SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
January 3, 1998 0-27422
ARTHROCARE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-3180312
(State or other jurisdiction of incorporation (I.R.S. employer
or organization) identification number)
595 North Pastoria Avenue, Sunnyvale, California 94086
(Address of principal executive offices and zip code)
(408) 736-0224
(Registrant's telephone number, including area code)
Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001
Par Value;
Preferred Share
Purchase Rights
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 10-K.
As of March 4, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $133,445,790 (based upon the closing sales
price of such stock as reported by The Nasdaq Stock Market on such date).
Shares of Common Stock held by each officer, director, and holder of 5% or more
of the outstanding Common Stock on that date have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination
As of March 4, 1998, the number of outstanding shares of the Registrants'
Common Stock was 8,896,386.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference from the Registrant's proxy statement for the 1998
Annual Stockholders Meeting (the Proxy Statement) which will be filed with the
Securities and Exchange Commission within 120 days after the close of the
Registrant's fiscal year ended January 3, 1998.
<PAGE>
PART I
ITEM 1. BUSINESS.
This Report on Form 10-K contains certain forward-looking statements regarding
future events with respect to the ArthroCare Corporation ("ArthroCare" or "the
company"). Actual events or results could differ materially due to a number of
factors, including those described herein and in the documents incorporated
herein by reference, and those factors described under "Additional Factors that
Might Affect Future Results"
OVERVIEW
ArthroCare develops, manufactures and markets surgical instruments based on
its novel Coblation (TM) technology. ArthroCare's tools enable surgeons to
ablate (remove) or shrink soft tissue and achieve hemostasis (sealing small
bleeding vessels). ArthroCare's Coblation-based tools are designed to allow
surgeons to operate on soft tissue with a high degree of precision and
accuracy, and with minimal damage to surrounding tissues. The ArthroCare
Arthroscopic System replaces the multiple surgical tools traditionally used in
arthroscopic procedures with one multi-purpose, surgical system that consists
of a controller unit and a series of disposable ArthroWand surgical tools
specialized for particular types of surgery. In March 1995, the company
received clearance of its 510(k) premarket notification to market the
ArthroCare Arthroscopic System for use in arthroscopic surgery of the knee,
shoulder, ankle and elbow. The company began shipping products for use in
arthroscopic surgery of the shoulder and knee in December 1995. In July 1996,
it received clearance of its 510(k) premarket notification to market its
Arthroscopic System for use in arthroscopic surgery of the wrist and hip.
To date, the company's operations have consisted primarily of research and
development, product engineering, seeking patent approvals on novel technology,
obtaining FDA clearance of its Arthroscopic System, developing a network of
distributors in the United States and abroad to market the Arthroscopic System,
marketing and sales efforts and more than two years of product sales. The
company has realized increasing revenues from the sale of its products, but
continues to generate operating losses and anticipates generating losses in
the future. Whether the company can successfully manage the transition to a
larger-scale commercial enterprise will depend upon increasing sales of
disposable ArthroWands from its domestic and international distribution
network, obtaining additional international regulatory approvals for the
Arthroscopic System, obtaining domestic and international regulatory approvals
for potential future products and maintaining its financial and management
systems, procedures and controls.
COBLATION TECHNOLOGY
Coblation technology is ArthroCare's patented soft-tissue surgical technology
upon which all the company's products are based. Coblation technology is a
novel use of radio frequency energy characterized by precision, accuracy, ease
of use and the capability of performing at a temperature lower than current
traditional surgical tools.
Traditional electrosurgical tools have relied upon heat to essentially burn
away targeted tissue, which often results in collateral thermal damage to
tissue surrounding the surgical area. Even excimer lasers, which are cooler
than other types of soft-tissue surgical tools, lack tactile feedback and
therefore make it difficult for surgeons to control the depth of tissue
penetration and also can lead to collateral tissue damage. Coblation
technology employs a lower temperature process that minimizes the risk of
thermal burn while increasing a surgeon's control and precision.
Coblation works through a cool process similar to that of excimer lasers. It
uses the electrically conductive fluid employed in arthroscopic surgeries in
the gap between the electrode and tissue. When electrical current is applied
to this fluid, it turns into a charged layer of particles, called a plasma
layer. Charged particles accelerate through the plasma and gain sufficient
energy to break the molecular bonds within cells. This literally causes the
cells to disintegrate molecule by molecule, so that tissue is volumetrically
removed. But, because this effect is confined to the surface layer of the
target tissue, there is minimal damage to surrounding tissue. An additional
advantage is that, unlike excimer lasers, Coblation can be performed in a
continuous mode. This results in much more efficient tissue removal.
In addition to achieving more precise tissue removal (or shrinkage) and less
damage to collateral tissue, surgical tools based on Coblation technology can
achieve hemostasis (sealing small bleeding vessels) near the surgical site,
which reduces bleeding at the site.
Coblation technology is applicable to soft tissue surgery thoughout the body
and the company is exploring its use in other non-arthroscopic indications.
The company commercially introduced the Arthroscopic System in December 1995
and by the year ended January 2, 1998, had reported 25 months of sales. The
Arthroscopic System is the company's only commercial product and will account
for substantially all of the company's revenue for the foreseeable future. As
such, the company is highly dependent on its Arthroscopic System.
Additionally, the company's potential products for non-arthroscopic
indications are in various stages of development, and the company may be
required to undertake time- consuming and costly development activities and
seek regulatory approval of these devices. There can be no assurance that
product development will ever be successfully completed, that regulatory
approval, if applied for, will be granted by the United States Food and Drug
Administration ("FDA") on a timely basis, if at all, or that the potential
products will ever achieve commercial acceptance.
THE ARTHROSCOPY MARKET
Historically, severe joint injuries have been treated using open surgery
involving large incisions, a hospital stay and a prolonged recovery period. In
contrast, arthroscopic surgery, which was introduced in the early 1980s, is
performed through several small incisions called portals and can be performed
on an outpatient basis. The company believes that arthroscopic surgery has
gained wide market acceptance because it promises shorter hospital stays and
reduced recovery time.
In 1996, approximately 2.2 million arthroscopic procedures were performed in
the United States. According to industry sources, the number of arthroscopic
procedures is growing due to patient demand for less invasive procedures as
well as the increasing incidence of joint injuries caused by a greater
emphasis on physical fitness and an aging population. Joints are susceptible
to injuries from blows, falls or twisting, as well as from natural
deterioration and stiffening associated with aging.
To perform arthroscopic surgery, a surgeon must use a tool to visualize the
site and a tool to perform the surgery. The tool used to visualize the site,
called an arthroscope, is a small fiber-optic viewing instrument made up of a
small lens, a light source and a video camera, which allows the surgeon to view
the surgical procedure on a video monitor. During the arthroscopic procedure,
an irrigant, such as saline or sterile water, is flushed through the joint to
permit clear visualization through the arthroscope and to create the space
within the joint for the surgical procedure. The surgeon inserts the
arthroscope into the joint through a portal measuring approximately six
millimeters (1/4 of an inch) in length. Other portals are used for the
insertion of surgical instruments to perform the surgery and to facilitate the
flow of irrigants. With small incision sites and direct access to most areas
of the joint, a surgeon can diagnose and correct an array of joint problems
such as cartilage tears, ligament tears and removal of loose and degenerative
tissue.
The advantages of arthroscopic surgery over open surgery are often
significant. Due to the smaller incisions and reduced surgical trauma, the
patient might experience several benefits including reduced pain; treatment on
an out-patient basis; reduced or eliminated hospitalization times; immediate
joint mobility and less muscle atrophy; less surrounding tissue damage; lower
rate of complications; and generally quicker rehabilitation. In addition,
treatment on an out-patient basis and reduced operating time can significantly
lower hospital costs.
Knee
The knee is the most commonly injured joint. In 1996, it accounted for
approximately 1.5 million arthroscopic procedures in the United States. Damage
to a meniscus - a pad of cartilage that helps cushion the knee joint - is a
common form of knee injury. A meniscus can be torn by a twist of the leg when
the knee is flexed, displaced either inward toward the center of the tibia
(central shin bone) or outward beyond the surface of the femur (central
thighbone), or worn down by normal aging. The knee is also susceptible to
partial or complete tears of the ligaments and degeneration of the cartilage
on the underside of the patella (knee cap). In addition, the cartilage
covering the bony surfaces of the knee wears down with age and can become
rough or tear loose from the bone, causing pain and interfering with smooth
joint movement.
Shoulder
The shoulder joint, because of its range of motion, is susceptible to a number
of injuries. In 1996, approximately 440,000 arthroscopic procedures in the
shoulder were performed in the United States. The company believes that
shoulder arthroscopy is the fastest-growing portion of the arthroscopy market.
With repetitive motion and lifting of the arm, such as that which occurs
during a tennis serve, the acromion (the "roof" of bone formed where the
scapula, or shoulder blade, extends over the humerus, the bone of the upper
arm) may pinch one of the shoulder muscles and cause persistent pain, known as
a rotator cuff injury. This condition can be treated by strengthening
exercises and physiotherapy; however, many rotator cuff injuries require
surgical intervention. The company believes that a significant percentage of
the population is born with an acromion that hooks over the humerus, making
such individuals more susceptible to rotator cuff injuries.
Elbow, Ankle, Wrist and Hip
The elbow, ankle, wrist and hip joints are also susceptible to certain stress-
related injuries and deterioration due to aging. In 1996, approximately 220,000
arthroscopic procedures were performed in the elbow, ankle and wrist, in the
United States. The company believes that the current number of surgical
procedures in the elbow, ankle, wrist and hip is relatively small due to the
limitations on conventional arthroscopic surgical equipment.
CONVENTIONAL TREATMENT METHODOLOGIES: THE PROBLEM
Most arthroscopic procedures require the surgeon to probe, cut, sculpt, shape
and cauterize (seal bleeding vessels) to achieve satisfactory results. Surgeons
frequently use a combination of instruments when performing an arthroscopic
procedure because each instrument is designed to perform a specific function.
Use of an assortment of tools requires the surgeon to insert and remove each
of the tools from the portals several times during the same procedure.
Surgical procedures can employ one or more of four groups of surgical
instruments: (1) power or motorized instruments, such as cartilage and bone
shavers; (2) mechanical instruments, such as basket punches, graspers and
scissors; (3) electrosurgery systems (Bovie); or (4) laser systems.
Power instruments are generally used to smooth tissue and cartilage defects on
the surface of the bones of the joint. The damaged tissue is removed from the
joint using suction through a cannula surrounding the shaft of the tool, which
can become obstructed by bits of tissue and bone. Power shavers have rotating
cutters inside a tube and are not currently available in a wide variety of tip
angles or sizes for the precise shaving of tissue. This prevents power shavers
from being used in many areas of the joint.
Mechanical instruments are used primarily in meniscus removal by snipping away
the unwanted tissue. Because mechanical tools must open and shut to operate,
they cannot be used in small areas such as the back of the knee. In addition,
mechanical tools must be resharpened at regular intervals and sterilized after
each procedure.
Electrosurgery systems are primarily used to achieve hemostasis, which is
necessary to minimize bleeding and maximize the arthroscopic surgeon's
visibility of the procedure through the arthroscope. Bleeding occurs most
commonly in shoulder arthroscopies. Electrosurgical systems contain two
electrodes: the electrode tip held by the surgeon and a dispersive pad that
rests under the patient's body. The metal electrode tip of the instrument,
which resembles a pencil point, is placed on or near the bleeding vessel to be
sealed. A generator connected to the electrode delivers high-frequency voltage
that arcs between the electrode and the target tissue, sealing blood vessels
in its vicinity. After arcing, the current travels through the remaining
tissue of the patient, through the skin to the dispersive electrode pad,
before being directed back to the generator. A non-conductive media such as
sterile water is used in the surgical space so that the electricity is forced
into the tissue instead of into the surrounding fluid. As a result of its
conductivity, saline - the preferred irrigant - cannot be used during the
procedure.
Laser systems are used to ablate tissue while achieving simultaneous
hemostasis. Laser systems are not tactile tools, meaning that the surgeon
cannot feel how much tissue is being ablated. The surgeon must be extensively
trained to precisely position the laser to control the depth of tissue
penetration to minimize unintended tissue damage. The company believes that
laser tools have not received wide acceptance because of high cost, lack of
tactile feedback for the surgeon and the required training and certification.
THE ARTHROCARE ARTHROSCOPIC SYSTEM
The company's Arthroscopic System is a high-frequency, surgical device
intended to perform tissue ablation and simultaneous hemostasis. The company
sells its Arthroscopic System for use in all six major joints: knee, shoulder,
elbow, ankle, wrist and hip. Tissues such as meniscus, synovium, cartilage and
ligaments can be ablated using the Arthroscopic System. In addition, the
company's capsular shrinkage (CAPS) wand is used to shrink collagen in shoulder
procedures.
