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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K/A
(AMENDMENT NO. 3)
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 0-27212
ENDOCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0618093
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7 Studebaker, Irvine, California 92618
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 595-4770
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form-K. [ ]
The number of shares of the registrant's common stock outstanding as of
February 12, 1997 was 8,195,853.
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was $32,783,875 (computed using the average bid
and asked prices quoted on the NASD Electronic Bulletin board on February 12,
1997).
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ENDOCARE, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Item Number and Caption
----------------------- Page
PART I Number
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<S> <C> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 14
PART II
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Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 21
PART III
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Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . 22
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . 28
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . 29
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
ENDOcare develops, manufactures and markets minimally invasive medical
devices to treat a variety of urological conditions. The Company has focused
its efforts on the development of surgical devices for the treatment of the two
most common diseases of the prostate: Benign Prostate Hyperplasia ("BPH") and
prostate cancer. To date, the Company has received marketing clearance by the
FDA for six of its products and has an attractive research and development
pipeline for the development of other novel urological devices.
ENDOcare has developed and recently introduced an innovative, second
generation cryosurgical system for the treatment of prostate cancer. The
CRYOcare System(TM) offers the advantage of controlled, targeted freezing of
the tumor with the benefit of faster patient recovery and minimal
complications. In November 1996, the Company entered into an exclusive
worldwide distribution agreement with Boston Scientific Corporation ("Boston
Scientific") to market and sell the CRYOcare System for urological
applications. The Company expects that the partnership with Boston Scientific
will allow the proper clinical and market development necessary to position the
CRYOcare System as an accepted outpatient therapy for the treatment of prostate
cancer.
ENDOcare also is developing new therapies for the improved treatment of
BPH. The Company's initial product development efforts for BPH involve the use
of stent technology to provide both immediate and long-term relief to BPH
patients. ENDOcare is implementing a two-part strategy for the
commercialization of its stent-based BPH therapies. The first stage is the
development of the Company's Horizon Temporary Stent. This nitinol-based
stent has shape memory characteristics for easy placement via a catheter
following surgical intervention of the prostate and convenient atraumatic
removal of the stent following the healing process. The Company believes that
its Horizon Temporary Stent will address one of the major issues of BPH
therapy, the immediate relief of patients following thermotherapy and surgical
resection. ENDOcare has recently commenced preclinical studies for the Horizon
Temporary Stent and expects to begin clinical trials in 1997.
The second stage in developing the Company's stent technology will
combine a nitinol stent with a catheter system to deliver thermotherapy. The
Company believes that this Hot Stent will provide immediate and long-term
therapy in a one-step process. Both stent applications are being designed to
be performed on an outpatient basis. The ability to perform BPH therapy in
this manner is expected to result in an increase in the number of BPH sufferers
who will seek curative surgical procedures.
Since its formation in 1990, ENDOcare operated first as a research and
development department, then later as a division of Medstone International,
Inc. ("Medstone"). Effective January 1, 1996, ENDOcare became a totally
independent, publicly-owned corporation. At the beginning of 1996, ENDOcare,
Inc. issued 5,616,528 shares of ENDOcare common stock to Medstone in exchange
for $500,000 cash and the accounts receivable, inventory, and other net assets
of the ENDOcare Division. On February 6, 1996, Medstone distributed to
existing Medstone shareholders a stock dividend of one share of ENDOcare common
stock for each share of Medstone common stock outstanding on December 29, 1995.
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On January 27, 1997, ENDOcare completed a $7,765,499 private placement of
its common stock whereby 2,218,714 shares were placed with qualified
institutional investors at a price of $3.50 per share. Net proceeds after
deducting commissions and estimated other expenses of sale were approximately
$7,050,000. Oppenheimer & Co., Inc. served as the placement agent for the
Offering.
MARKET BACKGROUND
PROSTATE CANCER
The incidence of prostate cancer has risen steadily since 1980 to become
the second most common cause of cancer-related deaths among men. The dramatic
increase in prostate cancer cases may be largely attributable to heightened
awareness of the disease, which has led to increased rates of testing and
improved diagnostic methods.
Therapeutic alternatives for patients with prostate cancer have been both
limited and unattractive. Current treatment options include radical surgery,
radiation therapy, hormone therapy, cryotherapy and "watchful waiting." These
options are evaluated using a number of criteria, including the patient's age,
physical condition and stage of the disease. However, due to the slow
progression of the disease, the decision for treatment typically is based upon
the severity of the condition and the resulting quality of life.
Radical prostatectomy is most often the therapy of choice due to the high
degree of confidence in surgically removing the cancerous tissue, particularly
for patients having more advanced stages of the disease and those who fail to
respond to less invasive alternatives. The procedure is dependent on the skill
of the surgeon and is highly morbid, often associated with high rates of
impotence, incontinence and operative mortality.
Cryosurgery, freezing tissue to destroy tumor cells, was first developed
in the 1960's. During this period, the use of "cold probes," or cryoprobes,
was explored as a manner to kill prostate tissue without having to use radical
surgery. Although effective in killing cancer cells, the lack of control as to
the amount of tissue frozen prevented broad use and development of cryotherapy
for prostate cancer.
In the late 1980's, progress in ultrasound imaging allowed for a revival
in the use of cryosurgery. Using ultrasound, the cryoprobe may be guided to
the targeted tissue from outside the body through a small incision. The
physician activates the cryoprobe and uses ultrasound to monitor the growth of
ice in the prostate as it is occurring. When the ice encompasses the entire
prostate, the probe is turned off. This feedback mechanism of watching the
therapy as it is administered allows the physician precise control during
application. Recent published studies suggest that cryosurgery may be able to
deliver disease free rates comparable to radical surgery, but with the benefit
of being performed in an outpatient setting and with lower rates of
incontinence and mortality.
BENIGN PROSTATE HYPERPLASIA
BPH, which affects a large number of adult men, is a non-cancerous
enlargement of the innermost part of the prostate. BPH frequently results in a
gradual squeezing of the part of the urethra which runs through the prostate.
This causes patients to experience a frequent urge to urinate because of the
incomplete emptying of the bladder and a burning sensation or similar
discomfort during urination. The obstruction of urinary flow can also lead to
a general lack of control over urination, including difficulty initiating
urination when desired as well as difficulty preventing urinary flow because of
the residual
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volume of urine in the bladder (a condition known as urinary incontinence).
BPH symptoms may disturb sleep by causing the BPH sufferer to awaken frequently
to urinate. Although symptoms occasionally stabilize or diminish without
intervention, they generally become more severe over the course of the disease.
Left untreated, the obstruction caused by BPH can lead to acute urinary
retention (complete inability to urinate), serious urinary tract infections and
permanent bladder and kidney damage.
Most males will eventually suffer from BPH. The incidence of BPH for men
in their fifties is approximately 50% and rises to approximately 80% by the age
of 80. The general aging of the United States population, as well as
increasing life expectancies, is anticipated to contribute to the continued
growth in the number of BPH sufferers.
Patients diagnosed with BPH generally have four options for treatment:
(i) "watchful waiting," (ii) drug therapy; (iii) surgical intervention,
including transurethral resection of the prostate ("TURP") and laser assisted
prostatectomy; and (iv) new, less invasive thermal therapies. Currently the
number of patients who are actually treated by surgical approaches is
approximately 2% to 3% of patients with BPH. Treatment is generally reserved
for patients with intolerable symptoms or those with significant potential
symptoms if treatment were withheld. A large number delay discussing their
symptoms or elect "watchful waiting" to see if the condition remains tolerable.
The Company believes the development of less invasive procedures for treatment
of BPH could result in a substantial increase in the number of BPH patients who
elect to receive interventional therapy.
Drug Therapies: Some drugs are designed to shrink the prostate by
inhibiting or slowing the growth of prostate cells. Other drugs are designed
to relax the muscles in the prostate and bladder neck to relieve urethral
obstruction. Current drug therapy generally requires daily administration for
the duration of the patient's life.
Surgical Interventions: The most common surgical procedure,
transurethral resection of the prostate ("TURP"), involves the removal of the
prostate's innermost core in order to reduce pressure on the urethra. TURP is
performed by introducing an electrosurgical cutting loop through a cystoscope
into the urethra and "chipping out" both the prostatic urethra and surrounding
prostate tissue up to the surgical capsule, thereby completely clearing the
obstruction. The average TURP procedure costs approximately $8,000 and
requires a hospital stay of approximately four days.
Modified Electrosurgical Electrodes: These devices have made it possible
to surgically remove prostate tissue in a "near bloodless" procedure using an
electrode which cauterizes as it removes tissue. Introduced in 1995, this new
technology has rapidly gained acceptance in the urology community as a means of
ablating prostate tissue in a well controlled and near-bloodless fashion.
However, like a conventional TURP, this procedure must be performed in a
hospital under general or spinal anesthesia, results in destruction of the
prostatic urethra and requires insertion of a urinary catheter post-surgery.
Laser Ablation of the Prostate: Laser assisted prostatectomy includes
two similar procedures, visual laser ablation of the prostate ( V- LAP ) and
contact laser ablation of the prostate ( C-LAP ), in which a laser fiber
catheter is guided through a cystoscope and used to ablate and coagulate the
prostatic urethra and prostatic tissue. Typically, the procedure is performed
in the hospital under either general or spinal anesthesia, and an overnight
hospital stay is required. In V-LAP, the burnt prostatic tissue then necroses,
or dies, and over four to twelve weeks is sloughed off during urination. In
C-LAP, the prostatic and urethral tissue is burned on contact and vaporized.
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Less Invasive Thermal Therapies: Other technologies under development
are non-surgical, catheter based therapies that use thermal energy to
preferentially heat diseased areas of the prostate to a temperature sufficient
to cause cell death. Thermal energy forms being utilized include microwave,
radio frequency ("RF") and ultrasound energy. The procedures are typically
performed in an outpatient setting under local anesthesia. Both microwave and
RF therapy systems are currently being marketed worldwide, including the United
States, where the first FDA clearances were obtained in May and October 1996,
for microwave and RF, respectively.
ENDOCARE PRODUCTS
<TABLE>
<CAPTION>
PRODUCT NAME TARGETED INDICATION STATUS LAUNCH DATE
<S> <C> <C> <C>
Prolase II General Urology Marketing October 1993
Prolase I General Urology Marketing November 1994
Diolase 60 watt laser General Urology Marketing May 1994
Vaporbar BPH Marketing November 1995
Uroloop BPH Marketing November 1995
CRYOcare System Prostate Cancer Marketing May 1996
Horizon Temporary Stent BPH Pre-Clinical Studies ------
Hot Stent BPH Development ------
</TABLE>
CRYOCARE SYSTEM
ENDOcare has developed the CRYOcare System, a second generation
cryosurgery system designed to overcome the limitations of existing systems and
to allow the urologist to treat prostate cancer in a minimally invasive manner
in an outpatient setting. The CRYOcare System has been designed to freeze
tissue much faster and with more control than existing systems. This product
will be marketed worldwide by Boston Scientific pursuant to an exclusive
distribution agreement.
The Company believes the CRYOcare System is significantly more efficient
than current competitive technology in creating the lethal temperatures in the
cryoprobe necessary to kill cancer cells. Current technology employs a tank of
liquid nitrogen, which is at -186 degrees C, and pumps it through a tube to the
cryoprobe. The challenge for current liquid nitrogen technology is to not
"leak" the cold prior to delivering it to the tumor site. Liquid nitrogen
technology starts out coldest at the storage tank and can only get warmer and
less effective by the time it reaches the tumor site and attempts to freeze the
tissue.
ENDOcare's CRYOcare System utilizes a system that converts argon gas to a
liquid form at the tip of the probe. The gas itself is at room temperature
until reaching the tip, making it easier to handle and eliminating the need to
store liquid nitrogen. In addition, a temperature of -150 degrees C is achieved
at the tip of the cryoprobe, considerably colder than the -90 degrees C achieved
using liquid nitrogen systems, which results in substantially faster tissue
freezing rates.
The CRYOcare System incorporates enhanced control mechanisms to minimize
the risk of unintended damage to tissue surrounding the prostate. Most
significantly, the CRYOcare probes stop freezing
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instantly, whereas probes using liquid nitrogen take up to one minute to stop
freezing tissue. Use of four to six temperature probes selectively placed in
the prostate near the rectal tissue, sphincter muscles (which control
continence) and neurovascular bundles (which control potency) enables the
physician to monitor temperatures of tissue adjacent to the prostate. Combining
these control features allows the physician to treat prostate cancer with a
high degree of control and precision that was not previously possible. The
CRYOcare System is approximately one quarter of the size of currently available
systems and one tenth of the weight.
The CRYOcare System has been cleared for marketing by the FDA and was
introduced in May 1996. The Company has installed CRYOcare Systems at six
sites in North America, with over 75 patients treated to date. Early clinical
data at the first two CRYOcare Systems clinical sites are encouraging. In the
initial series of 25 patients treated, 12 have had six month follow up and 100%
have reported no evidence of disease. While the early series of patients is
promising, further clinical work is needed to establish cryotherapy as a
primary treatment for prostate cancer. The Company expects that further
studies will be required prior to the establishment of national reimbursement
by Medicare. Until such time as Medicare reimbursement is approved, sales of
CRYOcare Systems may be limited within the urology market to small commercial,
self-paying, and international customers.
The Company has filed patent applications relating to the technology used
to create the freezing process and to precisely control the shape of the freeze
zone produced by the cryoprobes. This also may allow for expanded therapeutic
applications by tailoring the cryoprobe performance to other anatomical
targets, such as liver cancer and gynecology applications.
OFFICE-BASED BPH THERAPY
The goal of developing bloodless, anesthesia free, and pain free BPH
therapies has resulted in a category of new devices called thermotherapy
systems. In thermotherapy, a device is introduced into the prostate in the
gentlest manner possible and heat is delivered very slowly to thermally destroy
the enlarged tissue. The advantage of these thermotherapy systems is their
ability to destroy the obstruction without bleeding or anesthesia, thus
allowing the patient to be treated in the urologist's office. The
less-invasive nature of the therapy allows for faster and easier recovery
periods.
The disadvantage of thermotherapy based systems is the manner in which
the obstructive tissue is removed. The tissue temperature of the obstructive
tissue is slowly raised to the point the cells can no longer survive. The dead
tissue is left in place, in contrast to the traditional surgical techniques, in
which the obstructive tissue is removed immediately. The period it takes for
the dead cells to be completely cleared, and thus for the obstruction to be
removed, can be up to six months. Patients who are treated by thermotherapy
typically recover quickly, but need to be catheterized for up to one week post
treatment to maintain urine flow.
ENDOcare is developing innovative products that will address BPH therapy
to include thermotherapy approaches. The development process will occur in two
discrete steps. The first step will deliver an immediate relief component to
be used with existing thermotherapy systems. The second step will offer a
combination device that will be able to provide immediate relief and long-term
removal of the obstructive tissue without bleeding or anesthesia.
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Horizon Temporary Stent. ENDOcare is developing a new urological stent
which has been designed to provide immediate relief for BPH patients who
undergo thermotherapy. The Company's Horizon Temporary Stent is made of
nitinol, a new titanium metal alloy that employs a feature called shape memory.
This shape memory feature allows the Horizon Temporary Stent to be soft and
flexible in its relaxed state, allowing the device to be introduced in a
relatively pain free manner using a catheter. When the device is heated to its
transition temperature, the device self-expands to a pre-determined shape. In
the case of the Horizon Temporary Stent, the predetermined shape is that of a
rigid tube, or stent. The catheter will be inserted using a local anesthetic,
and positioned in the prostatic urethra under direct vision. The stent will be
activated by flowing warm water through the catheter, causing the shape memory
to open to its tube-like position. After approximately 30 days, the stent is
removed by the physician by flushing cold water through a flexible endoscope,
causing the stent to return to its soft, relaxed state. The stent will be
removed by retrieving it through the working channel of the flexible endoscope.
ENDOcare has completed the design of its Horizon Temporary Stent and has
recently commenced preclinical studies to demonstrate the ease of
administration and removal. The Company plans to file an IDE in early 1997 to
commence human clinical trials. Because the stent will be removed from the
patients within 30 to 60 days, the Company expects that the regulatory process
may be expedited. However, there can be no assurance that the FDA will not
require more time consuming and extensive clinical studies.
Hot Stent. ENDOcare's Hot Stent is expected to be the second product
developed for the Company's office-based therapy product line. The Hot Stent
is being designed to combine thermotherapy with the Company's nitinol stent.
The Company has secured a patent position on the Hot Stent device. In
April 1996, ENDOcare licensed from the Brigham and Women's Hospital an issued
patent covering urological applications of the delivery of thermal energy by a
stent. The Company has filed an additional patent application which describes
the device under development and its use to achieve temporary relief.
SURGICAL DISPOSABLES
Since its formation, ENDOcare has developed a line of surgical
disposables targeting improved treatment of BPH. The common element in the
development of each of the disposable devices is the ability to remove tissue
in a near bloodless manner.
In 1993, ENDOcare received FDA clearance to market a laser fiber which
allows urologists to heat the prostate tissue which causes the obstructive
symptoms of BPH. The device, Prolase, is a fiber optic catheter which bends
the laser energy sideways, enabling urologists to more easily reach the
obstructive tissue. Although lasers are effective in bloodlessly treating BPH,
sales of Prolase fibers have been inhibited by the high capital cost of
purchasing laser generators that has impacted the use of V-LAP generally.
ENDOcare also developed and is marketing the Diolase 60, a 60-watt
medical diode laser. This system was designed to be rugged, light weight, air
cooled and extremely efficient, making it an excellent
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surgical laser for use in the restrictive clinical environment. It was
introduced in 1994 and was designed to be used with the Prolase laser fiber.
In 1995, ENDOcare developed a line of disposable electrodes that vaporize
prostate tissue while cutting. The combination of vaporization and cutting
results in near bloodless removal of the obstructed tissue. The Uroloop and
Vaporbar electrodes represent the next step in the evolution of near bloodless,
outpatient procedures for BPH.
PATENTS AND INTELLECTUAL PROPERTY
The Company's policy is to secure and protect intellectual property
rights relating to its technology. While ENDOcare believes that the protection
of patents and licenses is important to its business, it also relies on trade
secrets, know-how and continuing technological innovation to maintain its
competitive position. The Company has received patents relating to its Prolase
line of side-firing laser fibers. The Company entered into a worldwide
licensing agreement relating to urological applications of a patent from
Brigham and Women's Hospital for the Hot Stent product ENDOcare is developing.
This issued patent covers the concept of a variety of methods to heat occluded
body passageways by use of a stent. The Company has filed a patent application
which focuses on the use of a combination therapy of a stent for short term
relief of the occlusion and thermotherapy for long-term relief. Certain
patents for some of the new products described under "Products" have been filed
or are in the process of being filed.
No assurance can be given that ENDOcare's processes or products will not
infringe patents or proprietary rights of others or that any license required
would be made available under any such patents or proprietary rights, on terms
acceptable to ENDOcare or at all. From time to time, the Company has received
correspondence alleging infringement of proprietary rights of third parties.
No assurance can be given that any relevant claims of third parties would not
be upheld as valid and enforceable, and therefore that the Company could be
prevented from practicing the subject matter claimed or would be required to
obtain licenses from the owners of any such proprietary rights to avoid
infringement.
The Company seeks to preserve the confidentiality of its technology by
entering into confidentiality agreements with its employees, consultants,
customers and key vendors and by other means. No assurance can be given,
however, that these measures will prevent the unauthorized disclosure or use of
such technology.
SALES AND MARKETING
For urological applications, ENDOcare's CRYOcare System is distributed
worldwide by Boston Scientific Corporation. In Canada it is distributed by
Mentor Medical Systems Canada under a three-year distribution agreement. For
the year ended December 31, 1996, Boston Scientific Corporation and Mentor
Medical Systems, Canada accounted for 12% and 14%, respectively, of the
Company's revenues. The loss of either of these distributors would have a
material adverse effect on the Company. With the exception of the CRYOcare
System, the Company sells its products domestically and internationally
primarily through independent distributors. Overall, international sales
represented approximately 50% of revenue during 1996. The Company's distributor
agreements typically provide the distributor with exclusive selling rights to
certain products in a particular territory, and are terminable by either party
on 180 days notice. Each party bears its own expenses in performing under the
agreement. The Company's ability to distribute its products depends
substantially on the capabilities of its distributors. There can be no
assurance that the Company will be able to maintain or
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expand its relationships with its distributors or to replace a distributor in
the event any such relationship were terminated. In the event that the
Company's relationships with any of its distributors were terminated and the
Company was unable to replace the distribution capability, the Company's
ability to distribute its products would be materially adversely affected,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, in such event, the Company's
current sales and marketing personnel and financial resources might not be
sufficient to enable the Company to establish its own distribution capability
to market and sell its products. See Note 11 to the Financial Statements.
In November 1996, the Company entered into an eight-year worldwide
exclusive distribution agreement with Boston Scientific to market the CRYOcare
System for urology. As a result, future sales of the CRYOcare System, the
Company's main current product, will be dependent upon the marketing efforts of
Boston Scientific. During 1996, no sales were made to Boston Scientific.
The Company derives a majority of its revenues from the sales of CRYOcare
Systems and expects that sales of CRYOcare Systems will continue to constitute
the majority of net sales for the foreseeable future. Accordingly, any factor
adversely affecting the sales of CRYOcare Systems would have a material adverse
effect on the Company's business, financial condition and results of its
operations. Although the distributorship agreement requires Boston Scientific
to purchase a minimum number of products, if and when there were a lack of
sales as a result of unforeseen regulatory (including lack of Medicare
reimbursement of cryosurgical ablation of the prostate) or clinical
circumstances relating to a product or failure of the Company to deliver
products in a timely manner, the minimum purchase requirements can be
renegotiated. Currently, Medicare does not provide reimbursement for
cryosurgical ablation of the prostate, the approved use of the Company's eight
probe CRYOcare System.
In addition, under the distribution agreement, Boston Scientific has a
right of first refusal to match any offer received by the Company from a third
party to purchase the assets related to the CRYOcare System, and a right to buy
the assets and technology related to the CRYOcare System at purchase dates of
twenty-four, thirty-six and forty-eight months after the date that Medicare
provides reimbursement for cryosurgical ablation of the prostate, for a
purchase price of 1.7, 1.5 and 1.3 times net sales for the product for the
preceding twelve months, but not less than $40 million, $50 million and $60
million, respectively.
BACKLOG
At December 31, 1996, the Company's backlog, consisting of firm orders
scheduled for delivery within the next twelve months, was approximately
$19,000. ENDOcare's policy is to stock enough inventory to be able to ship
most orders within a few days of receipt of order. Historically, most of the
Company's orders have been for shipment within 30 days of the placement of the
order. Therefore, backlog information as of the end of a particular period is
not necessarily indicative of future levels of the Company's revenue.
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MANUFACTURING
The Company uses a combination of internal manufacturing capacity and
third party manufacturers in its manufacturing efforts. Most of the Company's
purchased components and processes are available from more than one vendor.
However, certain components and processes are currently available from or
performed by a single vendor. The ability of third party manufacturing sources
to deliver components or finished goods will affect the Company's ability to
commercialize its products, and the Company's dependence on third party sources
may adversely affect the Company's profit margins. Further, although the
Company is in the process of identifying alternative vendors, the qualification
of additional or replacement vendors for certain components or services could
be a lengthy process. Any supply interruption from a single source vendor
would have a material adverse effect on the Company's ability to manufacture
its products until a new source of supply was qualified and, as a result, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Additionally, the Company's success will depend in part upon its ability
to manufacture its products in compliance with the FDA's current Good
Manufacturing Practices ("GMP") regulations and other regulatory requirements,
in sufficient quantities and on a timely basis, while maintaining product
quality and acceptable manufacturing costs. Failure to increase production
volumes in a timely or cost effective manner or to maintain compliance with
current GMP or other regulatory requirements could have a material adverse
effect on the Company's business, financial condition and results of
operations. ENDOcare also has obtained from the California Department of
Health Services a license to manufacture medical devices and is subject to
periodic inspections and other regulation by that agency.
Further, the Company has limited experience in producing its products in
commercial quantities. Manufacturers often encounter difficulties in scaling
up production of new products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. The Company's failure to overcome these manufacturing problems
could have a material adverse effect on the Company's business, financial
condition and results of operations.
GOVERNMENT REGULATION
Governmental regulation in the United States and other countries is a
significant factor affecting the research and development, manufacture and
marketing of the Company's products. In the United States, the FDA has broad
authority under the Federal Food, Drug and Cosmetic Act and the Public Health
Service Act to regulate the distribution, manufacture and sale of medical
devices. Foreign sales of medical devices are subject to foreign governmental
regulation and restrictions which vary from country to country.
Medical devices intended for human use in the United States are
classified into one of three categories, depending upon the degree of
regulatory control to which they will be subject. Such devices are classified
by regulation into either class I (general controls), class II (performance
standards) or class III (pre-market approval) depending upon the level of
regulatory control required to provide reasonable assurance of the safety and
effectiveness of the device. Good Manufacturing Practices, labeling,
maintenance of records and filings with the FDA also apply to medical devices.
- 11 -
<PAGE> 12
A subset of medical devices categorized as class I or II devices that
were commercially distributed before March 28, 1976 or are substantially
equivalent to a device that was in commercial distribution before that date may
be marketed after the acceptance of the pre-market notification under a 510(k)
exemption. The 510(k) section of the Federal Food, Drug and Cosmetic Act
allows an exemption from the requirement of pre-market notification.
Generally, devices that have an existing history or track record are included
in this category.
The process of obtaining FDA and other required regulatory clearances or
approvals is lengthy and expensive. There can be no assurance that ENDOcare
will be able to obtain necessary clearances or approvals for clinical testing
or for manufacturing or marketing of its products. Failure to comply with
applicable regulatory approvals can, among other things, result in warning
letters, fines, suspensions of regulatory approvals, product recalls, operating
restrictions and criminal prosecution. In addition, governmental regulation
may be established which could prevent, delay, modify or rescind regulatory
clearance or approval of ENDOcare's products. For example, in January 1993,
the FDA, subsequent to approving the use of lasers as in the Company's Prolase
products, deemed such use "experimental" for a particular procedure, which
dramatically decreased sales of the Company's Prolase products. Although such
designation was later rescinded by the FDA, there can be no assurance that any
such position by the FDA, or change of position by the FDA, would not adversely
impact the Company's business, financial condition or results of operations.
