's selection of a medical examiner shall be binding. In accordance with the foregoing, Employee (or Employee's legal representative) shall cooperate fully and comply with any requests made by the Corporation and/or the medical examiner in allowing said medical examiner to make a determination whether or not Employee is disabled and the estimated commencement date of 5 6 Disability. 12.2 TERMINATION FOR CAUSE. Notwithstanding anything herein set forth in this Agreement to the contrary, the Corporation may, at any time, terminate this Agreement for "cause." For purposes of this Agreement, "cause" shall include, but not be limited to, the occurrence of any of the following events: 12.2.1 Employee has committed an act of theft or embezzlement from or fraud on the Corporation; 12.2.2 Employee shall materially breach any of the terms, covenants and conditions of this Agreement, which shall include but not be limited to, any violation of the restrictions against competition contained in Section 14; 12.2.3 Employee shall have committed an act of sexual harassment or discrimination; 12.2.4 Employee shall have been convicted of a felony and sentenced to more than fourteen (14) days in jail; 12.2.5 Employee shall fail or refuse to abide by the lawful directions set by the Board of Directors. Notwithstanding the foregoing, in the event the Corporation decides to terminate Employee under this Paragraph 12.2.5, then the Corporation shall first give Employee written notice of the breach of this Agreement, specifying the details thereof and shall give Employee thirty (30) days to cure ("Cure Period") said conduct. If the conduct is not cured within said thirty (30) day period, the Corporation may terminate this Agreement at the expiration of the Cure Period. The Corporation may immediately terminate this Agreement for violation under Sections 12.2.1, 12.2.3 and 12.2.4. 12.3 CONTINUING OBLIGATIONS. Employee shall be only entitled to a pro-rata share of basic compensation and benefits, up to the Termination Date, based on the ratio that the number of days that Employee has performed in accordance with the terms and provisions of this Agreement in the relevant term year that bears to three hundred sixty-five (365). 13 EMPLOYEE'S DUTIES UPON TERMINATION. In the event of termination of working relationship with the Corporation, Employee agrees to deliver promptly to the Corporation all Corporation owned equipment, notebooks, documents, memoranda, reports, files, manuals, models, notes, logs, technical data, software, samples, books, correspondence, lists, or other written or graphic records, 7 keys, credit cards and the like, relating to the Corporation's business, which are or have been in his possession or under his control. 14 COMPETITIVE ACTIVITIES. During the Employment Period, Employee agrees that Employee will not, directly or indirectly, work for, provide consulting services on his own behalf for, own an interest in (excluding a passive investment in a public company where employee owns less than 5% of the stock of such company), operate, join, control, or participate in, or be connected as an officer, employee, agent, independent contractor, partner, shareholder, or principal of any corporation, partnership, proprietorship, firm, association, or person marketing products, goods, equipment, and/or services which directly or indirectly competes with the Corporation's services or products or the Corporation's business, without the prior written consent of Corporation. 15 NOTICES. Unless otherwise specifically provided, all notices and demands required to be given hereunder shall be deemed to be duly given at the time of delivery if such notice or demand is personally delivered, or forty-eight (48) hours after mailing if such notice or demand is deposited with the United States Postal Service, postage prepaid, for mailing via registered or certified mail, return receipt requested, to the Secretary of the Corporation and to Employee at the addresses set forth below. Such addresses may only be changed by giving written notice of such change to all of the other Parties hereto. To Corporation: President Medical Science Systems, Inc. A Texas Corporation 4400 MacArthur Boulevard, Suite 980 Newport Beach, California 92660 To Employee: Kenneth S. Kornman 3007 Orchard Hill San Antonio, Texas 78230 Any notice so given by mail or delivery service shall be deemed effectively given on the date actually received. Any Party may by like written notice to the other specify a different address for notice purposes. 16 ENTIRE AGREEMENT. This Agreement and the Confidentiality Agreement described in Paragraph 16 contain the entire understanding between and among the Parties hereto, and supersedes any prior written or oral agreement or negotiations between or 7 8 among the Parties concerning the subject matter contained herein. There are no representations, agreements, arrangements, or understanding, oral or written, between or among the Parties hereto, relating to the subject matter contained in this Agreement, which are not fully expressed herein. 17 AMENDMENTS. This Agreement shall not be modified or amended except by a writing signed by Employee and a duly empowered officer of the Corporation. 18 BINDING EFFECT. Subject to the restrictions against transfer or assignment herein contained, the provisions of this Agreement shall inure to the benefit of and shall be binding upon the heirs and legatees, successors-in-interest, personal representatives, estates and assigns of each of the Parties hereto. 19 CAPTIONS. Captions at the beginning of each numbered section of this Agreement are solely for the convenience of the Parties and shall not be deemed part of the context of this Agreement. 20 DEFINITIONS. 20.1 GENDER. As used herein, the masculine, feminine and neuter gender, and the singular or plural number, shall each be deemed to include the others whenever the context so indicates. 20.2 LEGAL REPRESENTATIVE. As used herein, the term "legal representative" shall refer to the executor, administrator, attorney-in-fact, guardian or conservator of the estate of Employee, Employee's surviving spouse, if applicable, and any trustee or successor. 21 WAIVER. No waiver of any breach or default of this Agreement by any Party hereto shall be considered to be a waiver of any other breach or default of this Agreement. 22 FURTHER ACTS. Each Party hereto agrees to perform any further acts and to execute and deliver any further documents which may be reasonably necessary to carry out the provisions of this Agreement. 23 ATTORNEYS' FEES. Should any litigation or arbitration be commenced between the Parties hereto or their personal representatives concerning any provision of this Agreement or the rights and duties of any person in relation thereto, the Party substantially prevailing in such litigation or arbitration shall be entitled, in addition to such other relief that may be granted, to all costs, expenses, expert witness fees, etc. and reasonable 8 9 attorneys' fees. 24 CHOICE OF LAW; VENUE. This Agreement has bee construed under and governed in accordance with the laws of the State of California. Venue shall be in Orange County, California. 25 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but such counterparts, when taken together, shall constitute but one Agreement. 26 SEVERABILITY. Should any one or more of the provisions of this Agreement be determined to be illegal or unenforceable, all other provisions of this Agreement shall be given effect separately from the provisions so determined and the other provisions shall not be affected by the illegality or unenforceability. 27 BINDING ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof (whether arising out of contract, tort, statute or any legal or equitable theory, including, without limitation, the issue of arbitrability), shall be settled by binding arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, except as expressly modified in this Agreement, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The arbitration shall be conducted in Orange County, California. The parties shall have the right to conduct discovery as if the dispute were being litigated in the California Superior Court. Without limiting the generality of the foregoing, the limitations on discovery contained in Section 1283, 1283.50, and 1283.1 of the California Code of Civil Procedure shall not apply. The only exception to the preceding provisions of this paragraph 27 is that either party shall have the absolute right, at any time prior to the entry of the award by the arbitrator, to seek any provisional remedy including but not limited to temporary injunctive relief (without waiver of any other rights or remedies under this Agreement) against the other party or any third party from any court of competent jurisdiction on such grounds as would exist for the granting of such provisional remedy in the absence of this Agreement. 28 INDEMNITY. The Corporation shall hold harmless and indemnify Employee against any and all liabilities, costs, damages, expenses and attorney fees resulting from or attributable to any and all acts or omissions of Employee relating to or arising out of Employee's employment with the Corporation provided that Employee has acted in good faith and in a manner which Employee reasonably 9 10 believed to be in, or not opposed to, the best interests of the Corporation. Except as provided herein, Employee shall not be required to indemnify or reimburse the Corporation or any insurer for any such liabilities, costs, damages, expenses and attorneys' fees, relating to or arising out of actions of Employee undertaken in good faith and in a manner which Employee reasonably believed to be in, or not opposed to, the best interests of the Corporation. 29 SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Agreement, the provisions hereof shall be binding upon and shall inure to the benefit of the Parties hereto, their personal representatives, heirs, executives, administrators, successors and/or permitted assigns. 30 ASSIGNMENT. Neither this Agreement nor the rights, duties or obligations arising hereunder shall be assignable by Employee. 10 11 31 CONFIDENTIALITY AND INVENTION ASSIGNMENT AGREEMENT (THE "CONFIDENTIALITY AGREEMENT"). Employee will be required to sign and abide by the Corporation's Confidentiality Agreement attached hereto, which the Corporation requires all of its employees to sign. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the day and year first above written. DATED: January 1, 1996 MEDICAL SCIENCE SYSTEMS, INC., A TEXAS CORPORATION By: --------------------------------- Paul J. White President By: --------------------------------- Michael G. Newman Secretary EMPLOYEE By: --------------------------------- Kenneth S. Kornman 11 EX-10.10 25 AMENDMENT OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10.10 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment"), by and between Medical Science Systems, Inc., a Texas corporation (the "Corporation"), and Dr. Kenneth S. Kornman ("Employee"), is effective this 1st day of August, 1997. The Corporation and Employee are hereinafter sometimes referred to, individually and collectively, as a "Party" or the "Parties". WHEREAS, the Corporation and Employee have previously entered into that certain employment agreement dated January 1, 1996 (the "Agreement"); and WHEREAS, the Corporation and Employee desire to amend the terms and conditions of the Employee's employment with the Corporation. NOW THEREFORE, in consideration of the promises and of the mutual covenants and agreements set forth below, the Parties hereto agree to amend the Agreement as follows: The final clause of the first paragraph of section three (COMPENSATION) shall be changed to read ". . . , the Corporation will pay Employee a salary (the "Salary") at an annual rate of $135,000 per year during the five (5) month period from August through December of 1997, and at an annual rate of $165,000 for the one-year period from January 1, 1998 through December 31, 1998. For each fiscal year commencing after December 31, 1998, the Board of Directors (or a committee thereof) may increase (but not decrease) Employee's annual salary, award bonuses and stock awards based upon the compensation of comparable officers at similarly situated companies. This Amendment is intended to and shall only effect the change set forth in the preceding paragraph. No other change, amendment, waiver, discharge or termination shall be effected except by a subsequent written instrument. IN WITNESS WHEREOF, the Parties hereto have executed this Amendment on the day and year first above written. DATED: August 1, 1997 MEDICAL SCIENCE SYSTEMS, INC., a Texas corporation By: ___________________________ Paul J. White President EMPLOYEE By: ___________________________ Dr. Kenneth S. Kornman EX-10.11 26 EMPLOYMENT AGREEMENT WITH MICHAEL G. NEWMAN 1 EXHIBIT 10.11 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("AGREEMENT"), by and between Medical Science Systems, Inc., a Texas Corporation (the "CORPORATION"), and Michael G. Newman ("EMPLOYEE"), is effective this 1st day of January, 1996 ("EFFECTIVE DATE"). The Corporation and Employee are hereinafter sometimes referred to, individually and collectively, as a "PARTY" or the "PARTIES." 1 TERM. The term of employment of Employee hereunder shall commence as of the date hereof and shall continue in full force and effect until the fifth anniversary of the date hereof (the "INITIAL TERM"), and shall automatically continue thereafter for successive 12 month periods unless terminated at the end of such Initial Term or any subsequent 12 month term after the Initial Term by either party hereto on not less than six months prior written notice to the other party (the "EMPLOYMENT TERM"). The term of this Agreement shall be coincident with the Employment Term. 2 DUTIES. Employee shall serve as Chief Scientific Officer of Product Development of the Corporation or such other position as may be agreed between Employee and the Corporation, and shall perform such duties, services and responsibilities as are consistent with such position. Employee's duties, services and responsibilities will be performed under the overall supervision of the President of the Corporation. Employee shall also be entitled to serve as a director of the Corporation. During the Employment Term, Employee shall devote his full business time, attention and skill to the performance of such duties, services and responsibilities, and will use his reasonable efforts to promote the interests of the Corporation. Employee will not, without the prior written approval of the Board of Directors, engage in any other business activity which would interfere with the performance of his duties, services and responsibilities hereunder or which is in violation of policies established from time to time by the Corporation. Personal passive investments and personal business affairs not inconsistent with this Agreement shall not be prohibited. 3 COMPENSATION. In consideration of the performance by Employee of Employee's obligations during the Employment Term (including any services as an officer, director, employee, member of any committee 1 2 of the Corporation or any of its subsidiaries, or otherwise), the Corporation will pay Employee a salary (the "Salary") at an annual rate of $250,000 per year during the Employment Term. The Salary shall be payable in accordance with the normal payroll practices of the Corporation then in effect. The Salary, and all bonuses or other forms of compensation paid to Employee hereunder, shall be subject to all applicable taxes required to be withheld by the Corporation pursuant to federal, state or local law. Employee shall be solely responsible for income taxes imposed on Employee by reason of any cash or non-cash compensation and benefits provided hereunder. In addition to the payment of the Salary, Employee shall be entitled to participate in any employee benefit plans then in effect for similarly situated employees to the extent Employee meets the eligibility requirements for any such plan, including group insurance, retirement, supplemental pension, bonus plan, stock option or awards plans; provided, however, that the Corporation shall provide health or medical insurance benefits to Employee and his spouse or any dependent of Employee as provided by any health and medical insurance plans sponsored for employees of the Corporation in general without any eligibility requirements or waiting periods as permitted under those plans and provided further that, at Employee's option, Employee shall be entitled to maintain his current insurance policy and the Corporation shall reimburse or pay directly Employee's insurance premiums. Employee may switch to the Corporation's plan at any time. 4 WORKING CONDITIONS. Employee shall be provided with workspace, office equipment, plain paper fax machine, computer equipment, furniture, supplies, and such other facilities and services as determined by the Corporation as is reasonably necessary for the performance of his duties. 5 EXPENSES. The Corporation shall reimburse Employee for all normal and reasonable business expenses upon presentation of an approved expense report and related receipts ("Expense Report"). Such reimbursable expenses will include Employee's business airfare, travel, lodging, car rentals, automobile, meals, long-distance telephone expenses, subscription dues, car telephone, home business telephone, home facsimile, mobile telephone, facsimile expenses (or similar technology as it becomes available) and reasonable client entertainment. Employee shall be reimbursed for such reasonable business expenses upon the verification and approval of such expenses. The Corporation shall either approve or disapprove such expense report no later than thirty (30) days after the submission of such expense report by Employee, and such report 2 3 shall be deemed approved unless expressly disapproved by Corporation within the thirty (30) day period. The Corporation agrees that the accumulation of frequent flyer mileage benefits shall be credited to Employee personally. 6 MISCELLANEOUS. The Corporation agrees to purchase professional books, professional journals and publications in an amount that Employee and the Corporation reasonably agree, for use by Employee during the term of this Agreement. Such books, publications and journals shall be considered and shall remain the property of the Corporation. The Corporation shall also pay continuing education and certification fees of Employee. 7 LIFE INSURANCE. During the Employment Term, the Corporation shall pay the premium on a policy of life insurance with a value of $1,000,000, naming the Employee's spouse as beneficiary. At the end of the term of the Agreement all rights under such policy (including any cash surrender value) shall belong to Employee; prior thereto, they shall belong to the Corporation. 8 AUTOMOBILE REIMBURSEMENT. In recognition of Employee's need for an automobile for business purposes, the Corporation shall reimburse Employee Six Hundred Dollars ($600.00) per month for automobile expenses, including automobile payments, maintenance, gasoline and car telephone costs incident thereto. 9 VACATION. Employee shall be entitled to four (4) weeks vacation annually, without loss of compensation, during Employee's full time employment under the terms of this Agreement. The times for these vacation periods shall be those most convenient to the Corporation's business, as may be orally agreed upon by the Corporation. In the event Employee's total accrued vacation is in excess of twelve (12) weeks vacation at the end of any calendar year (December 31st), accrual of vacation shall cease. 10 LEAVE OF ABSENCE. Employee shall be entitled to take an unpaid leave of absence (no compensation or benefits under this Agreement) only if approved by the Corporation. 11 HOLIDAYS. Employee shall be entitled to all holidays designated by the Corporation, without loss of compensation. 12 TERMINATION OF AGREEMENT. 12.1 TERMINATION WITHOUT CAUSE. Employee's employment with the Corporation shall be terminated and, except as provided below, this Agreement shall terminate as follows: 12.1.1 Whenever the Corporation and Employee shall 3 4 mutually agree, in writing, to termination; or 12.1.2 Upon the death of Employee; or 12.1.3 If (i) Employee is absent from work for 180 calendar days in any twelve month period by reason of illness or incapacity (whether physical or otherwise) or (ii) an independent 4 5 medical examiner reasonably determines that Employee is unable to perform his duties, services and responsibilities hereunder by reason of illness or incapacity (whether physical or otherwise) for a total of 180 calendar days in any twelve-month period during the Employment Term ("Disability"), the Corporation shall not be obligated to pay Employee any compensation (Salary or bonus) for any period in excess of such days; furthermore, any such payments shall be reduced by any amount Employee is entitled to receive as a result of such disability under any plan provided through the Corporation or under state or federal law. If the independent medical examiner certifies that Employee can work part-time after the expiration of the 180 day period, the Corporation shall reasonably accommodate Employee to allow him to work part-time. Compensation will be reduced proportionately. All of Employee's non-compete obligations shall survive any period of disability. 12.1.4 The existence of a disabling mental or physical condition and the date upon which such condition preventing performance of such duties commenced shall be determined by an independent medical examiner. In the event either party requests to have an independent medical examiner determine whether Employee is disabled, then the Corporation and Employee agree to meet and confer in good faith with one another to mutually select an independent medical examiner. The Corporation or Employee, whichever elects to request an independent medical examiner, shall give written notice of that election to the other party. The parties, or their legal representatives, agree to meet, at the offices of the Corporation, within ten (10) days of the notice of election to select an independent medical examiner. In the event that after meeting and conferring in good faith, the Corporation and Employee are unable to agree on the selection of an independent medical examiner within five (5) days, one medical examiner shall be selected by the Corporation and one medical examiner shall be selected by Employee, which two (2) medical examiners shall select a third medical examiner, and the third medical examiner shall determine, within fifteen (15) days after his or her appointment, if Employee is disabled. In the event that Employee (or Employee's legal representative) refuses to meet promptly with the Corporation to confer in good faith, or Employee (or Employee's legal representative) fails to select a medical examiner within said five (5) day period, the Corporation's selection of a medical examiner shall be binding. In accordance with the foregoing, Employee (or Employee's legal representative) shall cooperate fully and comply with any requests made by the Corporation and/or the medical examiner in allowing said medical examiner to make a determination whether or not Employee is disabled and the estimated commencement date of 5 6 Disability. 12.2 TERMINATION FOR CAUSE. Notwithstanding anything herein set forth in this Agreement to the contrary, the Corporation may, t any time, terminate this Agreement for "cause." For purposes of this Agreement, "cause" shall include, but not be limited to, the occurrence of any of the following events: 12.2.1 Employee has committed an act of theft or embezzlement from or fraud on the Corporation; 12.2.2 Employee shall materially breach any of the terms, covenants and conditions of this Agreement, which shall include but not be limited to, any violation of the restrictions against competition contained in Section 14; 12.2.3 Employee shall have committed an act of sexual harassment or discrimination; 12.2.4 Employee shall have been convicted of a felony and sentenced to more than fourteen (14) days in jail; 12.2.5 Employee shall fail or refuse to abide by the lawful directions set by the Board of Directors. Notwithstanding the foregoing, in the event the Corporation decides to terminate Employee under this Paragraph 12.2.5, then the Corporation shall first give Employee written notice of the breach of this Agreement, specifying the details thereof and shall give Employee thirty (30) days to cure ("Cure Period") said conduct. If the conduct is not cured within said thirty (30) day period, the Corporation may terminate this Agreement at the expiration of the Cure Period. The Corporation may immediately terminate this Agreement for violation under Sections 12.2.1, 12.2.3 and 12.2.4. 12.3 CONTINUING OBLIGATIONS. Employee shall be only entitled to a pro-rata share of basic compensation and benefits, up to the Termination Date, based on the ratio that the number of days that Employee has performed in accordance with the terms and provisions of this Agreement in the relevant term year that bears to three hundred sixty-five (365). 13 EMPLOYEE'S DUTIES UPON TERMINATION. In the event of termination of working relationship with the Corporation, Employee agrees to deliver promptly to the Corporation all Corporation owned equipment, notebooks, documents, memoranda, reports, files, manuals, models, notes, logs, technical data, software, samples, books, correspondence, lists, or other written or graphic records, 6 7 keys, credit cards and the like, relating to the Corporation's business, which are or have been in his possession or under his control. 14 COMPETITIVE ACTIVITIES. During the Employment Period, Employee agrees that Employee will not, directly or indirectly, work for, provide consulting services on his own behalf for, own an interest in (excluding a passive investment in a public company where employee owns less than 5% of the stock of such company), operate, join, control, or participate in, or be connected as an officer, employee, agent, independent contractor, partner, shareholder, or principal of any corporation, partnership, proprietorship, firm, association, or person marketing products, goods, equipment, and/or services which directly or indirectly competes with the Corporation's services or products or the Corporation's business, without the prior written consent of Corporation. 15 NOTICES. Unless otherwise specifically provided, all notices and demands required to be given hereunder shall be deemed to be duly given at the time of delivery if such notice or demand is personally delivered, or forty-eight (48) hours after mailing if such notice or demand is deposited with the United States Postal Service, postage prepaid, for mailing via registered or certified mail, return receipt requested, to the Secretary of the Corporation and to Employee at the addresses set forth below. Such addresses may only be changed by giving written notice of such change to all of the other Parties hereto. To Corporation: President Medical Science Systems, Inc. A Texas Corporation 4400 MacArthur Boulevard, Suite 980 Newport Beach, California 92660 To Employee: Michael G. Newman 809 Alma Real Drive Pacific Palisades, California 90272 Any notice so given by mail or delivery service shall be deemed effectively given on the date actually received. Any Party may by like written notice to the other specify a different address for notice purposes. 16 ENTIRE AGREEMENT. This Agreement and the Confidentiality Agreement described in Paragraph 16 contain the entire understanding between and among the Parties hereto, and supersedes any prior written or oral agreement or negotiations between or 7 8 among the Parties concerning the subject matter contained herein. There are no representations, agreements, arrangements, or understanding, oral or written, between or among the Parties hereto, relating to the subject matter contained in this Agreement, which are not fully expressed herein. 17 AMENDMENTS. This Agreement shall not be modified or amended except by a writing signed by Employee and a duly empowered officer of the Corporation. 18 BINDING EFFECT. Subject to the restrictions against transfer or assignment herein contained, the provisions of this Agreement shall inure to the benefit of and shall be binding upon the heirs and legatees, successors-in-interest, personal representatives, estates and assigns of each of the Parties hereto. 19 CAPTIONS. Captions at the beginning of each numbered section of this Agreement are solely for the convenience of the Parties and shall not be deemed part of the context of this Agreement. 20 DEFINITIONS. 20.1 GENDER. As used herein, the masculine, feminine and neuter gender, and the singular or plural number, shall each be deemed to include the others whenever the context so indicates. 20.2 LEGAL REPRESENTATIVE. As used herein, the term "legal representative" shall refer to the executor, administrator, attorney-in-fact, guardian or conservator of the estate of Employee, Employee's surviving spouse, if applicable, and any trustee or successor. 21 WAIVER. No waiver of any breach or default of this Agreement by any Party hereto shall be considered to be a waiver of any other breach or default of this Agreement. 22 FURTHER ACTS. Each Party hereto agrees to perform any further acts and to execute and deliver any further documents which may be reasonably necessary to carry out the provisions of this Agreement. 23 ATTORNEYS' FEES. Should any litigation or arbitration be commenced between the Parties hereto or their personal representatives concerning any provision of this Agreement or the rights and duties of any person in relation thereto, the Party substantially prevailing in such litigation or arbitration shall be entitled, in addition to such other relief that may be granted, to all costs, expenses, expert witness fees, etc. and reasonable 8 9 attorneys' fees. 24 CHOICE OF LAW; VENUE. This Agreement has bee construed under and governed in accordance with the laws of the State of California. Venue shall be in Orange County, California. 25 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but such counterparts, when taken together, shall constitute but one Agreement. 26 SEVERABILITY. Should any one or more of the provisions of this Agreement be determined to be illegal or unenforceable, all other provisions of this Agreement shall be given effect separately from the provisions so determined and the other provisions shall not be affected by the illegality or unenforceability. 27 BINDING ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof (whether arising out of contract, tort, statute or any legal or equitable theory, including, without limitation, the issue of arbitrability), shall be settled by binding arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, except as expressly modified in this Agreement, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The arbitration shall be conducted in Orange County, California. The parties shall have the right to conduct discovery as if the dispute were being litigated in the California Superior Court. Without limiting the generality of the foregoing, the limitations on discovery contained in Section 1283, 1283.50, and 1283.1 of the California Code of Civil Procedure shall not apply. The only exception to the preceding provisions of this paragraph 27 is that either party shall have the absolute right, at any time prior to the entry of the award by the arbitrator, to seek any provisional remedy including but not limited to temporary injunctive relief (without waiver of any other rights or remedies under this Agreement) against the other party or any third party from any court of competent jurisdiction on such grounds as would exist for the granting of such provisional remedy in the absence of this Agreement. 28 INDEMNITY. The Corporation shall hold harmless and indemnify Employee against any and all liabilities, costs, damages, expenses and attorney fees resulting from or attributable to any and all acts or omissions of Employee relating to or arising out of Employee's employment with the Corporation provided that Employee has acted in good faith and in a manner which Employee reasonably 9 10 believed to be in, or not opposed to, the best interests of the Corporation. Except as provided herein, Employee shall not be required to indemnify or reimburse the Corporation or any insurer for any such liabilities, costs, damages, expenses and attorneys' fees, relating to or arising out of actions of Employee undertaken in good faith and in a manner which Employee reasonably believed to be in, or not opposed to, the best interests of the Corporation. 29 SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Agreement, the provisions hereof shall be binding upon and shall inure to the benefit of the Parties hereto, their personal representatives, heirs, executives, administrators, successors and/or permitted assigns. 30 ASSIGNMENT. Neither this Agreement nor the rights, duties or obligations arising hereunder shall be assignable by Employee. 10 11 31 CONFIDENTIALITY AND INVENTION ASSIGNMENT AGREEMENT (THE "CONFIDENTIALITY AGREEMENT"). Employee will be required to sign and abide by the Corporation's Confidentiality Agreement attached hereto, which the Corporation requires all of its employees to sign. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the day and year first above written. DATED: January 1, 1996 MEDICAL SCIENCE SYSTEMS, INC., A TEXAS CORPORATION By: --------------------------------- Paul J. White President By: --------------------------------- Kenneth S. Kornman Chief Scientific Officer EMPLOYEE By: --------------------------------- Michael G. Newman 11 EX-10.12 27 AMENDMENT OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10.12 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment"), by and between Medical Science Systems, Inc., a Texas corporation (the "Corporation"), and Dr. Michael G. Newman ("Employee"), is effective this 1st day of August, 1997. The Corporation and Employee are hereinafter sometimes referred to, individually and collectively, as a "Party" or the "Parties". WHEREAS, the Corporation and Employee have previously entered into that certain employment agreement dated January 1, 1996 (the "Agreement"); and WHEREAS, the Corporation and Employee desire to amend the terms and conditions of the Employee's employment with the Corporation. NOW THEREFORE, in consideration of the promises and of the mutual covenants and agreements set forth below, the Parties hereto agree to amend the Agreement as follows: The final clause of the first paragraph of section three (COMPENSATION) shall be changed to read ". . . , the Corporation will pay Employee a salary (the "Salary") at an annual rate of $135,000 per year during the five (5) month period from August through December of 1997, and at an annual rate of $165,000 for the one-year period from January 1, 1998 through December 31, 1998. For each fiscal year commencing after December 31, 1998, the Board of Directors (or a committee thereof) may increase (but not decrease) Employee's annual salary, award bonuses and stock award based upon the compensation of comparable officers at similarly situated companies. This Amendment is intended to and shall only effect the change set forth in the preceding paragraph. No other change, amendment, waiver, discharge or termination shall be effected except by a subsequent written instrument. IN WITNESS WHEREOF, the Parties hereto have executed this Amendment on the day and year first above written. DATED: August 1, 1997 MEDICAL SCIENCE SYSTEMS, INC., a Texas corporation By: ___________________________ Paul J. White President EMPLOYEE By: ___________________________ Dr. Michael G. Newman EX-10.13 28 SERVICE AGREEMENT RELATING TO LABORATORY SERVICES 1 EXHIBIT 10.13 SERVICE AGREEMENT This AGREEMENT is entered into between MEDICAL SCIENCE SYSTEMS, 4400 MACARTHUR BLVD., STE. 980, NEWPORT BEACH, CA 92660 (hereinafter referred to as "COMPANY"), and BAYLOR COLLEGE OF MEDICINE, DEPARTMENT OF MOLECULAR AND HUMAN GENETICS, DNA DIAGNOSTIC LABORATORY, located at One Baylor Plaza, Houston, Texas 77030-3498 (hereinafter referred to as "BAYLOR"), with C. SUE RICHARDS, PH.D. (herein referred to as "PRINCIPAL INVESTIGATOR"). COMPANY, PRINCIPAL INVESTIGATOR, and BAYLOR may hereinafter be referred to individually as a "PARTY" and collectively as the "PARTIES". WHEREAS, COMPANY has developed a genetic test for screening patients for predisposition to severe periodontal disease (the "PERIODONTAL TEST", defined as IL1alpha and IL1-beta), the description for which is set forth in Exhibit A hereto; WHEREAS, BAYLOR has adequate laboratory facilities and skilled personnel to perform the PERIODONTAL TEST in accordance with an assay which was developed at Baylor, using specimens collected from patients, as described in Exhibit A, under the supervision and direction of PRINCIPAL INVESTIGATOR; WHEREAS, COMPANY desires to retain BAYLOR to perform the PERIODONTAL TEST based upon specimens sent to BAYLOR by COMPANY or its customers and to deliver the results of such tests back to COMPANY on the terms and conditions set forth in this AGREEMENT ("TEST SERVICES"); WHEREAS, it is anticipated that representatives of each PARTY will receive or have access to technical and scientific information which is in writing and is labeled as being confidential by the disclosing PARTY (hereafter referred to as the "CONFIDENTIAL INFORMATION"); WHEREAS, the PARTIES are willing to maintain such CONFIDENTIAL INFORMATION in confidence and each believes it would be seriously harmed if the CONFIDENTIAL INFORMATION were disclosed to third parties; NOW, THEREFORE, in consideration of the foregoing and the mutual benefits to be derived from the above-mentioned services and other good and valuable consideration, the PARTIES do hereby agree as follows: 1.0 Each PARTY agrees to: 1.1 restrict CONFIDENTIAL INFORMATION received solely to its employees and consultants on a need-to-know basis and solely to the extent reasonably necessary to enable the PARTIES and their employees to perform their obligations under this AGREEMENT; and - -------- * Confidential Treatment requested. 2 1.2 not disclose CONFIDENTIAL INFORMATION to any third party unless prior to such disclosure the PARTY from whom the CONFIDENTIAL INFORMATION was received shall have expressly agreed in writing to such a disclosure; and 1.3 use the CONFIDENTIAL INFORMATION solely for the performance of the PARTIES' obligations under this AGREEMENT and not make copies thereof, except as necessary to perform such obligations; and 1.4 instruct all recipients of the CONFIDENTIAL INFORMATION that it is subject to a Non-Disclosure and Confidentiality Agreement and cannot be used or disclosed except pursuant to a written agreement; and 1.5 use, and require all recipients to use, the same degree of care to protect the CONFIDENTIAL INFORMATION against unauthorized use or disclosure as the receiving PARTY uses to protect its own proprietary CONFIDENTIAL INFORMATION. BAYLOR agrees that the PERIODONTAL TEST, whether disclosed to BAYLOR in writing or orally, and all results of performing the PERIODONTAL TEST on specimens hereunder, shall be deemed to be CONFIDENTIAL INFORMATION subject to the restrictions of this AGREEMENT. 2.0 EXCEPTIONS. Notwithstanding anything to the contrary contained herein, the PARTY receiving CONFIDENTIAL INFORMATION shall have no obligation to preserve the confidentiality of any CONFIDENTIAL INFORMATION (whether received before or after the date of this AGREEMENT) which: 2.1 has passed into the public domain prior to or after its disclosure to the PARTY, other than through acts or omissions attributable to the receiving PARTY; or 2.2 was rightfully obtained subsequent to the date of this AGREEMENT, other than under binder of secrecy from a third party not acquiring the CONFIDENTIAL INFORMATION under an obligation of confidentiality from the disclosing PARTY; or 2.3 the receiving PARTY can show the CONFIDENTIAL INFORMATION was previously in its possession prior to disclosure thereof by the disclosing Party; or 2.4 the receiving PARTY is required to disclose by law or legal process, provided that, prior to any such disclosure the receiving PARTY will notify the disclosing PARTY that it intends to make such disclosure; or 2 3 2.5 developed by the recipient independent of the information received, or performed under, this AGREEMENT. 3.0 RETURN OF CONFIDENTIAL INFORMATION. Upon request, PRINCIPAL INVESTIGATOR will return all CONFIDENTIAL INFORMATION provided by COMPANY and all copies thereof. Nothing contained in this AGREEMENT shall be construed as granting or conferring any rights, by license or otherwise, in any CONFIDENTIAL INFORMATION disclosed to the receiving PARTY other than to use such CONFIDENTIAL INFORMATION in the performance of obligations under this AGREEMENT, in accordance with Section 1.0 above. Not withstanding the above, a party may retain a copy of any confidential information of the other party to the extent required by any regulation or law. 4.0 BAYLOR SERVICES. BAYLOR agrees to perform the PERIODONTAL TEST based upon specimens shipped to BAYLOR by COMPANY or its customers in accordance with the requirements set forth in Exhibit A for the PERIODONTAL TEST. Pricing and payment terms for the performance of the PERIODONTAL TEST is specified in Exhibit A. BAYLOR will report the results of the performance of such tests directly to COMPANY, in accordance with the terms set forth in Exhibit A. BAYLOR warrants that it has adequate laboratory facilities and skilled personnel to perform the PERIODONTAL TEST properly developed by Baylor. BAYLOR warrants that all TEST SERVICES will be performed in accordance with current laboratory standards, and in compliance with all applicable federal, state and local laws and regulations. 5.0 NOTICE OF PUBLICATION. BAYLOR agrees to submit a copy to COMPANY of any proposed publication or presentation relating to the PERIODONTAL TEST, INVENTIONS, or JOINT INVENTION to COMPANY, for its review, at least sixty (60) days prior to the estimated date of publication or presentation of such material to a journal, editor, or other third party, and if no response is received within thirty (30) days of the date submitted to COMPANY, it will be conclusively presumed that the presentation or publication may proceed without delay. If COMPANY determines that the proposed presentation or publication contains patentable subject matters which require protection or CONFIDENTIAL INFORMATION, COMPANY may request the delay of the presentation or publication for a period of time not to exceed ninety (90) days for the purpose of allowing the pursuit of such protection. In the event that COMPANY identifies CONFIDENTIAL INFORMATION contained in the proposed presentation or publication, the PARTIES shall discuss changes which shall prevent disclosure of CONFIDENTIAL INFORMATION. Title to any copyrightable material produced or composed in relation to such presentation or publication by BAYLOR or its RESEARCHERS shall remain with BAYLOR and RESEARCHERS, provided that BAYLOR and its RESEARCHERS shall grant to 3 4 COMPANY an irrevocable, royalty-free, non-exclusive right to reproduce, distribute and use all such copyrighted material in conjunction with the approval, registration, marketing or sale of the PERIODONTAL TEST or any INVENTION or JOINT INVENTION. In all such cases, COMPANY will use its best efforts to implement such protection in ways that minimize the impact on planned publication schedules. 6.0 INDEMNIFICATION 6.1 BAYLOR'S INDEMNIFICATION. COMPANY shall indemnify, defend and hold harmless BAYLOR and its researchers, their affiliates, officers, directors, employees and agents from any and all claims, demands, suits or proceedings arising out of any side effect, adverse reaction or illness occurring as a result of the performance of the PERIODONTAL TEST, provided, however, any such injury, loss or damage is not due to the negligence or intentional misconduct of BAYLOR or its RESEARCHERS, and the PERIODONTAL TEST has been administered in accordance with the assay supplied by COMPANY and any other protocol or instructions that COMPANY may supply from time to time to BAYLOR for the performance of the PERIODONTAL TEST. The foregoing indemnity is subject to the conditions that (i) BAYLOR and its RESEARCHERS promptly notify COMPANY in writing after BAYLOR or its RESEARCHERS receives notice of any claim; (ii) COMPANY is given the opportunity, at its option at any time during the pendency of such claim, to have the sole control of the defense, trial and/or any related settlement negotiations; and (iii) BAYLOR and its RESEARCHERS fully cooperate with COMPANY in the defense, trial and/or settlement of any such claim. 6.2 COMPANY'S INDEMNIFICATION. BAYLOR shall indemnify, defend and hold harmless COMPANY and its affiliates, officers, directors, employees and agents from any and all claims, demands, suits or proceedings arising out of the negligence or willful act of BAYLOR or its RESEARCHERS or the performance of this AGREEMENT. The foregoing indemnity is subject to the conditions that (i) COMPANY promptly notifies BAYLOR in writing after COMPANY receives notice of any claim; (ii) BAYLOR is given the opportunity, at its option at any time during the pendency of such claim, to have the sole control of the defense, trial and/or any related settlement negotiations; and (iii) COMPANY fully cooperates with BAYLOR in the defense, trial and/or settlement of any such claim. 7.0 TERM AND TERMINATION 7.1 EFFECTIVE DATE. This AGREEMENT shall become effective as of its execution by both PARTIES and shall continue in effect until terminated as set forth herein. 7.2 TERMINATION. Either PARTY may, upon thirty (30) days written notice to the other PARTY, terminate this Agreement in the event of a material breach of this 4 5 AGREEMENT by the other PARTY; provided, however, if such breach is cured within such thirty (30) day period, this AGREEMENT shall not be terminated. Either PARTY may terminate this AGREEMENT for any reason or no reason, at any time, upon six (6) months advance written notice to the other PARTY. 7.3 RETURN OF CONFIDENTIAL INFORMATION. Upon AGREEMENT termination, each PARTY shall return all CONFIDENTIAL INFORMATION and copies of CONFIDENTIAL INFORMATION of the other PARTY within its possession or under its control to the other PARTY, within ten (10) days thereof. COMPANY shall,within thirty (30) days of termination, pay any sums due and owing to BAYLOR hereunder. The provisions of Paragraphs 3.0, 5.0-7.0, 8.1, and 9.0-15.0 shall survive the termination of expiration of this AGREEMENT. The provisions of Paragraph 1.0 of this AGREEMENT shall survive. In accordance with Paragraph 12.0 below. Not withstanding the above, a party may retain a copy of any confidential information of the other party to the extent required by any regulation or law. 8.0 RECORD KEEPING. PARTIES agree that unauthorized disclosure of CONFIDENTIAL INFORMATION would result in irreparable harm. Accordingly, in the event that a PARTY breaches its obligations as provided under the AGREEMENT by disclosure or use of CONFIDENTIAL INFORMATION, it is agreed by the PARTIES that the injured PARTY shall be entitled to enjoin any further breach and may take such additional action as it deems necessary and appropriate, including seeking damages in any court of competent jurisdiction. 8.1 CONFIDENTIALITY. Either PARTY may disclose CONFIDENTIAL INFORMATION to the extent, but only to the extent, that disclosure is reasonably necessary in prosecuting or defending litigation where material harm to the disclosing PARTY would otherwise result (but such disclosure shall be subject to an appropriate protective order in such litigation) or in complying with or demonstrating compliance with government regulations. 8.2 RECORD ACCESS. Each PARTY shall keep and allow the other PARTY reasonable access to full and accurate books and records of all services rendered under this AGREEMENT as required by state and/or federal law. 9.0 USE OF BAYLOR NAME. COMPANY agrees that it will not at any time during or following termination of this AGREEMENT use the name of BAYLOR or any other names, insignia, symbol(s), or logotypes associated with BAYLOR or any variant, or variants thereof, or the names of the Principal Investigator, or any other BAYLOR faculty member or employee, orally or in any literature, advertising, or other materials (other than simply to state that BAYLOR will perform the PERIODONTAL TEST for COMPANY and its customers) without the prior written consent of BAYLOR, which consent may be withheld at BAYLOR'S sole discretion. 5 6 10.0 CONFIDENTIALITY OF TRADE SECRETS AND OTHER INTELLECTUAL PROPERTY. BAYLOR agrees to make no public presentations about the PERIODONTAL TEST or this AGREEMENT outside of appropriate scientific meetings, to issue no news releases about the PERIODONTAL TEST or this AGREEMENT, and neither PARTY shall make use of the other's name, in any form of public information, without the written permission of the other PARTY, except as permitted in this paragraph or in paragraph 10.0 above. 11.0 SURVIVAL. Except as provided in Paragraph 2.0, the provisions of this AGREEMENT shall continue as to any item of CONFIDENTIAL INFORMATION disclosed for a period of five (5) years following termination or expiration of this AGREEMENT. 12.0 INSURANCE. 12.1 BAYLOR'S INSURANCE OBLIGATIONS. Throughout the term of this AGREEMENT, BAYLOR shall provide the following insurance or equivalent coverage through the self-insurance program of BAYLOR: 12.1.1 Worker's compensation and employer's liability insurance covering its statutory and legal obligations for employee, job-related injuries. Said policy shall provide at least for statutory benefits; 12.1.2 General liability insurance coverage for third-party claims for bodily injury and property damage with limits of at least one million dollars ($1,000,000) per occurrence and two million dollars ($2,000,000) annual aggregate. All such insurance shall contain a waiver of subrogation pursuant to which the insurer waives all express and implied rights of subrogation against COMPANY and its directors, officers, staff members, employees, and agents. Upon receipt of COMPANY's written request, BAYLOR shall provide COMPANY with certificates evidencing the above insurance or equivalent coverages. 12.2 COMPANY'S INSURANCE OBLIGATIONS. During the term of this Agreement, COMPANY shall provide the following insurance: 12.2.1 Worker's compensation and employer's liability insurance covering its statutory and legal obligations for employee job-related injuries. Said policy shall at least provide for statutory benefits; 6 7 12.2.2 General liability insurance coverage for third-party claims for bodily injury and property damage with limits of at least one million dollars ($1,000,000) per occurrence and two million dollars ($2,000,000) annual aggregate; All such insurance shall contain a waiver of subrogation pursuant to which the insurer waives all express and implied rights of subrogation against BAYLOR and its trustees, officers, employees, residents, faculty, and agents. 12.3 Proof of Insurance. Upon receipt of a written request from either PARTY, the other PARTY shall provide the requesting PARTY with certificates evidencing the above insurance coverage. 13.0 NOTICES. Except as otherwise expressly provided herein, all notices required or permitted to be given under this AGREEMENT must be in writing and must either be delivered personally to the designated agent of the PARTY to whom the notice is directed or be mailed by registered or certified mails, return receipt requested, addressed as shown below. Either PARTY may, at any time, change the address for notices by delivering or mailing, as aforesaid, a notice stating the change and setting forth the changed address. Any notice hereunder shall be deemed effective when personally delivered or when deposited, postage prepaid, with the United States Postal Services, addressed as herein before provided. Notice must be given to the following: MEDICAL SCIENCE SYSTEMS BAYLOR COLLEGE OF MEDICINE ATTN: PAUL WHITE, J.D. ATTN: C. SUE RICHARDS, PH.D. President Laboratory Director Medical Science Systems Baylor DNA Diagnostic Laboratory 4400 MacArthur Blvd, Suite 980 Department of Molecular and Human Newport Beach, CA 92660 Genetics One Baylor Plaza Houston, TX 77030-3498 14.0 This AGREEMENT shall inure to the benefit of and be binding upon the PARTIES. 15.0 ASSIGNMENT. This AGREEMENT and all rights and obligations hereunder are personal to the PARTIES hereto and may not be assigned without the express prior written consent of the other PARTY. Any assignment or attempt to assign in the absences of such written consent shall be void and without effect. 7 8 16.0 SEVERABILITY. Each provision of this AGREEMENT shall be considered separable and, if for any reason, a provision which is not essential to the effectuation of the basic purposes of the AGREEMENT is determined to be invalid or contrary to any existing or future law, such invalidity shall not impair the operation of or affect those provisions of this AGREEMENT that are valid. 17.0 FORCE MAJEURE. Neither PARTY shall be liable nor deemed to be in default for any delay or failure in performance under this AGREEMENT or other interruption of service deemed resulting, directly or indirectly, from acts of God, acts of public enemy, war, accidents, fires, explosions, hurricanes, floods, failure of transportation, strikers, or other work interruptions by either PARTY's employees, or any similar cause beyond the reasonable control of either PARTY. 18.0 WAIVER. A waiver by either PARTY of breach or violation of any provision or clause of this AGREEMENT shall not operate as, or be construed to be, a waiver of any subsequent breach of this AGREEMENT. No delay in acting with regard to any breach of this AGREEMENT shall be construed to be a waiver of such breach. 19.0 NON-DISCRIMINATION. The PARTIES hereby agree that neither PARTY shall fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his or her compensation, terms, conditions or privileges OF employment under any provision of this AGREEMENT, because of such individual's race, color, religion, sex, age, veteran status, handicap or national origin. 20.0 AGREEMENT EXECUTION. Each multiple original of this document shall be deemed an original, but all multiple copies together shall constitute one and the same instrument. 21.0 ENTIRE AGREEMENT. This AGREEMENT sets forth the entire agreement of the PARTIES with respect to the subject matter contained herein and may not be modified, amended, or discharged, except as expressly stated herein or by a written agreement duly executed by all PARTIES hereto. 22.0 CAPTIONS. All captions in this Agreement are solely for convenience and are not part of this agreement. 8 9 IN WITNESS WHEREOF, the PARTIES hereto have caused this AGREEMENT to be executed in duplicate and delivered this AGREEMENT as of the date and year as executed below. MEDICAL SCIENCE SYSTEMS BAYLOR COLLEGE OF MEDICINE Department of Molecular and Human Genetics. /s/ PAUL WHITE /s/ C. SUE RICHARDS - --------------------------------- -------------------------------- Signature C. Sue Richards, Ph.D Laboratory Director Baylor DNA Diagnostic Laboratory Paul White, J.D. President Date: 12-7-96 Date: 12-3-97 ------- ------- 9 10 EXHIBIT A REFERRAL SERVICE Performing the PERIODONTAL TEST of COMPANY. DEFINITION OF PERIODONTAL TEST: IL-1alpha and IL-1 beta SPECIMEN REQUIREMENTS Buccal Swab: two swabs per patient, 40 seconds each from both cheeks Blood: Blood spots on filter paper/cardboard mounts from finger sticks SHIPPING SAMPLES Overnight shipping (within the United States only) will be provided BY Baylor via AIRBORNE EXPRESS. Company will be responsible for all international shipping. Company will arrange for specimens to be shipped directly to Baylor. Specimens will not be received on weekends. Company will request referring physicians to mark packages appropriately for weekday arrival at Baylor. Specific information should be preprinted on Airborne air-bills: - the TO section should have the Baylor DNA Lab's address filled in - the BILL RECEIVER box should be checked and the Baylor DNA Lab's account # should be printed on the line next to it - the NUMBER OF PKGS box should say 1 - the WEIGHT box should say 1 lb Baylor will not pay for shipping of unmarked packages - LAB PACK should be checked - TYPE of service should be checked Express REPORTING BAYLOR will report batched test results directly to COMPANY via diskette. BAYLOR will provide patient and doctor data agreed to by both parties to COMPANY. WEEKLY TESTING AS of the Effective Date, the Baylor DNA laboratory plans to run the PST(TM) weekly. Sample shipments will need to be scheduled to arrive no later than Friday afternoon in order to make the next run date. BILLING BAYLOR will bill COMPANY monthly for submitted samples. 10 11 [ * ] 11 EX-10.14 29 LEASE AGREEMENT DATED MARCH 21, 1996 1 EXHIBIT 10.14 STANDARD LEASE BETWEEN KOLL CENTER NEWPORT NUMBER 9 LANDLORD AND MEDICAL SCIENCE SYSTEMS, INC. TENANT 2 OFFICE BUILDING LEASE TABLE OF CONTENTS
PAGE ---- 1. BASIC LEASE TERMS............................................. 1 2. PREMISES AND COMMON AREAS..................................... 3 3. TERM.......................................................... 3 4. POSSESSION.................................................... 3 5. RENT.......................................................... 4 6. OPERATING EXPENSES............................................ 4 7. SECURITY DEPOSIT. ............................................ 5 8. USE........................................................... 5 9. NOTICES....................................................... 5 10. BROKERS....................................................... 6 11. SURRENDER; HOLDING OVER....................................... 6 12. TAXES ON TENANT'S PROPERTY.................................... 6 13. ALTERATIONS................................................... 6 14. REPAIRS....................................................... 7 15. LIENS......................................................... 8 16. ENTRY BY LANDLORD............................................. 8 17. UTILITIES AND SERVICES........................................ 8 18. ASSUMPTION OF RISK AND INDEMNIFICATION........................ 8 19. INSURANCE..................................................... 9 20. DAMAGE OR DESTRUCTION......................................... 10 21. EMINENT DOMAIN................................................ 11 22. DEFAULTS AND REMEDIES......................................... 12 23. LANDLORD'S DEFAULT............................................ 13 24. ASSIGNMENT AND SUBLETTING..................................... 13 25. SUBORDINATION................................................. 15 26. ESTOPPEL CERTIFICATE.......................................... 15 27. BUILDING PLANNING............................................. 15 28. RULES AND REGULATIONS......................................... 16 29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGES AND LESSORS......................................... 16 30. DEFINITION OF LANDLORD........................................ 16 31. WAIVER........................................................ 16 32. PARKING....................................................... 16 33. FORCE MAJEURE................................................. 17 34. SIGNS......................................................... 17 35. LIMITATION ON LIABILITY....................................... 18 36. FINANCIAL STATEMENTS.......................................... 18 37. QUIET ENJOYMENT............................................... 18 38. MISCELLANEOUS................................................. 18 39. EXECUTION OF LEASE............................................ 19 SIGNATURE PAGE.............................................. 19 EXHIBITS: A-I Site Plan A-II Outline of Floor Plan of Premises B Rentable Square Feet and Usable Square Feet C Work Letter Agreement D Notice of Lease Term Dates and Tenant's Percentage E Definition of Operating Expenses F Standards for Utilities and Services G Estoppel Certificate H Rules and Regulations