The company's Arthroscopic System comprises an array of disposable bipolar
multielectrode tools (ArthroWands), a connecting cable, foot pedal (or switch)
and a radio frequency power controller. The System 2000 controller,
approximately 14 inches by 11 inches by five inches, is used to deliver
high-frequency power to the ArthroWands. To ablate different tissues or
achieve hemostasis, the surgeon can control the voltage level using the foot
pedal or keys on the front panel of the controller. The cable, which is
approximately 10 feet in length, connects the System 2000 controller to the
ArthroWand. Power is transmitted through the cable to the ArthroWand by
depressing a foot pedal, thereby enabling surgeons to use the ArthroWand as a
conventional probe as well as an instrument that ablates and achieves
hemostasis (cauterize).
Accordingly, the surgeon using the Arthroscopic System need not remove and
insert a variety of instruments to perform different tasks as is required when
using conventional arthroscopic instruments. The ArthroWand is approved for
sale in tip sizes 1.5 mm to 4.5 mm, and in tip angles ranging from 0 to 90
degrees. The company currently sells 14 models in various tip sizes, angles
and shapes which enable the surgeon to ablate different volumes of tissue and
to reach treatment sites not readily accessible by existing mechanical
instruments and motorized cutting tools.
The company commercially introduced the Arthroscopic System in December 1995
and by the year ended January 3, 1998, had reported 25 months of sales. By the
end of fiscal 1997, the company had shipped over 1,500 controller units. In
addition, the company has sold more than 140,000 ArthroWands. The company has
ramped up its manufacturing capabilities and from 1996 to 1997 it doubled
ArthroWand volumes while maintaining high yields. During fiscal 1997, the
company also began manufacturing the System 2000 controllers in-house, to
maintain process control, manage availability and leverage fixed costs.
The Arthroscopic System is the company's only commercial product and will
account for substantially all of the company's revenue for the foreseeable
future. As such, the company is highly dependent on its Arthroscopic System.
The company has established distribution capability in Europe, Australia,
Korea, Japan, Canada and parts of South and Central America. Before the
Arthroscopic System can be sold outside these regions, the company will have
to obtain additional international regulatory approvals and establish
additional distribution capability in other geographic regions. If such
regulatory approval is obtained, there can be no assurance that the company
will be able to establish a successful distribution capability.
Physicians will not use the company's products unless they determine, based on
experience, clinical data and other factors, that these systems are an
attractive alternative to conventional means of tissue ablation. No
independent published clinical reports exist to support the company's
marketing efforts for its Arthroscopic Systems, which may have an adverse
effect on its ability to obtain physician acceptance. The company believes
that continued recommendations and endorsements by influential physicians are
essential for market acceptance of its Arthroscopic System. If the
Arthroscopic System does not continue to receive broad-based physician
acceptance and endorsement by influential physicians, the company's business,
financial condition and results of operations would be materially adversely
affected.
ARTHROCARE'S PATENTED TECHNOLOGY
The ArthroCare Arthroscopic System is based on the patented Coblation core
technology and is designed to achieve precise ablation of soft tissue and
simultaneous hemostasis while minimizing damage to the surrounding healthy
tissue. The company believes that its Coblation technology, and the surgical
tools the company has built based on this technology, offer several advantages
over other approaches to arthroscopic surgery. The company believes that
Coblation technology enables surgeons to perform ablation, tissue shrinkage and
hemostasis with a single set of tools, with minimal collateral tissue damage,
with high degrees of accuracy and precision, with greater control and
reproducible results and at a lower cost than other surgical alternatives.
Further, the company believes that patients operated on using Coblation-based
surgical tools experience improved outcomes compared to conventional surgical
procedures, characterized by less pain, faster recovery and smoother resumption
of pre-injury activities.
The company's bipolar, multielectrode configuration and power control system
allow high-frequency electrical energy to be precisely focused on the surface
of the tissue being treated. Using a bipolar array of electrodes eliminates
the need to deliver energy through the surgical site to a dispersive electrode
pad located outside the body, because the energy is directed from the tip of
the probe to a return electrode contained on its shaft. The electric current
travels a shorter distance from the electrode array to the target tissue
before returning to the electrode on the shaft, allowing the Arthroscopic
System to operate at lower voltages and at a lower temperature than
conventional monopolar electrosurgical systems.
As illustrated below, the ArthroWand's energy is concentrated only at the tip
of the electrodes. This configuration allows the energy to be focused on the
surface layer of the tissue being ablated, thereby minimizing the risk of
unwanted damage to surrounding healthy tissue. The controller provides power
individually to each of the electrodes at the tip of the ArthroWand, enabling
only those electrodes that come into contact with tissue to deliver sufficient
energy to ablate tissue. During use, the high frequency current flows from the
controller through each electrode to the tissue, returning to the controller
via the return electrode on the shaft of the ArthroWand. The operation of a 90
degree ArthroWand is depicted below.
[Illustration depicting the operation of an ArthroWand on Tissue]
The company's patented Coblation technology, delivered in the form of
multielectrode, bipolar, electrosurgical tools, offers a number of benefits
that the company believes may provide advantages over competing surgical
methods and devices. The principal benefits include:
- Ease of Use. The Coblation-based Arthroscopic System performs many of the
functions of mechanical tools, power tools and electrosurgery instruments,
allowing the surgeon to use a single instrument. The lightweight probe is
simple to use and complements the surgeon's existing tactile skills
without the need for extensive training.
- Precision. In contrast to conventional tools, the Coblation-based
Arthroscopic System permits surgeons to perform more precise tissue
ablation and sculpting. The company believes this may result in more rapid
patient rehabilitation.
- Safety. Coblation technology, unlike most electrosurgical tools does not
work by heating tissue. The company believes that cooler operation can
lead to significant benefits for patients being treated with Coblation-
based surgical tools, in the form of little or no collateral thermal
burning of tissues near the surgical site. As a result, the company
believes that patients are likely to experience less trauma and pain
following surgery and might be able to recover more quickly to their pre-
injury activity levels.
- Simultaneous Ablation and Hemostasis. The Coblation-based Arthroscopic
System efficiently seals small bleeding vessels during the tissue ablation
process, which improves the surgeon's visibility of the operative site.
- Cost Reduction. The Coblation Arthroscopic System eliminates the need to
introduce multiple instruments to remove and sculpt tissue and seal small
bleeding vessels. The company believes this may reduce operating time and
thereby produce cost savings for health care providers.
Despite the benefits of the Arthroscopic System, there can be no assurance
that doctors and surgical centers will buy the Arthroscopic System. In order to
secure the benefits of the Arthroscopic Systems, however, a hospital or
surgical center must procure and use a specifically designed controller to
power the ArthroWand. At hospital sites or surgical centers where several
arthroscopic procedures can be performed simultaneously, the procurement of
multiple controllers is required. To date, the company has placed its
controllers at substantial discounts in order to stimulate demand for its
Arthroscopic System. In addition, motorized and mechanical instruments and
electrosurgery systems currently used by hospitals and surgical centers for
arthroscopic procedures have a history of success and have become widely
accepted by orthopedic surgeons. If physicians do not determine that the
Arthroscopic System is an attractive alternative to conventional means of
tissue ablation, the Arthroscopic System will not be acceptable, and the
company's business, financial condition and results of operations would be
materially adversely affected.
ARTHROCARE STRATEGY
The company's objective is to use its patented Coblation technology to design,
develop, manufacture and sell innovative, clinically superior surgical devices
for the arthroscopic surgical treatment of joint injuries and for the surgical
treatment of other soft-tissue conditions throughout the body. The key elements
of the company's strategy to achieve this objective include:
- Continue to Penetrate Existing Arthroscopic Surgical Instrument Market.
The company's initial sales efforts are focused on marketing the company's
products to orthopedic surgeons performing high-volume arthroscopy and to
opinion leaders in orthopedic surgery.
- Expand into New Arthroscopic Surgical Markets. The company encourages
surgeons to use its Arthroscopic System to treat joints that have been
primarily treated by open surgery, such as the shoulder, elbow and ankle.
Because of the small size, varying shapes and tactile feel of the
company's ArthroWand, the company believes surgeons will be able to
arthroscopically access areas difficult to reach by conventional
arthroscopic surgical tools. In addition, the company has introduced new
products that expand the types of arthroscopic surgical procedures to
which its Coblation technology can be applied. The CAPS wand to shrink
collagen in shoulder joints and the small joint wands are an example of
this expansion.
- Target Key International Markets. The company has begun to market its
Arthroscopic System in international markets. The company has signed
agreements with marketing partners to assist with regulatory requirements
and to market and distribute the Arthroscopic System in Europe, Japan and
Australia.
- Leverage Broadly Applicable Proprietary Technology. The company plans to
leverage its proprietary Coblation technology by developing additional
wands for use in a variety of non-arthroscopic soft tissue surgical
procedures.
- Structure Targeted Strategies to Commercialize the Platform Technology.
While the company will continue to focus on the arthroscopy field, it will
evaluate and plans to pursue additional applications of its technology in
other promising fields. On a case-by-case basis, ArthroCare will determine
the best strategy for entering these additional markets. In some cases,
the company might choose to establish stable, long-term relationships with
strong partners to address specific fields outside of arthroscopy. In
select other areas, the company might bring products to market itself.
RESEARCH AND DEVELOPMENT
The company believes that its core Coblation technology is applicable to a
range of soft-tissue surgical applications that can use a system substantially
the same as the Arthroscopic System. The company expects to change the wand
design to accommodate the specific requirements of the indications in various
surgical fields. However, the company believes that the design, materials and
manufacturing methods incorporated into the initial Arthroscopic System should
be applicable to subsequent products and indications.
The company has undertaken preliminary animal studies and development for the
use of its Coblation technology with its controller in several fields. The
company has received 510(k) clearance for use of its technology in certain of
these fields. The company has received approval of an investigational Device
Exemption (IDE) to conduct a clinical study on a specific indication.
Following the completion of this study, the company may submit a 510(k)
application to the FDA.
Each of these potential products is in various stages of development, and the
company may be required to undertake time-consuming and costly development
activities and seek regulatory approval of these devices. There can be no
assurance that product development will ever be successfully completed, that
premarket applications (PMA) or 510(k) application, if applied for, will be
granted by the FDA on a timely basis, if at all, or that the products will ever
achieve commercial acceptance. Failure by the company to develop, obtain
necessary regulatory approval for or to successfully market new products could
have a material adverse effect on the company's business, financial condition
and results of operations.
MANUFACTURING
The company's manufacturing operations consist of an in-house assembly
operation for the manufacturing of ArthroWands, and a separate in-house
operation for the manufacturing of the System 2000 controllers. The ArthroWand
is manufactured by the company from several components. In 1997, the company
ramped up its manufacturing capacity to double the production levels of
ArthroWands compared to the previous year. Manufacture of the System 2000
controller, of which an earlier version was manufactured by a third party, was
brought in-house in 1997 for the purposes of maintaining process control,
managing availability, and leveraging fixed costs.
The company has no previous controller manufacturing experience as its
previous controller model was manufactured under contract by another company.
In December 1997 the company started manufacture and sale of its System 2000
controllers. Only a small number of controllers have been manufactured and
sold. As a result, the company has limited experience manufacturing
controllers in the volumes necessary for the company to achieve additional
commercial sales, and there can be no assurance that reliable, high-volume
manufacturing can be achieved at commercially reasonable cost. In addition,
there can be no assurance that the company or its suppliers will not encounter
any manufacturing difficulties, including problems involving regulatory
compliance, product recalls, production yields, quality control and assurance,
supplies of components or shortages of qualified personnel.
The company and its component suppliers are required to operate in conformance
with Quality System Regulation (QS Regulations) requirements, in order to
produce products for sale in the United States, and ISO 9001 standards, in
order to produce products for sale in Europe. There can be no assurance that
the company or its component suppliers will remain in compliance with QS
Regulations or ISO 9001 standards. Any failure by the company or its
component suppliers to remain in compliance with QS Regulation or ISO 9001
standards could have a material adverse effect on the company's business,
financial condition and results of operations. In addition, the ArthroWand is
sterilized by a single subcontractor, and the connector housings at each end
of the cable are available only from a single source. There can be no
assurance that an alternate sterilizer or connector housing supplier could be
established if necessary or that available inventories would be adequate to
meet the company's product needs during any prolonged interruption of supply.
A reduction or stoppage in supply of the sole- source component, or the
company's inability to secure an alternative sterilizer, if required, would
limit its ability to manufacture the Arthroscopic System and would have a
material adverse effect on the company's business, financial condition and
results of operations.