Regulatory clearances or approvals, if granted, may include significant
limitations on the indicated uses for which the Company's products may be
marketed. In addition, to obtain such clearances or approvals, the FDA and
foreign regulatory authorities may impose numerous other requirements on the
Company. FDA enforcement policy strictly prohibits the marketing of approved
medical devices for unapproved uses. In addition, product approvals can be
withdrawn for failure to comply with regulatory standards or the occurrence of
unforeseen problems following initial marketing. There can be no assurance
that the Company will be able to obtain regulatory clearances or approvals for
its products on a timely basis or at all, and delays in receipt of or failure
to receive such approvals, the loss of previously obtained approvals, or
failure to comply with existing or future regulatory requirements would have a
material adverse effect on the Company's business, financial condition and
results of operations.
ENDOcare's current surgical disposable products and its new eight probe
CRYOcare System have received FDA clearance for sale in the United States for
approved urological uses. ENDOcare's new manufacturing facility was subject to
an FDA audit in August 1996, and the Company received no notice that it did not
comply with the FDA's current GMP regulations. In addition, ENDOcare has
obtained from the California Department of Health Services a license to
manufacture medical devices, subject to periodic inspections and other
regulation by that agency.
COMPETITION
Currently, the Company markets products in the following categories:
side-firing laser fibers, high power diode lasers, electrosurgical disposables
and cryosurgical systems. Significant competitors include Cryomedical
Sciences, Inc., Urologix, Inc., VidaMed, Inc., EDAP/TMS, S.A., C.R. Bard, Inc.
and ACMI/Circon Corporation.
- 12 -
<PAGE> 13
Many of the Company's competitors are significantly larger than the
Company and have greater financial, technical, research, marketing, sales,
distribution and other resources than the Company. Additionally, the Company
believes there will be intense price competition for products developed in the
Company's market. There can be no assurance that the Company's competitors
will not succeed in developing or marketing technologies and products that are
more effective or commercially attractive than any that are being developed or
marketed by the Company, or that such competitors will not succeed in obtaining
regulatory approval, introducing or commercializing any such products prior to
the Company. Such developments could have a material adverse effect on the
Company's business, financial condition and results of operations. Further,
there can be no assurance that, even if the Company is able to compete
successfully, that it would do so in a profitable manner.
EMPLOYEES
As of December 31, 1996, ENDOcare had a total of 20 employees. Of the 20
employees, 6 are engaged directly in research and development activities, 2 in
regulatory affairs/quality assurance, 5 in manufacturing, 4 in sales and
marketing, and 3 in general and administrative positions. The Company expects
to substantially increase employment in anticipation of a commercial launch of
the CRYOcare System with Boston Scientific and expanded research and
development activities related to the Horizon Temporary Stent and Hot Stent
programs. The Company has never experienced a work stoppage, none of its
employees are represented by a labor organization, and the Company considers
its employee relations to be good.
Although ENDOcare conducts most of its research and development using its
own employees, the Company occasionally has funded and plans to continue to
fund research using consultants. Consultants provide services under written
agreements and are paid based on the amount of time spent on Company matters.
Under their consulting agreements, such consultants are required to disclose
and assign to the Company any ideas, discoveries and inventions developed by
them in the course of providing consulting services.
ITEM 2. PROPERTIES
The Company currently occupies 5,100 square feet of office,
manufacturing, engineering, warehouse, and research and development
laboratories in Irvine, California. The property is leased for a term of 24
months, expiring August 31, 1998.
On February 11, 1997, ENDOcare signed a five-year lease agreement for a
new, larger 16,100 square foot facility. The Company plans to sublease its
existing facility and move to the new one in March 1997.
- 13 -
<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS
On November 27, 1996, Cryomedical Sciences, Inc. ("CMS") filed a complaint
in the Circuit Court for Montgomery County, Maryland against the Company and Dr.
Chang, the Company's Vice President of Research and Development and former
employee of CMS. The suit alleges that Dr. Chang breached his employment
contract with CMS, that the Company tortiously interfered with the employment
contract and the prospective business relations of CMS, misappropriated trade
secrets and confidential information, competed unfairly with and conspired
against CMS. CMS is seeking injunctive relief and damages of at least
$10,000,000 and punitive damages of $20,000,000. On January 23, 1997 a temporary
restraining order was issued by the court against the Company and Dr. Chang for
the limited purpose of preventing disclosure of certain information at a
cryosurgery conference. The order expired by its terms on February 3, 1997. In
addition, at a hearing held on July 2, 1997, the court refused to issue an
injunction against the Company. At such hearing, the court, however, issued a
preliminary injunction against Dr. Chang that prohibits his employment relating
specifically to the Company's cryosurgery products until a trial on the merits
is held. The injunction was based on language contained in an employment
agreement between Dr. Chang and CMS that prevents him from working for a CMS
competitor. No other injunction or other relief has been granted to CMS. The
Company denies all allegations of wrongdoing in the complaint and intends to
defend the lawsuit vigorously. However, the costs of defending the lawsuit could
be material and there can be no assurance that damages, which could have a
material adverse effect on the Company, will not be assessed. The Company is
not a party to any other legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- 14 -
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Trading in ENDOcare's common stock is conducted in the over-the-counter
market on the NASDAQ Electronic Bulletin Board under the symbol "ENDO." The
following table sets forth the high and low bid prices for ENDOcare's common
stock during the periods indicated as quoted on the NASDAQ Electronic Bulletin
Board:
<TABLE>
<CAPTION>
High Low
---------- ----------
Fiscal year ended December 31, 1996:
- ------------------------------------
<S> <C> <C>
Fourth quarter $ 6.38 $ 3.38
Third quarter 5.00 2.25
Second quarter 5.88 1.88
First quarter (from February 20, 1996) 3.00 0.38
</TABLE>
ENDOcare's common stock first traded publicly on February 20, 1996, at a
price of $0.375 per share. As of February 12, 1997, ENDOcare had approximately
372 shareholders of record. On February 12, 1997, there were 8,195,853 shares
of ENDOcare common stock issued and outstanding.
ENDOcare has not paid any cash dividends on its common stock and does not
intend to pay any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Common Stock
On February 28, 1996, 12,500 shares of ENDOcare common stock were issued
as part of a settlement and termination agreement with an unaffiliated
consultant. The shares were issued in consideration of the consultant's
services and were valued at $0.375 per share.
On May 3, 1996, an additional 6,111 shares were issued to a Medstone
shareholder who had exercised an option to purchase Medstone shares in December
1995. It was determined that such shares should have been issued to that
shareholder as part of the Distribution to Medstone shareholders in February
1996.
On August 26, 1996, 10,000 shares were issued to four partnerships
managed by Technology Funding Inc. in consideration of their origination of an
aggregate of $1,500,000 convertible promissory notes for ENDOcare. On January
27, 1997, an aggregate of 332,000 shares of common stock were issued upon
conversion of an aggregate principal amount of $750,000, plus accrued interest
on such promissory notes.
On January 27, 1997, ENDOcare sold 2,218,714 shares of common stock at a
price of $3.50 per share in a private placement, with Oppenheimer & Co., Inc.
acting as placement agent.
- 15 -
<PAGE> 16
The sales and issuances of the common stock described above were deemed
to be exempt from registration under the Securities Act of 1933, as amended
(the "Securities Act") in reliance upon Section 4(2) thereof, as transactions
not involving a public offering. The purchasers in such private offerings of
stock represented their intention to acquire the securities for investment only
and not with a view to the distribution thereof.
Stock Options
During the period from January 1, 1996 through December 31, 1996, the
Company granted stock options to 14 individuals covering an aggregate of
526,000 shares of its common stock. All such options were granted at fair
market value, vest over a four year period, and are exercisable over a ten year
period. No consideration was paid for such options. Such grants were exempt
from the registration requirement of the Securities Act as not involving the
sale of a security.
Warrants
As of February 20, 1997, ENDOcare had issued warrants for the purchase of
382,497 shares of common stock.
On April 17, 1996, ENDOcare issued a warrant to purchase up to 10,000
shares of common stock to Brigham and Women's Hospital, Inc. in connection with
that unaffiliated entity's license of patent rights and other technology to the
Company.
On August 26, 1996, ENDOcare issued warrants to purchase up to 150,000
shares of common stock to four partnerships managed by Technology Funding Inc.,
one officer of which, Peter F. Bernardoni, has served on ENDOcare's Board of
Directors since November 1995. These warrants were issued in connection with
Technology Funding Inc.'s purchase of $1,500,000 of convertible promissory notes
from ENDOcare.
On January 27, 1997, ENDOcare issued a warrant to purchase up to 177,497
shares of common stock to Oppenheimer & Co., Inc. in connection with their
services as placement agent for the Company's private placement of common stock.
On February 14, 1997, ENDOcare issued a warrant to purchase up to 25,000
shares of common stock in connection with a license of technology.
On February 17, 1997, ENDOcare issued a warrant to purchase up to 20,000
shares of common stock to a consultant of the Company.
Such issuances of warrants described above were exempt from the
registration under the Securities Act in reliance upon Section 4(2) thereof.
- 16 -
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of ENDOcare, Inc.
for the year ended December 31, 1996 and for its predecessor, ENDOcare,
Division of Medstone, for previous years. Prior to 1996, ENDOcare was not an
independent company with publicly traded shares. Hence, no earnings per share
data is presented for those years.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(in thousands, except per share data) (restated)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
- -----------------------------
Revenues:
Net product sales . . . . . . . . . . $ --- $ 2,697 $ 2,283 $ 951 $ 1,878
Revenue from collaborative agreements --- --- --- --- 250
Research revenue from related party . 581 480 379 377 1
-------- -------- -------- -------- --------
Total revenues . . . . . . . . . . 581 3,177 2,662 1,328 2,129
Costs and expenses:
Cost of product sales . . . . . . . . 8 630 638 380 994
Research and development . . . . . . 1,163 1,061 911 852 1,023
Selling, general and administrative . 84 2,000 1,376 673 1,313
Impairment loss on long-lived assets --- --- --- --- 325
-------- -------- -------- -------- --------
Total costs and expenses . . . . . 1,255 3,691 2,925 1,905 3,655
-------- -------- -------- -------- --------
Loss from operations . . . . . . . . . . (674) (514) (263) (577) (1,526)
Provision for income taxes . . . . . . . --- --- --- --- 5
-------- -------- -------- -------- --------
Net loss . . . . . . . . . . . . . . . . $ (674) $ (514) $ (263) $ (577) $ (1,531)
======== ======== ======== ======== ========
Net loss per share . . . . . . . . . . . $ (.27)
========
Weighted average shares outstanding . . . 5,634,561
=========
</TABLE>
<TABLE>
<CAPTION>
Balances at December 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(in thousands) (restated)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
- -------------------
Working capital . . . . . . . . . . . . . $ 35 $ 236 $ 295 $ 328 $ 519
Total assets . . . . . . . . . . . . . . 133 1,041 972 806 1,751
Long-term debt . . . . . . . . . . . . . --- --- --- --- 750
Total shareholders'/division
equity (deficiency) . . . . . . . . . 118 867 864 803 (149)
</TABLE>
- 17 -
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
ENDOcare, designs, manufactures, and markets medical devices to treat
diseases of the prostate, including prostate cancer and prostate enlargement.
ENDOcare began marketing disposable surgical devices in 1993 with the
introduction of the Prolase laser catheter. In late 1995, ENDOcare began
marketing two new disposable product families, the Uroloop and Vaporbar
electrosurgical cutting elements, sales of which became the more significant
portion of revenue in early 1996. In May 1996, the Company introduced its new
CRYOcare cryosurgical system for the treatment of prostate cancer. In November
1996, ENDOcare signed a distribution agreement with Boston Scientific
Corporation granting that company exclusive world-wide marketing rights for
CRYOcare systems for urological applications.
ENDOcare currently is developing additional, innovative therapies for
prostate enlargement. The Company does not expect to be profitable in the
immediate future because of increased operating expenses from expanded research
and development efforts and support of clinical trials for products currently
under development.
Since its formation in 1990, ENDOcare operated first as a research and
development department, then later as a division of Medstone International,
Inc. In this form, ENDOcare shared facilities and certain personnel with its
parent. Effective January 1, 1996, ENDOcare began operating as an independent
corporation. Comparisons of financial results for 1996 with those of 1995 may
be impacted significantly by these two different organizational structures. In
1995 ENDOcare received direction, services, funding, and accounting allocations
from Medstone. All 1996 charges were directly incurred by ENDOcare as it
replaced services previously provided by Medstone with its own resources.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of total revenues.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1994 1995 1996
-------- -------- ----------
(restated)
<S> <C> <C> <C>
Revenues:
Net product sales . . . . . . . . . . . . . . 86 % 72 % 88 %
Revenue from collaborative agreements . . . . --- --- 12
Research revenue from related party . . . . . 14 28 ---
-------- -------- --------
Total revenues . . . . . . . . . . . . . 100 % 100 % 100 %
Costs and expenses:
Cost of product sales . . . . . . . . . . . . 24 29 47
Research and development . . . . . . . . . . 34 63 48
Selling, general and administrative . . . . . 52 51 62
Impairment loss on long-lived assets . . . . --- --- 15
-------- -------- --------
Total costs and expenses . . . . . . . . 110 143 172
-------- -------- --------
Net loss before income taxes . . . . . . . . . . . (10) (43) (72)
Provision for income taxes . . . . . . . . . . . . --- --- ---
-------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . (10)% (43)% (72)%
======== ======== ========
</TABLE>
- 18 -
<PAGE> 19
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue from product sales for the year ended December 31, 1996 increased
97% to $1,878,000 compared to $951,000 for the year ended December 31, 1995.
This increase resulted from the introduction of new products. In 1995 product
sales consisted almost entirely of Prolase laser catheters, the volumes of
which had dropped considerably by the end of 1995. At the beginning of 1996,
ENDOcare's newly introduced Uroloops and Vaporbars began contributing
significant revenue. In May 1996, ENDOcare introduced its new CRYOcare
surgical system, which generated $880,000 of revenue in 1996.
Revenue from collaborative agreements increased from zero in 1995 to
$250,000 for the year ended December 31, 1996. This $250,000 in 1996 was a
non-refundable, lump-sum payment from Boston Scientific Corporation to ENDOcare
upon signing of a distribution agreement giving Boston Scientific exclusive
world-wide marketing rights for CRYOcare systems in urological applications.
Research revenue from related party decreased from $377,000 in 1995 to
$1,600 in 1996. In 1996 ENDOcare focused its research efforts on its own
internal product development, rather than performing research services for its
former parent, Medstone.
Gross margins on product sales were 47% in 1996 compared to 60% in 1995.
This difference was caused by changes in ENDOcare's product revenue mix as new
products were introduced and older products exhibited margin declines. In 1995
ENDOcare's revenue was almost entirely from high margin Prolase sales. In
early 1996, Prolase margins were declining, and the dominant source of revenue
for the Company was Uroloops and Vaporbars, whose margins were lower than those
of Prolase. With the mid-year introduction of CRYOcare systems, some early
units were shipped with lower, introductory prices. Also, 1996 margins were
impacted by the sale of several low margin Diolase units.
Research and development expense increased 20% to $1,023,000 in 1996 from
$852,000 in 1995. These increases primarily reflect increased development
efforts completing development of the new CRYOcare system in the beginning of
1996 and the initiation of other new product development later in the year.
Selling, general and administrative expense increased 95% to $1,313,000
in 1996 from $673,000 in 1995. This increase reflects the higher
administrative expense of operating as an independent, publicly-traded company,
as well as general investment in sales and marketing resources to establish a
foundation for future revenue growth. Also, during the second quarter of 1996,
sales and marketing expenses increased for the introduction of the new CRYOcare
system.
ENDOcare's net loss increased to $1,531,000 in 1996 from $577,000 in
1995. This increase was primarily due to the increase in selling, general and
administrative expense described above. In addition, a major factor
contributing to the loss was the effect of adopting the new accounting
pronouncement requiring review of long-lived assets for possible impairment.
As described in Note 4 to the financial statements, review of the assets
contributed to ENDOcare by Medstone resulted in a write-down of $325,000
effective January 1, 1996.
- 19 -
<PAGE> 20
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues in 1995 decreased by $1,334,000, or 50%, from 1994. Product
sales decreased by $1,332,000, or 58%, due to increased market competition and
downward unit price pressure on Prolase laser catheters. Partially offsetting
this decrease was $134,000 revenue from the fourth quarter introduction of two
new technology products, Uroloops and Vaporbars.
Cost of sales decreased from $638,000 in 1994 to $379,000 in 1995. As a
percentage of net product sales, cost of sales increased to 40% in 1995 from
28% in 1994 due to the continued decline in Prolase unit sales prices and the
lower-revenue higher-volume nature of the new products. Although absolute
dollar costs of overhead were reduced, they increased on a per unit basis due
to the lower volumes.
Research and development costs declined 6% to $852,000 due to the
decrease in the Company's research effort at Medstone's direction.
Selling, general and administrative expenses decreased 51% to $673,000,
primarily due to the shift to non-commissioned stocking distributors rather
than the previous commission-based distribution.
The operating loss in 1995 increased by 119% to $577,000 due to the
reduced revenues as the Company transitioned from relying on an aging single
product line to offering a broad spectrum of products serving its target
market.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, ENDOcare's cash balance was $477,000, compared to
$2,000 at December 31, 1995. This cash increase was provided by product sales
as well as two financing transactions.
In connection with the January 1996 spin-out, Medstone contributed
$500,000 cash to ENDOcare. In addition, ENDOcare took possession of $102,000
of its accounts receivable and $219,000 of inventory. Medstone retained
responsibility for all financial liabilities incurred before January 1, 1996.
In August 1996, ENDOcare obtained a two-year $1,500,000 secured borrowing
facility from four partnerships managed by Technology Funding Inc., a venture
capital firm. At December 31, 1996, $750,000 was outstanding under this loan.
Additional working capital has been used as ENDOcare's operations have
increased in 1996. With higher revenue levels, net accounts receivable
increased to $588,000 at December 31, 1996, compared to $102,000 at December 31,
1995. To support higher production levels, inventory increased to $397,000 at
December 31, 1996, compared to $219,000 at the beginning of the year. Fixed
asset additions during 1996 were approximately $111,000. As described in Note
4 to the financial statements, implementation of a new accounting standard
resulted in a non-cash write-off of $325,000 of non-current assets effective
January 1, 1996. Working capital was provided as accounts payable and other
current liabilities grew to an operating level of approximately $984,000,
starting from the initial zero balance at the January 1, 1996, spin-out from
Medstone.
At December 31, 1996, ENDOcare's net working capital was $519,000 and the
ratio of current assets to current liabilities was 1.5 to 1.
In February 1997, ENDOcare signed a new five-year lease for a larger
facility in Irvine, California, with contractual rentals of $119,383 in 1997,
$153,860 in 1998, $157,727 in 1999, $161,593 in 2000 and $165,460 in 2001 and
$34,639 in 2002, which will be expensed on a straight line basis over the period
of the lease. However, the Company's existing lease expires on August 31, 1998
and has future minimum commitments of $40,872 in 1997 and $30,654 in 1998.
Although the Company expects to sublease its previous facility to another tenant
for the remaining lease term, the Company would be liable for the entire
remaining lease payments if it is unable to find a sublease tenant. If the
Company is unable to find a subtenant or if revenues do not increase
sufficiently to compensate for the increase in lease expenses for the new
facility, it would have a material adverse effect on the Company's cash flow and
operating results. Also, in connection with moving to the new larger facility,
the Company expects to incur significant expenditures for leasehold improvements
which will be depreciated over the period of the lease and will have a material
effect on cash flows during 1997.
- 20 -
<PAGE> 21
As described in Note 13 to the financial statements, subsequent to
year-end ENDOcare consummated two financial transactions which increased its
liquidity and capital resources.
On January 27, 1997, ENDOcare sold 2,218,714 shares of common stock at a
price of $3.50 per share in a private placement, with Oppenheimer & Co., Inc.
acting as placement agent. After deducting commissions and other estimated
expenses of the sale, this offering added approximately $7,050,000 to
ENDOcare's capital base.
Also on January 27, 1997, the four partnerships managed by Technology
Funding Inc. converted the outstanding principal amount of their $750,000
promissory notes and $50,000 of accrued interest into common stock at the
conversion rate of $2.50 per share. To induce conversion at that time,
ENDOcare issued to the partnerships an additional 12,000 shares of stock, with
a fair market value on that date of approximately $50,000. These transactions
converted the outstanding debt into equity so that ENDOcare will not be
required to re-pay principal or to continue to incur interest expense.
With these January 1997 capital infusions, the Company believes that its
existing cash resources and anticipated cash flows from future operations will
provide sufficient resources to meet present and reasonably foreseeable working
capital requirements and other cash needs through at least the end of 1997.
Insofar as the Company may elect to undertake or accelerate significant
research and development projects for new products or may pursue corporate
acquisitions, it may require additional outside financing prior to such time.
The preceding forward-looking statements are subject to uncertainties in
economic conditions, regulatory issues, and other risk factors. Such factors
may cause actual future results to differ significantly from management's
current expectations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14, "Exhibits, Financial Statement Schedules, and Reports on Form
8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There are no disagreements with the Company's present or past accountants
on accounting and financial disclosure.
On April 29, 1996, ENDOcare terminated the previous appointment of Ernst
& Young LLP and engaged KPMG Peat Marwick LLP as the Company's principal
accounting firm. Such change was approved by the Company's Board of Directors.
A report on Form 8-K was filed dated April 29, 1996.
- 21 -
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
February 12, 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---------------- ------- -----------------------------------------------------------
<S> <C> <C>
Paul W. Mikus 31 President, Chief Executive Officer, Chief Financial Officer,
Treasurer, Chairman of the Board and Director
David J. Battles 39 Vice President, Sales
Ralph L. Quigley 53 Vice President, Operations
Peter F. Bernardoni 37 Director
Kevin Marinelli 32 Director
</TABLE>
Paul W. Mikus has served as Chief Executive Officer, Chairman and
Director since November 1995. Prior to that time, he was President of ENDOcare
as a division of Medstone from June 1995. Prior to becoming President of
ENDOcare, he managed worldwide sales and marketing for Prosurg, Inc. From July
1989 to September 1994 he worked for Medstone as manager of engineering where
he was a co-founder of ENDOcare. Mr. Mikus holds a BS degree in Electrical
Engineering.
David J. Battles has served as Vice President, Sales for ENDOcare since
January 1996. Prior to that, from January 1995 to January 1996, he managed an
independent medical sales and distribution company, Aslan International. From
1993 to January 1995 he was the Managing Director of International Sales for
Medstone and ENDOcare. From 1990 to 1992 he worked as the Sales Manager, Asia
Pacific for Marquest Medical Products. Previously, he held a variety of sales
and management positions at Abbott Laboratories and Coast Medical Corporation.
He has a BS degree in Business Management from California Polytechnic State
University.
Ralph L. Quigley has served as Vice President, Operations since May 1996.
Prior to joining ENDOcare, Mr. Quigley served as Director and Division General
Manager at Everett-Charles Test Equipment Company from 1982 to 1988. From 1991
to 1993, Mr. Quigley was Vice President, Operations at L.H. Research, Inc., a
power supply manufacturer, where he was responsible for both domestic and
international operations with facilities in Malaysia and the Dominican
Republic. From 1993 to 1996, Mr. Quigley served as Director of Operations for
Workstation Technologies, a digital video equipment manufacturer.
Peter F. Bernardoni has served as a Director since November 1995. Mr.
Bernardoni has been a vice president of Technology Funding Inc. since 1991
and a partner in Technology Funding Ltd. since 1994. He serves on the board
of directors of Urogen, Corp. He has an MS in Mechanical Engineering from
Stanford University.
- 22 -
<PAGE> 23
Kevin Marinelli has served as a Director since November 1995. From 1991
to present Mr. Marinelli has been the Chief Financial Officer of BKM, a
privately-held office furnishings and services company. He is a Certified
Management Accountant and has a BS in Accountancy.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act ("Section 16(a)") requires the
Company's directors and certain of its officers, and persons who own more than
10% of a registered class of the Company's equity securities (collectively,
"Insiders"), to file reports of ownership and changes in ownership with the
Commission. Insiders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Form 5's were
required for those persons, the Company believes that (i) each of the directors
and executive officers identified in Item 10 above and Ralph Brady and
Jacqueline Hibbs (each a former executive officer of the Company) failed to
file a Form 3, (ii) Mr. Battles failed to report a grant of an option on a Form
4, (iii) Ms. Hibbs failed to report one acquisition on a Form 4 (although Ms.
Hibbs disclaims beneficial ownership of such shares), and (iv) Mr. Bernardoni
did not file a Form 4 for two acquisitions and one sale of ENDOcare's common
stock and for one acquisition of warrants (although Mr. Bernardoni disclaims
beneficial ownership of such shares). Each of the aforementioned individuals
has filed a Form 5 within the required time period to reflect such late
filings.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to the Chief Executive Officer and the other most highly compensated
executive officers with total compensation in excess of $100,000 other than the
Chief Executive Officer (the "Named Executive Officers") for their services to
the Company for the year ended December 31, 1996.
- 23 -
<PAGE> 24
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------- ------------
Securities
Other Annual Underlying All Other
Name and Compen- Options/ Compen-
Principal Position Year Salary($) Bonus($) sation($) SAR's(#) (1) sation($)
- ------------------ ---- --------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Paul W. Mikus 1996 97,500 --- --- --- 4,818 (2)
Chairman, President, Chief
Executive Officer, Chief
Financial Officer and
Treasurer
David J. Battles 1996 52,083 --- --- 100,000 43,185 (3)
Vice President, Sales
Ralph L. Quigley 1996 51,795 --- --- 75,000 370 (4)
Vice President, Operations
- -------------------------
</TABLE>
(1) The Company does not grant Stock Appreciation Rights.
(2) Represents $130 of group term life insurance payments and $4,688 of
commissions on sale of a CRYOcare System.
(3) Represents $55 of group term life insurance payments and $43,130 of
commissions.
(4) Represents group term life insurance payments.