3 OFFICE BUILDING LEASE This OFFICE BUILDING LEASE ("Lease") is entered into as of the 21 day of March, 1996 by and between Koll Center Newport Number 9, a California Limited Partnership ("Landlord"), and Medical Science Systems, Inc., a Texas Corporation ("Tenant"). 1. BASIC LEASE TERMS. For purposes of this Lease, the following terms have the following definitions and meanings: (a) LANDLORD: Koll Center Newport Number 9, a California Limited Partnership (b) LANDLORD'S ADDRESS (FOR NOTICES): 4350 Von Karman Avenue, Suite 100, Newport Beach, CA 92660. Attention: KCN 9 Manager, or such other place as Landlord may from time to time designate by notice to Tenant. (c) TENANT: Medical Science Systems, Inc., a Texas Corporation. (d) TENANT'S ADDRESS (PREMISES): 4400 MacArthur Boulevard, Suite 980, Newport Beach, CA 92660. Attention: Paul White. (e) DEVELOPMENT: The parcel(s) of real property commonly known as Koll Center Newport and located in the City of Newport Beach (the "City"), County of Orange (the "County"), State of California ("State"), as shown on the site plan attached hereto as Exhibit "A-1". (f) BUILDING: A nine (9) story office building located within the Development, which Building contains approximately 150,987 Rentable Square Feet, with the street address of 4400 MacArthur Boulevard. (g) PREMISES: Those certain premises known as Suite 980 as generally shown on the floor plan attached hereto as Exhibit "A-II", located on the ninth (9th) floor(s) of the Building, which Premises contains approximately 1,798 Rentable Square Feet and 1,605 Usable Square Feet (subject to adjustment as provided in Exhibit "B" and Exhibit "D"). (h) TENANT'S PERCENTAGE: Tenant's percentage of the Building on a Rentable Square Foot basis, which initially is 1.1908%, subject to final determination as provided in Exhibit "B" and Exhibit "D". (i) TERM: Five (5) Lease Years and Zero (0) Months. (j) ESTIMATED COMMENCEMENT DATE: April 15, 1996. ESTIMATED EXPIRATION DATE: April 14, 2001. (k) COMMENCEMENT DATE: The date on which the Term of this Lease will commence as determined in accordance with the provisions of Exhibit "C" and as stated on Exhibit "D". (l) MONTHLY BASE RENT: $2,697.00. 4 (n) OPERATING EXPENSE ALLOWANCE: Operating Expense Allowance means that portion of Tenant's Percentage of Operating Expenses as described in Paragraph 6 below which Landlord has included in Monthly Base Rent, which, for purposes of this Lease, will be an amount equal to Tenant's Percentage of Operating Expenses for the Building for the 1996 Calendar Year* (o) SECURITY DEPOSIT: $2,966.70 (p) TENANT IMPROVEMENTS: All tenant improvements installed or to be installed by Landlord or Tenant within the Premises to prepare the Premises for occupancy pursuant to the terms of the Work Letter Agreement attached hereto as Exhibit "C". (r) PERMITTED USE: General office use consistent with other Class "A" office uses at Koll Center Newport and no other use without the express written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. (s) PARKING: Up to six (6) unreserved employee parking spaces for the initial lease term and one (1) reserved employee parking spaces for the initial Lease Term subject to the terms and conditions of Paragraph 32 and Paragraph 42 below and the Rules and Regulations regarding parking contained in Exhibit "H". (t) BROKER(S): Koll Marketing Group (u) GUARANTOR(S): N/A (v) INTEREST RATE: shall mean the greater of ten percent (10%) per annum or two percent (2%) in excess of the prime lending reference rate of Wells Fargo Bank N.A. or any successor bank in effect on the twenty-fifth (25th) day of the calendar month immediately prior to the event giving rise to the Interest Rate imposition; provided, however, the Interest Rate will in no event exceed the maximum interest rate permitted to be charged by applicable law. (w) EXHIBITS: "A-I" through "H", inclusive, which Exhibits are attached to this Lease and incorporated herein by this reference. As provided in Paragraph 3 below, a completed version of Exhibit "D" will be delivered to Tenant after Landlord delivers possession of the Premises to Tenant. (x) ADDENDUM PARAGRAPHS: 40 through 44, inclusive, which Addendum Paragraphs are attached to this Lease and incorporated herein by this reference. This Paragraph 1 represents a summary of the basic terms and definitions of this Lease. In the event of any inconsistency between the terms contained in this Paragraph 1 and any specific provisions of this Lease, the terms of the more specific provision shall prevail. *In no event shall Tenant pay Operating Expenses in excess of the Operating Expense Allowance during the 1996 Calendar Year. -2- 5 2. PREMISES AND COMMON AREAS. (a) PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises as improved or to be improved with the Tenant improvements described in the Work Letter Agreement, a copy of which is attached hereto as Exhibit "C". (b) MUTUAL COVENANTS. Landlord and Tenant agree that the letting and hiring of the Premises is upon and subject to the terms, covenants and conditions contained in this Lease and each party covenants as a material part of the consideration for this Lease to keep and perform their respective obligations under this Lease. (c) TENANT'S USE OF COMMON AREAS. During the Term of this Lease. Tenant shall have the nonexclusive right to use in common with Landlord and all persons, firms and corporations conducting business in the Development and their respective customers, guests, licensees, invitees, subtenants, employees and agents (collectively, "Development Occupants"), subject to the terms of this Lease, the Rules and Regulations referenced in Paragraph 32 below and all covenants, conditions and restrictions now or hereafter affecting the Development, the following common area of the Building and/or the Development (collectively, the "Common Areas"): (i) The Building's common entrances, hallways, lobbies, public restrooms on multi-tenant floors, elevators, stairways and accessways, loading docks, ramps, drives and platforms and any passageways and serviceways thereto, and the common pipes, conduits, wires and appurtenant equipment within the Building which serve the Premises (collectively, "Building Common Areas"); and (ii) The parking facilities of the Development which serve the Building (subject to the provisions of Exhibit "H"), loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, plaza areas, fountains and similar areas and facilities situated within the Development and appurtenant to the Building which are not reserved for the exclusive use of any Development Occupants (collectively, "Development Common Areas"). (d) LANDLORD'S RESERVATION OF RIGHTS. Provided Tenant's use of and access to the Premises and parking to be provided to Tenant under this Lease is not interfered with in an unreasonable manner. Landlord reserves for itself and for all other owner(s) and operator(s) of the Development Common Areas and the balance of the Development, the right from time to time to (i) install, use, maintain, repair, replace and relocate pipes, ducts, conduits, wires and appurtenant meters and equipment above the ceiling surfaces, below the floor surfaces, within the walls and in the central core areas of the Building; (ii) make changes to the design and layout of the Development, including, without limitation, changes to buildings, driveways, entrances, loading and unloading areas, direction of traffic, landscaped areas and walkways, and, subject to the parking provisions contained in Paragraph 32 and Exhibit "H", parking spaces and parking areas; and (iii) use or close temporarily the Building Common Areas, the Development Common Areas and/or other portions of the Development while engaged in making improvements, repairs or alterations to the Building, the Development, or any portion thereof. 3. TERM. The term of this Lease ("Term") will be for the period designated in Subparagraph 1(i), commencing on the Commencement Date, and ending on the last day of the month in which the expiration of such period occurs, including any extensions of the Term pursuant to any provision of this Lease or written agreement of the parties. Notwithstanding the foregoing, if the Commencement Date falls on any day other than the first day of a calendar month then the Term of this Lease will be measured from the first day of the month following the month in which the Commencement Date occurs. Each consecutive twelve (12) month period of the Term of this Lease, commencing on the Commencement Date, will be referred to herein as a "Lease Year". Landlord's Notice of Lease Term Dates and Tenant's Percentage ("Notice"), in the form of Exhibit "D" attached hereto, will set forth the Commencement Date, the date upon which the Term of this Lease shall end, the Rentable Square Feet within the Premises and the Building and Tenant's Percentage and will be delivered to Tenant after Landlord delivers possession of the Premises to Tenant. The Notice will be binding upon Tenant unless Tenant objects to the Notice in writing within five (5) days of Tenant's receipt of the Notice. 4. POSSESSION. (a) DELIVERY OF POSSESSION. Landlord agrees to deliver possession of the Premises to Tenant in accordance with the terms of the Work Letter Agreement attached hereto as Exhibit "C", or, if no Work Letter Agreement is required for this Lease, then Landlord agrees to deliver possession of the Premises to Tenant on the Commencement Date; provided, however, Tenant agrees that if Landlord is unable to deliver possession of the Premises to Tenant on the Commencement Date for any reason other than Tenant Delays as defined in Exhibit "C", then this Lease will not be void or voidable and Landlord will not be liable to Tenant for any loss or damage resulting therefrom, but the Commencement Date and the Expiration Date will be extended by the number of days Landlord is late in delivering the Premises to Tenant, and rent will not commence to accrue under this Lease until Landlord delivers the Premises to Tenant. Notwithstanding the foregoing, Landlord will not be obligated to deliver possession of the Premises to Tenant (but Tenant will be liable for rent if Landlord can otherwise deliver the Premises to Tenant) until Landlord has received from Tenant all of the following: (i) a copy of this Lease fully executed by Tenant; (ii) the Security Deposit and the first installment of Monthly Base Rent; (iii) executed copies of policies of insurance or certificates thereof as required under Paragraph 19 of this Lease; (iv) copies of all governmental permits and authorizations, if any, required in connection with Tenant's operation of its business within the Premises; and (v) if Tenant is a corporation or partnership, such evidence of due formation, valid existence and authority as Landlord may reasonably require, which may include, without limitation, a certificate of good standing, certificate of secretary, articles of incorporation, statement of partnership, or other similar documentation. (b) CONDITION OF PREMISES. Prior to the Commencement Date and in accordance with the Work Letter Agreement attached hereto as Exhibit "C", Landlord and Tenant will jointly conduct a walk-through inspection of the Premises and will jointly prepare a punch-list ("Punch-List") of items required to be installed by Landlord under the Work Letter Agreement which require finishing or correction. The Punch-List will not include any items of damage to the Premises caused by Tenant's move-in or early entry, if permitted, which damage will be corrected or repaired by Landlord, at Tenant's expense or, at Landlord's election, by Tenant, at Tenant's expense. Other than the items specified in the Punch-List, and except for latent defects, by taking possession of the Premises, Tenant will be deemed to have accepted the Premises in its condition on the date of delivery of possession and to have acknowledged that the Tenant -3- 6 Improvements have been installed as required by the Work Letter Agreement and that there are no additional items needing work or repair. Landlord will cause all items in the Punch-List to be repaired or corrected within thirty (30) days following the preparation of the Punch-List or as soon as practicable after the preparation of the Punch-List. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Building, the Development or any portions thereof or with respect to the suitability of same for the conduct of Tenant's business and Tenant further acknowledges that Landlord will have no obligation to construct or complete any additional buildings or improvement within the Development. 5. RENT. (a) MONTHLY BASE RENT. Tenant agrees to pay Landlord the Monthly Base Rent for the Premises (subject to adjustment as hereinafter provided) in advance on the first day of each calendar month during the Term without prior notice or demand, except that Tenant agrees to pay the Monthly Base Rent for the first month of the Term directly to Landlord prior to Tenant's occupancy of the Premises. If the Term of this Lease commences or ends on a day other than the first day of a calendar month, then the rent for such period will be prorated in the proportion that the number of days this Lease is in effect during such period bears to the number of days in such month. All rent must be paid to Landlord, without any deduction or offset, in lawful money of the United States of America, at the address designated by Landlord or to such other person or at such other place as Landlord may from time to time designate in writing. Monthly Base Rent will be adjusted during the Term of this Lease as provided in Subparagraph 1(m). (b) ADDITIONAL RENT. All amounts and charges to be paid by Tenant hereunder, including, without limitation, payments for Operating Expenses, insurance, repairs and parking, will be considered additional rent for purposes of this Lease, and the word "rent" as used in this Lease will include all such additional rent unless the context specifically or clearly implies that only Monthly Base Rent is intended. (c) LATE PAYMENTS. Late payments of Monthly Base Rent and/or any item of additional rent will be subject to interest and a late charge as provided in Subparagraph 22(f) below. 6. OPERATING EXPENSES. (a) OPERATING EXPENSES. In addition to Monthly Base Rent, throughout the Term of this Lease beginning on January 1, 1997, Tenant agrees to pay Landlord as additional rent in accordance with the terms of this Paragraph 6, Tenant's Percentage of Operating Expenses as defined in Exhibit "E" attached hereto to the extent Tenant's Percentage of Operating Expenses exceeds Tenant's Operating Expense Allowance. (b) ESTIMATE STATEMENT. Prior to the Commencement Date and on or about March 1st of each subsequent calendar year during the Term of this Lease, Landlord will endeavor to deliver to Tenant a statement ("Estimate Statement") wherein Landlord will estimate both the Operating Expenses and Tenant's Percentage of Operating Expenses for the then current calendar year. If the estimate of Tenant's Percentage of Operating Expenses in the Estimate Statements exceeds Tenant's Operating Expense Allowance, Tenant agrees to pay Landlord, as "Additional Rent", one-twelfth (1/12th) of such excess each month thereafter, beginning with the next installment of rent due, until such time as Landlord issues a revised Estimate Statement or the Estimate Statement for the succeeding calendar year, except that, concurrently with the regular monthly rent payment next due following the receipt of each such Estimate Statement, Tenant agrees to pay Landlord an amount equal to one monthly installment of such excess (less any applicable Operating Expenses already paid) multiplied by the number of months from January, in the current calendar year, to the month of such rent payment next due, all months inclusive. If at any time during the Term of this Lease, but not more often than quarterly, Landlord reasonably determines that Tenant's Percentage of Operating Expenses for the current year will be greater than the amount set forth in the then current Estimate Statement, Landlord may issue a revised Estimate Statement and Tenant agrees to pay Landlord, within ten (10) days of receipt of the revised Estimate Statement, the difference between the amount owed by Tenant under such revised Estimate Statement and the amount owed by Tenant under the original Estimate Statement for the portion of the then current calendar year which has expired. Thereafter Tenant agrees to pay Tenant's Percentage of Operating Expenses based on such revised Estimate Statement until Tenant receives the next calendar year's Estimate Statement or a new revised Estimate Statement for the current calendar year. In the event Tenant's Percentage of Operating Expenses for any calendar year is less than Tenant's Operating Expense Allowance, Tenant will not be entitled to a credit against any rent, additional rent or Tenant's Percentage of future Operating Expenses payable hereunder. (c) ACTUAL STATEMENT. By March 1st of each calendar year during the Term of this Lease, Landlord will also endeavor to deliver to Tenant a statement ("Actual Statement") which states the actual Operating Expenses for the preceding calendar year. If the Actual Statement reveals that Tenant's Percentage of the actual Operating Expenses is more than the total Additional Rent paid by Tenant for Operating Expenses on account of the preceding calendar year, Tenant agrees to pay Landlord the difference in a lump sum within (10) days of receipt of the Actual Statement. If the Actual Statement reveals that Tenant's Percentage of the actual Operating Expenses is less than the Additional Rent paid by Tenant for Operating Expenses on account of the preceding calendar year, Landlord will credit any overpayment toward the next monthly installment(s) of Tenant's Percentage of the Operating Expenses due under this Lease. (d) MISCELLANEOUS. Any delay or failure by Landlord in delivering any Estimate Statement or Actual Statement pursuant to this Paragraph 6 will not constitute a waiver of its right to require an increase in rent nor will it relieve Tenant of its obligations pursuant to this Paragraph 6, except that Tenant will not be obligated to make any payments based on such Estimate Statement or Actual Statement until ten (10) days after receipt of such Estimate Statement or Actual Statement. Even though the Term has expired and Tenant has vacated the Premises, when the final determination is made of Tenant's Percentage of the actual Operating Expenses for the year in which this Lease terminates, Tenant agrees to promptly pay any increase due over the estimated expenses paid and, conversely, any overpayment made in the event said expenses decrease shall promptly be rebated by Landlord to Tenant. Such obligation will be a continuing one which will survive the expiration or earlier termination of this Lease. Prior to the expiration or sooner termination of the Lease Term and Landlord's acceptance of Tenant's surrender of the Premises, Landlord will have the right to estimate the actual Operating Expenses for the then current Lease Year and to collect from Tenant prior to Tenant's surrender of the Premises, Tenant's Percentage of any excess of such actual Operating Expenses over the estimated Operating Expenses paid by Tenant in such Lease Year. -4- 7 7. SECURITY DEPOSIT. Concurrently with Tenant's execution of this Lease, Tenant will deposit with Landlord the Security Deposit designated in Subparagraph 1(o). The Security Deposit will be held by Landlord as security for the full and faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the Term hereof. If Tenant fully and faithfully performs its obligations under this Lease, including, without limitation, surrendering the Premises upon the expiration or sooner termination of this Lease in compliance with Subparagraph 11(a) below, the Security Deposit or any balance thereof will be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) within thirty (30) days following the expiration of the Lease Term or as required under applicable law, provided that Landlord may retain the Security Deposit until such time as any outstanding rent or additional rent amount has been determined and paid in full. The Security Deposit is not, and may not be construed by Tenant to constitute, rent for the last month or any portion thereof. If Tenant defaults with respect to any provisions of this Lease including, but not limited to, the provisions relating to the payment of rent or additional rent, Landlord may (but will not be required to) use, apply or retain all or any part of the Security Deposit for the payment of any rent or any other sum in default, or for the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Security Deposit is so used or applied, Tenant agrees, within ten (10) days after Landlord's written demand therefor, to deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount and Tenant's failure to do so shall constitute a default under this Lease. Landlord is not required to keep Tenant's Security Deposit separate from its general funds, and Tenant is not entitled to interest on such Security Deposit. Should Landlord sell its interest in the Premises during the Term hereof and deposit with the purchaser thereof the then unappropriated Security Deposit funds, Landlord will be discharged from any further liability with respect to such Security Deposit. 8. USE. (a) TENANT'S USE OF THE PREMISES. The Premises may be used for the use or uses set forth in Subparagraph 1(r) only, and Tenant will not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. Nothing in this Lease will be deemed to give Tenant any exclusive right to such use in the Building or the Development. (b) COMPLIANCE. At Tenant's sole cost and expense, Tenant agrees to procure, maintain and hold available for Landlord's inspection, all governmental licenses and permits required for the proper and lawful conduct of Tenant's business from the Premises, if any. Tenant agrees not to use, alter or occupy the Premises or allow the Premises to be used, altered or occupied in violation of, and Tenant, at its sole cost and expense, agrees to use and occupy the Premises and cause the Premises to be used and occupied in compliance with: (i) any and all laws, statutes, zoning restrictions, ordinances, rules, regulations, orders and rulings now or hereafter in force and any requirements of any insurer, insurance authority or duly constituted public authority having jurisdiction over the Premises, the Building or the Development now or hereafter in force, (ii) the requirements of the Board of Fire Underwriters and any other similar body, (iii) the Certificate of Occupancy issued for the Building, and (iv) any recorded covenants, conditions and restrictions and similar regulatory agreements, if any, which affect the use, occupation or alteration of the Premises, the Building and/or the Development. Tenant agrees to comply with the Rules and Regulations referenced in Paragraph 28 below. Tenant agrees not to do or permit anything to be done in or about the Premises which will in any manner obstruct or interfere with the rights of other tenants or occupants of the Development, or injure or unreasonably annoy them, or use or allow the Premises to be used for any unlawful or unreasonably objectionable purpose. Tenant agrees not to cause, maintain or permit any nuisance or waste in, on, under or about the Premises or elsewhere within the Development. Notwithstanding anything contained in this Lease to the contrary, all transferable development rights related in any way to the Development are and will remain vested in Landlord, and Tenant hereby waives any rights thereto. (c) HAZARDOUS MATERIALS. Except for ordinary and general office supplies typically used in the ordinary course of business within office buildings, such as copier toner, liquid paper, glue, ink and common household cleaning materials (some or all of which may constitute "Hazardous Materials" as defined in this Lease), Tenant agrees not to cause or permit any Hazardous Materials to be brought upon, stored, used, handled, generated, released or disposed of on, in, under or about the Premises, the Building, the Common Areas or any other portion of the Development by Tenant, its agents, employees, subtenants, assignees, licensees, contractors or invitees (collectively, "Tenant's Parties"), without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. Upon the expiration or earlier termination of this Lease, Tenant agrees to promptly remove from the Premises, the Building and the Development, at its sole cost and expense, any and all Hazardous Materials, including any equipment or systems containing Hazardous Materials which are installed, brought upon, stored, used, generated or released upon, in, under or about the Premises, the Building and/or the Development or any portion thereof by Tenant or any of Tenant's Parties. To the fullest extent permitted by law, Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord and Landlord's partners, officers, directors, employees, agents, successors and assigns (collectively, "Landlord Indemnified Parties") from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including, without limitation, clean-up, removal, remediation and restoration costs, sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees and court costs) which arise or result from the presence of Hazardous Materials on, in, under or about the Premises, the Building or any other portion of the Development and which are caused or permitted by Tenant or any of Tenant's Parties. Tenant agrees to promptly notify Landlord of any release of Hazardous Materials at the Premises, the Building or any other portion of the Development which Tenant becomes aware of during the Term of this Lease, whether caused by Tenant or any other person or entities. In the event of any release of Hazardous Materials caused or permitted by Tenant or any of Tenant's Parties, Landlord shall have the right, but not the obligation, to cause Tenant to immediately take all steps Landlord deems necessary or appropriate to remediate such release and prevent any similar future release to the satisfaction of Landlord and Landlord's mortgagee(s). As used in this Lease, the term "Hazardous Materials" shall mean and include any hazardous or toxic materials, substances or wastes as now or hereafter designated under any law, statute, ordinance, rule, regulation, order or ruling of any agency of the State, the United States Government or any local governmental authority, including, without limitation, asbestos, petroleum, petroleum hydrocarbons and petroleum based products, urea formaldehyde foam insulation, polychlorinated biphenyls ("PCBs"), and freon and other chlorofluorocarbons. The provisions of this Subparagraph 8(c) will survive the expiration or earlier termination of this Lease. 9. NOTICES. Any notice required or permitted to be given hereunder must be in writing and may be given by personal delivery (including delivery by overnight courier or an express mailing service) or by mail, if sent by registered or certified mail. Notices to Tenant shall be sufficient if delivered to Tenant at the Premises and notices to Landlord shall be sufficient if delivered to Landlord -5- 8 at the address designated in Subparagraph 1(b). Either party may specify a different address for notice purposes by written notice to the other, except that the Landlord may in any event use the Premises as Tenant's address for notice purposes. 10. BROKERS. The parties acknowledge that the broker(s) who negotiated this Lease are stated in Subparagraph 1(t). Each party represents and warrants to the other, that, to its knowledge, no other broker, agent or finder (a) negotiated or was instrumental in negotiating or consummating this Lease on its behalf, and (b) is or might be entitled to a commission or compensation in connection with this Lease. Landlord and Tenant each agree to promptly indemnify, protect, defend and hold harmless the other from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including attorney's fees and court costs) resulting from any breach by the indemnifying party of the foregoing representation, including, without limitation, any claims that may be asserted by any broker, agent, or finder undisclosed by the indemnifying party. The foregoing mutual indemnity shall survive the expiration or earlier termination of this Lease. 11. SURRENDER; HOLDING OVER. (a) Surrender. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not constitute a merger, and shall, at the option of Landlord, operate as an assignment to Landlord of any or all subleases or subtenancies. Upon the expiration or earlier termination of this Lease, Tenant agrees to peaceably surrender the Premises to Landlord broom clean and in a state of first-class order, repair and condition, ordinary wear and tear and casualty damage (if this Lease is terminated as a result thereof pursuant to Paragraph 20) excepted, with all of Tenant's personal property and Alterations (as defined in Paragraph 13) removed from the Premises to the extent required under Paragraph 13 and all damage caused by such removal repaired as required by Paragraph 13. Prior to the date Tenant is to actually surrender the Premises so that Landlord and Tenant can schedule a walk-through of the Premises to review the condition of the Premises and identify the Alterations and personal property which are to remain upon the Premises and which items Tenant is to remove, as well as any repairs Tenant is to make upon surrender of the Premises. The delivery of keys to any employee of Landlord or to Landlord's agent or any employee thereof alone will not be sufficient to constitute a termination of this Lease or a surrender of the Premises. (b) Holding Over. Tenant will not be permitted to hold over possession of the Premises after the expiration or earlier termination of the term without the express written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. If Tenant holds over after the expiration or earlier termination of the Term, Landlord may, at its option, treat Tenant as a tenant at sufferance only, and such continued occupancy by Tenant shall be subject to all of the terms, covenants and conditions of this Lease, so far as applicable, except that the Monthly Base Rent for any such holdover period shall be equal to the greater of (i) one hundred twenty-five percent (125%) of the Monthly Base Rent in effect under this Lease immediately prior to such holdover, or (ii) the then currently scheduled rental rate for comparable space in the Building, in either event prorated on a daily basis. Acceptance by Landlord of rent after such expiration or earlier termination will not result in a renewal of this Lease. The foregoing provisions of this Paragraph 11 are in addition to and do not affect Landlord's right of re-entry or any rights of Landlord under this Lease or as otherwise provided by law. If Tenant fails to surrender the Premises upon the expiration of this Lease in accordance with the terms of this Paragraph 11 despite demand to do so by Landlord, Tenant agrees to promptly indemnify, protect, defend and hold Landlord harmless from all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including attorneys' fees and costs), including, without limitation, costs and expenses incurred by Landlord in returning the Premises to the condition in which Tenant was to surrender it and claims made by any succeeding tenant founded on or resulting from Tenant's failure to surrender the Premises. The provisions of this subparagraph 11(b) will survive the expiration or earlier termination of this Lease. 12. TAXES ON TENANTS PROPERTY. Tenant agrees to pay before delinquency, all taxes and assessments (real and personal) levied against (a) any personal property or trade fixtures placed by Tenant in or about the Premises (including any increase in the assessed value of the Premises based upon the value of any such personal property or trade fixtures), and (b) any Tenant Improvements or Alterations to the Premises (whether installed and/or paid for by Landlord or Tenant) to the extent such items are assessed at a valuation higher than the valuation at which tenant improvements conforming to Landlord's building standard tenant improvement are assessed. If any such taxes or assessments are levied against Landlord or Landlord's property, Landlord may, after written notice to Tenant (and under proper protest if requested by Tenant) pay such taxes and assessments, in which event Tenant agrees to reimburse Landlord all amounts paid by Landlord within ten (10) business days after demand by Landlord, provided, however, Tenant, at its sole cost and expense, will have the right, with Landlord's cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes and assessments so paid under protest. 13. ALTERATIONS. After installation of the initial Tenant Improvements for the Premises pursuant to Exhibit "C", Tenant may, at its sole cost and expense, make alterations, additions, improvements and decorations to the Premises (collectively, "Alterations") subject to and upon the following terms and conditions. (a) Prohibited Alterations. Tenant may not make any Alterations which (i) affect any area outside the Premises, (ii) affect the Building's structure, equipment, services or systems, or the proper functioning thereof, or Landlord's access thereto, (iii) affect the outside appearance, character or use of the building or the Building Common Areas; (iv) in the reasonable opinion of Landlord, lessen the value of the Building; or (v) will violate or require a change in any occupancy certificate applicable to the Premises. (b) Landlord's Approval. Before proceeding with any Alterations which are not prohibited in Subparagraph 13(a) above, Tenant must first obtain Landlord's written approval of the plans, specifications and working drawings for such Alterations, which approval Landlord will not unreasonably withhold or delay, provided, however, Landlord's prior approval will not be required for any such Alterations which are not prohibited by Subparagraph 13(a) above and which cost less than Two thousand Five Hundred Dollars ($2,500) as long as (i) Tenant delivers to Landlord notice and a copy of any final plans, specifications and working drawings for any such Alterations at least ten (10) days prior to commencement of the work thereof, and (ii) the other conditions of this Paragraph 13 are satisfied, including, without limitation, conforming to Landlord's rules, regulations and insurance requirements which govern contractors. Landlord's approval of plans, specifications and/or working drawings for Alterations will not create any responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with applicable permits, laws, rules and regulations of governmental agencies or authorities. In approving any Alterations, Landlord reserves the right to require Tenant to -6- 9 increase its Security Deposit to provide Landlord with additional reasonable security for the removal of such Alterations by Tenant as may be required by this Lease. (c) CONTRACTORS. Alterations may be made or installed only by contractors and subcontractors which have been approved by Landlord, which approval Landlord will not unreasonably withhold or delay, provided, however, Landlord reserves the right to require that Landlord's contractor for the Building be given the first opportunity to bid for any Alteration work. Before proceeding with any Alterations, Tenant agrees to provide Landlord with ten (10) days prior written notice and Tenant's contractors must obtain and maintain, on behalf of Tenant and at Tenant's sole cost and expense (i) all necessary governmental permits and approvals for the commencement and completion of such Alternations; and (ii) if requested by Landlord, a completion and lien indemnity bond, or other surety, reasonably satisfactory to Landlord for such Alterations. Throughout the performance of any Alterations, Tenant agrees to obtain, or cause its contractors to obtain, workers compensation insurance and general liability insurance in compliance with the provisions of Paragraph 19 of this Lease. (d) MANNER OF PERFORMANCE. All Alterations must be performed (i) in accordance with the approved plans, specifications and working drawings; (ii) in a lien-free and first-class and workmanlike manner; (iii) in compliance with all applicable permits, laws, statutes, ordinances, rules, regulations, orders and rulings now or hereafter in effect and imposed by any government agencies and authorities which assert jurisdiction; (iv) in such a manner so as not to interfere with the occupancy of any other tenant in the Building, nor impose any additional expense upon nor delay Landlord in the maintenance and operation of the Building; and (v) at such times, in such manner, and subject to such rules and regulations as Landlord may from time to time reasonably designate. (e) OWNERSHIP. The Tenant Improvements, including, without limitation, all affixed sinks, dishwashers, microwave ovens and other fixtures, and all Alterations will become the property of Landlord and will remain upon and be surrendered with the Premises at the end of the Term of this Lease; provided, however, Landlord may, by written notice delivered to Tenant concurrently with Landlord's approval of the final working drawings for any Alterations, identify those Alterations which Landlord will require Tenant to remove at the end of the Term of this Lease. Landlord may also require Tenant to remove Alterations which Landlord did not have the opportunity to approve as provided in this Paragraph 13. If Landlord requires Tenant to remove any Alterations, Tenant, at its sole cost and expense, agrees to remove the identified Alterations on or before the expiration or earlier termination of this Lease and repair any damage to the Premises caused by such removal (or, at Landlord's option, Tenant agrees to pay Landlord all of Landlord's costs of such removal and repair). (f) PLAN REVIEW. Tenant agrees to pay Landlord, as additional rent, the reasonable costs of professional services and costs for general conditions of Landlord's third party consultants if utilized by Landlord (but not Landlord's "in-house" personnel) for review of all plans, specifications and working drawings to any Alterations, within ten (10) business days after Tenant's receipt of invoices either from Landlord or such consultants. In addition, Tenant agrees to pay Landlord, within ten (10) business days after completion of any Alterations, a fee to cover Landlord's costs of supervising and administering the installation of such Alterations, in the amount of eight percent (8%) of the cost of such Alterations, but in no event less than Two Hundred Fifty Dollars ($250.00). (g) PERSONAL PROPERTY. All articles of personal property owned by Tenant or installed by Tenant at its expense in the Premises (including Tenant's business and trade fixtures, movable partitions and equipment [such as telephones, copy machines, computer terminals, refrigerators and facsimile machines]) will be and remain the property of Tenant, and must be removed by Tenant from the Premises, at Tenant's sole cost and expense, on or before the expiration or earlier termination of this Lease. Tenant agrees to repair any damage caused by such removal at its cost on or before the expiration or earlier termination of this Lease. (h) REMOVAL OF ALTERATIONS. If Tenant fails to remove by the expiration or earlier termination of this Lease all of its personal property, or any Alterations identified by Landlord for removal, Landlord may, at its option, treat such failure as a hold-over pursuant to Subparagraph 11(b) above, and/or Landlord may (without liability to Tenant for loss thereof) treat such personal property and/or Alterations as abandoned and, at Tenant's sole cost and expense, and in addition to Landlord's other rights and remedies under this Lease, at law or in equity: (a) remove and store such items; and/or (b) upon ten (10) days prior notice to Tenant, sell, discard or otherwise dispose of all or any such items at private or public sale for such price as Landlord may obtain or by other commercially reasonable means. Tenant shall be liable for all costs of disposition of Tenant's abandoned property and Landlord shall have no liability to Tenant with respect to any such abandoned property. Landlord agrees to apply the proceeds of any sale of any such property to any amounts due to Landlord under this Lease from Tenant (including Landlord's reasonable attorney's fees and other costs incurred in the removal, storage and/or sale of such items), with any remainder to be paid to Tenant. 14. REPAIRS (a) LANDLORD'S OBLIGATIONS. Landlord agrees to repair and maintain the structural portions of the Building and the plumbing, heating, ventilating, air conditioning, elevator and electrical systems installed or furnished by Landlord, unless such maintenance and repairs are (i) attributable to items installed in Tenant's Premises which are above standard interior improvements (such as, for example, custom lighting, special HVAC and/or electrical panels or systems, kitchen or restroom facilities and appliances constructed or installed within Tenant's Premises) or (ii) caused in part or in whole by the act, neglect or omission of any duty by Tenant, its agents, servants, employees or invitees, in which case Tenant will pay to Landlord, as additional rent, the reasonable cost of such maintenance and repairs. Landlord will not be liable for any failure to make any such repairs or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. Except as provided in Paragraph 20, Tenant will not be entitled to any abatement of rent and Landlord will not have any liability by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Premises or in or to fixtures, appurtenances and equipment therein. Tenant waives the right to make repairs at Landlord's expense under any law, statute, ordinance, rule, regulation, order or ruling, (including, without limitation, to the extent the Premises are located in California, the provisions of California Civil Code Section 1941 and 1942 and any successor statutes or laws of a similar nature). (b) TENANT'S OBLIGATIONS. Tenant agrees to keep, maintain and preserve the Premises in first class condition and repair and, when and if needed, at Tenant's sole cost and expense, to make all repairs to the Premises and every part thereof. Any such maintenance and repairs will be performed by Landlord's contractor, or at Landlord's option, by such contractor or contractors as Tenant may choose from an approved list to be submitted by Landlord. Tenant agrees to pay all costs and expenses incurred in such -7- 10 maintenance and repair within seven (7) days after billing by Landlord or such contractor or contractors. Tenant agrees to cause any mechanics' liens or other liens arising as a result of work performed by Tenant or at Tenant's direction to be eliminated as provided in Paragraph 15 below. Except as provided in Subparagraph 14(a) above, Landlord has no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof. (c) TENANT'S FAILURE TO REPAIR. If Tenant refuses or neglects to repair and maintain the Premises properly as required hereunder to the reasonable satisfaction of Landlord, Landlord, at any time following ten (10) days from the date on which Landlord makes a written demand on Tenant to effect such repair and maintenance, may enter upon the Premises and make such repairs and/or maintenance, and upon completion thereof, Tenant agrees to pay to Landlord as additional rent. Landlord's costs for making such repairs plus an amount not to exceed ten percent (10%) of such costs for overhead, within ten (10 days of receipt from Landlord of a written itemized bill therefor. Any amounts not reimbursed by Tenant within such ten (10) day period will bear interest at the Interest Rate until paid by Tenant. 15. LIENS. Tenant agrees not to permit any mechanic's, materialmen's or other liens to be filed against all or any part of the Development, the Building or the Premises, nor against Tenant's leasehold interest in the Premises, by reason of or in connection with any repairs, alterations, improvements or other work contracted for or undertaken by Tenant or any other act or omission of Tenant or Tenant's agents, employees, contractors, licensees or invitees. At Landlord's request, Tenant agrees to provide Landlord with enforceable, conditional and final lien releases (or other evidence reasonably requested by Landlord to demonstrate protection from liens) from all persons furnishing labor and/or materials at the Premises. Landlord will have the right at all reasonable times to post on the Premises and record any notices of non-responsibility which it deems necessary for protection from such liens. If any such liens are filed, Tenant will, at its sole cost, promptly cause such liens to be released of record or bonded so that it no longer affects title to the Development, the Building or the Premises. If Tenant fails to cause any such liens to be so released or bonded within ten (10) days after filing thereof, such failure will be deemed a material breach by Tenant under this Lease without the benefit of any additional notice or cure period described in Paragraph 22 below, and Landlord may, without waiving its rights and remedies based on such breach, and without releasing Tenant from any of its obligations, cause such liens to be released by any means it shall deem proper, including payment in satisfaction of the claims giving rise to such liens. Tenant agrees to pay to Landlord within ten (10) days after receipt of invoice from Landlord, any sum paid by Landlord to remove such liens, together with interest at the Interest Rate from the date of such payment by Landlord. 16. ENTRY BY LANDLORD. Landlord and its employees and agents will at all times have the right to enter the Premises to inspect the same, to supply janitorial service and any other service to be provided by Landlord to Tenant hereunder, to show the Premises to prospective purchasers or tenants, to post notices of nonresponsibility, and/or to repair the Premises as permitted or required by this Lease. In exercising such entry rights, Landlord will endeavor to minimize, as reasonably practicable, the interference with Tenant's business, and will provide Tenant with reasonable advance notice of any such entry (except in emergency situations). Landlord may, in order to carry out such purposes, erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed. Landlord will at all times have and retain a key with which to unlock all doors in the Premises, excluding Tenant's vaults and safes. Landlord will have the right to use any and all means which Landlord may reasonably deem proper to open said doors in an emergency in order to obtain entry to the Premises. Any entry to the Premises obtained by Landlord by an of said means, or otherwise, will not be construed or deemed to be a forcible or unlawful entry unto the Premises, or an eviction of Tenant from the Premises. Landlord will not be liable to Tenant for any damages or losses for any entry by Landlord. 17. UTILITIES AND SERVICES. Throughout the Term of the Lease so long as the Premises are occupied, Landlord agrees to furnish or cause to be furnished to the Premises the utilities and services described in the Standards for Utilities and Services attached hereto as Exhibit "F" subject to the conditions and in accordance with the standards set forth therein. Landlord may require Tenant from time to time to provide Landlord with a list of Tenant's employees and/or agents which are authorized by Tenant to subscribe on behalf of Tenant for any additional services which may be provided by Landlord. Any such additional services will be provided to Tenant at Tenant's cost. Landlord will not be liable to Tenant for any failure to furnish any of the foregoing utilities and services if such failure is caused by all or any of the following: (i) accident, breakage or repairs; (ii) strikes, lockouts or other labor disturbance or labor dispute of any character, (iii) governmental regulation, moratorium or other governmental action or inaction; (iv) inability despite the exercise of reasonable diligence to obtain electricity, water or fuel; or (v) any other cause beyond Landlord's reasonable control. In addition, in the event of any stoppage or interruption of services or utilities, Tenant shall not be entitled to any abatement or reduction of rent (except as expressly provided in subparagraph 20(f) or 21(b) if such failure results from a damage or taking described therein), no eviction of Tenant will result from such failure and Tenant will not be relieved from the performance of any covenant or agreement in this Lease because of such failure. In the event of any failure, stoppage or interruption thereof, Landlord agrees to diligently attempt to resume service promptly. If Tenant requires or utilizes more water or electrical power than is considered reasonable or normal by Landlord, Landlord may at is option require Tenant to pay, as additional rent, the cost, as fairly determined by Landlord, incurred by such extraordinary usage and/or Landlord may install separate meter(s) for the Premises, at Tenant's sole expense, and Tenant agrees thereafter to pay all charges of the utility providing service and Landlord will make an appropriate adjustment to Tenant's Operating Expenses calculation to account for the fact Tenant is directly paying such metered charges, provided Tenant will remain obligated to pay its proportionate share of Operating Expenses subject to such adjustment. 18. ASSUMPTION OF RISK AND INDEMNIFICATION. (A) ASSUMPTION OF RISK. Tenant, as a material part of the consideration to Landlord, hereby agrees that neither Landlord nor any Landlord Indemnified parties (as defined in Subparagraph 8(c) above) will be liable to Tenant for, and Tenant expressly assumes the risk of and waives any and all claims it may have against Landlord or any Landlord Indemnified Parties with respect to, (i) any and all damage to property or injury to persons in, upon or about the Premises, the Building or the Development resulting from any act or omission (except for the grossly negligent or intentionally wrongful act or omission) of Landlord, (ii) any such damage caused by other tenants or persons in or about the Building or the Development, or caused by quasi-public work, (iii) any damage to property entrusted to employees of the Building, (iv) any loss of or damage to property by theft or otherwise, or (v) any injury or damage to persons or property resulting from any casualty, explosion, falling plaster or other masonry or glass, steam, gas electricity, water or rain which may leak from any part of the Building or any other portion of the Development or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place, or resulting from dampness. -8- 11 Notwithstanding anything to the contrary contained in this Lease, neither Landlord nor any Landlord Indemnified Parties will be liable for consequential damages arising out of any loss of the use of the Premises or any equipment or facilities therein by Tenant or any Tenant Parties or for interference with light or other incorporeal hereditaments. Tenant agrees to give prompt notice to Landlord in case of fire or accidents in the Premises or the Building, or of defects therein or in the fixtures or equipment. (b) INDEMNIFICATION. Tenant will be liable for, and agrees, to the maximum extent permissible under applicable law, to promptly indemnify, protect, defend and hold harmless Landlord and all Landlord Indemnified Parties, from and against, any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs, including reasonable attorneys' fees and court costs (collectively, "Indemnified Claims"), arising or resulting from (i) any act or omission of Tenant or any Tenant Parties (as defined in Subparagraph 8(c) above), (ii) the use of the Premises and Common Areas and conduct of tenant's business by Tenant or any Tenant Parties, or any other activity, work or thing done, permitted or suffered by Tenant or any Tenant Parties, in or about the Premises, the Building or elsewhere within the Development; and/or (iii) any default by Tenant of any obligations on Tenant's part to be performed under the terms of this Lease with the exception of claims resulting from Landlord gross negligence. In case any action or proceeding is brought against Landlord or any Landlord Indemnified Parties by reason of any such Indemnified Claims, Tenant, upon notice from Landlord, agrees to promptly defend the same at Tenant's sole cost and expense by counsel approved in writing by Landlord, which approval Landlord will not unreasonably withhold. (c) SURVIVAL; NO RELEASE OF INSURERS. Tenant's indemnification obligations under Subparagraph 18(b) will survive the expiration or earlier termination of this Lease. Tenant's covenants, agreements and indemnification obligation in Subparagraphs 18(a) and 18(b) above, are not intended to and will not relieve any insurance carrier of its obligations under policies required to be carried by Tenant pursuant to the provisions of this Lease. 19. INSURANCE. (a) TENANT'S INSURANCE. On or before the earlier to occur of (i) the Commencement Date, or (ii) the date Tenant commences any work of any type in the Premises pursuant to this Lease (which may be prior to the Commencement Date), and continuing throughout the entire Term hereof and any other period of occupancy, Tenant agrees to keep in full force and effect, at its sole cost and expense, the following insurance: (i) "All Risks" property insurance including at least the following perils: fire and extended coverage, smoke damage, vandalism, malicious mischief, sprinkler leakage (including earthquake sprinkler leakage). This insurance policy must be upon all property owned by Tenant, for which Tenant is legally liable, or which is installed at Tenant's expense, and which is located in the Building including, without limitation, any Tenant Improvements which satisfy the foregoing qualification and any Alterations, and all furniture, fittings, installations, fixtures and any other personal property of Tenant, in an amount not less than the full replacement cost thereof. If there is a dispute as to full replacement cost, the decision of Landlord or any mortgagee of Landlord will be presumptive. (iii) Commercial General Liability Insurance or Comprehensive General Liability Insurance (on an occurrence form) insuring bodily injury, personal injury and property damage including the following divisions and extensions of coverage: Premises and Operations; Owners and Contractors protective; blanket contractual liability (including coverage for Tenant's indemnity obligations under this Lease); products and completed operations, liquor liability (if Tenant serves alcohol on the Premises); and fire damage legal liability in an amount equal to $50,000, including Tenant improvements, that are rented under the terms of this Lease. Such insurance must have the following minimum limits of liability: bodily injury, personal injury and property damage - $1,000,000 each occurrence, provided that if liability coverage is provided by a Commercial General Liability policy the general aggregate limit shall apply separately and in total to this location only (per location general aggregate), and provided further, such minimum limits of liability may be adjusted from year to year to reflect increases in coverages as recommended by Landlord's insurance carrier as being prudent and commercially reasonable for tenants of first class office buildings comparable to the Building, rounded to the nearest five hundred thousand dollars. (iv) Comprehensive Automobile Liability insuring bodily injury and property damage arising from all owned, non-owned and hired vehicles, if any, with minimum limits of liability of $1,000,000 per accident. (v) Worker's Compensation as required by the laws of the State with the following minimum limits of liability: Coverage A - statutory benefits; Coverage B - $1,000,000 per accident and disease. (vi) Any other form or forms of insurance as Tenant or Landlord or any mortgagees of Landlord may reasonably require from time to time in form, in amounts, and for insurance risks against which, a prudent tenant would protect itself, but only to the extent coverage for such risks and amounts are available in the insurance market at commercially acceptable rates. Landlord makes no representation that the limits of liability required to be carried by Tenant under the terms of this Lease are adequate to protect Tenant's interests and Tenant should obtain such additional insurance or increased liability limits as Tenant deems appropriate. (b) SUPPLEMENTAL TENANT INSURANCE REQUIREMENTS. (i) All policies must be in a form reasonably satisfactory to Landlord and issued by an insurer admitted to do business in the State. (ii) All policies must be issued by insurers with a policyholder rating of "A" and a financial rating of "X" in the most recent version of Best's Key Rating Guide. -9- 12 (iii) All policies must contain a requirement to notify Landlord (and Landlord's property manager and any mortgagees or ground lessors of Landlord who are named as additional insureds, if any) in writing not less than thirty (30) days prior to any material change, reduction in coverage, cancellation or other termination thereof. Tenant agrees to deliver to Landlord, as soon as practicable after placing the required insurance, but in any event within the time frame specified in Subparagraph 19(a) above, certificate(s) of insurance and/or if required by Landlord, certified copies of each policy evidencing the existence of such insurance and Tenant's compliance with the provisions of this Paragraph 19. Tenant agrees to cause replacement policies or certificates to be delivered to Landlord not less than thirty (30) days prior to the expiration of any such policy or policies. If any such initial or replacement policies or certificates are not furnished within the tune(s) specified herein, Tenant will be deemed to be in material default under this Lease without the benefit of any additional notice or cure period provided in Subparagraph 22(a)(iii) below, and Landlord will have the right, but not the obligation, to procure such insurance as Landlord deems necessary to protect Landlord's interests at Tenant's expense. If Landlord obtains any insurance that is the responsibility of Tenant under this Paragraph 19, Landlord agrees to deliver to Tenant a written statement setting forth the cost of any such insurance and showing in reasonable detail the manner in which it has been computed and Tenant agrees to promptly reimburse Landlord for such costs as additional rent. (iv) General Liability and Automobile Liability policies under Subparagraphs 19(a)(iii) and (iv) must name Landlord and Landlord's property manager (and at Landlord's request, Landlord's mortgagees and ground lessors of which Tenant has been informed in writing) as additional insureds and must also contain a provision that the insurance afforded by such policy is primary insurance and any insurance carried by Landlord and Landlord's property manager or Landlord's mortgagees or ground lessors, if any, will be excess over and non-contributing with Tenant's insurance. (c) TENANT'S USE. Tenant will not keep, use, sell or offer for sale in or upon the Premises any article which may be prohibited by any insurance policy periodically in force covering the Building or the Development Common Areas. If Tenant's occupancy or business in, or on, the Premises, whether or not Landlord has consented to the same, results in any increase in premiums for the insurance periodically carried by Landlord with respect to the Building or the Development Common Areas or results in the need for Landlord to maintain special or additional insurance, Tenant agrees to pay Landlord the cost of any such increase in premiums or special or additional coverage as additional rent within ten (10) days after being billed therefor by Landlord. In determining whether increased premiums are a result of Tenant's use of the Premises, a schedule issued by the organization computing the insurance rate on the Building, the Development Common Areas or the Tenant Improvements showing the various components of such rate, will be conclusive evidence of the several items and charges which make up such rate. Tenant agrees to promptly comply with all reasonable requirements of the insurance authority or any present or future insurer relating to the Premises. (d) CANCELLATION OF LANDLORD'S POLICIES. If any of Landlord's insurance policies are cancelled or cancellation is threatened or the coverage reduced or threatened to be reduced in any way because of the use of the Premises or any part thereof by Tenant or any assignee or subtenant of Tenant or by anyone Tenant permits on the Premises and, if tenant fails to remedy the condition giving rise to such cancellation, threatened cancellation, reduction of coverage, threatened reduction of coverage, increase in premiums, or threatened increase in premiums, within forty-eight (48) hours after notice thereof, Tenant will be deemed to be in material default of this Lease and Landlord may, at its option, either terminate this Lease or enter upon the Premises and attempt to remedy such condition, and Tenant shall promptly pay Landlord the reasonable costs of such remedy as additional rent. If Landlord is unable, or elects not to remedy such condition, then Landlord will have all of the remedies provided for in this Lease in the event of a default by Tenant. (e) WAIVER OF SUBROGATION. Tenant's property insurance shall contain a clause whereby the insurer waives all rights of recovery by way of subrogation against Landlord. Tenant shall also obtain and furnish evidence to Landlord of the waiver by Tenant's worker's compensation insurance carrier of all rights of recovery by way of subrogation against Landlord. Notwithstanding any provisions of this Lease to the contrary, whenever (a) any loss, cost, damage or expense relating to personal property (excluding personal injuries or death) resulting from fire, explosion or any other casualty is incurred by either Landlord or by Tenant or by anyone claiming by, through or under Landlord or Tenant in connection with the Premises or the building, and (b) such party is covered in whole or in part by insurance with respect to such loss, cost, damage or expense or is required under this Lease to be so insured, then the party so insured (or so required) hereby waives (on its own behalf and on behalf of its insurer) any claims against and releases the other party from any liability said other party may have on account of such loss, cost, damage or expense. 