Although the company believes that its subcontractor, and component suppliers
are in compliance with applicable regulations, there can be no assurance that
the FDA, or a state, local or international regulator, will not take action
against the subcontractor or a component supplier found to be violating such
regulations.
MARKETING AND SALES
Of the 18,500 orthopedic surgeons in the United States, approximately 80%
perform arthroscopy and approximately 40% consider arthroscopy to be their
major practice area. These 40% of orthopedic surgeons perform an estimated 70%
of the total arthroscopic procedures. In addition to marketing efforts aimed
at these surgeons, the company also recognizes that purchase decisions are
greatly influenced by health care administrators, who are subject to
increasing pressures to reduce costs. Health care administrators must
determine that the Arthroscopic System and the company's potential products
are cost-effective alternatives to current means of tissue ablation.
The company had shipped more than 1,500 Arthroscopic System controller units
and more than 140,000 ArthroWands by the end of fiscal 1997. The company is
marketing and selling its Arthroscopic System in the United States through a
network of independent orthopedic distributors. The company has more than 40
distributors representing more than 250 field sales representatives. The
distributors are supervised by 6 sales managers who are employed by the
company. The company expects that the network of distributors will market
directly to more than 7,500 orthopedic surgeons who primarily perform
arthroscopic surgery. As of the end of fiscal 1997, the company believes it
has achieved approximately 5% share of the market for knee procedures and 25%
share of .the market for shoulder procedures.
The company's distributors sell orthopedic arthroscopy devices for a number of
other manufacturers, and there can be no assurance that they will commit the
necessary resources to effectively market and sell the company's Arthroscopic
System, or that they will be successful in closing sales with doctors and
hospitals. The company has offered its controller to these independent
distributors at substantial discounts and may be required to continue to offer
such discounts on its controller to generate demand for its ArthroWands. The
inability to sell sufficient quantities of ArthroWands would have a material
adverse effect on the company's business, financial condition and results of
operations.
In October 1996, the company signed a distribution agreement with Advanced
Surgical Technologies Pty Ltd (AST), a large orthopedic distributor based in
Australia, to exclusively sell the company's Arthroscopic System in Australia.
In 1997, ArthroCare signed a distribution agreement with Arthrex, Inc., a
leading provider of arthroscopic equipment and training to surgeons and
hospitals worldwide, to distribute the company's products in Europe. Also in
1997, the company signed a distribution agreement with Kobayashi
Pharmaceutical Co., Ltd., a 110-year-old, $1.5 billion health-care company,
which will use its extensive medical device distribution operations to sell
the company's products in Japan. The company has also signed agreements with
regional distributors in Mexico, Brazil, Argentina and Korea.
If the company is successful in obtaining necessary regulatory approvals in
additional international markets, it expects to establish a sales and marketing
capability in those markets. In these international markets, the company
intends to collaborate with one or more marketing partners to establish
marketing and distribution channels for the Arthroscopic System. However,
regulatory requirements vary by region, and compliance with such regulations
may be costly and time-consuming. Accordingly, the distribution, pricing and
marketing structure to be established by the company may vary from country to
country.
No assurance can be given that the company will successfully sell its product
through its distributors in Europe, Australia, Mexico, Brazil, Argentina,
Canada, Japan or Korea, that the company will secure marketing partners for
other international markets, successfully sell its Arthroscopic System in
global markets or that any of its international distributors and marketing
partners will commit the necessary resources to obtain additional necessary
international regulatory approvals on behalf of the company and successfully
sell the Arthroscopic System in international markets.
PATENTS AND PROPRIETARY RIGHTS
The company's ability to compete effectively depends in part on developing and
maintaining the proprietary aspects of its platform Coblation technology. The
company owns ten issued United States patents, more than 30 pending United
States patent applications and international patent applications in Europe
(covering 16 separate countries), Japan, Canada, Australia and New Zealand
corresponding to eight of the United States filings relating to its Coblation
technology. The initial patent is currently set to expire in 2008, three
issued patents are currently expected to expire between 2008 and 2012 and the
other six patents are expected to expire between 2014 and 2016. The company
believes that the issued patents cover both the core technology used in the
company's Arthroscopic System, including both multielectrode and
single-electrode configurations of its wand tools, as well as the use of
Coblation technology in specific surgical procedures.
The issued patents cover, among other things, systems and methods for applying
radio frequency energy to tissue in the presence of electrically conductive
fluid such as isotonic saline and blood; probes having an electrode array and
a means to supply current independently to individual electrodes; and systems
and methods for employing radio frequency energy in urological and cardiac
procedures (e.g. transmyocardial revascularization of the heart). The pending
patent applications include coverage for the fundamental tissue ablation and
cutting technology as well as methods and apparatus for specific procedures.
There can be no assurance that the patents that have been issued to the
company or any patents which may be issued as a result of the company's United
States or international patent applications will provide any competitive
advantages for the company's products or that they will not be successfully
challenged, invalidated or circumvented in the future. In addition, there can
be no assurance that competitors, many of which have substantial resources and
have made substantial investments in competing technologies, will not seek to
apply for and obtain patents that will prevent, limit or interfere with the
company's ability to make, use and sell its products either in the United
States or in international markets.
A number of medical device and other companies, universities and research
institutions have filed patent applications or have issued patents relating to
monopolar and/or bipolar electrosurgical methods and apparatus. If third-party
patents or patent applications contain claims infringed by the company's
technology and such claims are ultimately determined to be valid, there can be
no assurance that the company would be able to obtain licenses to those
patents at a reasonable cost, if at all, or be able to develop or obtain
alternative technology, either of which would have a material adverse effect
on the company's business, financial condition and results of operations.
There can be no assurance that the company will not be obligated to defend
itself in court against allegations of infringement of third-party patents.
In addition to patents, the company relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through confidentiality and
proprietary information agreements. The company requires its key employees and
consultants to execute confidentiality agreements upon the commencement of an
employment or consulting relationship with the company. These agreements
generally provide that all confidential information, developed or made known to
the individual by the company during the course of the individual's
relationship with the company, is to be kept confidential and not disclosed to
third parties. These agreements also generally provide that inventions
conceived by the individual in the course of rendering services to the company
shall be the exclusive property of the company. There can be no assurance
that such agreements will not be breached, that the company would have
adequate remedies for any breach or that the company's trade secrets will not
otherwise become known to or be independently developed by competitors.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain
a competitive advantage. There can be no assurance that the company will not
become subject to patent infringement claims or litigation or interference
proceedings declared by the United States Patent and Trademark Office ("USPTO")
to determine the priority of inventions. On February 13, 1998 the company
filed a lawsuit (the "Lawsuit") against Ethicon, Inc. Mitek Surgical
Products, a division of Ethicon, Inc. and GyneCare, Inc. alleging among other
things, infringement of several of the company's patents. See Part I, Item 3
"Legal Proceedings" of this Annual Report on Form 10-K. The defense and
prosecution of the Lawsuit and intellectual property suits generally, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time-consuming. The company believes that the Lawsuit is
necessary and if others violate the proprietary rights of the company, further
litigation may be necessary to enforce patents issued to the company, to
protect trade secrets or know-how owned by the company or to determine the
enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference proceedings will result in substantial expense to
the company and significant diversion of effort by the company's technical and
management personnel. An adverse determination in the Lawsuit or other
litigation or interference proceedings to which the company may become a party
could subject the company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the company to
cease using such technology. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing
or similar arrangements, costs associated with such arrangements may be
substantial and could include ongoing royalties. Furthermore, there can be no
assurance that necessary licenses would be available to the company on
satisfactory terms, if at all. Adverse determinations in a judicial or
administrative proceeding or failure to obtain necessary licenses could
prevent the company from manufacturing and selling its products, which would
have a material adverse effect on the company's business, financial condition
and results of operations.
COMPETITION
The arthroscopic medical device industry is intensely competitive. The company
competes with providers of laser systems, electrosurgical systems, manual
instruments and power shavers. Many of these competitors have significantly
greater financial, manufacturing, marketing, distribution and technical
resources than the company. There can be no assurance that the company can
effectively compete against such competitors. In addition, there can be no
assurance that these or other companies will not succeed in developing
technologies and products that are more effective than the company's or that
would render the company's technology or products obsolete or uncompetitive.
The company believes that its Arthroscopic System, comprising the controller
unit and disposable ArthroWands, presents a competitive pricing structure
compared to alternative tools being used in arthroscopic procedures. The list
price of the controller, including the cable, is approximately $14,500. The
disposable ArthroWand, which can be used by surgeons as a conventional probe as
well as to ablate soft tissue, collagen shrinkage and seal small bleeding
vessels, have list prices ranging from of approximately $125-$195. Motorized
cutting tools consist of a power source with list prices of approximately
$8,000 to $10,000 and disposable tips, with list prices of approximately $60
to $80. Reusable mechanical tools have list prices of approximately $150 to
$950 and it is not unusual for 30 (thirty) different shaped tools to be
resterilized for each procedure. Neither motorized nor mechanical tools
perform hemostasis, and therefore additional tools may need to be purchased
for that purpose. Electrosurgical systems, used to stop the bleeding from
small blood vessels during surgery, consist of a power source with list prices
of approximately $4,000 to $9,000 plus a disposable tip with list prices of
approximately $40 to $50, including a single-use, dispersive electrode pad.
Electrosurgical systems are not generally used to cut or remove tissue. Laser
systems, with list prices of approximately $80,000 to $125,000, are used in
conjunction with disposable or reusable tips, with list prices of
approximately $60 to $300, to ablate soft tissue and simultaneously achieve
hemostasis.
Smith & Nephew Endoscopy, Inc. (which owns Acufex Microsurgical, Inc. and
Dyonics, Inc.), Conmed Corporation (including its Linvatec unit) and Stryker
Corp. each have large shares of the market for manual instruments, power
shavers and arthroscopes. These companies offer broad product lines, which
they may offer as a single package; have substantially greater resources and
name recognition than the company; and frequently offer significant discounts
as a competitive tactic. In addition, United States. Surgical, Corporation.
(including its Valley Labs unit) and Conmed Corporation each have large shares
of the market for electrosurgical systems, and Trimedyne, Inc. and Coherant.
each have large shares of the market for laser systems. The company expects
that competition from these and other well-established competitors will
increase as will competition from start-up and development stage medical
device companies such as Gyrus Medical Ltd., a company based in the United
Kingdom, and Orotec Interventions, Inc., a company based in Menlo Park,
California. The company is aware that Johnson & Johnson (including its Ethicon
unit) is marketing a bipolar electrosurgical tool developed by Gyrus Medical
Ltd. In order to successfully compete in the arthroscopic medical device
industry, the company anticipates that it may have to continue to offer
substantial discounts on its controller in order to increase demand for the
disposable ArthroWand, and that such competition could have a material
adverse effect on the company's business, financial condition and results of
operations.
The company believes that the primary competition factors in the market for
tissue ablation are precision, ease of use and price. The company further
believes that its tissue ablation instruments are easier to use than current
ablation instruments on the market while also providing the surgeon with a more
precise and efficient means of ablating tissue at lower cost. In addition, the
company's surgical system features a hemostasis mode and shrinks collagen. As a
result, the company believes that its products compete favorably with respect
to these factors, although no assurance can be given that they will be able to
continue to do so in the future, or that new instruments that perform more
favorably will not be introduced.
The company has received 510(k) premarket notifications for clearance to
market tissue ablation products to treat certain urological, periodontal,
dermatological, ear/nose/throat and general surgical conditions and has filed
510(k) premarket notification for clearance to market products for
gynecological conditions; the FDA has indicated that the 510(k) submission for
certain gynecological conditions must be supported by data from clinical
trials. These fields are intensely competitive and no assurance can be given
that these potential products, if approved, would be successfully marketed.
GOVERNMENT REGULATION
United States
The company's products are regulated in the United States as medical devices
by the FDA under the Federal Food, Drug, and Cosmetic Act ("FDC Act") and
require premarket clearance or approval by the FDA prior to commercialization.
In addition, certain material changes or modifications to medical devices also
are subject to FDA review and clearance or approval. Pursuant to the FDC Act,
the FDA regulates the research, testing, manufacture, safety, labeling,
storage, record keeping, advertising, distribution and production of medical
devices in the United States. Noncompliance with applicable requirements can
result in warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices, and
criminal prosecution. Failure to comply with the regulatory requirements could
have a material adverse effect on the company's business, financial condition
and results of operations.
If human clinical trials of a device are required and if the device presents a
"significant risk," the manufacturer or the distributor of the device is
required to file an IDE application prior to commencing human clinical trials.
The IDE application must be supported by data, typically including the results
of animal and, possibly, mechanical testing. If the FDA does not object to the
IDE application within 30 days from filing of the application, human clinical
trials may begin as defined in the IDE. Sponsors of clinical trials are
permitted to sell investigational devices distributed in the course of the
study, provided such costs do not exceed recovery of the costs of manufacture,
research, development and handling. The clinical trials must be conducted
under the auspices of an independent Institutional Review Board ("IRB")
established pursuant to FDA regulations, and with appropriate informed consent
of the patient.
