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EXHIBIT 10.3
ROYALTY AGREEMENT
THIS ROYALTY AGREEMENT is made on March 18,1999 by and between LIFEQUEST
MEDICAL, INC., a Delaware corporation ("LifeQuest"), and TFX EQUITIES
INCORPORATED, a Delaware corporation (the "Royaltyholders' Agent"), as such
agent, for the benefit of the persons whose names are set forth on the Schedule
of Royaltyholders attached hereto (the "Royaltyholders").
BACKGROUND
A. On the date hereof Dexterity Incorporated, a Delaware corporation
("Seller"), has merged with and into LifeQuest pursuant to a Plan of Merger and
Acquisition Agreement, dated December 18, 1998 between LifeQuest and Seller
(the "Merger Agreement"). Such merger is hereinafter referred to as the
"Merger."
B. Pursuant to Section 2.6 of the Merger Agreement, by virtue of the Merger,
each share of common stock of Seller held immediately before the Merger by the
Royaltyholders has been converted into the right to receive, among other
things, an undivided percentage interest (a "Royaltyholder's Percentage
Interest") in the royalty payments provided for in this Agreement. The number
of shares of such common stock of Seller so held by each of the Royaltyholders,
and the aggregate Percentage Interest held by each such person, is specified on
the Schedule of Royaltyholders.
NOW, THEREFORE, in consideration of the Merger and other valuable
consideration specified in the Merger Agreement, receipt of which is hereby
acknowledged, and intending to be legally bound hereby, LifeQuest and the
Royaltyholders' Agent agree as follows:
1. Definitions. For the purposes of this Agreement, the following
terms shall have the respective meanings set forth below:
(a) "Affiliate" of any Person means any Person, directly or
indirectly controlling, controlled by or under common control with such Person,
and includes any Person who is an officer, director or employee of such Person
and any Person that would be deemed to be an "affiliate" or an "associate" of
such Person, as those terms are defined in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act. As used in this definition,
"controlling" (including, with its correlative meanings, "controlled by" and
"under common control with") means possession, directly or indirectly, of power
to direct or cause the direction of management or policies (whether through
ownership of securities, partnership or other ownership interests, by contract
or otherwise).
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(b) "Converted Supplemental Royalties" at any date means the
aggregate amount of Supplemental Royalties for which LifeQuest's obligation
has, at or before such date, been converted into an obligation to pay amounts
from the proceeds of Infringement Actions pursuant to Section 3(a). "Converted
Supplemental Royalties Outstanding" at any time means the greater of (i) zero
or (ii) the amount determined by subtracting from the Converted Supplemental
Royalties at such time the aggregate amount of payments which have then been
made by LifeQuest pursuant to Section 3(b).
(c) "Dexterity PneumoSleeve Product" means the extracorporeal
pneumoperitoneum surgical device heretofore offered for sale by Seller, known
as the "Dexterity PneumoSleeve."
(d) "Dexterity Product" means the Dexterity PneumoSleeve Product or
the Dexterity Protractor Product, including any modification or improvement of
any such device at any time offered for sale by LifeQuest, any of its
Affiliates or any Licensee, assignee or successor of LifeQuest or any of its
Affiliates.
(e) "Dexterity Protractor Product" means the incision liner and
retractor surgical device heretofore offered for sale by Seller, known as the
"Dexterity Protractor," (including the modified protractor product developed
for use in AAA surgical procedures which is in prototype form).
(f) "Infringement Action" means any action, suit or other
proceeding instituted or maintained by LifeQuest against any Person, claiming
that such Person has manufactured, used or sold a device or apparatus which
infringes one or more claims of any patent acquired by LifeQuest from Seller
and seeking relief therefor, including a declaratory or injunctive order or
damages in respect thereof.
(g) "Licensee" of any Person means any other Person who shall be
granted a license, directly or indirectly, mediately or immediately, to use or
practice any patent rights or other intellectual property rights of such first
mentioned Person.
(h) "LifeQuest" means LifeQuest Medical, Inc., a Delaware
corporation.
(i) "Merger" has the meaning given thereto in Background paragraph
A.
(j) "Merger Agreement" has the meaning given thereto in Background
paragraph A.
(k) "Net Sales Price" of a Dexterity Product sold by any Person
means the gross sales price of such sale, less any credit for returns, any
discounts or other allowances available to the purchaser thereof and the amount
of any sales or fiscal taxes, duties and shipping and insurance charges
included in such gross sales price.
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(l) "Percentage Interest" of any Royaltyholder means the percentage
amount set forth opposite the name of such Royaltyholder in the Schedule of
Royaltyholders.
(m) "Person" means an individual, a corporation, a partnership, an
association, a trust or other entity or a governmental body or agency.