20. DAMAGE OR DESTRUCTION. (a) PARTIAL DESTRUCTION. If the Premises or the building are damaged by fire or other casualty to an extent not exceeding twenty-five percent (25%) of the full replacement cost thereof, and Landlord's contractor reasonably estimates in a writing delivered to Landlord and Tenant that the damage thereto may be repaired, reconstructed or restored to substantially its condition immediately prior to such damage within one hundred eighty (180) days from the date of such casualty, and Landlord will receive insurance proceeds sufficient to cover the costs of such repairs, reconstruction and restoration (including proceeds from Tenant and/or Tenant's insurance which Tenant is required to deliver to Landlord pursuant to Subparagraph 20(3) below to cover Tenant's obligation for the costs of repair, reconstruction and restoration of any portion of the Tenant improvements and any Alterations for which Tenant is responsible under this lease), then Landlord agrees to commence and proceed diligently with the work of repair, reconstruction and restoration and this Lease will continue in full force and effect. (b) SUBSTANTIAL DESTRUCTION. Any damage or destruction to the Premises or the Building which Landlord is not obligated to repair pursuant to Subparagraph 20(a) above will be deemed a substantial destruction. In the event of a substantial destruction Landlord may elect to either (i) repair, reconstruct and restore the portion of the Building or the Premises damaged by such casualty, in which case this Lease will continue in full force and effect, subject to Tenant's termination right contained in Subparagraph 20(d) below; or (ii) terminate this Lease effective as of the date which is thirty (30) days after Tenant's receipt of Landlord's election to so terminate. (c) NOTICE. Under any of the conditions of Subparagraph 20(a) or (b) above, Landlord agrees to give written notice to Tenant of its intention to repair or terminate, as permitted in such paragraphs, within the earlier of sixty (60) days after the occurrence of such casualty, or fifteen (15) days after Landlord's receipt of the estimate from Landlord's contractor (the applicable time period to be referred to herein as the "Notice Period"). (d) TENANT'S TERMINATION RIGHTS. If Landlord elects to repair, reconstruct and restore pursuant to Subparagraph 20(b)(i) hereinabove, and if Landlord's contractor estimates that as a result of such damage, Tenant cannot be given reasonable use of and access to the Premises within three hundred sixty-five (365) days after the date of such damage, then Tenant may terminate this Lease effective upon delivery of written notice to Landlord within ten (10) days after Landlord delivers notice to Tenant of its election to so repair, reconstruct or restore. -10- 13 (e) TENANT'S COSTS AND INSURANCE PROCEEDS. In the event of any damage or destruction of all or any part of the Premises, Tenant agrees to immediately (i) notify Landlord thereof, and (ii) deliver to Landlord all property insurance proceeds received by Tenant with respect to any Tenant Improvements installed by or at the cost of Tenant and any Alterations, but excluding proceeds for Tenant's furniture, fixtures, equipment and other personal property, whether or not this Lease is terminated as permitted in this Paragraph 20, and Tenant hereby assigns to Landlord all rights to receive such insurance proceeds. If, for any reason (including Tenant's failure to obtain insurance for the full replacement cost of any Tenant Improvements installed by or at the cost of Tenant and any Alterations from any and all casualties), Tenant fails to receive insurance proceeds covering the full replacement cost of any Tenant Improvements installed by or at the cost of Tenant and any Alterations which are damaged, Tenant will be deemed to have self-insured the replacement cost of such items, and upon any damage or destruction thereto. Tenant agrees to immediately pay to Landlord the full replacement cost of such items, less any insurance proceeds actually received by Landlord from Landlord's or Tenant's insurance with respect to such items. (f) ABATEMENT OF RENT. In the event of any damage, repair, reconstruction and/or restoration described in this Paragraph 20, rent will be abated or reduced, as the case may be, from the date of such casualty, in proportion to the degree to which Tenant's use of the Premises is impaired during such period or repair until such use is restored. Except for abatement of rent as provided hereinabove, Tenant will not be entitled to any compensation or damages for loss of, or interference with, Tenant's business or use of all or any part of the Premises or for lost profits or any other consequential damages of any kind or nature, which result from any such damage, repair, reconstruction or restoration. (g) INABILITY TO COMPLETE. Notwithstanding anything to the contrary contained in this Paragraph 20, if Landlord is obligated or elects to repair, reconstruct and/or restore the damaged portion of the Building of the Premises pursuant to Subparagraph 20(a) or 20(b)(i) above, but is delayed from completing such repair, reconstruction and/or restoration beyond the date which is one hundred eighty (180) days after the date estimated by Landlord's contractor for completion thereof by reason of any causes (other than delays caused by Tenant, its subtenants, employees, agents or contractors) which are beyond the reasonable control of Landlord as described in Paragraph 33, then either Landlord or Tenant may elect to terminate this Lease upon ten (10) days prior written notice given to the other after the expiration of such one hundred eighty (180) day period. (h) DAMAGE NEAR END OF TERM. Landlord and Tenant shall each have the right to terminate this Lease if any damage to the Premises of the Building occurs during the last twelve (12) months of the Term of this Lease where Landlord's contractor estimates in a writing delivered to Landlord and Tenant that the repair, reconstruction or restoration of such damage cannot be completed within sixty (60) days after the date of such casualty. If either party desires to terminate this Lease under this Subparagraph (h), it shall provide written notice to the other party of such election within ten (10) days after receipt of Landlord's contractor's repair estimates. (i) WAIVER OF TERMINATION RIGHTS. Landlord and Tenant agree that the foregoing provisions of this Paragraph 20 are to govern their respective rights and obligations in the event of any damage or destruction and supersede and are in lieu of the provisions of any applicable law, statute, ordinance, rule, regulation, order of ruling now or hereafter in force which provide remedies for damage or destruction of leased premises (including, without limitation, to the extent the Premises are located in California, the provisions of California Civil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 and any successor statute or laws of a similar nature). (j) TERMINATION. Upon any termination of this Lease under any of the provisions of this Paragraph 20, the parties will be released without further obligation to the other from the date possession of the Premises is surrendered to Landlord except for items which have accrued and are unpaid as of the date of termination and matters which are to survive any termination of this Lease as provided in this Lease. 21. EMINENT DOMAIN. (a) SUBSTANTIAL TAKING. If the whole of the Premises, or such part thereof as shall substantially interfere with Tenant's use and occupancy of the Premises, as contemplated by this Lease, is taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, either party will have the right to terminate this Lease effective as of the date possession is required to be surrendered to such authority. (b) PARTIAL TAKING; ABATEMENT OF RENT. In the event of a taking of a portion of the Premises which does not substantially interfere with Tenant's use and occupancy of the Premises, then, neither party will have the right to terminate this Lease and Landlord will thereafter proceed to make a functional unit of the remaining portion of the Premises (but only to the extent Landlord receives proceeds therefor from the condemning authority), and rent will be abated with respect to the part of the Premises which Tenant is deprived of on account of such taking. Notwithstanding the immediately preceding sentence to the contrary, if any part of the Building or the Development is taken (whether or not such taking substantially interferes with Tenant's use of the Premises), Landlord may terminate this Lease upon thirty (30) days prior written notice to Tenant if Landlord also terminates the leases of the other tenants of the Building which are leasing comparably sized space for comparable lease terms. (c) CONDEMNATION AWARD. In connection with any taking of the Premises or the Building, Landlord will be entitled to receive the entire amount of any award which may be made or given in such taking or condemnation, without deduction or apportionment for any estate or interest of Tenant, it being expressly understood and agreed by Tenant that no portion of any such award will be allowed or paid to Tenant for any so-called bonus or excess value of this Lease, and such bonus or excess value will be the sole property of Landlord. Tenant agrees not to assert any claim against Landlord or the taking authority for any compensation because of such taking (including any claim for bonus or excess value of this Lease); provided, however, if any portion of the Premises is taken, Tenant will have the right to recover from the condemning authority (but not from Landlord) and compensation as may be separately awarded or recoverable by Tenant for the taking of Tenant's furniture, fixtures, equipment and other personal property within the Premises, for Tenant's relocation expenses, and for any loss of goodwill or other damage to Tenant's business by reason of such taking. (d) TEMPORARY TAKING. In the event of taking of the Premises or any part thereof for temporary use, (i) this Lease will remain unaffected thereby and rent will not abate, and (ii) Tenant will be entitled to receive such portion or portions of any award made for -11- 14 such use with respect to the period of the taking which is within the Term, provided that if such taking remains in force at the expiration or earlier termination of this Lease, Tenant will then pay to Landlord a sum equal to the reasonable cost of performing Tenant's obligations under Paragraph 11 with respect to surrender of the Premises and upon such payment Tenant will be excused from such obligations. For purpose of this Subparagraph 21(d), a temporary taking shall be defined as a taking for a period of ninety (90) days or less. 22. DEFAULTS AND REMEDIES. (a) DEFAULTS. The occurrence of any one or more of the following events will be deemed a default by Tenant. (i) The abandonment of the Premises by Tenant, which for purposes of this Lease means any absence by Tenant from the Premises for five (5) business days or longer while in default of any other material provision of this Lease and, with respect to ground floor space only, any vacation of the Premises, which for purposes of this Lease means any absence by Tenant from the Premises for thirty (30) days or longer whether or not Tenant is in default under any provision of this Lease. (ii) The failure by Tenant to make any payment of rent or additional rent or any other payment required to be made by a Tenant hereunder, as and when due, where such failure continues for a period of three (3) days after written notice thereof from Landlord to Tenant; provided, however, that any such notice will be in lieu of, and not in addition to, any notice required under applicable law (including, without limitation, to the extent the Premises are located in California, the provisions of California Code of Civil Procedure Section 1161 regarding unlawful detainer actions or any successor statute or law of a similar nature). (iii) The failure by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in Subparagraph 22(a)(i) or (ii) above, where such failure continues for a period of ten (10) days after written notice thereof from Landlord to Tenant. The provisions of any such notice will be in lieu of, and not in addition to, any notice required under applicable law (including, without limitation, to the extent the Premises are located in California, California Code of Civil Procedure Section 1161 regarding unlawful detainer actions and any successor statute or similar law). If the nature of Tenant's default is such that more than ten (10) days are reasonably required for its cure, then Tenant will not be deemed to be in default if Tenant, with Landlord's concurrence, commences with cure within such ten (10) day period and thereafter diligently prosecutes such cure to completion. (iv) (A) The making by Tenant of any general assignment for the benefit of creditors; (B) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (C) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or (D) the attachment, executive or other such judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in the Lease where such seizure is not discharged within thirty (30) days. (b) LANDLORD'S REMEDIES; TERMINATION. In the event of any default by Tenant, in addition to any other remedies available to Landlord at law or in equity under applicable law (including, without limitation, to the extent the Premises are located in California, the remedies of Civil Code Section 1951.4 and any successor statute or similar law), Landlord will have the immediate right and option to terminate this Lease and all rights of Tenant hereunder. If Landlord elects to terminate this Lease then, to the extent permitted under applicable law, Landlord may recover from Tenant (i) The worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rent loss that Tenant proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of such rent loss that Tenant proves could be reasonably avoided; plus (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which, in the ordinary course of things, results therefrom including, but not limited to: reasonable attorneys' fees and costs; broker's commissions; the costs of refurbishment, alterations, renovation and repair of the Premises, and removal (including the repair of any damage caused by such removal) and storage (or disposal) of Tenant's personal property, equipment, fixtures, Alterations, the Tenant Improvements and any other items which Tenant is required under this Lease to remove but does not remove, as well as the unamortized value of any free rent, reduced rent, free parking, reduced rate parking and any Tenant Improvement Allowance or other costs or economic concessions provided, paid, granted or incurred by Landlord pursuant to this Lease. The unamortized value of such concessions shall be determined by taking the total value of such concessions and multiplying such value by a fraction, the numerator of which is the number of months of the Lease Term not yet elapsed as of the date on which the Lease is terminated, and the denominator of which is the total number of months of the Lease Term. As used in Subparagraphs 22(b)(i) and (ii) above, the "worth at the time of award" is computed by allowing interest at the Interest Rate. As used in Subparagraph 22(b)(iii) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (c) LANDLORD'S REMEDIES; RE-ENTRY RIGHTS. In the event of any default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord will also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere and/or disposed of at the sole cost and expense of and for the account of Tenant in accordance with the provisions of Subparagraph 13(h) of this Lease or any other procedures permitted by applicable law. No re-entry or taking possession of the Premises by Landlord pursuant to this Subparagraph 22(c) will be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. (d) LANDLORD'S REMEDIES; RE-LETTING. In the event of the vacation or abandonment of the Premises by Tenant or in the event that Landlord elects to re-enter the Premises or takes possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease, Landlord may from time to time, without terminating this Lease, either recover all rent as it becomes due or relet the Premises or any part thereof on terms and conditions as Landlord in its sole and absolute discretion may deem advisable with the right to make alterations and repairs to the Premises in connection with -12- 15 such reletting. If Landlord elects to relet the Premises, then rents received by Landlord from such reletting will be applied first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any cost of such reletting; third, to the payment of the cost of any alterations and repairs to the Premises incurred in connection with such reletting, forth, to the payment of rent due and unpaid hereunder and the residue, if any, will be held by Landlord and applied to payment of future rent as the same may become due and payable hereunder. Should that portion of such rents received from such reletting during any month, which is applied to the payment of rent hereunder, be less than the rent payable during that month by Tenant hereunder, then Tenant agrees to pay such deficiency to Landlord immediately upon demand therefor by Landlord. Such deficiency will be calculated and paid monthly. (e) LANDLORD'S REMEDIES; PERFORMANCE FOR TENANT. All covenants and agreements to be performed by Tenant under any of the terms of this Lease are to be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. If Tenant fails to pay any sum of money owed to any party other than Landlord, for which it is liable under this Lease, or if Tenant fails to perform any other act on its part to be performed hereunder, and such failure continues for ten (10) days after notice thereof by Landlord, Landlord may, without waiving or releasing Tenant from its obligations, but shall not be obligated to make any such payment or perform any such other act to be made or performed by Tenant. Tenant agrees to reimburse Landlord upon demand for all sums so paid by Landlord and all necessary incidental costs, together with interest thereon at the Interest Rate, from the date of such payment by Landlord until reimbursed by Tenant. This remedy shall be in addition to any other right or remedy of Landlord set forth in this Paragraph 22. (f) LATE PAYMENT. If Tenant fails to pay any installment of rent within five (5) days of when due or if Tenant fails to make any other payment for which Tenant is obligated under this Lease within (5) days of when due, such late amount will accrue interest at the Interest Rate and Tenant agrees to pay Landlord as additional rent such interest in such amount from the date such amount becomes due until such amount is paid. In addition, Tenant agrees to pay to Landlord concurrently with such late payment amount, as additional rent, a late charge equal to five percent (5%) of the amount due to compensate Landlord for the extra costs Landlord will incur as a result of such late payment. The parties agree that (i) it would be impractical and extremely difficult to fix the actual damage Landlord will suffer in the event of Tenant's late payment, (ii) such interest and late charge represents a fair and reasonable estimate of the detriment that Landlord will suffer by reason of late payment by Tenant, and (iii) the payment of interest and late charges are distinct and separate in that the payment of interest is to compensate Landlord for the use of Landlord's money by Tenant, while the payment of late charges is to compensate Landlord for Landlord's processing, administrative and other costs incurred by Landlord as a result of Tenant's delinquent payments. Acceptance of any such interest and late charge will not constitute a waiver of the Tenant's default with respect to the overdue amount, or prevent landlord from exercising any of the other rights and remedies available to Landlord. If Tenant incurs a late charge more than three (3) times in any period of twelve (12) months during the Lease Term, then, notwithstanding that Tenant cures the late payments for which such late charges are imposed, Landlord will have the right to require Tenant thereafter to pay all installments of Monthly Base Rent quarterly in advance throughout the remainder of the Lease Term. (g) LANDLORD'S SECURITY INTEREST. Subject to Tenant's equipment leasing and rights associated with bank loans, Tenant hereby grants to Landlord a lien and security interest on all property of Tenant now or hereafter placed in or upon the Premises including, but not limited to, all fixtures, machinery, equipment, furnishings and other articles of personal property, and all proceeds of the sale or other disposition of such property (collectively, the "Collateral") to secure the payment of all rent to be paid by Tenant pursuant to this Lease. Such lien and security interest shall be in addition to any landlord's lien provided by law. This Lease shall constitute a security agreement under the Commercial Code of the State so that Landlord shall have and may enforce a security interest in the Collateral. Tenant agrees to execute as debtor and deliver such financing statement or statements and any further documents as Landlord may now or hereafter reasonably request to protect such security interest pursuant to such code. Landlord may also at any time file a copy of this Lease as a financing statement. Landlord, as secured party, shall be entitled to all rights and remedies afforded as secured party under such code, which rights and remedies shall be in addition to Landlord's liens and rights provided by law or by the other terms and provisions of this Lease. (h) RIGHTS AND REMEDIES CUMULATIVE. All rights, options, and remedies of Landlord contained in this Lease will be construed and held to be cumulative, and no one of them will be exclusive of the other, and landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law or in equity, whether or not stated in this Lease. Nothing in this Paragraph 22 will be deemed to limit or otherwise effect Tenant's indemnification of Landlord pursuant to any provision of this Lease. 23. LANDLORD'S DEFAULT. Landlord will not be in default in the performance of any obligation required to be performed by Landlord under this Lease unless Landlord fails to perform such obligation within thirty (30) days after the receipt of written notice from Tenant specifying in detail Landlord's failure to perform, provided however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance, then Landlord will not be deemed in default if it commences such performance within such thirty (30) day period and thereafter diligently pursues the same to completion. Upon any default by Landlord, Tenant may exercise any of its rights provided at law or in equity, subject to the limitations on liability set forth in Paragraph 35 of this Lease. 24. ASSIGNMENT AND SUBLETTING. (a) RESTRICTION ON TRANSFER. Except as expressly provided in this Paragraph 24, Tenant will not, either voluntarily or by operation of law, assign or encumber this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use of occupancy of the Premises by any party other than Tenant (any such assignment, incumbrance, sublease or the like will sometimes be referred to as a "Transfer"), without the prior written consent of Landlord, which consent Landlord will not unreasonably withhold. (b) CORPORATE AND PARTNERSHIP TRANSFERS. For purposes of this Paragraph 24, if Tenant is a corporation, partnership or other entity, any transfer, assignment, encumbrance or hypothecation of thirty-four percent (34%) or more (individually or in the aggregate) of any stock or other ownership interest in such entity, and/or any transfer, assignment, hypothecation or encumbrance of any controlling ownership or voting interest in such entity, will be deemed a Transfer and will be subject to all of the restrictions and provisions contained in this Paragraph 24. Notwithstanding the foregoing, the immediately preceding sentence will not apply to -13- 16 any transfers of stock of Tenant if Tenant is a publicly-held corporation and such stock is transferred publicly over a recognized security exchange or over-the-counter market. (c) PERMITTED CONTROLLED TRANSFERS. Notwithstanding the provisions of this Paragraph 24 to the contrary, Tenant may assign this Lease or sublet the Premises or any portion thereof ("Permitted Transfer"), without Landlord's consent and without extending any sublease termination option to Landlord, to any parent, subsidiary or affiliate corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern, provided that: (i) at least twenty (20) days prior to such assignment or sublease, Tenant delivers to Landlord the financial statements and other financial and background information of the assignee or sublessee described in Subparagraph 24(d) below; (ii) if an assignment, the assignee assumes, in full, the obligations of Tenant under this Lease (or if a sublease, the sublessee of a portion of the Premises or Term assumes, in full, the obligations of Tenant with respect to such portion); (iii) the financial net worth of the assignee or sublessee as of the time of the proposed assignment or sublease equals or exceeds that of Tenant as of the date of execution of this Lease; (iv) Tenant remains fully liable under this Lease; and (v) the use of the Premises under Paragraph 8 remains unchanged. (d) TRANSFER NOTICE. If Tenant desires to effect a Transfer, then at least thirty (30) days prior to the date when Tenant desires the Transfer to be effective (the "Transfer Date"), Tenant agrees to give Landlord a notice (the "Transfer Notice"), stating the name, address and business of the proposed assignee, sublessee or other transferee (sometimes referred to hereinafter as "Transferee"), reasonable information (including references) concerning the character, ownership, and financial condition of the proposed Transferee, the Transfer Date, any ownership or commercial relationship between Tenant and the proposed Transferee, and the consideration and all other material terms and conditions of the proposed Transfer, all in such detail as Landlord may reasonably require. If Landlord reasonably requests additional detail, the Transfer Notice will not be deemed to have been received until Landlord receives such additional detail, and Landlord may withhold consent to any Transfer until such information is provided to it. (e) LANDLORD'S OPTIONS. Within fifteen (15) days of Landlord's receipt of any Transfer Notice, and any additional information requested by Landlord concerning the proposed Transferee's financial responsibility, Landlord will elect to do one of the following (i) consent to the proposed Transfer, (ii) refuse such consent, which refusal shall be on reasonable grounds including, without limitation those set forth in Subparagraph 24(f) below, or (iii) terminate this Lease as to all or such portion of the Premises which is proposed to be sublet or assigned and recapture all or such portion of the Premises for reletting by Landlord transfers involving twenty-five percent (25%) or less of the Premises. (f) REASONABLE DISAPPROVAL. Landlord and Tenant hereby acknowledge that Landlord's disapproval of any proposed Transfer pursuant to Subparagraph 24(e) will be deemed reasonably withheld if based upon any reasonable factor, including, without limitation, any or all of the following factors: (i) if the Building is less than eighty percent (80%) occupied, if the net effective rent payable by the Transferee (adjusted on a rentable square foot basis) is less than the net effective rent then being quoted by Landlord for new leases in the Building for comparable size space for a comparable period of time; (ii) the proposed-Transferee is a governmental entity; (iii) the portion of the Premises to be sublet or assigned is irregular in shape with inadequate means of ingress and egress; (iv) the use of the Premises by the Transferee (A) is not permitted by the use provisions in Paragraph 8 hereof, (B) violates any exclusive use granted by Landlord to another tenant in the Building, or (C) otherwise poses a risk of increased liability to Landlord; (v) the Transfer would likely result in a significant and inappropriate increase in the use of the parking areas or Development Common Areas by the Transferee's employees or visitors, and/or significantly increase the demand upon utilities and services to be provided by Landlord to the Premises; (vi) the Transferee does not have the financial capability to fulfill the obligations imposed by the Transfer and this Lease; (vii) the Transferee is not in Landlords' reasonable opinion consistent with Landlord's desired tenant mix; or (viii) the Transferee poses a business or other economic risk which Landlord deems unacceptable. (g) ADDITIONAL CONDITIONS. A condition to Landlord's consent to any Transfer of this Lease will be the delivery to Landlord of a true copy of the fully executed instrument of assignment, sublease, transfer or hypothecation, and, in the case of an assignment, the delivery to Landlord of an agreement executed by the Transferee in form and substance reasonably satisfactory to Landlord, whereby the Transferee assumes and agrees to be bound by all of the terms and provisions of this Lease and to perform all of the obligations of Tenant hereunder. As a condition for granting its consent to any assignment or sublease, Landlord may require that the assignee or sublessee remit directly to Landlord on a monthly basis, all monies due to Tenant by said assignee or sublessee. As a condition to Landlord's consent to any sublease, such sublease must provide that it is subject and subordinate to this Lease and to all mortgages; that landlord may enforce the provisions of the sublease, including collection of rent; that in the event of termination of this Lease for any reason, including without limitation a voluntary surrender by Tenant, or in the event of any reentry or repossession of the Premises by Landlord, Landlord may, at is option, either (i) terminate the sublease, or (ii) take over all of the right, title and interest of Tenant, as sublessor, under such sublease, in which case such sublessee will attorn to Landlord, but that nevertheless Landlord will not (1) be liable for any previous act or omission of Tenant under such sublease, (2) be subject to any defense or offset previously accrued in favor of the sublessee against Tenant, or (3) be bound by any previous modification of any sublease made without Landlord's written consent, or by any previous prepayment by sublessee of more than one month's rent. (h) EXCESS RENT. If Landlord consents to any assignment of this Lease, Tenant agrees to pay to Landlord, as additional rent, fifty percent (50%) of all sums and other consideration payable to and for the benefit of Tenant by the assignee on account of the assignment, as and when such sums and other consideration are due and payable by the assignee to or for the benefit of Tenant (or, if Landlord so requires, and without any release of Tenant's liability for the same, Tenant agrees to instruct the assignee to pay such sums and other consideration directly to Landlord). If for any sublease, Tenant receives rent or other consideration, either initially or over the term of the sublease, in excess of the rent fairly allocable to the portion of the Premises which is subleased based on square footage. Tenant agrees to pay to Landlord as additional rent fifty percent (50%) of the excess of each such payment of rent or other consideration received by Tenant promptly after its receipt. In calculating excess rent or other consideration which may be payable to Landlord under this paragraph, Tenant will be entitled to deduct commercially reasonable third party brokerage commissions and attorneys' fees and other amounts reasonably and actually expended by Tenant in connection with such assignment or subletting if acceptable written evidence of such expenditures is provided to Landlord. (i) TERMINATION RIGHTS. If Tenant requests Landlord's consent to any assignment or subletting of all or a portion of the Premises, Landlord will have the right, as provided in Subparagraph 24(e), to terminate this Lease as to all or such portion of the Premises which is proposed to be sublet or assigned effective as of the date Tenant proposes to sublet or assign all or less than all of -14- 17 the Premises. Landlord's right to terminate this Lease as to less than all of the Premises proposed to be sublet or assigned will not terminate as to any future additional subletting or assignment as a result of Landlord's consent to a subletting of less than all of the Premises or Landlord's failure to exercise its termination right with respect to any subletting or assignment. Landlord will exercise such termination right, if at all, by giving written notice to Tenant within thirty (30) days of receipt by Landlord of the financial responsibility information required by this Paragraph 24. Tenant understands and acknowledges that the option, as provided in this Paragraph 24, to terminate this Lease as to all or such portion of the Premises which is proposed to be sublet or assigned rather than approve the subletting or assignment of all or a portion of the Premises, is a material inducement for Landlord's agreeing to lease the Premises to Tenant upon the terms and conditions herein set forth. In the event of any such termination with respect to less than all of the Premises, the cost of segregating the recaptured space from the balance of the Premises will be paid by Tenant and Tenant's future monetary obligations under this Lease will be reduced proportionately on a square footage basis to correspond to the balance of the Premises which Tenant continues to lease. (j) NO RELEASE. No Transfer will release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder. Landlord may require that any Transferee remit directly to Landlord on a monthly basis, all monies due Tenant by said Transferee. However, the acceptance of rent by Landlord from any other person will not be deemed to be a waiver by Landlord of any provisions hereof. Consent by Landlord to one Transfer will not be deemed consent to any subsequent Transfer. In the event of default by any Transferee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such Transferee or successor. Landlord may consent to subsequent assignments of this Lease or sublettings or amendments or modifications to this Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and any such actions will not relieve tenant of liability under this Lease. (k) ADMINISTRATIVE AND ATTORNEYS' FEES. If Tenant effects a transfer or requests the consent of Landlord to any Transfer (whether or not such Transfer is consummated), then, upon demand, Tenant agrees to pay Landlord a non-refundable administrative fee of Two Hundred Fifty Dollars ($250.00), plus any reasonable attorneys' and paralegal fees incurred by Landlord in connection with such Transfer or request for consent (whether attributable to Landlord's in-house attorneys or paralegals or otherwise) not to exceed One Hundred Dollars ($100.00) for each one thousand (1,000) rentable square feet of area contained within the Premises or portion thereof to be assigned or sublet. Acceptance of the Two Hundred Fifty Dollar ($250.00) administrative fee and/or reimbursement of Landlord's attorneys' and paralegal fees will in no event obligate Landlord to consent to any proposed Transfer or the premises shall not exceed $100.00. 25. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any mortgagee or beneficiary with a deed of trust encumbering the Building and/or the Development, or any lessor of a ground or underlying lease with respect to the Building, this Lease will be subject and subordinate at all times to: (i) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Building; and (ii) the lien of any mortgage or deed of trust which may now exist or hereafter be executed for which the Building, the Development or any leases thereof, or Landlord's interest and estate in any of said items, is specified as security. Notwithstanding the foregoing, Landlord reserves the right to subordinate any such ground leases or underlying leases or any such liens to this Lease. If any such ground lease or underlying lease terminates for any reason or any such mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, at the election of Landlord's successor in interest, Tenant agrees to attorn to and become the tenant of such successor in which event Tenant's right to possession of the Premises will not be disturbed as long as Tenant is not in default under this Lease. Tenant hereby waives its rights under any law which gives or purports to give Tenant any right to terminate or otherwise adversely affect this Lease and the obligations of Tenant hereunder in the event of any such foreclosure proceeding or sale. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form reasonably required by Landlord, any additional documents evidencing the priority or subordination of this Lease and Tenant's attornment agreement with respect to any such ground lease or underlying leases or the lien of any such mortgage or deed of trust. If Tenant fails to sign and return any such documents within ten (10) days of receipt, Tenant will be in default hereunder. 26. ESTOPPEL CERTIFICATE. (a) TENANT'S OBLIGATIONS. Within ten (10) days following any written request which Landlord may make from time to time, Tenant agrees to execute and deliver to Landlord a statement, in a form substantially similar to the form of Exhibit "G" attached hereto or as may reasonably be required by Landlord's lender, certifying: (i) the date of commencement of this Lease; (ii) the fact that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, and stating the date and nature of such modifications); (iii) the date to which the rent and other sums payable under this Lease have been paid; (iv) that there are no current defaults under this Lease by either Landlord or Tenant except as specified in Tenant's statement; and (v) such other matters reasonably requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph 26 may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or any interest therein. (b) TENANT'S FAILURE TO DELIVER. Tenant's failure to deliver such statement within such time will be conclusive upon Tenant (i) that this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) that there are no uncured defaults in Landlord's performance, and (iii) that not more than one (1) month's rent has been paid in advance. Without limiting the foregoing, if Tenant fails to deliver any such statement within such ten (10) day period, Landlord may deliver to Tenant an additional request for such statement and Tenant's failure to deliver such statement to Landlord within ten (10) days after delivery of such additional request will constitute a default under this Lease. Tenant agrees to indemnify and protect Landlord from and against any and all claims, damages, losses, liabilities and expenses (including attorneys' fees and costs) attributable to any failure by Tenant to timely deliver any such estoppel certificate to Landlord as required by this Paragraph 26. 27. BUILDING PLANNING. If Landlord requires the Premises for use in conjunction with another suite or for other reasons connected with the planning program for the Building, Landlord will have the right, upon sixty (60) days prior written notice to Tenant, to move Tenant to other space in the Building of substantially similar size as the Premises, and with tenant improvements of substantially similar age, quality and layout as then existing in the Premises. Any such relocation will be at Landlord's cost and expense, including the cost of providing such substantially similar tenant improvements (but not any furniture or personal property) and Tenant's reasonable moving, telephone installation and stationery reprinting costs. If Landlord so relocates Tenant, the terms -15- 18 and conditions of this Lease will remain in full force and effect and apply to the new space, except that (a) a revised Exhibit "A-II" will become part of this Lease and will reflect the location of the new space, (b) Paragraph 1 of this Lease will be amended to include and state all correct data as to the new space, (c) the new space will thereafter be deemed to be on the "Premises" and (d) all economic terms and conditions (e.g. rent, total Operating Expense Allowance, etc.) will be adjusted to on a per square foot basis based on the total number of rentable square feet of area contained in the new space. Landlord and Tenant agree to cooperate fully with one another in order to minimize the inconvenience of Tenant resulting from any such relocation. However, if the new space does not meet with Tenant's reasonable approval, Tenant will have the right to cancel this Lease upon giving Landlord thirty (30) days notice within ten (10) days following receipt of Tenant's cancellation notice to rescind Landlord's relocation notice, in which event Landlord's relocation notice will be rescinded, Tenant's cancellation notice will be cancelled and this Lease will remain in full force and effect. If Tenant cancels this Lease pursuant to this Paragraph 27, Tenant agrees to vacate the Building and the Premises within thirty (30) days of its delivery to Landlord of the notice of cancellation. 28. RULES AND REGULATIONS. Tenant agrees to faithfully observe and comply with the "Rules and Regulations," a copy of which is attached hereto and incorporated herein by this reference as Exhibit "H," and all reasonable and nondiscriminatory modifications thereof and additions thereto from time to time put into effect by Landlord. Landlord will not be responsible to Tenant for the violation or non-performance by any other tenant or occupant of the Building of any of the Rules and Regulations. 29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS. (a) MODIFICATIONS. If, in connection with Landlord's obtaining or entering into any financing or ground lease for any portion of the Building or the Development, the lender or ground lessor requests modifications to this Lease, Tenant, within ten (10) days after request therefor, agrees to execute an amendment to this Lease incorporating such modifications, provided such modifications are reasonable and do not increase the obligations of Tenant under this Lease or adversely affect the leasehold estate created by this Lease. (b) CURE RIGHTS. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgage covering the Premises or ground lessor of Landlord whose address has been furnished to Tenant, and Tenant agrees to offer such beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the default (including with respect to any such beneficiary or mortgagee, time to obtain possession of the Premises, subject to this Lease and Tenant's rights hereunder, by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure). 30. DEFINITION OF LANDLORD. The term "Landlord," as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, means and includes only the owner or owners, at the time in question, of the fee title of the Premises or the lessees under any ground lease, if any. In the event of any transfer, assignment or other conveyance or transfers of any such title (other than a transfer for security purposes only), Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) will be automatically relieved from and after the date of such transfer, assignment or conveyance of all the liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed, so long as the transferee assumes in writing all such covenants and obligations of Landlord arising after the date of such transfer. Landlord and Landlord's transferees and assignees have the absolute right to transfer all or any portion of their respective title and interest in the Development, the Building, the Premises and/or this Lease without the consent of Tenant, and such transfer or subsequent transfer will not be deemed a violation on Landlord's part of any of the terms and conditions of this Lease. 31. WAIVER. The waiver by either party of any breach of any term, covenant or condition herein contained will not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition herein contained, nor will any custom or practice which may develop between the parties in the administration of the terms hereof be deemed a waiver of or in any way affect the right of either party to insist upon performance in strict accordance with said terms. The subsequent acceptance of rent or any other payment hereunder by Landlord will not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No acceptance by Landlord of a lesser sum than the basic rent and additional rent or other sum then due will be deemed to be other than on account of the earliest installment of such rent or other amount due, nor will any endorsement or statement on any check or any letter accompanying any check be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or other amount or pursue any other remedy provided in this Lease. The consent or approval of Landlord to or of any act by Tenant requiring Landlord's consent or approval will not be deemed to waive or render unnecessary Landlord's consent or approval to or any of subsequent similar acts by Tenant. 32. PARKING. (a) GRANT OF PARKING RIGHTS. So long as this Lease is in effect and provided Tenant is not in default hereunder, Landlord grants to Tenant and Tenant's Authorized Users (as defined below) a license to use the number and type of parking spaces designated in Subparagraph 1(s) subject to the terms and conditions of this Paragraph 32 and the Rules and Regulations regarding parking contained in Exhibit "H" attached hereto. Except as otherwise expressly set forth in Subparagraph 1(s), as consideration for the use of such parking spaces, Tenant agrees to pay Landlord or, at Landlord's election, directly to Landlord's parking operator, as additional rent under this Lease, the prevailing parking rate for each such parking space as established by Landlord in its discretion from time to time. Tenant agrees that all parking charges will be payable on a monthly basis concurrently with each monthly payment of Monthly Base Rent. Tenant agrees to submit to Landlord or, at Landlord's election, directly to Landlord's parking operator with a copy to Landlord, written notice in a form reasonably specified by Landlord containing the names, home and office addresses and telephone numbers of those persons who are authorized by Tenant to use Tenant's parking spaces on a monthly basis ("Tenant's Authorized Users") and shall use its best efforts to identify each vehicle of Tenant's Authorized Users by make, model and license number. Tenant agrees to deliver such notice prior to the beginning of the Term of this Lease and to periodically update such notice as well as upon specific request by Landlord or Landlord's parking operator to reflect charges to Tenant's Authorized Users or their vehicles. -16- 19 (b) VISITOR PARKING. So long as this Lease is in effect, Tenant's visitors and guests will be entitled to use those specific parking areas which are designated for short term visitor parking and which are located within the surface parking area(s), if any, and/or within the parking structure(s) which serve the Building. Visitor parking will be made available at a charge to Tenant's visitors and guests, with the rate being established by Landlord in its discretion from time to time. Tenant, at its sole cost and expense, may elect to validate such parking for its visitors and guests. All such visitor parking will be on a non-exclusive, in common basis with all other visitors and guests of the Development. (c) USE OF PARKING SPACES. Tenant will not use or allow any of Tenant's Authorized Users to use any parking spaces which have been specifically assigned by Landlord to other tenants or occupants or for other uses such as visitor parking or which have been designated by any governmental entity as being restricted to certain uses. Tenant will not be entitled to increase or reduce its parking privileges applicable to the Premises during the Term of the Lease except as follows. If at any time Tenant desires to increase or reduce the number of parking spaces allocated to it under the terms of this Lease, Tenant must notify Landlord in writing of such desire and Landlord will have the right, in its sole and absolute discretion, to either (a) approve such requested increase in the number of parking spaces allocated to Tenant (with an appropriate increase to the additional rent payable by Tenant for such additional spaces based on the then prevailing parking rates), (b) approve such requested decrease in the number of parking spaces allocated to Tenant (with an appropriate reduction in the additional rent payable by Tenant for such eliminated parking spaces based on the then prevailing parking rates), or (c) disapprove such requested increase or decrease in the number of parking spaces allocated to Tenant. Promptly following receipt of Tenant's written request, Landlord will provide Tenant with written notice of its decision including a statement of any adjustments to the additional rent payable by Tenant for parking under the Lease, if applicable. (d) GENERAL PROVISIONS. Except as otherwise expressly set forth in Subparagraph 1(s), Landlord reserves the right to set and increase monthly fees and/or daily and hourly rates for parking privileges from time to time during the Term of the lease. Landlord may assign any unreserved and unassigned parking spaces and/or make all or any portion of such spaces reserved, if Landlord reasonably determines that it is necessary for orderly and efficient parking or for any other reasonable reason. Failure to pay the rent for any particular parking spaces or failure to comply with any terms and conditions of this Lease applicable to parking may be teated by Landlord as a default under this Lease and, in addition to all other remedies available to Landlord under the Lease, at law or in equity, Landlord may elect to recapture such parking spaces for the balance of the Term of this Lease if Tenant does not cure such failure within the applicable cure period set forth in Paragraph 22 of this Lease. In such event, Tenant and Tenant's Authorized Users will be deemed visitors for purposes of parking space use and will be entitled to use only those parking areas specifically designated for visitor parking subject to all provisions of this Lease. Tenant's parking rights and privileges described therein are personal to Tenant and may not be assigned or transferred, or otherwise conveyed, without Landlord's prior written consent, which consent Landlord may withhold in its sole and absolute discretion. In any event, under no circumstances may Tenant's parking rights and privileges be transferred, assigned or otherwise conveyed separate and apart form Tenant's interest in this Lease. (e) COOPERATION WITH TRAFFIC MITIGATION MEASURES. Tenant agrees to use its reasonable, good faith efforts to cooperate in traffic mitigation programs which may be undertaken by Landlord independently, or in cooperation with local municipalities or governmental agencies or other property owners in the vicinity of the Building. Such programs may include, but will not be limited to, carpools, vanpools and other ridesharing programs, public and private transit, flexible work hours, preferential assigned parking programs and programs to coordinate tenants within the Development with existing or proposed traffic mitigation programs. (f) PARKING RULES AND REGULATIONS. Tenant and Tenant's Authorized Users shall comply with all rules and regulations regarding parking set forth in Exhibit "H" attached hereto and Tenant agrees to cause its employees, subtenants, assignees, contractors, suppliers, customers and invitees to comply with such rules and regulations. Landlord reserves the right from time to time to modify and/or adopt such other reasonable and non-discriminatory rules and regulations for the parking facilities as it deems reasonably necessary for the operation of the parking facilities. 33. FORCE MAJEURE. If either Landlord or Tenant is delayed, hindered in or prevented from the performance of any act required under this Lease by reason of strikes, lock-outs, labor troubles, inability to procure standard materials, failure of power, restrictive governmental laws, regulations or orders or governmental action or inaction (including failure, refusal or delay in issuing permits, approvals and/or authorizations which is not the result of the action or inaction of the party claiming such delay), riots, civil unrest or insurrection, war, fire, earthquake, flood or other natural disaster, unusual and unforeseeable delay which results from an interruption of any public utilities (e.g., electricity, gas, water, telephone) or other unusual and unforeseeable delay not within the reasonable control of the party delayed in performing work or doing acts required under the provisions of this Lease, then performance of such act will be excused for the period of the delay and the period for the performance of any such act will be extended for a period equivalent to the period of such delay. The provisions of this Paragraph 33 will not operate to excuse Tenant from prompt payment of rent or any other payments required under the provisions of this Lease. 34. SIGNS. Landlord will designate the location on the Premises, if any, for one or more Tenant identification sign(s). Tenant agrees to have Landlord install and maintain Tenant's identification sign(s) in such designated location in accordance with this Paragraph 34 at Tenant's sole cost and expense. Tenant has no right to install Tenant identification signs in any other location in, on or about the Premises or the Development and will not display or erect any other signs, displays or other advertising materials that are visible from the exterior of the Building or from within the Building in any interior or exterior common areas. The size, design, color and other physical aspects of any and all permitted sign(s) will be subject to (i) Landlord's written approval prior to installation, which approval may be withheld in Landlord's discretion, (ii) any covenants, conditions or restrictions governing the Premises, and (iii) any applicable municipal or governmental permits and approvals. Tenant will be solely responsible for all costs for installation, maintenance, repair and removal of any Tenant identification sign(s). If Tenant fails to remove Tenant's sign(s) upon termination of this Lease and repair any damage caused by such removal, Landlord may do so at Tenant's sole cost and expense. Tenant agrees to reimburse Landlord for all costs incurred by Landlord to effect any installation, maintenance or removal on Tenant's account, which amount will be deemed additional rent, and may include, without limitation, all sums disbursed, incurred or deposited by Landlord including Landlord's costs, expenses and actual attorney's fees with interest thereon at the Interest Rate form the date of Landlord's demand until paid by Tenant. Any sign rights granted to Tenant under this Lease are personal to -17- 20 Tenant and may not be assigned, transferred or otherwise conveyed to any assignee or subtenant of Tenant without Landlord's prior written consent, which consent Landlord may withhold in its sole and absolute discretion. 35. LIMITATION ON LIABILITY. In consideration of the benefits accruing hereunder, Tenant on behalf of itself and all successors and assigns of Tenant covenants and agrees that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (a) Tenant's recourse against Landlord for monetary damages will be limited to Landlord's interest in the Building including, subject to the prior rights of any Mortgagee, Landlord's interest in the rents of the Building and any insurance proceeds payable to Landlord; (b) Except as may be necessary to secure jurisdiction of the partnership, no partner of Landlord shall be sued or named as a party in any suit or action, and no service of process shall be made against any partner of Landlord; (c) No partner of Landlord shall be required to answer or otherwise plead to any service of process; (d) No judgment will be taken against any partner of Landlord and any judgment taken against any partner of Landlord may be vacated and set aside at any time after the fact; (e) No writ of execution will be levied against the assets of any partner of Landlord; (f) The obligations under this Lease do not constitute personal obligations of the individual partners, directors, officers or shareholders of Landlord, and Tenant shall not seek recourse against the individual partners, directors, officers or shareholders of Landlord or any of their personal assets for satisfaction of any liability in respect to this Lease; and (g) These covenants and agreements are enforceable both by Landlord and also by any partner of Landlord. 