Generally, before a new device can be introduced into the market in the United
States, the manufacturer or distributor must obtain FDA clearance of a 510(k)
notification or approval of a PMA application. If a medical device manufacturer
or distributor can establish that a device is "substantially equivalent" to a
legally marketed Class I or Class II device, or to a Class III device for which
FDA has not called for PMAs, the manufacturer or distributor may seek clearance
from FDA to market the device by filing a 510(k) notification. The 510(k)
notification will need to be supported by appropriate data establishing the
claim of substantial equivalence to the satisfaction of FDA. FDA recently has
been requiring a more rigorous demonstration of substantial equivalence.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an
order is issued by the FDA. No law or regulation specifies the time limit by
which FDA must respond to a 510(k) notification. At this time, the FDA
typically responds to the submission of a 510(k) notification within 90 to 120
days, but it may take longer. An FDA order may declare that the device is
substantially equivalent to another legally marketed device and allow the
proposed device to be marketed in the United States. The FDA, however, may
determine that the proposed device is not substantially equivalent or require
further information, including clinical data, to make a determination
regarding substantial equivalence. Such determination or request for
additional information could delay market introduction of the products that
are the subject of the 510(k) notification.
The company has received clearance of 510(k) premarket notifications to market
its Arthroscopic System for surgery of the knee, shoulder, elbow, wrist, hip
and ankle joints. In addition, the company received clearance of 510(k)
premarket notifications to market products based upon its proprietary core
technology to treat certain other soft tissue conditions. There can be no
assurance that the company will be able to obtain necessary clearances or
approvals to market any other products on a timely basis, if at all, and
delays in receipt or failure to receive such clearances or approvals, the loss
of previously received clearances or approvals, or failure to comply with
existing or future regulatory requirements could have a material adverse
effect on the company's business, financial condition and results of
operations.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek premarket approval of the proposed device
through submission of a PMA application. A PMA application must be supported by
extensive data, including, in many instances, preclinical and clinical trial
data, as well as extensive literature to prove the safety and effectiveness of
the device. Following receipt of a PMA application, if the FDA determines that
the application is sufficiently complete to permit a substantive review, the
FDA will "file" the application. Under the FDC Act, the FDA has 180 days to
review a PMA application, although the review of such an application more
often occurs over a protracted time period, and generally takes approximately
two years or more from the date of filing to complete.
The PMA application approval process can be expensive, uncertain and lengthy.
A number of devices for which premarket approval has been sought have never
been approved for marketing. The review time is often significantly extended
by the FDA, which may require more information or clarification of information
already provided in the submission. In addition, the FDA will inspect the
manufacturing facility to ensure compliance with the FDA's Good Manufacturing
Practice (GMP) or QS Regulations requirements prior to approval of an
application. If granted, the approval of the PMA application may include
significant limitations on the indicated uses for which a product may be
marketed.
If necessary, the company will file a PMA application with the FDA for
approval to sell its potential products commercially in the United States when
it has developed such products. There can be no assurance that the company
will be able to obtain necessary PMA application approvals to market such
products on a timely basis, if at all, and delays in receipt or failure to
receive such approvals, the loss of previously received approvals, or failure
to comply with existing or future regulatory requirements could have a
material adverse effect on the company's business, financial condition and
results of operations.
The company is also required to register as a medical device manufacturer with
the FDA and state agencies, such as the California Department of Health
Services ("CDHS") and to list its products with the FDA. As such, the company
is subject to inspections by both the FDA and the CDHS for compliance with the
FDA's GMP or QS Regulations and other applicable regulations. These
regulations require that the company maintain its documents in a prescribed
manner with respect to manufacturing, testing and control activities. Further,
the company and the third party manufacturers of its products are required to
comply with various FDA requirements for design, safety, advertising and
labeling. There can be no assurance that the company or its component
suppliers will not encounter any manufacturing difficulties, or that the
company any of its subcontractors or component suppliers will not experience
similar difficulties, including problems involving regulatory compliance,
product recalls, production yields, quality control and assurance, supplies of
components or shortages of qualified personnel.
Regulations regarding the manufacture and sale of the company's products are
subject to change. The company cannot predict the effect, if any, that such
changes might have on its business, financial condition or results of
operations.
International
International sales of the company's products are subject to the regulatory
agency product registration requirements of each country. The regulatory review
process varies from country to country. The company has obtained regulatory
clearance to market the Arthroscopic System in Australia and Europe but has not
obtained any other international regulatory approvals permitting sales of its
products outside of the United States. The company intends to seek regulatory
approvals in certain other international markets. There can be no assurance,
however, that such approvals will be obtained on a timely basis or at all.
For European distribution, the company has received ISO 9001 certification and
the CE mark. ISO 9001 certification standards for quality operations have been
developed to ensure that companies know, on a worldwide basis, the standards of
quality to which they will be held. The European Union has promulgated rules
requiring medical products to receive by mid-1998 the CE mark, an international
symbol of quality and compliance with applicable European medical device
directives. Failure to maintain the CE mark will prohibit the company from
selling its products in Europe. ISO 9001 certification in conjunction with
demonstrated performance to the medical device directive is one of the
alternatives available to meet the CE mark requirements. There can be no
assurance that the company will be successful in maintaining certification
requirements.
THIRD-PARTY REIMBURSEMENT
In the United States, health care providers, such as hospitals and physicians,
that purchase medical devices, such as the company's Arthroscopic System and
potential future products, generally rely on third-party payors, principally
federal Medicare, state Medicaid and private health insurance plans, to
reimburse all or part of the cost of the procedure in which the medical device
is being used. Reimbursement for arthroscopic procedures performed using
devices that have received FDA approval has generally been available in the
United States. In addition, certain health care providers are moving toward a
managed care system in which such providers contract to provide comprehensive
health care for a fixed cost per person. Managed care providers are attempting
to control the cost of health care by authorizing fewer elective surgical
procedures, such as certain knee and shoulder, ankle, wrist, elbow and hip
arthroscopic procedures.
The company is unable to predict what changes will be made in the
reimbursement methods used by third-party health care payors. The company
anticipates that in a prospective payment system, such as the diagnosis related
group (DRG) system utilized by Medicare, and in many managed care systems used
by private health care payors, the cost of the company's products will be
incorporated into the overall cost of the procedure and that there will be no
separate, additional reimbursement for the company's products. The company
anticipates that hospital administrators and physicians will justify the use of
the company's products by the attendant cost savings and clinical benefits that
the company believes will be derived from the use of its products. However,
there can be no assurance that this will be the case. Furthermore, the company
could be adversely affected by changes in reimbursement policies of
governmental or private health care payors, particularly to the extent any
such changes affect reimbursement for procedures in which the company's
products are used. Failure by physicians, hospitals and other users of the
company's products to obtain sufficient reimbursement from health care payors
for procedures in which the company's products are used or adverse changes in
governmental and private third- party payors, policies toward reimbursement for
such procedures would have a material adverse effect on the company's
business, financial condition and results of operations.
If the company obtains the necessary international regulatory approvals ,
market acceptance of the company's products in international markets would be
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both
government- sponsored health care and private insurance. The company intends to
seek international reimbursement approvals, although there can be no assurance
that any such approvals will be obtained in a timely manner, if at all.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products entail significant
risks of product liability claims. The company's current product liability
insurance coverage limits are $5,000,000 per occurrence and $5,000,000 in the
aggregate. There can be no assurance that such coverage limits are adequate to
protect the company from any liabilities it might incur in connection with the
development, manufacture and sale of its Arthroscopic System and potential
future products. In addition, the company may require increased product
liability coverage if any potential future products are successfully
commercialized. Product liability insurance is expensive and in the future may
not be available to the company on acceptable terms, if at all. The company
has been selling its product since December 1995 and has not experienced any
product liability claims to date. However, a successful product liability
claim or series of claims brought against the company in excess of its
insurance coverage could have a material adverse effect on the company's
business, financial condition and results of operations.
EMPLOYEES
As of January 3, 1998, the company had 108 employees. 51 people are engaged in
manufacturing activities, 15 are engaged in research and development
activities, 19 people are engaged in sales and marketing activities, 12
persons are engaged in regulatory affairs and quality assurance and 11 people
are engaged in administration and accounting. No employees are covered by
collective bargaining agreements, and the company believes it maintains good
relations with its employees.
The company is dependent upon a number of key management and technical
personnel. The loss of the services of one or more key employees or consultants
could have a material adverse effect on the company. The company's success will
also depend on its ability to attract and retain additional highly qualified
management and technical personnel. The company faces intense competition for
qualified personnel, many of whom are often subject to competing employment
offers, and there can be no assurance that the company will be able to attract
and retain such personnel. Furthermore, the company's scientific advisory board
members all are otherwise employed on a full-time basis. As a result, the
scientific advisory board members are not available to devote their full time
or attention to the company's affairs.
FACILITIES
The company leases approximately 32,000 square feet in two neighboring
buildings in Sunnyvale, California, which comprise the company's administrative
offices and manufacturing and warehousing space. The company's lease for this
facility extends through February 2002. The company believes that its existing
facilities will be sufficient for its operational purposes through 1998.
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
History of Losses; Fluctuations in Operating Results; Losses Expected to
Continue
The company has experienced significant operating losses since inception and,
as of January 3, 1998, had an accumulated deficit of $25.3 million. The company
expects to generate additional losses due to increased operating expenditures
primarily attributable to the expansion of marketing and sales activities,
increased research and development, and activities to support regulatory
applications. Results of operations may fluctuate significantly from quarter
to quarter due to the timing of such expenditures, absence of a backlog of
orders, timing of the receipt of orders, promotional discounts of the
company's products, re-use of the company's disposable products, in addition
to those detailed above. The company's revenues and profitability will be
critically dependent on whether it can successfully continue to market its
Arthroscopic System. In addition, the company's gross margins may be
adversely affected due to the necessity to promote and sell its product at
significantly reduced prices. There can be no assurance that significant
profitability will ever be achieved.
Control by Directors, Executive Officers and Affiliated Entities
The company's directors, executive officers and entities affiliated with them,
in the aggregate, beneficially own approximately 40% of the company's
outstanding common stock. These stockholders, if acting together, will have
significant influence over all matters requiring approval by the stockholders
of the company, including the election of directors and the approval of
mergers or other business combination transactions.
Potential Volatility of Stock Price
The stock markets have experienced price and volume fluctuations that have
particularly affected medical technology companies, resulting in changes in the
market prices of the stocks of many companies that may not have been directly
related to the operating performance of those companies. Such broad market
fluctuations may adversely affect the market price of the company's common
stock. In addition, the market price of the company's common stock may be
highly volatile. Factors such as variations in the company's financial
results, comments by security analysts, announcements of technological
innovations or new products by the company or its competitors, changing
government regulations and developments with respect to FDA submissions,
patents, proprietary rights or litigation may have a significant adverse
effect on the market price of the common stock.
Anti-Takeover Effect of Stockholder Rights Plan and Certain Charter and Bylaw
Provisions
In November 1996, the company's Board of Directors adopted a Stockholder
Rights Plan. The Stockholder Rights Plan provides for a dividend distribution
of one Preferred Shares Purchase Right (a "Right") on each outstanding share
of the company's common stock. Each Right entitles shareholders to buy
1/1000th of a share of the company's Series A participating preferred stock at
an exercise price of $50.00. The Rights will become exercisable following the
tenth day after a person or group announces acquisition of 15 percent or more
of the company's common stock, or announces commencement of a tender offer,
the consummation of which would result in ownership by the person or group of
15 percent or more of the company's common stock. The company will be
entitled to redeem the Rights at $0.01 per Right at any time on or before the
tenth day following acquisition by a person or group of 15 percent or more of
the company's common stock.
The Stockholder Rights Plan and certain provisions of the company's
Certificate of Incorporation and Bylaws may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire control of the company. This could limit the price that
certain investors might be willing to pay in the future for shares of the
company's common stock. Certain provisions of the company's Certificate of
Incorporation and Bylaws allow the company to issue preferred stock without any
vote or further action by the stockholders, eliminate the right of stockholders
to act by written consent without a meeting, specify procedures for director
nominations by stockholders and submission of other proposals for consideration
at stockholder meetings, and eliminate cumulative voting in the election of
directors. Certain provisions of Delaware law applicable to the company could
also delay or make more difficult a merger, tender offer or proxy contest
involving the company, including Section 203, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years unless certain conditions are met. The
Stockholder Rights Plan, the possible issuance of preferred stock, the
procedures required for director nominations and stockholder proposals and
Delaware law could have the effect of delaying, deferring or preventing a
change in control of the company, including without limitation, discouraging a
proxy contest or making more difficult the acquisition of a substantial block
of the company's common stock. These provisions could also limit the price
that investors might be willing to pay in the future for shares of the
company's common stock.