STOCK OPTIONS
The following table sets forth information concerning each grant of stock
options made during 1996 to each of the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------- Potential Realizable Value
Number of Percent of at Assumed Annual Rates
Shares Total Options of Stock Price Appreciation
Underlying Granted to Exercise for Option Term (1)
Options Employees Price Expiration ---------------------------
Name Granted (2) in Period Per Share Date 5% 10%
- -------------- -------------- -------------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Paul W. Mikus --- --- --- --- --- ---
David J. Battles 100,000 19.0% $0.18 02/08/06 $ 11,340 $ 28,620
Ralph L. Quigley 75,000 14.3% $3.63 04/17/06 $171,518 $432,878
- -------------------------
</TABLE>
(1) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated by assuming
that the stock price on the date of grant appreciates at the indicated
annual rate, compounded annually for the entire term of the option.
(2) All options become exercisable upon the merger of the Company with or into
another corporation or the sale of substantially all of the Company's
assets.
(3) The options vest over a four-year period with 25% on February 9, 1997 and
the remaining 75% exercisable in equal monthly installments thereafter
over the next three years.
(4) The options vest over a four-year period with 25% on April 18, 1997 and
the remaining 75% exercisable in equal monthly installments thereafter
over the next three years.
- 24 -
<PAGE> 25
The following table sets forth the number and value as of December 31,
1996 of shares underlying unexercised options held by each of the Named
Executive Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Shares Underlying Value of Unexercised
Unexercised Options as of In the Money Options as of
December 31, 1996 December 31, 1996 (1) ($)
------------------------------------- --------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Paul W. Mikus (2) 125,000 375,000 $415,000 $1,245,000
David J. Battles (3) 6,250 118,750 $ 20,750 $ 394,250
Ralph L. Quigley (4) --- 75,000 --- 0
- -------------------------
</TABLE>
(1) Based on the fair market value (computed using the average bid and ask
prices quoted on the NASDAQ Electronic Bulletin Board as of December 31,
1996, ($3.50 per share)) less the exercise price payable upon exercise of
such options.
(2) The options vest over a four-year period with 25% on December 1, 1996 and
the remaining 75% exercisable in equal monthly installments thereafter
over the next three years.
(3) 100,000 options vest as set forth above, with the remaining 25,000 options
vesting over a four-year period with 25% on December 1, 1996 and the
remaining 75% exercisable in equal monthly installments thereafter over
the next three years.
(4) All of Mr. Quigley's options were out of the money at December 31, 1996.
The exercise price of his 75,000 options was greater than the fair market
value of the Company's common stock (as calculated in footnote (1) above)
at December 31, 1996.
1995 STOCK PLAN
On November 1, 1995, ENDOcare adopted the ENDOcare, Inc. 1995 Stock Plan
(the "1995 Stock Plan"), a stock incentive plan covering 1,500,000 shares of
common stock of ENDOcare which may be awarded in order to attract and retain
qualified personnel. The Compensation Committee of the Board of Directors
administers the 1995 Stock Plan. Any employee or other person providing
services to the Company is eligible to receive awards under the 1995 Stock
Plan. Awards available under the 1995 Stock Plan include common stock purchase
options and restricted common stock.
BOARD COMMITTEES
Audit Committee: The Board of Directors established the Audit Committee
on October 31, 1995 to: (i) make recommendations concerning the engagement of
independent public accountants; (ii) review with the independent public
accountants the plans for, and scope of, the audit procedures to be utilized
and results of the audit; (iii) approve the professional services provided by
the independent public accountants; (iv) review the independence of the
independent public accountants; and (v) review the adequacy and effectiveness
of the Company's internal accounting controls. Mr. Peter F. Bernardoni and Mr.
Kevin Marinelli are the members of the Audit Committee.
Compensation Committee: The Board of Directors established the
Compensation Committee on October 31, 1995 consisting of Mr. Peter F. Bernardoni
and Mr. Kevin Marinelli, neither of whom are employees of the Company. The
Compensation Committee determines the compensation of the Company's executive
officers and administers the 1995 Stock Plan and the 1995 Director Option Plan.
- 25 -
<PAGE> 26
COMPENSATION OF DIRECTORS
Directors are elected annually. The Company does not compensate its
directors for their services as such. However, directors are reimbursed for
their out of pocket expenses in attending Board meetings, and each of the
Company's non-employee directors participates in the 1995 Director Option Plan.
In 1995, ENDOcare adopted the ENDOcare, Inc. 1995 Director Option Plan
(the "Director Plan") covering 100,000 shares of ENDOcare common stock. The
Director Plan provides that each non-employee director (each, an "Outside
Director") is automatically granted an option to purchase 10,000 shares of
ENDOcare common stock upon his or her initial election or appointment as an
Outside Director. Subsequently, each Outside Director who has served for at
least six months will be granted an additional option to purchase 5,000 shares
of ENDOcare common stock on January 1 of each year so long as he or she remains
an Outside Director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee, which was established on October
31, 1995, consists of Messrs. Bernardoni and Marinelli, neither of whom was at
any time during fiscal 1996 or at any other time an officer or employee of the
Company. There are no compensation committee interlocks between the Company
and other entities involving the Company's executive officers and Board members
who serve as executive officers or Board members of such other entities.
INDEMNIFICATION AND EXCULPATION ARRANGEMENTS
The Restated Certificate of Incorporation of ENDOcare limits the
liability of directors to ENDOcare or its stockholders to the fullest extent
permitted by the Delaware General Corporation Law (the "DGCL"). Accordingly,
pursuant to the provisions of the DGCL presently in effect, directors of
ENDOcare will not be personally liable for monetary damages for breach of a
director's fiduciary duty as a director, except for liability: (i) for any
breach of the director's duty of loyalty to the Company or its shareholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) under Section 174 of the DGCL;
or (iv) for any transaction from which the director derived an improper
personal benefit. In addition, the bylaws of ENDOcare require ENDOcare to
indemnify its directors and officers to the fullest extent permitted by the
laws of the State of Delaware.
- 26 -
<PAGE> 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of ENDOcare common stock owned as of February 1, 1997 by (i) the
holders of more than 5% of the ENDOcare common stock, (ii) each director of the
Company, (iii) each of ENDOcare's Named Executive Officers, and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial
Title of Class of Beneficial Owner (1) Ownership (2) Percent of Class
- -------------- ----------------------- ------------- ----------------
<S> <C> <C> <C>
Common Stock The Kaufman Fund 1,000,000 12.2%
140 E. 45th Street
New York, NY 10017
Peter F. Bernardoni (3) 634,500 7.7%
Technology Funding
2000 Alameda de las Pulgas
San Mateo, CA 94402
Paul W. Mikus (6) 166,667 (4) 2.0%
David J. Battles (6) 44,416 (5) *
Ralph L. Quigley (6) --- *
Kevin Marinelli 2,500 (4) *
113 Cottage Lane
Aliso Viejo, CA 92656
All executive officers and directors 848,083 9.9%
as a group (5 persons)
</TABLE>
- --------------------------
* Less than 1%.
(1) All such shares were held of record with sole voting and investment
power, subject to applicable community property laws, by the named
individual and/or by his wife, except as indicated in the following
footnotes.
(2) Beneficial ownership is determined in accordance with the rules of
the Commission and generally includes voting or investment power with
respect to securities. Shares of common stock relating to options
currently exercisable or exercisable within 60 days of February 1,
1997, are deemed outstanding for computing the percentage of the
person holding such securities but are not deemed outstanding for
computing the percentage of any other person. Except as indicated by
footnote, and subject to community property laws where applicable,
the persons named in the table above have sole voting and investment
power with respect to all shares shown as beneficially owned by them.
(3) Includes 632,000 shares held by Technology Funding Partners III,
L.P., Technology Funding Venture Partners IV, an Aggressive Growth
Fund, L.P., Technology Funding Venture Partners V, an Aggressive
Growth Fund, L.P., and Technology Funding Medical Partners I, L.P.
(collectively, the "Funds"). Mr. Bernardoni is an officer of
Technology Funding Inc., and a partner of Technology Funding Ltd.,
each a general partner of the Funds. Mr. Bernardoni has sole voting
and shared investment power with respect to all shares owned by the
Funds, and therefore may be deemed to be beneficial owner of such
shares. Also includes 2,500 shares issuable with respect to exercise
of options.
(4) Represents shares issuable with respect to the exercise of options.
(5) Represents 35,416 shares issuable with respect to the exercise of
options.
(6) The address of such persons is 18 Technology Drive, Suite 134, Irvine,
California 92618.
- 27 -
<PAGE> 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationship Between ENDOcare and Medstone After the Distribution
Prior to 1996, ENDOcare had operated as a division of Medstone
International. ENDOcare, Inc. was incorporated as a wholly-owned subsidiary in
1994. Through 1995, the Company relied upon Medstone for financial support and
administrative assistance. Since completion of the Distribution at the
beginning of 1996, ENDOcare has operated independently from Medstone.
Prior to the Distribution, ENDOcare and Medstone entered into a
Distribution Agreement, a Research and Development Services Agreement, an
Administrative Services Agreement and a Contribution Agreement. The full text
of these agreements has been filed as exhibits to the Registration Statement at
the time of the Distribution.
During 1996 ENDOcare and Medstone exchanged few services. During the
first quarter, Medstone billed ENDOcare approximately $3,000 for administrative
services, and ENDOcare billed Medstone approximately $3,000 for engineering and
administrative services. Throughout 1996, ENDOcare provided health insurance
to its employees through continuation of Medstone's policy. Effective January
1, 1997, ENDOcare is providing its own, independent health insurance.
Relationship Between ENDOcare and Technology Funding
Peter F. Bernardoni has served on ENDOcare's Board of Directors since
November 1995. He also is a partner of Technology Funding Ltd. and an officer
of Technology Funding Inc., a venture capital group. In August 1996 ENDOcare
obtained a two-year $1,500,000 borrowing facility from four partnerships
managed by Technology Funding Inc. The outstanding principal balance of
$750,000 was convertible and, at the option of the holders, was converted on
January 27, 1997 into 300,000 shares of ENDOcare common stock at a conversion
price of $2.50 per share. Interest on the loan had accrued at a rate of 16%
per year, and all $50,000 was converted into 20,000 shares on that same date at
the same $2.50 per share. Also on January 27, 1997, the four partnerships
managed by Technology Funding Inc. received an additional 12,000 shares
($50,250 total market value) to induce conversion at that time. On August 26,
1996, the partnerships also received warrants for the purchase of up to 150,000
shares of ENDOcare common stock at any time on or before August 26, 2001, at a
price of $3.00 per share. The partnerships received an origination fee of
10,000 shares of common stock on that same date.
- 28 -
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT
<TABLE>
<S> <C> <C>
(1) Index to Financial Statements
Independent Auditors' Reports 32
Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 34
Balance Sheets at December 31, 1995 and 1996 35
Statement of Shareholders'/Division Equity (Deficiency)
for the year ended December 31, 1996 36
Statements of Cash Flows for the years ended 37
December 31, 1994, 1995 and 1996
Notes to Financial Statements 38
(2) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts 49
(All other schedules are omitted because they are not applicable
or the required information is included in the consolidated
financial statements or notes thereto.)
</TABLE>
- 29 -
<PAGE> 30
(3) Exhibits
<TABLE>
<S> <C>
2.1 Distribution Agreement between the Registrant and Medstone
International, Inc., dated October 31, 1995 (1)
3.1 Certificate of Incorporation of the Company (2)
3.2 Amended and Restated Bylaws of the Company **
4.1 Specimen Certificate of the Company's Common Stock (3)
10.1 Facility Lease on 18 Technology Drive (2)
10.2 Contribution Agreement between Medstone International, Inc.
and the Company, dated October 31, 1995 (1)
10.3 Research and Development Services Agreement between Medstone
International, Inc. and the Company, dated October 31,
1995 (1)
10.4 Form of Indemnification Agreement (2) *
10.5 1995 Stock Plan (1) *
10.6 1995 Director Option Plan (1) *
10.7 Patent License Agreement between the Company and Brigham
and Women's Hospital, Inc., dated April 17, 1996 (4)
10.8 Form of Convertible Secured Promissory Note due
August 26, 1998, issued by ENDOcare, Inc. in an aggregate
principal amount of $1,500,000, dated August 26, 1996 (5)
10.9 Form of Warrant to purchase an aggregate of 150,000 shares of
common stock, dated August 26, 1996 (5)
10.10 Distributorship Agreement between the Company and Boston
Scientific Corporation, dated November 18, 1996 (6)
10.11 Common Stock Purchase Agreement by and among the Company and
the persons listed on the Schedule of Investors attached
thereto as Exhibit A, dated January 21, 1997 (7)
10.12 Facility Lease dated January 31, 1997 for 7 Studebaker **
10.13 Sublease dated May 19, 1997 for 18 Technology Drive **
11.1 Earnings Per Share Calculation **
23.1 Consent of KPMG Peat Marwick LLP **
23.2 Consent of Ernst & Young LLP **
27.1 Financial Data Schedule **
29.1 ENDOcare, Inc. Information Statement distributed to
shareholders of Medstone International, Inc., dated
February 6, 1996 (8)
</TABLE>
- -----------------------
(1) Previously filed with the Company's Application for Registration on Form
10-SB under the Securities Exchange Act of 1934, filed on November 14,
1995, and incorporated herein by reference. Each such exhibit had the
same exhibit number in that filing, except that the 1995 Stock Plan was
exhibit number 10.6 and the 1995 Director Option Plan was exhibit 10.7.
(2) Previously filed with Amendment number 1 to Company's Application for
Registration on Form 10-SB, filed on December 21, 1995, and incorporated
herein by reference.
(3) Previously filed with the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
(4) Previously filed with the Company's Current Report on Form 8-K, as
amended, dated April 25, 1996 as filed with the Securities and Exchange
Commission on April 26, 1996, and incorporated herein by reference.
(5) Previously filed with the Company's Current Report on Form 8-K dated
August 26, 1996 as filed with the Securities and Exchange Commission on
September 10, 1996, and incorporated herein by reference.
(6) Previously filed with the Company's Current Report on Form 8-K dated
November 18, 1996 as filed with the Securities and Exchange Commission on
December 3, 1996, and incorporated herein by reference.
(7) Previously filed with the Company's Current Report on Form 8-K dated
January 27, 1997 as filed with the Securities and Exchange Commission on
January 31, 1997, and incorporated herein by reference.
(8) Previously filed on February 9, 1996 by Medstone International, Inc. under
Section 14(c) of the Securities Exchange Act of 1934, and incorporated
herein by reference.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to applicable rules of the Securities and
Exchange Commission.
- 30 -
<PAGE> 31
** Filed herewith.
(b) REPORTS ON FORM 8-K
The registrant filed a Current Report on Form 8-K dated November 18, 1996
with the Securities and Exchange Commission on December 3, 1996 describing
the Distribution Agreement dated November 18, 1996 between the Company and
Boston Scientific Corporation.
- 31 -
<PAGE> 32
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
ENDOcare, Inc.:
We have audited the accompanying balance sheet of ENDOcare, Inc. (the Company)
as of December 31, 1996, and the related statements of operations, shareholders'
equity (deficiency), and cash flows for the year then ended. In connection with
our audit of the financial statements, we also have audited the financial
statement schedule as listed in the Index at Item 14(a). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit.
We conducted our audit 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 audit provides 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 ENDOcare, Inc. as of December
31, 1996, and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles. Also
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
As discussed in note 2 to the financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," as of January 1, 1996.
As discussed in Note 1 to the Financial Statements, the Company has restated
its financial statements as of December 31, 1996 and for the year then ended.
KPMG PEAT MARWICK LLP
Orange County, California
February 3, 1997, except as to the
fourth paragraph of Note 1 to the Financial
Statements which is as of May 28, 1997, and the
fourth paragraph of Note 8 to the Financial Statements which
is as of July 2, 1997.
- 32 -
<PAGE> 33
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Endocare, Inc.
We have audited the accompanying balance sheet of Endocare (a division of
Medstone International, Inc.) as of December 31, 1995, and the related
statements of operations and cash flows for each of the two years in the period
ended December 31, 1995. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 Endocare (a division of
Medstone International, Inc.) at December 31, 1995, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Orange County, California
February 14, 1996
- 33 -
<PAGE> 34
ENDOCARE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------
1994 1995 1996
---------------- ---------------- ---------------
(restated)
<S> <C> <C> <C>
Revenues:
Net product sales $ 2,282,819 $ 951,311 $ 1,877,678
Revenue from collaborative agreements --- --- 250,000
Research revenue from related party 379,309 376,533 1,600
---------------- ---------------- ---------------
Total revenues 2,662,128 1,327,844 2,129,278
Costs and expenses:
Cost of product sales 638,294 379,478 994,374
Research and development 910,929 852,025 1,023,172
Selling, general and administrative 1,375,845 673,258 1,313,302
Impairment loss on long-lived assets --- --- 324,878
---------------- ---------------- ---------------
Total costs and expenses 2,925,068 1,904,761 3,655,726
---------------- ---------------- ---------------
Loss before income taxes (262,940) (576,917) (1,526,448)
Provision for income taxes --- --- 5,000
---------------- ---------------- ---------------
Net loss $ (262,940) $ (576,917) $ (1,531,448)
================ ================ ===============
Net loss per share of common stock $ (.27)
=======
Weighted average shares and common
stock equivalents outstanding 5,634,561
===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 34 -
<PAGE> 35
ENDOCARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------------------
1995 1996
------------- -------------
(restated)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,941 $ 476,854
Accounts receivable, less allowances of $46,948
and $58,139 at December 31, 1995 and 1996 102,416 587,945
Inventories 219,298 396,725
Prepaid expenses and other current assets 7,335 41,398
------------ ------------
Total current assets 330,990 1,502,922
Property and equipment, net 397,965 178,788
Intangible assets 60,831 ---
Other assets 15,907 69,191
------------ ------------
Total assets $ 805,693 $ 1,750,901
============ ============
LIABILITIES AND SHAREHOLDERS'/DIVISION EQUITY (DEFICIENCY)
- -------------------------------------------------------------
Current liabilities:
Accounts payable $ --- $ 668,761
Accrued compensation --- 53,190
Other accrued liabilities --- 143,399
Deferred revenue 1,628 118,333
Customer deposits 932 ---
------------ ------------
Total current liabilities 2,560 983,683
Deferred revenue --- 166,667
Convertible note payable --- 750,000
Commitments and contingencies
Shareholders'/division equity (deficiency):
Advances from Medstone International, Inc. 2,831,364 ---
Preferred stock, $.001 par value; 1,000,000 shares
authorized; zero issued and outstanding --- ---
Common stock, $.001 par value; 20,000,000 shares
authorized; zero and 5,645,139 issued and
outstanding at December 31, 1995 and 1996 --- 5,645
Additional paid-in capital --- 1,376,354
Accumulated deficit (2,028,231) (1,531,448)
------------ ------------
Total shareholders'/division equity (deficiency) 803,133 (149,449)
------------ ------------
Subsequent events
Total liabilities and equity (deficiency) $ 805,693 $ 1,750,901
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 35 -
<PAGE> 36
ENDOCARE, INC.
STATEMENT OF SHAREHOLDERS'/DIVISION EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Total
Shareholders'/
Common Stock Additional Advances Division
------------------------ Paid-In from Accumulated Equity
Shares Amount Capital Medstone Deficit (Deficiency)
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 --- $ --- $ --- $2,831,364 $(2,028,231) $ 803,133
Common stock issued in
Medstone Distribution 5,616,528 5,617 1,297,516 (2,831,364) 2,028,231 500,000
Other common stock issued 28,611 28 59,868 --- --- 59,896
Equity provided by
warrant amortization --- --- 18,970 --- --- 18,970
Net loss --- --- --- --- (1,531,448) (1,531,448)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1996 5,645,139 $ 5,645 $1,376,354 $ --- $(1,531,448) $ (149,449)
=========== =========== =========== =========== ============ ===========
</TABLE>
No data is presented for periods prior to December 31, 1995, because at that
time ENDOcare was operating as a division of Medstone, not as an independent
public corporation. (See note 12).
The accompanying notes are an integral part of these financial statements.
- 36 -
<PAGE> 37
ENDOCARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
(restated)
<S> <C> <C> <C>
Cash flows from operating activities:
- -------------------------------------
Net loss $ (262,940) $ (576,917) $ (1,531,448)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 156,065 163,193 38,325
Amortization of warrant value --- --- 18,970
Common stock issued for services --- --- 59,896
Impairment loss on long-lived assets --- --- 324,878
Changes in operating assets and liabilities:
Accounts receivable 113,724 87,365 (485,529)
Inventories (111,175) (21,605) (177,427)
Prepaid expenses and other current assets 3,800 8,565 (34,063)
Other assets --- (66,738) (53,284)
Accounts payable (40,032) (4,968) 668,761
Accrued compensation (4,941) (101,775) 53,190
Other accrued liabilities (13,502) (122) 143,399
Deferred revenue --- --- 283,372
Customer deposits (7,000) 932 (932)
------------- ------------- -------------
Net cash used in operating activities (166,001) (512,070) (691,892)
Cash flows from investing activities:
- -------------------------------------
Purchases of property and equipment (125,601) (28,697) (110,569)
Proceeds from sale of property and equipment 31,748 26,594 27,374
------------- ------------- -------------
Net cash used in investing activities (93,853) (2,103) (83,195)
Cash flows from financing activities:
- -------------------------------------
Advances from Medstone 259,854 516,114 ---
Issuance of common stock, Medstone Distribution --- --- 500,000
Borrowing on convertible note payable --- --- 750,000
------------- ------------- -------------
Net cash provided by financing activities 259,854 516,114 1,250,000
------------- ------------- -------------
Net increase in cash and cash equivalents --- 1,941 474,913
Cash and cash equivalents, beginning of year --- --- 1,941
------------- ------------- -------------
Cash and cash equivalents, end of year $ --- $ 1,941 $ 476,854
============= ============= =============
Non-cash activities:
- --------------------
Book value of net assets contributed by
Medstone at time of spin-out and
initial capitalization of ENDOcare, Inc. $ --- $ --- $ 803,133
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 37 -
<PAGE> 38
ENDOCARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF THE COMPANY
ENDOcare, Inc. (the "Company") designs, manufactures, and markets medical
devices to treat prostate diseases worldwide.
Since its formation in 1990, ENDOcare operated first as a research and
development department, then later as a division of Medstone
International, Inc. ("Medstone"). Effective January 1, 1996, ENDOcare
became a totally independent, publicly-owned corporation. At the
beginning of 1996, ENDOcare, Inc. issued 5,616,528 shares of ENDOcare
common stock to Medstone in exchange for $500,000 cash and the accounts
receivable, inventory, and other net assets of the ENDOcare Division. On
February 6, 1996, Medstone distributed to existing Medstone shareholders
a stock dividend of one share of ENDOcare common stock for each share of
Medstone common stock outstanding on December 29, 1995.
All 1995 and earlier comparative amounts shown in the accompanying
financial statements reflect operations while ENDOcare was a division of
Medstone. In particular, the December 31, 1995 Balance Sheet is before
Medstone's conversion of its net advance to equity and before Medstone's
contribution of $500,000 cash.
During its third quarter of 1996, the Company recognized a sale relating
to the shipment of product to an international distributor. The total
revenue recognized on this sale approximated $140,000. Due to the lack of
payment by the customer, the Company provided an allowance for doubtful
accounts for a substantial portion of the sale in the fourth quarter of
1996. However, the Company became aware that the product had been shipped
from the Company's warehouse in error. As a result, the Company has
restated the results of operations for the third quarter of 1996. Though
revenues, cost of product sales and selling, general and administrative
expenses for the year ended December 31, 1996 have been restated, there
has been no net change to the net loss for the year ended December 31,
1996. In addition, the above restatement has been reflected in the
Company's balance sheet at December 31, 1996, primarily as a reduction of
net accounts receivable and certain current liabilities and an increase in
inventories.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents: All highly liquid investments purchased with
an original maturity of three months or less are considered to be cash
equivalents.
Inventories: Inventories are stated at the lower of actual cost
(first-in, first-out) or net realizable value.
Property and Equipment: Property and equipment are stated at cost and
are depreciated on a straight-line basis over the estimated useful lives
of the respective assets, which range from two to five years. Leasehold
improvements are amortized over the shorter of the estimated useful lives
of the assets or the related lease term.
Long-Lived Assets: In 1995 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("SFAS 121"). ENDOcare adopted SFAS 121 in the first
quarter of 1996. Per this statement's provisions, ENDOcare reviews
property, equipment, and intangible assets for possible impairment
whenever events or circumstances indicate that the carrying amounts may
not be recoverable. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of an asset, an impairment loss is
recognized. See Note 4 for impairment adjustments in 1996.
- 38 -
<PAGE> 39
Revenue Recognition: ENDOcare recognizes product revenue upon the
shipment of its products and records reserves for estimated returns. A
portion of CRYOcare system sales are made on extended terms requiring
periodic payments of up to 365 days due to the capital nature and expense
of the CRYOcare system. Such CRYOcare system sales and sales of the
Company's other products do not include a right of return, except for
defective products, and no conditions to customer acceptance exist at the
time of sale. Research and service revenues are recognized as the related
activities are performed or milestones are met, whichever is later.
Realizability of accounts receivable is determined based upon an
understanding of the financial condition of, and prior history with, the
buyer and overall historical experience.
Warranty Costs: Certain of the Company's products are covered by
warranties against defects in material and workmanship for periods of up
to twelve months. The estimated warranty cost is recorded at the time of
sale and is adjusted periodically to reflect actual experience.
Research and Development: Research and development costs relate to both
present and future products and are expensed immediately as incurred.
Stock-Based Compensation: In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Effective January 1,
1996, ENDOcare adopted this pronouncement to account for stock options
and warrants. Under this standard's "fair value" method, compensation
cost is measured based on the fair value of the award computed as of the
grant date and is recognized over the service period of the award, which
usually is the vesting period. In accordance with this standard, the
Company has elected to follow the guidance of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," disclosing
the effect of fair value in Note 10.
Earnings (Loss) Per Share: Earnings (loss) per share data for 1996 is
computed using the weighted average number of common shares and dilutive
common stock options and warrants outstanding. Fully diluted earnings
(loss) per share amounts are not presented because they approximate
primary earnings (loss) per share. Earnings (loss) per share data is not
presented for 1995 or earlier, because at that time ENDOcare was
operating as a division of Medstone. ENDOcare, Inc. shares were not
outstanding at any time during 1995.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS No. 128). This statement is effective for both interim and annual
periods ending after December 31, 1997, and replaces the presentation of
"primary" earnings per share with "basic" earnings per share and the
presentation of "fully diluted" earnings per share with "diluted" earnings
per share. Earlier application is not permitted. When adopted, all
previously reporting earnings per common share amounts must be restated
based on the provision of SFAS No. 128. Management does not expect that
the adoption of SFAS No. 128 will have a material effect on the loss per
share amounts of the Company previously reported.