(n) "Proceeds" of an Infringement Action means all amounts and
pecuniary benefits received by LifeQuest, net of expenses (including reasonable
attorneys' fees and costs) in respect of such Infringement Action, including
the proceeds of any judgment, settlement or other disposition of the claims of
LifeQuest asserted in such proceeding.
(o) "Quarterly Royalty Period" has the meaning given thereto in
Section 2(c).
(p) "Royalties" means the payments provided for in Section 2(a).
(q) "Royalty Amount" has the meaning given thereto in Section 2(a).
(r) "Royalty Period" has the meaning given thereto in Section 2(a).
(s) "Royalty Year" means each successive twelve (12) month period
commencing on the date of this Agreement, except that if the date of this
Agreement is other than the first day of a month, the first Royalty Year shall
be the period commencing on the date of this Agreement and ending on the last
day of the twelfth (12th) full calendar month thereafter.
(t) "Royaltyholder" means each of the Persons whose names are set
forth in the Schedule of Royaltyholders attached hereto.
(u) "Royaltyholders' Agent" at any time means TFX Equities
Incorporated, if it is then acting as such agent, or such successor thereto
then so acting pursuant to Section 4(g).
(v) "Seller" means Dexterity Incorporated, a Delaware corporation.
(w) "Supplemental Royalties" means the payments provided for in
Section 2(b).
(x) "Termination of any Infringement Action" means the entry of a
final judgment in respect of LifeQuest's claims in such proceeding which is or
has become final and unappealable or the resolution of such claims by
settlement or other amicable action.
2. Royalties.
(a) Royalty Amount and Term. LifeQuest will pay to each
Royaltyholder (or, in the circumstances specified in Section 4(a), to the
Royaltyholders' Agent) royalties (the "Royalties") in the amount of such
Royaltyholder's Percentage Interest of the Royalty Amount. The "Royalty Amount"
means the amount equal to 15% of the Net Sales Price of Dexterity Products sold
by LifeQuest, or any of its Affiliates or any Licensee, assignee or successor
of
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LifeQuest or any of its Affiliates, during the period commencing on the
effective date of this Agreement and ending on the last day of the
eighty-fourth (84th) full calendar month thereafter (the "Royalty Period").
(b) Minimum Royalties. Subject to Section 3, if the Royalties
payable to all Royaltyholders in respect of sales of Dexterity Products made in
any Royalty Year shall be less than the Minimum Royalty Amount for such Royalty
Year specified below, LifeQuest will pay to each Royaltyholder an amount equal
to such Royaltyholder's Percentage Interest of such shortfall ("Supplemental
Royalties").
Royalty Year Minimum Royalty Amount
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1 $ 442,908
2 $ 827,270
3 $1,307,313
4 $1,779,401
5 $1,779,401
6 $1,779,401
7 $1,779,401
(c) Time of Royalty Payments. Royalties payable pursuant to Section
2(a) in respect of sales of Dexterity Products in any Quarterly Royalty Period
will be paid within thirty (30) days after the end of such Quarterly Royalty
Period. Supplemental Royalties payable pursuant to Section 2(b) in respect of
any Royalty Year will be paid within thirty (30) days after the end of such
Royalty Year. "Quarterly Royalty Periods" means the successive periods,
commencing on the date of this Agreement, each comprising three (3) months,
except that if the date of this Agreement is other than the first day of a
month, the first such period will end on the last day of the third full
calendar month after the date of this Agreement.
(d) Manner of Royalty Payments. All payments to be made by
LifeQuest pursuant hereto shall be made by check drawn on good funds on deposit
in a commercial bank in the United States, mailed at least one (1) day before
such payments are due.
(e) Records. LifeQuest will keep accurate books of account
containing all information necessary to identify sales during the Royalty
Period and to calculate the Royalties payable in respect thereof. Such books of
account will be made available for inspection by the Royaltyholders (including
representatives of the Royaltyholders), upon reasonable notice at reasonable
times.
(f) Reports. LifeQuest will accompany each payment of Royalties
with a report as to the aggregate quantity and Net Sales Price of the Dexterity
Products in respect of which such payment is made, and will supply to any
Royaltyholder such additional information in respect thereof as such
Royaltyholder may reasonably request.
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(g) Currency. All payments to be made by LifeQuest pursuant hereto
shall be made in U.S. dollars. For purposes of calculating Royalties in respect
of sales of Dexterity Products made in a currency other than U.S. dollars, the
Net Sales Price of such sales shall be translated into the U.S. dollar
equivalent thereof at the rate quoted for exchange of such currency into U.S.
dollars in the Wall Street Journal (or similar publication reasonably selected
by LifeQuest) at a date reasonably proximate to the last date of the Quarterly
Royalty Period in which such sales were made.
(h) Interest. LifeQuest will pay interest on any Royalties or other
amounts payable by it hereunder not paid when due at the rate of twelve percent
(12%) per annum.