36. FINANCIAL STATEMENTS. Prior to the execution of this Lease by Landlord and at any time during the Term of this Lease upon thirty (30) days prior written notice from Landlord, Tenant agrees to provide Landlord with a current financial statement for Tenant and any guarantors of Tenant and financial statements for the two (2) years prior to the current financial statement year for Tenant and any guarantors of Tenant. Such statements are to be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, audited by an independent certified public accountant. 37. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that upon Tenant paying the rent required under this Lease and paying all other charges and performing all of the covenants and provisions on Tenant's part to be observed and performed under this Lease, Tenant may peaceably and quietly have, hold and enjoy the Premises in accordance with this Lease. 38. MISCELLANEOUS. (a) CONFLICT OF LAWS. This Lease shall be governed by and construed solely pursuant to the laws of the State, without giving effect to choice of law principles thereunder. (b) SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. (c) PROFESSIONAL FEES AND COSTS. If either Landlord or Tenant should bring suit against the other with respect to this Lease, then all costs and expenses, including without limitation, actual reasonable professional fees and costs such as appraisers', accountants' and attorneys' fees and costs, incurred by the party which prevails in such action, whether by final judgment or out of court settlement, shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. As used herein, attorneys' fees and costs shall include, without limitation, reasonable attorneys' fees, costs and expenses incurred in connection with any (i) postjudgment motions; (ii) contempt proceedings; (iii) garnishment, levy and debtor and third party examination; (iv) discovery; and (v) bankruptcy litigation. (d) TERMS AND HEADINGS. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. Words used in any gender include other genders. The paragraph headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (e) TIME. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. (f) PRIOR AGREEMENT; AMENDMENTS. This Lease constitutes and is intended by the parties to be a final, complete and exclusive statement of their entire agreement with respect to the subject matter of this Lease. This lease supersedes any and all prior and contemporaneous agreements and understandings of any kind relating to the subject matter of this Lease. There are no other agreements, understandings, representations, warranties, or statements, either oral or in written form, concerning the subject matter of this Lease. No alteration, modification, amendment or interpretation of this Lease shall be binding on the parties unless contained in a writing which is signed by both parties. (g) SEPARABILITY. The provisions of this Lease shall be considered separable such that if any provision or part of this Lease is ever held to be invalid, void or illegal under any law or ruling, all remaining provisions of this Lease shall remain in full force and effect to the maximum extent permitted by law. (h) RECORDING. Neither Landlord nor Tenant shall record this Lease nor a short form memorandum thereof without the consent of the other. (i) COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement. (j) NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord. Disclosure of the terms could adversely affect the ability of Landlord to negotiate other leases and impair Landlord's relationship with other tenants. Accordingly, Tenant agrees that it, and its partners, officers, directors, employees, agents and attorneys, shall not intentionally and voluntarily disclose the terms and conditions of this Lease to any newspaper or other publication or any other tenant or apparent prospective tenant of the Building or other portion of the -18- 21 Development, or real estate agent, either directly or indirectly, without the prior written consent of Landlord, provided, however, that Tenant may disclose the terms to prospective subtenants or assignees under this Lease. (k) NON-DISCRIMINATION. Tenant acknowledges and agrees that there shall be no discrimination against, or segregation of, any person, group of persons, or entity on the basis of race, color, creed, religion, age, sex, marital status, national origin, or ancestry in the leasing, subleasing, transferring, assignment, occupancy, tenure, use, or enjoyment of the Premises, or any portion thereof. 39. EXECUTION OF LEASE. (a) JOINT AND SEVERAL OBLIGATIONS. If more than one person executes this Lease as Tenant, their execution of this Lease will constitute their covenant and agreement that (i) each of them is jointly and severally liable for the keeping, observing and performing of all of the terms, covenants, conditions, provisions and agreements of this Lease to be kept, observed and performed by Tenant, and (ii) the term "Tenant" as used in this Lease means and includes each of them jointly and severally. The act of or notice from, or notice or refund to, or the signature of any one or more of them, with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, expiration, termination or modification of this Lease, will be binding upon each and all of the persons executing this Lease as Tenant with the same force and effect as if each and all of them had so acted or so given or received such notice or refund or so signed. (b) TENANT AS CORPORATION OR PARTNERSHIP. If Tenant executes this Lease as a corporation or partnership, then Tenant and the persons executing this Lease on behalf of Tenant represent and warrant that such entity is duly qualified and in good standing to do business in California and that the individuals executing this Lease on Tenant's behalf are duly authorized to execute and deliver this Lease on its behalf, and in the case of a corporation, in accordance with a duly adopted resolution of the board of directors of Tenant, a copy of which is to be delivered to Landlord on execution hereof, if requested by Landlord, and in accordance with the by-laws of Tenant, and, in the case of a partnership, in accordance with the partnership agreement and the most current amendments thereto, if any, copies of which are to be delivered to Landlord on execution hereof, if requested by Landlord, and that this Lease is binding upon Tenant in accordance with its terms. (c) EXAMINATION OF LEASE. Submission of this instrument by Landlord to Tenant for examination or signature by Tenant does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution by and delivery to both Landlord and Tenant. IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed by their duly authorized representatives as of the date first above written. TENANT LANDLORD MEDICAL SCIENCE SYSTEMS, INC. KOLL CENTER NEWPORT NUMBER 9, a Texas Corporation a California limited partnership By: /s/ PAUL J. WHITE By: KOLL MANAGEMENT SERVICES, INC., - ---------------------- Print Name: Paul J. White a Delaware corporation, ------------- Title: President as Agent ------------------ Date: 3-18-96 -------------------- By: /s/ RICHARD KOENIG By: --------------------- -------------------------- Print Name: Richard Koenig Print Name: --------------- --------------- Title: Senior Manager Title: -------------------- -------------------- Date: Date: ----------------------- --------------------- -19- 22 ADDENDUM TO OFFICE BUILDING LEASE DATED 21 MARCH, 1996 BY AND BETWEEN KOLL CENTER NEWPORT NUMBER 9, A CALIFORNIA LIMITED PARTNERSHIP, AS "LANDLORD" AND MEDICAL SCIENCE SYSTEMS, INC., A TEXAS CORPORATION AS "TENANT" - -------------------------------------------------------------------------------- 40. OPTION TO TERMINATE: Subject to the terms of this Paragraph 40 and Paragraph 41, entitled "Options," and notwithstanding anything to the contrary contained in this Lease, Tenant will have a one-time option to terminate and cancel this Lease (the "Termination Option"), effective as of the last day of the twenty-forth (24th) month of the Lease Term (the "Termination Date"), by delivering to Landlord, on or before the first day of the twentieth (20th) month of the Lease Term, written notice ("Termination Notice") of Tenant's exercise of its Termination Option. As a condition to the effectiveness of Tenant's exercise of its Termination Option and in addition to Tenant's obligation to satisfy all other monetary and non monetary obligations arising under this Lease through the Termination Date, Tenant must pay to Landlord cash (or its equivalent) in the amount Thirty-Eight Thousand Two Hundred and One Dollars ($38,201.00) (the "Termination Consideration"). The payment of the Termination Consideration must be paid upon submittal of the Termination Notice from Tenant to Landlord. If Tenant properly and timely delivers the Termination Notice and the Termination Consideration to Landlord and satisfies all other monetary and non monetary obligations under this Lease through the Termination Date, including, without limitation, the provisions regarding surrender of the Premises, then this Lease will terminate as of midnight on the Termination Date and Tenant's security deposit shall be refunded in accordance with the terms of the Lease. 41. OPTION: (a) Definition: As used in this Paragraph, the word "Option" has the following meaning: (i) The Option to Terminate pursuant to Paragraph 40 herein. (b) Effect of Default on Option: Tenant shall have no right to exercise any Option, notwithstanding any provision of the grant of Option to the contrary, and Tenant's exercise of any Option may be nullified by Landlord and deemed of no further force or effect, if (i) Tenant shall be in default after applicable notice and cure period of any monetary obligation or material non-monetary obligation under the terms of the Lease (or if Tenant would be in such default under the Lease but for the passage of time or the giving of notice, or both) as of Tenant's exercise of the Option in question or at any time after the exercise of any such and prior to the commencement of the Option event, or (ii) Landlord has given Tenant three (3) or more notices of monetary (non-payment of Monthly Base Rent or Additional Rent) default beyond applicable notice and cure period, whether or not such defaults are subsequently cured, during any twelve (12) consecutive month period of the Lease. (c) Options Personal: Tenant's Option is personal to Tenant and shall not be transferable or assignable. 42. PARKING: (a) Unreserved Employee Parking: Notwithstanding anything contained to the contrary in Paragraphs 1(s) and 32 of this lease, and so long as this Lease is in effect, Landlord shall lease to Tenant up to six (6) unreserved employee parking spaces. All such unreserved employee parking spaces shall be available to all tenants on a non-exclusive, in-common basis within the non-visitor portions of the parking facilities. Tenant's parking rent shall be as follows for up to six (6) unreserved parking spaces for the initial Lease term: Months 01 - 36: $15.00 per space per month; Months 37 - 60: $20.00 per space per month. (b) Reserved Parking: So long as this Lease is in effect, Landlord shall lease to Tenant one (1) reserved parking spaces in the parking structure adjacent to the Building. The location of such reserved parking spaces within the parking structure shall be determined by Landlord, in its sole discretion. Tenant's parking rent shall be as follows for one (1) reserved parking spaces for the initial Lease term: Months 01 - 36: $50.00 per month; Months 37 - 60: $75.00 per month. 43. RELOCATION PROVISION: Provided Tenant is not in default under this Lease, or would be in default but for the passage of time of the giving of notice, or both, Tenant shall have the right, upon the terms and conditions hereinafter set forth, to relocate to a building within Kull Center Newport having the same ownership entity as the Building. Tenant's exercise of its right to relocate shall be contingent upon its 23 Medical Science Systems, Inc. March 13, 1996 Page 2 leasing space equal to not less than one hundred thirty percent (130%) of the space Tenant occupies under the terms of this Lease. If at any time during the term of this Lease, Tenant desires to exercise its right to relocate contained herein, Tenant shall notify Landlord in writing of such fact. From and after Landlord receives such written notice, Landlord shall use its best efforts to notify Tenant of space availability within Koll Center Newport. In the event Tenant exercises its right to relocate with respect to any such available space, Landlord and Tenant shall negotiate in good faith the terms of a new Lease for the relocation space. Landlord and Tenant hereby agree that if Landlord and Tenant are unable to agree upon the terms of a new lease for a relocation space, neither party shall have the right to terminate this Lease, but this Lease shall remain in full force and effect for its remaining term and any extension thereof. 44. CONFLICT WITH BASIC LEASE: To the extent of any conflict between the printed portion of this Lease and the provisions of this Addendum Sections 40 through 43, the provisions of this Addendum shall prevail. "TENANT" "LANDLORD" MEDICAL SCIENCE SYSTEMS, INC., KOLL CENTER NEWPORT NUMBER 9, a Texas corporation a California general partnership By: /s/ PAUL J. WHITE By: KOLL MANAGEMENT SERVICES, INC., --------------------------- a Delaware corporation Print Name: Paul J. White Its Authorized Agent ---------------- Print Title: President By: /s/ RICHARD KOENIG --------------- ------------------------------- Date: 3-18-96 Print Name: Richard Koenig ---------------------- -------------------- Print Title: Senior Manager ------------------- By: Date: --------------------------- -------------------------- Print Name: ---------------- Print Title: --------------- Date: ---------------------- 24 SITE PLAN KOLL CENTER NEWPORT [MAP] EXHIBIT "A-1" ------------- 9313803H.OC1/KMS FORM/05-20-93/km 25 OUTLINE OF FLOOR PLAN OF PREMISES ---------------- PRELIMINARY PLEASE REVIEW LOCATION OF DEMISING WALLS. SQUARE FOOTAGES HAVE NOT BEEN FINALIZED. [DRAWING OF FLOOR PLAN]
FLOOR 9 Koll Center Newport Building 9 4400 MacAuthur Blvd. Tenant Load Factor: 1.1205 Newport Beach, CA - ----------------------------------------------------------------------------------------------- e#: 980 Tenant: Medical Science Systems Suite Usable: 1540.4 STEVENSON D#: 9-13 Corridor Ext: 64.5 SYSTEMS INC [LOGO] Usable: 1605 KCN9A Date: 12/4/95 Rentable: 1798 (C) 1990 ALL RIGHTS RESERVED
EXHIBIT "A-11" 9313803H.OC1/KMS FORM/05-20-93/km 26 RENTABLE SQUARE FEET AND USABLE SQUARE FEET ------------------------------------------- 1. The term "Rentable Square Feet" as used in the Lease will be deemed to include (a) with respect to the Premises, the usable area of the Premises determined in accordance with the Method for Measuring Floor Area in Office Buildings, ANSI Z65 1-1980 (the "BOMA Standard"), plus a pro rata portion of the main lobby area on the ground floor and all elevator machine rooms, electrical and telephone equipment rooms and mail delivery facilities and other areas used by all tenants of the Building, if any, plus (i) for single tenancy floors, all the area covered by the elevator lobbies, corridors, special stairways, restrooms, mechanical rooms, electrical rooms and telephone closets on such floors, or (ii) for multiple tenancy floors, a pro-rata portion of all of the area covered by the elevator lobbies, corridors, special stairways, restrooms, mechanical rooms, electrical rooms and telephone closets on such floor, and (b) with respect to the Building, the total rentable area for all floors in the Building computed in accordance with the provisions of Subparagraph 1(a) above. In calculating the "Rentable Square Feet" of the Premises or the Building, the area contained within the exterior walls of the Building stairs, fire towers, vertical ducts, elevator shafts, flues, vents, stacks and major pipe shafts will be excluded. 2. The term "Usable Square Feet" as used in Exhibit "C" with respect to the Premises will be deemed to include the usable area of the Premises as determined in accordance with the BOMA Standard. 3. For purposes of establishing the initial Tenant's Percentage, Tenant's Operating Expense Allowance, Monthly Base Rent, and Security Deposit as shown in Paragraph 1 of the Lease, the number of Rentable Square Feet of the Premises is deemed to be as set forth in Subparagraph 1(g) of the Lease, and the number of Rentable Square Feet of the Building is deemed to be as set forth in Subparagraph 1(f) of the Lease. For the purposes of establishing the amount of the Tenant Improvement Allowance in Exhibit "C", the number of Usable Square Feet of the Premises is deemed to be as set forth in Subparagraph 1(g). From time to time at Landlord's option, Landlord's architect may redetermine the actual number of Rentable Square Feet of the Premises, and the Building, and the actual number of Usable Square Feet of the Premises respectively, based upon the criteria set forth in Paragraph 1 and Paragraph 2 above, which determination will be conclusive, and thereupon Tenant's Percentage, Tenant's Operating Expense Allowance, Monthly Base Rent and the Security Deposit and the Tenant Improvement Allowance will be adjusted accordingly. EXHIBIT "B" 9313803H.OC1/KMS FORM/05-20-93/km 27 WORK LETTER AGREEMENT This WORK LETTER AGREEMENT ("Work Letter Agreement") is entered into as of the 21 day of March, 1996, by and between Koll Center Newport Number 9, a California Limited Partnership ("Landlord"), and Medical Science Systems, Inc., a Texas Corporation ("Tenant"). R E C I T A L S: A. Concurrently with the execution of this Work Letter Agreement, Landlord and Tenant have entered into a lease (the "Lease") covering certain premises (the "Premises") more particularly described in EXHIBIT "A" attached to the Lease. All terms not defined herein shall have the same meaning a set forth in the Lease. To the extent applicable, the provisions of the Lease are hereby incorporated herein by this reference. B. In order to induce Tenant to enter into the Lease and in consideration of the mutual covenants hereinafter contained, Landlord and Tenant hereby agree as follows: 1. TENANT IMPROVEMENTS. Landlord shall construct and, except as provided below to the contrary, pay for the entire cost of constructing the tenant improvements ("Tenant Improvements") described by the plans and specifications identified in Schedule "1" attached hereto and incorporated herein by this reference (the "Plans"). Tenant may request changes to the Plans provided that (a) the changes shall not be of a lesser quality than Landlord's standard specifications for tenant improvements for the Building, as the same may be changed from time to time by Landlord (the "Standards"); (b) the changes conform to applicable governmental regulations and necessary governmental permits and approvals can be secured; (c) the changes do not require building service beyond the levels normally provided to other tenants in the Building; (d) the changes do not have any adverse affect on the structural integrity or systems of the Building; (e) the changes will not, in Landlord's opinion, unreasonably delay construction of the Tenant Improvements; and (f) Landlord has determined in its sole discretion that the changes are of a nature and quality consistent with the overall objectives of Landlord for the Building. If Landlord approves a change requested by Tenant, then, as a condition to the effectiveness of Landlord's approval, Tenant shall pay to Landlord upon demand by Landlord the increased cost attributable to such change, if any, as reasonably determined by Landlord. To the extent any such change results in a delay of completion of construction of the Tenant Improvements, then such delay shall constitute a delay caused by Tenant as described below. 2. CONSTRUCTING OF TENANT IMPROVEMENTS. Upon Tenant's payment to Landlord of the total amount of the cost of any changes to the Plans, if any, Landlord's contractor shall commence and diligently proceed with the constructing of the Tenant Improvements, subject to Tenant Delays (as described in Paragraph 4 below) and Force Majeure Delays (as described in Paragraph 5 below). Promptly upon the commencement of the Tenant Improvements. Landlord shall furnish Tenant with a construction schedule letter setting forth the projected completion dates therefor and showing the deadlines for any actions required to be taken by Tenant during such construction, and Landlord may from time to time during construction of the Tenant Improvements modify such schedule. 3. COMMENCEMENT DATE AND SUBSTANTIAL COMPLETION (a) Commencement Date. The Term of the Lease shall commence on the date (the "Commencement Date") which is the earlier of: (i) the date Tenant moves into the Premises to commence operation of its business in all or any portion of the Premises; or (ii) the date the Tenant Improvements have been "substantially completed" (as defined below); provided, however, that if substantial completion of the Tenant Improvements is delayed as a result of any Tenant Delays described in Paragraph 4 below, then the Commencement Date as would otherwise have been established pursuant to this Subparagraph 3(a)(ii) shall be accelerated by the number of days of such Tenant Delays. (b) Substantial Completion; Punch-List. For purposes of Subparagraph 3(a)(ii) above, the Tenant Improvements shall be deemed to be "substantially completed" when Landlord's contractor certifies in writing to Landlord and Tenant that Landlord: (a) is able to provide Tenant reasonable access to the Premises; (b) has substantially completed the Tenant Improvements in accordance with the Plans, other than decoration and minor "punch-list" type items and adjustments which do not materially interfere with Tenant's access to or use of the Premises; and (c) has obtained a temporary certificate of occupancy or other required equivalent approval from the local governmental authority permitting occupancy of the Premises: Within ten (10) days after receipt of such certificate from Landlord's contractor, Tenant shall conduct a walk-through inspection of the Premises with Landlord and provide to Landlord a written punch-list specifying those decoration and other punch-list items which require completion, which items Landlord shall thereafter diligently complete. (c) Delivery of Possession. Landlord agrees to deliver possession of the Premises to Tenant when the Tenant Improvements have been substantially completed in accordance with Subparagraph (b) above. The parties estimate that Landlord will deliver possession of the Premises to Tenant and the Term of this Lease will commence on or before the Estimated Commencement Date set forth in subparagraph 1(j) of the Lease. Landlord shall use its commercially reasonable efforts to cause the Premises to be substantially completed on or before the Estimated Commencement Date. Tenant agrees that if Landlord is unable to deliver possession of the Premises to Tenant on or prior to the Estimated Commencement Date specified in Subparagraph 1(i) of the Lease, the Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, but if such late delivery is not due to Tenant Delays or negligence, then, as Tenant's sole remedy, the commencement Date and the Expiration Date of the Term shall be extended one (1) day for each day Landlord is delayed in delivering possession of the Premises to Tenant. EXHIBIT "C" 28 4. TENANT DELAYS. For purposes of this Work Letter Agreement, "Tenant Delays" shall mean any delay in the completion of the Tenant Improvements resulting from any or all of the following: (a) Tenant's failure to timely perform any of its obligations pursuant to this Work Letter Agreement, including any failure to complete, on or before the due date therefor, any action item which is Tenant's responsibility pursuant to the construction schedule delivered by Landlord to Tenant pursuant to this Work Letter Agreement; (b) Tenant's changes to the Plans; (c) Tenant's request for materials, finishes, or installations which are not readily available or which are incompatible with the Standards; (d) any delay of Tenant in making payment to Landlord for Tenant's share of any costs in excess of the cost of the Tenant Improvements as described in the Plans; or (e) any other act or failure to act by Tenant, Tenant's employees, agents, architects, independent contractors, consultants and/or any other person performing or required to perform services on behalf of Tenant. 5. FORCE MAJEURE DELAYS. For purposes of this Work Letter, "Force Majeure Delays" shall mean any actual delay in the construction of the Tenant Improvements, which is beyond the reasonable control of Landlord or Tenant, as the case may be, as described in Paragraph 33 of the Lease. 6. FREIGHT/CONSTRUCTION ELEVATOR. Landlord shall, consistent with its obligation to other tenants in the Building, make the freight/construction elevator reasonably available to Tenant in connection with initial decorating, furnishing and moving into the Premises. Tenant shall pay for any after-hours staffing of the freight/construction elevator. IN WITNESS WHEREOF, the undersigned Landlord and Tenant have caused this Work Letter Agreement to be duly executed by their duly authorized representatives as of the date of the Lease.
"TENANT" "LANDLORD" MEDICAL SCIENCE SYSTEMS, INC., KOLL CENTER NEWPORT NUMBER 9, a Texas Corporation a California general partnership By: /s/ PAUL J. WHITE By: KOLL MANAGEMENT SERVICES, INC. -------------------------------- a Delaware corporation Its Authorized Agent Print Name: Paul J. White By: /s/ RICHARD KOENIG -------------------- ---------------------- Print Title: President Print Name: Richard Koenig -------------------- ---------------------- Date: 3/18/96 Print Title: Senior Manager --------------------------- --------------------- Date: By: ---------------------------- -------------------------------- Print Name: -------------------- Print Title: -------------------- Date: ---------------------------
29 DESCRIPTION OF PLANS AND SPECIFICATIONS MAP GOES HERE SCHEDULE "1" Page 1 of 3 30 DESCRIPTION OF PLANS AND SPECIFICATIONS 1. ALL CONSTRUCTION IS EXISTING, U.O.N. 2. PATCH AND REPAIR ALL AFFECTED AREAS DUE TO DEMOLITION. 3. PATCH AND REPAIR ALL PARTITIONS REMAINING FOR REUSE. 4. PROVIDE PARTITIONS AS KEYED TO PARTITION LEGEND. 5. PROVIDE NEW AND/OR MODIFY EXISTING PARTITION TO BECOME BUILDING STANDARD DEMISING PARTITION. 6. MODIFY HVAC AND FIRE/LIFE SAFETY SYSTEMS AS REQUIRED PER NEW LAYOUT. 7. RELOCATE APPROX. (35) EXISTING DOORS, AND PROVIDE APPROX. (5) NEW BLDG. STD. DOORS (WITH BLDG. STD. FRAME AND LEVER HARDWARE). TOUCH UP ALL EXISTING DOORS TO A "LIKE NEW" CONDITION. 8. ALL HARDWARE TO BE LEVER TYPE PROVIDE NEW TO MATCH EXISTING BUILDING STANDARD. REPLACE ALL SCRATCHED/DAMAGED HARDWARE WITH NEW. 9. ALL DOORS TO HAVE STANDARD LATCHSET U.O.N. 10. DEMO ALL EXISTING INTERIOR GLAZING AND SIDELIGHTS, U.O.N. PATCH WALLS AS REQUIRED. 11. DEMO EXISTING MILLWORK, U.O.N. 12. EXISTING ELECTRICAL TO BE REMAIN, U.O.N. 13. DEMO ALL EXISTING FLOOR OUTLETS AND NON-STANDARD ELECTRICAL, U.O.N. 14. OUTLETS WITH SUBSCRIPT "E" ARE EXISTING. ALL OTHERS ARE NEW. 15. PROVIDE NEW LIGHT FIXTURES AS REQUIRED TO ALLOW FOR (1) 2 X 4 FIXTURE FOR EVERY 70 SQUARE FEET OF OFFICE SPACE. REPLACE ALL NON-BUILDING STANDARD FIXTURES. RECIRCUIT/RESWITCH AS REQUIRED. PROVIDE NEW LAMPS IN EXISTING FIXTURES TO ALLOW FOR CONSISTENT COLOR RENDITION IN EACH OFFICE. 16. RETURN AIR GRILLES TO BE PAINTED AS REQUIRED TO A "LIKE NEW" CONDITION. PAINT TO MATCH EXISTING. 17. REPLACE DAMAGED/DISCOLORED CEILING TILES AS NECESSARY. CONTACT ARCHITECT IF TILES TO MATCH SUITE EXISTING ARE NOT AVAILABLE. 18. DEMO ALL NON-STANDARD CONCEALED SPLINE CEILING, AND REPLACE WITH NEW BLDG. STD. CEILING GRID AND TILES, U.O.N. ALIGN WITH EXISTING AS REQUIRED. PAINT GRID AS REQUIRED - FOR PRICING PURPOSES, ASSUME 50% TO BE REPAINTED. UPGRADE CEILING AS REQUIRED TO COMPLY WITH SEISMIC BRACING. 19. DEMO ALL EXISTING FINISHES, U.O.N. DEMO TO INCLUDE WOOD BASE, CHAIR RAIL WAINSCOT, TRIM, AND MARBLE FLOORING BORDER, U.O.N. 20. PREPARE SURFACE AND PROVIDE NEW BLDG. STD. CARPET (DESIGNWEAVE, NEW WINDSWEPT), PAD, AND 4" BASE THROUGHOUT, U.O.N. 21. PREPARE WALLS AND PROVIDE TWO COATS FLAT PAINT THROUGHOUT SUITE, U.O.N. 22. PREPARE SURFACE, AND PROVIDE NEW V.C.T. FLOORING. 23. REPAIR BLINDS TO A "LIKE-NEW" CONDITION. SCHEDULE "1" Page 2 of 3 31 DESCRIPTION OF PLANS AND SPECIFICATIONS SUITE 980 NOTES (MEDICAL SCIENCE SYSTEMS) (37.) PROVIDE NEW PL. LAM. UPPER CABINET AND LOWER CABINET WITH NEW SINK, GARBAGE DISPOSAL, INSTALL HOT WATER HEATER, AND ASSOCIATED ELECTRICAL. PROVIDE SPACE BELOW COUNTER FOR N.I.C. GE "SPACEMAKER" REFRIGERATOR W/FREEZER (34-1/4"H X 23-5/8"W AND 24-7/8"D), AND PROVIDE ASSOCIATED ELECTRICAL. (38.) PROVIDE NEW 30"D X 34"H PL. LAM. L-SHAPED WORK COUNTER. (39.) PROVIDE (2) NEW PL. LAM. CLOSED OVERHEAD SHELVES, MOUNT @ 5'-6" A.F.F. AND PROVIDE NECESSARY BLOCKING/SUPPORTS. sht 2 of 2 SCHEDULE "I" Page 3 of 3 32 NOTICE OF LEASE TERM DATES AND TENANT'S PERCENTAGE To __________________________ _____________________________ _____________________________ Date: _______________________ Re: Lease dated ___________________________, 19___ (the "Lease"), between ______________________, Landlord, and ___________________________, Tenant, concerning Suite ______________ located at _________________________ (the "Premises"). To Whom It May Concern: In accordance with the subject Lease, we wish to advise and/or confirm as follows: 1. That the Premises have been accepted by the Tenant as being substantially complete in accordance with the subject Lease and that there is no deficiency in construction except for latent defects as may be indicated on the "Punch-List" prepared by Landlord and Tenant, a copy of which is attached hereto. 2. That the Tenant has possession of the subject Premises and acknowledges that under the provisions of the Lease the Commencement Date is _____________________, and the Term of the Lease will expire on _____________________. 3. That in accordance with the Lease, rent commenced to accrue on ___________________. 4. If the Commencement Date of the Lease is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter will be for the full amount of the monthly installment as provided for in the Lease. 5. Rent is due and payable in advance on the first day of each and every month during the Term of the Lease. Your rent checks should be made payable to _____________________________ at _________________________________________. 6. The number of Rentable Square Feet within the Premises is _________________ square feet as determined by Landlord's architect in accordance with the terms of the Lease. 7. The number of Rentable Square Feet within the Building is ____________ square feet as determined by Landlord's architect in accordance with the terms of the Lease. 8. Tenant's Percentage, as adjusted based upon the number of Rentable Square Feet within the Premises, is ____________%. LANDLORD: ________________________________ a ______________________________ By: ____________________________ Print Name: ________________ Title: _____________________ By: ____________________________ Print Name: ________________ Title: _____________________ SAMPLE ONLY [NOT FOR EXECUTION] EXHIBIT "D" 33 DEFINITION OF OPERATING EXPENSES 1. ITEMS INCLUDED IN OPERATING EXPENSES. The term "Operating Expenses" as used in the Lease to which this Exhibit "E" is attached means all costs and expenses of operation and maintenance of the Building and the Common Areas (as such terms are defined in the Lease), as determined by standard accounting practices, calculated assuming the Building is ninety-five percent (95%) occupied, including the following costs by way of illustration but not limitation, but excluding those items specifically set forth in Paragraph 3 below: (a) Real Property Taxes and Assessments (as defined in Paragraph 2 below) and any taxes or assessments imposed in lieu thereof; (b) any and all assessments imposed with respect to the Building pursuant to any covenants, conditions and restrictions affecting the Development, the Common Areas or the Building; (c) water and sewer charges and the costs of electricity, heating, ventilating, air conditioning and other utilities; (d) utilities surcharges and any other costs, levies or assessments resulting from statutes or regulations promulgated by any government or quasi-government authority in connection with the use, occupancy or alteration of the Building or the Premises or the parking facilities serving the Building or the Premises; (e) costs of insurance obtained by Landlord pursuant to Paragraph i9 of the Lease; (f) waste disposal and janitorial services; (g) labor; (h) costs incurred in the management of the Building, including, without limitation: (i) supplies, (ii) wages and salaries (and payroll taxes and similar governmental charges related thereto) of employees used in the management, operation and maintenance of the Building, (iii) Building management office rental, supplies, equipment and related operating expenses, and (iv) a management/administrative fee determined as a percentage of the annual gross revenues of the Building exclusive of the proceeds of financing or a sale of the Building and an administrative fee for the management of the Development Common Area determined as a percentage of Development Common Area Operating Expenses; (i) supplies, materials, equipment and tools including rental of personal property used for maintenance; (j) repair and maintenance of the elevators and the structural portions of the Building, including the plumbing, heating, ventilating, air-conditioning and electrical systems installed or furnished by Landlord. (k) maintenance, costs and upkeep of all parking and Development Common Areas; (l) depreciation on a straight line basis and rental of personal property used in maintenance; (m) amortization on a straight line basis over the useful life [together with interest at the Interest Rate on the unamortized balance] of all capitalized expenditures which are: (i) reasonably intended to produce a reduction in operating charges or energy consumption; or (ii) required under any governmental law or regulation that was not applicable to the Building at the time it was originally constructed; or (iii) for replacement of any Building equipment needed to operate the Building at the same quality levels as prior to the replacement; (n) costs and expenses of gardening and landscaping; (o) maintenance of signs (other than signs of tenants of the Building); (p) personal property taxes levied on or attributable to personal property used in connection with the Building or the Common Areas; (q) reasonable accounting, audit, verification, legal and other consulting fees; and (r) costs and expenses of repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning, refuse removal, security and similar items, including appropriate reserves. When calculating Operating Expenses for purposes of establishing Tenant's Operating Expense Allowance, Operating Expenses shall not include Real Property Taxes and Assessments attributable to special assessments, charges, costs, or fees or due to modifications or changes in governmental laws or regulations including, but not limited to, the institution of a split tax roll, and shall exclude market-wide labor-rate increases due to extraordinary circumstances including, but not limited to, boycotts and strikes and utility increases due to extraordinary circumstances including, but not limited to, conservation surcharges, boycotts, embargoes or other shortages. 2. REAL PROPERTY TAXES AND ASSESSMENTS. The term "Real Property Taxes and Assessments", as used in this Exhibit "E" means; any form of assessment, license fee, license tax, business license fee, commercial rental tax, levy, charge, improvement bond, tax or similar imposition imposed by any authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof, as against any legal or equitable interest of Landlord in the Premises, Building, Common Areas or the Development (as such terms are defined in the Lease), adjusted to reflect an assumption that the Building is fully assessed for real property tax purposes as a completed building ready for occupancy, including the following by way of illustration but not limitation: EXHIBIT "E" 34 (a) any tax on Landlord's "right" to rent or "right" to other income from the Premises or as against Landlord's business of leasing the Premises; (b) any assessment, tax, fee, levy or charge in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants. It is the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies and charges be included within the definition of "real property taxes" for the purposes of this Lease. (c) any assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises or other premises in the Building or the rent payable by Tenant hereunder or other tenants of the Building, including, without limitation, any gross receipts tax or excise tax levied by state, city or federal government, or any political subdivision thereof, with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof but not on Landlord's other operations; (d) any assessment, tax, fee, levy or charge upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises; and/or (e) any assessment, tax, fee, levy or charge by any governmental agency related to any transportation plan, fund or system (including assessment districts) instituted within the geographic area of which the Building is a part. Notwithstanding the foregoing, if at any time after the Commencement Date, the amount of Real Property Taxes and Assessments decreases, then for purposes of all subsequent Lease Years, including the Lease Year in which such decrease in Real Property Taxes and Assessments occurs, Tenant's Operating Expense Allowance shall be decreased by an amount equal to such decrease in Real Property Taxes and Assessments. 3. ITEMS EXCLUDED FROM OPERATING EXPENSES. Notwithstanding the provisions of Paragraphs 1 and 2 above to the contrary, "Operating Expenses" will not include. (a) Landlord's federal or state income, franchise, inheritance or estate taxes; (b) any ground lease rental; (c) costs incurred by Landlord for the repair of damage to the Building to the extent that Landlord is reimbursed by insurance or condemnation proceeds or by tenants, warrantors or other third persons; (d) depreciation, amortization and interest payments, except as specifically provided herein, and except on materials, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party, where such depreciation, amortization and interest payments would otherwise have been included in the charge for such third party's services, all as determined in accordance with standard accounting practices; (e) brokerage commissions, finders' fees, attorneys' fees, space planning costs and other costs incurred by Landlord in leasing or attempting to lease space in the Building; (f) costs of a capital nature, including, without limitation, capital improvements, capital replacements, capital repairs, capital equipment and capital tools, all as determined in accordance with standard accounting practices; provided, however, the capital expenditures set forth in Subparagraph 1(m) above will in any event be included in the definition of Operating Expenses; (g) interest, principal, points and fees on debt or amortization on any mortgage, deed of trust or other debt encumbering the Building or the Development; (h) costs, including permit, license and inspection costs, incurred with respect to the installation of tenant improvements for tenants in the Building (including the original Tenant Improvements for the Premises), or incurred in renovating or otherwise improving, decorating, painting or redecorating space for tenants or other occupants of the Building, including space planning and interior design costs and fees; (i) attorneys' fees and other costs and expenses incurred in connection with negotiations or disputes with present or prospective tenants or other occupants of the Building; provided, however, that Operating Expenses will include those attorneys' fees and other costs and expenses incurred in connection with negotiations, disputes or claims relating to items of Operating Expenses, enforcement of rules and regulations of the Building, and such other matters relating to the maintenance of standards required of Landlord under the Lease; (j) except for the administrative/management fees described in Subparagraph 1(h) above, costs of Landlord's general corporate overhead; (k) all items and services for which Tenant or any other tenant in the Building reimburses Landlord (other than through operating expense pass-through provisions); (l) electric power costs for which any tenant directly contracts with the local public service company; and (m) costs arising from Landlord's charitable or political contributions. E-2 35 STANDARDS FOR UTILITIES AND SERVICES The following standards for utilities and services are in effect. Landlord reserves the right to adopt nondiscriminatory modifications and additions hereto. Subject to the terms and conditions of the Lease and provided Tenant remains in occupancy of the Premises, Landlord will provide or make available the following utilities and services. 1. Provide non-attended automatic elevator facilities Monday through Friday, except holidays, from 8 a.m. to 6 p.m. and have one elevator available for Tenant's use at all other times. 2. On Monday through Friday, except holidays, from 8 a.m. to 6 p.m. and on Saturday from 8 a.m. to 12 Noon (and other times for a reasonable additional charge to be fixed by Landlord), ventilate the Premises and furnish air conditioning or heating on such days and hours, when in the reasonable judgment of Landlord it may be required for the comfortable occupancy of the Premises. The air conditioning system achieves maximum cooling when the window coverings are extended to the full length of the window opening and adjusted to a 45 degree angle upwards. Landlord will not be responsible for room temperatures if Tenant does not keep all window coverings in the Premises extended to the full length of the window opening and adjusted to a 45 degree angle upwards whenever the system is in operation. Tenant agrees to cooperate fully at all times with Landlord, and to abide by all reasonable regulations and requirements which Landlord may prescribe for the proper function and protection of said air conditioning system. Tenant agrees not to connect any apparatus, device, conduit or pipe to the chilled and hot water air conditioning supply lines of the Building. Tenant further agrees that neither Tenant nor its servants, employees, agents, visitors, licensees or contractors shall at any time enter the mechanical installations or facilities of the Building or the Development or adjust, tamper with, touch or otherwise in any manner affect said installations or facilities. The cost of maintenance and service calls to adjust and regulate the air conditioning system will be charged to Tenant if the need for maintenance work results from either Tenant's adjustment of room thermostats or Tenant's failure to comply with its obligations under this Exhibit, including keeping window coverings extended to the full length of the window opening and adjusted to a 45 degree angle upwards. Such work will be charged at hourly rates equal to then-current journeyman's wages for air conditioning mechanics. 3. Landlord will make available to the Premises, 24 hours per day, seven days a week, electric current as required by the Building standard office lighting and fractional horsepower office business machines including copiers, personal computers and word processing equipment in an amount not to exceed six (6) watts per square foot per normal business day. Tenant agrees, should its electrical installation or electrical consumption be in excess of the aforesaid quantity or extend beyond normal business hours, to reimburse Landlord monthly for the measured consumption at the average cost per kilowatt hour charged to the Building during the period. If a separate meter is not installed at Tenant's cost, such excess cost will be established by an estimate agreed upon by Landlord and Tenant, and if the parties fail to agree, such cost will be established by an independent licensed engineer selected in Landlord's reasonable discretion, whose fee shall be shared equally by Landlord and Tenant. Tenant agrees not to use any apparatus or device in, upon or about the Premises (other than standard office business machines, personal computers and word processing equipment) which may in any way increase the amount of such services usually furnished or supplied to said Premises, and Tenant further agrees not to connect any apparatus or device with wires, conduits or pipes, or other means by which such services are supplied, for the purpose of using additional or unusual amounts of such services without the written consent of Landlord. Should Tenant use the same to excess, the refusal on the part of Tenant to pay upon demand of Landlord the amount established by Landlord for such excess charge will constitute a breach of the obligation to pay rent under this Lease and will entitle Landlord to the rights therein granted for such breach. Tenant's use of electric current will never exceed the capacity of the feeders to the Building, or the risers or wiring installation and Tenants will not install or use or permit the installation or use of any computer or electronic data processing equipment in the Premises (except standard office business machines, personal computers and word processing equipment) without the prior written consent of Landlord. 4. Water will be available in public areas for drinking and lavatory purposes only, but if Tenant requires, uses or consumes water for any purpose in addition to ordinary drinking and lavatory purposes, of which fact Tenant constitutes Landlord to be the sole judge, Landlord may install a water meter and thereby measure Tenant's water consumption for all purposes. Tenant agrees to pay Landlord for the cost of the meter and the cost of the installation thereof and throughout the duration of Tenant's occupancy. Tenant will keep said meter and installation equipment in good working order and repair at Tenant's own cost and expense, in default of which Landlord may cause such meter and equipment to be replaced or repaired and collect the cost thereof from Tenant. Tenant agrees to pay for water consumed, as shown on such meter, as and when bills are rendered, and on default in making such payment, Landlord may pay such charges and collect the same from Tenant. Any such costs or expenses incurred, or payments made by Landlord for any of the reasons or purposes hereinabove stated will be deemed to be additional rent payable by Tenant and collectible by Landlord as such. 5. Landlord will provide janitor service to the Premises, provided the same are used exclusively as offices, and are kept reasonably in order by Tenant, and unless otherwise agreed to by Landlord and Tenant no one other than persons approved by Landlord shall be permitted to enter the Premises for such purposes. If the Premises are not used exclusively as offices, they will be kept clean and in order by Tenant, at Tenant's expense, and to the satisfaction of Landlord, and by persons approved by Landlord. Tenant agrees to pay to Landlord the cost of removal of any of Tenant's refuse and rubbish to the extent that the same exceeds the refuse and rubbish to the extent that the same exceeds the refuse and rubbish usually attendant upon the use of the Premises as offices. 6. Landlord reserves the right to stop service of the elevator, plumbing, ventilation, air conditioning and electrical systems, when necessary, by reason of accident or emergency or for repairs, alterations or improvements, when in the judgment of Landlord such actions are desirable or necessary to be made, until said repairs, alterations or improvements shall have been completed, and Landlord will have no responsibility or liability for failure to supply elevator facilities, plumbing, ventilating, air conditioning or electric service, when prevented from so doing by strike or accident or by any cause beyond Landlord's reasonable control, or by laws, rules, orders, ordinances, directions, regulations or by reason of the requirements of any federal, state, county or municipal authority or failure of gas, oil or other suitable fuel supply or inability by exercise of reasonable diligence to obtain gas, oil or other suitable fuel supply. It is expressly understood and agreed that any covenants on Landlord's part to furnish any services pursuant to any of the terms, covenants, conditions, provisions or agreements of this Lease, or to perform any act or thing for the benefit of Tenant, will not be deemed breached if Landlord is unable to furnish or perform the same by virtue of a strike or labor trouble or any other cause whatsoever beyond Landlord's control. EXHIBIT "F" 36 ESTOPPEL CERTIFICATE The undersigned, ___________________________ ("Tenant"), hereby certifies to _______________________________, as follows: 1. Attached hereto is a true, correct and complete copy of that certain lease dated _________________, 1993, between ____________________, a __________________ ("Landlord") and Tenant (the "Lease"), regarding the premises located at ______________________________ (the "Premises"). The Lease is now in full force and effect and has not been amended, modified or supplemented, except as set forth in Paragraph 4 below. 2. The Term of the Lease commenced on ___________________, 19__. 3. The Term of the Lease will expire on ___________________, 19__. 4. The Lease has: (Initial one) (_________) not been amended, modified, supplemented, extended, renewed or assigned. (_________) been amended, modified, supplemented, extended, renewed or assigned by the following described terms or agreements, copies of which are attached hereto: _______________________________________________________________________________ _______________________________________________________________________________ 5. Tenant has accepted and is now in possession of the Premises. 6. Tenant and Landlord acknowledge that Landlord's interest in the Lease will be assigned to _______________________________ and that no modification, adjustment, revision or cancellation of the Lease or amendments thereto shall be effective unless written consent of _________________________ is obtained, and that until further notice, payments under the Lease may continue as heretofore. 7. The amount of Monthly Base Rent is $________________ 8. The amount of Security Deposit (if any) is $________________. No other security deposits have been made except as follows: ___________________________ __________________________________________________________ 9. Tenant is paying the full lease rental which has been paid in full as of the date hereof. No rent or other charges under the Lease have been paid for more than thirty (30) days in advance of its due date except as follows _______________________________________________________________________________ 10. All work required to be performed by Landlord under the Lease has been completed except as follows _______________________________________________________________________________ 11. There are no defaults on the part of the Landlord or Tenant under the Lease except as follows _______________________________________________________________________________ 12. Neither Landlord nor Tenant has any defense as to its obligations under the Lease and claims no set-off or counterclaim against the other party except as follows: _______________________________________________________________________________ 13. Tenant has no right to any concession (rental or otherwise) or similar compensation in connection with renting the space it occupies other than as provided in the Lease except as follows: ______________________________________ __________________________________________ All provisions of the Lease and the amendments thereto (if any) referred to above are hereby ratified. The foregoing certification is made with the knowledge that ___________________ is relying upon the representations herein made in funding a loan to Landlord in purchasing the Premises. IN WITNESS WHEREOF, this certificate has been duly executed and delivered by the authorized officers of the undersigned as of __________________, 19___. TENANT: _____________________________________ a ___________________________________ By: _________________________________ SAMPLE ONLY Print Name: _____________________ Title: __________________________ [NOT FOR EXECUTION] By: _________________________________ Print Name: _____________________ Title: __________________________ EXHIBIT "G" 37 RULES AND REGULATIONS A. GENERAL RULES AND REGULATIONS The following rules and regulations govern the use of the Building and the Development Common Areas. Tenant will be bound by such rules and regulations and agrees to cause Tenant's Authorized Users, its employees, subtenants, assignees, contractors, suppliers, customers and invitees to observe the same. 1. Except as specifically provided in the Lease to which these Rules and Regulations are attached, no sign, placard, picture, advertisement, name or notice may be installed or displayed on any part of the outside or inside of the Building or the Development without the prior written consent of Landlord. Landlord will have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls are to be printed, painted, affixed or inscribed at the expense of Tenant and under the direction of Landlord by a person or company designated or approved by Landlord. 2. If Landlord objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, or placed on any windowsill, which is visible from the exterior of the Premises, Tenant will immediately discontinue such use. Tenant agrees not to place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises including from within any interior common areas. 3. Tenant will not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators, or stairways of the Development. The halls, passages, exits, entrances, elevators and stairways are not open to the general public, but are open, subject to reasonable regulations, to Tenant's business invitees. Landlord will in all cases retain the right to control and prevent access thereto of all persons whose presence in the reasonable judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Development and its tenants, provided that nothing herein contained will be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal or unlawful activities. No tenant and no employee or invitee of any tenant will go upon the roof of the Building. 4. Tenant will not obtain for use on the Premises ice, drinking water, food, food vendors, beverage, towel or other similar services or accept barbering or bootblacking service upon the Premises, except at such reasonable hours and under such reasonable regulations as may be fixed by Landlord. Landlord expressly reserves the right to absolutely prohibit solicitation, canvassing, distribution of handbills or any other written material, peddling, sales and displays of products, goods and wares in all portions of the Development except as may be expressly permitted under the Lease. Landlord reserves the right to restrict and regulate the use of the common areas of the Development and Building by invitees of tenants providing services to tenants on a periodic or daily basis including food and beverage vendors. Such restrictions may include limitations on time, place, manner and duration of access to a tenant's premises for such purposes. Without limiting the foregoing, Landlord may require that such parties use service elevators, halls, passageways and stairways for such purposes to preserve access within the Building for tenants and the general public. 5. Landlord reserves the right to require tenants to periodically provide Landlord with a written list of any and all business invitees which periodically or regularly provide goods and services to such tenants at the premises. Landlord reserves the right to preclude all vendors from entering or conducting business within the Building and the Development if such vendors are not listed on a tenant's list of requested vendors. 6. Landlord reserves the right to exclude from the Building between the hours of 6 p.m. and 8 a.m. the following business day, or such other hours as may be established from time to time by Landlord, and on Sundays and legal holidays, any person unless that person is known to the person or employee in charge of the Building or has a pass or is properly identified. Tenant will be responsible for all persons for whom it requests passes and will be liable to Landlord for all acts of such persons. Landlord will not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. 7. The directory of the Building or the Development will be provided exclusively for the display of the name and location of tenants only and Landlord reserves the right to exclude any other names therefrom. 8. All cleaning and janitorial services for the Development and the Premises will be provided exclusively through Landlord, and except with the written consent of Landlord, no person or persons other than those approved by Landlord will be employed by Tenant or permitted to enter the Development for the purpose of cleaning the same. Tenant will not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises. 9. Landlord will furnish Tenant, free of charge, with two keys to each door lock in the Premises. Landlord may make a reasonable charge for any additional keys. Tenant shall not make or have made additional keys, and Tenant shall not alter any lock or install any new additional lock or bolt on any door of the Premises. Tenant, upon the termination of its tenancy, will deliver to Landlord the keys to all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, will pay Landlord therefor. 10. If Tenant requires telegraphic, telephonic, burglar alarm, satellite dishes, antennae or similar services, it will first obtain Landlord's approval, and comply with, Landlord's reasonable rules and requirements applicable to such services, which may include separate licensing by, and fees paid to, Landlord. 11. Freight elevator(s) will be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord, in its direction, deems appropriate. No equipment, materials, furniture, packages, supplies, merchandise or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Landlord. Tenant's initial move in and subsequent deliveries of bulky items, such as furniture, safes and similar items will, unless otherwise agreed in writing by Landlord, be made during the hours of 6:00 p.m. to 6:00 a.m. or on Saturday or Sunday. Deliveries EXHIBIT "H" 38 during normal office hours shall be limited to normal office supplies and other small items. No deliveries will be made which impede or interfere with other tenants or the operation of the Building. 12. Tenant will not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord will have the right to reasonably prescribe the weight, size and position of all safes, heavy equipment, files, materials, furniture or other property brought into the Building. Heavy objects will, if considered necessary by Landlord, stand on such platforms as determined by Landlord to be necessary to properly distribute the weight which platforms will be provided at Tenant's expense. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to any tenants in the Building or Landlord, are to be placed and maintained by Tenant, at Tenant's expense on vibration eliminators or other devises sufficient to eliminate noise or vibration. Tenant will be responsible for all structural engineering required to determine structural load, as well as the expense thereof. The persons employed to move such equipment in or out of the Building must be reasonably acceptable to Landlord. Landlord will not be responsible for loss of, or damages to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property will be repaired at the expense of Tenant. 13. Tenant will not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant will not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, nor will Tenant bring into or keep in or about the Premises any birds or animals. 14. Tenant will not use any method of heating or air conditioning other than that supplied by Landlord without Landlord's prior written consent. 15. Tenant will not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice, and will refrain from attempting to adjust controls. Tenant will keep corridor doors closed, and shall keep all window coverings pulled down. 16. Landlord reserves the right, exercisable without notice and without liability to Tenant,to change the name and street address of the Building. Without the written consent of Landlord, Tenant will not use the name of the Building or the Development in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 17. Tenant will close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus and lighting or gas before Tenant and its employees leave the Premises. Tenant will be responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 18. The toilet rooms, toilets, urinals, wash bowls and other apparatus will not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from any violation of this rule will be borne by the tenant who, or whose employees or invitees, break this rule. Cleaning of equipment of any type is prohibited. Shaving is prohibited. 19. Tenant will not sell, or permit the sale at retail of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant will not use the Premises for any business or activity other than that specifically provided for in this Lease. Tenant will not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Landlord's prior written consent, which consent Landlord may withhold in its sole and absolute discretion. 20. Tenant will not install any radio or television antenna, loudspeaker, satellite dishes or other devices on the roof(s) or exterior walls of the Building or the Development. Tenant will not interfere with radio or television broadcasting or reception from or in the Development or elsewhere. 21. Except for the ordinary hanging of pictures and wall decorations, Tenant will not mar, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof, except in accordance with the provisions of the Lease pertaining to alterations. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduced to the Premises. Tenant will not cut or bore holes for wires. Tenant will not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule. 22. Tenant will not install, maintain or operate upon the Premises any vending machines without the written consent of Landlord. 23. Landlord reserves the right to exclude or expel from the Development any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Building. 24. Tenant will store all its trash and garbage within its Premises or in other facilities provided by Landlord. Tenant will not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal is to be made in accordance with directions issued from time to time by Landlord. 25. The Premises will not be used for lodging or for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind, nor shall the Premises be used for any improper, immoral or objectionable purpose. No cooking will be done or permitted on the Premises without Landlord's consent, except the use by Tenant of Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted, and the use of a microwave oven for employees use will be permitted, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. H-2 39 26. Neither Tenant nor any of its employees, agents, customers and invitees may use in any space or in the public halls of the Building or the Development any hand truck except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant will not bring any other vehicles of any kind into the Building. 27. Tenant agrees to comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 28. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 29. To the extent Landlord reasonably deems it necessary to exercise exclusive control over any portions of the Common Areas for the mutual benefit of the tenants in the Building or the Development, Landlord may do so subject to reasonable, non-discriminatory additional rules and regulations. 30. Landlord may prohibit smoking in the Building and may require Tenant and any of its employees, agents, clients, customers, invitees and guests who desire to smoke, to smoke within designated smoking areas within the Development. 31. Tenant's requirements will be attended to only upon appropriate application to Landlord's asset management office for the Development by an authorized individual of Tenant. Employees of Landlord will not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions from Landlord. 32. These Rules and Regulations are in addition to, and will not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of the Lease. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord will be construed as a waiver of such Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Development. 33. Landlord reserves the right to make such other and reasonable and non-discriminatory Rules and Regulations as in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Development and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations herein above stated and any additional reasonable and non-discriminatory rules and regulations which are adopted. Tenant is responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. B. PARKING RULES AND REGULATIONS The following rules and regulations govern the use of the parking facilities which serve the Building. Tenant will be bound by such rules and regulations and agrees to cause its employees, subtenants, assignees, contractors, suppliers, customers and invitees to observe the same: 1. Tenant will not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, subtenants, customers or invitees to be loaded, unloaded or parked in areas other than those designated by Landlord for such activities. No vehicles are to be left in the parking areas overnight and no vehicles are to be parked in the parking areas other than normally sized passenger automobiles, motorcycles and pick-up trucks. No extended term storage of vehicles is permitted. 2. Vehicles must be parked entirely within painted stall lines of a single parking stall. 3. All directional signs and arrows must be observed. 4. The speed limit within all parking areas shall be five (5) miles per hour. 5. Parking is prohibited: (a) in areas not striped for parking; (b) in aisles or on ramps; (c) where "no parking" signs are posted; (d) in cross-hatched areas; and (e) in such other areas as may be designated from time to time by Landlord or Landlord's parking operator. 6. Landlord reserves the right, without cost or liability to Landlord, to tow any vehicle if such vehicle's audio theft alarm system remains engaged for an unreasonable period of time. 7. Washing, waxing, cleaning or servicing of any vehicle in any area not specifically reserved for such purpose is prohibited. 8. Landlord may refuse to permit any person to park in the parking facilities who violates these rules with unreasonable frequency, and any violation of these rules shall subject the violator's car to removal, at such car owner's expense. Tenant agrees to use its best efforts to acquaint its employees, subtenants, assignees, contractors, suppliers, customers and invitees with these parking provisions, rules and regulations. 9. Parking stickers, access cards, or any other device or form of identification supplied by Landlord as a condition of use of the parking facilities shall remain the property of Landlord. Parking identification devices, if utilized by Landlord, must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Parking identification devices, if any, are not transferable and any device in the possession of an unauthorized holder will be void. Landlord reserves the right to refuse the sale of monthly stickers or other parking identification devices to Tenant or any of its agents, employees or representatives who willfully refuse to comply with these rules and regulations and all unposted city, state or federal ordinances, laws or agreements. 10. Loss or theft of parking identification devices or access cards must be reported to the management office in the Development immediately, and a lost or stolen report must be filed by the Tenant or user of such parking identification device or access card at the time. Landlord has the right to exclude any vehicle from the parking facilities that does not have a parking identification device H-3 40 or valid access card. Any parking identification device or access card which is reported lost or stolen and which is subsequently found in the possession of an unauthorized person will be confiscated and the illegal holder will be subject to prosecution. 11. All damage or loss claimed to be the responsibility of Landlord must be reported, itemized in writing and delivered to the management office located within the Development within ten (10) business days after any claimed damage or loss occurs. Any claim not so made is waived. Landlord is not responsible for damage by water or fire, or for the acts or omissions of others, or for articles left in vehicles. In any event, the total liability of Landlord, if any, is limited to Two Hundred Fifty Dollars ($250.00) for all damages or loss to any car. Landlord is not responsible for loss of use. 12. The parking operators, managers or attendants are not authorized to make or allow any exceptions to these rules and regulations, without the express written consent of Landlord. Any exceptions to these rules and regulations made by the parking operators, managers or attendants without the express written consent of Landlord will not be deemed to have been approved by Landlord. 13. Landlord reserves the right, without cost or liability to Landlord, to tow any vehicles which are used or parked in violation of these rules and regulations. 14. Landlord reserves the right from time to time to modify and/or adopt such other reasonable and non-discriminatory rules and regulations for the parking facilities as it deems reasonably necessary for the operation of the parking facilities. H-4 EX-10.15 30 LEASE AGREEMENT DATED MARCH 31, 1997 1 EXHIBIT 10.15 LEASE DATE: March 31, 1997 LESSOR: Jim Jamison and Richard Henderson P. O. Box 30155 Flagstaff, Arizona 86003 LESSEE: Medical Science Systems, Inc. a Texas corporation 4400 Macarthur Blvd. Newport Beach, California 92660 PREMISES: A portion of the property described in Exhibit A consisting of the building of approximately 6,000 square feet to be erected thereon, together with the non-exclusive use of the drives, parking and open space adjacent thereto. Lessor hereby leases to Lessee, and Lessee accepts, the subject premises on the following terms and conditions. 1. CONSTRUCTION OF PREMISES. The Building which is to be the subject premises shall be constructed by Lessor for the purpose of this lease. The building shall be constructed according to the plans and specifications prepared by architect Josh Barclay. Both parties shall approve the plans and specifications by their signatures on such documents no later than April 11, 1997. 2. LEASE TERM. The lease term shall commence on the date that the premises is certified for occupancy by the City of Flagstaff. Such date, however, shall not be sooner than August 1, 1997, nor later than October 1, 1997. If the premises are not certified for occupancy by October 1, 1997, Lessee may, at its option, cancel this lease without liability of any kind. If Lessor does not deliver occupancy to Lessee by October 1, 1997, this lease may be cancelled by Lessor and Lessor's only liability to Lessee shall be payment of two months rent for Lessee at its current Flagstaff location. The term shall continue for three years from the first day of the first full month after the date of commencement. 2 3. MONTHLY RENTAL. The monthly rental paid by Lessee to Lessor shall be equal to the number of gross square feet of the completed building (based on exterior dimensions) times $1.20. In addition, Lessee shall reimburse Lessor for all transaction taxes imposed on this rental transaction by the State, County and City. Such reimbursement shall be paid to Lessor at the same time as the monthly rental. If the rental term commences on a date other than the first day of a month, the rent shall be prorated for the first partial month. Thereafter, the full monthly rent shall be due on the first day of each month. 4. RENT ADJUSTMENTS. Each October, beginning with October 2000, the monthly rental shall be increased if the Consumer Price Index -- U.S. City Average -- All Urban Consumers (1967-100), as published by the United States Department of Labor's Bureau of Statistics, increases over the base period Index. The base period Index shall be the Index for the calendar month in which the lease term commences. The base period Index shall be compared with the Index for the same calendar month for each subsequent year (comparison month). If the Index for the comparison month is higher than the base period Index, then the Minimum Rent for the next year shall be increased by the identical percentage commencing with the next rental commencement month. Such increase shall be limited to 3% for any one year. 5. SECURITY DEPOSIT. No security deposit shall be required from Lessee. 6. USE OF PREMISES. Lessor represents and warrants that there are no deed restrictions or covenants restricting the use of the premises for Lessee's purposes. Lessee is satisfied that its proposed use is allowed by the City of Flagstaff. 7. ENVIRONMENTAL HAZARDS. Lessor warrants that the premise is free of any environmental hazards. Lessor, at its sole expense, will remedy any such hazards that may be found unless such hazards were caused or created by Lessee. Lessee shall remedy any environmental hazards caused or created by Lessee. 8. RENEWAL OPTION. Lessee shall have the option to renew this lease for two additional terms of three years each. Such renewals shall be on the same terms and conditions. To exercise these renewal options, Lessee must give Lessor notice of intent to renew, in writing, at least 90 days prior to the expiration of the current term. Such notice is binding on both parties. If 3 Lessee does not elect to renew the lease then Lessor or its agents may enter the premises during regular hours, after 24 hours notice to Lessee, to show the premises to prospective new tenants. 9. CONDITION OF PREMISES. Lessor shall deliver the premises to Lessee clean and free of debris on the commencement date of this Lease, and Lessor further warrants to Lessee that the plumbing, lighting, heating and other systems in the premises shall be in good operating condition and the roof free of leaks on said commencement date. Except as otherwise provided herein, Lessee hereby accepts the premises in their condition existing as of the date that Lessee takes possession of the premises. 10. MAINTENANCE, REPAIRS AND ALTERATIONS. Lessee, at Lessee's expense, shall provide the routine maintenance for the heating and air conditioning systems, plumbing and electrical. So long as no failure or needed repair is due to lack of maintenance, Lessor shall keep in good order, condition and repair the heating and ventilating systems, hot water heater, plumbing and electrical systems. Lessor shall maintain the exterior walls and surfaces including painting. Lessor shall also maintain the exterior roof and structural integrity of the premises. Lessor shall provide snow removal. Lessor shall keep in good repair the asphalt and concrete of the sidewalks and parking areas. Lessee, at Lessee's sole cost and expense, shall keep the interior premises in good order, condition and repair. If Lessee fails to perform Lessee's obligations under this paragraph, Lessor may at Lessor's option, enter upon the premises after 15 days' prior written notice to Lessee (except in the case of emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf and put the premises in good order, condition and repair, and the cost thereof, together with interest thereon at the maximum rate then allowable by law, shall be due and payable as additional rent to Lessor with Lessee's next rental installment. On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the premises to Lessor in the same condition as received, clean and free of debris, but obsolescence, ordinary wear and tear and damage by fire or the elements excepted. Lessee shall repair any damage to the premises occasioned by the installation or removal of its trade fixtures, furnishings and equipment. 11. INTERIOR REMODELING. Lessee shall not, without Lessor's prior written consent, except for any nonstructural alterations, improvements or additions, make any alterations, improvements, additions or utility installations in, on or about the premises. All such work shall be at Lessee's expense. 3 4 Any alterations, improvements, additions or utility installations in or about the premises which Lessee shall desire to make and which requires the consent of Lessor shall be presented to Lessor in written form with proposed detailed plans. If Lessor shall give its consent, the consent shall be deemed conditioned upon Lessee acquiring a permit to perform the work from appropriate governmental agencies and all work being done at Lessee's sole expense. If Lessor fails to respond to Lessee's request for consent in 15 days, consent will be deemed given. Lessor's consent shall not be unreasonably withheld. Unless Lessor requires their removal, all alterations, improvements, additions and utility installations which may be made on the premises shall become the property of Lessor and remain upon and be surrendered with the premises at the expiration of the term; provided, however, Lessee's machinery, equipment, computers, telephone systems and similar items and systems, trade fixtures and furnishings shall remain the property of Lessee and may be removed by Lessee. 12. INSURANCE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this lease a policy of Combined Single Limit Bodily Injury and Property Damage Liability Insurance policy insuring Lessee against any liability arising out of the use, occupancy or maintenance of the premises. Such insurance shall be in an amount not less than $1,000,000 per occurrence. Lessor shall be named as an additional insured on said policy. Lessor at Lessor's expense shall obtain a policy of casualty insurance insuring the building against damage to the premises from fire and other casualties. Lessee shall be solely responsible for insuring its own contents and personal property against casualty loss at its own expense. 13. INDEMNITY. Except for any act, omissions, fault or negligence of Lessor or Lessor's agents, employees, representatives or invitees, Lessee shall indemnify and hold harmless Lessor from and against any and all claims of third parties arising from Lessee's use of the premises, or from the conduct of Lessee's business. Lessee shall further indemnify and hold harmless Lessor from and against any and all claims arising from any negligence of Lessee, or any of Lessee's agents, contractors, or employees, and from and against all costs, attorney's fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon; and in case any action or proceeding be brought against Lessor by reason of any such claim, Lessee upon notice from Lessor shall defend the same at Lessee's expense. 4 5 14. DAMAGE OR DESTRUCTION. If the premises is totally or substantially destroyed by any cause whatsoever this lease shall terminate as of the date the destruction occurred. If the property is only partially damaged, Lessor, at its sole discretion, may repair the damage as soon as reasonably possible. If Lessor makes such repairs, the lease shall remain in effect with Lessee being entitled to a proportionate deduction of rent while such repairs are being made with such proportionate deduction based upon the extent to which the making of such repairs shall interfere with the business carried on by the Lessee on the property. If Lessor does not elect to repair such partial damage, Lessor shall notify Lessee within 30 days of the occurrence of the damage and the lease shall terminate as of the date of the damage. 15. COMMON AREA EXPENSES. Lessor shall pay all common area or other charges assessed by the owners of the Cedar Pines Shopping Center. 16. REAL PROPERTY TAX. Lessor shall pay and be solely responsible for all real property tax assessed against the premises during the lease term up to the amount assessed for the first full year of assessment of the property as improved property. One-half of any increase in subsequent years ("one-half" being one-half of the total parcel described in Exhibit A) will be paid by Lessee at least ten days before the taxes are due to the County Treasurer. 17. PERSONAL PROPERTY TAX. Lessee shall pay, to the extent required by law, and be solely responsible for all personal property tax assessed to the premises or Lessee's operations at the premises. 18. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services supplied to the premises, together with any tax thereon. 19. ASSIGNMENT AND SUBLETTING. Lessee may, with Lessor's consent, (not to be unreasonably withheld) assign or sublet all or part of Lessee's interest in this lease. No subletting or assignment shall release Lessee or Lessee's obligation or alter the primary liability of Lessee to pay the rent and to perform all other obligations to be performed by lessee hereunder. 5 6 20. LESSEE DEFAULTS. The occurrence of any one or more of the following events shall constitute a material default and breach of this lease by Lessee: a. The vacating or abandonment of the property by Lessee. b. The failure of Lessee to make any payment of rent or other payment required to be made by Lessee under the lease where such failure shall continue for a period of 10 days after the receipt of written notice thereof from Lessor to Lessee. c. The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this lease to be observed or performed by Lessee, other than #b above, where such failure shall continue for a period of 15 days after receipt of written notice of such from Lessor to Lessee; provided, however, that if the nature of Lessee's default is such that more than 15 days are reasonably required for its cure, then Lessee shall not be deemed in default if Lessee commences such cure within the 15-day period and thereafter diligently prosecutes such cure to completion. d. The making by Lessee of any general assignment or general arrangement for the benefit of creditors or the filing by or against Lessee of a petition to have Lessee adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy, the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the property or of Lessee's interest in the lease, or the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the property or of Lessee's interest in the lease. 21. LESSOR REMEDIES. In the event of any material default or breach by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default or breach: a. Terminate Lessee's right to possession of the property by any lawful means, in which case this lease shall terminate and Lessee shall immediately surrender possession of the property to the Lessor. In such event, Lessor shall be entitled to recover from lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the property, expenses or reletting, including necessary renovation and alteration of the property, reasonable attorney's fees, and any real estate commission actually paid as well as the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided. 6 7 b. Maintain Lessee's right to possession in which case this lease shall continue in effect whether or not Lessee shall have abandoned the property. In such event, Lessor shall be entitled to enforce all of Lessor's rights and remedies under this lease, including the right to recover rent as it becomes due. c. Pursue any other remedy now or hereafter available to Lessor under law with unpaid installments of rent and any other unpaid monetary obligations of Lessee under the terms of this lease to bear interest from the date due at the maximum rate then allowable by law no matter which remedy or remedies are selected and enforced. d. It is agreed remedies which are not inconsistent at law or equity are cumulative. 22. LATE CHARGE. Lessee acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by the lease, the exact amount of which is extremely difficult to ascertain. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor by the tenth day of the month in which it is due, then Lessee shall pay to Lessor a late charge of $300. If the monthly rent has not been paid by the 25th of the month, Lessee will be deemed to have breached this lease. 23. DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than 15 days after written notice by Lessee to Lessor specifying the exact nature of the default; however, if the nature of Lessor's obligation is such that more than 15 days are required to perform, then Lessor shall not be in default if Lessor commences performance within such 15 days period and thereafter diligently prosecutes the same to completion. 24. TIME IS OF THE ESSENCE. Time is of the essence. 25. SIGNS. Lessee may place signs upon the property at its own expense with the approval of the City of Flagstaff. 26. WAIVERS. No waiver by Lessor of any provision of this lease shall be deemed a waiver of any other provision or any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of any act, shall not be deemed to render unnecessary the obtaining of Lessor's consent to or 7 8 approval of any subsequent act of Lessee. The acceptance of rent by Lessor shall not be a waiver of any preceding breach by Lessee of any provision of the lease, other than the failure of Lessee to pay the particular rents so accepted. 27. TRANSFER BY LESSOR. In the event Richard Henderson or Jim Jamison (or any successor owner of the property) shall sell, convey or transfer interest in the property, the Lessor's obligations in regard to this lease shall be fully binding on such successor owner. The memorandum of lease to be recorded pursuant to Paragraph 29 shall specifically state that by acceptance of a deed to the property the grantee is accepting the obligations of this lease. However, neither Richard Henderson nor Jim Jamison nor any successor owner shall have any personal liability for the performance of the Lessor's obligation after a transfer of the property to another party. 28. GENERAL PROVISIONS. If any term or provision of this lease shall be deemed invalid or unenforceable, the remainder of the lease or the application of such term or provision to the extent it is valid, shall be in full force and effect. The parties agree in the event of a breach of this lease by either party, the breaching party shall pay the non-breaching party costs and reasonable attorney's fees incurred because of the breach whether a lawsuit is instituted or not. Lessee understands and agrees this is a proposal to lease and does not bind the Lessor until approved by the Lessor or its agent. Each individual executing this lease on behalf of Lessee represents and warrants that he or she is duly authorized to execute and deliver this lease on behalf of the entity. Lessor through an authorized agent, accompanied by Lessee, shall have the right to enter the property at reasonable times for the purpose of inspecting the same or showing the property to prospective purchasers, lenders or tenants, and for making such alterations, repairs, improvements or additions to the property or to the building which Lessor deems necessary or desirable. Lessee shall not record this lease in any form. However, a memorandum of this lease shall be recorded. Captions and paragraph headings used in this lease are for convenience only and are not part of this agreement and shall not be deemed to limit or alter any provisions of the agreement and shall not be deemed relevant in construing the agreement. 8 9 LESSOR LESSEE MEDICAL SCIENCE SYSTEMS, INC. /s/ RICHARD HENDERSON By /s/ PAUL J. WHITE - -------------------------------------- ----------------------------------- Richard Henderson Paul J. White, President /s/ JIM JAMISON By /s/ MICHAEL G. NEWMAN - -------------------------------------- ----------------------------------- Jim Jamison Michael G. Newman, Secretary ACKNOWLEDGEMENT OF SPOUSES: I agree to the foregoing lease and agree that my community property interest is bound hereto. /s/ DARLENE JAMISON ----------------------------------- Darlene Jamison I acknowledge that the subject property is Richard Henderson's sole and separate property and acknowledge that I have no community property interest. /s/ CLARISA HENDERSON ----------------------------------- Clarisa Henderson 9 EX-10.16 31 LEASE AGREEMENT DATED OCTOBER 23, 1997 1 EXHIBIT 10.16 OFFICE LEASE ONE INTERNATIONAL CENTRE This is a Lease Agreement made and entered into between Diamond Shamrock Leasing, Inc. ("Lessor"), and Medical Science Systems, Incorporated as ("Lessee"), whether one or more. 1.1. THE LEASED PREMISES. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor the "Leased Premises" which consists of Lessee's "Office Space" and "Common Area" as defined below. (a) LESSEE'S OFFICE SPACE. Lessee's "Office Space", to which Lessee shall have exclusive use rights, consists of suite(s) 1350 representing the Office Space outlined and shaded on the floor plan contained in Exhibit A. Such Office Space is located in the office building known as One International Centre ("Office Building") on a tract of land, legally described by lot and block and metes and bounds in Exhibit B. The street address of the Office Building is 100 N.E. Loop 410, San Antonio, Texas 78216-4742. The "Property" shall mean the land, the Office Building, the parking building, the parking areas and all other improvements to the land. b) COMMON AREA. The "Common Area", to which Lessee shall have non-exclusive use rights, consists of (1) the interior Common Area located in the Office Building, i.e., areas normally accessible to all tenants such as the hallways, stairwells, elevators, lobby, restrooms, and snack bar areas, and (2) the exterior Common Area located outside the Office Building on the above described land, i.e., loading areas, sidewalks, driveways, parking garage, parking areas, and other open areas (if any), subject to paragraph 9.2 on parking. 1 .2. USE. Lessee's Office Space may be used only for general office purposes. The name of Lessee's business will be Medical Science Systems, Incorporated. 1.3. RENTABLE AREA. (a) The term "Rentable Area" as used herein means (i) in a case of a single lessee floor, all floor area measured from the inside surface of the outer glass of the Office Building, excluding only the area ("Service Area") within the outside wall used for building stairs, fire towers, elevator shafts, flues, vents, stacks, pipestacks, and vertical ducts (which areas shall be measured from the mid-point of walls enclosing such areas) but including any Service Area which is for the specific use of Lessee, such as special stairs or elevators, plus a proportionate part of the square footage of the Office Building central areas for providing electrical, mechanical, janitorial, security and mail services as well as the central lobby, central fire exit corridor, and central loading dock ("Central Area"), and (b) in the case of a floor to be occupied by more than one (1) lessee, all floor areas within the inside surface of the outer glass enclosing the space on such floor and measured to the mid-point of the walls separating areas leased by or held for lease to other lessees or from Common Area devoted to public corridors, electrical and telephone rooms, elevators, foyers, restrooms, mechanical, janitor's closet, vending areas, and other similar facilities for the use of all lessees on the particular floor, plus Lessee's proportionate part of such Common Area located on such floor plus a proportionate share of the square footage of the Office Building's Central Area. In the case of both single and multiple tenant floors, telephone, electrical, mechanical, maintenance, janitorial and security rooms not included in the Office Building Central Area, but which serve more than one (1) floor shall be considered Common Area and shall be allocated among lessees whose office spaces are served thereby, regardless of whether such Office Spaces are located on the same floor as the rooms in question. Such allocation shall be made in proportion with the Rentable Areas of all Tenants so served. No deductions from Rentable Area shall be made for columns or projections necessary to the Office Building. (b) The Rentable Area of the Office Building is approximately two hundred ninety-five thousand twenty-one square feet (295,021 sq.ft.) and the Rentable Area of the Office Space is estimated to be 1,961 and shall be specifically calculated in accordance with the above definition by Lessor or Lessor's architect when floor plans are complete. Upon such determination, the Rentable Area of the Office Space shall be appropriately adjusted to reflect the actual square feet of the Rentable Area of the Office Space as determined by such calculation. The Rentable Area of the 2 Office Building shall be subject to further adjustment only in the event of any future expansion or modification of the Office Building. 1.4. USABLE AREA. The term "Usable Area" as used herein means the Rentable Area less Lessee's proportionate part Common Area on a multiple lessee floor and less Lessee's allocation of Central Area. 2.1. BASE RENT AND ADDITIONAL RENTS. Lessee shall pay to Lessor a "Base Rent" of $145,212.05 in total for the initial lease term, which amounts to $1,315.51 per calendar month for months 1 - 12 and $2,696.38 per calendar month for months 13 - 60. Such Base Rent is equivalent to $8.05 per square foot per year for year 1 and $16.50 per square foot per year for years 2 - 5 for Lessee's Rentable Area. "Additional Rent" representing Lessee's prorata share of Office Building Operating Expenses shall be paid in accordance with paragraph 32.1. 3.1. DATE AND PLACE OF PAYMENT. The monthly rent and one-twelfth of Lessee's share of estimated Office Building Operating Expenses under paragraph 32.1 shall be due and payable in advance on the first day of each calendar month without demand. Partial months shall be prorated. All rent and other sums are due and payable in San Antonio, Bexar County, Texas at the address designated by Lessor from time to time. All sums due by Lessee are without right of set-off or deduction. Monies mailed are considered timely paid only if received by Lessor by the due date or if received later than the due date, in an envelope postmarked more than two (2) days before the due date. Rent shall be paid without notice or demand. All other sums shall be due as otherwise provided herein (or upon delivery of written notice in accordance with paragraph 29.1). 3.2. LATE PAYMENTS. If any rent payment or other sum due by Lessee to Lessor is received and accepted by Lessor later than five (5) days after its due date, Lessee shall pay a late charge of five (5%) of such rent payment or other sum. Lessor's acceptance of late rent or other sum shall not constitute permission for Lessee to pay the rent or other sum late thereafter and shall not constitute a waiver of Lessor's remedies for subsequent late payments. Late payment charges are due immediately upon notice or demand. For each returned check, Lessee shall pay all applicable bank charges incurred by Lessor plus $25.00. Payments of any kind received by Lessor on behalf of Lessee may be applied at Lessor's option to non-rent items first, then to rent. Payment of rent by Lessee shall be an independent covenant. If Lessee has not timely paid rentals and other sums due on two or more occasions, or if a check from Lessee is returned for insufficient funds or no account, Lessor may require that all rent and other sums due be paid by cashier's check, certified check, or money order. 3.3. SECURITY DEPOSIT. At the time of execution of this lease, Lessee shall deposit with Lessor $2,696.30 cash to secure performance of Lessee's obligations under this lease. If Lessee fails to pay rent or other sums when due under this lease, Lessor may apply any cash security deposit toward amounts due and unpaid by Lessee. Lessee shall immediately restore the security deposit to its original amount after any portion of it is applied to amounts due and unpaid by Lessee. Lessee acknowledges that Lessor has the right to transfer or mortgage its interest in the property and in this Lease and Lessee agrees that in the event of any such transfer or mortgage, Lessor shall have the right to transfer or assign the security deposit of Lessee to the transferee or mortgagee. Lessee's security deposit shall not be mortgaged, assigned or encumbered in any manner whatsoever by Lessee. 4.1 TERM, COMMENCEMENT, AND ANNIVERSARY. The initial lease term shall start on the commencement date and shall continue for any partial first calendar month plus 60 full calendar months thereafter and shall continue for month-to-month thereafter until Lessor or Lessee gives thirty (30) days prior written notice of termination. The lease commencement date shall be the 1st day of December, 1995 or the date Lessee occupies all or any part of Lessee's Office Space, whichever occurs first. The annual anniversary date of this lease shall be the first day of the first full month following the commencement date of the lease, unless the lease commencement date is the first day of the month. The date rent commences shall be the same day as the above lease commencement date. 4.2. ACKNOWLEDGEMENT OF LEASE. Upon commencement of this lease, Lessor and Lessee shall execute a recordable acknowledgement of this lease in a form which is attached as Exhibit D and which will confirm the commencement date, ending date, annual anniversary date of the lease, Rentable Area and Usable Area in Lessee's Office Space. 4.3. DELIVERY OF POSSESSION. Lessor shall deliver keys and/or access cards or codes and possession of Lessee's Office Space to Lessee on the lease commencement date stated in paragraph 4.1 unless otherwise agreed in writing by the parties. Lessee shall not be liable for rent until Lessor delivers possession of the Leased Premises to Lessee. If there is a delay in delivery of possession, rent shall be abated until Lessee's Office Space is ready for occupancy; and neither Lessor nor Lessor's agents shall otherwise be liable for any damages; and the lease shall not terminate. Initials [SIG] [SIG] ----- ----- -2- 3 5.1 TENANT FINISH-OUT. Lessor shall provide standard building finish-out, as described in Exhibit E. Lessor shall perform any special construction described in Exhibit E. Costs of tenant finish-out special construction shall be paid for pursuant to such exhibit. 6.1. QUIET POSSESSION. If Lessee is current and in compliance with all of Lessee's obligations under this lease, Lessee shall be entitled to peaceful and quiet possession and enjoyment of Lessee's Office Space, subject to the terms and conditions of this lease. Lessee shall have access to the building parking garage and common parking areas at all times, subject to parking fees and the rules referred to in paragraphs 9.2 and 23.1. Lessor shall make diligent efforts to have all other tenants in the Office Building comply with parking and building rules. Failure of other tenants to comply with such rules shall not be considered a default by Lessor. Construction noise or vibrations shall not be considered a default by Lessor. 7.1. UTILITIES AND SERVICES BY LESSOR. Except where otherwise stated in this lease, Lessor shall pay for and furnish in a timely and diligent manner to Lessee the following utilities and services and no others, subject to paragraph 32.1 regarding Lessee's payment of Lessee's prorata share of Office Building Operating Expenses. (a) electricity, gas, water and waste water services for Common Area as well as electric lighting service; (b) air conditioning and heating as reasonably required on a seasonal basis to maintain the average temperature in the Lessee's Office Space at no lower than 68 degrees fahrenheit, but no more than 74 degrees fahrenheit for comfortable use and occupancy under normal office conditions from 7:00 a.m. to 7:00 p.m. on Monday through Friday inclusive, and from 7:00 a.m. to 1:00 p.m. on Saturday upon request, (but not on Sunday, New Year's Day, Memorial Day, July 4th, Labor Day, Thanksgiving and Christmas) or during such other times or days as Landlord may reasonably designate; (c) janitorial service, five (5) day per week (excluding the above holidays); (d) electricity for standard office equipment and lighting; (e) trash collection services (dumpster or garbage cans); (f) pest control services as needed in the reasonable judgment of Lessor; (g) landscaping and parking lot maintenance services; (h) repair and maintenance services pursuant to paragraph 8.1 (i) replacement of fluorescent light bulbs and ballasts in building standard lighting fixtures (but not incandescent light bulbs for nonstandard fixtures or for Lessee's lamps); and (j) elevator service. 7.2. UTILITIES AND SERVICES BY LESSEE. Charges for any services for which Lessee is required to pay from time to time hereunder shall be due and payable within five (5) days after such billing. If Lessee shall fail to make payment for such services in full within three (3) days after Lessor hand delivers to Lessee or to Lessee's representative written notice of Lessor's intent to terminate utilities or services which are furnished by Lessor, then Lessor may terminate such utilities or services after such three (3) day notice period without further notice, and such discontinuance shall not be deemed to constitute an eviction or disturbance of the Lessee's use and possession of the Leased Premises or relieve Lessee from paying rent or performing any of its obligations under this Lease. Lessor reserves the right to submeter electricity and/or water. Any electricity or water submetering shall be billed to and paid by Lessee at Lessor's average cost per KWH or gallon, and no more. If the water bill from the utility company includes waste water charges, Lessee's liability for water submetering shall include corresponding waste water costs (if any). 7.3. INTERRUPTION OF UTILITIES OR SERVICES. Temporary interruption or malfunction of utilities, services, and/or telephones shall not render Lessor liable for damages, rent abatements, or release of any Lessee obligation. Lessor shall use diligent efforts to have such utilities and services restored as soon as reasonably possible. Should interruption of utilities or services render Office Space unusable for three (3) consecutive days, then Lessee's rent shall abate until such utilities or services are restored. 7.4. EXTRA ELECTRICITY. There shall be no extra electricity charges for typewriters, word processors, dictating equipment, adding machines, desk top calculators, lamps, or other standard 110 volt office equipment. However, Lessee shall pay Lessor monthly, as billed, for charges which are separately metered or which Lessor may reasonably compute for electricity utilized by Lessee for the following purposes: x-ray machines, hotplates, electric heaters, 220 volt equipment, computers (other than desktop or word processor computers), or other electrical service not standard for the Office Building. 7.5. EXTRA HEATING OR AIR CONDITIONING. If Lessee requests air conditioning or heating after the hours as set forth in paragraph 7.1(a), Lessor may charge Lessee an hourly fee established from time to time by Lessor for after-hour air conditioning or heating in the Office Building. Initials [SIG] [SIG] ----- ----- -3- 4 8.1 MAINTENANCE AND REPAIRS BY LESSOR. Except as described herein, Lessor shall maintain the interior of Lessee's Office Space in good repair, at Lessee's expense. Lessor shall use diligence to provide for the reasonable cleaning, maintenance, repair, reconnection of interrupted utilities or services, and landscaping of Common Area, subject to any reimbursement obligations of Lessee under paragraph 8.2. Lessor may rekey at any time without reduction in access to Office Space. Lessor may temporarily close any part of the common facilities if reasonably necessary for repairs or construction. Repairs and maintenance shall be in accordance with applicable governmental requirements. 8.2. MAINTENANCE AND REPAIRS BY LESSEE. Lessee shall promptly reimburse Lessor for Lessor's cost of repairing or replacing damage which is caused inside Lessee's Office Space by Lessee, Lessee's agents, employees, family, or licensees, invitees, visitors, or customers or outside Lessee's Office Space by Lessee or Lessee's employee's, agents, or contractors. Lessor's cost of repair shall include 15% for overhead. Lessor may require advance payment therefor prior to repair or replacement. Lessor shall have right of approval of all repairmen or maintenance personnel. Lessee shall not damage or allow other persons listed above to damage any portion of the Leased Premises. Lessee shall pay for replacement of all incandescent light bulbs and for unstopping any drains or water closets in Lessee's Office Space. If Lessor or Lessee's workmen or contractors are permitted to repair, alter, or modify Lessee's Office Space, Lessee shall warrant that no mechanic's or materialman's lien shall be filed against the Leased Premises. All such work shall be in accordance with applicable governmental requirements. 8.3. TELECOMMUNICATIONS EQUIPMENT. All telecommunications equipment necessary to serve Lessee shall be located in Lessee's Office Space and paid for by Lessee. 9.1. ACCESS, KEYS, LOCKS, AND SECURITY. (a) ACCESS. Lessee shall have access to Lessee's Office Space at all times. Lessor shall have access to Lessee's Office Space at reasonable times for reasonable business purposes. (b) KEYS. Lessor shall furnish Lessee two (2) keys or access codes or cards for Lessee's Office Space, two (2) keys or access codes or cards for the main exterior entry doors of the Office Building if such door is locked after hours, and two (2) keys or access codes or cards to Lessee's mailbox in the Office Building. A deposit of $10.00 shall be charged for each mailbox key and office key, and access card. Additional or replacement keys or access codes or cards shall be furnished at the same amount charged to all other tenants in the Office Building at the time of Lessee's request. Lessor shall not be liable for risk of loss resulting from Lessee's keys, access codes, or cards being lost or used by unauthorized persons. Lessor reserves the right to rekey or change locks for security reasons if new keys are timely furnished to Lessee. (c) LOCKS. Lessee may not add locks, change locks, or rekey locks without written permission of Lessor. Locks may be changed at Lessee's request and expense. If locks to the Office Space are changed, Lessor may specify kind and brand of locks, placement, installation, master key compatibility, etc. (d) SECURITY. Lessor shall have no duty to provide any security services of any kind unless expressly provided in this lease. Lessor shall not be liable to Lessee or Lessee's employees, family, customers, invitees, contractors, or agents for injury, damage, or loss to person or property caused by criminal conduct of other persons, including theft, burglary, assault, vandalism or other crimes. Lessee shall be responsible for locking its Office Space doors when the last person leaves such Office Space for the day. 9.2. PARKING. Lessee shall have the use of seven (7) free unreserved parking spaces (one (1) space for each three hundred square feet (300 sq. ft.) of Rentable Area of the Leased Premises) in the parking garage. Lessor shall have sole control over parking and the parking building and parking areas. Parking rules are contained in attached Exhibit F-1. If vehicles are parked in violation of Lessor parking rules or in violation of state statutes, Lessor may exercise vehicle removal remedies under Articles 6701 g-1 and 6701 g-2 of the Texas Civil Statutes upon compliance with statutory notice. There shall be no reserved parking spaces unless agreed in writing by Lessor. 10.1. OCCUPANCY, NUISANCE, AND HAZARDS. Lessee's Office Space shall be occupied only by Lessee or Lessee's employees and shall not be left entirely vacant or used exclusively for storage. Lessee and Lessee's agents, employees, family, licensees, invitees, visitors, and contractors shall comply with all federal, state, and local laws relating to occupancy or to criminal conduct while such persons are on the Leased Premises. Lessee and the persons listed above shall not (1 ) use, occupy, or permit the use or occupancy of the Leased Premises for any purpose which is directly or indirectly forbidden by such laws or which may be dangerous to life or property, (2) permit any public or private nuisance, (3) disturb the quiet enjoyment of other tenants, (4) do anything which might emit offensive odors or fumes, (5) make undue noise or vibrations, (6) permit anything which would cancel insurance coverage or increase the insurance rate on the Office Building or contents, (7) otherwise damage the Leased Premises. Initials [SIG] [SIG] ----- ----- -4- 5 11.1 TAXES. Lessor shall be responsible for payment of all taxes and assessments against the Office Building subject to Lessee's obligation to pay Lessor for Lessee's share thereof, on a prorata square ft. basis, as additional rent pursuant to paragraph 32-1. Lessee shall timely pay any taxes assessed against Lessee's furniture, equipment, fixtures, or other personal property in Lessee's Office Space. 12.1. INSURANCE. Lessor and Lessee shall comply with the respective insurance obligations as set forth below: (a) LESSOR. Lessor, at its option, may maintain (1) fire and extended coverage insurance, including vandalism and malicious mischief, on the office building, and (2) comprehensive general liability insurance. If Lessor elects to so insure, the amounts shall be as Lessor may deem reasonably appropriate. Lessor shall have no responsibility to maintain fire and extended coverage insurance on Lessee's contents. (b) LESSEE. Lessee shall carry insurance from the first day of Lessee's occupancy and then during the entire occupancy hereof insuring Lessee and Lessor as their interests may appear with terms and coverages and by companies satisfactory to Lessor, and with such increases in limits as Lessor may from time to time request, but initially Lessee shall maintain the following coverages in the amounts as follows: (i) in case of personal injury to or death of any person or persons, not less than $1,000,000.00 for each injury or death to a person and $1,000,000.00 for each incident involving personal injury or death of person, and, in the case of property damage, not less than $1,000,000.00 for one occurrence; and (ii) in case of fire, sprinkler leakage, malicious mischief, vandalism, and other extended coverage perils, for the full insurable replacement value of all additions, improvements and alterations to the Office Space which are beyond those tenant improvements initially provided by Lessor, as per Exhibit E, and all office furniture, trade fixtures, office equipment, merchandise, and all other items of Lessee's property on the Leased Premises. (c) WAIVER OF SUBROGATION. Upon written request after signing this lease, but before any loss or damage occurs, Lessor may require that Lessee's fire/casualty and liability insurance policy provide a waiver for all right of recovery by way of subrogation in connection with any loss or damage covered by such insurance policies. Notwithstanding the foregoing, if such waiver of subrogation is not incorporated into the policy and cannot be procured or if it can be procured only with an additional premium charge, such party shall furnish to the other party written evidence from the insurance company or insurance agent, verifying that such waiver is (1) not obtainable or (2) not obtainable without extra charge. Thereafter, within a reasonable time after receiving such notice, the party for whose benefit the waiver is sought may (1) agree to pay any additional charge necessary to obtain the waiver of subrogation or (2) place the insurance with a company which is reasonably satisfactory to the other party and its mortgagees with a policy of the same terms and coverage, the extra cost of which will be entirely borne by the party for whose benefit the waiver of subrogation is sought. (d) INSURANCE CERTIFICATES. Lessee shall provide Lessor with a certificate of Lessee's insurance as required prior to the date Lessee initially occupies Lessee's Office Space or any portion thereof. Lessor and Lessor's managing agent (if any) shall be named as additional insureds on Lessee's liability insurance policy. Upon written request by Lessor, changes in the name of Lessor or Lessor's managing agent shall be reflected on such certificate. Upon written request, Lessee shall furnish to Lessor copies of the policies of insurance referred to in this lease, including any waivers of subrogation, or satisfactory evidence of same. (e) NOTICE FROM LESSEE'S INSURANCE CARRIER. All policies of insurance to be provided by Lessee shall contain a provision (to the extent legally permitted) that the insurance company shall give Lessor thirty (30) days' written notice in advance of (1) any cancellation or non-renewal of the policy, (2) any reduction in the policy amount, and (3) any deletion of additional insureds. 12.2. MUTUAL RELEASES. (a) To the extent that the coverage of their respective insurance policies are not adversely affected, Lessor and Lessee release each other and their respective officers, directors, employees, and agents from any claims for loss or damage to any person or property on the Leased Premises which is caused by or which results from risks insured against under insurance policies carried by Lessor or Lessee and in force at the time of any such loss or damage. The foregoing release shall not apply to property losses or damages in excess of policy limits or to losses or damages not covered by insurance due to a deductible clause in the policy. 12.3. HOLD HARMLESS. (a) Except to the extent caused by the gross negligence or willful misconduct of Lessor, its employees, duly authorized agents, licensees, contractors, servants, or invitees, Lessee hereby waives any and all claims against Lessor for (i) any death of or injury of person or damage to property due to the condition or design of or any defect Initials [SIG] [SIG] ----- ----- -5- 6 in the Property or any attached mechanical systems and equipment which may exist or occur, or any defect in or failure of pipes or wiring, or the backing up of drains or to the bursting or leaking of pipes, faucets and plumbing fixtures, or to gas, water, steam, electricity or oil leaking, escaping or flowing into the Office Space, (ii) any damage caused by other persons on the Property, and (iii) any damage caused by private, public or quasi-public construction or other work on about or adjoining the Property. Lessee for itself and its agents, employees, licensees, servants, and invitees, expressly assume such risks of death or injury to person or damage to Property resulting from the condition of the Property. Lessee hereby defends and indemnifies Lessor and holds Lessor harmless from any damage to any property, or injury or death of any person arising from any event, regardless of cause, including, without limitations, the negligence of Lessor, its employees, duly authorized agents, licensees, contractors, servants or invitees (except as hereinafter provided), which occurs within the Office Space (and outside the Office Space if caused by gross negligence or willful misconduct of Lessee or Lessee's agents, licensees, employees, servants, and invitees) including without limitation, reasonable attorneys fees, investigation costs, and all other reasonable costs and expenses incurred by Lessor following the first notice that any claim or demand has been made or may be made against Lessor unless such damage or injury results from the gross negligence or willful misconduct of Lessor, its employees, duly authorized agents, licensees, contractors, servants, or invitees and then only to the extent not collectable by insurance carried under Lessee. (c) If Lessor is made a party to any litigation commenced by or against Lessee or relating to this Lease or Lessee's use of the Office Space, the Leased Premises or the Property, and in any such litigation Lessor is adjudicated not to have any legal responsibility by reasons of its gross negligence or willful misconduct, then Lessee shall pay all costs and expenses, including reasonable attorneys fees and costs, incurred by or imposed against Lessor because of any such litigation and the amount of such costs and expenses, including reasonable attorneys fees and court costs, shall be a demand obligation owed by Lessee to Lessor. However, if Lessor is adjudicated to have been comparatively negligent, then Lessee's payment to Lessor of all costs and expenses shall be reduced by the percentage of Lessor's comparative negligence. (d) In no event shall Lessor be liable to Lessee for incidental, consequential, special or indirect damages, including without limitation, lost business profits, and in no event shall Lessee be liable to Lessor for incidental, consequential, special or indirect damages, including, without limitation lost business profits. Lessor's liability to Lessee for any default by Lessor under the Lease or for any other claim arising out of Lessee's occupancy, possession or use of the Leased Premises shall be limited to Lessor's interest in the Property, and Lessee agrees to look solely to Lessor's interest in the Property for the recovery of any judgement from Lessor, it being agreed by Lessee that neither Lessor nor any shareholder, officer or director Lessor shall be personally liable for any such liability, judgment or deficiency. This paragraph 1 2.3 shall survive any expiration or earlier termination of this Lease for a period not to exceed two (2) years during which time any and all claims hereunder must be asserted. 13.1. ALTERATIONS BY LESSEE. Lessee may not make any alterations, improvements, door lock changes, or other modifications of any kind to the Leased Premises without Lessor's written consent. 'Alterations' include but are not limited to improvements glued, screwed, nailed, or otherwise permanently attached to the Office Building, structural changes, roof and wall penetrations, and all plumbing, electrical, and HVAC changes. Requests for Lessor's approval shall be in writing and shall be detailed to Lessor's reasonable satisfaction. The foregoing shall be done only by Lessor's contractors or employees or by third parties approved by Lessor in writing. Lessee shall pay in advance for any requested alterations, improvements, lock changes, or other modifications which are approved and performed by Lessor. If same are performed by Lessee with Lessor's permission, Lessee shall not allow any liens to be placed against the Office Building as a result of such additions or alterations. Alterations, improvements, and modifications done at Lessee's request shall comply with all applicable laws. Changes in Lessee's alterations or improvements which may be later required by governmental action shall also be paid for by Lessee. 