Lack of Dividends
The company has not paid any dividends and does not anticipate paying any
dividends in the foreseeable future.
Item 2. PROPERTIES
The company leases approximately 32,000 square feet in two neighboring
buildings in Sunnyvale, California, which comprise the company's
administrative offices and manufacturing and warehousing space. The company's
two leases for these facilities extend through February 2002. The company
believes that its existing facilities will be sufficient for its operational
purposes through 1998.
Item 3. LEGAL PROCEEDINGS
On February 13, 1998, the company filed a lawsuit against Ethicon, Inc. Mitek
Surgical Products, a division of Ethicon, Inc. and GyneCare, Inc. ("the
Defendants") in the United States District Court for the Northern District of
California. The lawsuit alleges, among other things, that the Defendants have
been and are currently infringing four patents issued to the company in
December 1997. Specifically, the Defendants use, market and sell two separate
electrosurgical systems under the names of "VAPR" and "VersaPoint" which
infringe these patents. The company seeks: (1) a judgment that the Defendants
have infringed these patents; (2) to preliminarily and permanently restrain
and enjoin the Defendants from marketing and selling the VAPR and VersaPoint
systems; and (3) an award of damages (including attorneys' fees) to compensate
the company for lost profits, the damages to be trebled because of the
Defendants' willful infringement. In addition, the company filed a motion on
March 5, 1998 for preliminary injunction against the Defendants marketing and
selling of the VAPR system.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
EXECUTIVE OFFICERS
The executive officers of the company who are elected by and serve at the
discretion of the Board of Directors and their ages are as follows:
Name Age Position
- --------------------- ------ ------------------------------------
Michael A. Baker 39 President and Chief Executive Officer
Hira V. Thapliyal, Ph.D. 48 Chief Technical Officer
Robert T. Hagan 52 Vice President, Manufacturing
Christine E. Hanni 37 Vice President, Finance
and Chief Financial Officer
Allan Weinstein 44 Vice President, Sales and Marketing
Michael A. Baker joined the company in July 1997 as President and Chief
Executive Officer and Director, From 1989 to 1997, Mr. Baker held several
positions in planning, corporate development and senior management at
Medtronic, Inc. a $2.4 billion medical technology company specializing in
implantable and invasive therapies. His most recent position at Medtronic,
Inc., was Vice President, General Manager of Medtronic's Coronary Vascular
Division based in San Diego, CA. From 1988 to 1989, Mr. Baker was a
Management Consultant at The Carroll Group. From 1986 to 1988, Mr. Baker was
the Corporate Development Officer at American National Bank & Trust Co. Prior
to joining American National Bank & Trust Co., Mr. Baker served in the United
States Army from 1981 to 1986 were he rose to the rank of Captain. Mr. Baker
holds a bachelor degree from the United States Military Academy at West Point
and an MBA from the University of Chicago.
Hira V. Thapliyal, Ph.D., a founder of the company, has served as Chief
Technical Officer of the company since July 1997. Prior to July 1997, Dr.
Thapliyal was President, Chief Executive and Officer of the company since its
inception in April 1993. He has also been a Director of the company since April
1993. From 1989 to 1993, Dr. Thapliyal was President and Chief Executive
Officer of MicroBionics, Inc., a privately held company developing an in-vivo
continuous blood gas monitor. In 1986, Dr. Thapliyal founded Cardiovascular
Imaging Systems, Inc. (CVIS) and served as its President until 1988. CVIS
develops and markets catheters for ultrasonic intraluminal imaging of human
arteries. From 1984 to 1986, Dr. Thapliyal was Vice President, Engineering of
Devices for Vascular Interventions, Inc., a leader in marketing atherectomy
systems for treatment of atherosclerotic disease. Dr. Thapliyal holds an M.S.
degree in Electrical Engineering from University of Idaho and a Ph.D. in
Materials Science & Engineering from Cornell University.
Robert T. Hagan joined the company in August 1995 as Vice President,
Manufacturing. From October 1992 to July 1995, Mr. Hagan was retired. From
October 1984 to September 1992, Mr. Hagan held several manufacturing oversight
positions with Haemonetics Corporation, a manufacturer of blood processing
equipment and sterile disposables. His most recent position at Haemonetics
Corporation was Director of Advanced Manufacturing Technologies. Mr. Hagan
holds a B.S. degree in Industrial Engineering from Tennessee Technology
University.
Christine E. Hanni joined the company in January 1998 as Vice President,
Finance and Chief Financial Officer. From 1992 until 1997, Ms. Hanni first
served as Corporate Controller and then as Director of International Finance
and Sales Administration of Target Therapeutics, Inc. (Target), a leading
manufacturer of disposable medical devices for the treatment of various brain
diseases. Prior to joining Target, she held several finance and accounting
positions with Tandem Computers, Inc. including Marketing Accounting Manager.
From 1983 to 1987 Ms. Hanni was an auditor for Coopers & Lybrand in San Jose,
California and Portland, Oregon. Ms. Hanni holds a B.S. degree in Accounting
from Southern Oregon University.
Allan Weinstein joined the company in January 1995 as Vice President, Sales
and Marketing. From December 1982 to December 1994, Mr. Weinstein held various
marketing positions with Acufex Microsurgical, Inc. (Acufex), a manufacturer of
arthroscopic instruments. His most recent position at Acufex was Director of
Sales, North and South America. Mr. Weinstein holds a B.A. degree in
Communications from Seton Hall University.
DISCLOSURE WITH REGARD TO DELINQUENT FILINGS
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the company's directors and officers and persons who
own more than 10% of a registered class of the company's equity securities, to
file reports of ownership and reports of changes in the ownership with the
Securities and Exchange Commission (the "SEC"). Such persons are required by
SEC 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 submitted to it during
the year ended January 3, 1998, the company believes that, during the Last
Fiscal Year, its director and officer Michael A Baker failed to timely file
one Form 3 disclosing shares of the company common stock aquired by Mr. Baker
before he became a director and officer of the company.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The company's common stock trades publicly on The Nasdaq Stock Market under
the symbol ARTC. The following table sets forth for the periods indicated, the
quarterly high and low closing sales prices of the common stock on The Nasdaq
Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Year Ended December 28, 1996
- --------------------------------------
Quarter Ended March 30, 1996 (1) $ 25.750 $ 16.875
Quarter Ended June 29, 1996 $ 24.750 $ 14.813
Quarter Ended September 28, 1996 $ 18.000 $ 8.750
Quarter Ended December 28, 1996 $ 11.000 $ 6.750
Year Ended January 3, 1998
- --------------------------------------
Quarter Ended March 29, 1997 $ 10.625 $ 5.500
Quarter Ended June 28, 1997 $ 9.500 $ 5.500
Quarter Ended September 27, 1997 $ 14.750 $ 8.625
Quarter Ended January 3, 1998 $ 13.563 $ 9.500
</TABLE>
(1) Prior to February 5, 1996, there was no established public
trading market for the common stock. Market prices presented
for the quarter ended March 31, 1996 are for the period
commencing February 5, 1996 and ending March 31, 1996.
As of March 4, 1998, there were no outstanding shares of Preferred Stock and
231 holders of record of 8,896,386 shares of outstanding Common Stock. The
company has not paid any dividends since its inception and does not intend to
pay any dividends on its Common Stock in the foreseeable future.
Item 6. SELECTED FINANCIAL DATA
The following is a summary of the company's unaudited quarterly results for
the eight quarters in the period ended January 3, 1998, the audited annual
results for the years ended January 3, 1998, December 28, 1996, December 31,
1995 and 1994 and for the period from April 29, 1993 (date of inception) to
December 31, 1993. In management's opinion, the quarterly results have been
prepared on a basis consistent with the audited financial statements
contained elsewhere herein, and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
information for the periods presented. The information set forth below is not
necessarily indicative of the results of future operations and should be read
in conjunction with the audited financial statements and notes thereto
appearing on pages 21-38 of this report.
<PAGE>
<TABLE>
<CAPTION>
Three Month Period Ended
--------------------------------------------------
March 29, June 28, September 27, January 3,
1997 1997 1997 1998
----------- ----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Net sales $ 2,261 $ 2,832 $ 3,366 $ 4,337
Gross margin 582 838 1,165 1,716
Operating expenses 3,135 3,186 3,396 3,684
Net loss (2,167) (1,989) (1,900) (1,632)
Net loss per common share and
per common share-assuming
dilution(1) $ (0.25) $ (0.23) $ (0.22) $ (0.18)
Three Month Period Ended
--------------------------------------------------
March 30, June 29, September 28, December 28,
1996 1996 1996 1996
----------- ----------- ----------- -----------
(in thousands, except per share data)
Net sales $ 1,159 $ 1,406 $ 1,574 $ 1,883
Gross margin 94 170 209 307
Operating expenses 2,098 2,349 2,534 3,008
Net loss (1,743) (1,735) (1,932) (2,295)
Net loss per common share and
per common share-assuming
dilution(1) $ (0.30) $ (0.20) $ (0.22) $ (0.26)
</TABLE>
(1) Per Share data has been restated to reflect the company's adoption of
Statement of Financial Accounting Standard No. 128 "Earnings Per Share" and
the Securities and Exchange Commission Staff Accounting Bulletin No. 98. See
Note 2 of the Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
For The
Period From
April 29,
1993
(Date of
Year Ended Inception)
------------------------------------------------------ To
January 3, December 28, December 31, December 31, December 31,
1998 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 12,796 $ 6,022 $ 218 $ -- $ --
Gross margin 4,301 780 (229) -- --
Total operating expenses 13,401 9,989 6,940 2,247 857
Net loss (7,688) (7,705) (6,950) (2,121) (842)
Net loss per common share and per
common share-assuming dilution (1) (0.87) (0.97) (1.82) (0.64) (0.51)
January 3, December 28, December 31, December 31, December 31,
1998 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $ 8,188 $ 11,359 $ 4,774 $ 2,599 $ 993
Working capital 20,342 23,468 5,119 2,467 858
Total assets 26,675 33,297 7,800 2,917 1,048
Total stockholders' equity (2) 23,546 30,782 6,325 2,727 890
</TABLE>
(1) Per Share data has been restated to reflect the company's adoption of
Statement of Financial Accounting Standard No. 128 "Earnings Per Share" and
the Securities and Exchange Commission Staff Accounting Bulletin No. 98. See
Note 2 of the Financial Statements.
(2) The company has not declared any cash dividends on its common stock since
its inception and does not anticipate paying cash dividends in the
foreseeable future.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Statements in this Management's Discussion and Analysis of Financial Condition
and Results of Operations which express that the company "believes",
"anticipates" or "plans to..." as well as other statements which are not
historical fact, are forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual events or results may
differ materially as a result of the risks and uncertainties described herein
and elsewhere including, in particular, those factors described under
"Business" and "Additional Factors That Might Affect Future Results" set forth
in Part I of this Report as well as other risks and uncertainties in the
documents incorporated herein by reference.
Since commencing operations in April 1993, ArthroCare Corporation (the company)
has primarily engaged in the design, development, clinical testing,
manufacturing and marketing of its Arthroscopic System. The Arthroscopic
System uses the company's novel Coblation (TM) technology that allows surgeons
to operate with increased precision and accuracy with minimal damage to
surrounding tissue. It is currently being used in closed joint surgery
including many types of knee and shoulder procedures. The Arthroscopic System
consists of a disposable, bipolar ArthroWand, a radio frequency controller
that powers the ArthroWand and a cable that connects the ArthroWand to the
controller. The ArthroWand ablates (removes) soft tissue with minimal damage
to surrounding healthy tissue and simultaneously achieves hemostasis (sealing
of small bleeding vessels). After the close of the 1997 fiscal year, the
company entered into a license agreement under which Boston Scientific
Corporation will develop and market products based on the company's Coblation
(TM) technology for myocardial revascularization procedures.
The company received clearance of its 510(k) premarket notification from the
United States Food and Drug Administration (FDA) in March 1995 to market its
Arthroscopic System in the United States for use in arthroscopic surgery of the
knee, shoulder, elbow and ankle. The company has since received clearance for
use in the wrist and hip. In December 1995, the company commercially
introduced its Arthroscopic System through a network of distributors in the
United States. In light of the for going, the company has a limited history of
operations. The company's strategy includes placing with arthroscopic
surgeons, controllers that are intended to generate future wand revenues. The
company's long-term strategy includes applying its patented platform
technology to a range of other soft tissue surgical procedures. The company
has received 510(k) clearance for use of its technology in several fields and
has received approval of an investigational device exemption (IDE) to conduct
a clinical study which may result in the company submitting a 510(k)
application to the FDA. There can be no assurance that any of the company's
clinical studies will lead to 510(k) applications or that the applications
will be cleared by the FDA on a timely basis, if at all, or that the products,
if cleared for marketing, will ever achieve commercial acceptance.