(i) Other Competing Products. Without the prior written consent of
the Royaltyholders who hold at least a majority of the Percentage Interests of
all Royaltyholders, LifeQuest will not,during the Royalty Period, directly or
indirectly, manufacture or offer for sale any device or apparatus, other than a
Dexterity Product, which is generally similar to, may be used as a substitute
for, or otherwise is or would be competitive with any Dexterity Product.
3. Conversion of Supplemental Royalty Obligations Under Certain
Circumstances.
(a) If (i) the aggregate Royalties payable to all Royaltyholders
pursuant to Section 2(a) in respect of any Royalty Year shall be less than
seventy-five percent (75%) of the Minimum Royalty Amount for such Royalty Year
and (ii) LifeQuest shall have commenced one or more Infringement Actions at
least one of which has not been terminated before the end of such Royalty Year,
then at LifeQuest's option (exercised by notice given to the Royaltyholders on
or before the date when Supplemental Royalties in respect of such Royalty Year
would become due), LifeQuest may convert its obligation to pay Supplemental
Royalties in respect of such Royalty Year into an obligation to pay, in lieu
thereof, amounts pursuant to Section 3(b).
(b) If LifeQuest shall convert its obligation to pay any
Supplemental Royalties pursuant to Section 3(a), thereafter, upon the receipt
by LifeQuest of any Proceeds of any Infringement Action (whether or not such
Infringement Action shall have been the Infringement Action on which such
conversion election was based), LifeQuest will pay to each Royaltyholder, only
from such Proceeds, the greater of such Royaltyholder's Percentage Interest of
(i) the amount of the Converted Supplemental Royalties Outstanding at such date
or (ii) fifteen percent (15%) of such Proceeds.
(c) Nothing in this Section 3 shall be deemed to authorize the
suspension or conversion of any obligation of LifeQuest to pay Royalties
pursuant to Section 2(a), which obligations are absolute.
4. Rights and Duties of Royaltyholders' Agent.
(a) Royalty and Other Payments to be Made to Royaltyholders' Agent
Under Certain Circumstances. If any default shall occur in the timely payment
or performance by LifeQuest of any of its obligations hereunder, the
Royaltyholders' Agent may give notice to
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LifeQuest that all Royalties and other payments due by LifeQuest hereunder
shall thenceforth be made to the Royaltyholders' Agent. In such event LifeQuest
shall thereafter make all such payments directly to the Royaltyholders' Agent,
until the Royaltyholders' Agent shall give LifeQuest notice to the contrary,
and all such payments so made shall be deemed, as between LifeQuest and the
Royaltyholders, to have been made to and received by the Royaltyholders. The
Royaltyholders' Agent may apply any such payments so received, first, to the
payment or reimbursement of the Royaltyholders' Agent for expenses incurred in
the performance of its duties hereunder, and thereafter ratably to the
Royaltyholders in accordance with their respective Percentage Interests.
(b) Enforcement Action on Behalf of Royaltyholders. Actions against
LifeQuest to enforce the rights of the Royaltyholders' Agent or of any
Royaltyholder may be brought only by the Royaltyholders' Agent.
(c) Royaltyholders' Instructions. Provided that the Royaltyholders'
Agent shall have received such indemnification for, or advances of, expenses as
the Royaltyholders' Agent may reasonably request, the Royaltyholders' Agent
will take all such action as any Royaltyholder may reasonably direct the
Royaltyholders' Agent to take to enforce the performance of LifeQuest's
obligations hereunder for the benefit of such Royaltyholder. The
Royaltyholders' Agent will not be required to institute any legal proceedings
or take any other action to enforce the performance of the obligations of
LifeQuest hereunder or to enforce or foreclose upon the security interest
granted in Section 3(c), except pursuant to specific instructions deemed by it
sufficient, duly given or consented to by the Royaltyholders holding a majority
of the Percentage Interests.
(d) Royaltyholders' Agent's Authority to Act. The Royaltyholders'
Agent shall have full authority to take all such action, without instructions
from any Royaltyholder, as the Royaltyholders' Agent shall deem appropriate to
enforce the provisions of this Agreement and to enforce the security interest
for the benefit of the Royaltyholders ratably, and the Royaltyholders' Agent
may settle, compromise, compound or otherwise release, modify or adjust any
claim which might be made by the Royaltyholders' Agent hereunder or in respect
hereof as the Royaltyholders' Agent in its absolute discretion may deem
appropriate.
(e) No Implied Duties of Royaltyholders' Agent. Without limiting
the authority of the Royaltyholders' Agent to act pursuant to Section 4(d), the
Royaltyholders' Agent shall be responsible only for performing and need only
perform those duties to the Royaltyholders specifically set forth in this
Agreement, and no implied covenants or obligations shall be read into this
Agreement against the Royaltyholders' Agent.