14.1. REMOVAL OF PROPERTY BY LESSEE. Lessee may remove its trade fixtures, furniture, and equipment only if (1) such removal is made prior to the end of the lease term, (2) Lessee is not in default under this lease at time of removal, and (3) such removal is not in anticipation of an early move-out prior to the end of the lease term. Lessee shall pay all costs of removal. Lessee shall have no rights to property remaining on the Leased Premises after move-out and all such property shall be conclusively presumed to have been abandoned by Lessee and title to such property shall pass to Lessor under this Lease as in a bill of sale. Lessee may not remove any alterations as defined in paragraph 1 3.1 or improvements such as wall-to-wall carpeting, book shelves, window coverings, drapes, cabinets, paneling, counters, kitchen or break room built-ins, shelving, wall covering, and anything else attached to the floor, walls, or ceilings. If Lessor requests in writing, Lessee shall, immediately prior to moving out, remove any alterations, fixtures, equipment, and other property installed by Lessee unless previously approved in writing by Lessor. Lessee shall pay for cleaning or repairing damage caused by Lessee's removal of any property. Initials [SIG] [SIG] ------- ------- -6- 7 15.1. SUBLETTING AND ASSIGNMENT. Lessee may not sublet, assign, pledge, or mortgage this lease and may not grant licenses, commissions, or other rights of occupancy to all or any part of the Leased Premises without Lessor's prior written approval, not to be unreasonably withheld. Sale, transfer, or merger of the majority of the voting shares or voting partnership interests in Lessee (if a corporation or partnership) shall be considered an assignment; likewise for issuance of treasury stock or admission of a new general partner. Lessor shall not be obligated to approve any sublease or assignment. However, if Lessor gives such approval, Lessor shall be entitled to (1) the excess between Lessee's rental per square foot under the lease and the rental per square foot under the sublease or assignment, and (2) any other consideration flowing directly or indirectly from the sublessee or assignee to Lessee or Lessee's agents, excluding commissions to independent real estate brokers. The foregoing is in consideration of additional management performed or to be performed by Lessor under such sublease or assignment. In addition to the foregoing, Lessor may charge Lessee a one-time fee equal to one month's lease rental for such additional administrative, investigative, and management services. Violation of this lease by sublessees or assignees shall be deemed a violation by Lessee. Approval by Lessor of any sublease or assignment shall not release Lessee from any obligation under this lease and shall not constitute approval for subsequent subletting or assignment. Sublessees or assignees shall be liable for all of Lessee's obligations under this lease unless otherwise specified in writing. Upon default by Lessee any sublessee shall pay all sublease rentals and other sums due Lessor, direct to Lessor, to be credited against sums owed to Lessor by Lessee under this lease. Unless otherwise agreed in writing, no sublease or assignment shall be valid unless (1) a copy of this lease is attached thereto, (2) the sublessee or assignee agrees in writing to be liable for all of Lessee's obligations under this lease, and (3) Lessor's written approval is attached to the sublease or assignment. 16.1. DESTRUCTION BY FIRE OR OTHER CASUALTY. (a) TOTAL DESTRUCTION, RENT ABATEMENT, AND RESTORATION. If Lessee's Office Space, is totally damaged by fire or other casualty so that it cannot reasonably be used by Lessee and if this lease is not terminated as provided in subparagraph (d) below, there shall be a total abatement of Lessee's rent and Lessee's obligation to pay Office Building Operating Expenses until Lessee's Office Space is restored by Lessor and Lessee. (b) PARTIAL DESTRUCTION, RENT ABATEMENT, AND RESTORATION. If Lessee's Office Space is partially destroyed or damaged by fire or other hazard so that it can be only partially used by Lessee for the purposes allowed in this lease and if this lease is not terminated as provided in subparagraph (d) below, there shall be a partial abatement of Lessee's rent and Lessee's obligation to pay Office Building Operating Expenses which fairly and reasonably corresponds to the time and extent to which Lessee's Office Space cannot reasonably be used by Lessee. (c) RESTORATION. Lessor's obligation to restore shall be limited to the condition of the Leased Premises as constructed by Lessor or as otherwise delivered to Lessee by Lessor on the commencement date. Lessor shall proceed with diligence to restore. During restoration, Lessee shall continue business to the extent practical in Lessee's reasonable judgment. (d) LEASE TERMINATION. If Lessee's Office Space or the Office Building is so badly damaged that restoration and repairs cannot be completed within one hundred fifty (150) days after the fire or casualty, then this lease may be terminated as of the date of the destruction by either Lessor or Lessee by serving written notice upon the other. Termination notice must be delivered within 30 days after the casualty. 17.1. CONDEMNATION. If any part of Lessee's Office Space is taken by condemnation or by deed in lieu of condemnation by any governmental authority, this lease shall terminate one day prior to such taking. If any part of the Office Building's parking building is so taken, Lessee's right to use such portion shall terminate one day prior to such taking; and Lessee's rent shall be reduced only to the extent that such partial taking reduces the fair market value of Lessee's Office Space. Lessor shall pay all costs associated with construction reasonably necessary to render the Leased Premises usable for Lessee's permitted purposes after such partial taking. All compensation awarded for any partial or total taking of the Property shall be the property of Lessor. If Lessor has received written notice of intent to condemn, Lessee shall upon ten (10) days written request by Lessor execute an acknowledgement that the lease terminates one day prior to the condemnation or deed in lieu of condemnation and that Lessee claims no interest in the condemnation award. Lessor shall have no interest in any monies paid by the condemning authorities to Lessee for moving costs or for the other personal property within the Leased Premises (excluding leasehold improvements) if a separate award for such items is made to Lessee. 18.1. DEFAULT BY LESSOR. Lessee shall be entitled to recover actual damages and terminate this lease if (1) Lessor fails to pay any sum due and owing to Lessee within seven (7) days after written demand from Lessee, or (2) Lessor remains in default on any other obligation for seven (7) days after Lessee's written demand for performance. However, Lessor shall not be in default if Lessor promptly commences to cure such noncompliance and diligently proceeds in good faith to cure same after receiving written notice of such default. If taxes and utilities are not timely paid, Lessee may pay same to the extent that it is necessary to avert foreclosure or cutoff. 19.1. DEFAULT BY LESSEE. If Lessee defaults, Lessor shall have any or all remedies set forth below. Initials [SIG] [SIG] ------- ------ -7- 8 (a) DEFINITION OF DEFAULT. The occurrence of any of the following shall constitute a default by Lessee: (1) failure to pay rent or any other sum due by Lessee under the lease within three (3) days after the due date; (2) failure to vacate on or before the last day of the lease term, renewal term, or extension period; (3) failure to pay rent in advance on a daily basis in the event of unlawful holdover by Lessee; (4) unauthorized early move-out or notice of same as set forth below; (5) acquisition of Lessee's interest in the lease by a third party by judicial or non-judicial process; or (6) failure to comply with any other provision of the lease (including rules). However, Lessee shall not be in default under subclause (6) above if Lessee promptly commences to cure such noncompliance and diligently proceeds in good faith to cure same after receiving written notice of such default. (b) DOOR LOCKS. If Lessee is in default for nonpayment of rent or other sums due and if Lessee fails to pay same in full within three (3) days after Lessor delivers to Lessee or to Lessee's Office Space written demand or notice of nonpayment, then Lessor shall be entitled to change or modify door locks on all entry doors of Lessee's Office Space until all such sums are paid in full; provided, however, Lessor shall immediately thereafter post a notice on the primary entry door to Lessee's Office Space, stating that Lessor has expressed such lockout rights. No other notice requirements or lockout laws shall apply. Lessor's right to modify or change locks shall occur automatically and without notice if Lessee's rent is accelerated under subparagraph (e) below, relating to unlawful early move-out. If Lessee moves out or abandons Lessee's Office Space for ten (10) consecutive days, Lessor may permanently change the locks without notice to Lessee, and Lessee shall not be entitled to a key or to reentry. (c) UTILITIES AND SERVICES. If Lessee is in default for nonpayment of rent or other sums due and if Lessee fails to pay same in full within three (3) days after Lessor hand delivers to Lessee or to Lessee's representative written notice of Lessor's intent to terminate utilities or services which are furnished by Lessor, then Lessor may terminate such utilities or services after such three (3) day notice period, without further notice. Lessor's right to terminate such utilities or services shall occur automatically and without notice if Lessee's rent is accelerated under subparagraph (e) below, relating to unlawful early move-out. (d) ACCELERATION AFTER NOTICE OF RENTAL DELINQUENCY. If Lessee is in default for nonpayment of rent or other sums due and if Lessee fails to pay same in full within three (3) days after Lessor delivers to Lessee or to Lessee's Office Space a written notice of Lessor's intent to accelerate, then all rent for the remainder of the lease term shall be accelerated, due, and delinquent at the end of such three (3) day notice period without further demand or notice. Such acceleration rights are in consideration of the rentals for the entire term being payable in monthly installments rather than in one lump sum at the beginning of the lease term. If Lessee has already vacated the Leased Premises, notice of acceleration may be delivered to Lessee pursuant to paragraph 29.1. Liability for additional rents accruing in the future (over and above any Base Rents) shall not be waived by such acceleration. (e) ACCELERATION UPON EARLY MOVE-OUT. If Lessee is lawfully evicted, or if Lessee moves out or gives written notice of intent to move-out prior to the end of the lease term without the rent being paid in full for the entire remainder of the lease term or renewal or extension period or without prior written consent of Lessor, all remaining rents for the remainder of the lease term shall be accelerated immediately and automatically, without demand or notice. Such accelerated rents shall be due and delinquent without notice before or after such acceleration. Such acceleration shall occur even if the rent for the current month has been paid in full. (f) TERMINATION OF POSSESSION. If Lessee is in default as defined in subparagraph (a) above and if Lessee remains in default for three (3) days after Lessor gives notice of such default to Lessee, or if Lessee abandons the Leased Premises, Lessor may (with or without demand for performance) terminate Lessee's right of possession by giving one day's written notice to vacate; and Lessor shall be entitled to immediate possession without termination of Lessee's obligations under the lease. Lessor's repossession shall not be considered an election to terminate this lease unless written notice of such intention to terminate is given to Lessee by Lessor. Repossession may be by voluntary agreement or by eviction lawsuit. Commencement of an eviction lawsuit shall not preclude other Lessor remedies under this lease or other laws. (g) RELETTING COSTS. If Lessee is in default as defined in subparagraph (a) above and if Lessor terminates Lessee's right of possession without terminating this lease, Lessee shall pay upon Lessor's demand the following: (1) all reasonable costs of reletting (which in no event shall be less than one month's rent), including leasing commissions, rent concessions, but excluding assuming or buying out lease remainders elsewhere, but including free rent for a period of time, or reduced rental rates), utilities during the vacancy, advertising costs, administrative overhead, and all costs of repair, remodeling, or redecorating for replacement tenants in Lessee's Office Space, (2) all rent and other indebtedness due from Lessee to Lessor through the date of termination of Lessee's right of possession, and (3) all rent and other sums required to be paid by Lessee requiring the remainder of the entire lease term, subject to the acceleration paragraphs above. Initials [SIG] [SIG] ------- ------- -8- 9 (h) Mitigation by Lessor. Upon eviction or voluntary vacation of the Leased Premises by Lessee without the lease terminated by Lessor, Lessor shall make reasonable efforts to relet the Leased Premises. After deduction of reasonable expenses incurred by Lessor, Lessee shall receive credit for any rentals received by Lessor through reletting the Leased Premises during the remainder of the lease term or renewal or extension period. Such deductible expenses may include reasonable real estate commissions, reasonable attorney's fees, and all other reasonable expenses in connection with reletting. Lawsuits to collect amounts due by Lessee under this lease may be brought from time to time on one or more occasions without the necessity of Lessor's waiting until the expiration of the lease term. If judgment for accelerated rents recovered, Lessor shall give credit against such judgment for subsequent payments made by Lessee and subsequent rentals received by Lessor from other tenants of Lessee's Office Space, less lawful deductions and expenses of reletting. (i) Termination of Lease. Lessor may terminate this lease (as contrasted to termination of possession rights only) upon default by Lessee or at any time after Lessor's lawful re-entry or repossession following default by Lessee. Lessor's agents have authority to terminate the Lease only by written notice given pursuant to paragraph 29.1. (j) Damages. In addition to other remedies, Lessor may recover actual damages incurred. 20.1. LIEN FOR RENT. (a) Notwithstanding anything to the contrary in this lease, Lessor's landlord lien shall be subordinate to any existing security interest and any future purchase money security interests on Lessee's personal property if such security interest is properly perfected and timely recorded as required by the Texas Business Code. Lessor shall cooperate in signing lien subordinations in accordance with the foregoing. Any lien subordination shall be on forms reasonably acceptable to Lessor. (b) Subject to the limitations of subparagraph (a) above, Lessee gives to Lessor a contractual lien on all of Lessee's property which may be found on the Leased Premises to secure payment of all monies and damages owed by Lessee under the Lease. Such lien also covers all insurance proceeds on such property. Lessee shall not remove such property while rent or other sums remain due and unpaid to Lessor and such property shall not be removed until all Lessee's obligations under the Lease have been complied with. This lien is in addition to Lessor's statutory lien under Section 54.021 of the Texas Property Code. If Lessee is in default for nonpayment of rent or any other sums due by Lessee, Lessor's representatives may peacefully enter the Leased Premises and remove and store all property. If Lessor removes any property under this lien, Lessor shall leave the following information in a conspicuous place inside Lessee's Office Space: (1) written notice of exercise of lien, (2) a list of items removed, (3) the name of Lessor's representative who removed such items, and (4) the date of such removal. Lessor shall be entitled to reasonable charges for packing, removing, or storing abandoned or seized property, and may sell at public or private sale (subject to any properly recorded chattel mortgage or recorded financing statement) after 30 days' written notice of time and place of sale is given to Lessee by certified mail, return receipt requested. Upon request by Lessor, Lessee shall acknowledge the above lien rights by executing a UCC-1 form or similar form reflecting same. 21.1. ATTORNEY'S FEES, INTEREST, AND OTHER EXPENSES. If Lessee or Lessor is in default and if the nondefaulting party places the Lease in the hands of an attorney in order to enforce lease rights or remedies, the nondefaulting party may recover reasonable attorney's fees from the defaulting party even if suit has not been filed. In any lawsuit enforcing lease rights, the prevailing party shall be entitled to recover reasonable attorney's fees from the nonprevailing party, plus all out-of-pocket expenses. All delinquent sums due by Lessor or Lessee shall bear interest at the maximum lawful rate of interest, compounded annually, from date of default until paid, plus any late payment fees. Late payment fees as set forth in paragraph 3.2 shall be considered reasonable liquidated damages for the time, trouble, inconvenience, and administrative overhead expense incurred by Lessor in collecting late rentals, such elements of damages being uncertain and difficult to ascertain. Late payment fees shall not be liquidated damages for attorney's fees or for Lessor's loss of use of such funds during the time of delinquency. 22.1. NONWAIVER. The acceptance of monies past due or the failure to complain of any action, nonaction, delayed payment, or default, whether singular or repetitive, shall not constitute a waiver of rights or obligations under the Lease. Lessor's or Lessee's waiver of any right or any default shall not constitute waiver of other rights, violations, defaults, or subsequent rights, violations, or defaults under this lease. No act or omission by Lessor or Lessor's agents shall be deemed an acceptance of surrender by Lessee of the Leased Premises, and no agreement by Lessor to accept a surrender of the Leased Premises shall be valid unless it is in writing and signed by a duly authorized agent of Lessor. 23.1. COMPLIANCE WITH LAWS AND RULES OF OFFICE BUILDING. Lessee shall comply with all laws, ordinances, rules and regulations (state, federal, municipal and other agencies or bodies having any jurisdiction hereof) relating to the use, condition or occupancy of the Leased Premises, including but not limited to the Americans with Disabilities Act of 1990. Lessee will comply with the rules of the Office Building adopted by Lessor which are set forth in Exhibit F-2 attached hereto. Separate parking rules are contained in Exhibit F-1. Lessor shall have the right, if necessary, to change such rules and Initials ______ ______ -9- 10 regulations or amend them in any reasonable manner and for preservation of good order therein, all of which changes and amendments will be sent by Lessor to Lessee in writing and shall be thereafter carried out and observed by Lessee. Lessee shall further be responsible for the compliance with such rules and regulations by its employees, servants, authorized agents visitors and invitees. 24.1. TRANSFER OF OWNERSHIP BY LESSOR. If Lessor transfers ownership of the Property (other than as security for mortgage) and if Lessor has delivered to the transferee all of Lessee's security deposits and any prepaid rents, Lessor shall be released from all liability under the Lease; and such transferee shall become liable as Lessor. Such right to be released of liability shall accrue to subsequent owners only if such transfer is in good faith and for consideration. 25.1. GROUND LEASES; MORTGAGES. (a) This Lease is subject and subordinate to all present and future ground and underlying leases of the Property and to the lien of any mortgages or trust deeds, now or hereafter enforced against the Property, and to all renewals, extensions, modifications, consolidations and replacements thereof, and to all advances made or hereafter to be made upon the security of such mortgages or trust deeds. Lessee shall at Lessor's request execute such further instruments or assurances as Lessor may reasonably deem necessary to evidence or confirm the subordination of this Lease to any mortgages, trust deeds, ground leases or underlying Leases. In the event of execution by Lessor after the date of this Lease of any mortgage, deed of trust, security instrument, ground or primary lease, renewal, replacement or extension, Lessee agrees to execute a non-disturbance and subordination with the holder thereof, which agreement shall provide that: (i) such holder shall not disturb the possession and other right of Lessee under this Lease so long as Lessee is not in default; (ii) In the event of acquisition of title to the Property by such holder, such holder shall accept the Lessee of the Leased Premises, under the terms and conditions of this Lease and shall perform all the obligation of Lessor hereunder; provided, however, that such holder shall not (x) have any responsibility or liability for any act or omission of Lessor under this Lease and prior to such holder obtaining possession of the Property or occurring after such holder is no longer in possession of the Property; (y) be subject to any offsets or defenses which Lessee may have with respect to this Lease or Lessor hereunder arising prior to such holder obtaining possession of the Property; or (z) be bound by or responsible for any such security deposits; (iii) Lessee shall recognize such holder as Lessor hereunder and; (iv) Such other provisions as Lessee and such holder may reasonably approve. This Lease is further subject and subordinate to: (x) all applicable ordinances of the city of San Antonio and all easements, franchises, and other interests or rights upon, across or pertinent to the Property; and (y) all utility easements and agreements. (b) Notwithstanding the generality of the foregoing provisions of paragraph 25.1 (a) above, any such mortgagee or ground or primary lessor shall have the right at any time to subordinate any such ground or primary leases or such deeds of trusts, mortgages or other security instruments to this Lease on such terms and subject to such conditions as such ground or primary lessor or such mortgagee may consider appropriate in its discretion. At any time, before or after the institution of any proceedings for the foreclosure of any such deed of trusts, mortgages or any other security instruments or sale of the Property under any such deeds and trusts, mortgages, or other security instruments, or termination of any ground or primary lease, Lessee shall attorn to such ground or primary lessor or such purchaser upon any sale or the grantee under a deed in lieu of foreclosure and shall recognize any such ground or primary lessor, purchaser or grantee as Lessor under this Lease. The agreement of Lessee to attorn contained in the immediately preceding sentence shall survive any such termination of ground or primary lease, foreclosure sale, trustee sale or conveyance in lieu thereof. Lessee shall upon demand at any time, before or after such termination of ground or primary lease, foreclosure sale, trustee sale or conveyance in lieu thereof, execute, acknowledge and deliver to Lessor's mortgagee or the ground or primary lessor as, the case may be, any written instruments or certificates evidencing such attornment as Lessor's mortgagee or ground or primary lessor may be reasonably required. 26.1. SURRENDER OF PREMISES. When Lessee moves out, Lessee shall surrender Lessee's Office Space in the same condition as on the date of lease commencement by Lessee (as changed or improved from time to time in accordance with (this lease), less ordinary wear and shall return all keys and/or access cards. Removal of property from the Leased Premises subject to paragraph 14.1 above. Initials ______ ______ -10- 11 27.1 HOLDING OVER. If Lessee remains in possession of the Leased Premises after the expiration or mutually-agreed termination date of the Lease, without the execution by Lessor and Lessee of a new lease or a renewal or extension of the Lease, then (1) Lessee shall be deemed to be occupying the Leased Premises as a tenant-at-sufferance on a daily basis, subject to all obligations of the Lease, (2) Lessee shall pay rent daily for the entire holdover period at a daily rate equal to 150% of the last monthly payment of Base Rent plus Additional Rent divided by thirty (30), (3) Lessee shall be subject to all other remedies of Lessor as provided in paragraph 19.1, (4) Lessee shall indemnify Lessor and/or prospective tenants for damages, including lost rentals, storage expenses, and reasonable attorney's fees, and (5) at Lessor's sole option, Lessor may extend the Lease term for a period of one month at the then current rental rates for the Office Building, as reasonably determined by Lessor, by delivering written notice to Lessee or to Lessee's Office Space while Lessee is holding over. Holdover rents shall be immediately due on a daily basis and delinquent without notice or demand; and the prior written notice and waiting period requirements of this Lease shall not be necessary in order for Lessor to exercise remedies thereunder. 28.1. SIGNS AND BUILDING NAME. Except for standard suite signage and Office Building directory listings, there shall be no signs, symbols, or identifying marks on or in the Office Building, halls, elevators, staircases, entrances, parking areas, landscape areas, doors, walls, or windows without prior written approval of Lessor. All signs or lettering shall conform to the sign and lettering criteria established by Lessor. Unless otherwise stated in the rules, suite signage and Office Building directory changes shall be done exclusively by Lessor and at Lessee's expense. Lessor may remove all unapproved signs without prior notice to Lessee and at Lessee's expense. Lessor may at any time change the name of the Office Building upon fifteen (15) days' written notice to Lessee. 28.2. RELOCATION OF LESSEE. Upon at least twenty (20) days notice to Lessee, Lessor shall have the right to relocate Lessee within the Office Building to lease space which is the same size or larger and suited to Lessee's use. Such relocation shall be made at Lessor's sole expense, including necessary reprinting of Lessee's stationary, envelopes, business cards, door signs, etc. Rent shall not be increased if the relocation Office Space is larger or better quality. The Relocation date shall be contained in the relocation notice referred to above. Lessor shall not be liable to Lessee in connection with such relocation except for undue delay or property damages caused by Lessor or Lessor's employees, agents, or contractors. 28.3. FOOD SERVICE ESTABLISHMENT ON PROPERTY. Lessor shall have no obligation at any time to maintain or replace any food service establishment on the Property. 28.4. LESSEE FINANCIAL STATEMENTS. Prior to execution of the Lease and thereafter no more than once per year from time to time, Lessee shall, upon written request, furnish to Lessor a statement of Lessee's financial condition in a form reasonably satisfactory to Lessor. All financial statements shall be originally signed by Lessee or Lessee's certified public accountant. 29.1. NOTICES. Whenever notice is required or permitted under this lease, such notice shall be in writing and shall be either (a) delivered personally to the party being notified, (b) delivered to or inside such party's mailing address, or (c) delivered at such party's mailing address by certified mail, return receipt requested, postage prepaid. The mailing address of Lessor shall be the address to which Lessee normally mails or delivers the monthly rent unless Lessor notifies Lessee of a different address in writing. The mailing address of Lessee shall be Lessee's Office Space under this lease. However, if Lessee moves out, it shall be Lessee's last address known by Lessor. Hand delivered notice is required only when expressly required in the Lease. Notice by noncertified mail is sufficient if actually received by the addressee or an employee or agent of addressee. The term "notice" shall be inclusive of notices, billings, requests, and demands. 30.1. ESTOPPEL CERTIFICATES. From time to time, upon seven (7) days' prior written request from Lessor, Lessee shall execute and deliver to Lessor the estoppel certificate attached as Exhibit G. The form in Exhibit G may be changed as reasonably required by a prospective purchaser or lender. If any statement in the estoppel certificate form is contrary to the facts existing at the time of execution of such form, Lessee may correct same before signing. The estoppel certificate may be conclusively relied upon by Lessor and by any prospective lienholder or purchaser of the Leased Premises. If Lessee fails to comply with the foregoing by the end of such seven (7) day period, it shall be conclusively presumed that (1) this Lease is in full force and effect without any subleases or assignments and is unamended or modified except for amendments verified by affidavit of Lessor to the prospective lienholder or purchaser, (2) no rents, or other charges except for security deposits, have been prepaid, (3) the statements contained in the estoppel certificate form (Exhibit G) are correct, (4) there are no uncured defaults by Lessor, (5) Lessee has no right of offset or rescission, and (6) any prospective purchaser or lienholder may conclusively rely on such silence or noncompliance by Lessee and may conclusively assume no Lessor defaults within the 120 days preceding Lessee's receipt of Lessor's request for an estoppel certificate. Initials [SIG] [SIG] ----- ----- -11- 12 31.1. SUCCESSORS. This Lease shall bind and inure to the benefit of the parties, any guarantors of this Lease, and their respective successors and assigns. 31.2. LEASING AGENT COMMISSIONS. No leasing commission shall be due by Lessor to any leasing agent unless in writing. Commission agreements executed by Lessor shall be binding on subsequent Property owners if the tenant of the Lease in question is in possession at the time of transfer of Property ownership. At the time of the execution of this lease, Lessee shall deposit with Lessor $9,706.95 for commissions. Such commission shall be paid to Investment Realty Company $6,471.30 and Orion Partners, Inc. $3,235.65. 32.1. BUILDING OPERATING EXPENSES. In addition to the monthly Base Rent in paragraph 2.1, Lessee shall pay Additional Rent on a monthly basis, equivalent to Lessee's prorata share of actual Office Building Operating Expenses as per Exhibit C. 33.1. REPRESENTATIONS AND WARRANTIES BY LESSOR. Lessor warrants that Lessor has full right to enter into this Lease. Lessor's duties and warranties are limited to those expressly stated in this Lease and shall not include any implied duties or implied warranties, now or in the future. No representations or warranties have been made by Lessor other than those expressly contained in this Lease. 34.1. REPRESENTATIONS AND WARRANTIES BY LESSEE. Lessee warrants to Lessor that (1) the financial statements of Lessee heretofore furnished to Lessor are true and correct to the best of Lessee's knowledge, (2) there has been no significant adverse change in Lessee's financial condition since the date of the financial statements, (3) the financial statements fairly represent the financial condition of Lessee upon those dates and at the time of execution hereof, (4) there are no delinquent taxes due and unpaid by Lessee, and (5) Lessee and none of the officers or partners of Lessee (if Lessee is a corporation or partnership) have ever declared bankruptcy. Lessee warrants that Lessee has disclosed in writing to Lessor all lawsuits pending or threatened against Lessee, and Lessee has made no material misrepresentation or material omission of facts regarding Lessee's financial condition or business operations. All financial statements must be dated and signed by Lessee or Lessee's certified public accountant. Lessee acknowledges that Lessor has relied on the above information furnished by Lessee to Lessor and that Lessor would not have entered into this lease otherwise. 35.1. PLACE OF PERFORMANCE. Unless otherwise expressly stated in this lease, all obligations under this lease, including payment of rent and other sums due, shall be performed in San Antonio, Texas, at the address designated from time to time Lessor. 36.1. MISCELLANEOUS. This Lease contains the entire agreement of the parties. No other written or oral promises or representations have been made, and none shall be binding. This Lease supersedes and replaces any previous Lease between the parties on Lessee's Office Space, including any renewals or extensions thereunder. Except for reasonable changes in written rules, this Lease shall not be amended or changed except by written instrument, signed by both Lessor and Lessee. Lessor's agents do not and will not have authority to (1) make exceptions, changes or amendments to this Lease, or factual representations not expressly contained in this Lease, (2) waive any right, requirement, or provision of this Lease, or (3) release Lessee from all or part of this Lease, unless such action is in writing. Multiple lessees shall be jointly and severally liable under this Lease. Notices, requests, or agreements to, from, or with one of multiple lessees shall be deemed to be to, from, or with all such Lessees. Under no circumstances shall Lessor or Lessee be considered an agent of the other. The Lease shall not be construed against either party more or less favorably by reason of authorship or origin of language. Texas law applies. If any date of performance or exercise of a right ends on a Saturday, Sunday, or state holiday, such date shall be automatically extended through the next business day. Time is of the essence; and all performance dates, time schedules, and conditions precedent to exercising a right shall be strictly adhered to without delay except where otherwise expressly provided. If any provision of this Lease is invalid under present or future laws, the remainder of this Lease shall not be affected. 37.1. GUARANTY. This Lease ( ) is or (X) is not guaranteed by others. The names and titles of any guarantors are shown on the signature page(s) at the end of this Lease. The specific obligations of such guarantors; if any, shall be pursuant to attached Exhibit H entitled "Lease Guaranty". Such guaranty shall continue and shall be unaffected by any modification or amendment to this lease or any renewal or extension thereof. The signature requirements and corporate resolution requirements for any guarantors shall conform to the requirements for Lessees in paragraph 39.1 below. 37.2. SPECIAL CONDITIONS. None. Initials PW RS ---- ---- -12- 13 38.1 EXHIBIT LIST. The exhibits attached to this lease are listed below. All exhibits are a part of this lease except for those which have been lined out or which have been shown below as omitted. Exhibit A Floor Plan of Lessee's Office Space (paragraph 1.1) Exhibit B Legal Description of Office Building (paragraph 1.1) Exhibit C Building Operating Expense Passthrough Calculations (paragraphs 2.1 and 32.1) Exhibit D Acknowledgement of Lease (paragraph 4.2) Exhibit E Construction by Lessor (paragraph 5.1) Exhibit F-1 Parking Rules (paragraphs 9.2 and 23.1) Exhibit F-2 Building Rules (paragraph 23.1) Exhibit G Estoppel Certificate (paragraph 30.1) Exhibit H None Provided Exhibit I Corporate Resolution Authorizing Lease or Guaranty (paragraphs 37.1 and 39.1) Exhibit J Option to Renew 39.1. LESSEE SIGNATURE REQUIREMENTS. Lessee is (__) an individual, (__) several individuals, (__) a general partnership, (__) a limited partnership, (__) a joint venture, (__) an unincorporated association, (__) a professional corporation, (__) professional association, or (X) a corporation (check one). Such partnership, JOINT venture, unincorporated association, or corporation is organized or chartered under the laws of the State of Texas. Lessee's name stated at the beginning of this Lease (__) is or (X) is not an assumed name. If so, an assumed name certificate has been or will be filed by Lessee in Bexar County, Texas or with the Texas Secretary of State's Office in Austin, Texas, whichever is appropriate. Lessee shall disclose to Lessor the names and addresses of all partners or venturers of Lessee if Lessee is a partnership or joint venture. If Lessee or Guarantor is a corporation, corporate resolutions shall be executed on the form in Exhibit 1. 39.2. LEASE DATE AND AUTHORITY TO SIGN. This lease has been executed effective this 23 day of October, 1995. The names and signatures of all parties are shown below; and all persons signing have been duly authorized to sign. LESSOR DIAMOND SHAMROCK LEASING, INC. By: [SIG] ---------------------------------- Vice President LESSEE MEDICAL SCIENCE SYSTEMS, INCORPORATED ------------------------------------- Printed Name of Company or Firm (if applicable) /s/ PAUL J. WHITE ------------------------------------- Signature Paul J. White ------------------------------------- Printed name of person signing Chief Executive Officer ------------------------------------- Title of person signing (if applicable) Initials PW RS -13- 14 ORION PARTNERS. INC. ------------------------------------- Printed name of company or firm (if applicable) [SIG] /s/ W. DEAN BUNDRICK ------------------------------------- Signature W. Dean Bundrick ------------------------------------- Printed name of person signing Vice President, Sales & Leasing ------------------------------------- Title of person signing (if applicable) -14- 15 EXHIBIT A FLOOR PLAN OF LESSEE'S OFFICE SPACE (see paragraph 1.1 of lease) The parties agree that the floor plan below is a true and correct diagram of Lessee's office space referred to in paragraph 1.1 and reflects 1,961 square feet of Rentable Area and 1,683 square feet of Usable Area. 16 EXHIBIT B LEGAL DESCRIPTION OF OFFICE BUILDING by lot, block, subdivision, and county or by metes and bounds description (See paragraph 1.1 of lease) Field Notes for 4.345 Acres of Land in Bexar County, Texas. BEING 4.345 acres of land which is Lot 72, Block 6, N.C.B. 8673, City of San Antonio, Bexar County, Texas, being also Uranga Towers Subdivision, of Record in Volume 9507, Page 44, of the Plat Records of Bexar County, Texas, and being more particularly described by metes and bounds as follows: BEGINNING at a found Texas Highway Department brass cap monument on the South right-of-way line of Interstate Highway Loop 410 for a cutback corner of said Interstate Highway Loop 410 and Jones Maltsberger Road for the Northwest corner of this tract; THENCE South 88 (degrees) 58 feet 42 inches East, a distance of 442.26 feet coincident with the South right-of-way line of said Interstate Highway Loop 410 and the North property line of this tract to a set iron rod on the West right-of-way line of a 50-foot drainage right-of-way for the Northeast corner of this tract; THENCE coincident with the West and South right-of-way lines of those particular drainage rights-of-way as shown on the plat of said Uranga Towers Subdivision and the East property line of this tract the following courses and distances: South 11 degrees 26 ft. 00 in. West, a distance of 61.24 feet to a set iron rod; South 19 degrees 50 ft. 00 in. East, a distance of 270.52 feet to a set iron rod; South 89 degrees 30 ft. 00 in. West, a distance of 30.73 feet to a set iron rod; South 19 degrees 50 ft. 00 in. East, a distance of 63.59 feet to a set iron rod; North 89 degrees 30 ft. 00 in. East, a distance of 64.36 feet to a point of curvature of a non-tangent curve on the North right-of-way line of Haim Boulevard for the Southeast corner of this tract; THENCE coincident with the North right-of-way line of said Haim Boulevard and the South property line of this tract the following courses and distances; Curving to the right with a radius bearing of North 44 degrees 50 ft. 16 in. West, a radius distance of 69.98 feet, and a central angle of 45 degrees 51 ft. 34 in., and arc length of 56.01 feet to a set iron rod for a point of tangency; North 88 degrees 58 ft. 42 in. West, a distance of 486.69 feet to a set iron rod for a point of curvature and the Southwest corner of this tract; Curving to the right with a radius bearing of North 01 degrees 01 ft. 18 in. East, a radius distance of 15.00 feet, and a central angle of 79 degrees 29 ft. 12 in., an arc length of 20.81 feet to a set iron rod for a point of tangency on the East right-of-way line of said Jones Maltsberger Road; THENCE coincident with the East right-of-way line of said Jones Maltsberger Road and the West property line of this tract and the following courses and distances; North 09 degrees 29 ft. 29 in. West, a distance of 348.20 feet to a set iron rod; North 40 degrees 28 ft. 05 in. East, a distance of 49.44 feet to the POINT OF BEGINNING and containing 4.345 acres of land in Bexar County, Texas. 17 EXHIBIT C BUILDING OPERATING EXPENSE PASS THROUGH CALCULATIONS (see paragraphs 2.1 and 32.1 of lease) A. In the event that during the term hereof the Office Building Operating Expenses during any Calendar Year shall exceed the Office Building Operating Expenses during the Base Year, Lessee shall pay in addition to Base Rent as described in Paragraph 2.1 as Additional Rent its Proportionate Share of such excess. B. As promptly as practical following the close of the Base Year and each Calendar Year thereafter, Lessor shall furnish to Lessee, in reasonable detail, a schedule of the Office Building Operating Expenses for such year, including the Base Rent. Failure of Lessee to notify Lessor in writing of any objections to the schedule of Office Building Operating Expenses within thirty (30) days of receipt of the schedule by Lessee shall conclusively constitute acceptance by Lessee of such schedule. In the event of a timely objection by Lessee, Lessee shall have the right, at its expense and reasonable time, to review Lessor's Office Building Operating Expense invoices or checks relating to the year for which such schedule was prepared. Lessor shall cause to be kept books and records showing Office Building Operating Expenses in accordance with an appropriate system of accounts and accounting practices consistently maintained. Notwithstanding the foregoing, should Lessor provide Lessee with an audited schedule of Office Building Operating Expenses certified by an independent certified public accountant, such schedule of Office Building Operating Expenses shall be deemed final and conclusive on Lessee. C. At such time as Lessor delivers the schedule of Office Building Operating Expenses for a year other than the Base Year, Lessor shall deliver to Lessee a computation notice setting forth: 1) the adjustment for the Additional Rent, if any, due Lessor resulting from the Office Building Operating Expenses for the immediately preceding Calendar Year ("Lump Sum Adjustment"); 2) an adjustment in the monthly Base Rent for the current Calendar Year resulting from the Office Building Operating Expenses for the immediately preceding year ("Catch Up Adjustment"); and 3) an adjustment in the monthly Base Rent for the current Calendar Year based upon Landlord's estimate of the increase in Office Building Operating Expenses for the current Calendar Year ("Estimate Adjustment"). (a) In determining the Lump Sum Adjustment for the immediately preceding Calendar Year: (1) a comparison shall be made between the Office Building Operating Expenses for such Calendar Year and the Office Building Operating Expenses for the immediately preceding Calendar Year; and (2) a credit against the Lump Sum Adjustment shall be provided Lessee for the Estimate Adjustment, if any, made by Lessee, attributable to such Calendar Year. Lessee shall pay in full the Lump Sum Adjustment 18 attributable to the previous Calendar Year within thirty (30) days from receipt of the computation notice from Landlord. (b) In addition to the Lump Sum Adjustment, on the first day for the payment of a monthly Base Rent installment following the furnishing to Lessee of the computation notice for the immediately preceding Calendar Year, Lessee shall pay to Lessor an amount equal to (1) One-twelfth (1/12) of the Lump Sum Adjustment (prior credit for the Estimate Adjustment), multiplied by (2) the number of months of the lease term elapsed during the current Calendar Year. (c) Thereafter, commencing with the next due installment of monthly Base Rent for the current Calendar Year and continuing monthly thereafter, until a different computation notice is received by Lessee, the monthly Base Rent shall be increased by (1) an amount equal to one-twelfth (1/12) of the Lump Sum Adjustment (prior credit for the Estimate Adjustment, and (2) the Estimate Adjustment, if any. D. In the event that Office Building Operating Expenses for a Calendar Year are less than Office Building Operating Expenses for the immediately preceding Calendar Year, and/or the Lump Sum Adjustment for any Calendar Year is less than the Estimate Adjustment for such year, Lessee shall receive a lump sum payment refunding such excess payments within one hundred twenty (120) days after the close of the Calendar Year: E. Definitions: (1) "Base Year" shall mean Calendar Year 1996; (2) "Calendar Year" shall mean each calendar year or part thereof during the Term of this Lease; (3) "Proportionate Share" shall be the percentage calculated by dividing the Rentable Area of the Leased Premises by 100% of the Rentable Area of the Office Building; (4) "Office Building Operating Expenses" shall mean Taxes and all cost of operation and maintenance of the Property of every kind and nature paid or incurred by Lessor in connection with the ownership, management, operation and repair of the Property, including but not limited to utility charges, sewerage charges, insurance premiums, management, janitorial and cleaning services, elevator services, licenses, permits and inspection fees, heating and cooling, maintenance and repairs, labor and supplies, but not including costs normally capitalized under generally accepted accounting principles, except for the costs of capital investment items that are intended to primarily reduce 19 attributable to the previous Calendar year within thirty (30) days from receipt of the computation notice from Landlord. (b) In addition to the Lump Sum Adjustment, on the first day for the payment of a monthly Base Rent installment following the furnishing to Lessee of the computation notice for the immediately preceding Calendar Year, Lessee shall pay to Lessor an amount equal to (1) One-twelfth (1/12) of the Lump Sum Adjustment (prior credit for the Estimate Adjustment), multiplied by (2) the number of months of the lease term elapsed during the current Calendar Year. (c) Thereafter, commencing with the next due installment of monthly Base Rent for the current Calendar Year and continuing monthly thereafter, until a different computation notice is received by Lessee, the monthly Base Rent shall be increased by (1) an amount equal to one-twelfth (1/12) of the Lump Sum Adjustment (prior credit for the Estimate Adjustment, and (2) the Estimate Adjustment, if any. D. In the event that Office Building Operating Expenses for a Calendar Year are less than Office Building Operating Expenses for the immediately preceding Calendar Year, and/or the Lump Sum Adjustment for any Calendar Year is less than the Estimate Adjustment for such year, Lessee shall receive a lump sum payment refunding such excess payments within one hundred twenty (120) days after the close of the Calendar Year: E. Definitions: (1) "Base Year" shall mean Calendar Year 1996; (2) "Calendar Year" shall mean each calendar year or part thereof during the Term of this Lease; (3) "Proportionate Share" shall be the percentage calculated by dividing the Rentable Area of the Leased Premises by 100% of the Rentable Area of the Office Building; (4) "Office Building Operating Expenses" shall mean Taxes and all cost of operation and maintenance of the Property of every kind and nature paid or incurred by Lessor in connection with the ownership, management, operation and repair of the Property, including but not limited to utility charges, sewerage charges, insurance premiums, management, janitorial and cleaning services, elevator services, licenses, permits and inspection fees, heating and cooling, maintenance and repairs, labor and supplies, but not including costs normally capitalized under generally accepted accounting principles, except for the costs of capital investment items that are intended to primarily reduce operating costs for the Leased Premises or the Property as a whole or that are required by any governmental authority, which costs shall be included in Office Building Operating Expenses; and (5) "Taxes" shall mean all real estate taxes and assessments, special or otherwise, levied or assessed upon or with respect to the Property and ad valorem taxes for any personal property used in connection therewith. Should, by way of substitution, for such real estate taxes and ad valorem personal property taxes, the State in which the Property is located, or any political subdivision thereof, or any other governmental authority having jurisdiction over the Property, impose a tax, assessment, charge or fee, including but not limited to an income or franchise tax or a tax on rents, all such taxes, assessments, fees or charges (hereinafter defined as "in lieu Taxes") shall be deemed to constitute Taxes hereunder. Taxes may also include all fees and costs incurred by Lessor in seeking to obtain a reduction of, or a limitation on the increase in, any taxes, regardless of whether any reduction or limitation is obtained. Except as hereinabove provided with regard to "in lieu Taxes". Taxes shall not include any inheritance, estate, succession, transfer, gift, franchise, net income or capital stock tax; and F. Any payment to be made pursuant to this Section with respect to the Calendar Year in which the Lease commences and/or terminates shall be prorated if less than a full year, with such proration to be calculated on a daily basis. Any obligations of Tenant applicable to the Calendar Year in which this Lease terminates shall survive the expiration of this Lease. G. At Lessor's option, adjustments may be delayed. Lessor's delay in implementing such adjustments shall not waive Lessor's right thereto, and the most recent monthly rental figures shall continue to be paid during such delay. If Lessor delays in timely calculating adjustments, such adjustments shall be retroactive to the respective date on which Lessor had a right to make such adjustment; and such delayed rent adjustments shall become due upon written notice to Lessee. 20 EXHIBIT D ACKNOWLEDGEMENT OF LEASE (see paragraph 4.2 of lease) The undersigned parties acknowledge that the Lease described below is in full force and effect and that Lessee has taken possession of the space. Date of Lease: Lessor: Diamond Shamrock Leasing, Inc. Lessee: Medical Science Systems, Incorporated Guarantor, if any (not Lessee's name): None Building name: One International Centre Suite No.: 1,961 square feet Rentable Area; 1,683 square feet Useable Area; and 7 unreserved parking spaces. Building address: 100 N.E. Loop 410 San Antonio, Texas 78216-4742 Legal description of property: See Attached Exhibit "B" to the Lease Agreement The commencement date, annual anniversary date, and ending date of the initial lease term as defined in paragraph 4.1 of above Lease are as follows: Commencement date: December 1, 1995 Annual Anniversary date: December 1 Ending date: November 30, 2000 The parties acknowledge that the Lease has not been amended or modified and that this acknowledgement may be filed of record with the Texas Secretary of State or in Bexar County in order to record (1) Lessee's possession rights to the Leased Premises, and (2) Lessor's contractual landlord lien rights over all personal property therein. The entire Lease is hereby affirmed and incorporated herein. The Lease will cease to be an encumbrance to Lessor's title if Lessor files an affidavit of record, stating that Lessee no longer occupies the premises and that Lessee's right of possession has been lawfully terminated. 21 LESSEE LESSOR (To be signed at move-in) (To be signed at move-in) -------------------------------- Diamond Shamrock Leasing, Inc. Printed name of Lessee (company or firm) ------------------------------- --------------------------------- Signature of person Signature of person signing signing ------------------------------- --------------------------------- Printed name of person Printed name of person signing signing ------------------------------- --------------------------------- Title of person signing Title of person signing (if applicable) (if applicable) ------------------------------- --------------------------------- Date signed Date signed STATE OF TEXAS ) ) COUNTY OF BEXAR ) This instrument was acknowledged before me on ______________________________ by _____________________________on behalf of the above stated LESSOR and in the above stated capacity. ---------------------------------------------------- Notary Public for the State of Texas Printed name of notary: ----------------------------- My commission expires: ------------------------------ 22 STATE OF TEXAS ) ) COUNTY OF BEXAR ) This instrument was acknowledged before me on ____________________________ by ____________________________________ on behalf of the above stated LESSEE and in the above stated capacity. ---------------------------------------------------- Notary Public for the State of Texas Printed name of notary: ----------------------------- My commission expires: ------------------------------ 23 EXHIBIT E CONSTRUCTION BY LESSOR (see paragraph 5.1 of lease) Lessor: Diamond Shamrock Leasing, Inc. Lessee: Medical Service Systems, Inc. Date of lease: Office space: Suite 1350 Building name or address: One International Centre 1. STANDARD CONSTRUCTION BY LESSOR. Lessor shall construct and furnish all common facilities, the building shell, and standard office finish work as set forth below. All construction work and all standard and non-standard finish work and other improvements to the Leased Premises will be performed by Lessor's employees or contractors. 2. STANDARD OFFICE FINISH WORK. The standard office finish work to be constructed by Lessor at Lessor's expense includes the items set forth below. (Non-standard finish work is addressed in paragraphs 3 and 4.) The allowance for standard office finish work as set forth in paragraph 4 hereunder contemplates providing the items described in subsections (a) through (i) below. Finish out requirements of less than the standards set forth below shall not result in credits or refunds to Lessee. a. Standard carpet or carpet allowance of $12.50 per square yard of carpet installed, including tax. b. One linear foot of painted and textured drywall partitioning, including vinyl baseboard, per __ square feet of Usable Area. c. Electrical duplex outlets equivalent to one duplex outlet for every __ square feet of Usable Area. d. One light switch for every __ square feet of Usable Area. e. One wall telephone outlet per __ square feet of Usable Area. f. One corridor door to Lessee's Office Space. g. One interior door per ____ square feet of Usable Area, complete with frames, metal jambs, and standard hardware. h. One air conditioning register per __ square feet of Usable Area. i. Lessor will provide ordinary space planning services and ordinary standard finish work plans and specifications for Lessee's Office Space. Such services shall be done by project architect or designer of Lessor's choice. 3. CHARGES FOR ADDITIONAL OR NON-STANDARD FINISH WORK. Any other finish items desired by Lessee which are not included in the standard finish work as described above will be designed and constructed at Lessee's expense. Payment therefor is set out in paragraph 7 below or will be agreed upon at the signing of any change order by Lessor and Lessee. All additional or nonstandard finish work items must be approved by Lessor's architect in advance. 4. ALLOWANCE FOR STANDARD FINISH WORK. If Lessee desires to substantially depart from the standard finish work design, and if calculation of charges for additional or non-standard finish work is not done under paragraph 2 above, Lessee shall be provided a standard allowance of $0 per square foot of Rentable Area as defined in paragraph 1.3 of the Lease to cover Lessor's obligations regarding finish work. All costs of additional or non-standard finish work in excess of such standard allowance [SIG] [SIG] 24 shall be paid by Lessee prior to construction of such improvements, as set forth in paragraph 7 below, All additional or nonstandard finish work items must be approved by Lessor's architect in advance. PLANS FOR LESSEE'S OFFICE SPACE. Final plans and specifications for Lessee's Office Space [ ] are or [X] are not attached to this lease (check one). If such plans and specifications are not attached hereto, Lessee agrees to deliver to Lessor not later than November 1, 1995, a complete set of plans and specifications of finish work, including partitions, electrical and telephone outlets, and other improvements which Lessee desires to be made in or to Office Space. Such plans shall be prepared by [X] Lessor's architect or [ ] Lessee's architect at [X] Lessor's expense or [ ] Lessee's expense (check appropriate items). 6. CHANGE ORDERS. Change orders are permitted if they are provided in a timely manner and are agreed in writing. Lessor shall not be responsible for delays resulting from change orders unless the change order states otherwise. 7. PAYMENT FOR ADDITIONAL OR NON-STANDARD FINISH WORK. a. Payment for additional or non-standard finish work which is known at time of lease signing shall be as follows: 50% upon signing of the lease. 50% upon completion of the job. b. Payment for change orders or for additional or non-standard finish work in initial plans which may be approved by Lessor after lease signing, shall be as follows: 100% upon execution by Lessor of the change order. 8. ESTIMATED COMPLETION DATE. Lessor's estimated completion date for finishing Lessor's standard construction and any additional or non-standard finish work for Lessee shall be November 20, 1995. If construction pursuant to initial plans or change orders for Lessee's Office Space will cause delay in such estimated completion date and if Lessor and Lessee mutually note on such initial plans or change orders that same will cause a specified number of days of delay, the estimated completion date above shall be extended by such specified number of days. Also, in the event of such mutually agreed construction delay periods, Lessee shall pay additional rent which shall be prorated on a daily basis for such periods and payable when the Leased Premises are ready for occupancy by Lessee. 