Fair Value of Financial Instruments: The carrying amount of cash and
cash equivalents approximates fair value for all periods presented
because of the short-term maturity of these financial instruments. The
carrying amounts of all other financial instruments on the balance sheets
approximate fair values.
Use of Estimates: Company management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities in
conformity with generally accepted accounting principles. Actual results
could differ from these estimates.
3. SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Inventories:
------------
Raw materials $ 168,788 $ 213,154
Work in process 2,849 86,130
Finished goods (restated) 47,661 97,441
-------------- --------------
Total inventories $ 219,298 $ 396,725
============== ==============
</TABLE>
- 39 -
<PAGE> 40
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1995 1996
------------- -------------
<S> <C> <C>
Property and Equipment:
-----------------------
Production equipment $ 721,104 $ 201,106
Furniture and fixtures 38,907 49,037
Leasehold improvements --- 7,076
Assets held for disposal (net of reserves) (see note 4) --- 190,573
------------- -------------
Total property and equipment, at cost 760,011 447,792
Accumulated depreciation and amortization (362,046) (269,004)
------------- -------------
Net property and equipment $ 397,965 $ 178,788
============= =============
</TABLE>
4. IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENT: ASSET IMPAIRMENT
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS
121") Effective January 1, 1996, ENDOcare adopted this pronouncement. In
accordance with this standard, the Company reviewed the cash flows being
generated by certain assets which were not expected to be utilized fully
in the Company's operations after its spin-out from Medstone
International, Inc. Based upon this review, effective January 1, 1996,
ENDOcare reduced the value of certain property and equipment by $264,047
and intangible organizational costs by $60,831 to their estimated fair
market values. These adjustments were charged to operations in the
quarter ended March 31, 1996. The identification and measurement of these
impaired assets was primarily a result of the post spin-out business
operations of the Company, not solely the adoption of SFAS 121.
However, the provisions of SFAS 121 were utilized in determining the
amount of the impairment charge. Prior to the adoption of SFAS 121 the
Company periodically analyzed and reviewed its long-term assets for
impairment based on economic factors and continuing benefits of the
specific assets as determined by current and expected operations at that
time.
Assets held for disposal:
The majority of the property and equipment adjustment pertained to laser
machines which were no longer generating sales of the Company's ProLase
laser catheters. At the December 31, 1995 spin-out date, these lasers had
a cost of $441,243. Accumulated depreciation was $234,033. Effective
January 1, 1996, ENDOcare reduced the machines' carrying values to their
estimated disposal value of $50,000, of which $27,374 was realized during
1996. These assets are included in assets held for disposal. Included in
the impairment loss in the statement of operations for the year ended
December 31, 1996 is $157,210 related to these assets.
The $60,831 adjustment to intangible organizational costs is described in
Note 5 below.
5. INTANGIBLE ASSETS
At the end of 1995, Medstone International, Inc. incurred significant
legal, accounting, and other professional expenses in connection with its
distribution of its subsidiaries, ENDOcare and Urogen, to its existing
Medstone shareholders. Medstone elected to capitalize these expenses as
deferred organizational costs on its balance sheet. At the time of the
actual distribution, $60,831 was allocated by Medstone to ENDOcare,
appearing as Intangible Assets on ENDOcare's initial December 31, 1995
Balance Sheet. Effective January 1, 1996, in accordance with the new
accounting standard described in Note 4 above, ENDOcare wrote off these
amounts entirely.
6. CONVERTIBLE LOAN PAYABLE
On August 26, 1996, ENDOcare obtained a two-year $1,500,000 borrowing
facility from four partnerships (the "Partnerships") managed by
Technology Funding Inc., a venture capital firm. Peter F. Bernardoni
is an officer of Technology Funding Inc. and has served as a member of
ENDOcare's Board of Directors since November 1995. At December 31, 1996,
$750,000 was outstanding under this loan.
- 40 -
<PAGE> 41
In connection with entering into this loan, ENDOcare issued to the four
partnerships 10,000 shares of common stock as an origination fee and
warrants to purchase an aggregate of up to 150,000 shares of ENDOcare
common stock. The warrants are exercisable at any time between August 26,
1996 and August 26, 2001, at an exercise price of $3.00 per share, subject
to adjustment. At December 31, 1996, $750,000 was outstanding under this
loan.
The loan accrues interest at the rate of 16% per year, which is due and
payable in arrears on the maturity date. The outstanding principal and
interest under the loan is convertible into common stock of ENDOcare at a
conversion price of $2.50 per share, subject to certain conditions. All
of the obligations under the loan are secured by a security interest in
all present and after acquired personal property of ENDOcare.
On January 27, 1997, the partnerships converted their $750,000 principal
amount and accrued interest into 320,000 shares of common stock. Also,
12,000 additional shares of common stock were issued to the partnerships
as an inducement to convert at that time. The Convertible Loan which
provided an additional $750,000 of borrowing facility was cancelled as of
the conversion date. See Note 13 "Subsequent Events -- Private Placement
and Note Conversion."
7. COLLABORATIVE AGREEMENTS
Brigham: On April 17, 1996, ENDOcare entered into a patent license
agreement with Brigham and Women's Hospital, Inc., ("Brigham") an
affiliate of Harvard University. This agreement gives ENDOcare the
worldwide exclusive right to use Brigham's patented thermal radiation
technology in the Company's planned Hot Stent product. In return,
Brigham received a warrant to purchase up to 10,000 shares of ENDOcare
common stock at a price of $2.875 per share. The warrants are
exercisable at any time between April 17, 1996 and April 17, 2001. In
addition, if ENDOcare successfully brings the product to market, Brigham
may receive royalties on Hot Stent product sales. No royalties were
earned or paid in 1996.
Boston Scientific: On November 18, 1996, ENDOcare signed a distribution
agreement with Boston Scientific Corporation ("Boston Scientific"). This
agreement grants Boston Scientific exclusive worldwide marketing rights
for ENDOcare's CRYOcare system for urology. ENDOcare retains marketing
rights for other applications. In return Boston Scientific has
guaranteed ENDOcare certain minimum purchases of CRYOcare systems over
the next five years subject to certain conditions and renegotiation. In
addition, Boston Scientific has committed to pay ENDOcare four payments
of $250,000 each, based upon meeting certain specified milestones. The
first milestone, based upon contract signing, was received in November
1996, and revenue was recognized in the fourth quarter of 1996. Cash
related to the second milestone was received in December when the second
milestone was achieved, but no revenue was recognized in 1996. Due to
certain continuing obligations of the Company to Boston Scientific as it
relates to this payment, ENDOcare plans to recognize revenue on this
second payment over the three-year period beginning in January 1997.
In addition, under the distribution agreement, Boston Scientific has a
right of first refusal to match any offer received by the Company from a
third party to purchase the assets related to the CRYOcare System, and a
right to buy the assets and technology related to the CRYOcare System at
purchase dates of twenty-four, thirty-six and forty-eight months after
the date that Medicare provides reimbursement for cryosurgical ablation
of the prostate, for a purchase price of 1.7, 1.5 and 1.3 times net sales
for the product for the preceding twelve months, but not less than $40
million, $50 million, and $60 million, respectively.
- 41 -
<PAGE> 42
8. COMMITMENTS AND CONTINGENCIES
Commitments
Prior to September 1995, ENDOcare incurred no outside rental expense,
since it shared facilities with its parent, Medstone. In September 1995,
ENDOcare moved to its own facility in Irvine, California. Rent expense
was $9,184 and $51,391 in 1995 and 1996, respectively. This facility
lease expires on August 31, 1998. Future minimum commitments on this
lease are $40,872 in 1997 and $30,654 in 1998. In February 1997, ENDOcare
signed a new five-year lease for a larger 16,100 square foot facility in
Irvine, California, with contractual rentals of $119,383 in 1997, $153,860
in 1998, $157,727 in 1999, $161,593 in 2000, and $165,460 in 2001,
and $34,639 in 2002. The Company expects to use the old facility for
warehousing of inventory and in the future expects to sublease its
previous facility for its remaining term. However, if the Company is
unsuccessful in finding a sublease tenant, the Company would be liable for
the entire remaining lease payments. If the Company is unable to find a
subtenant or if revenues do not increase sufficiently to compensate for
the increase in lease expenses for the new facility, it would have a
material adverse effect on the Company's cash flow and operating results.
ENDOcare also leases various office equipment, with lease commitments
totaling $11,320 in 1997, $10,557 in 1998, $7,937 in 1999, and $5,358 in
2000.
As of December 31, 1996, ENDOcare has no other facility leases, capital
leases, or other long-term commitments.
Contingencies
On November 27, 1996, Cryomedical Sciences, Inc. ("CMS") filed a complaint
in the Circuit Court for Montgomery County, Maryland against the Company
and Dr. Chang, the Company's Vice President of Research and Development
and former employee of CMS. The suit alleges that Dr. Chang breached his
employment contract with CMS, that the Company tortiously interfered with
the employment contract and the prospective business relations of CMS,
misappropriated trade secrets and confidential information, competed
unfairly with and conspired against CMS. CMS is seeking injunctive relief
and damages of at least $10,000,000 and punitive damages of $20,000,000.
On January 23, 1997 a temporary restraining order was issued by the court
against the Company and Dr. Chang for the limited purpose of preventing
disclosure of certain information at a cryosurgery conference. The order
expired by its terms on February 3, 1997. In addition, at a hearing held
on July 2, 1997, the court refused to issue an injunction against the
Company. At such hearing, the court, however, issued a preliminary
injunction against Dr. Chang that prohibits his employment relating
specifically to the Company's cryosurgery products until a trial on the
merits is held. The injunction was based on language contained in an
employment agreement between Dr. Chang and CMS that prevents him from
working for a CMS competitor. No other injunction or other relief has
been granted to CMS. The Company denies all allegations of wrongdoing in
the complaint and intends to defend the lawsuit vigorously. However, the
costs of defending the lawsuit could be material and there can be no
assurance that damages, which could have a material adverse effect on the
Company, will not be assessed or, if they are assessed, what the possible
range of loss would be. The Company is not a party to any other legal
proceedings.
From time to time, the Company has received correspondence alleging
infringement of proprietary rights of third parties. No assurance can be
given that any relevant claims of third parties would not be upheld as
valid and enforceable, and therefore that the Company could be prevented
from practicing the subject matter claimed or would be required to obtain
licenses from the owners of any such proprietary rights to avoid
infringement. Management does not expect any material adverse effect on
financial condition or the results of operations because of such actions.
- 42 -
<PAGE> 43
9. INCOME TAXES
<TABLE>
<S> <C>
Income tax expense for the year ended December 31, 1996 consisted of:
Current: Federal $ ---
State and local 5,000
Deferred: Federal ---
State and local ---
--------------
Total $ 5,000
==============
</TABLE>
The following table summarizes the tax effects of temporary differences
which give rise to significant portions of the deferred tax assets at
December 31, 1996:
<TABLE>
<S> <C>
Deferred tax assets:
Product and contingent liability reserves
established for book purposes $ 20,000
Fixed asset reserve 123,000
Inventory obsolescence reserve 44,000
Accounts receivable reserve 26,000
Net operating loss carryforwards 131,000
Other 7,000
--------------
Gross deferred tax assets 351,000
Valuation allowance (351,000)
--------------
Net deferred tax assets $ ---
==============
</TABLE>
The valuation allowance increased by $351,000 for the year ended December
31, 1996.
Actual income tax expense differs from amounts computed by applying the
U.S. federal income tax rate of 34% to pretax income as a result of the
following:
<TABLE>
<S> <C>
Computed expected tax benefit $ (519,000)
State income taxes net of federal benefit 2,000
Nondeductible expenses 3,000
Change in valuation allowance 351,000
Change in tax rate with respect to net operating loss 165,000
Other 3,000
--------------
Actual tax expense $ 5,000
==============
</TABLE>
As of December 31, 1996, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $871,000 which are
available to offset future federal taxable income, if any, through the
year 2011. For state income tax purposes, the Company has net operating
loss carryforwards of approximately $267,000 which are available to
offset future state taxable income, if any, through the year 2001.
In accordance with Internal Revenue Code Section 382, the annual
utilization of net operating loss carryforwards and credits existing
prior to a change in control may be limited.
- 43 -
<PAGE> 44
Prior to 1996, ENDOcare's net operating losses and research and
development credits have been included in the consolidated tax returns of
Medstone and have been fully utilized. As a result, ENDOcare had no net
operating losses or research and development credits to offset against
future taxable income at the time of the spin-out from Medstone.
10. STOCK OPTIONS AND WARRANTS
At December 31, 1996, ENDOcare had two stock-based compensation plans, as
described below. Per FASB Statement No. 123, the Company has elected to
apply APB Opinion No. 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation expense has been recognized for
these plans in the Statements of Operations.
The 1995 Stock Plan authorizes the Board or one or more committees which
the Board may appoint from among its members (the "Committee") to grant
options and rights to purchase common stock to employees and certain
consultants and distributors. Options granted under the 1995 Stock Plan
may be either "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, or nonstatutory stock options,
as determined by the Board or the Committee. The exercise price of
options granted under the 1995 Stock Plan is equal to the fair market
value of ENDOcare common stock on the date of grant. Options vest 25% on
the one year anniversary date, with the remaining 75% vesting monthly
over the following three years. Options are exercisable for ten years.
A total of 1,500,000 shares of common stock has been reserved for
issuance under the 1995 Stock Plan. As of December 31, 1996, options to
purchase a total of 1,486,000 shares of the Company's common stock have
been granted under the 1995 Stock Plan.
The 1995 Director Option Plan (the "Director Plan") was adopted by the
Board of Directors (the "Board") in October 1995 and approved by the
shareholders in November 1995. It provides automatic, nondiscretionary
grants of options to ENDOcare's non-employee directors ("Outside
Directors"). The Director Plan provides that each Outside Director is
automatically granted an option to purchase 10,000 shares of ENDOcare
common stock upon his or her initial election or appointment as an
Outside Director. Subsequently, each Outside Director who has served for
at least six months will be granted an additional option to purchase
5,000 shares of ENDOcare common stock on January 1 of each year so long
as he or she remains an Outside Director. The exercise price of options
granted to Outside Directors must be the fair market value of ENDOcare
common stock on the date of grant. Options granted to Outside Directors
have ten-year terms, subject to an Outside Director's continued service
as a director. Options granted to the Outside Directors vest over four
years at the rate of 25% per year. A total of 100,000 shares of common
stock has been reserved for issuance under the Director Plan. As of
December 31, 1996, options to purchase a total of 20,000 shares of the
Company's common stock have been granted under the Director Plan.
- 44 -
<PAGE> 45
The following two tables summarize ENDOcare's option activity:
<TABLE>
<CAPTION>
1 9 9 5 1 9 9 6
------------------------------ -------------------------------
Weighted Avg. Weighted Avg.
Number of Exercise Price Number of Exercise Price
Options Per Option Options Per Option
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year --- 980,000 $0.18
Granted during year 980,000 $0.18 626,000 $2.07
Cancelled during year --- --- (100,000) $2.09
------------- ------------- -------------- --------------
Outstanding, end of year 980,000 $0.18 1,506,000 $0.84
============= ============= ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
--------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.18 1,205,000 8.9 years $0.18 245,000 $0.18
$1.88 6,000 9.2 years $1.88 --- $1.88
$3.25 85,000 9.7 years $3.25 --- $3.25
$3.38 50,000 9.6 years $3.38 --- $3.38
$3.63 75,000 9.3 years $3.63 --- $3.63
$3.75 70,000 9.7 years $3.75 --- $3.75
$3.88 15,000 9.4 years $3.88 --- $3.88
-------------- -------------
$0.18 to $3.88 1,506,000 9.1 years $0.84 245,000 $0.18
============== =============
</TABLE>
No options were exercisable at December 31, 1995.
The following table presents pro forma information as if ENDOcare
recorded compensation cost using the fair value of the issued stock
options using the Black-Scholes valuation model:
<TABLE>
<CAPTION>
1995 1996
----------------- -----------------
<S> <C> <C>
Net loss:
---------
As reported $ (576,917) $ (1,531,448)
Assumed stock compensation cost (4,545) (107,011)
----------------- -----------------
Pro forma, adjusted $ (581,462) $ (1,638,459)
================= =================
Net loss per share:
-------------------
As reported $ (0.27)
Pro forma, adjusted $ (0.29)
</TABLE>
The weighted average fair value of the Company's options at the grant date
was approximately $0.17. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model, with
the following assumptions:
<TABLE>
<CAPTION>
1995 1996
----------------- -----------------
<S> <C> <C>
Stock volatility .3 .3
Risk-free interest rate 8.00% 8.00%
Option term in years 10 years 10 years
Stock dividend yield --- ---
</TABLE>
- 45 -
<PAGE> 46
During 1996, ENDOcare issued warrants to purchase 160,000 shares of the
Company's common stock. Using the Black-Scholes valuation model, the
weighted-average grant-date fair value of these warrants was $0.75 per
share. The Company amortizes these fair values to expense over the
service period of the related warrants. No warrants were issued in 1995
or earlier.
11. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
ENDOcare sells its devices worldwide to distributors of medical devices
and directly to hospitals and other medical professional organizations.
With its November 18, 1996 signing of a distribution agreement with
Boston Scientific (see Note 7), ENDOcare's CRYOcare systems will be
distributed exclusively by Boston Scientific for that product's original
market, urological applications.
Customer credit may be extended based upon evaluation of the customer's
financial condition. In general, on sales of major surgical systems,
such as CRYOcare and Diolase, ENDOcare attempts to secure an up-front
deposit and payment at time of delivery, often through a secured letter
of credit. The Company maintains reserves for credit losses, and Company
management considers such reserves to be adequate based upon historical
experience.
During the year ended December 31, 1996, two customers accounted for over
10% of the Company's revenues. A Canadian distributor accounted for 14%
of total revenues, and Boston Scientific accounted for 12%. At December
31, 1996, four customers accounted for over 10% of gross accounts
receivable. An Australian distributor accounted for 19%, a Michigan
medical group accounted for 16%, a Texas distributor accounted for 17% and
a San Diego distributor accounted for 11%. The Company derived 50% of its
total revenues from foreign customers during the year ended December 31,
1996.
During the year ended December 31, 1995, two customers accounted for over
10% of the Company's revenues. A domestic distributor accounted for 17%
of total revenues, and a Korean distributor accounted for 10%. The
Company derived 38% of its total revenues from foreign customers during
the year ended December 31, 1995. During the year ended December 31,
1994, no single customer accounted for 10% or more of the total revenue,
and the Company derived 16% of its total revenues from foreign customers.
12. RELATED PARTY TRANSACTIONS
Relationship with Medstone
Since its inception, ENDOcare operated as a division of Medstone
International. Prior to becoming an independent corporation in January
1996, ENDOcare received funding and certain administrative services from
Medstone. In return, ENDOcare provided certain research and development
services to Medstone, and Medstone received the cash collected from
ENDOcare's outside sales. With the Distribution of ENDOcare as an
independent company, no Advances were outstanding effective January 1,
1996.
- 46 -
<PAGE> 47
Until October 1995, ENDOcare's operations were located within Medstone's
facilities. Medstone allocated to ENDOcare a charge for rent and other
facilities-related expenses based upon square footage occupied. ENDOcare
and Medstone shared the services of certain employees, whose costs,
including salary, payroll taxes, and group benefits were allocated to
ENDOcare based upon the percentage of time spent on ENDOcare projects.
Expenses other than those related to facilities and employees were
allocated to ENDOcare based upon actual usage, headcount, or other bases.
Medstone management believed the allocations discussed above were made on
a reasonable basis and were representative of the expenses ENDOcare would
have incurred on a stand-alone basis.
During 1996 ENDOcare and Medstone exchanged very little services. During
the first quarter, Medstone billed ENDOcare approximately $3,000 for
administrative services, and ENDOcare billed Medstone approximately $3,000
for engineering and administrative services. Throughout 1996, ENDOcare
provided health insurance to its employees through continuation of
Medstone's policy.
The following table summarizes the transactions reflected in the Advances
from Medstone:
<TABLE>
<CAPTION>
Advances from
Medstone
----------------
<S> <C>
Balance at December 31, 1993 . . . $ 2,055,396
Cash expended by Medstone on behalf of ENDOcare . . . 2,773,226
Expenses allocated to ENDOcare by Medstone . . . . . . 399,290
Expenses allocated to Medstone by ENDOcare . . . . . . (135,316)
Cash collected from ENDOcare net product sales . . . . (2,398,037)
Research revenues recorded by ENDOcare for services
performed on behalf of Medstone . . . . . . . . . (379,309)
----------------
Balance at December 31, 1994 . . . 2,315,250
Cash expended by Medstone on behalf of ENDOcare . . . 1,624,399
Expenses allocated to ENDOcare by Medstone . . . . . . 306,775
Expenses allocated to Medstone by ENDOcare . . . . . . ---
Cash collected from ENDOcare net product sales . . . . (1,038,527)
Research revenues recorded by ENDOcare for services
performed on behalf of Medstone . . . . . . . . . (376,533)
----------------
Balance at December 31, 1995 . . . 2,831,364
Conversion of Advance to equity in Distribution . . . $ (2,831,364)
---------------
Balance at December 31, 1996 . . . $ ---
================
</TABLE>
- 47 -
<PAGE> 48
Relationship with Technology Funding
Peter F. Bernardoni has served on ENDOcare's Board of Directors since
November 1995. He also is a partner of Technology Funding Ltd. and an
officer of Technology Funding Inc., a venture capital group. In August
1996 ENDOcare obtained a two-year $1,500,000 borrowing facility from four
partnerships managed by Technology Funding Inc. The outstanding
principal balance of $750,000 was convertible and, at the option of the
holders, was converted on January 27, 1997 into 300,000 shares of
ENDOcare common stock at a conversion price of $2.50 per share. Interest
on the loan had accrued at a rate of 16% per year, and all $50,000 was
converted into 20,000 shares on that same date at the same $2.50 per
share. Also on January 27, 1997, the four partnerships managed by
Technology Funding Inc. received an additional 12,000 shares ($50,250
total market value) to induce conversion at that time. On August 26,
1996, the partnerships also received warrants for the purchase of up to
150,000 shares of ENDOcare common stock at any time on or before August
26, 2001, at a price of $3.00 per share. The partnerships received an
origination fee of 10,000 shares of common stock on that same date.
13. SUBSEQUENT EVENTS -- PRIVATE PLACEMENT AND NOTE CONVERSION
On January 27, 1997, ENDOcare sold 2,218,714 shares of common stock at a
price of $3.50 per share in a private placement, with Oppenheimer & Co.,
Inc. ("Oppenheimer") acting as placement agent. After expenses, the net
contribution to the Company's capital was approximately $7,050,000.
Expenses deducted from the proceeds include a commission to Oppenheimer
of $543,585 and estimated legal, accounting, and other professional
expenses of $160,000 (actual expenses may be different). In addition,
Oppenheimer received a warrant to purchase 177,497 shares of ENDOcare
common stock for a period of five years at a price of $4.20 per share.
The warrants are exercisable at any time between January 27, 1998 and
January 27, 2002.
Also on January 27, 1997, the four partnerships managed by Technology
Funding Inc. converted the $750,000 outstanding principal amount under
the promissory notes and $50,000 of accrued interest into common stock at
the conversion rate of $2.50 per share. To induce conversion at the same
time as the private placement, the Company issued an additional 12,000
shares of common stock to the partnerships (fair market value of $50,250
at January 27, 1997). At ENDOcare's election, the remaining borrowing
facility was cancelled on that same date.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Net Income (Loss)
Total -------------------------------
Revenue Total Per Share
-------------- -------------- --------------
<S> <C> <C> <C>
Quarter Ended:
- --------------
December 31, 1996 (restated) $ 839,764 $ (192,245) $ (0.03)
September 30, 1996 (restated) 499,073 (367,062) (0.07)
June 30, 1996 419,785 (394,557) (0.07)
March 31, 1996 370,656 (577,584) (0.10)
</TABLE>
- 48 -
<PAGE> 49
ENDOCARE, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Allowance for Reserve for
Doubtful Receivables Inventory Obsolescence
and Sales Returns and Net Realizable Value
----------------- ------------------------
<S> <C> <C>
Balance at December 31, 1993 . . . . . . . . $ 98,600 $ ---
Charges to operations . . . . . . . . . --- ---
Deductions . . . . . . . . . . . . . . (1,494) ---
Other . . . . . . . . . . . . . . . . . --- ---
-------------- --------------
Balance at December 31, 1994 . . . . . . . . 97,106 ---
Charges to operations . . . . . . . . . --- ---
Deductions . . . . . . . . . . . . . . (50,158) ---
Other . . . . . . . . . . . . . . . . . --- ---
-------------- --------------
Balance at December 31, 1995 . . . . . . . . 46,948 ---
Charges to operations . . . . . . . . . 22,687 77,236
Deductions . . . . . . . . . . . . . . (11,496) ---
Other . . . . . . . . . . . . . . . . . --- ---
-------------- --------------
Balance at December 31, 1996 . . . . . . . . $ 58,139 $ 77,236
============== ==============
</TABLE>
- 49 -
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 3 to
the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ENDOCARE, INC.
By: /s/ PAUL W. MIKUS
-----------------------------------
Paul W. Mikus
Chief Executive Officer,
President, Chief Financial
Officer and Treasurer
Dated: July 3, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Amendment No. 3 to the report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on July 3,
1997.
Signature Title
--------- -----
Chief Executive Officer, President,
/s/ PAUL W. MIKUS Chief Financial Officer, and Treasurer
- ------------------------------ (Principal Executive Officer and
Paul W. Mikus Principal Financial and Accounting Officer)
/s/ PETER F. BERNARDONI Director
- ------------------------------
Peter F. Bernardoni
/s/ KEVIN MARINELLI Director
- ------------------------------
Kevin Marinelli
- 50 -
<PAGE> 51
ENDOCARE, INC.