(f) Liability of Royaltyholders' Agent. The Royaltyholders' Agent
shall not be liable except for its own willful misconduct, bad faith or gross
negligence. The Royaltyholders' Agent shall not incur any liability in acting
upon any signature, instrument, notice, resolutions, request, consent, order,
certificate, report, opinion or other document or paper believed by it to be
genuine and to be signed by the proper person. The Royaltyholders' Agent may
accept a certified copy of a resolution of the board of directors or other
governing body of any Person as conclusive evidence that such resolution has
been duly adopted by such body and that the same is in full force and effect.
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(g) Merger or Succession of Royaltyholders' Agent. Any corporation
into which the Royaltyholders' Agent may be merged or with which it may be
consolidated or any corporation resulting from any merger or consolidation to
which the Royaltyholders' Agent shall be a party, or any corporation succeeding
to any part of the Royaltyholders' Agent's business, shall have and may
exercise the powers and authority of the Royaltyholders' Agent, as such agent
hereunder, without the execution or filing of any document or any other act on
the part of any Royaltyholder.
(h) Royaltyholders' Agent May be a Royaltyholder. The
Royaltyholders' Agent may be a Royaltyholder.
5. Notices. All notices and other communications hereunder or in
connection herewith to any of LifeQuest, the Royaltyholders' Agent or any
Royaltyholder shall be in writing and shall be deemed to have been given to
such Person if delivered (which may be by telefax or other electronic
transmission) or mailed in the continental United States by registered or
certified mail, return receipt requested, to such Person at the following
address therefor, or to such other address as such Person may hereafter specify
by notice to the others:
If to LifeQuest:
LifeQuest Medical, Inc.
12961 Park Central, Suite 1300
San Antonio, TX 78216
Attention: Randall K. Boatright
Executive Vice President and CFO
If to the Royaltyholders' Agent:
TFX Equities Incorporated
1787 Sentry Parkway West
Building Sixteen, Suite 220
Blue Bell, PA 19422
Attention: John J. Sickler, President
If to any Royaltyholder: to such Person at the address
therefor specified in the Schedule of Royaltyholders.
6. General Provisions.
(a) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without regard to conflict-of-laws rules as applied in Pennsylvania.
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(b) Construction. References herein to "Sections" are references to
Sections of this Agreement. The word "including" means "including without
limitation."
(c) Section Headings. The section headings contained herein are for
convenience of reference only and shall not be deemed to constitute a part of
this Agreement or affect the meaning or interpretation of it in any way.
(d) Assignment. The rights and powers of the Royaltyholders and the
Royaltyholders' Agent may be assigned and shall inure to the benefit of their
respective heirs, successors and assigns.
(e) Delay or Omission Not Waiver. No delay or omission on the part
of the Royaltyholders' Agent or any Royaltyholder to exercise any right
hereunder will impair any such right or be construed as a waiver of any default
or any acquiescence therein. No waiver of any default hereunder will affect any
later default or will impair any rights hereunder of the Royaltyholders' Agent
or any Royaltyholder. No single, partial or other exercise of any right by the
Royaltyholders' Agent or any Royaltyholder will preclude further or other
exercise hereof.
(f) Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. This Agreement
shall be binding when one or more counterparts hereof, individually or taken
together, shall bear the execution signatures of each of LifeQuest and the
Royaltyholders' Agent.
EXECUTED by LifeQuest and the Royaltyholders' Agent the date first
above written.
LIFEQUEST MEDICAL, INC.
By: ______________________________
Richard A. Woodfield,
President and Chief Executive Officer
TFX EQUITIES INCORPORATED,
as Royaltyholders' Agent
By: ______________________________
John J. Sickler,
President
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SCHEDULE OF ROYALTYHOLDERS
Number of Shares of
Name and Address Seller Stock Owned Percentage Interest
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TFX Equities, Inc. 731 62.85%
1787 Sentry Parkway West
Building Sixteen, Suite 220
Blue Bell, PA 19422
Christopher K. Black 202 17.37%
c/o Dexterity, Inc.
1787 Sentry Parkway West
Building Sixteen, Suite 220
Blue Bell, PA 19422
Surgical Visions I, Inc. 165 14.19%
Fulton 400 Corporate Center
1495 Hembree Road,
Suite 700
Roswell, GA 30076
Frederick C. Feiler, Jr. 40 3.44%
c/o Dexterity, Inc.
925 Tanworth Drive
Raleigh, NC 27615
Jerome F. Flaherty 20 1.72%
c/o Dexterity, Inc.
2705 Northwest Boulevard
Columbus, OH 43221
Dr. Clark Gerhart, M.D. 5 0.43%
29th Street Office Complex
Building B, Suite 415
1201 North Church Street
Hazleton, PA 19201