<PAGE>
RESULTS OF OPERATIONS
The year ended January 3, 1998 was the company's second full year of product
shipments. The company was in its development stage during the comparable year
ended December 31, 1995.
ArthroCare Corporation Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended
------------------------------------------
January 3, December 28, December 31,
1998 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 12,796 $ 6,022 $ 218
Cost of sales 8,495 5,242 447
------------ ------------ ------------
Gross margin 4,301 780 (229)
------------ ------------ ------------
Operating expenses:
Research and development 4,026 3,772 4,009
Sales and marketing 6,263 3,635 1,351
General and administrative 3,112 2,582 1,320
Non-recurring charge for acquired technology -- -- 260
------------ ------------ ------------
Total operating expenses 13,401 9,989 6,940
------------ ------------ ------------
Loss from operations (9,100) (9,209) (7,169)
Interest and other expense, net 1,413 1,505 219
------------ ------------ ------------
Loss before income tax provision (7,687) (7,704) (6,950)
Income tax provision (1) (1) --
------------ ------------ ------------
Net loss $ (7,688) $ (7,705) $ (6,950)
============ ============ ============
</TABLE>
Net Sales
Revenues for the year ended January 3, 1998 were $12.8 million compared to
$6.0 million for the year ended December 28, 1996. The $6.8 million increase
was due to higher unit volume wand and controller sales resulting from
controller promotional programs and a larger installed base of controllers.
The company was in its development stage during 1995 and shipped its first
Arthroscopic System in December 1995. Revenues for the year ended December 31,
1995 were $0.2 million.
The company's strategy has been and continues to be to increase future wand
sales by increasing the installed base of controllers through aggressive
promotional programs. This strategy has and will continue to have an adverse
impact on controller revenue and on gross margins, partially offsetting the
positive impact of increased wand sales.
Overall, wands were sold at or near list price during the years ended January
3, 1998 and December 28, 1996. The company expects to sell wands at discounted
prices to international dealers in the future.
For the years ended January 3, 1998 and December 28, 1996 wands sales
comprised the vast majority of revenues. The company believes increased wand
sales are a result of the company's strategic plan to build market share
through continued promotional programs of controllers. The company expects
wand sales to remain the primary component of revenues in the future.
The company believes that, in its second full year of product shipments, it
has penetrated 15% to 20% of hospitals that perform arthroscopic procedures in
the United States and that more than half of the company's wand revenue is
being generated by wands purchased for use in shoulder procedures. The company
believes that shoulder procedures are the fastest growing segment of the
arthroscopic market and knee procedures represent the largest segment of the
arthroscopic market. In order to achieve increasing wand sales over time, the
company believes it must further penetrate the market for knee procedures.
The company has introduced additional wand styles including its new Turbo Dome
wands designed to be used in both knee and shoulder arthroscopic procedures. In
November 1997, the company introduced its System 2000 controller designed for
more aggressive ablation and hemostasis. The company believes these features
will increase wand sales in the market for knee and shoulder procedures. In
addition, the company has introduced wand styles for small joint and for
capsular shrinkage procedures. The new wand styles and the new System 2000
controller are intended to increase the market for the company's products.
There can be no assurance that the use of these new products will be adopted
by doctors.
The company has limited sales and marketing experience and can make no
assurance that current trends in sales and product acceptance will continue.
Cost of Sales
Cost of sales for the year ended January 3, 1998 was $8.5 million, or 66% of
sales. During the year ended December 28, 1996, cost of sales was $5.2 million,
or 87% of sales. The company was in its development stage during 1995 and
shipped its first Arthroscopic System in December 1995. Cost of sales for the
year ended December 31, 1995 was $0.4 million. The $3.3 million increase in
cost of sales for the year ended January 3, 1998 over the year ended December
28, 1996 was due to increased shipments of both wands and controllers. Cost of
sales as a percentage of sales decreased 21 percentage points during the year
ended January 3, 1998 as compared to the year ended December 28, 1996
resulting from the fixed and semi-fixed costs being spread over higher
manufacturing volume. Improvements to the manufacturing process also reduced
costs by improving efficiency.
In 1997 the company made a strategic decision to manufacture its new System
2000 controller in-house and introduced this new product in November 1997.
While the shipments of System 2000 controllers did not have a material impact
on controller cost or gross margin in the year ended January 3, 1998, the
company believes it can reduce controller unit cost in the future by
manufacturing the new controller in-house. However, there can be no assurance
that the company will be able to achieve this objective.
The improvement in gross margin in 1997 includes the effect of the controller
promotional programs. The company believes that if its promotional programs
maintain the same or higher number of wands bundled with a discounted
controller, and if the demand for disposable wands increases over a growing
installed base of controllers, then the cost of sales will continue to
decrease as a percentage of sales and gross margins will continue to increase.
However, there can be no assurance the company will be successful in
maintaining the mix of wands to discounted controllers in its promotional
programs or in increasing demand for its disposable wands. Further, production
of future new products may adversely impact gross margin due to the
inefficiencies in manufacturing new products.
Operating Expenses
Research and development expense, which includes expenditures for regulatory
compliance and quality assurance, increased 7% to $4.0 million for the year
ended January 3, 1998 compared to $3.8 million for the year ended December 28,
1996. The $0.2 million increase is attributed to the development and
introduction of seven new wand styles and the System 2000 controller as well
as the development and investigation of products suitable for additional
markets. This increase was partially offset by reduced spending for outside
design and engineering services. Research and development expenses decreased 6
% or $0.2 million during the year ended December 28, 1996 as compared to $4.0
million for the year ended December 31, 1995. The decrease was due to the
inclusion of manufacturing startup costs in research and development in the
year ended December 31, 1995 when the company was in its development stage, as
well as a non-recurring charge of $260,000 in March 1995, for acquired
technology.
The company believes that continued investment in its platform technology is
essential if it is to maintain its competitive position. The company expects to
continue increasing research and development spending through substantial
expenditures on new product development, regulatory affairs, clinical studies
and patents, although not at the rate seen in the past year. The company
believes that its ability to attract and retain qualified engineers in the
future is critical to the continued success of the company.
Sales and marketing expense increased 72% to $6.3 million in the year ended
January 3, 1998 as compared to $3.6 million for the year ended December 28,
1996. The $2.7 million increase was primarily due to higher dealer commissions
resulting from increased sales, higher staffing, and promotional and trade show
expenses reflecting an increased level of sales and marketing activity. Sales
and marketing expenses increased 169% or $2.3 million during the year ended
December 28, 1996 as compared to $1.4 million in the year ended December 31,
1995 when the company was in its development stage. The increase was primarily
due to dealer commissions and promotional, demonstration and sample expenses.
The company anticipates that sales and marketing spending will continue to
increase due to higher dealer commissions from increased sales, the additional
cost of penetrating international markets for the company's products, higher
promotional, demonstration and sample expenses, and additional investments in
the sales, marketing and support staff necessary to market its current
products and commercialize future products.
General and administrative expense increased 21% to $3.1 million in the year
ended January 3, 1998 as compared to $2.6 million for the year ended December
28, 1996. The $0.5 million increase is primarily due to the expense of
attracting, recruiting and relocating a Chief Executive Officer and increased
staffing. Higher expenditures also include the cost of legal service, business
development activities, insurance and expenses necessary to expand the
corporate infrastructure. General and administrative expenses nearly doubled
to $2.6 million for the year ended December 28, 1996 from $1.3 million for the
year ended December 31, 1995 due to additional staffing including management
personnel, the increased cost of being a public company, business development
activities, consulting fees and expenses necessary to expand the corporate
infrastructure. The company expects that general and administrative expenses
will continue to increase as a result of a patent litigation claim against
certain competitors filed by the company after the close of the year, further
expansion of its staff, and business development activities. See Part I, Item
3 of this report for a description of the patent litigation.
Interest and Other Expense
Net interest income decreased slightly to $1.4 million for the year ended
January 3, 1998 as compared to $1.5 million for the year ended December 28,
1996. The $0.1 million decrease is attributable to the conversion of
investments to cash for use in business operations during the year. Interest
income increased $1.3 million in fiscal 1996 from $0.2 million for the year
ended December 31, 1995 due to interest received on investment of the proceeds
from the 1996 initial public offering of the company's common stock. At the
end of fiscal 1997, the company had $19.9 million in cash, cash equivalents,
and available-for-sale securities (which included long-term available-for-sale
securities) as compared to $29.3 million at the end of fiscal 1996 and $4.8
million at the end of fiscal 1995. The company expects that interest income
will decrease as the company reduces its investments to meet the future cash
needs of the business.
Net Loss
Net loss remained unchanged at $7.7 million for the years ended January 3,
1998 and December 28, 1996. During fiscal 1997, sales doubled, gross margin
grew four and a half times and operating expenses increased only 34%. The net
loss of $7.7 million for the year ended December 28, 1996 compares to $7.0
million in the year ended December 31, 1995. The increased loss is due to
higher operating expenses resulting from increased business activity including
product development, manufacturing ramp-up, higher dealer commissions, the
sales and marketing expenses necessary to promote products and the building of
corporate infrastructure. The higher operating expense was partially offset by
an increase in gross margin and higher interest income.
The company expects net losses to continue to decrease as sales increase
faster than operating expenses and gross margin continues to improve. However,
there can be no assurance the company will be successful in its efforts to
increase sales and gross margin or control the growth of operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
At January 3, 1998 the company had $20.3 million in working capital and its
principal sources of liquidity consisted of $19.9 million in cash, cash
equivalents, and available-for-sale securities which include long-term
available- for-sale securities. The cash and cash equivalents are highly liquid
with original maturities of ninety days or less.
The company's cash used in operations increased to $8.5 million for the year
ended January 3, 1998 from $6.4 million for the year ended December 28, 1996
due to a higher inventory balance resulting from increased sales activity, the
build- up of controller component inventory in anticipation of volume, in-house
manufacturing of the new System 2000 controller and higher accounts receivable
balances resulting from higher sales. This was partially offset by higher
accrued compensation due to increased staffing levels and higher accrued
commissions due to increased sales. Cash used in operations during the year
ended December 28, 1996 decreased slightly to $6.4 million from $6.6 million
for the year ended December 31, 1995 reflecting higher accounts receivable,
net loss, and inventory at the end of fiscal year 1996, offset by higher
accrued compensation, accounts payable and financial reporting expenses, and
lower prepayments to a supplier of the company's inventory.
Net accounts receivable increased to $2.2 million as of January 3, 1998 from
$1.3 million as of December 28, 1996. Accounts receivable were $0.2 million as
of December 31, 1995. The increase in accounts receivable between the fiscal
years was due to sequentially increasing sales and the timing of sales within
the last few months of the year.
Inventories increased to $2.0 million as of January 3, 1998 compared to $0.8
million at December 28, 1996 due to higher product sales activity and higher
parts inventory in anticipation of volume, in-house manufacturing of the new
System 2000 controller. Inventories were $0.5 million at December 31, 1995. The
increase in fiscal year 1996 was due to the higher level of product sales
activity compared to the prior year during which the company began shipping
product in December. The company expects future inventory levels to grow both
in absolute value and as a percentage of total assets as sales volume
increases.
Net property and equipment decreased to $1.4 million as of January 3, 1998
compared to $1.5 million at December 28, 1996. The slight decrease in fiscal
1997 was due to an increase in accumulated depreciation partially offset by
the acquisition of capital equipment. Net property and equipment was $1.1
million as of December 31, 1995. The increase in fiscal 1996 was primarily due
to purchases of computer equipment, manufacturing equipment and machinery, and
furniture and fixtures. In 1998, the company has planned but not committed to
approximately $0.7 million in capital expenditures.
On February 11, 1998 the company and Boston Scientific Corporation (BSC)
announced an agreement in which BSC will develop and market the company's
proprietary Coblation (TM) technology for use in myocardial revascularization.
Under the agreement, BSC acquires exclusive licensing rights to the company's
intellectual property in this field. BSC will pay license fees, a portion of
which will be classified as prepaid royalties, to the company upon achievement
of designated milestones and royalties on sales of resulting products. There
can be no assurance the company and BSC will achieve the milestones required
for the company to receive the license fees or that a product will be
developed, cleared for marketing and achieve sufficient commercial acceptance
for the company to receive royalties.
The company relies on computers and computer software to run its business as
do its vendors, suppliers and customers. These computers and computer software
may not be able to properly recognize the dates commencing in the Year 2000.