INDEX TO EXHIBITS
<TABLE>
<S> <C>
2.1 Distribution Agreement between the Registrant and Medstone
International, Inc., dated October 31, 1995 (1)
3.1 Certificate of Incorporation of the Company (2)
3.2 Amended and Restated Bylaws of the Company **
4.1 Specimen Certificate of the Company's Common Stock (3)
10.1 Facility Lease on 18 Technology Drive (2)
10.2 Contribution Agreement between Medstone International, Inc.
and the Company, dated October 31, 1995 (1)
10.3 Research and Development Services Agreement between Medstone
International, Inc. and the Company, dated
October 31, 1995 (1)
10.4 Form of Indemnification Agreement (2) *
10.5 1995 Stock Plan (1) *
10.6 1995 Director Option Plan (1) *
10.7 Patent License Agreement between the Company and Brigham and
Women's Hospital, Inc., dated April 17, 1996 (4)
10.8 Form of Convertible Secured Promissory Note due
August 26, 1998, issued by ENDOcare, Inc. in an aggregate
principal amount of $1,500,000, dated August 26, 1996 (5)
10.9 Form of Warrant to purchase an aggregate of 150,000 shares of
common stock, dated August 26, 1996 (5)
10.10 Distributorship Agreement between the Company and Boston
Scientific Corporation, dated November 18, 1996 (6)
10.11 Common Stock Purchase Agreement by and among the Company and
the persons listed on the Schedule of Investors attached
thereto as Exhibit A, dated January 21, 1997 (7)
10.12 Facility Lease dated January 31, 1997 for 7 Studebaker **
10.13 Sublease dated May 19, 1997 for 18 Technology Drive **
11.1 Earnings Per Share Calculation **
23.1 Consent of KPMG Peat Marwick LLP **
23.2 Consent of Ernst & Young LLP **
27.1 Financial Data Schedule **
29.1 ENDOcare, Inc. Information Statement distributed to
shareholders of Medstone International, Inc., dated
February 6, 1996 (8)
- -----------------------------------------------
</TABLE>
(1) Previously filed with the Company's Application for Registration on Form
10-SB under the Securities Exchange Act of 1934, filed on November 14,
1995, and incorporated herein by reference. Each such exhibit had the
same exhibit number in that filing, except that the 1995 Stock Plan was
exhibit number 10.6 and the 1995 Director Option Plan was exhibit 10.7.
(2) Previously filed with Amendment number 1 to Company's Application for
Registration on Form 10-SB, filed on December 21, 1995, and incorporated
herein by reference.
(3) Previously filed with the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
(4) Previously filed with the Company's Current Report on Form 8-K, as
amended, dated April 25, 1996 as filed with the Securities and Exchange
Commission on April 26, 1996, and incorporated herein by reference.
(5) Previously filed with the Company's Current Report on Form 8-K dated
August 26, 1996 as filed with the Securities and Exchange Commission on
September 10, 1996, and incorporated herein by reference.
(6) Previously filed with the Company's Current Report on Form 8-K dated
November 18, 1996 as filed with the Securities and Exchange Commission on
December 3, 1996, and incorporated herein by reference.
(7) Previously filed with the Company's Current Report on Form 8-K dated
January 27, 1997 as filed with the Securities and Exchange Commission on
January 31, 1997, and incorporated herein by reference.
- 51 -
<PAGE> 52
(8) Previously filed on February 9, 1996 by Medstone International, Inc. under
Section 14(c) of the Securities Exchange Act of 1934, and incorporated
herein by reference.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to applicable rules of the Securities and
Exchange Commission.
** Filed herewith.
- 52 -
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
ENDOCARE, INC.
ARTICLE I
OFFICES
Section 1.1 Registered Office. The registered office shall be
located in the City of Wilmington, County of New Castle, State of Delaware or
at such other location within the State of Delaware as the Board of Directors
may from time to time determine or as the business of the corporation may
require.
Section 1.2 Other Offices. The corporation may also have offices
at such other places both within and without the State of Delaware as the Board
of Directors may from time to time determine or the business of the corporation
may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1 Time and Place of Meetings. All meetings of the
stockholders for the election of directors shall be held at such place either
within or without the State of Delaware as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting.
Meetings of stockholders for any other purpose may be held at such time and
place, within or without the State of Delaware, as shall be stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
Section 2.2 Annual Meetings. Annual meetings of stockholders
shall be held at such date and time as shall be designated from time to time by
the Board of Directors and stated in the notice of the meeting, at which the
stockholders shall elect directors by a plurality vote, and transact such other
business as may properly be brought before the meeting. Written notice of the
annual meeting stating the place, date and hour of the meeting shall be given
to each stockholder entitled to vote at such meeting not less than ten (10) nor
more than sixty (60) days before the date of the meeting.
Section 2.3 Special Meetings. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by
statute or by the certificate of incorporation, may be called by the Chairman
of the Board, the president and shall be called by the president or secretary
at the request in writing of a majority of the Board of Directors, or at the
request in writing of holders of shares entitled to cast not less than 10
percent of the votes at such meeting. Such request shall state the purpose or
purposes of the proposed meeting. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice. Written
notice of a special meeting stating the place, date and hour of the meeting and
the purpose or purposes for which the meeting is called, shall be given not
less than ten (10) nor
<PAGE> 2
more than sixty (60) days before the date of the meeting, to each stockholder
entitled to vote at such meeting.
Section 2.4 Quorum. The holders of a majority of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute or by the certificate of incorporation. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to 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. If the adjournment is for more than
thirty (30) days, or if at the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 2.5 Voting. When a quorum is present at any meeting, the
vote of the holders of a majority of the stock having voting power present in
person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of the
statutes or of the certificate of incorporation, a different vote is required
in which case such express provision shall govern and control the decision of
such question.
Section 2.6 Proxies. Unless otherwise provided in the
certificate of incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of
the capital stock having voting power held by such stockholder, but no proxy
shall be voted on after three years from its date, unless the proxy provides
for a longer period.
Section 2.7 List of Stockholders Entitled to Vote. The officer
who has charge of the stock ledger of the corporation shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.
<PAGE> 3
ARTICLE III
DIRECTORS
Section 3.1 Powers. The business of the corporation shall be
managed by or under the direction of its Board of Directors which may exercise
all such powers of the corporation and do all such lawful acts and things as
are not by statute or by the certificate of incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
Section 3.2 Number, Qualification and Election of Directors. The
number of directors may be fixed from time to time by resolution of the Board
of Directors, but shall be not less than three (3) and not more than seven (7).
The initial number of directors which shall constitute the whole Board shall be
three (3) until changed, within the limits specified above, by resolution duly
adopted by the Board of Directors or by a bylaw amending this Section 3.2 duly
adopted by the stockholders. The directors shall be elected at the annual
meeting of the stockholders, except as provided in Section 2 of this Article,
and each director elected shall hold office until his successor is elected and
qualified. Directors need not be stockholders.
Section 3.3 Vacancies and Additional Directorships. Vacancies
and newly created directorships resulting from any increase in the authorized
number of directors may be filled by a majority of the directors then in
office, though less than a quorum, or by a sole remaining director, and the
directors so chosen shall hold office until the next annual election and until
their successors are duly elected and shall qualify, unless sooner displaced.
If there are no directors in office, then an election of directors may be held
in the manner provided by statute. If, at the time of filling any vacancy of
any newly created directorship, the directors then in office shall constitute
less than a majority of the whole Board (as constituted immediately prior to
any such increase), the Court of Chancery may, upon application of any
stockholder or stockholders holding at least ten percent (10%) of the total
number of the shares at the time outstanding having the right to vote for such
directors, summarily order an election to be held to fill any such vacancies or
newly created directorships, or to replace the directors chosen by the
directors then in office.
Section 3.4 Place of Meetings. The Board of Directors of the
corporation may hold meetings, both regular and special, either within or
without the State of Delaware.
Section 3.5 First Meeting. The first meeting of each newly
elected Board of Directors shall be held at such time and place as shall be
fixed by the vote of the stockholders at the annual meeting, and no notice of
such meeting shall be necessary to the newly elected directors in order legally
to constitute the meeting, provided a quorum shall be present. In the event of
the failure of the stockholders to fix the time or place of such first meeting
of the newly elected Board of Directors, or in the event such meeting is not
held at the time and place so
3.
<PAGE> 4
fixed by the stockholders, the meeting may be held at such time and place as
shall be specified in a notice given as hereinafter provided for special
meetings of the Board of Directors, or as shall be specified in a written
waiver signed by all of the directors.
Section 3.6 Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and at such place as shall
from time to time be determined by the Board.
Section 3.7 Special Meetings. Special meetings of the Board may
be called by the president on one (1) day's notice to each director, either
personally or by mail or by telegram; special meetings shall be called by the
president or secretary in like manner and on like notice on the written request
of two directors unless the Board consists of only one director; in which case
special meetings shall be called by the president or secretary in like manner
and on like notice on the written request of the sole director.
Section 3.8 Quorum. At all meetings of the Board a majority of
directors shall constitute a quorum for the transaction of business and the act
of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 3.9 Action by Directors Without a Meeting. Unless
otherwise restricted by the certificate of incorporation or these Bylaws, any
action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting, if all
members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board or committee.
Section 3.10 Telephonic Meetings. Unless otherwise restricted by
the certificate of incorporation or these bylaws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or any committee, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at the meeting.
Section 3.11 Committees. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of a member
of a committee,
4.
<PAGE> 5
the member or members thereof present at any meeting and not disqualified from
voting, whether or not such person or persons constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member.
Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the
business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
certificate of incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a revocation of a dissolution,
removing or indemnifying directors or amending the Bylaws of the corporation;
and, unless the resolution or the certificate of incorporation expressly so
provides, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock. Such committee or committees
shall have such name or names as may be determined from time to time by
resolution adopted by the Board of Directors.
Section 3.12 Committee Rules. Unless the Board of Directors
otherwise provides, each committee designated by the Board of Directors may
adopt, amend and repeal rules for the conduct of its business. In the absence
of a provision by the Board of Directors or a provision in the rules of such
committee to the contrary, a majority of the entire authorized number of
members of such committee shall constitute a quorum for the transaction of
business, the vote of a majority of the members present at a meeting at the
time of such vote if a quorum is then present shall be the act of such
committee, and in other respects each committee shall conduct its business in
the same manner as the Board of Directors conducts its business pursuant to
Article III of these Bylaws. Each committee shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
Section 3.13 Compensation of Directors. Unless otherwise
restricted by the certificate of incorporation or these Bylaws, the Board of
Directors shall have the authority to fix the compensation of directors. The
directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or a stated salary as director. No such
payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
Section 3.14 Approval of Loans to Officers. The corporation may
lend money to, or guarantee any obligation of, or otherwise assist any officer
or other employee of the corporation or of its subsidiary, including any
officer or employee who is a director of the
5.
<PAGE> 6
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.
Section 3.15 Removal of Directors. Unless otherwise restricted by
the certificate of incorporation or by law, any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority
of shares entitled to vote at an election of directors.
ARTICLE IV
NOTICES
Section 4.1 Required Notice. Whenever, under the provisions of
the statutes or of the certificate of incorporation or of these Bylaws, notice
is required to be given to any director or stockholder, it shall not be
construed to mean personal notice, but such notice may be given in writing and
will be deemed to have been duly given if personally delivered or sent by
United States mail (addressed to such director or stockholder, at his address
as it appears on the records of the corporation, with postage thereon prepaid),
or by telegram, telex or facsimile confirmed by letter, and will be deemed
given, unless earlier received, if by mail, at the time when the same shall be
deposited in the United States mail, and if by telegram, telex or facsimile, on
the day such confirmation letter shall be deposited in the United States mail.
Section 4.2 Waiver of Notice of Meetings of Stockholders,
Directors and Committees. Whenever notice is required to be given by law or
under any provision of the Certificate of Incorporation or these Bylaws, a
written waiver thereof, signed by the person entitled to notice, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business
to be transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors, or members of a committee of directors need be
specified in any written waiver of notice unless so required by the Certificate
of Incorporation or these Bylaws. Unless either proper notice of a meeting of
the Board of Directors, or any committee thereof, has been given or else the
persons entitled thereto have waived such notice (either in writing or by
attendance as set forth above), any business transacted at such meeting shall
be null and void.
6.
<PAGE> 7
ARTICLE V
OFFICERS
Section 5.1 Officers. The officers of the corporation shall be a
chairman of the board, a president, a chief financial officer/treasurer, one or
more vice presidents and a secretary. The corporation may also have, at the
discretion of the Board of Directors, one or more assistant vice presidents,
one or more assistant secretaries, one or more assistant treasurers and such
other officers as may be appointed in accordance with the provisions hereof.
One person may hold two or more offices. The salaries of all officers of the
corporation shall be fixed by the Board of Directors.
Section 5.2 Term of Office. The officers of the corporation,
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article V, shall be chosen annually by the Board
of Directors, and each shall hold his office until he shall resign or shall be
removed or otherwise disqualified to serve, or his or her successor shall be
elected and qualified.
Section 5.3 Subordinate Officers. The Board of Directors may
appoint such other officers as the business of the corporation may require,
each of whom shall have such authority and perform such duties as are provided
in these Bylaws or as the Board of Directors or the president may from time to
time specify, and shall hold office until he or she shall resign or shall be
removed or otherwise disqualified to serve.
Section 5.4 Removal and Resignation. Any officer may be removed,
either with or without cause, by the Board of Directors at any regular or
special meeting of the Board of Directors or, except in case of an officer
chosen by the Board of Directors, by any officer upon whom such power or
removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written
notice to the Board of Directors, the chairman of the Board of Directors, if
any, the president or the secretary of the corporation. Any such resignation
shall take effect at the date of the receipt of such notice or at any later
time specified therein; and unless otherwise specified therein, the acceptance
of such resignation shall not be necessary to make it effective.
Section 5.5 Vacancy. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in
the manner prescribed in the Bylaws for the regular appointments to such
office.
7.
<PAGE> 8
Section 5.6 Chairman of the Board. The chairman of the board, if
such an officer be elected, shall, if present, preside at meetings of the Board
of Directors and exercise and perform such other powers and duties as may from
time to time be assigned to him or her by the Board of Directors or as may be
prescribed by these Bylaws. If there is no president, then the chairman of the
board shall also be the chief executive officer of the corporation and shall
have the powers and duties prescribed in Section 5.7 of these Bylaws.
Section 5.7 President. Subject to such supervisory powers, if
any, as may be given by the Board of Directors to the chairman of the board, if
there be such an officer, the president shall be the chief executive officer of
the corporation and shall, subject to the control of the Board of Directors,
have general supervision, direction and control of the business and the
officers of the corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors. He or she shall have the general
powers and duties of management usually vested in the office of president of a
corporation and shall have such other powers and duties as may be prescribed by
the Board of Directors or these Bylaws.
Section 5.8 Vice Presidents. The vice presidents shall exercise
and perform such powers and duties with respect to the administration of the
business and affairs of the corporation as may from time to time be assigned to
each of them by the chief executive officer, the president, by the Board of
Directors or as is prescribed by these Bylaws. In the absence or disability of
the president, the vice presidents, in order of their rank as fixed by the
Board of Directors, or if not ranked, the vice president designated by the
Board of Directors, shall perform all of the duties of the president and when
so acting shall have all of the powers of and be subject to all the
restrictions upon the president.
Section 5.9 Secretary and Assistant Secretary. The secretary
shall keep, or cause to be kept, a book of minutes at the principal office for
the transaction of the business of the corporation, or such other place as the
Board of Directors may order, of all meetings of directors and stockholders,
with the time and place of holding, whether regular or special, and if special,
how authorized and the notice thereof given, the names of those present at
directors' meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the
principal offices for the transaction of the business of the corporation or at
the office of the corporation's transfer agent, a share register, or a
duplicate share register, showing the names of the stockholders and their
addresses, the number and classes of shares held by each; the number and date
of certificates issued for the same; and the number and date of cancellation of
every certificate surrendered for cancellation.
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The secretary shall give, or cause to be given,
notice of all the meetings of the stockholders and of the Board of Directors
required by these Bylaws or by law to be given, and he or she shall keep the
seal of the corporation in safe custody, and shall have such other powers and
perform such other duties as may be prescribed by the Board of Directors or
these Bylaws. If for any reason the secretary shall fail to give notice of any
special meeting of the Board of Directors called by one or more of the persons
identified in Section 3.7 of Article III of these Bylaws, or if he or she shall
fail to give notice of any special meeting of the stockholders called by one or
more of the persons identified in Section 2.3 of Article II of these Bylaws,
then any such person or persons may give notice of any such special meeting.
Section 5.10 Chief Financial Officer and Treasurer. The chief
financial officer shall keep and maintain, or cause to be kept and maintained,
adequate and correct accounts of the properties and business transactions of
the corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, surplus and shares. Any surplus,
including earned surplus, paid-in surplus and surplus arising from a reduction
of capital, shall be classified according to source and shown in a separate
account. The books of account shall at all reasonable times be open to
inspection by any director. The chief financial officer shall be the treasurer
of the corporation.
The chief financial officer shall deposit, or cause
to be deposited, all moneys and other valuables in the name and to the credit
of the corporation with such depositories as may be designated by the Board of
Directors. He or she shall disburse the funds of the corporation as may be
ordered by the Board of Directors, shall render to the president and to the
directors, whenever they request it, an account of all of his or her
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or the Bylaws.
Section 5.11 Assistant Treasurer. The assistant treasurer, or, if
there is more than one, the assistant treasurers, in the order determined by
the stockholders or Board of Directors (or if there be no such determination,
then in the order of their election), shall, in the absence of the treasurer or
in the event of his or her inability or refusal to act, perform the duties and
exercise the powers of the treasurer and shall perform such other duties and
have such other powers as the Board of Directors or the stockholders may from
time to time prescribe.
ARTICLE VI
INDEMNITY
Section 6.1 Indemnity of Directors and Officers. The corporation
shall, to the maximum extent and in the manner permitted by the General
Corporation Law of Delaware, indemnify each of its directors and officers
against expenses (including attorneys' fees),
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judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding, arising by reason of the fact that
such person is or was an agent of the corporation. For purposes of this
Section 6.1, a "director" or "officer" of the corporation includes any person
(i) who is or was a director or officer of the corporation, (ii) who is or was
serving at the request of the corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, or (iii)
who was a director or officer of a corporation which was a predecessor
corporation of the corporation or of another enterprise at the request of such
predecessor corporation.
Section 6.2 Indemnification of Others. The corporation shall
have the power, to the extent and in the manner permitted by the General
Corporation Law of Delaware, to indemnify each of its employees and agents
(other than directors and officers) against expenses (including attorneys'
fees), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding, arising by reason of the fact that
such person is or was an agent of the corporation. For purposes of this
Section 6.2, an "employee" or "agent" of the corporation (other than a director
or officer) includes any person (i) who is or was an employee or agent of the
corporation, (ii) who is or was serving at the request of the corporation as an
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, or (iii) who was an employee or agent of a corporation which
was a predecessor corporation of the corporation or of another enterprise at
the request of such predecessor corporation.
Section 6.3 Insurance. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of the General
Corporation Law of Delaware.
ARTICLE VII
STOCK
Section 7.1 Stock Certificates; Partly Paid Shares. The shares
of the corporation shall be represented by certificates, provided that the
Board of Directors of the corporation may provide by resolution or resolutions
that some or all of any or all classes or series of its stock shall be
uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or
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vice-chairman of the Board of Directors, or the president or vice-president,
and by the treasurer or an assistant treasurer, or the secretary or an
assistant secretary of such corporation representing the number of shares
registered in certificate form.
The corporation may issue the whole or any part of
its shares as partly paid and subject to call for the remainder of the
consideration to be paid therefor. Upon the face or back of each stock
certificate issued to represent any such partly paid shares, upon the books and
records of the corporation in the case of uncertificated partly paid shares,
the total amount of the consideration to be paid therefor and the amount paid
thereon shall be stated. Upon the declaration of any dividend on fully paid
shares, the corporation shall declare a dividend upon partly paid shares of the
same class, but only upon the basis of the percentage of the consideration
actually paid thereon.
Section 7.2 Special Designation on Certificates. If the
corporation is authorized to issue more than one class of stock or more than
one series of any class, then the powers, the designations, the preferences,
and the relative, participating, optional or other special rights of each class
of stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights shall be set forth in full or summarized on
the face or back of the certificate that the corporation shall issue to
represent such class or series of stock; provided, however, that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware,
in lieu of the foregoing requirements there may be set forth on the face or
back of the certificate that the corporation shall issue to represent such
class or series of stock a statement that the corporation will furnish without
charge to each stockholder who so requests the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
Section 7.3 Facsimile Signature. Any of or all the signatures on
the certificate may be facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he or she were such officer, transfer agent or registrar at
the date of issue.
Section 7.4 Lost Certificates. The corporation may issue a new
certificate of stock in the place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed, and the corporation may require
the owner of the lost, stolen or destroyed certificate, or his legal
representative, to give the corporation a bond sufficient to indemnify it
against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
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Section 7.5 Transfer Agents and Registrars. The Board of
Directors may appoint one or more transfer agents or transfer clerks, and one
or more registrars, who may be the same person, and may be the secretary of the
corporation, or an incorporated bank or trust company, either domestic or
foreign, who shall be appointed at such times and places as the requirements of
the corporation may necessitate and the Board of Directors may designate.
Section 7.6 Transfer of Stock. Upon surrender to the corporation
or the transfer agent of the corporation of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignation or
authority to transfer, it shall be the duty of the corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
Section 7.7 Fixing Record Date for Determination of Stockholders
of Record. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record
date is adopted by the Board of Directors, and which record date shall not be
more than sixty (60) nor less than ten (10) days before the date of such
meeting. If no record date is fixed by the Board of Directors, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
Section 7.8 Dividends, Distributions and Other Stockholder
Rights. In order that the corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty (60) days prior to
such action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
Section 7.9 Registered Stockholders. The corporation shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends, and to vote as such owner, and to
hold liable for calls and assessments a person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
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whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
Section 7.10 Maintenance and Inspection of Records. The
corporation shall, either at its principal executive office or at such place or
places as designated by the Board of Directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws, as amended to date,
accounting books and other records.
Any stockholder of record, in person or by attorney
or other agent, shall, upon written demand under oath stating the purpose
thereof, have the right during the usual hours for business to inspect for any
proper purpose the corporation's stock ledger, a list of its stockholders, and
its other books and records and to make copies or extracts therefrom. A proper
purpose shall mean a purpose reasonably related to such person's interest as a
stockholder. In every instance where an attorney or other agent is the person
who seeks the right to inspection, the demand under oath shall be accompanied
by a power of attorney or such other writing that authorizes the attorney or
other agent to so act on behalf of the stockholder. The demand under oath
shall be directed to the corporation at its registered office in Delaware or at
its principal place of business.
Section 7.11 Inspection by Directors. Any director shall have the
right to examine the corporation's stock ledger, a list of its stockholders and
its other books and records for a purpose reasonably related to his or her
position as a director. The Court of Chancery is hereby vested with the
exclusive jurisdiction to determine whether a director is entitled to the
inspection sought. The Court may summarily order the corporation to permit the
director to inspect any and all books and records, the stock ledger, and the
stock list and to make copies or extracts therefrom. The Court may, in its
discretion, prescribe any limitations or conditions with reference to the
inspection, or award such other and further relief as the Court may deem just
and proper.
Section 7.12 Annual Statement. The Board of Directors shall
present at each annual meeting, and at any special meeting of the stockholders
when called for by vote of the stockholders, a full and clear statement of the
business and condition of the corporation.
Section 7.13 Representation of Shares of Other Corporations. The
chairman of the board, the president, any vice president, the treasurer, the
secretary or assistant secretary of this corporation, or any other person
authorized by the Board of Directors or the president or a vice president, is
authorized to vote, represent and exercise on behalf of this corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this corporation. The authority granted herein may be
exercised either by such person directly or by any other person authorized to
do so by proxy or power of attorney duly executed by such person having the
authority.
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ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Checks. All checks for demands for money and notes
of the corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
Section 8.2 Execution of Corporate Contracts and Instruments.
The Board of Directors, except as otherwise provided in these Bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
Section 8.3 Dividends. Dividends upon the capital stock of the
corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation.
Section 8.4 Reserve of Funds. Before payment of any dividend,
there may be set aside out of any funds of the corporation available for
dividends such sum or sums as the directors from time to time, in their
absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for repairing or maintaining any property of the corporation,
or for such other purpose as the directors shall think conducive to the
interest of the corporation, and the directors may modify or abolish any such
reserve in the manner in which it was created.
Section 8.5 Fiscal Year. The fiscal year of the corporation
shall be fixed by resolution of the Board of Directors and may be changed by
the Board of Directors.
Section 8.6 Seal. The corporate seal shall have inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal." The seal may be used by causing it or a facsimile thereof to
be impressed or affixed or reproduced or otherwise.
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ARTICLE IX
AMENDMENTS
Section 9.1 Amendments. These Bylaws may be altered, amended or
repealed, or new Bylaws may be adopted, by the stockholders entitled to vote,
or by the Board of Directors when such power is conferred upon the Board of
Directors by the Certificate of Incorporation, at any regular meeting of the
stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors, if notice of such alteration,
amendment, repeal or adoption of new Bylaws is contained in the notice of such
special meeting. If the power to adopt, amend or repeal Bylaws is conferred
upon the Board of Directors by the certificate of incorporation, it shall not
divest or limit the power of the stockholders to adopt, amend or repeal Bylaws.
15.
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EXHIBIT 10.12
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only,
January 31, 1997 is made by and between Irvine East Partners Lot 35 ("Lessor")
and Endocare, Inc., a Delaware corporation ("Lessee"), (collectively, the
"PARTIES," or individually, a "PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 7 Studebaker, Irvine Spectrum located in the County of Orange , State
of California , and generally described as (describe briefly the nature of the
property and, if applicable, the "PROJECT", if the property is located within a
Project) An approximate 16,111 square foot freestanding building and all the
parking area (AP #591-023-04) ("PREMISES"). (See also Paragraph 2)
1.3 TERM: Five (5) years and 0 months ("ORIGINAL TERM") commencing March
15, 1997 ("COMMENCEMENT DATE") and ending March 14, 2002 ("EXPIRATION DATE").
(See also Paragraph 3.)
1.4 EARLY POSSESSION: upon fully executed and delivered leases ("EARLY
POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $ see Addendum #50 per month ("BASE RENT"), payable on the
15th day of each month commencing April 15, 1997. (See also Paragraph 4)
[ ] If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $12,566.58 as Base Rent for the period
March 15, 1997 - April 14, 1997.