9. DELAY. If the Leased Premises are not ready for occupancy within 30 days following the above estimated completion date, Lessee may terminate the Lease by written notice to Lessor prior to the date the Leased Premises are ready for occupancy by Lessee. In such event, neither party shall have any further liability or obligations under the Lease; and Lessor shall refund to Lessee any prepaid rent, security deposits, and any amounts paid by Lessee in excess of the construction allowance. Otherwise, if the Leased Premises are not ready on or before such estimated completion date, then (a) Lessor shall not be deemed to be in default or liable in damages to Lessee, (b) rent and lease term shall begin when the Leased Premises are ready for occupancy, and (c) the Lease shall not be further affected. 25 EXHIBIT F-1 OFFICE BUILDING PARKING RULES (see paragraph 9.2 of lease) It is the desire of Lessor to maintain and operate the parking garage and parking areas in an orderly manner. The following rules and regulations apply to all tenants in the building and their agents, employees, family, licensees, invitees, visitors, and contractors unless otherwise stated. Lessor reserves the right to rescind these rules, make reasonable changes, or make other reasonable rules and regulations for the safety, care, and cleanliness of the parking garage and parking areas and for the preservation of good order. 1. TRAFFIC SIGNS. All persons parking in the parking areas and parking garage shall observe posted signs and markings regarding speed, stop signs, traffic lanes, reserved parking, no parking, parking stripes, etc. 2. LESSEE EMPLOYEE AND CUSTOMER PARKING. Except as may otherwise be provided in the lease agreement of a particular lease, Lessees and their employees and customers may park without charge in spaces which are not specifically reserved for other tenants or for "Visitors", fire lanes, loading zones, handicapped parking, or other specialized parking and so marked. Lessee's and other tenant's usage of the parking building and parking areas shall be limited to parking of vehicles during the normal operating hours of the Office building. If Lessee desires from time to time to park a vehicle for a period exceeding seventy-two (72) hours, Lessee shall notify Lessor of such desire and Lessor may allow Lessee to park a vehicle for such period. Lessor reserves the right to utilize any reasonable system by which building tenants may access and pay for parking of their guests or customers. 3. TRASH. All persons parking in the parking garage or parking areas shall refrain from throwing trash, ashtray contents, or other debris on the parking garage floor or parking areas. 4. FLAT TIRES. All vehicle owners and all persons parking in the parking garage or parking areas shall be responsible for promptly repairing flat tires or other conditions of the vehicle which cause unsightliness in the reasonable judgment of Lessor. 5. REMOVAL OF UNAUTHORIZED VEHICLES. If vehicles are blocking driveways or passageways or parked in violation of these rules and regulations or state statutes, Lessor may exercise vehicle removal remedies under Article 6701g-1 and 6701g-2 upon compliance with statutory notice. 6. SECURITY. Lessor shall use reasonable diligence in the maintenance of existing lighting in the parking garage or parking areas. Lessor shall have no duty for additional lighting or further security measures in the parking areas, including the parking garage. 7. PARKING OF EMPLOYEE VEHICLES. Lessor may from time to time designate specific areas in which vehicles owned by Lessee and Lessee's employees, sublessees, assignees, licensees, and concessionaires shall be parked. Lessee shall use best efforts to see that such vehicles are parked in such areas. Upon request by Lessor, Lessee shall furnish Lessor a complete list of license numbers of all vehicles operated by Lessee and the above listed persons. Lessor may charge penalty fees for vehicles not parked in the designated areas. 26 8. PARKING OF TRUCKS AND DELIVERY VEHICLES. Without Lessor's prior written approval, no trailers or large trucks may be parked in the parking areas except for temporary loading or unloading. Service and delivery vehicles may be parked in loading zones only when necessary. 9. ALLOTTED SPACES. At no time shall Lessee or its employees use more than the number of unreserved parking spaces allotted to Lessee in its lease. 10. TIMELY PAYMENT OF PARKING RENT. Lessee shall be entitled to monthly parking rights in the parking garage for reserved spaces only upon timely payment of the then current monthly parking rent, in advance. Lessee may rent less than the allowed number of spaces. Lessee may rent more than the allowed number of spaces if available in the reasonable judgment of Lessor. 11. CONTROL DEVICES. Lessor reserves the right to install or utilize any reasonable system of entry and exit control devices in the parking garage, parking areas and marked loading areas. 27 EXHIBIT F-2 BUILDING RULES AND REGULATIONS 1. Normal Office Building operating hours are defined as 7:00 a.m. to 7:00 p.m. Monday through Friday, holidays excepted. In addition, the building will be unlocked on Saturday from 7:00 a.m. to 1:00 p.m., but an access card will be needed to operate the elevators. During non-office building working hours, access to the Office Building, or to the halls, corridors, elevators, or stairways in the Office building, or to the office space premises may be refused unless the person seeking has a pass or is properly identified. Lessee, its employees, guests and invitees may be called upon to show identification and sign Office Building register when entering or leaving the Office Building at times other than normal Office Building operating hours and Lessee shall cooperate fully with Office Building security procedures, if any, in complying with such requirements. 2. Janitorial service will be provided on Sunday through Thursday. Should Lessee find specific fault with the service rendered, he will so inform the building manager who will be responsible for arranging corrective action. The janitorial contractor is only responsible for services and standards established in the service contract. Lessee may be provided a copy of contract specifications upon request. Lessee shall not employ any person for the purpose of cleaning other than the authorized cleaning and maintenance personnel for the Office Building unless otherwise approved in writing by Lessor. In those instances when Lessee contracts, with Lessor's written approval, for its own janitorial services, rubbish removal and exterminating shall be part of the work of the lessee's contractor. Janitorial service shall not be hindered by Lessee after 7:00 p.m. unless specific arrangements have been made with the building management office. 3. Lessee will refer all contractors, contractor's representatives and installation technicians, rendering any service on or to the Leased Premises for Lessee, to Lessor for Lessor's approval and supervision before performance of any contractual service. This provision shall apply to all work performed in the Office Building including installation of telephones, telegraph equipment, electrical devices and attachments and installations of any nature affecting floors, walls, woodwork, trim, windows, ceiling, equipment or any other physical portion of the Office Building. 4. No Lessee shall at any time occupy any part of the Office Building as sleeping or lodging quarters. 5. Lessee shall not place, install or operate on the Leased Premises or any part of Office Building, any engine, stove or machinery, or conduct mechanical operations or cook thereon or therein, or place or use on or about the Leased Premises any explosives, gasoline, kerosene, oil, acids, caustics, or any inflammable, explosive, or hazardous material without written consent of Lessor. Microwave ovens, refrigerators and coffee makers for Lessee's own use and installed in Lessee's Office space are exceptions to these conditions. 6. Lessee shall exercise caution in the protection of personal property located within the Office Space from loss or damage by keeping doors to unattended areas locked. Lessor shall not be responsible to the Lessee, its agents, employees or invitees for any losses of money, jewelry or other personnel property from the Office Space or public areas or for any damages to any [SIG] [SIG] 28 property therein from any cause whatsoever whether such loss or damage occurs when an area is locked against entry or not. Lessee shall report any thefts or losses to the Building Manager and security personnel as soon as reasonably possible after discovery and shall also notify the Building Manager and security personnel of the presence of any persons whose conduct is suspicious or causes a disturbance. 7. No birds, fowl, fish, reptiles or animals shall be brought into or kept in or about the Office Building. 8. Employees of Lessor shall not receive or carry messages for or to any Lessee or other person, nor contract with or render free or paid services to any Lessee or Lessee's agents, employees or invitees. 9. Lessor will not permit entrance to Lessee's Office Space by use of pass key controlled by Lessor, to any person at any time without permission by Lessee, except Lessor's employees, contractors, or service personnel. 10. None of the entries, passages, doors, elevators, hallways, stairways, or other common areas shall be blocked or obstructed, or any rubbish, litter, trash or material of any nature placed, emptied or thrown into the Common Areas, or such areas be used at any time except for access or egress by Lessee, Lessee's agent, employees or invitees. 11. During move-in, and at other times when receiving large items on the Office Building, Lessee shall give Lessor at least one day's notice to provide time to equip elevators, and office building walls and floors with protective covering as necessary. Only the freight elevator will be used for move-in or move-out, and all hand cart/dolly traffic. Further, Lessee will insure that delivery personnel make deliveries through the west emergency exit, and that they use all caution necessary to prevent any damage to the Office Building structure and furnishings. Lessee shall be responsible for any damages resulting from its own or its employee's, agent's, or invitee's activities on the Property, and may be billed for any repairs required as a result of such damage. 12. Lessor will provide outside waste containers available to Lessee for the disposal of waste too large to deposit in Office Space containers. Lessee may use the outside containers, but must ensure that waste is deposited only in the containers provided, and that the area around the Office Space and the waste containers is kept in a neat, orderly condition. Packing cartons, large boxes or other items must be broken down before depositing so as to fit in the hopper. 13. Planters are not waste containers. Waste paper, smoking materials, drink or food remains, or any other refuse must not be deposited in any area or container designed or used for growing plants in the Office Building's Common Areas either inside or outside. 14. The water closets and other water fixtures shall not be used for any purpose other than that for which they were constructed, and any damage resulting to them from misuse, or the defacing or injury of any part of the Office Building shall be borne by the person who shall occasion it. No person shall waste water by interfering with the faucets or otherwise. Lessee shall bear the cost of any repairs which may from time to time be required to plumbing into the Lessee's Leased Premises, such responsibility to include all pipes and fixtures from the point at which they depart the office building's Common Areas either inside or outside. [SIG] [SIG] 29 15. No person shall disturb the occupants of the Office Building by the use of any musical instruments, the making of unseemly noises, or any unreasonable use. 16. Nothing shall be thrown from the top of the Office Building, or down the stairways, corridors, or from balconies. 17. Uninvited soliciting is prohibited on the Property. Any Lessee annoyed by uninvited solicitors should report them to the Building Manager. 18. Lessee, its employees, agents, customers, guests and invitees shall have access to the parking facilities as may be provided by Lessor, to the extent available, but not so as to unreasonably interfere with the similar parking rights of other tenants in the Office Building; parking rights, if any, of Lessee pursuant to the terms and conditions of this Lease are subject to the parking rules and to the rights and interests of municipal and other governmental agencies and authorities as with respect thereto and the exercise of any such right or authority by any such party shall in no event be or constitute a default of any of the terms hereof. 19. Lessor shall have the right to prescribe the weight, size and position of all safes and other heavy equipment brought into the Office Building. Safes or other heavy objects shall, if considered necessary by Lessor, stand on supports of such thickness as is necessary to properly distribute the weight, with the cost thereof being borne by Lessee. Lessor will not be responsible for loss or damage done to the Office Building by moving or maintaining any such safe or other property and all such damage shall be repaired at the expense of Lessee. 20. Unauthorized storage or abandonment of vehicles or equipment in or about the Property is prohibited Lessor has the right to enforce this restriction by removal and storage of same and such cost of storage and removal shall be borne by Lessee. 21. Lessor reserves the right to approve all vending machines or any other machines and all concessionaires, vending machines operators or other distributors of cold drinks, coffee, food or other concessions, water, towels or newspapers. 22. Lessor reserves the right, at any time, to grant to anyone the exclusive right to conduct any business or render any service in the Office Building. 23. Glass that reflects or admits light into passageways or into any place in the Office Building or Leased Premises shall not be covered or obstructed by Lessee. Lessor shall designate Building Standard window coverings. 24. Lessor reserves the right to erect, use and maintain pipes, ducts, wiring and conduits, and appurtenances thereto in and through the Leased Premises at reasonable locations. 25. Lessee and Lessee's agents, employees, family, licensees, invitees, visitors and contractors shall comply with all federal, state and local laws relating to occupancy or use of the Office Space, the Leased Premises and the Property, including but not limited to, the observance of designated non-smoking areas. It is the Lessor's desire to maintain in the Office Building the highest standard of dignity and good taste consistent with comfort and convenience for Lessee. Any action or condition not meeting this high [SIG] [SIG] 30 standard should be reported directly to Lessor. Your cooperation will be mutually beneficial and sincerely appreciated. Lessor reserves the right to make such other and further reasonable rules and regulations as in its judgment may from time to time be needful, for the safety, care and cleanliness of the Property, and for the preservation of good order therein. 31 EXHIBIT G This form is not to be executed at time of lease execution. ESTOPPEL CERTIFICATE (see paragraph 30.1 of lease) The purpose of this certificate is to confirm the current status of matters relating to the lease described below. It is for the benefit of the owner or prospective purchaser or mortgagee of the building in which the leased premises are located. 1. The undersigned is the Lessee under a lease between________________ ______________, as Lessor, and _______________________________________________ _______, as Lessee, dated ________________________ on leased premises locally known as the _____________________________ building and located at 100 N.E. Loop 410 in San Antonio, Texas. A copy of the fully executed lease and any amendments or modifications thereto are attached. There are no other modifications or amendments to the above described lease. The dates of any amendments or modifications are: (put "none" if inapplicable) _______________. 2. There are no unfulfilled written or verbal promises, representations, or warranties by Lessor. 3. There are no subleases of the leased premises or any portions thereof. 4. The lease (together with any amendments or modifications referred to above) is in good standing and in full force and effect. Lessor is not in default. Lessee agrees to give notice of any Lessor default to any purchaser or lender making written requests to Lessee for same. 5. Except for rents (if any) which may be due under the lease for the current month, there are no rents or other charges which have been prepaid by the undersigned Lessee to Lessor under the lease other than the following: 6. The amount of security deposit currently posted by Lessee with Lessor is $________ in the form of cash. 7. Lessee acknowledges that the space being leased consists of _____ square feet of Rentable Area according to the lease, that the improvements to be constructed by Lessor have been satisfactorily completed, that the lease space has been accepted by Lessee, that Lessee now occupies the lease space, and that the commencement date for the lease term was ______________________. 8. There are no rentals which are due and unpaid. Rentals are fully paid (if required by the lease) through the last day of the month in which this estoppel certificate has been executed. 32 9. There are no known offsets or credits against rentals except as expressly provided by the terms of the lease. There is no known right of rescission and no known defense to Lessee's future obligations to pay the specified rentals at the times and in accordance with the lease terms. Lessee has not received any concession (rental or otherwise) or similar compensation not expressed in the lease which is presently in effect. 10. Lessee has no options or rights of refusal regarding the leased premises or additional rental space other than as set out in the lease. 11. Lessee has not: (a) made a general assignment for the benefit of creditors; and (b) commenced any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution, or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization, or relief of debtors; or (c) had any law relating to bankruptcy, insolvency, reorganization, or relief of debtors; or (c) had any involuntary case, proceeding, or other action commenced against it which seeks to have an order for relief entered against it, as debtor, or seeks reorganization, arrangement, adjustment, adjustment, liquidation, dissolution, or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization, or relief of debtors; or (d) concealed, removed, or permitted to be concealed or removed, any part of its property, with intent to hinder, delay, or defraud its creditors or any of them, or made or suffered a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance, or similar law; or made any transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid; or (e) had a trustee, receiver, custodian or other similar official appointed for or take possession of all or any part of its property or had any court take jurisdiction of any other of its property. 12. Lessee agrees to furnish Lessor with estoppel letters on this form within 10 days (stating the then-current facts) after written request by Lessor or subsequent owners of the building. 13. Lessee acknowledges that, upon 10 days' prior written request of Lessor's mortgagee at any time after foreclosure proceedings or a deed in lieu of foreclosure, Lessee shall attorn to the mortgage or foreclosure purchaser by recognizing such new owner as Lessor under the lease provided that such purchaser shall recognize the rights of Lessee under the lease as long as tenant is not in default. The agreement of Lessee to attorn shall survive any foreclosure sale or deed in lieu of foreclosure. Lessee shall, upon 10 days' written notice from Lessor's mortgagee anytime before or after foreclosure sale, execute, acknowledge, and deliver to Lessor's mortgagee all instruments and certificates that in the reasonable judgment of Lessor's mortgagee may be necessary or proper to confirm such attornment. 14. Lessee acknowledges that this estoppel certificate and the statements therein may be conclusively relied upon by Lessor and by any prospective purchaser or lien holder of the leased premises. 15. The form of this estoppel certificate may vary, depending on lender or purchaser requirements. It is agreed that this certificate may be modified to conform to reasonable requests by lenders or purchasers. ---- ---- 33 16. This agreement shall be binding upon and shall inure to the benefit of the Lessor, any present or future mortgage, any prospective buyer or master Lessee of the property, and their successors and assigns. Dated this ______________ day of __________, 19___. LESSEE By:____________________________ Signature _______________________________ Printed name of signatory Title:________________________ 34 EXHIBIT I CERTIFICATE OF CORPORATE RESOLUTION AUTHORIZING LEASE OR GUARANTY (see paragraphs 37.1 and 39.1 of lease) The undersigned, as secretary of the corporation named below, certifies that at a meeting of the board of directors of the corporation, duly called and held on the ____ day of ____________, 19___, at which a quorum of the directors were present and acting throughout, the following resolutions were unanimously adopted and are still in force and effect: RESOLVED that the president or any vice president of the corporation shall be authorized to execute a lease for office space on behalf of the corporation and/or to guarantee performance of a lease for office space, described below: Date of lease: Lessor: Diamond Shamrock Leasing, Inc. Lessee: Medical Science Systems, Incorporated Guarantor, if any (not Lessee's name): None Building name: One International Centre Suite No.: 1350 Building address: 100 N.E. Loop 410 San Antonio, Texas 78216-4742 RESOLVED FURTHER, that the president or any vice president is authorized on behalf of the Corporation to execute and deliver to the Lessor all instruments reasonably necessary for the lease. Lessor is entitled to rely upon the above resolutions until the board of directors of the corporation revokes or alters same in written form, certified by the secretary of the corporation, and delivers same, certified mail, return receipt requested, to the Lessor. The corporation is duly organized and is in good standing under the laws of the State of Texas. The undersigned further certifies that on the meeting date referred to above, the names and respective titles of the officers of the corporation were as follows: WITNESS MY HAND this 18th day of October, 1995 Medical Science Systems, Incorporated ------------------------------------- Typed name of corporation /s/ PAUL J. WHITE ------------------------------------- Signature of secretary of corporation /s/ PAUL J. WHITE ------------------------------------- Printed name of secretary [SIG] [SIG] 35 STATE OF CALIFORNIA ) ) COUNTY OF ORANGE ) This instrument was acknowledged before me on October 18, 1995 by Paul J. White on behalf of the above stated LESSOR and in the above stated capacity. /s/ DEVON D. GRANT ----------------------------------------- Notary Public for the State of California Printed name of notary: Devon D. Grant My commission expires: August 25, 1999 [SEAL] [SIG] [SIG] 36 EXHIBIT J RIGHT TO RENEW Provided Lessee is not in default, Lessor shall grant Lessor an option to renew this Lease for an additional period of three (3) years. Lessee shall provide Lessor with not less than one hundred twenty (120) days' prior written notice of its intentions to renew. Rental rate shall be based on the rental rate currently being charged by One International Centre to other tenants. All other terms and conditions shall remain the same. [SIG] [SIG] EX-10.17 32 1996 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.17 MEDICAL SCIENCE SYSTEMS, INC. 1996 EQUITY INCENTIVE PLAN As Adopted As of June 28, 1996 1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent and Subsidiaries, by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 24 hereof. 2. SHARES SUBJECT TO THE PLAN. 2.1 Number of Shares Available. Subject to Sections 2.2 and 18 hereof, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 750,000 Shares. Subject to Sections 2.2 and 19 hereof, Shares will again be available for grant and issuance in connection with future Awards under this Plan that: (a) are subject to issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option, (b) are subject to an Award granted hereunder but are forfeited or are repurchased by the Company at the original issue price, or (c) are subject to an Award that otherwise terminates without Shares being issued. At all times the Company will reserve and keep available a sufficient number of Shares as will be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan. 2.2 Adjustment of Shares. In the event that the number of outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the shareholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be paid in cash at Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Committee. 3. ELIGIBILITY. ISOs (as defined in Section 5 hereof) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants and advisors of the Company or any Parent or Subsidiary of the Company; provided such consultants and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. A person may be granted more than one Award under this Plan. 2 4. ADMINISTRATION. 4.1 Committee Authority. This Plan will be administered by the Committee or the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Without limitation, the Committee will have the authority to: (a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan; (b) prescribe, amend and rescind rules and regulations relating to this Plan; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission, or reconcile any inconsistency in this Plan, any Award or any Award Agreement; (j) determine whether an Award has been earned; and (k) make all other determinations necessary or advisable for the administration of this Plan. 4.2 Committee Discretion. Any determination made by the Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company. 4.3 Exchange Act Requirements. If the Company is subject to the Exchange Act, the Company will take appropriate steps to comply with the disinterested director requirements of Section 16(b) of the Exchange Act, including but not limited to, the appointment -2- 3 by the Board of a Committee consisting of not less than two persons (who are members of the Board), each of whom is a Disinterested Person. 5. OPTIONS. The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISOS") or Nonqualified Stock Options ("NQSOS"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following: 5.1 Form of Option Grant. Each Option granted under this Plan will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO ("STOCK OPTION AGREEMENT"), and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan. 5.2 Date of Grant. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 Exercise Period. Options may be exercisable immediately (subject to repurchase pursuant to Section 13 hereof) or may be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option, including the date such Option is forfeited or deemed to expire upon the exercise of any tandem SAR; provided, however, that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company ("TEN PERCENT SHAREHOLDER") will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for the exercise of Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines. 5.4 Exercise Price. The Exercise Price of an Option will be determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that (i) the Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the Shares on the date of grant and (ii) the Exercise Price of any Option granted to a Ten Percent Shareholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 9 hereof. 5.5 Method of Exercise. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant's -3- 4 investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased. 5.6 Termination. Subject to earlier termination pursuant to Section 18.1 hereof and notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of Option will always be subject to the following: (a) If the Participant is Terminated for any reason except death, Disability or for Cause, then the Participant may exercise such Participant's Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such shorter time period as may be specified in the Stock Option Agreement) or longer time period not exceeding five (5) years after the Termination Date as may be determined by the Committee, with any exercise beyond three (3) months after the Termination Date deemed to be an NQSO, but in any event, no later than the expiration date of the Options. (b) If the Participant is Terminated because of Participant's death or Disability (or the Participant dies within three (3) months after a Termination other than because of Participant's death or Disability), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee) no later than twelve (12) months after the Termination Date (or such shorter time period as may be specified in the Stock Option Agreement) or longer time period not exceeding five (5) years after the Termination Date as may be determined by the Committee, with any exercise beyond (a) three (3) months after the Termination Date when the Termination is for any reason other than the Participant's death or disability within the meaning of Section 22(e)(3) of the Code, or (b) twelve (12) months after the Termination Date when the Termination is for Participant's death or disability within the meaning of Section 22(e)(3) of the Code, deemed to be an NQSO, but in any event no later than the expiration date of the Options. (c) If the Participant is terminated for Cause, then Participant's options shall expire on such Participant's Termination Date, or at such later time and on such conditions as determined by the Committee. 5.7 Limitations on Exercise. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, or subject to a -4- 5 SAR not granted in tandem with an Option (including a SAR that can be settled in cash), provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable, or such SAR. 5.8 Limitations on ISOs. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company or any Parent or Subsidiary of the Company) will not exceed $100,000.00. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000.00, then the Options for the first $100,000.00 worth of Shares to become exercisable in such calendar year will be ISOs and the Options for the amount in excess of $100,000.00 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date (as defined below) of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment. 5.9 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 hereof for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 No Disqualification. Notwithstanding any other provision in this Plan, no term of this Plan relating to ISOs will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. STOCK APPRECIATION RIGHTS. 6.1 Grant. Subject to the terms and conditions of this Plan, the Committee may grant a SAR to any Participant either (a) in tandem with the grant of an ISO, (b) in tandem with the grant of an NQSO or (c) independent of the grant of an ISO or NQSO. Each grant of a SAR which is in tandem with the grant of an ISO or an NQSO will be evidenced by the same Award Agreement as the ISO or NQSO which is granted in tandem with such SAR and such SAR will relate to the same number of Shares as such Option. Each SAR which is granted independent of an ISO or NQSO will be evidenced by a separate Award Agreement which will state the number of Shares to which such SAR will relate and such other terms and conditions as the Committee in its sole discretion deems are consistent with the terms of this Plan, including -5- 6 conditions on the exercise of such SAR which relate to the employment of the Participant or the requirement that the Participant exchange a prior outstanding Option and/or SAR. 6.2 Payment at Exercise. Upon the settlement of a SAR in accordance with the terms of the related Award Agreement, the Participant will (subject to the terms and conditions of this Plan and such Award Agreement) receive a payment equal to the excess, if any, of the SAR Exercise Price for the number of Shares of the SAR being exercised at that time over the SAR Grant Price for such Shares. Such payment may be made in whole Shares or in cash, or partially in Shares and partially in cash, as determined under the Award Agreement. If payment is made in whole or in part in Shares, such Shares will be valued for this purpose at the SAR Exercise Price on the date the SAR is exercised, and any payment in Shares which calls for a payment in a fractional Share automatically will be paid in cash based on such valuation. 6.3 Special Terms and Conditions. Each Award Agreement which evidences the grant of a SAR will incorporate such terms and conditions as the Committee in its absolute discretion deems are consistent with the terms of this Plan and the Award Agreement for the ISOs and NQSOs, if any, granted in tandem with such SAR except that (a) if a SAR is granted in tandem with an ISO or a NQSO, the SAR will be exercisable only when the related ISO or NQSO is exercisable and (b) the Participant's right to exercise a SAR granted in tandem with an ISO or NQSO will be forfeited to the extent that the Participant exercises the related ISO or NQSO and the Participant's right to exercise the ISO or NQSO will be forfeited to the extent Participant exercises the related SAR, but any such forfeiture will not count as a forfeiture for purposes of making the Shares subject to such Option or SAR again available for use under Section 2 hereof. 7. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to sell to an eligible person Shares that are subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "PURCHASE PRICE"), the restrictions to which the Shares will be subject, and all other terms and conditions of the Restricted Stock Award, subject to the following: 7.1 Form of Restricted Stock Award. All purchases under a Restricted Stock Award made pursuant to this Plan will be evidenced by an Award Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. The offer of Restricted Stock will be accepted by the Participant's execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer will terminate, unless otherwise determined by the Committee. 7.2 Purchase Price. The Purchase Price of Shares sold pursuant to a Restricted Stock Award will be determined by the Committee and will be at least 85% of the Fair Market Value of the Shares on the date the Restricted Stock Award is granted, except in the case of a -6- 7 sale to a Ten Percent Shareholder, in which case the Purchase Price will be 100% of the Fair Market Value. Payment of the Purchase Price may be made in accordance with Section 9 hereof. 7.3 Restrictions. Restricted Stock Awards will be subject to such restrictions (if any) as the Committee may impose. 8. STOCK BONUSES. 8.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares (which may consist of Restricted Stock) for services rendered to the Company or any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past services already rendered to the Company, or any Parent or Subsidiary of the Company pursuant to an Award Agreement (the "STOCK BONUS AGREEMENT") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in the Participant's individual Award Agreement (the "PERFORMANCE STOCK BONUS AGREEMENT") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent or Subsidiary and/or individual performance factors or upon such other criteria as the Committee may determine; provided, however, that performance-based bonuses shall be restricted to individuals earning at least $60,000.00 per year and of adequate sophistication and sufficiently empowered to achieve the performance goals. 8.2 Terms of Stock Bonuses. The Committee will determine the number of Shares to be awarded to the Participant and whether such Shares will be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee will determine: (a) the nature, length and starting date of any period during which performance is to be measured (the "PERFORMANCE PERIOD") for each Stock Bonus; (b) the performance goals and criteria to be used to measure the performance, if any; (c) the number of Shares that may be awarded to the Participant; and (d) the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships. 8.3 Form of Payment. The earned portion of a Stock Bonus may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee may determine. Payment may be made in the form of cash, whole Shares, including -7- 8 Restricted Stock, or a combination thereof, either in a lump sum payment or in installments, all as the Committee will determine. 8.4 Termination During Performance Period. If a Participant is Terminated during a Performance Period for any reason, then such Participant will be entitled to payment (whether in Shares, cash or otherwise) with respect to the Stock Bonus only to the extent earned as of the date of Termination in accordance with the Performance Stock Bonus Agreement, unless the Committee will determine otherwise. 9. PAYMENT FOR SHARE PURCHASES. 9.1 Payment. Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such Shares); or (2) were obtained by Participant in the public market; (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not employees or directors of the Company will not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares. (d) by waiver of compensation due or accrued to the Participant for services rendered; (e) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD DEALER") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from the Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the -8- 9 Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (f) by any combination of the foregoing. 9.2 Loan Guarantees. The Committee may help the Participant pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 10. WITHHOLDING TAXES. 10.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 10.2 Stock Withholding. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may in its sole discretion allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined (the "TAX DATE"). All elections by a Participant to have Shares withheld for this purpose will be made in writing in a form acceptable to the Committee and will be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made, then except as provided below, the election will be irrevocable as to the particular Shares as to which the election is made; (c) all elections will be subject to the consent or disapproval of the Committee; (d) if the Participant is an Insider and if the Company is subject to Section 16(b) of the Exchange Act: (1) the election may not be made within six (6) months of the date of grant of the Award, except as otherwise permitted by SEC Rule 16b-3(e) under the Exchange Act, and (2) either (A) the election to use stock withholding must be irrevocably made at least six (6) months prior to the Tax Date (although such election may be revoked at any time at least six (6) months prior to the Tax Date) or (B) -9- 10 the exercise of the Option or election to use stock withholding must be made in the ten (10) day period beginning on the third day following the release of the Company's quarterly or annual summary statement of sales or earnings; and (e) in the event that the Tax Date is deferred until six (6) months after the delivery of Shares under Section 83(b) of the Code, the Participant will receive the full number of Shares with respect to which the exercise occurs, but such Participant will be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. -10- 11 11. PRIVILEGES OF STOCK OWNERSHIP. 11.1 Voting and Dividends. No Participant will have any of the rights of a shareholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a shareholder and have all the rights of a shareholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant's original Purchase Price pursuant to Section 13 hereof. 11.2 Financial Statements. The Company will provide financial statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company will not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information. 12. TRANSFERABILITY. Awards granted under this Plan, and any interest therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as consistent with the specific Plan and Award Agreement provisions relating thereto. During the lifetime of the Participant an Award will be exercisable only by the Participant, and any elections with respect to an Award, may be made only by the Participant. 13. RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement (a) a right of first refusal to purchase all Shares that a Participant (or a subsequent transferee) may propose to transfer to a third party, and/or (b) a right to repurchase a portion of or all Shares held by a Participant following such Participant's Termination at any time within ninety (90) days after the later of Participant's Termination Date and the date Participant purchases Shares under this Plan, for cash and/or cancellation of purchase money indebtedness, at: (A) with respect to Shares that are "Vested" (as defined in the Award Agreement), the Fair Market Value of such Shares on Participant's Termination Date, provided, that such right of repurchase (i) must be exercised as to all such "Vested" Shares unless a Participant consents to the Company's repurchase of only a portion of such "Vested" Shares and (ii) terminates when the Company's securities become publicly traded; or (B) with respect to Shares that are not "Vested" (as defined in the Award Agreement), at the Participant's original Purchase Price or such higher price as determined by the Committee, provided, that to the extent the Participant is not an officer, director or consultant of the Company, the right to repurchase at the original Purchase Price lapses at the rate of at least 20% per year over five (5) years from the date the Shares were purchased (or from the date of grant of options in the case of Shares obtained pursuant to a Stock Option Agreement and Stock Option Exercise Agreement). -11- 12 14. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted. 15. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's Unvested Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid. 16. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares (including Restricted Stock) or other consideration, based on such terms and conditions as the Committee and the Participant may agree. 17. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so. -12- 13 18. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without cause. 19. CORPORATE TRANSACTIONS. 19.1 Assumption or Replacement of Awards by Successor. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which shareholders owning at least 80% of the voting stock of the Company (other than any shareholder which merges, or which owns or controls another corporation which merges, with the Company in such merger) cease to own their shares or other equity interests in the Company, or (d) the sale of substantially all of the assets of the Company, any or all outstanding Awards may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to shareholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor corporation (if any) refuses to assume or substitute Options, as provided above, pursuant to a transaction described in this Section 19.1, then notwithstanding any other provision in this Plan to the contrary, such Options will expire on such transaction at such time and on such conditions as the Board will determine. 19.2 Other Treatment of Awards. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 19, in the event of the occurrence of any transaction described in Section 19.1 hereof, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, sale of assets or other transaction. 19.3 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Award under this Plan in substitution of such other company's award, or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such -13- 14 grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 20. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become effective on the date that it is adopted by the Board (the "EFFECTIVE DATE"). This Plan will be approved by the shareholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the Board. Upon the Effective Date, the Board may grant Awards pursuant to this Plan; provided, however, that: (a) no Option may be exercised prior to initial shareholder approval of this Plan; (b) no Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board will be exercised prior to the time such increase has been approved by the shareholders of the Company; and (c) in the event that shareholder approval of such increase is not obtained within the time period provided herein, all Awards granted hereunder will be canceled, any Shares issued pursuant to any Award will be canceled and any purchase of Shares hereunder will be rescinded. So long as the Company is subject to Section 16(b) of the Exchange Act, the Company will comply with the requirements of Rule 16b-3 (or its successor), as amended, with respect to shareholder approval. 21. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided herein, this Plan will terminate ten (10) years after the date this Plan is adopted by the Board or, if earlier, ten (10) years after the date of shareholder approval. This Plan and all agreements thereunder shall be governed by and construed in accordance with the laws of the State of California. 22. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the shareholders of the Company, amend this Plan in any manner that requires such shareholder approval pursuant to the Code or the regulations promulgated thereunder as such provisions apply to ISO plans. 23. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board, the submission of this Plan to the shareholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 24. DEFINITIONS. As used in this Plan, the following terms will have the following meanings: -14- 15 "AWARD" means any award under this Plan, including any Option, Restricted Stock or Stock Bonus, or SAR. "AWARD AGREEMENT" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "BOARD" means the Board of Directors of the Company. "CAUSE" means Termination because of (i) any willful material violation by the Participant of any law or regulation applicable to the business of the Company or a Parent or Subsidiary of the Company, the Participant's conviction for, or guilty plea to, a felony or a crime involving moral turpitude, any willful perpetration by the Participant of a common law fraud or any unlawful use by the Participant of drugs or other controlled substances, (ii) the Participant's commission of an act of personal dishonesty which involves personal profit in connection with the Company or any other entity having a business relationship with the Company, (iii) any material breach by the Participant of any provision of any agreement or understanding between the Company and the Participant regarding the terms of the Participant's service as an employee, director, consultant, independent contractor or adviser to the Company or a Parent or Subsidiary of the Company, including without limitation, the willful and continued failure or refusal of the Participant to perform the material duties required of such Participant as an employee, director, consultant, independent contractor or adviser of the Company or a Parent or Subsidiary of the Company, other than as a result of being found to have a Disability, or a breach of any applicable invention assignment and confidentiality agreement or similar agreement between the Company and the Participant, (iv) Participant's disregard of the policies of the Company so as to cause loss, damage or injury to the property, reputation or employees of the Company or a Parent or Subsidiary of the Company, or (v) any other misconduct by the Participant which is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or a Parent or Subsidiary of the Company. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the committee appointed by the Board to administer this Plan, or if no committee is appointed, the Board. "COMPANY" means Medical Science Systems, Inc. or any successor corporation. "DISABILITY" means a disability, whether temporary or permanent, partial or total, as determined by the Committee. "DISINTERESTED PERSON" means a director who has not, during the period that person is a member of the Committee and for one year prior to commencing service as a member of the Committee, been granted or awarded equity securities pursuant to this Plan or any other plan of the Company or any Parent or Subsidiary of the Company, except in accordance with the requirements set forth in Rule 16b-3(c)(2)(i) (and any successor regulation thereto) as promulgated by the SEC under Section 16(b) of the Exchange Act, as such rule is amended from time to time and as interpreted by the SEC. -15- 16 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXERCISE PRICE" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. "FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the NASDAQ National Market, its closing price on the NASDAQ National Market on the last trading day prior to the date of determination as reported in The Wall Street Journal; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the last trading day prior to the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal; (c) if such Common Stock is publicly traded but is not quoted on the NASDAQ National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the last trading day prior to the date of determination as reported by The Wall Street Journal; or (d) if none of the foregoing is applicable, by the Committee in good faith. "INSIDER" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act. "OPTION" means an award of an option to purchase Shares pursuant to Section 5 hereof. "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if at the time of the granting of an Award under this Plan, each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "PARTICIPANT" means a person who receives an Award under this Plan. "PLAN" means this Medical Science Systems, Inc. 1996 Equity Incentive Plan, as amended from time to time. "RESTRICTED STOCK AWARD" means an award of Shares pursuant to Section 7 hereof. "SAR" or "STOCK APPRECIATION RIGHT" means the contractual right granted to a Participant pursuant to Section 6.1 hereof to receive a payment upon the exercise of such right -16- 1 17 which reflects the appreciation in the Fair Market Value of the number of Shares for which such right was granted. "SAR EXERCISE DATE" means the date on which the exercise of an SAR occurs under the related Award Agreement. "SAR EXERCISE PRICE" means the Fair Market Value of a Share on the SAR Exercise Date. "SAR GRANT PRICE" means the price which would have been the Exercise Price for one Share if the SAR had been granted as an Option or, if the SAR is granted in tandem with an Option, the Exercise Price for the related Option. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SHARES" means shares of the Company's Common Stock, no par value, reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 19 hereof, and any successor security. "STOCK BONUS" means an award of Shares, or cash in lieu of Shares, pursuant to Section 8 hereof. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "TERMINATION" or "TERMINATED" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, director, consultant or advisor to the Company or a Parent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee, provided that such leave is for a period of not more than 90 days unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Option while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Option agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "Termination Date"). "UNVESTED SHARES" means "Unvested Shares" as defined in the Award Agreement. "VESTED SHARES" means "Vested Shares" as defined in the Award Agreement. -17- EX-10.18 33 AMENDMENT TO THE 1996 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.18 AMENDMENT TO THE 1996 EQUITY INCENTIVE PLAN Pursuant to the provisions of Paragraph 22 of the 1996 Equity Incentive Plan, the undersigned corporation adopts, following a majority shareholder vote at the annual meeting, the following Amendment to its 1996 Equity Incentive Plan: 1. Paragraph 2 of the 1996 Equity Incentive Plan is hereby amended to read as follows: "2. SHARES SUBJECT TO THE PLAN. 2.1 Number of Shares Available. Subject to Sections 2.2 and 18 hereof, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 1,000,000 Shares. Subject to Sections 2.2 and 19 hereof, Shares will again be available for grant and issuance in connection with future Awards under this Plan that: (a) are subject to issuance upon exercise of such Option, (b) are subject to an Award granted hereunder but are forfeited or are repurchased by the Company at the original issue price, or (c) are subject to an Award that otherwise terminates without Shares being issued. At all times the Company will reserve and keep available a sufficient number of Shares as will be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan." 2. Paragraph 20 of the 1996 Equity Incentive Plan is hereby amended to read as follows: "20. ADOPTION AND SHAREHOLDER APPROVAL. This Plan became effective on June 28, 1996, the date that it was adopted by the Board so long as the shareholder approval was received within one year (the "EFFECTIVE DATE"). Shareholder approval of the Plan was received in the form of a unanimous written consent dated June 28, 1996. So long as the Company is subject to Section 16(b) of the Exchange Act, the Company will comply with the requirements of Rule 16b-3 (or its successor), as amended, with respect to shareholder approval." Dated May 6, 1997 MEDICAL SCIENCE SYSTEMS, INC. By: ______________________________ Paul J. White Its: President EX-10.19 34 FORM OF STOCK OPTION AGREEMENT 1 EXHIBIT 10.19 FORM OF STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is made and entered into as of the date of grant set forth below (the "Date of Grant") by and between Medical Science Systems, Inc., a Texas corporation (the "Company"), and the participant named below ("Participant"). Capitalized terms not defined herein shall have the meaning ascribed to them in the Company's 1996 Equity Incentive Plan (the "Plan"). PARTICIPANT: _________________ SOCIAL SECURITY NUMBER: _________________ ADDRESS: _________________ _________________ TOTAL OPTION SHARES: _________________ EXERCISE PRICE PER SHARE: _________________ DATE OF GRANT: _________________ FIRST VESTING DATE: _________________ EXPIRATION DATE: _________________ TYPE OF STOCK OPTION (CHECK ONE): [__] INCENTIVE STOCK OPTION [__] NONQUALIFIED STOCK OPTION 1. GRANT OF OPTION. The Company hereby grants to Participant an option (the "Option") to purchase the total number of shares of Common Stock, no par value, of the Company set forth above (the "Shares") at the Exercise Price Per Share set forth above (the "Exercise Price"), subject to all of the terms and conditions of this Agreement and the Plan. If designated as an Incentive Stock Option above, the Option is intended to qualify as an "incentive stock option" ("ISO") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2 2. EXERCISE PERIOD. 2.1 Exercise Period of Option. At the end of each month (with "month" defined for purposes hereof as the period from the Vesting Commencement Date, such as "March 12," through the same numerical date in the next calendar month, such as "April 12") throughout the thirty-six (36) month period commencing on _____________ (the "Vesting Commencement Date") and ending on _____________ (the "Vesting Period"), if at the end of such month Participant has not been Terminated, the Option shall become exercisable as to portions of the Shares as follows: (a) This Option shall not be exercisable with respect to any of the Shares until ______________ (the "First Vesting Date"), which is the date 6 months after the Vesting Commencement Date; (b) on the First Vesting Date the Option shall become exercisable as to sixteen and sixty-six one thousandths percent (16.66%) of the Shares (i.e., for ______ Shares); and (c) and thereafter at the end of each full succeeding month the Option shall become exercisable as to two and seven hundred seventy-seven one thousandths percent (2.777%) of the Shares (i.e., for ______ additional Shares). If application of such vesting percentage results in a fractional Share, such Share shall be rounded downward to the nearest whole Share for each month except for the last month in such Vesting Period, at the end of which last month this Option shall become exercisable for the full remainder. 2.2 Vesting of Options. Shares that are vested pursuant to the schedule set forth in Section 2.1 are "Vested Shares." Shares that are not vested pursuant to the schedule set forth in Section 2.1 are "Unvested Shares." Unvested Shares may not be sold or otherwise transferred by Participant without the Company's prior written consent. 2.3 Expiration. The Option shall expire on the Expiration Date set forth above and must be exercised, if at all, on or before the Expiration Date. 3. TERMINATION. 3.1 Termination for Any Reason Except Death, Disability or Cause. If Participant is Terminated for any reason, except death, Disability or for Cause, the Option, to the extent (and only to the extent) that it would have been exercisable by Participant on the date of Termination, may be exercised by Participant no later than three (3) months after the date of Termination, but in any event no later than the Expiration Date. 3.2 Termination Because of Death or Disability. If Participant is Terminated because of death or Disability of Participant, the Option, to the extent that it is exercisable by Participant on the date of Termination, may be exercised by Participant (or Participant's legal representative) no later than twelve (12) months after the date of Termination, but in any event no later than the Expiration Date. 3.3 Termination for Cause. If Participant is Terminated for Cause, then Participant's options shall expire on such Participant's Termination Date, or at such later time and on such conditions as determined by the Committee. -2- 3 3.4 No Obligation to Employ. Nothing in the Plan or this Agreement shall confer on Participant any right to continue in the employ of, or other relationship with, the Company or any Parent or Subsidiary of the Company, or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without cause. 4. MANNER OF EXERCISE. 4.1 Stock Option Exercise Agreement. To exercise this Option, Participant (or in the case of exercise after Participant's death, Participant's executor, administrator, heir or legatee, as the case may be) musT deliver to the Company an executed stock option exercise agreement in the form attached hereto as Exhibit A, or in such other form as may be approved by the Company from time to time (the "Exercise Agreement"), which shall set forth, inter alia, Participant's election to exercise the Option, the number of Shares being purchased, any restrictions imposed on the Shares and any representations, warranties and agreements regarding Participant's investment intent and access to information as may be required by the Company to comply with applicable securities laws. If someone other than Participant exercises the Option, then such person must submit documentation reasonably acceptable to the Company that such person has the right to exercise the Option. 4.2 Limitations on Exercise. The Option may not be exercised unless such exercise is in compliance with all applicable federal and state securities laws, as they are in effect on the date of exercise. The Option may not be exercised as to fewer than one hundred (100) Shares unless it is exercised as to all Shares as to which the Option is then exercisable. 