The company has not completed an assessment of the impact this may have on its
business and does not have a reasonable basis to conclude whether the impact of
the year 2000 will or will not materially effect future financial results. To
date the company has not found any material impact which may result from the
failure of its computers and computer software or that of its vendors,
suppliers, and customers. However, the company plans to make an assessment of
this issue during 1998 and, if appropriate, develop an action plan to correct
it.
The company plans to finance its capital needs principally from cash from
product sales, cash, cash equivalents, and available-for-sale securities which
include long-term available-for-sale securities and related interest, existing
capital resources and licensing arrangements which the company believes will be
sufficient to fund its operations at least through fiscal year 1999. The
company currently has no commitments for any credit facilities such as
revolving credit agreements or lines of credit that could provide additional
working capital. The company's future liquidity and capital requirements will
depend on numerous factors including the company's success of commercializing
the Arthroscopic System, development and commercialization of products in
fields other than arthroscopy, the ability of the company's suppliers to
continue to meet the demands of the company at current prices, the cost
associated with the company's ongoing patent litigation, obtaining and
enforcing patents important to the company's business, the status of
regulatory approvals and competition. There can be no assurance that the
company will not be required to raise additional capital or that such capital
will be available on acceptable terms, if at all.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income", and Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosure about Segments of an Enterprise and Related Information". SFAS 130
establishes requirements for disclosure of comprehensive income and becomes
effective for the company's fiscal year 1998 with reclassification of earlier
financial statements for comparative purposes. Comprehensive income generally
represents all changes in stockholders' equity except those resulting from
investments or contributions by stockholders. SFAS 131 establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports and standards for related
disclosures about products and services, geographic areas and major customers.
This statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise". The new standard
becomes effective for the company's fiscal year 1998, and requires that
comparative information from earlier years be restated to conform to
requirements of this standard. The company is evaluating the requirements of
SFAS 130 and SFAS 131 and the effects, if any, on the company's current
reporting and disclosures.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Certain information required by this Item is included in Item 6 of Part II of
this Report and is incorporated herein by reference. All other information
required by this Item is included on pages to in Item 14 of Part IV of
this Report and is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
Item 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Information regarding the Directors of the Company is incorporated by
reference from the information set forth under the caption "Proposal No. 1:
Election of Directors" in the Proxy Statement. Information regarding the
executive officers of the Company is incorporated by reference from the
information set forth under the caption "Executive Officers of the Company" at
the end of Part I of this Report. Information with respect to Directors and
Officers of the Company required by Item 405 of Regulation S-K is set forth
under the captin "Disclosure with Regard to Delinquent Filings" at the end of
Part I of this Report
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
discussion in the Proxy Statement captioned "Executive Compensation."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
discussion in the Proxy Statement captioned "Share Ownership of Directors,
Officers and Certain Beneficial Owners."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
discussion in the Proxy Statement captioned "Certain Transactions."
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM
8-K
(a) The following documents are filed as part of this Report.
1. Financial Statements. The following financial statements of the Company
and the Report of Independant Accountants, are included in Part IV of this
Report on the pages indicated.
Page
------
Report of Independent Accountants
Balance Sheets as of January 3, 1998 and December 28, 1996
Statements of Operations for the years ended January 3, 1998,
December 28, 1996, and December 31, 1995
Statement of Stockholders' Equity for the years ended
January 3, 1998, December 28, 1996 and December 31, 1995
Statements of Cash Flows for the years ended January 3,
1998, December 28, 1996 and December 31, 1995
Notes to Financial Statements
2. Financial Statement Schedule. The following financial statement schedule
of the Company as of and for the years ended January 3, 1998, December 28,
1996 and December 31, 1995, and the Report of Independent Accountants on
Financial Statements Schedule are included in Part IV of this Report on the
pages indicated. This financial statement schedule should be read in
conjunction with the Financial Statements, and notes thereto, of the Company.
Schedule Title Page
- -------- ------------------------------------ ------
II Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not applicable,
not required, or the information required to be set forth therein is included
in the Financial Statements or notes thereto.
3. Exhibits (in accordance with Item 601 of Regulation S-K).
(1) 3.2 Certificate of Incorporation of the Registrant.
(1) 3.3 Bylaws of the Registrant.
(1) 4.1 Specimen Common Stock Certificate.
(1) 10.1 Form of Indemnification Agreement between the Registrant
and each of its directors and officers.
(1) 10.2 Incentive Stock Plan and form of Stock Option Agreement
thereunder.
(1) 10.3 Director Option Plan and form of Director Stock Option
Agreement thereunder.
(1) 10.4 Employee Stock Purchase Plan and forms of agreements
thereunder.
(1) 10.5 Form of Exclusive Distribution Agreement.
(1) 10.6 Form of Exclusive Sales Representative Agreement.
(1) 10.7 Consulting Agreement, dated May 10, 1993, between the
Registrant and Philip E. Eggers, and amendment thereto.
(1) 10.8 Consulting Agreement, dated May 20, 1993, between the
Registrant and Eggers & Associates, Inc., and amendment
thereto.
(1) 10.9+ Development and Supply Agreement, dated March 1, 1994,
between the Registrant and SeaMed Corporation.
(1) 10.10 Lease Agreement, dated September 15, 1994, between
Registrant and The Arrillaga Foundation and the Perry
Foundation for the Registrant's facility located at 595
North Pastoria Avenue, Sunnyvale, California 94086.
(1) 10.11 Employment Letter Agreement, dated October 21, 1994,
between the Registrant and Allan Weinstein and amendment
thereto.
(1) 10.12 Purchase Assistance Promissory Note, dated January 19,
1995, between Registrant and Allan Weinstein.
(1) 10.13 Sublease Agreement, dated February 1, 1995, between
Registrant and Guided Medical Systems, Inc. for the
Registrant's former facility at 453 Ravendale Drive,
Mountain View, California 94043.
(1) 10.14 Mortgage Assistance Promissory Note Agreement, dated
February 5, 1995, between the Registrant and Allan
Weinstein.
(1) 10.15 Restricted Stock Purchase and Security Agreement, dated
February 5, 1995, between the Registrant and Allan
Weinstein.
(1) 10.16 Employment Letter Agreement, dated July 18, 1995, between
the Registrant and Robert T. Hagan.
(1) 10.17 Restricted Stock Purchase and Security Agreement, dated
August 1, 1995, between the Registrant and Robert T. Hagan.
(1) 10.18 Employment Letter Agreement, dated September 3, 1995,
between the Registrant and A. Larry Tannenbaum.
(1) 10.19+ Radiation Services Agreement, dated September 13, 1995,
between the Registrant and SteriGenics International.
(1) 10.20 Amended and Restated Stockholder Rights Agreement, dated
October 16, 1995, between the Registrant and certain
holders of the Registrant's securities.
(1) 10.21 Contribution Agreement, dated March 31, 1995, by and among
Philip E. Eggers, Robert S. Garvie, Anthony J. Manlove,
Hira V. Thapliyal and the Registrant.
(2) 10.22 Preferred Stock Rights Agreement, dated November 14, 1996,
between the Registrant and Norwest Bank Minnesota, N.A.
(3) 10.23+ Exclusive Distributor Agreement, dated April 15, 1997,
between the Registrant and Arthrex, Gmbh.
(4) 10.24++ Employment Letter Agreement, dated June 20, 1997, between
the Registrant and Michael A. Baker.
(5) 10.25+ Exclusive Distributor Agreement, dated August 21, 1997,
between the Registrant and Kobayashi Pharmaceutical
Company, Ltd.
10.26++ License Agreement dated February 9, 1998, between the
Registrant and Boston Scientific Corporation.
10.27++ Development and Supply Agreement Agreement dated February
9, 1998, between the Registrant and Boston Scientific
Corporation.
10.28 Lease Agreement date March 25, 1998 between the Registrant
and Aetna Life Insurance Company for the Registrant's
facility located at 840 Del Rey Avenue, Sunnyvale,
California 94086.
23.1 Consent of Coopers & Lybrand L.L.P., Independent
Accountants.
24.1 Power of Attorney (see Page 34).
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule (1996).
27.3 Restated Financial Data Schedule (1997).
(1) Incorporated herein by reference to the same-numbered exhibit
previously filed with the Registrant's Registration Statement on Form
S- 1 (Registration No. 33-80453).
(2) Incorporated here in by reference to exhibit 5 previously filed with the
Registrant's Registration Statement on Form 8-A (Registration No. 000-
27422).
(3) Incorporated herein by reference to the same-numbered exhibit
previously filed with the Registrant's Quarterly Report on Form 10-Q
for the period ended March 29, 1997.
(4) Incorporated herein by reference to the same-numbered exhibit
previously filed with the Registrant's Quarterly Report on Form 10-Q
for the period ended June 28, 1997.
(5) Incorporated herein by reference to the same numbered exhibit
previously filed with the Registrant's Quarterly Report on Form 10-Q
for the period ended September 27, 1997.
+ Confidential treatment granted.
++ Confidential treatment requested.
<PAGE>
REPORT OF INDEPENTANT ACCOUNTANTS
To the Board of Directors and Stockholders
ArthroCare Corporation:
We have audited the accompanying balance sheets of ArthroCare Corporation as of
January 3, 1998 and December 28, 1996, and the related statements of
operations, stockholders equity and cash flows for each of the three years in
the period ended January 3, 1998. These financial statements are the
responsibility of the companys management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ArthroCare Corporation as of
January 3, 1998 and December 28, 1996, and the results of its operations and
its cash flows for each of the three years in the period ended January 3, 1998,
in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
San Jose, California
January 27, 1998
except for Note 11 for which
the date is March 25, 1998
<PAGE>
ARTHROCARE CORPORATION
BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
January 3, December 28,
1998 1996
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,188 $11,359
Available-for-sale securities 10,674 12,281
Accounts receivable, net of allowance for bad
debt of $115 in 1997 and $142 in 1996 2,223 1,251
Inventories 2,019 759
Prepaid expenses and other current assets 210 155
Total current assets 23,314 25,805
Available-for-sale securities 1,010 5,641
Property and equipment, net 1,412 1,484
Related party receivables 876 298
Other assets 63 69
----------- -----------
Total assets $26,675 $33,297
=========== ===========
Liabilities
Current liabilities:
Accounts payable:
Trade $ 950 $ 1,001
Related parties 18 54
Accrued liabilities 1,987 1,245
Capital lease obligation, current portion 17 37
----------- -----------
Total current liabilities 2,972 2,337
Capital lease obligation, less current portion -- 21
Deferred rent 157 157
----------- -----------
Total liabilities 3,129 2,515
----------- -----------
Commitments (Note 5 and Note 11)
Stockholders' Equity
Preferred stock, par value $0.001:
Authorized: 5,000 shares;
Issued and outstanding: 0 shares in 1997 and 1996 -- --
Common stock, par value $0.001:
Authorized: 20,000 shares;
Issued and outstanding: 8,869 shares in 1997
and 8,778 shares in 1996 9 9
Additional paid-in capital 49,153 48,862
Notes receivable from stockholders (92) (92)
Deferred compensation (228) (388)
Unrealized gain on available-for-sale securities 10 9
Accumulated deficit (25,306) (17,618)
----------- -----------
Total stockholders' equity 23,546 30,782
----------- -----------
Total liabilities and stockholders' equity $26,675 $33,297
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ARTHROCARE CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended
------------------------------------------
January 3, December 28, December 31,
1998 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 12,796 $ 6,022 $ 218
Cost of sales 8,495 5,242 447
------------ ------------ ------------
Gross margin 4,301 780 (229)
------------ ------------ ------------
Operating expenses:
Research and development 4,026 3,772 4,009
Sales and marketing 6,263 3,635 1,351
General and administrative 3,112 2,582 1,320
Non-recurring charge for acquired technology -- -- 260
------------ ------------ ------------
Total operating expenses 13,401 9,989 6,940
------------ ------------ ------------
Loss from operations (9,100) (9,209) (7,169)
Interest income 1,418 1,514 219
Other expense (5) (9) --
------------ ------------ ------------
Loss before income tax provision (7,687) (7,704) (6,950)
Income tax provision (1) (1) --
------------ ------------ ------------
Net loss $ (7,688) $ (7,705) $ (6,950)
============ ============ ============
Net loss per common share and per common
share-assuming dilution $ (0.87) $ (0.97) $ (1.82)
============ ============ ============
Shares used in computing net loss per common
share and per common share-assuming dilution 8,813 7,936 3,812
============ ============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE>
ARTHROCARE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
for the years ended January 3, 1998, December 28, 1996, and December 31, 1995
(in thousands, except per share data)
</TABLE>
<TABLE>
<CAPTION>
Unreal-
ized
Notes Gain on
Receiv- Avail-
Addi- able able- Total
Preferred Stock Common Stock tional from Deferred for-Sale Accum- Stock-
--------------- ----------------- Paid-In Stock- Compensa- Secur- ulated holders'
Shares Amount Shares Amount Capital holders tion ities Deficit Equity