1.7 SECURITY DEPOSIT: $ 12,566.58 ("SECURITY DEPOSIT"). (See also
Paragraph 5)
1.8 AGREED USE: Administrative office, assembly, research and development
and
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distribution of medical components. (See also Paragraph 6)
1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise
stated herein. (See also Paragraph 8)
1.10 REAL ESTATE BROKERS: (See also Paragraph 15)
(A) REPRESENTATION: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction (check applicable boxes):
/X/ Voit Commercial Brokerage represents Lessor exclusively ("LESSOR'S
BROKER"); or
/X/ CB Commercial Real Estate Group represents Lessee exclusively ("LESSEE'S
BROKER");
/ / ______________________________________ represents both Lessee and Lessor
("DUAL AGENCY").
(B) PAYMENT TO BROKERS: Upon execution and delivery of this Lease
by both Parties, Lessor shall pay to the Broker the fee agreed to in their
separate written agreement (or if there is no such agreement, the sum of as per
separate agreement % of the total Base Rent for the brokerage services rendered
by said Broker).
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("GUARANTOR"). (See also Paragraph 37)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 57 and Exhibits "A" and "B" , all of which
constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual square footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom clean
and free of debris on the Commencement Date or the Early Possession Date,
whichever first occurs ("START DATE"), and, so long as the required service
contracts described in Paragraph 7.1(b) below are obtained by Lessee within
thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on said date and that the structural
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elements of the roof, bearing walls and foundation of any buildings on the
Premises (the "BUILDING") shall be free of material defects. If a non-compliance
with said warranty exists as of the Start Date, Lessor shall, as Lessor's sole
obligation with respect to such matter, except as otherwise provided in this
Lease, promptly after receipt of written notice from Lessee setting forth with
specifity the nature and extent of such non-compliance, rectify same at Lessor's
expense. If, after the Start Date, Lessee does not give Lessor written notice of
any non-compliance with this warranty within: (i) one year as to the surface of
the roof and the structural portions of the roof, foundations and bearing walls,
(ii) six (6) months as to the HVAC systems, (iii) thirty (30) days as to the
remaining systems and other elements of the Building, correction of such
non-compliance shall be the obligation of Lessee at Lessee's sole cost and
expense.
2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises
comply with all applicable laws, covenants or restrictions of record, building
codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect on the
Start Date. Said warranty does not apply to the use to which Lessee will put the
Premises or to any Alterations or Utility installations (as defined in Paragraph
7.3(a)) made or to be made by Lessee. NOTE:Lessee is responsible for determining
whether or not the zoning is appropriate for Lessee's intended use, and
acknowledges the past uses of the Premises may no longer be allowed. If the
Premises does not comply with said warranty, Lessor shall, except as otherwise
provided, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify the same
at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within six (6) months following the Start
Date, correction of that non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense. If the Applicable Requirements are hereafter
changed (as opposed to being in existence at the Start Date, which is addressed
in Paragraph 6.2(e) below) so as to require during the term of this Lease the
construction of an addition to or an alteration of the Building, the remediation
of any Hazardous Substance, or the reinforcement or other physical modification
of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the
cost of such work as follows:
(A) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall be
fully responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last two (2) years of this Lease and the cost
thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this
Lease unless Lessor notifies Lessee, in writing, within ten (10) days after
receipt of Lessee's termination notice that Lessor has elected to pay the
difference between the actual cost thereof and the amount equal to six (6)
months' Base Rent. If Lessee elects termination, Lessee shall immediately cease
the use of the Premises which requires such Capital Expenditure and deliver to
Lessor written notice specifying a termination date at least ninety (90) days
thereafter. Such termination date shall, however, in no event be earlier than
the last day that Lessee could legally utilize the Premises without commencing
such Capital Expenditure.
(B) If such Capital Expenditure is not the result of the specific
and unique use of the Premises by Lessee (such as, governmentally mandated
seismic modifications), then Lessor and Lessee shall allocate the obligation to
pay for such costs pursuant to the provisions of
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Paragraph 7.1(c); provided, however, that if such Capital Expenditure is
required during the last two years of this Lease or if Lessor reasonably
determines that it is not economically feasible to pay its share thereof, Lessor
shall have the option to terminate this Lease or if Lessor reasonably determines
that it is not economically feasible to pay its share thereof, Lessor shall have
the option to terminate this Lease upon ninety (90) days prior written notice to
Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after
receipt of Lessor's termination notice that Lessee will pay for such Capital
Expenditure. If Lessor does not elect to terminate, and fails to tender its
share of any such Capital Expenditure, Lessee may advance such funds and deduct
same, within Interest, from Rent until Lessor's share of such costs have been
fully paid. If Lessee is unable to finance Lessor's share, or if the balance of
the Rent due and payable for the remainder of this Lease is not sufficient to
fully reimburse Lessee on an offset basis, Lessee shall have the right to
terminate this Lease upon thirty (30) days written notice to Lessor.
(C) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.
2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised
by Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including, but not limited to the electrical HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use, (b) Lessee has
made such investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to the said matters
other than as set forth in this Lease. In addition, Lessor acknowledges that:
(a) Broker has made no representations, promises or warranties concerning
Lessee's ability to honor the Lease or suitability to occupy the Premises, and
(b) it is Lessor's sole responsibility to investigate the financial capability
and/or suitability of all proposed tenants.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. TERM.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early
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possession. All other terms of this Lease, however, (including, but not limited
to the obligations to pay Real Property Taxes and insurance premiums and to
maintain the Premises) shall, however, be in effect during such period. Any such
early possession shall not affect the Expiration Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within sixty (60)
days after the Commencement Date, Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is received by Lessor within said ten (10) day
period, Lessee's right to cancel shall terminate. Except as otherwise provided,
if possession is not tendered to Lessee when required and Lessee does not
terminate this Lease, as aforesaid, any period of rent abatement that Lessee
would otherwise have enjoyed shall run from the date of delivery of possession
and continue for a period equal to what Lessee would otherwise have enjoyed
under the terms hereof, but minus any days of delay caused by the acts or
omissions of Lessee. If possession of the Premises is not delivered within four
(4) months after the Commencement Date, this Lease shall terminate unless other
agreements are reached between Lessor and Lessee, in writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession
of the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee
shall be required to perform all of its obligations under this Lease from and
after the Start Date, including the payment of Rent, notwithstanding Lessor's
election to withhold possession pending receipt of such evidence of insurance.
Further, if Lessee is required to perform any other conditions prior to or
concurrent with the Start Date, the Start Date shall occur but Lessor may elect
to withhold possession until such conditions are satisfied.
4. RENT.
4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("RENT").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due. Rent for any period during the term hereof which is
for less than one (1) full calendar month shall be prorated based upon the
actual number of days of said month. Payment of Rent shall be made to Lessor at
its address stated herein or to such other persons or place as Lessor may from
time to time designate in writing. Acceptance of a payment which is less than
the amount then due shall not be a waiver of Lessor's rights to the balance of
such Rent, regardless of Lessor's endorsement of any check so stating.
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5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Base Rent, or otherwise
Defaults under this Lease, Lessor may use, apply or retain all or any portion of
said Security Deposit for the payment of any amount due Lessor or to reimburse
or compensate Lessor for any liability, cost, expense, loss or damage which
Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or
any portion of said Security Deposit, Lessee shall within ten (10) days after
written request therefor deposit monies with Lessor sufficient to restore said
Security Deposit to the full amount required by this Lease. Should the Agreed
Use be amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase the
Security Deposit to the extent necessary, in Lessor's reasonable judgment, to
account for any increased wear and tear that the Premises may suffer as a result
thereof. If a change in control of Lessee occurs during this Lease and following
such change the financial condition of Lessee is, in Lessor's reasonable
judgment, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said change in financial condition.
Lessor shall not be required to keep the Security Deposit to separate from its
general accounts. Within fourteen (14) days after the expiration or termination
of this Lease, if Lessor elects to apply the Security Deposit only to unpaid
Rent, and otherwise within thirty (30) days after the Premises have been vacated
pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest or to be prepayment
for any monies to be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the Agreed
Use, or any other legal use which is reasonably comparable thereto, and for no
other purpose. Lessee shall not use or permit the use of the Premises in a
manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to, neighboring properties. Lessor
shall not unreasonably withhold or delay its consent to any written request for
a modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request given written notification of same, which
notice shall include an explanation of Lessor's objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(A) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation or release, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority; or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include,
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but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or
any products, by-products or fractions thereof. Lessee shall not engage in any
activity in, or on the Premises which constitutes a Reportable Use of Hazardous
Substances without the express prior written consent of Lessor and timely
compliance (at Lessee's expense) with all Applicable Requirements. "Reportable
Use" shall mean (i) the installation or use of any above or below ground storage
tank, (ii) the generation, possession, storage, use, transportation, or disposal
of a Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with, any
governmental authority, and/or (iii) the presence at the Premises of a Hazardous
Substance with respect to which any Applicable Requirements requires that a
notice be given to persons entering or occupying the Premises or neighboring
properties. Notwithstanding the foregoing, lessee may use any ordinary and
customary materials reasonably required to be used in the normal course of the
Agreed Use, so long as such use is in compliance with all Applicable
Requirements, is not a Reportable Use, and does not expose the Premises or
neighboring property to any meaningful risk of contamination or damage or expose
Lessor to any liability therefor. In addition, Lessor may condition its consent
to any Reportable Use upon receiving such additional assurances as Lessor
reasonably deems necessary to protect itself, the public, the Premises and/or
the environment against damage, contamination, injury and/or liability,
including, but not limited to, the installation (and removal on or before Lease
expiration or termination) of protective modifications (such as concrete
encasements) and/or increasing the Security Deposit.
(B) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor, and provide
Lessor with a copy of any report, notice, claim or other documentation which it
has concerning the presence of such Hazardous Substance.
(C) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any Hazardous
Substance brought onto the Premises during the term of this Lease, by or for
Lessee, or any third party.
(D) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless
from and against any and all loss of rents and/or damages, liabilities,
judgments, claims, expenses, penalties, and attorney's and consultant's fees
arising out of or involving any Hazardous Substance brought onto the Premises by
or for Lessee, or any third party (provided, however, that Lessee shall have no
liability under this Lease with respect to underground migration of any
Hazardous Substance under the Premises from adjacent properties). Lessee's
obligations shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement, and
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shall survive the expiration or earlier termination of this Lease. NO
TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE
SHALL RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO
HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE
TIME OF SUCH AGREEMENT.
(E) LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages which existed as a
result of Hazardous Substances on the Premises prior to the Start Date or which
are caused by the gross negligence, or intentional acts of Lessor, its agents or
employees. Lessor's obligations, as and when required by the Applicable
Requirements, shall include, but not be limited to, the cost of investigation,
removal, remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease.
(F) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date. Lessee shall
cooperate fully in any such activities at the request of Lessor, including
allowing Lessor and Lessor's agents to have reasonable access to the Premises at
reasonable times in order to carry out Lessor's investigative and remedial
responsibilities.
(G) LANDLORD TERMINATION OPTION. If a Hazardous Substance
Condition occurs during the term of this Lease, unless Lessee is legally
responsible therefor (in which case Lessee shall make the investigation and
remediation thereof required by the Applicable Requirements and this Lease shall
continue in full force and effect, but subject to Lessor's rights under
Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i)
investigate and remediate such Hazardous Substance Condition, if required, as
soon as reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to remediate
such condition exceeds twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater, give written notice to Lessee, within thirty (30) days
after receipt by Lessor of knowledge of the occurrence of such Hazardous
Substance Condition, of Lessor's desire to terminate this Lease as of the date
sixty (60) days following the date of such notice. In the event Lessor elects to
give a termination notice, Lessee may, within ten (10) days thereafter, give
written notice to Lessor of Lessee's commitment to pay the amount by which the
cost of the remediation of such Hazardous Substance Condition exceeds an amount
equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater. Lessee shall provide Lessor with said funds or satisfactory assurance
thereof within thirty (30) days following such commitment. In such event, this
Lease shall continue in full force and effect, and Lessor shall proceed to make
such remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise
provided in this Lease, Lessee, shall at Lessee's sole expense, fully,
diligently and in a timely
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manner, materially comply with all Applicable Requirements, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants which relate in any
manner to the Premises, without regard to whether said requirements are now in
effect or become effective after the Start Date. Lessee shall, within ten (10)
days after receipt of Lessor's written request, provide Lessor with copies of
all permits and other documents, and other information evidencing Lessee's
compliance with any Applicable Requirements specified by Lessor, and shall
immediately upon receipt, notify Lessor in writing (with copies of any documents
involved) of any threatened or actual claim, notice, citation, warning,
complaint or report pertaining to or involving the failure of Lessee or the
Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender and consultants
shall have the right to enter into the Premises at any time, in the case of an
emergency, and otherwise at reasonable times, for the purpose of inspecting the
condition of the Premises and for verifying compliance by Lessee with this
Lease. The cost of any such inspections shall be paid by Lessor, unless a
violation of Applicable Requirements, or a contamination is found to exist or be
imminent, or the inspection is requested or ordered by a governmental authority.
In such case, Lessee shall upon request reimburse Lessor for the cost of such
inspections, so long as such inspection is reasonably related to the violation
or contamination.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 Lessee's Obligations.
(A) IN GENERAL. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including, but
not limited to, all equipment or facilities such as plumbing, HVAC, electrical,
lighting facilities, boilers, pressure vessels, fire protection system,
fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors,
windows, doors, plate glass, skylights, landscaping, driveways, parking lots,
fences, retaining walls, signs, sidewalks and parkways located in, on, or
adjacent to the Premises. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices,
specifically including the procurement and maintenance of the service contracts
required by Paragraph 7.1(b) below. Lessee's obligations shall include
restorations, replacements or renewals when necessary to keep the Premises and
all improvements thereon or a part thereof in good order, condition and state of
repair. Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition consistent with the
exterior appearance of other similar facilities of comparable age and size in
the vicinity, including, when necessary, the exterior repainting of the
Building.
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(B) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure
and maintain contracts, with copies to Lessor, in customary form and substance
for, and with contractors specializing and experienced in the maintenance of the
following equipment and improvements, ("Basic Elements"), if any, as and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire protection systems, (iv) landscaping and irrigation systems,
(v) roof covering and drains, and (vi) asphalt and parking lots, (vii)
clarifiers and (viii) any other equipment, if reasonably required by Lessor.
(C) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set
forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee' failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of replacing
such Basic Elements, then such Basic Elements shall be replaced by Lessor, and
the cost thereof shall be prorated between the Parties and Lessee shall only be
obligated to pay, each month during the remainder of the term of this Lease, on
the date on which Base Rent is due, an amount equal to the product of
multiplying the cost of such replacement by a fraction, the numerator of which
is one, and the denominator of which is the number of months of the useful life
of such replacement as such useful life is specified pursuant to Federal income
tax regulations or guidelines for depreciation thereof (including interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its obligation
at any time.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation),
it is intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, or the equipment
therein, all of which obligations are intended to be that of the Lessee except
as provided in paragraphs 52 and 55 of Addendum. It is the intention of the
Parties that the terms of this Lease govern the respective obligations of the
Parties as to maintenance and repair of the Premises, and they expressly waive
the benefit of any statute now or hereafter in effect to the extent it is
inconsistent with the terms of this Lease.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(A) DEFINITIONS; CONSENT REQUIRED. The term "Utility Installations"
refers to all floor and window coverings, air lines, power panels, electrical
distribution, security and fire protection systems, communication systems,
lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises.
The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can
be removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned
Alterations and/or Utility Installations" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor pursuant
to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations to the Premises without Lessor's prior written consent. Lessee
may, however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof) without such consent but upon notice to Lessor, as
long as they are not visible from the outside, do not involve
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puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during this Lease as extended does not exceed $50,000 in
the aggregate or $10,000 in any one year.
(B) CONSENT. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with detailed plans. Consent shall be deemed conditioned
upon Lessee's: (i) acquiring all applicable governmental permits: (ii)
furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee' posting an
additional Security Deposit with Lessor.
(C) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanic's or
materialsmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility. If Lessee shall contest the validity of any such
lien, claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof. If Lessor shall require, Lessee shall furnish a surety bond in an
amount equal to one and one-half times the amount of such contested lien, claim
or demand, indemnifying Lessor against liability for the same. If Lessor elects
to participate in any such action, Lessee shall pay Lessor's attorneys' fees and
costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(A) OWNERSHIP. Subject to Lessor's right to require removal or elect
ownership as hereinafter provided, all Alterations and Utility Installations
made by Lessee shall be the property of Lessee, but considered a part of the
Premises. Lessor may, at any time, elect in writing to be the owner of all or
any specified part of the Lessee Owned Alterations and Utility Installations.
Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned
Alterations and Utility Installations shall, at the expiration or termination of
this Lease, become the property of Lessor and be surrendered by Lessee with the
Premises.
(B) REMOVAL. By delivery to Lessee of written notice from Lessor not
later than ninety (90) days prior to the end of the term of this Lease, Lessor
may require that any or all Lessee Owned Alterations or Utility Installations or
tenant improvements other than initial improvements (i.e., new carpet, tile and
paint) be removed by the expiration or termination of this Lease. Lessor may
require the removal at any time of all or any part of any Lessee Owned
Alterations
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or Utility Installations, or tenant improvements other than initial improvements
made without the required consent.
(C) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the
Expiration Date or any earlier termination date, with all of the improvements,
parts and surfaces thereof broom clean and free of debris, and in good operating
order, condition and state of repair, ordinary wear and tear excepted. "Ordinary
wear and tear" shall not include any damage or deterioration that would have
been prevented by good maintenance practice. Lessee shall repair any damage
occasioned by the installation, maintenance or removal of Trade Fixtures,
furnishings, and equipment as well as the removal of any storage tank installed
by or for Lessee, and the removal, replacement, or remediation of any soil,
material or groundwater contaminated by Lessee. Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee. The failure by Lessee to
timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express
written consent of Lessor shall constitute a holdover under the provisions of
Paragraph 26 below.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance required
under Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per
occurrence. Premiums for policy periods commencing prior to or extending beyond
the Lease term shall be prorated to correspond to the Lease term. Payment shall
be made by Lessee to Lessor within ten (10) days following receipt of an
invoice.
8.2 LIABILITY INSURANCE.
(A) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial
General Liability Policy of Insurance protecting Lessee and Lessor against
claims for bodily injury, personal injury and property damage based upon or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $2,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises
Endorsement' and contain the "Amendment of the Pollution Exclusion Endorsement"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligations hereunder. All
insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(B) CARRIED BY LESSOR. Lessor shall maintain liability insurance
as described in Paragraph 8.2(a), in addition to, and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
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8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(A) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss payable
to Lessor and to any Lender insuring loss or damage to the Premises. The amount
of such insurance shall be equal to the full replacement cost of the Premises,
as the same shall exist from time to time, or the amount required by any
Lenders, but in no event more than the commercially reasonable and available
insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations, Trade Fixtures, and Lessee's personal
property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor.
If the coverage is available and commercially appropriate, such policy or
policies shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a Lender),
including coverage for debris removal and the enforcement of any Applicable
Requirements requiring the upgrading, demolition, reconstruction or replacement
of any portion of the Premises as the result of a covered loss. Said policy or
policies shall also contain an agreed valuation provision in lieu of any
coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $10,000 per occurrence, and Lessee shall be liable for such deductible
amount in the event of an Insured Loss.
(B) RENTAL VALUE. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable to Lessor and
any Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee
shall be liable for any deductible amount in the event of such loss.
(C) ADJACENT PREMISES. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to the
Premises, the Lessee shall pay for any increase in the premiums for the property
insurance of such building or buildings if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(A) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $10,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and
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Utility Installations. Lessee shall provide Lessor with written evidence that
such insurance is in force.
(B) BUSINESS INTERRUPTION. If reasonably available, and if Lessor
requests Lessee to do so in writing, Lessee shall obtain and maintain loss of
income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(C) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender, Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior to
Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand. Such policies shall be for a term of at least one year, or the length of
the remaining term of this Lease, whichever is less. If either Party shall fail
to procure and maintain the insurance required to be carried by it, the other
Party may, but shall not be required to, procure and maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages against the other, for loss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.
8.7 INDEMNITY. Except for Lessor's sole negligence, Lessee shall
indemnify, protect, defend and hold harmless the Premises, Lessor and its
agents, Lessor's master or ground lessor, partners and Lenders, from and against
any and all claims, loss of rents and/or damages, liens, judgments, penalties,
attorneys and consultants fees, expenses and/or liabilities arising out of,
involving, or in connection with, the use and/or occupancy of the Premises by
Lessee. If any action or proceeding is brought against Lessor by reason of any
of the foregoing matters, Lessee shall upon notice defend the same at Lessee's
expense by counsel reasonably satisfactory to
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Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be defended or indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a part
or from other sources or places. Lessor shall not be liable for any damages
arising from any act or neglect of any other tenant of Lessor. Notwithstanding
Lessor's negligence or breach of this Lease, Lessor shall under no circumstances
be liable for injury to Lessee's business or for any loss of income or profit
therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(A) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in six (6) months or
less from the date of the damage or destruction. Lessor shall notify Lessee in
writing within thirty (30) days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.
(B) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility Installations,
which cannot reasonably be repaired in six (6) months or less from the date of
the damage or destruction. Lessor shall notify Lessee in writing within thirty
(30) days from the date of the damage or destruction as to whether or not the
damage is Partial or Total.
(C) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a).
respective of any deductible amounts or coverage limits involved.
(D) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements, and
without deduction for depreciation.
(E) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
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9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds (except as to
the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the fact
that, by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover the same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said then (10)
day period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (i) make
such restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall
not be entitled to reimbursement of any funds contributed by Lessee to repair
any such damages or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damages as soon as reasonably possible at
Lessor's expense, in which this Lease shall continue in full force and effect,
or (ii) terminate this Lease by giving written notice to Lessee within thirty
(30) days after receipt by Lessor of knowledge of the occurrence of such damage.
Such termination shall be effective sixty (60) days following the date of such
notice. In the event Lessor elects to terminate this Lease, Lessee shall have
the right within ten (10) days after receipt of the termination notice to give
written notice to Lessor of Lessee's commitment to pay for the repair of such
damage without reimbursement from Lessor. Lessee shall provide Lessor with said
funds or satisfactory assurance thereof within thirty (30) days after making
such commitment. In such event this Lease shall continue in full force and
effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee,
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Lessor shall have the right to recover Lessor's damages from Lessee except as
provided in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during such period, then this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(A) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which Lessee
is not responsible under this Lease, the Rent payable by Lessee for the period
required for the repair, remediation or restoration of such damage shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired, but not to exceed the proceeds received from the Rental Value
insurance. All other obligations of Lessee hereunder shall be performed by
Lessee, and Lessor shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein.
(B) REMEDIES. If Lessor shall be obligated to repair or restore
the Premises and does not commence, in a substantial and meaningful way, such
repair or restoration within ninety (90) days after such obligation shall
accrue, Lessee may, at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of which Lessee
has actual notice, of Lessee's election to terminate this Lease on a date not
less than sixty (60) days following the giving of such notice. If Lessee gives
such notice and such repair or restoration is not commenced within thirty (30)
days thereafter, this Lease shall terminate as of the date specified in said
notice. If the repair or restoration is commenced within said thirty (30) days
thereafter, this Lease shall terminate as of the date specified in said notice.
If the repair or restoration is commenced within said thirty (30) days, this
Lease shall continue in full force and effect. "Commence" shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
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9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant
to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "Real
Property Taxes" shall include any form of assessment; real estate, general,
special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect power to tax and
where the funds are generated with reference to the building address and where
the proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. The
term "Real Property Taxes" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring during
the term of this Lease, including but not limited to, a change in the ownership
of the Premises.
10.2
(A) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes shall cover any
period of time prior to or after the expiration or termination of this Lease,
Lessee's share of such taxes shall be prorated to cover only that portion of the
tax bill applicable to the period that this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment. If Lessee shall fail to pay any required
Real Property Taxes, Lessor shall have the right to pay the same, and Lessee
shall reimburse Lessor therefor upon demand.
(B) ADVANCE PAYMENT. In the event Lessee incurs a late charge on
any Rent payment, Lessor may, at Lessor's option, estimate the current Real
Property Taxes, and require that such taxes be paid in advance to Lessor by
Lessee, either: (i) in a lump sum amount equal to the installment due, at least
twenty (20) days prior to the applicable delinquency date, or (ii) monthly in
advance with the payment of the Base Rent. If Lessor elects to require payment
monthly in advance, the monthly payment shall be an amount equal to the amount
of the estimated installment of taxes divided by the number of months remaining
before the month in which said installment becomes delinquent. When the actual
amount of the applicable tax bill
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is known, the amount of such equal monthly advance payments shall be adjusted as
required to provide the funds needed to pay the applicable taxes. If the amount
collected by Lessor is insufficient pay such Real Property Taxes when due,
Lessee shall pay Lessor, upon demand such additional sums as are necessary to
pay such obligations. All moneys paid to Lessor under this Paragraph may be
intermingled with other moneys of Lessor and shall not bear interest. In the
event of a Breach by Lessee in the performance of its obligations under this
Lease, then an balance of funds paid to Lessor under the provisions of this
Paragraph may at the option of Lessor, be treated as an additional Security
Deposit.
10.3 JOINT ASSESSMENT. If the Premisses are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(A) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "assign or assignment") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(B) A change in the control of Lessee shall constitute an
assignment requiring consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(C) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale, acquisition, financing,
transfer, leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount greater than
twenty-five percent (25%) of such Net Worth as it was represented at the time of
the execution of this Lease or at the time of the most recent assignment to
which Lessor has
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consented, or as it exists immediately prior to said transaction or transactions
constituting such reduction, whichever was or is greater, shall be considered an
assignment of this Lease to which Lessor may withhold its consent. "Net Worth of
Lessee" shall mean the net worth of Lessee (excluding any guarantors)
established under generally accepted accounting principles.*
(D) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a noncurable
Breach, Lessor may either; (i) terminate this Lease, or (ii) upon thirty (30)
days written notice, increase the monthly Base Rent to one hundred ten percent
(110%) of the Base Rent then in effect. Further, in the event of such Breach and
rental adjustment, (i) the purchase price of any option to purchase the Premises
held by Lessee shall be subject to similar adjustment to one hundred ten percent
(110%) of the price previously in effect, and (iii) all fixed and non-fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
(E) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2. TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(A) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.