4.3 Payment. The Exercise Agreement shall be accompanied by full payment of the Exercise Price for the Shares being purchased in cash (by check), or where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) at the discretion of the Committee, by surrender of shares of the Company's Common Stock that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Participant in the open public market; and (3) are clear of all liens, claims, encumbrances or security interests; (c) at the discretion of the Committee, by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; -3- 4 (d) by waiver of compensation due or accrued to Participant for services rendered; (e) provided that a public market for the Company's stock exists, (1) through a "same day sale" commitment from Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the exercise price and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company, or (2) through a "margin" commitment from Participant and an NASD Dealer whereby Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the exercise price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; or (f) by any combination of the foregoing. 4.4 Tax Withholding. Prior to the issuance of the Shares upon exercise of the Option, Participant must pay or provide for any applicable federal, state and local withholding obligations of the Company. If the Committee permits, Participant may provide for payment of withholding taxes upon exercise of the Option by requesting that the Company retain Shares with a Fair Market Value equal to the minimum amount of taxes required to be withheld. In such case, the Company shall issue the net number of Shares to the Participant by deducting the Shares retained from the Shares issuable upon exercise. 4.5 Issuance of Shares. Provided that the Exercise Agreement and payment are in form and substance satisfactory to counsel for the Company, the Company shall issue the Shares registered in the name of Participant, Participant's authorized assignee, or Participant's legal representative, and shall deliver certificates representing the Shares with the appropriate legends affixed thereto. 5. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option is an ISO, and if Participant sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (a) the date two (2) years after the Date of Grant, and (b) the date one (1) year after transfer of such Shares to Participant upon exercise of the Option, Participant shall immediately notify the Company in writing of such disposition. Participant agrees that Participant may be subject to income tax withholding by the Company on the compensation income recognized by Participant from the early disposition by payment in cash or out of the current wages or other compensation payable to Participant. 6. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of the Option and the issuance and transfer of Shares shall be subject to compliance by the Company and Participant with all applicable requirements of federal and state securities laws and with all -4- 5 applicable requirements of any stock exchange on which the Company's Common Stock may be listed at the time of such issuance or transfer. Participant understands that the Company is under no obligation to register or qualify the Shares with the Securities and Exchange Commission, any state securities commission or any stock exchange to effect such compliance. 7. NONTRANSFERABILITY OF OPTION. The Option 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 Participant only by Participant. The terms of the Option shall be binding upon the executors, administrators, successors and assigns of Participant. 8. TAX CONSEQUENCES. Set forth below is a brief summary as of the Date of Grant of some of the federal and California tax consequences of exercise of the Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. PARTICIPANT SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES. 8.1 Exercise of ISO. If the Option qualifies as an ISO, there will be no regular federal or California income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as a tax preference item for federal income tax purposes and may subject the Participant to the alternative minimum tax in the year of exercise. 8.2 Exercise of Nonqualified Stock Option. If the Option does not qualify as an ISO, there may be a regular federal and California income tax liability upon the exercise of the Option. Participant will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. The Company will be required to withhold from Participant's compensation or collect from Participant and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. 8.3 Disposition of Shares. If the Shares are held for more than twelve (12) months after the date of the transfer of the Shares pursuant to the exercise of the Option (and, in the case of an ISO, are disposed of more than two (2) years after the Date of Grant), any gain realized on disposition of the Shares will be treated as long term capital gain for federal and California income tax purposes. If Shares purchased under an ISO are disposed of within one (1) year of exercise or within two (2) years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. The Company will be required to withhold from Participant's compensation or collect from Participant and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. -5- 6 9. PRIVILEGES OF STOCK OWNERSHIP. Participant shall not have any of the rights of a shareholder with respect to any Shares until Participant exercises the Option and pays the Exercise Price. 10. INTERPRETATION. Any dispute regarding the interpretation of this Agreement shall be submitted by Participant or the Company to the Committee for review. The resolution of such a dispute by the Committee shall be final and binding on the Company and Participant. 11. ENTIRE AGREEMENT. The Plan is incorporated herein by reference. This Agreement and the Plan constitute the entire agreement of the parties and supersede all prior undertakings and agreements with respect to the subject matter hereof. 12. NOTICES. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to Participant shall be in writing and addressed to Participant at the address indicated above or to such other address as such party may designate in writing from time to time to the Company. All notices shall be deemed to have been given or delivered upon: personal delivery; three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested); one (1) business day after deposit with any return receipt express courier (prepaid); or one (1) business day after confirmed transmission by facsimile. 13. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under this Agreement. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement shall be binding upon Participant and Participant's heirs, executors, administrators, legal representatives, successors and assigns. 14. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 15. ACCEPTANCE. Participant hereby acknowledges receipt of a copy of the Plan and this Agreement. Participant has read and understands the terms and provisions thereof, and accepts the Option subject to all the terms and conditions of the Plan and this Agreement. Participant acknowledges that there may be adverse tax consequences upon exercise of the Option or disposition of the Shares and that Participant should consult a tax adviser prior to such exercise or disposition. [REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY] -6- 7 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in duplicate by its duly authorized representative and Participant has executed this Agreement in duplicate as of the Effective Date. MEDICAL SCIENCE SYSTEMS, INC. PARTICIPANT By: --------------------------- -------------------------------- (Signature) Paul J. White - ------------------------------- -------------------------------- (Please print name) (Please print name) President - ------------------------------- (Please print title) [SIGNATURE PAGE TO MEDICAL SCIENCE SYSTEMS, INC. STOCK OPTION AGREEMENT] -7- EX-10.20 35 STOCK OPTION EXERCISE AGREEMENT 1 EXHIBIT 10.20 MEDICAL SCIENCE SYSTEMS, INC. 1996 EQUITY INCENTIVE PLAN STOCK OPTION EXERCISE AGREEMENT This Exercise Agreement is made and entered into as of ________, 199_ (the "Effective Date") by and between Medical Science Systems, Inc., a Texas corporation (the "Company"), and the purchaser named below (the "Purchaser"). Capitalized terms not defined herein shall have the meaning ascribed to them in the Company's 1996 Equity Incentive Plan (the "Plan"). PURCHASER: _______________________________________ SOCIAL SECURITY NUMBER: _______________________________________ ADDRESS: _______________________________________ _______________________________________ TOTAL NUMBER OF SHARES: _______________________________________ PURCHASE PRICE PER SHARE: _______________________________________ TOTAL PURCHASE PRICE: _______________________________________ OPTION NO.: _______________________________________ DATE OF GRANT: _______________________________________ TYPE OF OPTION (CHECK ONE): [_] INCENTIVE STOCK OPTION [_] NONQUALIFIED STOCK OPTION 2 1. EXERCISE OF OPTION. 1.1 EXERCISE. Pursuant to exercise of that certain option ("Option") granted to Purchaser under the Plan and subject to the terms and conditions of this Agreement, Purchaser hereby purchases from the Company, and the Company hereby sells to Purchaser, the total number of shares set forth above ("Shares") of the Company's Common Stock, no par value per share, at a purchase price per share set forth above for a total purchase price set forth above (the "Purchase Price"). As used in this Agreement, the term "Shares" refers to the Shares purchased under this Exercise Agreement and includes all securities received (a) in replacement of the Shares, (b) as a result of stock dividends or stock splits with respect to the Shares, and (c) all securities received in replacement of the Shares in a merger, recapitalization, reorganization or similar corporate transaction. 1.2 TITLE TO SHARES. The exact spelling of the name(s) under which Purchaser will take title to the Shares is: _______________________________________________ _______________________________________________ Purchaser desires to take title to the Shares as follows: [_] Individual, as separate property [_] Husband and wife, as community property [_] Joint Tenants [_] Alone or with spouse as trustee(s) of the following trust (including date): _____________________________________________________ _____________________________________________________ [_] Other; please specify:_______________________________ _______________________________ 1.3 PAYMENT. Purchaser hereby delivers payment of the Purchase Price in the manner permitted in the Stock Option Agreement as follows (check and complete as appropriate): [_] in cash in the amount of $__________, receipt of which is acknowledged by the Company; [_] by cancellation of indebtedness of the Company to Purchaser in the amount of $________; [_] at the discretion of the Committee, by delivery of __________ fully-paid, nonassessable and vested shares of the Common Stock of the Company owned by Purchaser for at least six (6) months prior to the date hereof which have been paid for within the meaning of SEC Rule 144, if purchased by use of a promissory note, such note has been fully paid with respect to such vested shares), or obtained by Purchaser in the open public market, and owned free and clear of all liens, claims, encumbrances or security interests, valued at the current Fair Market Value of $_______ per share; [_] at the discretion of the Committee, by tender of a Full Recourse Promissory Note in the principal amount of $_______, secured by a Pledge Agreement of even date herewith; [_] by the waiver hereby of compensation due or accrued for services rendered in the amount of $_____. 3 2. DELIVERY. 2.1 DELIVERIES BY PURCHASER. Purchaser hereby delivers to the Company (i) this Exercise Agreement, (ii) two (2) copies of a blank Stock Power and Assignment Separate from Stock Certificate in the form of Exhibit 1 attached hereto (the "Stock Powers"), both executed by Purchaser (and Purchaser's spouse, if any), (iii) if Purchaser is married, a Consent of Spouse in the form of Exhibit 2 attached hereto (the "Spouse Consent") executed by Purchaser's spouse, and (iv) the Purchase Price [NOTE FOR PREPARATION OF SPECIFIC EXERCISE AGREEMENT: USE THE FOLLOWING IF ALL OR PART OF THE PURCHASE PRICE IS PAID WITH A NOTE: [BY DELIVERY OF A SECURED FULL RECOURSE PROMISSORY NOTE IN THE FORM OF EXHIBIT 4 AND (V) A STOCK PLEDGE AGREEMENT IN THE FORM OF EXHIBIT 5, EXECUTED BY PURCHASER (THE "PLEDGE AGREEMENT")] 2.2 DELIVERIES BY THE COMPANY. Upon its receipt of the Purchase Price and all the documents to be executed and delivered by Purchaser to the Company under Section 2.1, the Company will issue a duly executed stock certificate evidencing the Shares in the name of Purchaser, to be placed in escrow as provided in Section [11] until expiration or termination of the Company's [REPURCHASE OPTION AND] Right of First Refusal described in Section[S 8 AND 9. 3. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and warrants to the Company that: 3.1 AGREES TO TERMS OF THE PLAN. Purchaser has received a copy of the Plan and the Stock Option Agreement, has read and understands the terms of the Plan, the Stock Option Agreement and this Exercise Agreement, and agrees to be bound by their terms and conditions. Purchaser acknowledges that there may be adverse tax consequences upon exercise of the Option or disposition of the Shares, and that Purchaser should consult a tax adviser prior to such exercise or disposition. 3.2 PURCHASE FOR OWN ACCOUNT FOR INVESTMENT. Purchaser is purchasing the Shares for Purchaser's own account for investment purposes only and not with a view to, or for sale in connection with, a distribution of the Shares within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). Purchaser has no present intention of selling or otherwise disposing of all or any portion of the Shares and no one other than Purchaser has any beneficial ownership of any of the Shares. 3.3 ACCESS TO INFORMATION. Purchaser has had access to all information regarding the Company and its present and prospective business, assets, liabilities and financial condition that Purchaser reasonably considers important in making the decision to purchase the Shares, and Purchaser has had ample opportunity to ask questions of the Company's representatives concerning such matters and this investment. 3.4 UNDERSTANDING OF RISKS. Purchaser is fully aware of: (i) the highly speculative nature of the investment in the Shares; (ii) the financial hazards involved; (iii) the lack of liquidity of the Shares and the restrictions on transferability of the Shares (~, that Purchaser may not be able to sell or dispose of the Shares or use them as collateral for loans); (iv) the qualifications and backgrounds of the management of the Company; and (v) the tax consequences of investment in the Shares. Purchaser is capable of evaluating the merits and risks of this investment, has the ability to protect Purchaser's own interests in this transaction and is financially capable of bearing a total loss of this investment. 4 3.5 NO GENERAL SOLICITATION. At no time was Purchaser presented with or solicited by any publicly issued or circulated newspaper, mail, radio, television or other form of general advertising or solicitation in connection with the offer, sale and purchase of the Shares. 4. COMPLIANCE WITH SECURITIES LAWS. 4.1 COMPLIANCE WITH FEDERAL SECURITIES LAWS. Purchaser understands and acknowledges that the Shares have not been registered with the Securities and Exchange Commission ("SEC") under the Securities Act and that, notwithstanding any other provision of the Stock Option Agreement to the contrary, the exercise of any rights to purchase any Shares is expressly conditioned upon compliance with the Securities Act and all applicable state securities laws. Purchaser agrees to cooperate with the Company to ensure compliance with such laws. The Shares are being issued under the Securities Act pursuant to the following (the Company will check the applicable box): [_] the exemption provided by SEC Rule 701; [_] the exemption provided by SEC Rule 504; [_] the exemption provided by Section 4(2) of the Securities Act; [_] other: _________________________________________. 4.2 COMPLIANCE WITH CALIFORNIA SECURITIES LAWS. THE SALE OF THE SECURITIES THAT ARE THE SUBJECT OF THIS EXERCISE AGREEMENT, IF NOT YET QUALIFIED WITH THE CALIFORNIA COMMISSIONER OF CORPORATIONS AND NOT EXEMPT FROM SUCH QUALIFICATION, IS SUBJECT TO SUCH QUALIFICATION, AND THE ISSUANCE OF SUCH SECURITIES, AND THE RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE IS EXEMPT. THE RIGHTS OF THE PARTIES TO THIS EXERCISE AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION BEING AVAILABLE. 5. RESTRICTED SECURITIES. 5.1 NO TRANSFER UNLESS REGISTERED OR EXEMPT. Purchaser understands that Purchaser may not transfer any Shares unless such Shares are registered under the Securities Act or qualified under applicable state securities laws or unless, in the opinion of counsel to the Company, exemptions from such registration and qualification requirements are available. Purchaser understands that only the Company may file a registration statement with the SEC and that the Company is under no obligation to do so with respect to the Shares. Purchaser has also been advised that exemptions from registration and qualification may not be available or may not permit Purchaser to transfer all or any of the Shares in the amounts or at the times proposed by Purchaser. 5.2 SEC RULE 144. In addition, Purchaser has been advised that SEC Rule l44 promulgated under the Securities Act, which permits certain limited sales of unregistered securities, is not presently available with respect to the Shares and, in any event, requires that the Shares be held for a minimum of two years, and in certain cases three years, after they have been purchased and paid for (within the meaning of Rule 144). [[NOTE FOR PREPARATION OF SPECIFIC EXERCISE 5 AGREEMENT: USE THE FOLLOWING IF SHARES ARE PURCHASED WITH A NOTE:] [PURCHASER UNDERSTANDS THAT SHARES PAID FOR WITH A NOTE MAY NOT BE DEEMED TO BE FULLY "PAID FOR" WITHIN THE MEANING OF RULE 144 UNLESS CERTAIN CONDITIONS ARE MET AND THAT, ACCORDINGLY, THE RULE 144 HOLDING PERIOD OF SUCH SHARES MAY NOT BEGIN TO RUN UNTIL SUCH SHARES ARE FULLY PAID FOR WITHIN THE MEANING OF RULE 144]. Purchaser understands that Rule l44 may indefinitely restrict transfer of the Shares so long as Purchaser remains an "affiliate" of the Company or if "current public information" about the Company (as defined in Rule 144) is not publicly available. 5.3 SEC RULE 701. The Shares may become freely tradable by non-affiliates if issued pursuant to SEC Rule 701 promulgated under the Securities Act (under limited conditions regarding the method of sale) 90 days after the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the SEC, subject to the lengthier market standoff agreement contained in Section 7 of this Exercise Agreement or any other agreement entered into by Purchaser. Affiliates must comply with the provisions (other than the holding period requirements) of Rule l44. 5.4 STATE LAW RESTRICTIONS ON TRANSFER. Purchaser understands that transfer of the Shares may be restricted by Section 260.14 l .11 of the Rules of the California Commissioner of Corporations, a copy of which is attached hereto as Exhibit 3, and that the certificate(s) representing the Shares may bear a legend to that effect. 6. RESTRICTIONS ON TRANSFERS. 6.1 DISPOSITION OF SHARES. Purchaser hereby agrees that Purchaser shall make no disposition of the Shares (other than as permitted by this Agreement) unless and until: (a) Purchaser shall have notified the Company of the proposed disposition and provided a written summary of the terms and conditions of the proposed disposition; (b) Purchaser shall have complied with all requirements of this Exercise Agreement applicable to the disposition of the Shares; (c) Purchaser shall have provided the Company with written assurances, in form and substance satisfactory to counsel for the Company, that (i) the proposed disposition does not require registration of the Shares under the Securities Act or (ii) all appropriate action necessary for compliance with the registration requirements of the Securities Act or of any exemption from registration available under the Securities Act (including Rule 144) has been taken: and (d) Purchaser shall have provided the Company with written assurances, in form and substance satisfactory to the Company, that the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Shares pursuant to the provisions of the Commissioner Rules identified in Section 4.2. 6.2 RESTRICTION ON TRANSFER. Purchaser shall not transfer, assign, grant a lien or security interest in, pledge, hypothecate, encumber or otherwise dispose of any of the Shares which are 6 subject to [THE COMPANY'S REPURCHASE OPTION OR] the Company's Right of First Refusal. except as permitted by this Agreement. 6.3 TRANSFEREE OBLIGATIONS. Each person (other than the Company) to whom the Shares are transferred by means of one of the permitted transfers specified in this Agreement must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Company that such person is bound by the provisions of this Exercise Agreement and that the transferred shares are subject to (i) [BOTH THE COMPANY'S REPURCHASE OPTION (only with respect to Vested Shares) and] the Company's Right of First Refusal granted hereunder and (ii) the market stand-off provisions of Section 7, to the same extent such shares would be so subject if retained by the Purchaser. 7. MARKET STANDOFF AGREEMENT. Purchaser agrees in connection with any registration of the Company's securities that, upon the request of the Company or the underwriters managing any public offering of the Company's securities, Purchaser will not sell or otherwise dispose of any Shares without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) after the effective date of such registration requested by such managing underwriters and subject to all restrictions as the Company or the underwriters may specify. [NOTE FOR PREPARATION OF SPECIFIC EXERCISE AGREEMENT: IF THE REPURCHASE RIGHT ALTERNATIVE IS NOT USED, REMEMBER TO RENUMBER SUBSEQUENT SECTIONS AND CHECK SECTION REFERENCES THROUGHOUT TO CONFORM TO THIS FACT, AND TO DELETE REFERENCES THROUGHOUT TO REPURCHASE OPTION] 8. COMPANY'S REPURCHASE OPTION. The Company, or its assignee, shall have the option to repurchase the Unvested Shares (as defined in the Option) on the terms and conditions set forth in this Section (the "Repurchase Option") if Purchaser is Terminated (as defined in the Option) for any reason, or no reason, including without limitation Purchaser's death, Disability (as defined in the Plan), voluntary resignation or termination by the Company with or without cause. 8.1 TERMINATION AND TERMINATION DATE. In case of any dispute as to whether Purchaser is Terminated, the Committee shall have discretion to determine whether Purchaser has been Terminated and the effective date of such Termination (the "Termination Date"). 8.2 EXERCISE OF REPURCHASE OPTION. At any time within ninety (90) days after the later of the Termination Date or the date the Purchaser purchased the Shares, the Company, or its assignee, may elect to repurchase the Unvested Shares by giving Purchaser written notice of exercise of the Repurchase Option as specified below. 8.3 CALCULATION OF REPURCHASE PRICE. The Company or its assignee shall have the option to repurchase from Purchaser (or from Purchaser's personal representative as the case may be) the Unvested Shares at the Purchaser's original Purchase Price Per Share (as adjusted to reflect any stock dividend, stock split, reverse stock split or recapitalization of the Common Stock of the Company occurring after the Effective Date). 7 8.4 PAYMENT OF REPURCHASE PRICE. The repurchase price shall be payable, at the option of the Company or its assignee, by check or by cancellation of all or a portion of any outstanding indebtedness of Purchaser to the Company or such assignee, or by any combination thereof. The repurchase price shall be paid without interest within thirty (30) days after exercise of the Repurchase Option. 8.5 RIGHT OF TERMINATION UNAFFECTED. Nothing in this Exercise Agreement shall be construed to limit or otherwise affect in any manner whatsoever the right or power of the Company (or any Parent or Subsidiary of the Company) to terminate Purchaser's employment or other relationship with Company (or the Parent or Subsidiary of the Company) at any time, for any reason or no reason, with or without cause.] [NOTE FOR PREPARATION OF SPECIFIC EXERCISE AGREEMENT: IF THE COMPANY'S BYLAWS ALREADY CONTAIN, AT THE DATE THE OPTION IS EXERCISED, A RIGHT OF FIRST REFUSAL ON TRANSFERS, THIS SECTION 9 WILL NOT BE NECESSARY AND SHOULD BE DELETED. IF DELETED, REMEMBER TO RENUMBER SUBSEQUENT SECTIONS AND CHECK SECTION REFERENCES THROUGHOUT TO CONFORM TO THIS FACT.] 9. COMPANY'S RIGHT OF FIRST REFUSAL. Unvested Shares may not be sold or otherwise transferee by Purchaser without the Company's prior written consent. Before any Vested Shares held by Purchaser or any transferee of such Vested Shares (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including without limitation a transfer by gift or operation of law), the Company and/or its assignee(s) shall have an assignable right of first refusal to purchase the Vested Shares to be sold or transferred (the "Offered Shares") on the terms and conditions set forth in this Section (the "Right of First Refusal"). 9.1 NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer the Offered Shares; (ii) the name of each proposed bona fide purchaser or other transferee ("Proposed Transferee"); (iii) the number of Offered Shares to be transferred to each Proposed Transferee; (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Offered Shares (the "Offered Price"); and (v) that the Holder will offer to sell the Offered Shares to the Company and/or its assignee(s) at the Offered Price as provided in this Section. 9.2 EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty (30) days after the date of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all of the Offered Shares proposed to be transferred to any one or more of the Proposed Transferees named in the Notice, at the purchase price determined as specified below. 9.3 PURCHASE PRICE. The purchase price for the Offered Shares purchased under this Section will be the Offered Price. If the Offered Price includes consideration other than cash, then the cash equivalent value of the non-cash consideration shall conclusively be deemed to be the value of such non-cash consideration as determined in good faith by the Company's Board of Directors. 9.4 PAYMENT. Payment of the purchase price for Offered Shares will be payable, at the option of the Company and/or its assignee(s) (as applicable), by check or by cancellation of all or a portion 8 of any outstanding indebtedness of the Holder to the Company (or to such assignee, in the case of a purchase of Offered Shares by such assignee) or by any combination thereof. The purchase price will be paid without interest within thirty (30) days after the Company's receipt of the Notice, or, at the option of the Company and/or its assignee(s), in the manner and at the time(s) set forth in the Notice. 9.5 HOLDER'S RIGHT TO TRANSFER. If all of the Offered Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Offered Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the date of the Notice, and provided further, that (i) any such sale or other transfer is effected in compliance with all applicable securities laws and (ii) the Proposed Transferee agrees in writing that the provisions of this Section will continue to apply to the Offered Shares in the hands of such Proposed Transferee. If the Offered Shares described in the Notice are not transferred to the Proposed Transferee within such 120 day period, then a new Notice must be given to the Company, and the Company will again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. 9.6 EXEMPT TRANSFERS. Notwithstanding anything to the contrary in this Section, the following transfers of Shares will be exempt from the Right of First Refusal: (i) the transfer of any or all of the Vested Shares during Purchaser's lifetime by gift or on Purchaser's death by will or intestacy to Purchaser's "immediate family" (as determined below) or to a trust for the benefit of Purchaser or Purchaser's immediate family, provided that each transferee or other recipient agrees in a writing satisfactory to the Company that the provisions of this Section Will continue to apply to the transferred Vested Shares in the hands of such transferee or other recipient; (ii) any transfer of Vested Shares made pursuant to a statutory merger or statutory consolidation of the Company with or into another corporation or corporations (except that the Right of First Refusal will continue to apply thereafter to such Vested Shares, in which case the surviving corporation of such merger or consolidation shall succeed to the rights of the Company under this Section unless the agreement of merger or consolidation expressly otherwise provides); or (iii) any transfer of Shares pursuant to the winding up and dissolution of the Company. As used herein, the term "immediate family" will mean Purchaser's spouse, the lineal descendant or antecedent, father, mother, brother or sister, adopted child or grandchild of the Purchaser or the Purchaser's spouse, or the spouse of any child, adopted child, grandchild or adopted grandchild of Purchaser or the Purchaser's spouse. 9.7 TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First Refusal will terminate as to all Shares on the effective date of the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the SEC under the Securities Act (other than a registration statement relating solely to the issuance of Common Stock pursuant to a business combination or an employee incentive or benefit plan).] 10. RIGHTS AS SHAREHOLDER. Subject to the terms and conditions of this Exercise Agreement, Purchaser will have all of the rights of a shareholder of the Company with respect to the Shares from and after the date that Purchaser delivers payment of the Purchase Price until such time as Purchaser disposes of the Shares or the Company and/or its assignee(s) exercise(s) [THE REPURCHASE OPTION OR] Right of First Refusal. Upon an exercise of [THE REPURCHASE OPTION OR]THE Right of First Refusal, Purchaser will have no further rights as a holder of the Shares so purchased upon such exercise, except the right to receive 9 payment for the Shares so purchased in accordance with the provisions of this Exercise Agreement, and Purchaser will promptly surrender the stock certificate(s) evidencing the Shares so purchased to the Company for transfer or cancellation. 11. ESCROW. As security for Purchaser's faithful performance of this Agreement, Purchaser agrees, immediately upon receipt of the stock certificate(s) evidencing Unvested Shares subject to the Repurchase Option or Shares purchased with a promissory note, to deliver such certificate(s), together with the Stock Powers executed by Purchaser and by Purchaser's spouse, if any (with the date and number of Shares left blank), to the Secretary of the Company or other designee of the Company ("Escrow Holder"), who is hereby appointed to hold such certificate(s) and Stock Powers in escrow and to take all such actions and to effectuate all such transfers and/or releases of such Shares as are in accordance with the terms of this Agreement. Purchaser and the Company agree that Escrow Holder will not be liable to any party to this Exercise Agreement (or to any other party) for any actions or omissions unless Escrow Holder is grossly negligent or intentionally fraudulent in carrying out the duties of Escrow Holder under this Exercise Agreement. Escrow Holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may rely on the advice of counsel and obey any order of any court with respect to the transactions contemplated by this Agreement. The Shares will be released from escrow upon termination of the Repurchase Option for Unvested Shares [NOTE FOR PREPARATION OF SPECIFIC EXERCISE AGREEMENT: ADD IF SHARES ARE PLEDGED:] [PROVIDED, HOWEVER, THAT THE SHARES WILL BE RETAINED IN ESCROW SO LONG AS THEY ARE SUBJECT TO THE PLEDGE AGREEMENT]. 12. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS. 12.1 LEGENDS. Purchaser understands and agrees that the Company will place the legends set forth below or similar legends on any stock certificate(s) evidencing the Shares, together with any other legends that may be required by state or federal securities laws, the Company's Articles Certificate of Incorporation or Bylaws, any other agreement between Purchaser and the Company or any agreement between Purchaser and any third party: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES 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 SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON PUBLIC RESALE, TRANSFER, [RIGHT OF REPURCHASE] AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER AND/OR ITS 10 ASSIGNEE(S) AS SET FORTH IN A STOCK OPTION EXERCISE AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH PUBLIC SALE AND TRANSFER RESTRICTIONS AND THE [RIGHT OF REPURCHASE AND] RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES. The California Commissioner of Corporations may require that the following legend also be placed upon the share certificate(s) evidencing ownership of the Shares: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA. EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. 12.2 STOP-TRANSFER INSTRUCTIONS. Purchaser agrees that, to ensure compliance with the restrictions imposed by this Agreement, the Company may issue appropriate "stop-transfer" instructions to its transfer agent, if any, and if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. 12.3 REFUSAL TO TRANSFER. The Company will not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares, or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares have been so transferred. 13. TAX CONSEQUENCES. PURCHASER UNDERSTANDS THAT PURCHASER MAY SUFFER ADVERSE TAX CONSEQUENCES AS A RESULT OF PURCHASER'S PURCHASE OR DISPOSITION OF THE SHARES. PURCHASER REPRESENTS THAT PURCHASER HAS CONSULTED WITH ANY TAX ADVISER PURCHASER DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR DISPOSITION OF THE SHARES AND THAT PURCHASER IS NOT RELYING ON THE COMPANY FOR ANY TAX ADVICE. IN PARTICULAR, IF THE SHARES ARE SUBJECT TO REPURCHASE BY THE COMPANY OR IF PURCHASER IS AN INSIDER SUBJECT TO SECTION 16(b) OF THE EXCHANGE ACT, PURCHASER REPRESENTS THAT PURCHASER HAS CONSULTED WITH PURCHASER'S TAX ADVISER CONCERNING THE ADVISABILITY OF FILING AN 83(b) ELECTION WITH THE INTERNAL REVENUE SERVICE. Set forth below is a brief summary as of the date of this Exercise Agreement of some of the federal and California tax consequences of exercise of the Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. PARTICIPANT SHOULD CONSULT A TAX ADVISER BEFORE EXECUTING THIS OPTION OR DISPOSING OF THE SHARES. 13.1 EXERCISE OF INCENTIVE STOCK OPTION. If the Option qualifies as an incentive stock option, there will be no regular federal income tax liability or California income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Purchase Price Per Share will be treated as a tax preference item for federal income tax 11 purposes and may subject Purchaser to the alternative minimum tax in the year of exercise as discussed further in Section 13.4 below. 13.2 EXERCISE OF NONQUALIFIED STOCK OPTION. If the Option does not qualify as an incentive stock option, there may be a regular federal income tax liability and a California income tax liability upon the exercise of the Option. Purchaser will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Purchase Price Per Share. The Company will be required to withhold from Purchaser's compensation or collect from Purchaser and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. 13.3 DISPOSITION OF SHARES. If the Shares are held for more than twelve months after the date of the transfer of the Shares pursuant to the exercise of the Option (and, in the case of an ISO, are disposed of more than two years after the Option Date of Grant), any gain realized on disposition of the Shares will be treated as long term capital gain for federal and California income tax purposes. If Shares purchased under an ISO are disposed of within one year of exercise or within two years after the Option Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the fair market value of the Shares on the date of exercise over the Purchase Price Per Share. The Company will be required to withhold from Purchaser's compensation or collect from Purchaser and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. 13.4 SECTION 83(b) ELECTION FOR UNVESTED SHARES. With respect to Unvested Shares, which are subject to repurchase at the original Purchase Price, Purchaser hereby acknowledges that Purchaser has been informed that, unless and election is filed by the Purchaser with the Internal Revenue Service (and, if necessary, the proper state taxing authorities), within 30 days of the purchase of the Unvested Shares, electing pursuant to Section 83(b) of the Internal Revenue Code (and similar state tax provisions, if applicable) to be taxed currently on any difference between the Purchase Price of the of the Unvested Shares and their Fair Market Value on the date of purchase, there may be a recognition of taxable income (including, where applicable, alternative minimum tax) to the Purchaser, measured by the excess, if any, of the Fair Market Value of the Unvested Shares. Purchaser represents that Purchaser has consulted any tax advisers Purchaser deems advisable in connection with Purchaser's purchase of the Unvested Shares and the filing of the election under Section 83(b) and similar tax provisions. A form of Election under Section 83(b) is attached hereto as Exhibit 5 for reference. PURCHASER HEREBY ASSUMES ALL RESPONSIBILITY FOR FILING SUCH ELECTION AND PAYING ANY TAXES RESULTING FROM SUCH ELECTION OR FROM FAILURE TO FILE THE ELECTION AND PAYING TAXES RESULTING FROM THE LAPSE OF THE REPURCHASE RESTRICTIONS ON THE UNVESTED SHARES. 14. COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and transfer of the Shares will be subject to and conditioned upon compliance by the Company and Purchaser with all applicable state and federal laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Company's Common Stock may be listed or quoted at the time of such issuance or transfer. 12 15. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under this Agreement, including its rights to repurchase Shares under [THE REPURCHASE OPTION AND] the Right of First Refusal. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement will be binding upon Purchaser and Purchaser's heirs, executors, administrators, legal representatives, successors and assigns. 16. GOVERNING LAW: SEVERABILITV. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California as such laws are applied TO AGREEMENTS between California residents entered into and to be performed entirely within California, excluding that body of laws pertaining to conflict of laws. If any provision of this Agreement is determined by a court of law to be illegal or unenforceable, then such provision will be enforced to the maximum extent possible and the other provisions will remain fully effective and enforceable. 17. NOTICES. Any notice required to be given or delivered to the Company shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to Purchaser shall be in writing and addressed to Purchaser at the address indicated above or to such other address as Purchaser may designate in writing from time to time to the Company. All notices shall be deemed effectively given upon personal delivery, three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested), one ( l ) business day after its deposit with any return receipt express courier (prepaid), or one (l) business day after transmission by rapifax or telecopier. 18. FURTHER INSTRUMENTS. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement. 19. HEADINGS. The captions and headings of this Agreement are included for ease of reference only and will be disregarded in interpreting or construing this Agreement. All references herein to Sections will refer to Sections of this Agreement. 20. ENTIRE AGREEMENT. The Plan, the Stock Option Agreement and this Exercise Agreement, together with all its Exhibits, constitute the entire agreement and understanding of the parties with respect to the subject matter of this Agreement, and supersede all prior understandings and agreements, whether oral or written, between the parties hereto with respect to the specific subject matter hereof. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in duplicate by its duly authorized representative and Purchaser has executed this Agreement in duplicate as of the Effective Date. MEDICAL SCIENCE SYSTEMS, INC. PURCHASER By: _______________________________ _______________________________ (Signature) ___________________________________ _______________________________ (Please print name) (Please print name) ___________________________________ (Please print title) [SIGNATURE PAGE TO MEDICAL SCIENCE SYSTEMS, INC. STOCK OPTION EXERCISE AGREEMENT] 13 LIST OF EXHIBITS Exhibit 1: Stock Power and Assignment Separate from Stock Certificate Exhibit 2: Spouse Consent Exhibit 3: California Commissioner Rule 260.141.11 Exhibit 4: Copy of Purchaser's Check [AND/OR SECURED FULL RECOURSE PROMISSORY NOTE Exhibit 5: STOCK PLEDGE AGREEMENT] 14 EXHIBIT 1 STOCK POWER AND ASSIGNMENT SEPARATE FROM STOCK CERTIFICATE 15 STOCK POWER AND ASSIGNMENT SEPARATE FROM STOCK CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Stock Option Exercise Agreement No.__ dated as of __________, 199_, (the "Agreement"), the undersigned hereby sells, assigns and transfers unto ______________________, shares of the Common Stock of Medical Science Systems, Inc., a Texas corporation (the "Company"), standing in the undersigned's name on the books of the Company represented by Certificate No(s).________ delivered herewith, and does hereby irrevocably constitute and appoint the Secretary of the Company as the undersigned's attorney-in-fact, with full power of substitution, to transfer said stock on the books of the Company. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND ANY EXHIBITS THERETO. Dated: ____________, 199_ PURCHASER __________________________________ (Signature) ------------------------------- (Please Print Name) ------------------------------- (Spouse's Signature, if any) ------------------------------- (Please Print Spouse's Name) INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this Stock Power and Assignment is to enable the Company to acquire the shares upon [A DEFAULT UNDER PURCHASER'S NOTE AND TO] exercise of its ["REPURCHASE OPTION" AND/OR "RIGHT OF FIRST REFUSAL"] set forth in the Agreement without requiring additional signatures on the part of the PURCHASER [OR PURCHASER'S SPOUSE]. 16 EXHIBIT 2 SPOUSE CONSENT 17 SPOUSE CONSENT The undersigned spouse of Purchaser has read, understands, and hereby approves the Stock Option Exercise Agreement (the "Agreement") between Purchaser and Medical Science Systems, Inc. (the "Company"). In consideration of the Company's granting my spouse the right to purchase the Shares as set forth in the Agreement, the undersigned hereby agrees to be irrevocably bound by the Agreement and further agrees that any community property interest shall similarly be bound by the Agreement. The undersigned hereby appoints Purchaser as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement. Date: ____________ ____________________ Signature of Purchaser's Spouse Printed Name: ____________________ Address: ____________________ ____________________ 18 EXHIBIT 3 CALIFORNIA COMMISSIONER RULE 260.141.11 (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules: (4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation intervivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Section 25111, 25112, 25113, or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; 19 (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this slate; (14) to the State Controller pursuant to the Unclaimed Property Law or the administrator of the unclaimed property law of another state; or (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirements of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFORE, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. 20 EXHIBIT 4 COPY OF PURCHASER'S CHECK [AND/OR SECURED FULL RECOURSE PROMISSORY NOTE] 21 SECURED FULL RECOURSE PROMISSORY NOTE ___________________, California $ _________________ _________, 199_ 1. OBLIGATION. In exchange for the issuance to the undersigned ("Purchaser") of ________ shares (the "Shares") of the Common Stock of Medical Science Systems, Inc., a Texas corporation (the "Company"), receipt of which is hereby acknowledged, Purchaser hereby promises to pay to the order of the Company on or before _______________, 199_, at the Company's principal place of business at _______________, California __________, or at such other place as the Company may direct, [ALTERNATIVE FOR PREPARATION OF SPECIFIC PROMISSORY NOTE:] [IN INSTALLMENTS AS HEREINAFTER SET FORTH] the principal sum of ____________ Dollars ($______) together with interest compounded semi-annually on the unpaid principal at the rate of __________ percent (____%), which rate is not less than the minimum rate established pursuant to Section 1274(d) of the Internal Revenue Code of 1986, as amended, on the earliest date on which there was a binding contract in writing for the purchase of the Shares; provided, however, that the rate at which interest will accrue on unpaid principal under this Note will not exceed the highest rate permitted by applicable law. [NOTE FOR PREPARATION OF SPECIFIC PROMISSORY NOTE: IF NOTE WILL BE PAID IN INSTALLMENTS ADD FOLLOWING:] [THE PRINCIPAL SUM WILL BE PAYABLE IN SUCCESSIVE [MONTHLY] [QUARTERLY] [ANNUAL] INSTALLMENTS OF $_____ EACH, EACH DUE AND PAYABLE ON [IF MONTHLY: THE FIRST DAY OF EACH CALENDAR MONTH BEGINNING __________, 19___ [IF QUARTERLY: MARCH 31, JUNE 30, SEPTEMBER 30 AND DECEMBER 31 OF EACH YEAR] [IF ANNUALLY: EACH SUCCESSIVE ANNIVERSARY OF THE DATE OF THIS NOTE] AND ALL PAYMENTS OF ACCRUED INTEREST WILL BE PAYABLE WITH EACH INSTALLMENT OF PRINCIPAL.] 2. SECURITY. Payment of this Note is secured by a security interest in the Shares granted to the Company by Purchaser under a Stock Pledge Agreement dated of even date herewith between the Company and Purchaser (the "Pledge Agreement"). This Note is being tendered by Purchaser to the Company as part of the purchase price of the Shares pursuant to that certain Stock Option Exercise Agreement between Purchaser and the Company dated of even date with this Note (the "Purchase Agreement"). 3. DEFAULT: ACCELERATION OF OBLIGATION. Purchaser will be deemed to be in default under this Note and the principal sum of this Note, together with all interest accrued thereon, will immediately become due and payable in full: (a) upon Purchaser's failure to make any payment when due under this Note; (b) in the event Purchaser is Terminated (as defined in the Company's 1996 Equity Incentive Plan) for any reason; [ALTERNATIVE FOR PREPARATION OF SPECIFIC PROMISSORY NOTE:] [(c) UPON ANY TRANSFER OF ANY OF THE SHARES (EXCEPT A TRANSFER TO THE COMPANY);] (d) upon the filing by or against Purchaser of any voluntary or involuntary petition in bankruptcy or any petition for relief under the federal bankruptcy code or any other state or federal law for the relief of debtors; or (e) upon the execution by Purchaser of an assignment for the benefit of creditors or the appointment of a receiver, custodian, trustee or similar party to take possession of Purchaser's assets or property. 22 4. REMEDIES ON DEFAULT. Upon any default of Purchaser under this Note, the Company will have, in addition to its rights and remedies under this Note and the Pledge Agreement, full recourse against any real, personal, tangible or intangible assets of Purchaser, and may pursue any legal or equitable remedies that are available to it. 5. PREPAYMENT. Prepayment of principal and/or interest due under this Note may be made at any time without penalty. Unless otherwise agreed in writing by the Company, all payments will be made in lawful tender of the United States and will be applied first to the payment of accrued interest, and the remaining balance of such payment, if any, will then he applied to the payment of principal. If Purchaser prepays all or a portion of the principal amount of this Note, the Shares paid for by the portion of principal so paid will continue to be held in pledge under the Pledge Agreement to serve as independent collateral for the outstanding portion of this Note for the purpose of commencing the holding period under Rule 144(d) of the Securities and Exchange Commission with respect to other Shares purchased with this Note unless Purchaser notifies the Company in writing otherwise and the Company consents to release of the Shares from the Pledge Agreement. 6. GOVERNING LAW: WAIVER. The validity, construction and performance of this Note will be governed by the internal laws of the State of California, excluding that body of law pertaining to conflicts of law. Purchaser hereby waives presentment, notice of non-payment, notice of dishonor, protest, demand and diligence. 7. ATTORNEYS' FEES. If suit is brought for collection of this Note, Purchaser agrees to pay all reasonable expenses, including attorneys' fees, incurred by the holder in connection therewith whether or not such suit is prosecuted to judgment. 8. RULE 144 HOLDING PERIOD. PURCHASER UNDERSTANDS THAT THE HOLDING PERIOD SPECIFIED UNDER RULE 144(d) OF THE SECURITIES AND EXCHANGE COMMISSION WILL NOT BEGIN TO RUN WITH RESPECT TO SHARES PURCHASED WITH THIS NOTE UNTIL EITHER (A) THE PURCHASE PRICE OF SUCH SHARES IS PAID IN FULL IN CASH OR BY OTHER PROPERTY ACCEPTED BY THE COMPANY, OR (B) THIS NOTE IS SECURED BY COLLATERAL, OTHER THAN THE SHARES THAT HAVE NOT BEEN FULLY PAID FOR, HAVING A FAIR MARKET VALUE AT LEAST EQUAL TO THE AMOUNT OF PURCHASER'S THEN OUTSTANDING OBLIGATION UNDER THIS NOTE (INCLUDING ACCRUED INTEREST). IN WITNESS WHEREOF, Purchaser has executed this Note as of the date and year first above written ____________________________________ __________________________________ Purchaser's Name [type or print] Purchaser's Signature [SIGNATURE PAGE TO MEDICAL SCIENCE SYSTEMS, INC. SECURED FULL RECOURSE PROMISSORY NOTE] 23 EXHIBIT 5 STOCK PLEDGE AGREEMENT 24 STOCK PLEDGE AGREEMENT This Agreement is made and entered into as of __________, 199_ between Medical Science Systems, Inc., a Texas corporation (the "Company"), and __________________________("Pledgor"). RECITALS A. In exchange for Pledgor's Secured Full Recourse Promissory Note to the Company of even date herewith (the "Note"), the Company has issued and sold to Pledgor ______ shares of its Common Stock, no par value per share (the "Shares"), pursuant to the terms and conditions of that Stock Option Exercise Agreement between the Company and Pledgor of even date herewith (the "Purchase Agreement"). B. Pledgor has agreed that repayment of the Note will be secured by the pledge of the Shares pursuant to this Agreement. NOW, THEREFORE, the parties agree as follows: 1. CREATION OF SECURITY INTEREST. Pursuant to the provisions of the California Commercial Code, Pledgor hereby grants to the Company, and the Company hereby accepts, a first and present security interest in the Shares as collateral to secure the payment of Pledgor's obligation to the Company under the Note. Pledgor herewith delivers to the Company Common Stock certificate(s) No(s)._________, representing all the Shares, together with one stock power for each certificate in the form attached as an Exhibit to the Purchase Agreement, duly executed (with the date and number of shares left blank) by Pledgor and Pledgor's spouse, if any. For purposes of this Agreement, the Shares pledged to the Company hereby, together with any additional collateral pledged pursuant to Sections 5 and 6 hereof, will hereinafter be collectively referred to as the "Collateral." Pledgor agrees that the Collateral pledged to the Company will be deposited with and held by the Escrow Holder (as defined in the Purchase Agreement) and that, notwithstanding anything to the contrary in the Purchase Agreement, for purposes of carrying out the provisions of this Agreement, Escrow Holder will act solely for the Company as its agent. 2. REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents and warrants to the Company that Pledgor has good title (both record and beneficial) to the Collateral, free and clear of all claims, pledges, security interests, liens or encumbrances of every nature whatsoever, and that Pledgor has the right to pledge and grant the Company the security interest in the Collateral granted under this Agreement. Pledgor further agrees that, until the entire principal sum and all accrued interest due under the Note has been paid in full, Purchaser will not, without the Company's prior written consent, (i) sell, assign or transfer, or attempt to sell, assign or transfer, any of the Collateral, or (ii) grant or create, or attempt to grant or create, any security interest, lien, pledge, claim or other encumbrance with respect to any of the Collateral. 25 3. RIGHTS ON DEFAULT. In the event of default (as defined in the Note) by Pledgor under the Note, the Company will have full power to sell, assign and deliver the whole or any part of the Collateral at any broker's exchange or elsewhere, at public or private sale, at the option of the Company, in order to satisfy any part of the obligations of Pledgor now existing or hereinafter arising under the Note. On any such sale, the Company or its assigns may purchase all or any part of the Collateral. In addition, at its sole option, the Company may elect to retain all the Collateral in full satisfaction of Pledgor's obligation under the Note, in accordance with the provisions and procedures set forth in the California Commercial Code. 4. ADDITIONAL REMEDIES. The rights and remedies granted to the Company herein upon default under the Note will be in addition to all the rights, powers and remedies of the Company under the California Commercial Code and applicable law and such rights, powers and remedies will be exercisable by the Company with respect to all of the Collateral. Pledgor agrees that the Company's reasonable expenses of holding the Collateral, preparing it for resale or other disposition, and selling or otherwise disposing of the Collateral, including attorneys' fees and other legal expenses, will be deducted from the proceeds of any sale or other disposition and will be included in the amounts Pledgor must tender to redeem the Collateral. All rights, powers and remedies of the Company will be cumulative and not alternative. Any forbearance or failure or delay by the Company in exercising any right, power or remedy hereunder will not be deemed to be a waiver of any such right, power or remedy and any single or partial exercise of any such right. power or remedy hereunder will not preclude the further exercise thereof. 5. DIVIDENDS: VOTING. All dividends hereinafter declared on or payable with respect to the Collateral during the term of this pledge (excluding only ordinary cash dividends, which will be payable to Pledgor so long as Pledgor is not in default under the Note) will be immediately delivered to the Company to be held in pledge under this Agreement. Notwithstanding this Agreement, so long as Pledgor owns the Shares and is not in default under the Note, Pledgor will be entitled to vote any shares comprising the Collateral, subject to any proxies granted by Pledgor. 6. ADJUSTMENTS. In the event that during the term of this pledge, any stock dividend, reclassification, readjustment, stock split or other change is declared or made with respect to the Collateral, or if warrants or any other rights, options or securities are issued in respect of the Collateral, then all new, substituted and/or additional shares or other securities issued by reason of such change or by reason of the exercise of such warrants, rights, options or securities, will be immediately pledged to the Company to be held under the terms of this Agreement in the same manner as the Collateral is held hereunder. 7. RIGHTS UNDER PURCHASE AGREEMENT. Pledgor understands and agrees that the Company's rights to repurchase the Collateral under the Purchase Agreement, if any, will continue for the periods and on the terms and conditions specified in the Purchase Agreement, whether or not the Note has been paid during such period of time, and that to the extent that the Note is not paid during such period of time, the repurchase by the Company of the Collateral may be made by way of cancellation of all or any part of Pledgor's indebtedness under the Note. 26 8. REDELIVERY OF COLLATERAL. Upon payment in full of the entire principal sum and all accrued interest due under the Note, and subject to the terms and conditions of the Purchase Agreement, the Company will immediately redeliver the Collateral to Pledgor and this Agreement will terminate; provided, however, that all rights of the Company to retain possession of the Shares pursuant to the Purchase Agreement will survive termination of this Agreement. 9. SUCCESSORS AND ASSIGNS. This Agreement will inure to the benefit of the respective heirs, personal representatives, successors and assigns of the parties hereto. 10. GOVERNING LAW: SEVERABILITV. This Agreement will be governed by and construed in accordance with the internal laws of the State of California, excluding that body of law relating to conflicts of law. Should one or more of the provisions of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions nevertheless will remain effective and will be enforceable. 11. MODIFICATION: ENTIRE AGREEMENT. This Agreement will not be amended without the written consent of both parties hereto. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings related to such subject matter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. MEDICAL SCIENCE SYSTEMS, INC. PLEDGOR By:____________________________ _______________________________ (Signature) _______________________________ _______________________________ (Please print name) (Please print name) _______________________________ (Please print title) [SIGNATURE PAGE TO MEDICAL SCIENCE SYSTEMS, INC. STOCK PLEDGE AGREEMENT] EX-23.1 36 CONSENT OF SINGER LEWAK GREENBAUM & GOLDSTEIN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated September 26, 1997, accompanying the financial statements of Medical Science Systems, Inc. contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts." SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California October 8, 1997 EX-27.1 37 FINANCIAL DATA SCHEDULE
5 12-MOS 6-MOS DEC-31-1996 DEC-31-1997 JAN-01-1996 JAN-01-1997 DEC-31-1996 JUN-30-1997 55,966 29,982 0 0 12,359 40,434 0 0 0 0 74,890 70,416 183,618 208,641 100,741 116,740 311,962 414,598 810,876 863,253 0 0 0 0 0 0 171,500 1,691,257 (871,248) (2,705,153) 311,962 414,598 1,918,879 100,289 1,918,879 100,289 672,766 104,596 1,996,017 1,798,946 (1,627) (38) 0 0 34,229 30,690 (782,506) (1,833,905) 6,040 0 (782,506) (1,833,905) 0 0 0 0 0 0 (782,506) (1,833,905) (0.18) (0.43) (0.18) (0.43)
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