(B) Lessor may accept Rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(C) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(D) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first
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*Notwithstanding anything contained herein, Lessee shall have the right to
assign this lease to any affiliated entity ("defined as any entity in which
Lessee maintains at least a 50% ownership interest") or to any entity with which
Lessee may merge or consolidate.
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exhausting Lessor's remedies against any other person or entity responsible
therefore to Lessor, or any security held by Lessor.
(E) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a fee of
$1,000 or ten percent (10%) of the current monthly Base Rend applicable to the
portion of the Premises which is the subject of the proposed assignment or
sublease, whichever is greater, as consideration for Lessor's considering and
processing said request. Lessee agrees to provide Lessor with such other or
additional information and/or documentation as may be reasonably requested.
(F) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease be deemed to
have assumed an agreed to conform and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLIANCE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(A) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or
any assignment of such sublease, nor by reason of the collection of Rent, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligations to such sublessee. Lessee shall rely upon any
such notice from Lessor and shall pay all Rents to Lessor without any obligation
or right to inquire as to whether such Breach exits, notwithstanding any claim
from Lessee to the contrary.
(B) In the event of a Breach by Lessee, Lessor may, at its
option, require sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time of
the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any prior Defaults or Breaches
of such sublessor.
(C) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
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(D) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(E) Lessor shall deliver a copy of any notice of default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the space period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH, REMEDIES.
13.1 DEFAULT; BREACH. A "Default" is defined as a failure by the Lessee
to comply with or perform any of the terms, covenants, conditions or rules under
this Lease. A "Breach" is defined as the occurrence of one or more of the
following Defaults, and the failure of Lessee to cure such Default within any
applicable grace period:
(A) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or where
the coverage of the property insurance described in Paragraph 8.3 is jeopardized
as a result thereof, or without providing reasonable assurances to minimize
potential vandalism.
(B) The failure of Lessee to make any payment of Rent or any
other monetary payment required to be made by Lessee hereunder, whether to
Lessor or to a third party, when due, to provide reasonable evidence of
insurance or surety bond, or to fulfill any obligation under this Lease which
endangers or threatens life or property, where such failure continues for a
period of three (3) business days following written notice to Lessee.
(C) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service contracts,
(iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.
(D) A Default by Lessee as to the terms covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(E) The occurrence of any of the following events: (i) the making
of any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute
thereto (unless, in the case of a petition filed
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against Lessee, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(F) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.
(G) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee, equals
or exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties
or obligations, within ten (10) days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:
(A) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises,
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expenses of reletting, including necessary renovation and alteration of the
Premises, reasonable attorneys' fees, and that portion of any leasing commission
paid by Lessor in connection with this Lease applicable to the unexpired term of
this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the immediately preceding sentence shall be computed by
discounted such amount at the discount rate of the Federal Reserve Bank of the
District within which the Premises are located at the time of award plus one
percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of
this Lease shall not waive Lessor's right to recover damages under Paragraph 12.
If termination of this Lease is obtained through the provisional remedy of
unlawful detainer, Lessor shall have the right to recover in such proceeding any
unpaid Rent and damages as are recoverable therein, or Lessor may reserve the
right to recover all or any part thereof in a separate suit. If a notice and
grace period required under Paragraph 13.1 was not previously given, a notice to
pay rent or quit, or to perform or quit given to Lessee under the unlawful
detainer statute shall also constitute the notice required by Paragraph 13.1. In
such case, the applicable grace period required by Paragraph 13.1 and the
unlawful detainer statutes hall run concurrently, and the failure of Lessee to
cure the Default within the greater of the two such grace periods shall
constitute both an unlawful detainer and a Breach of this Lease entitling Lessor
to the remedies provided for in this Lease and/or by said statute.
(B) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or assign,
subject only to reasonable limitations. Acts of maintenance, efforts to relet,
and/or the appointment of a receiver to protect the Lessor's interests, shall
not constitute a termination of the Lessee's right to possession.
(C) Pursue any other remedy now or hereafter available under the
laws or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or other
charges, or for the giving or paying by Lessor to or for Lessee of any cash or
other bonus, inducement or consideration for Lessee's entering into this Lease,
all of which concessions are herein after referred to as "INDUCEMENT
PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such Inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
of Rent will cause Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and
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accounting charges, and late charges which may be imposed upon Lessor by any
Lender. Accordingly, if any Rent shall not be received by Lessor within five (5)
days after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten percent
(10%) of each such overdue amount. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the costs Lessor will incur
by reason of such late payment. Acceptance of such late charge by Lessor shall
in no event constitute a waiver of Lessee's Default or Breach with respect to
such overdue amount, nor prevent the exercise of any of the other rights and
remedies granted hereunder. In the event that a late charge is payable
hereunder, whether or not collected, for three (3) consecutive installments of
Base Rent, then notwithstanding any provision of this Lease to the contrary,
Base Rent shall, at Lessor's option, become due and payable quarterly in
advance.
13.5 INTEREST. Any monetary payment due Lessor hereunder, other than late
charges, not received by Lessor within thirty (30) days following the date on
which it was due, shall bear interest from the thirty-first (31st) day after it
was due. The interest ("Interest") charged shall be equal to the prime rate
charged by the largest state chartered bank in the state in which the Premises
are located plus 4%, but shall not exceed the maximum rate allowed by law.
Interest is payable in addition to the potential late charge provided for in
Paragraph 13.4.
13.6 BREACH OF LESSOR.
(A) NOTICE OF BREACH. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Lessor shall not be in breach if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.
(B) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "CONDEMNATION"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building, or more than
twenty-five percent (25%) of the land area not occupied by any building, is
taken by Condemnation, Lessee may, at Lessee's option, to be exercised in
writing within ten
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(10) days after Lessor shall have given Lessee written notice of such taking (or
in the absence of such notice, within ten (10) days after the condemning
authority shall have taken possession) terminate this Lease as of the date the
condemning authority takes such possession. If Lessee does not terminate this
Lease in accordance with the foregoing, this Lease shall remain in full force
and effect as to the portion of the Premises remaining, except that the Base
Rent shall be reduced in proportion to the reduction in utility of the Premises
caused by such Condemnation. Condemnation awards and/or payments shall be the
property of Lessor, whether such award shall be made as compensation for
diminution in value of the leasehold, the value of the part taken, or for
severance damages; provided, however, that Lessee shall be entitled to any
compensation for Lessee's relocation expenses, loss of business goodwill and/or
Trade Fixtures, without regard to whether or not this Lease is terminated
pursuant to the provisions of this Paragraph. All alterations and Utility
Installations made to the Premises by Lessee, for purposes of Condemnation only,
shall be considered the property of the Lessee and Lessee shall be entitled to
any and all compensation which is payable therefor. In the event that this Lease
is not terminated by reason of the Condemnation, Lessor shall repair any damage
to the Premises caused by such Condemnation.
15. BROKERS' FEE.
15.1 ADDITIONAL COMMISSION. In addition to the payments owed pursuant to
Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in
writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee
acquires any rights to the Premises or other premises owned by Lessor and
located within the same Project, if any, within which the Premises is located,
(c) if Lessee remains in possession of the Premises, with the consent of Lessor,
after the expiration of this Lease, or (d) if Base Rent is increased, whether by
agreement or operation of an escalation clause herein, then Lessor shall pay
Brokers a fee in accordance with the schedule of said Brokers in effect at the
time of the execution of this Lease.
15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Each Broker shall be a third party beneficiary of the provisions of
Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts
due as and for commissions pertaining to this Lease when due, then such amounts
shall accrue Interest. In addition, if Lessor fails to pay any amounts to
Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and
Lessee of such failure and if Lessor fails to pay such amounts within ten (10)
days after said notice, Lessee shall pay said monies to its Broker and offset
such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a
third party beneficiary of any commission agreement entered into by and/or
between Lessor and Lessor's Broker.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee and
Lessor each represent and warrant to the other that it has had no dealings with
any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such
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unnamed broker, finder or other similar party by reason of any dealings or
actions of the indemnifying Party, including any costs, expenses, attorneys'
fees reasonably incurred with respect thereto.
16. TENANCY STATEMENT/ESTOPPEL CERTIFICATE.
16.1 Each Party (as "Responding Party") shall within ten (10) days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party an estoppel certificate in
writing, in form similar to the then most current "Tenancy Statement" form
published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. DEFINITION OF LESSOR. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, the original Lessor under this Lease, and
all subsequent holders of the Lessor's interest in this Lease shall remain
liable and responsible with regard to the potential duties and liabilities of
Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above.
18. SEVERABILITY. The invalidity of any provision of this Lease ,as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and defer to calendar days.
20. LIMITATION ON LIABILITY. Except with respect to Lessor's fraud, gross
negligence or willful misconduct, the obligations of Lessor under this Lease
shall not constitute personal obligations of Lessor, the individual partners of
Lessor or its or their individual partners, directors, officers or shareholders,
and Lessee shall look to the Premises, and to no other assets of Lessor, for the
satisfaction of any liability of Lessor with respect to this Lease, and shall
not seek recourse
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against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification thereto shall be limited to an amount up to the fee received by
such Broker pursuant to this Lease; provided, however, that the foregoing
limitation on each Broker's liability shall not be applicable to any gross
negligence or willful misconduct of such Broker.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by courier) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantee next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the Postal Service or courier. Notices transmitted by
facsimile transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt, provided a copy is also delivered via delivery or mail.
If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed
received on the next business day.
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24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessee may be accepted by Lessor on account of moneys or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the parties, but rather
according to its fair meaning as a whole, as if both parties had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security devices shall have no liability or
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obligation to perform any of the obligations of Lessor under this Lease. Any
Lender may elect to have this Lease and/or any Option granted hereby superior to
the lien of its Security device by giving written notice thereof to Lessee, this
Lease and such Options shall be deemed prior to such Security Device,
notwithstanding the relative dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not; (i) be liable
for any at or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership; (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor prior to as well as after the execution of this Lease, Lessee's
subordination of this Lease shall be subject to receiving a commercially
reasonable non-disturbance agreement (a "Non-Disturbance Agreement") from the
Lender which Non-Disturbance Agreement provides that Lessee's possession of the
Premises, and this Lease, including any options to extend the term hereof, will
not be disturbed so long as Lessee is not in Breach hereof and attorns to the
record owner of the Premises. Further, within sixty (60) days after the
execution of this Lease, Lessor shall use its commercially reasonable efforts to
obtain a Non-Disturbance Agreement from the holder of any pre-existing Security
Device which is secured by the Premises. In the event that Lessor is unable to
provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee
may, at Lessee's option, directly contact Lessor's lender and attempt to
negotiate for the execution and delivery of a Non-Disturbance Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fees award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and
expenses incurred in the preparation and service of notices of Default and
consultations in connection
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therewith, whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessee and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "FOR SALE" signs and
Lessor may during the last six (6) months of the term hereof place on the
Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on or
about the Premises any ordinary "FOR SUBLEASE" sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction
upon the Premises without Lessor's prior written consent. Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
permit an auction.
34. SIGNS. Except for ordinary "FOR SUBLEASE" signs, Lessee shall not place any
sign upon the Premises without Lessor's prior written consent. All signs must
comply with Applicable Requirements.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the
consent of a party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
shall be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgement that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition by Lessor at the
time of consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within ten (10) business days following such request.
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37. GUARANTOR.
37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in
the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.
37.2 DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.
39. OPTIONS.
39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term of
or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(A) Lessee shall have no right to exercise an Option: (i) during
the period commencing with the giving of any notice of Default and continuing
until said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof given Lessee), (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been
given three (3) or more notices of Default, whether or not the Defaults are
cured, during the twelve (12) month period immediately preceding the exercise of
the Option.
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(B) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(C) An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term, (i)
Lessee fails to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (ii)
Lessor gives to Lessee three (3) or more notices of separate Default during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay.
44. AUTHORITY. If either Party hereto is a corporation, trust, limited liability
company, partnership, or similar entity, each individual executing this Lease on
behalf of such entity represents and warrants that he or she is duly authorized
to execute and deliver this Lease on its behalf. Each party shall, within thirty
(30) days after request, deliver to the other party satisfactory evidence of
such authority.
Initials PM
Page - 33 - PM
<PAGE> 34
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease [ ] IS [ ] IS NOT attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
Initials PM
Page - 34 - PM
<PAGE> 35
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS
TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF
THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES
ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE
THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD
INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF
HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND
OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR
LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN
CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE
REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE
PREMISES IS LOCATED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at:Irvine, CA Executed at:Endocare
- ---------------------------------- -------------------------------------
on: 2-15-97 on: 2-14-97
- ---------------------------------- -------------------------------------
By LESSOR: By LESSEE:
Irvine East Partners, Lot 35
- ---------------------------------- -------------------------------------
- ---------------------------------- -------------------------------------
By:/s/ Philip MacDonald By:/s/ Paul Mikus
- ---------------------------------- -------------------------------------
Name Printed:Philip MacDonald Name Printed:Paul Mikus
- ---------------------------------- -------------------------------------
Title:General Partner Title:CEO
- ---------------------------------- -------------------------------------
By: By:
- ---------------------------------- -------------------------------------
Initials PM
Page - 35 - PM
<PAGE> 36
Name Printed: Name Printed:
- ---------------------------------- -------------------------------------
Title: Title:
- ---------------------------------- -------------------------------------
Address: Address:
- ---------------------------------- -------------------------------------
- ---------------------------------- -------------------------------------
Telephone: (714) 241-7705 Telephone: (714) 450-1410
------------------------ --------------------------
Facsimile: (714) 241-0904 Facsimile: (714) 450-1413
------------------------ --------------------------
Federal ID No.95-3702299 Federal ID No.33-0618093
- ---------------------------------- -------------------------------------
BROKER: BROKER:
- ---------------------------------- -------------------------------------
Executed at: Executed at:
- ---------------------------------- -------------------------------------
on: on:
- ---------------------------------- -------------------------------------
By: By:
- ---------------------------------- -------------------------------------
Title: Title:
- ---------------------------------- -------------------------------------
Address: Address:
- ---------------------------------- -------------------------------------
- ---------------------------------- -------------------------------------
Telephone: Telephone:
- ---------------------------------- -------------------------------------
Facsimile: Facsimile:
- ---------------------------------- -------------------------------------
Federal ID No. Federal ID No.
- ---------------------------------- -------------------------------------
NOTE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So.
Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777.
Fax No. (213) 687-8616.
FORM 204N-R-6/96
Page - 36 -
(C)Copyright 1996 - By American Industrial Real Estate Association. All rights
reserved. No part of these works may be reproduced in any form without
permission in writing.
<PAGE> 37
7 STUDEBAKER (DIAMOND) IRVINE SPECTRUM, CA
[FLOOR PLAN]
FORM 204N-R-6/96
Page - 36 -
(C)Copyright 1996 - By American Industrial Real Estate Association. All rights
reserved. No part of these works may be reproduced in any form without
permission in writing.
<PAGE> 38
ADDENDUM TO THE LEASE BETWEEN
IRVINE EAST PARTNERS LOT 35 ("LESSOR") AND
ENDOCARE, INC. ("LESSEE")
DATED JANUARY 31, 1997
FOR THE PROPERTY LOCATED AT
7 STUDEBAKER, IRVINE SPECTRUM, CA
50. BASE RENT: The base rent shall be paid as follows:
<TABLE>
<CAPTION>
MONTHS AMOUNT
- ----------------- ------------------
<S> <C>
1-12 $ 12,566.58
13-24 12,888.80
25-36 13,211.02
37-48 13,533.24
49-60 13,855.46
</TABLE>
51. TENANT IMPROVEMENTS: Lessor shall provide Lessee with an allowance of
$30,000.00 allocated towards tenant improvements per Lessee's discretion.
This allowance shall be used for general refurbishment (i.e., new carpet,
tile and repaint). Lessor shall provide one-half (1/2) of the allowance
within fifteen (15) days after full execution of leases and will provide
one-half (1/2) upon completion of tenant improvements.
52. STRUCTURAL REPAIRS: Lessor shall be responsible for all expenses related
to structural repairs (i.e., roof, foundation and exterior walls) during
the term of the lease.
53. SUBLEASING/ASSIGNMENT: Lessee shall have the right to sublease or assign
said premises with Lessor's consent. Lessor shall not unreasonably
withhold consent to sublease and shall have absolute discretion over all
assignments.
54. AMERICANS WITH DISABILITIES ACT: Lessor, at Lessor's sole cost and
expense, shall be responsible for ensuring that the building, throughout
the lease term and all options, is in full compliance with all applicable
ADA codes and requirements, so long as such compliance is not a result of
Lessee's specific use.
55. CAPITAL IMPROVEMENTS: Unless damage is caused by Lessee, Lessor will be
responsible for all costs of all necessary Capital Improvements. Capital
Improvements required by future law will be amortized over the useful and
life of said improvements. Lessee shall be responsible for any capital
improvements required as a result of Lessee's specific use in the
building.
<PAGE> 39
56. WARRANTY: Lessor shall warranty the operating systems of the building
(i.e., HVAC system, mechanical, electrical, plumbing and lighting) for
the first six (6) months of the lease.
57. SIGNAGE: Lessee, at Lessee's sole cost and expense, shall have the right
to install building top and/or monument signage. Signage shall conform to
Irvine Spectrum CC&R's and City of Irvine sign criteria.
AGREED & ACCEPTED:
LESSOR: Irvine East Partners Lot 35 LESSEE: ENDOcare, Inc., a
Delaware Corporation
By: /s/ Philip MacDonald By: /s/ Paul W. Mikus
------------------------------ ------------------------------
Its: General Partner Its: CEO
------------------------------ ------------------------------
Date: 2-15-97 Date: 2-11-97
------------------------------ ------------------------------
- 39 -
<PAGE> 40
Voit
Commercial Brokerage
NOTICE TO OWNERS AND PROSPECTIVE TENANTS
AND BUYERS OF REAL PROPERTY REGARDING
THE AMERICANS WITH DISABILITIES ACT
Pleased be advised that an Owner and/or Tenant of real property may be subject
to the Americans with Disabilities Act (the "ADA"), a Federal Law codified at 42
USC Section 12101 et seq. Among other requirements of the ADA that could apply
to your property, Title III of the ADA requires Owners and Tenants of "public
accommodations" to remove barriers to access by disabled persons or provided
auxiliary aids and services for hearing, vision or speech impaired persons by
January 26, 1992. The regulations under Title III of the ADA are codified at 28
CFR Part 36.
We recommend that you and your attorney review the ADA and the regulations, and,
if appropriate, your proposed lease or purchase agreement, to determine if this
law would apply to you, and the nature of the requirements. These are legal
issues. YOU ARE RESPONSIBLE FOR CONDUCTING YOUR OWN INDEPENDENT INVESTIGATION OF
THESE ISSUES. VOIT COMMERCIAL BROKERAGE CANNOT GIVE YOU LEGAL ADVICE ON THESE
ISSUES.
Please acknowledge your receipt of this notice by signing and dating it below.
Thank you.
By: /s/ Paul W. Mikus 2-11-97
------------------------------ ------------------------------
Signature Date
By: /s/ Philip MacDonald 2-15-97
------------------------------ ------------------------------
Signature Date
Exhibit "A"
<PAGE> 1
EXHIBIT 10.13
SUBLEASE
[LOGO] CB Commercial Real Estate Group, Inc.
Brokerage and Management
Licensed Real Estate Broker
1. PARTIES.
This Sublease, dated May 19, 1997, is made between Endocare, Inc.
("Sublessor"), and XL Vision, a Delaware corporation ("Sublessee").
2. MASTER LEASE.
Sublessor is the lessee under a written lease dated September 20,
1995, wherein Irvine Technology Partners II ("Lessor") leased to
Sublessor the real property located in the City of Irvine, County of
Orange, State of California, described as Technology Plaza I, 18
Technology, Suites 133 and 134, Irvine, consisting of approximately
5,161 rentable square feet in a larger multi-tenant, R&D, and
business park ("Master Premises"). Said lease has been amended by
the following amendments:
The First Amendment to Lease dated April 29, 1996
said lease and amendments are herein collectively referred to as the
"Master Lease" and are attached hereto as Exhibit "A."
3. PREMISES.
Sublessor hereby subleases to Sublessee on the terms and conditions
set forth in this Sublease the following portion of the Master
Premiss ("Premises"): Approximately 5,161 rentable square feet. The
address is 18 Technology, Suites 133 and 134, Irvine, California
92718.
4. WARRANTY BY SUBLESSOR.
Sublessor warrants and represents to Sublessee that the Master Lease
has not been amended or modified except as expressly set forth
herein, that Sublessor is not now, and as of the commencement of the
Term hereof will not be, in default or breach of any of the
provisions of the Master Lease, and that Sublessor has no knowledge
of any claim by Lessor that Sublessor is in default or breach of any
of the provisions of the Master Lease.
<PAGE> 2
5. TERM.
The Term of this Sublease shall commence on June 1, 1997
("Commencement Date"), or when Lessor consents to this Sublease (if
such consent is required under the Master Lease), whichever shall as
occur, and end on September 30, 1998 ("Termination Date"), unless
otherwise sooner terminated in accordance with the provisions of
this Sublease. In the event the Term commences on a date other than
the Commencement Date, Sublessor and Sublessee shall execute a
memorandum setting forth the actual date of commencement of the
Term. Possession of the Premises ("Possession") shall be delivered
to Sublessee on the commencement of the Term. If for any reason
Sublessor does not deliver Possession to Sublessee on the
commencement of the Term, Sublessor shall not be subject to any
liability for such failure, the Termination Date shall not be
extended by the delay, and the validity of this Sublease shall not
be impaired, but rent shall abate until delivery of Possession.
Notwithstanding the foregoing, if Sublessor has not delivered
Possession to Sublessee within thirty (30) days after the
Commencement Date then at any time thereafter and before delivery of
Possession, Sublessee may give written notice to Sublessor of
Sublessee's intention to cancel this Sublease. Said notice shall set
forth an effective date for such cancellation which shall be at
least ten (10) days after delivery of said notice to Sublessor. If
Sublessor delivers Possession to Sublessee on or before such
effective date, this Sublease shall remain in full force and effect.
If Sublessor fails to deliver Possession to Sublessee on or before
such effective date, this Sublease shall be cancelled, in which case
all consideration previously paid by Sublessee to Sublessor on
account of this Sublease shall be returned to Sublessee, this
Sublease shall thereafter be of no further force or effect and
Sublessor shall have no further liability to Sublessee on account of
such delay or cancellation. If Sublessor permits Sublessee to take
Possession prior to the commencement of the Term, such early
Possession shall not advance the Termination Date and shall be
subject to the provisions of this Sublease, including without
limitation the payment of rent.
6. RENT.
6.1 Minimum Rent. Sublessee shall pay to Sublessor as
minimum rent, without deduction, setoff, notice, or
demand, at 7 Studebaker, Irvine, California 92718, or at
such other place as Sublessor shall designate from time
to time by notice to Sublessee, the sum of three
thousand seven hundred sixteen and 0/100 Dollars
($3,716.00) per month, in advance on the first day of
each month of the Term. Sublessee shall pay to Sublessor
upon execution of this Sublease the sum of three
thousand seven hundred sixteen and 0/100 Dollars
($3,716.00) as rent for June 1- June 30, 1997. If the
Term begins or ends on a day other than the first or
last day of a month, the rent for the partial months
shall be prorated on a pier diem basis.
Additional provisions:
- 2 -
<PAGE> 3
6.2 Operating Costs. If the Master Lease requires Sublessor
to pay to Lessor all or a portion of the expenses of
operating the building and/or project of which the
Premises are a part ("Operating Costs"), including but
not limited to taxes, utilities or insurance, then
Sublessee shall pay to Sublessor as additional rent, one
hundred percent (100%) of the amounts payable by
Sublessor for Operating Costs incurred during the Term.
Such additional rent shall be payable as and when
Operating Costs are payable by Sublessor to Lessor. If
the Master Lease provides for the payment by Sublessor
of Operating Costs on the basis of an estimate thereof,
then as and when adjustments between estimated and
actual Operating Costs are made under the Master Lease,
the obligations of Sublessor and Sublessee hereunder
shall be adjusted in a like manner, and if any such
adjustment shall occur after the expiration or earlier
termination of the Term, then the obligations of
Sublessor and Sublessee under this Subsection 6.2 shall
survive such expiration or termination. Sublessor shall,
upon request by Sublessee, furnish Sublessee with copies
of all statements submitted by Lessor of actual or
estimated Operating Costs during the Term.
7. SECURITY DEPOSIT.
Sublessee shall deposit with Sublessor upon execution of this
Sublease the sum of three thousand seven hundred sixteen and 00/100
Dollars ($3,716.00) as security for Sublessee's faithful performance
of Sublessee's obligations hereunder ("Security Deposit"). If
Sublessee fails to pay rent or other charges when due under this
Sublease, or fails to perform any of its other obligations
hereunder, Sublessor may use or apply all or any portion of the
Security Deposit for the payment of any rent or other amount then
due hereunder and unpaid, for the payment of any other sum for which
Sublessor may become obligated by reason of Sublessee's default or
breach, or for any loss or damage sustained by Sublessor as a result
of Sublessee's default or breach. If Sublessor so uses any portion
of the Security Deposit, Sublessee shall, within ten (10) days after
written demand by Sublessor, restore the Security Deposit to the
full amount originally deposited, and Sublessee's failure to do so
shall constitute a default under this Sublease. Sublessor shall not
be required to keep the Security Deposit separate from its general
accounts, and shall have no obligation or liability for payment of
interest on the Security Deposit. In the event Sublessor assigns its
interest in this Sublease, Sublessor shall deliver to its assignee
so much of the Security Deposit as is then held by Sublessor. Within
ten (10) days after the Term has expired, or Sublessee has vacated
the Premises, or any final adjustment pursuant to Subsection 6.2
hereof has been made, whichever shall last occur, and provided
Sublessee is not then in default of any of its obligations
hereunder, the Security Deposit, or as much thereof as had not the
theretofore been applied by Sublessor, shall be returned to
Sublessee or to the last assignee, if any, of Sublessee's interest
hereunder.
- 3 -
<PAGE> 4
8. USE OF PREMISES.
The Premises shall be used and occupied only for general office, and
storage of medical products, and for no other use or purpose.
9. ASSIGNMENT AND SUBLETTING.
Sublessee shall not assign this Sublease or further sublet all or
any part of the Premises without the prior written consent of
Sublessor (and the consent of Lessor, if such is required under the
terms of the Master Lease).
10. OTHER PROVISIONS OF SUBLEASE.
All applicable terms and conditions of the Master Lease are
incorporated into and made a part of this Sublease as if Sublessor
were the lessor thereunder, Sublessee the lessee thereunder, and the
Premises the Master Premises, except for the following:
___________________________________________________________________
___________________________________________________________________
Sublessee assumes and agrees to perform the lessee's obligations
under the Master Lease during the Term to the extent that such
obligations are applicable to the Premises, except that the
obligation to pay rent to Lessor under the Master Lease shall be
considered performed by Sublessee to the extent and in the amount
rent is paid to Sublessor in accordance with Section 6 of this
Sublease. Sublessee shall not commit or suffer any act or omission
that will violate any of the provisions of the Master Lease.
Sublessor shall exercise due diligence in attempting to cause Lessor
to perform its obligations under the Master Lease for the benefit of
Sublessee. If the Master Lease terminates, this Sublease shall
terminate and the parties shall be relieved of any further liability
or obligation under this Sublease, provided however, that if the
Master Lease terminates as a result of a default or breach by
Sublessor or Sublessee under this Sublease and/or the Master Lease,
then the defaulting party shall be liable to the nondefaulting party
for the damage suffered as a result of such termination.
Notwithstanding the foregoing, if the Master Lease gives Sublessor
any right to terminate the Master Lease in the event of the partial
or total damage, destruction, or condemnation of the Master Premises
or the building or project of which the Master Premises are a part,
the exercise of such right by Sublessor shall not constitute a
default or breach hereunder.
11. ATTORNEYS' FEES.
If Sublessor, Sublessee, or Broker shall commence an action against
the other arising out of or in connection with the Sublease, the
prevailing party shall be entitled to recover its costs of suit and
reasonable attorneys' fees.
- 4 -
<PAGE> 5
12. AGENCY DISCLOSURE.
Sublessor and Sublessee each warrant that they have dealt with no
other real estate broker in connection with this transaction except:
CB COMMERCIAL REAL ESTATE GROUP, INC., who represents Endocare,
Inc., and CB COMMERCIAL REAL ESTATE GROUP, INC., who represents XL
VISION. In the event that CB COMMERCIAL REAL ESTATE GROUP, INC.
represents both Sublessor and Sublessee, Sublessor and Sublessee
hereby confirm that they were timely advised of the dual
representation and that they consent to the same, and that they do
not expect said broker to disclose to either of them the
confidential information of the other party.
13. COMMISSION.
Upon execution of this Sublease, and consent thereto by Lessor (if
such consent is required under the terms of the Master Lease),
Sublessor shall pay Broker a real estate brokerage commission in
accordance with Sublessor's contract with Broker for the subleasing
of the Premises, if any, and otherwise in the amount of per a
separate agreement __________ Dollars ($__________), for services
rendered in effecting this Sublease. Broker is hereby made a third
party beneficiary of this Sublease for the purpose of enforcing its
right to said commission.
14. NOTICES.
All notices and demands which may or are to be required or permitted
to be given by either party on the other hereunder shall be in
writing. All notices and demands by the Sublessor to Sublessee shall
be sent by United States Mail, postage prepaid, addressed to the
Sublessee at the Premises, and to the address herein below, or to
such other place as Sublessee may from time to time designate in a
notice to the Sublessor. All notices and demands by the Sublessee to
Sublessor shall be sent by United States Mail, postage prepaid,
addressed to the Sublessor at the address set forth herein, and to
such other person or place as the Sublessor may from time to time
designate in a notice to the Sublessee.
To Sublessor: 7 Studebaker, Irvine, California 92718
To Sublessee: 10305 102nd Terrace, Sebastian, Florida 32958
15. CONSENT BY LESSOR.
THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY
LESSOR WITHIN 10 DAYS AFTER EXECUTION HEREOF, IF SUCH CONSENT IS
REQUIRED UNDER THE TERMS OF THE MASTER LEASE.
- 5 -
<PAGE> 6
16. COMPLIANCE.
The parties hereto agree to comply with all applicable federal,
state and local laws, regulations, codes, ordinances and
administrative orders having jurisdiction over the parties, property
or the subject matter of this Agreement, including, but not limited
to, the 1964 Civil Rights Act and all amendments thereto, the
Foreign Investment in Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The
Americans With Disabilities Act.
Sublessor: Endocare, Inc. Sublessee: XL Vision
----------------------- -----------------------------
By: /s/ Paul W. Mikus By: /s/ James E. Wellman
----------------------- -----------------------------
Title: CEO 6/10/97 Title: VP of Administration 6/6/97
----------------------- -----------------------------
By: By:
----------------------- -----------------------------
Title: Title:
----------------------- -----------------------------
Date: Date:
----------------------- -----------------------------
LESSOR'S CONSENT TO SUBLEASE
The undersigned ("Lessor"), lessor under the Master Lease, hereby consents to
the foregoing Sublease without waiver of any restriction in the Master Lease
concerning further assignment or subletting. Lessor certifies that, as of the
date of Lessor's execution hereof, Sublessor is not in default or breach of any
of the provisions of the Master Lease, and that the Master Lease has not been
amended or modified except as expressly set forth in the foregoing Sublease.
Lessor:
--------------------------
By:
--------------------------
Title:
--------------------------
By:
--------------------------
Title:
--------------------------
Date:
--------------------------
-6-
<PAGE> 7
CONSULT YOUR ADVISORS - This document has been prepared for approval by your
attorney. No representation or recommendation is made by Broker as to the legal
sufficiency or tax consequences of this document or the transaction to which it
relates. These are questions for your attorney.
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person,
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous materials and underground storage
tanks.
-7-
<PAGE> 8
ADDENDUM TO SUBLEASE
This Addendum to Sublease (this "Addendum") is entered into as of
May 19, 1997 between Endocare, Inc. ("Sublessor") and XL Vision ("Sublessee")
concurrently with the execution and delivery of the Sublease dated May 19, 1997
between Sublessor and Sublessee relating to Suites 133 and 134 of the building
commonly known as Technology Plaza I in Irvine, California. All references in
this Addendum to the "Sublease" refer to said Sublease as amended and
supplemented by the Addendum except where the context otherwise requires,
including without limitation where specific sections of the Sublease are
referred to.
The purpose of this Addendum is to make certain changes and
additions to the Sublease. All capitalized terms not otherwise defined in this
Addendum shall have the same meaning as in the Sublease, and all inconsistencies
between this Addendum and the Sublease shall be resolved in favor of this
Addendum.
1. Term. Notwithstanding the provisions of Section 5 of the
Sublease:
(a) the Term of the Sublease shall commence on the later of (i)
June 9, 1997 or (ii) five days after Sublessor obtains and delivers to Sublessee
the written consent to the Sublease from the Lessor under the Master Lease.
(b) the failure of Sublessor to obtain the written consent of the
Lessor under the Master Lease shall result in the termination of the Sublease as
provided in Section 15 of the Sublease unless Sublessor and Sublessee otherwise
agree to the contrary in writing; and
(c) Sublessor agrees to vacate the Premises prior to June 9, 1997
and shall be liable to Sublessee for any failure to do so.
2. Rent and Deposit. Notwithstanding the provisions of Sections 6
and 7 of the Sublease, Sublessor shall have no obligation to pay any amount
contemplated by those sections until the Lessor under the Master Lease has
consented to the Sublease as amended and supplemented by this Addendum. No rent
or other charges shall accrue or be payable for any period before such consent
is obtained.
3. Assignment and Subletting. Supplementing the provisions of
Section 9 of the Sublease, Sublessor shall not unreasonably withhold its consent
to any assignment of the Sublease or further subletting of the Premises by
Sublessee.
4. Other Provisions of Sublease. Notwithstanding the provisions of
Section 10 of the Sublease:
(a) To clarify the obligation to pay rent to the Lessor under the
Master Lease which is already set forth in Section 10 of the Sublease, the
Sublessee shall pay to Sublessor and Sublessor shall pay to the Lessor under the
Master Lease any additional rent as provided in Section IIIA(4) of the First
Amendment to Lease dated April 29, 1996 between said
<PAGE> 9
Lessor under the Master Lease and Sublessor and such amount shall be based upon
the Basic Rent under the Master Lease, not the Sublease.
(b) All amounts payable as Tenant's Share of Operating Expenses
pursuant to Section 4.2 of the Master Lease for the Term of the Sublease shall
be payable by Sublessee to Sublessor, and a Sublessee shall have no obligation
to make such payments directly to the Lessor under the Master Lease. Sublessor
will assert to the Lessor under the Master Lease any objection to Operating
Expenses as contemplated by Section 4.2(b) of the Master Lease as Sublessee may
reasonably request and will cooperate in good faith with Sublessee to have such
objection resolved to the reasonable satisfaction of Sublessee. If Sublessee
requests that Sublessor assert any such objection, Sublessee will reimburse
Sublessor for its reasonable, direct, out-of-pocket expenses ("Out-Of-Pocket
Expenses") incurred in asserting the objection (excluding any allocation of
general and administrative expense, overhead, employee salaries and the like).
If Sublessor has the right to recover any of such expenses from the Lessor under
the Master Lease and Sublessee requests that Sublessor do so, Sublessor will
assert its right to collect such expenses and, to the extent Sublessor has been
reimbursed by Sublessee with respect thereto, Sublessor will pay over to
Sublessee the amount so recovered. All Out-Of-Pocket Expenses incurred by
Sublessor in asserting such rights will be reimbursed by Sublessee as provided
above for expenses incurred in asserting objections to Operating Expenses.
(c) Sublessee shall have no obligation to Sublessor or the Lessor
under the Master Lease with respect to any Hazardous Materials brought upon,
stored, used, generated, released or disposed of on, under, from or about the
Premises by Sublessor at any time or by another person prior to the Commencement
Date.
(d) Sublessee shall have no obligation to remove any alteration,
decoration, fixture, addition, improvement or the like installed by Sublessor on
the Premises or by the Lessor under the Master Lease at the request of the
Sublessor, notwithstanding the provisions of Section 7.3 and 15 and any other
provision of the Lease to the contrary.
(e) Sublessee's right to assign the Sublease and to sublet the
Premises shall be governed by Section 9 of the Sublease and by Article IX of the
Master Lease incorporated by reference into the Sublease pursuant to Section 10
of the Sublease.
(f) In the event of damage or destruction referred to in Article
XI of the Master Lease or a taking referred to in Article XII of the Master
Lease;
(i) Sublessor shall have no obligation to rebuild or restore
the Building or the Project;
(ii) Any decision by the Lessor under the Master to terminate
the Master Lease shall result in a concurrent termination of the Sublease;
2.
<PAGE> 10
(iii) Sublessor cannot terminate the Sublease unless the
Lessor under the Master terminates the Master Lease or Sublessor has the right
to terminate the Master Lease in accordance with its terms and elects to do so;
(iv) If Sublessor has the right to terminate the Master Lease
in accordance with the terms thereof, Sublessee will have the right to terminate
the Sublease, whether or not Sublessor exercises its right to terminate the
Master Lease, but such right to terminate under Article XI, if exercised, must
be exercised not later than five business days before the last day by which
Sublessor has the right to terminate the Master Lease; and
(v) Any insurance proceeds or condemnation award payable to
Sublessor under the Master Lease shall be payable to Sublessee under the
Sublease, except to the extent that the amount of any payment is attributable to
the difference between the rent under the Master Lease and the rent under the
Sublease.
(g) Sublessee is not assuming Sublessor's obligations to the
Lessor under Sections 13.3 of the Master Lease with respect to the financial
statements of Sublessor referred to therein, but said Section 13.3 is
incorporated by reference into the Sublease pursuant to Section 10 of the
Sublease so that it refers to the financial statements provided by Sublessee to
Sublessor.
(h) Sublessee will deliver to Sublessor an estoppel certificate
as contemplated by Section 13.2 of the Master Lease upon 7 days prior written
notice form Sublessor provided that, for this purpose, all reference in said
Section 13.2 to "Tenant" shall be deemed to refer to "Sublessee", all references
to "Landlord" shall be deemed to refer to "Sublessor" and all references to
"this Lease" shall be deemed to refer to the Sublease. Sublessee shall have no
other obligations with regard to said Section 13.2 and Sublessor shall continue
to be obligated to deliver the estoppel certificate referred to therein to the
Lessor under the Master Lease.
(i) Sublessee does not assume any liability or obligation under
the Master Lease arising out of or relating to any default by Sublessor
thereunder, except to the extent that such default is caused by a default by
Sublessee in the performance of a corresponding covenant incorporated by
reference into the Sublease.
(j) Although Section 14.5 of the Master Lease is incorporated by
reference in the Sublease as provided in Section 10 of the Sublease, the thirty
(30) day period of time referred to in said Section 14.5 shall be reduced to
three (3) days as incorporated into the Sublease insofar as it relates to any
breach of the Sublease by Sublessor involving the failure to pay money to
Sublessee, the Lessor under the Master Lease or any other party or to any breach
of the provisions of this Addendum.
3.
<PAGE> 11
(k) Sublessee does not assume any obligation of Sublessor under
the Master Lease set forth in Section 15.1, except to the extent the holdover of
Sublessor under the Master Lease consists of the holdover of Sublessee under the
Sublease.
(l) The following additional sections of the Master Lease are not
incorporated into the Sublease as provided in Section 10 of the Sublease and
Sublessee is not assuming and agreeing to perform any of Sublessor's obligations
with respect thereto: Sections 4.3, 14.8, Article XVI (to the extent that it
relates to the giving of notices, elections, demands, consents, approvals and
other communications), Article XIX and Sections 20.10, 22.3, and 22.4.
5. Obligations Assumed. To clarify the provisions of Section 10 of
the Sublease, Sublessee is assuming and agreeing to perform only those
obligations of Sublessor under the Master Lease referred to therein which arise
during, and are attributable to, the Term of the Sublease. By way of example,
Sublessee is agreeing to pay the Operating Expenses contemplated by Section 4.2
of the Master Lease which are attributable to the period from June 1, 1997 to
September 30, 1998 (the Term of the Sublease) but is not agreeing to pay
Operating Expenses attributable to the period prior to June 1, 1997 even though
the amount thereof may be payable during the Term of the Sublease.
6. Performance of Obligations of Sublessor Under Master Lease.
Sublessor will perform in full all of its obligations under the Master Lease not
assumed by Sublessee pursuant to the Sublease and will use its best efforts to
cause the Lessor under the Master Lease to perform all of its obligations
thereunder. If Sublessee requests that Sublessor use its best efforts to cause
the Lessor under the Master Lease to perform any of its obligations thereunder,
Sublessee will reimburse Sublessor for its Out-Of-Pocket Expenses incurred in
doing so. If Sublessor has the right to recover its Out-Of-Pocket Expenses from
the Lessor under the Master Lease and Sublessee requests that Sublessor do so,
Sublessor will use its best efforts to collect such Expenses and, to the extent
Sublessor has been reimbursed by Sublessee with respect thereto, Sublessor will
pay over to Sublessee the amount so recovered. All Out-Of-Pocket Expenses
incurred by Sublessor in asserting its right to so collect from the Lessor under
the Master Lease will likewise be reimbursed by Sublessee as provided above for
expenses incurred in causing the Lessor to perform its obligations under the
Master Lease.
Any default by Sublessor in the performance of any such obligations
shall be deemed to be a default under the Sublease. In the event Sublessor fails
to perform any of such obligations under the Master Lease, Sublessee will have
the right, but not the obligation, to tender such performance directly to the
Lessor under the Master Lease, and any such performance by Sublessee shall be
deemed to satisfy the corresponding obligation to Sublessor under the Sublease.
Sublessor will deliver to Sublessee and Sublessee will deliver to
Sublessor, promptly after receipt by either of them, a copy of any notice of
default and any other notice, request, demand or other communication delivered
to such party by the Lessor under and
4.
<PAGE> 12
pursuant to the Master Lease and shall keep the other such party advised of any
litigation, claim or other event relating to the Premises, the Sublease or the
Master Lease.
7. Surrender of Master Lease. In no event shall Sublessor surrender
or otherwise agree or consent to any termination of the Master Lease which would
cause a termination or otherwise adversely affect the rights of Sublessee under
the Sublease, except as provided in the last sentence of Section 10 of the
Sublease.
8. Performance by Sublessee. The parties acknowledge that Section 10
of the Sublease provides (subject to certain exceptions) both
(a) that all applicable terms and conditions of the Master Lease
are incorporated into and made a part of the Sublease as if Sublessor were the
lessor thereunder, Sublessee were the lessee thereunder and the Premises were
the Master Premises and
(b) that Sublessee assumes and agrees to perform Sublessor's
obligations under the Master Lease arising during and attributable to the Term
of the Sublease to the extent that such obligations are applicable to the
Premises.
The parties further acknowledge their understanding that, taken
literally, the provisions in (a) and (b) above could overlap and that Sublessee
could be obligated to perform the same obligation twice. For example, (a) and
(b) taken together and literally read could require the Sublessee to pay both
the Sublessor and the Lessor under the Master Lease for utilities that are not
separately metered or assessed to the tenant under the Master Lease, as provided
in Section 6.1. Sublessor and Sublessee intend Section 10 to incorporate into
the Sublease only applicable terms and conditions of the Master Lease, and
Sublessor agrees that to the extent of any overlap in Sublessee's obligations
under the Sublease and applicable obligations under the Master Lease which have
been assumed by Sublessee, any performance by Sublessee of such assumed
obligations shall be deemed to satisfy Sublessee's obligations under the
Sublease.
9. Disclaimer of Third-Party Beneficiary Rights. Sublessee's
assumption of certain of Sublessor's obligations under the Master Lease and the
incorporation of certain provisions of the Master Lease into the Sublease by
reference are intended to create rights and obligations only between Sublessor
and Sublessee and are not intended to make the Lessor under the Master Lease a
third-party beneficiary of any such rights and obligations.
10. Compliance with Law. The obligations of the parties pursuant to
Section 16 of the Sublease to comply with provisions of law apply only to such
provisions of law which affect the Sublease, the Premises or the operations of
either party on the Premises.
11. Parking. Sublessee's rights under the Sublease shall include the
right to the 15 parking spaces contemplated by the Master Lease.
5.
<PAGE> 13
12. Entire Agreement. The Sublease and this Addendum cover in full
each and every agreement of every kind between the Sublessor and the Sublessee
concerning the Premises, and all preliminary negotiations, all agreements,
understandings and/or practices except those set forth or referred to in the
Sublease or this Addendum are superseded and of no further affect. No verbal
agreement or implied covenant shall be held to modify the provisions of this
Sublease or this Addendum.
ENDOCARE, INC. XL VISION
By:/s/ Paul W. Mikus By:/s/ James E. Wellman
-------------------------- --------------------
Paul W. Mikus James E. Wellman
CEO 6/10/97 VP of Administration 6/6/97
6.
<PAGE> 14
CONSENT TO SUBLETTING
I. PARTIES AND DATES.
This Consent to Subletting ("Consent") dated May 19, 1997, is by and
between IRVINE TECHNOLOGY PARTNERS II ("Landlord"), ENDOCARE, INC. ("Tenant"),
and XL VISION ("Subtenant").
II. RECITALS.
On September 20, 1995, Landlord and Tenant entered into a lease
("Lease") for space in a building owned by Landlord and located at 18
Technology, Suites 133 and 134, Irvine, California. The Lease has subsequently
been amended on April 19, 1996.
The Lease contains provisions which require, among other things
Tenant to obtain Landlord's consent to any subletting of the Premises. Tenant
has requested Landlord to consent to a subletting of the Premises to Subtenant.
III. CONSENT TO SUBLETTING.
For valuable consideration including Tenant's and Subtenant's
agreement to the provisions of this Consent, Landlord consents to a subletting
to Subtenant of approximately 5,161 rentable square feet of the Premises. Tenant
and Subtenant agree that this Consent is conditioned upon their agreement that:
A. The sublease agreement ("Sublease") between Tenant
and Subtenant is expressly subject to the provisions of the Lease, a copy of
which Subtenant acknowledges it has received.
B. Tenant will deliver a copy of the Sublease to
Landlord within five (5) business days of landlord's request, provided that if
the Sublease is not in writing, Tenant may deliver a reasonably detailed summary
of the Sublease including information respecting the length of the term and the
amount of rent and other charges payable under the Sublease, which summary shall
be approved by Subtenant.
C. Tenant's obligations under the Lease shall not be
affected by this Consent.
D. Landlord shall be entitled to receive profits derived
by Tenant from this subletting in accordance with the provisions of the Lease.
E. The provisions of the Lease respecting assignment and
subletting are not waived with respect to future assignments and sublettings.
<PAGE> 15
F. Subtenant is not claiming any interest in a right
belonging solely to Tenant pursuant to the Lease.
G. The Lease is in full force and effect and that
Landlord is not in breach of any provision of the Lease.
H. That if the Sublease terminates by reason of a
termination of the Lease, landlord may, at its option, by delivering written
notice to Subtenant, assume the obligation of Tenant under the Sublease in which
event Subtenant shall recognize Landlord as if it were Sublandlord under the
Sublease.
IV. SUBTENANT'S PRINCIPAL PLACE OF BUSINESS.
The address of Subtenant's principal place of business is 10305
102nd Terrace, Sebastian, FL 32958.
V. GENERAL.
A. EFFECT OF SUBLETTING. The Lease and Tenant's
obligations to Landlord shall not be deemed to have been modified by this
Consent.
B. ENTIRE AGREEMENT. This Consent embodies the entire
understanding between Landlord, Tenant and Subtenant with respect to the
subletting and can be changed only by an instrument in writing signed by the
party against whom enforcement is sought.
C. COUNTERPARTS. If this Consent is executed in
counterparts, each is hereby declared to be an original; all, however, shall
constitute but one in the same Consent. In any action or proceeding, any
photographic, photostatic, or other copy of this Consent may be introduced into
evidence without foundation.
D. DEFINED TERMS. All words commencing with initial
capital letters in this Consent and defined in the Lease shall have the same
meaning in this Consent as in the Lease.
E. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a
corporation or partnership, or is comprised of either or both of them, each
individual executing this Consent for the corporation or partnership represents
that he or she is duly authorized to execute and deliver this Consent on behalf
of the corporation or partnership and that this Consent is binding upon the
corporation or partnership in accordance with its terms.
F. ATTORNEYS' FEES. The provisions of the Lease
respecting payment of attorneys' fees shall also apply to this Consent to
Subletting.
- 2 -
<PAGE> 16
VI. EXECUTION.
Landlord, Tenant and Subtenant have entered into this Consent as of
the date set forth in "I. PARTIES AND DATE" above.
LANDLORD: TENANT:
ENDOCARE, INC.
IRVINE TECHNOLOGY PARTNERS II, /s/ Paul W. Mikus
a California general partnership ------------------------------------
CEO 6/10/97
------------------------------------
By: THE IRVINE COMPANY, By:
a Michigan corporation ------------------------------
Its General Partner Title:
------------------------------
By: /s/ J. Donald McNutt By:
-------------------------- ------------------------------
J. Donald McNutt, Senior Title:
Vice President, Irvine ------------------------------
Industrial Company, a
division of The Irvine
Company
By: /s/ John C. Tsu SUBTENANT:
--------------------------
John C. Tsu, Assistant
Secretary
XL VISION
------------------------------------
By: /s/ James E. Wellman
-----------------------------
Title: James E. Wellman
-----------------------------
VP of Administration
6/6/97
By:
------------------------------
Title:
------------------------------
- 3 -
<PAGE> 1
EXHIBIT 11.1
ENDOCARE, INC.
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
-----------------
<S> <C>
Net loss $ (1,531,448)
=================
Weighted average number of common shares
outstanding during the period 5,634,561
=================
Primary net loss per share $ (.27)
========
Fully diluted net loss per share $ (.27)
========
</TABLE>
Notes: Earnings per share data is not presented for 1995 because ENDOcare
was operating as a division of Medstone International, Inc.
at that time.
The effect of potential exercise of common stock options is not
included in these calculations because such effect would be
anti-dilutive.
- 53 -
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (No. 333-30405) on Form S-8 of Endocare, Inc. of our report dated
February 3, 1997, except as to the fourth paragraph of Note 1 to the Financial
Statements which is as of May 28, 1997, and the fourth paragraph of Note 8 to
the Financial Statements, which is as of July 2, 1997 relating to the balance
sheet of Endocare, Inc. as of December 31, 1996 and the related statements of
operations, shareholders' equity (deficiency) and cash flows for the year then
ended and related financial statement schedule, which report appears in
Amendment No. 3 to the December 31, 1996 Annual Report on Form 10-K of
Endocare, Inc. Such report refers to the restatement of the financial
statements of Endocare, Inc. as of December 31, 1996, and for the year then
ended. In addition, our report refers to a change in the accounting for the
impairment of long-lived assets and for long-lived assets to be disposed of.
KPMG PEAT MARWICK LLP
Orange County, California
July 7, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-30405) pertaining to the 1995 Stock Plan, 1995 Director Option Plan
and Employee Stock Purchase Plan of Endocare, Inc. of our report dated February
14, 1996, with respect to the financial statements and schedule of Endocare,
Inc. included in its Annual Report (Form 10-K/A Amendment No. 3) for the year
ended December 31, 1996, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Orange County, California
July 7, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 476,854
<SECURITIES> 0
<RECEIVABLES> 587,945
<ALLOWANCES> 58,139
<INVENTORY> 396,725
<CURRENT-ASSETS> 1,502,922
<PP&E> 447,792
<DEPRECIATION> 269,004
<TOTAL-ASSETS> 1,750,901
<CURRENT-LIABILITIES> 983,683
<BONDS> 750,000
0
0
<COMMON> 5,645
<OTHER-SE> 1,576,354
<TOTAL-LIABILITY-AND-EQUITY> 1,750,901
<SALES> 1,877,678
<TOTAL-REVENUES> 2,129,278
<CGS> 994,374
<TOTAL-COSTS> 994,374
<OTHER-EXPENSES> 2,661,352
<LOSS-PROVISION> 12,687
<INTEREST-EXPENSE> 41,935
<INCOME-PRETAX> (1,526,448)
<INCOME-TAX> 5,000
<INCOME-CONTINUING> (1,531,448)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,531,448)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