------- ------- -------- -------- -------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 4,356 $ 4 1,186 $ 1 $ 5,685 $ -- $ -- $ -- $ (2,963) $ 2,727
Issuance of Series C preferred
stock for cash at $2.00 per share
in March and June 1995, net of
issuance costs of $17 2,923 3 -- -- 5,825 -- -- -- -- 5,828
Issuance of notes receivable in
exchange for exercise of options
to purchase common stock at $0.32
per share in February 1995 and
$0.80 per share in August 1995 -- -- 190 -- 104 (104) -- -- -- --
Issuance of common stock through:
Exchange of intellectual
property rights at $0.40 per
share in March 1995 -- -- 400 1 160 -- -- -- -- 161
Exercise of options -- -- 16 -- 24 -- -- -- -- 24
Issuance of Series D preferred
stock for cash at $3.00 per
share in October 1995, net of
issuance cost of $7 1,399 2 -- -- 4,189 -- -- -- -- 4,191
Repayment of notes receivable
from stockholder in November 1995 -- -- -- -- -- 12 -- -- -- 12
Deferred compensation related to
grants of stock options -- -- -- -- 882 -- (882) -- -- --
Amortization of deferred
compensation -- -- -- -- -- -- 332 -- -- 332
Net Loss -- -- -- -- -- -- -- -- (6,950) (6,950)
------- ------- -------- -------- -------- -------- --------- -------- --------- --------
Balances, December 31, 1995 8,678 9 1,792 2 16,869 (92) (550) -- (9,913) 6,325
Issuance of common stock through:
Initial public offering at
$14.00 per share in February
1996, net of issuance costs of
$3,563 -- -- 2,530 3 31,854 -- -- -- -- 31,857
Conversion of preferred stock
in connection with the initial
public offering in February 1996 (8,678) (9) 4,339 4 5 -- -- -- -- --
Exercise of options -- -- 107 -- 63 -- -- -- -- 63
Employee stock purchase plan -- -- 10 -- 66 -- -- -- -- 66
Deferred compensation related to
issuance of common stock and
grants of stock options -- -- -- -- 5 -- (5) -- -- --
Amortization of deferred
compensation -- -- -- -- -- -- 167 -- -- 167
Change in unrealized gain on
available-for-sale securities -- -- -- -- -- -- -- 9 -- 9
Net Loss -- -- -- -- -- -- -- -- (7,705) (7,705)
------- ------- -------- -------- -------- -------- --------- -------- --------- --------
Balances, December 28, 1996 -- -- 8,778 9 48,862 (92) (388) 9 (17,618) 30,782
Issuance of common stock through:
Exercise of options -- -- 74 -- 201 -- -- -- -- 201
Employee stock purchase plan -- -- 17 -- 90 -- -- -- -- 90
Amortization of deferred
compensation -- -- -- -- -- -- 160 -- -- 160
Change in unrealized gain on
available-for-sale securities -- -- -- -- -- -- -- 1 -- 1
Net Loss -- -- -- -- -- -- -- -- (7,688) (7,688)
------- ------- -------- -------- -------- -------- --------- -------- --------- --------
Balances, January 3, 1998 -- $ -- 8,869 $ 9 $49,153 $ (92) $(228) $ 10 $(25,306) $23,546
======= ======= ======== ======== ======== ======== ========= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ARTHROCARE CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended
--------------------------------------
January 3, December 28, December 31,
1998 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,688) $ (7,705) $ (6,950)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 615 370 173
Provision for doubtful accounts
receivable and product returns 276 313 5
Forgiveness of notes receivable 11 -- --
Provision for excess and obsolete
inventory 249 50 50
Loss on disposal of property and
equipment 19 309 --
Amortization of deferred compensation 160 167 332
Deferred rent -- 9 137
Non-recurring charge for acquired
technology -- -- 260
Changes in operating assets and
liabilities:
Accounts receivable (1,248) (1,352) (217)
Inventory (1,509) (293) (566)
Prepaid expenses and other current
assets (55) 736 (860)
Accounts payable (87) 288 647
Accrued liabilities 742 772 437
Other assets 6 (20) (37)
------------ ------------ ------------
Net cash used in operating
activities (8,509) (6,356) (6,589)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (562) (1,028) (920)
Purchases of available-for-sale securities (113,117) (189,648) (2,500)
Sales or maturities of available-for-sale
securities 119,356 171,735 2,500
Purchase of intellectual property rights -- -- (100)
------------ ------------ ------------
Net cash provided by (used in)
investing activities 5,677 (18,941) (1,020)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of notes receivable to related
parties (686) (75) (223)
Repayment of capital leases (41) (29) (47)
Repayment of notes receivable from
related parties 97 -- --
Repayment of notes receivable from
stockholder -- -- 12
Proceeds from issuance of common stock
and preferred stock, net of issuance
costs 90 31,923 10,018
Proceeds from exercise of options to
purchase common stock 201 63 24
------------ ------------ ------------
Net cash provided by (used in)
financing activities (339) 31,882 9,784
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (3,171) 6,585 2,175
Cash and cash equivalents, beginning of period 11,359 4,774 2,599
------------ ------------ ------------
Cash and cash equivalents, end of period $ 8,188 $ 11,359 $ 4,774
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ARTHROCARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
1. Formation and Business of the Company:
ArthroCare Corporation (the company) was incorporated on April 29, 1993. The
company designs, develops, manufactures and markets medical devices for use
in arthroscopic and orthopedic procedures. The company's principal operations
commenced in August 1995, at which time it emerged from the development stage.
On November 22, 1995, the company was reincorporated in the state of Delaware
with the associated exchange of shares of each class and series of stock of
the predecessor company for one share of each identical class and series of
stock of the Delaware successor company having a par value of $0.001 per share
for both common stock and preferred stock.
The company sold 2,530,000 shares of common stock (including 330,000 shares
from the exercise of the underwriter's overallotment option) at $14.00 per
share through an initial public offering in February 1996. Net proceeds
(after underwriter's commissions and fees along with other costs associated
with the offering) totaled $31,857,000. Upon completion of the offering, all
outstanding shares of preferred stock (a total of 8,678,000 shares) were
converted into shares of common stock on a two-for-one basis.
In the course of its development activities, the company has sustained
operating losses and expects such losses to continue through fiscal year
1998. The company intends to finance its operations primarily through its
cash, cash equivalents and available-for-sale securities, together with
future revenues and licensing fees. There can be no assurance that the
company will not require additional funding and should this prove necessary,
the company may sell additional shares of its common or preferred stock
through private placement or further public offerings. Such offerings could
cause additional dilution of the company's capital.
2. Summary of Significant Accounting Policies:
BASIS OF PRESENTATION
The company maintains a fifty-two/fifty-three week fiscal year cycle ending on
a Saturday. To conform the company's fiscal year ends, the company must add a
fifty- third week to every fifth or sixth fiscal year. Accordingly, fiscal
1997 was a fifty-three week fiscal year.
STOCK SPLIT
On December 12, 1995, the company effected a one-for-two reverse common stock
split and a corresponding change in the preferred stock conversion ratios. All
common stock data in the accompanying financial statements has been
retroactively adjusted to reflect the reverse stock split.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND AVAILABLE-FOR- SALE SECURITIES
The company considers all highly liquid investments purchased with original
maturities of ninety days or less to be cash equivalents. Cash and cash
equivalents include money market funds and various deposit accounts.
The company has classified its investments as "available-for-sale." Such
investments are recorded at fair value and unrealized gains and losses, if
material, are recorded as a separate component of equity until realized.
Interest income is recorded using an effective interest rate, with the
associated premium or discount amortized to "interest income". The cost of
securities sold is based upon the specific identification method.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in, first-
out basis) or market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on a
straight-line basis over their estimated useful lives of three to five years.
Leasehold improvements are amortized over the shorter of their estimated
useful lives or the lease term. Maintenance and repair costs are charged to
operations as incurred.
REVENUE RECOGNITION
The company recognizes revenue upon shipment of product to the customer, upon
fulfillment of acceptance terms, if any, and when no significant contractual
obligations remain. Revenue is reported net of a provision for estimated
product returns.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
RECLASSIFICATIONS
Certain amounts in the financial statements have been reclassified to conform
with the current year presentation. These classifications and restatements did
not impact previously reported total assets, liabilities, stockholders'
equity or net loss.
CONCENTRATION OF RISKS AND UNCERTAINTIES
The company's cash and cash equivalents are maintained at five financial
institutions in the United States. Deposits at these institutions may exceed
the amount of insurance provided on such deposits. The company has not
experienced any losses on its deposits of cash and cash equivalents.
The company's Sunnyvale facility currently accounts for all of its product
manufacturing. Disruption of operations at the company's production facility
could cause delays in, or an interruption of, production and shipment of
products which could have a material adverse impact on the company's business,
operating results and financial condition.
The company's products require approval from the United States Food and Drug
Administration (FDA) and international regulatory agencies prior to the
commencement of commercial sales. There can be no assurance that the company's
products will receive any of these required approvals. If the company was
denied such approvals, or if such approvals were delayed, it would have a
materially adverse impact on the company's business.
Sales to both international and domestic customers are generally made on open
credit terms. Management performs ongoing credit evaluations of the company's
customers and maintains an allowance for potential credit losses when needed
but historically has not experienced any significant losses related to
individual customers or a group of customers in any particular geographic
area. Export sales totalled approximately $900,000 for 1997.
The company operates in an industry with rapid technological changes which may
render inventories maintained by the company obsolete.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts for cash equivalents and accrued liabilities are a reasonable
estimate of their fair value due to their short-term nature. The estimated
fair value amounts of the company's financial instruments have been determined
by the company, using appropriate market information and valuation
methodologies. Considerable judgment is required to develop the estimates of
fair value, thus, the estimates provided herein are not necessarily
indicative of the amounts that could be realized in a current market exchange.
INCOME TAXES
The company accounts for income taxes under Statement of Financial Accounting
Standard (SFAS) No. 109, "Accounting for Income Taxes," which prescribes the
use of the liability method whereby deferred tax asset or liability account
balances are calculated at the balance sheet date using current tax laws and
rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
COMPUTATION OF NET LOSS PER COMMON SHARE AND PER COMMON SHARE-ASSUMING
DILUTION
The company adopted SFAS No. 128 "Earnings Per Share" and the Securities and
Exchange Commission Staff Accounting Bulletin No. 98 (SAB No. 98) effective
January 3, 1998; accordingly, all prior periods have been restated. Net loss
per common share and per common share-assuming dilution are computed using
the weighted average number of shares of common stock outstanding. Common
equivalent shares from stock options and preferred stock are excluded from
the computation of net loss per common share-assuming dilution as their effect
is antidilutive. No additional shares are considered to be outstanding for
either computation under the provisions of SAB No. 98.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income". This statement establishes
requirements for disclosure of comprehensive income and becomes effective for
the company's fiscal year 1998, with reclassification of earlier financial
statements for comparative purposes. Comprehensive income generally
represents all changes in stockholders' equity except those resulting from
investments or contributions by stockholders. The company is evaluating
alternative formats for presenting this information but does not expect this
pronouncement to materially impact the company's reporting of results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information". This statement establishes standards for
disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. This statement supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise". The new standard becomes
effective for the company's fiscal year 1998 and requires that comparative
information from earlier years be restated to conform to requirements of this
standard. The company is evaluating the requirements of SFAS No. 131 and the
effects, if any, on the company's current reporting and disclosures.
<PAGE>
3. Available-For-Sale Securities (in thousands):
The following summarizes the company's available-for-sale securities:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Accrued Market
Cost Gains Losses Interest Value
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
January 3, 1998:
Corporate notes and bonds............. $ 11,550 $ 10 $ -- $ 124 $ 11,684
========== ========== ========== ========= =========
December 28, 1996:
U.S. government notes and bonds....... $ 1,588 $ 7 $ -- $ 42 $ 1,637
Corporate notes and bonds............. 13,040 12 (10) 336 13,378
Corporate equities.................... 2,900 -- -- 7 2,907
---------- ---------- ---------- --------- ---------
$ 17,528 $ 19 $ (10) $ 385 $ 17,922
========== ========== ========== ========= =========
</TABLE>
Available-for-sale debt securities by contractual maturity at January 3, 1998
are shown below :
<TABLE>
<CAPTION>
Amortized Market
Cost Value
---------- ----------
<S> <C> <C>
Less than one year.................... $ 10,550 $ 10,674
One to five years..................... 1,000 1,010
---------- ----------
$ 11,550 $ 11,684
========== ==========
</TABLE>
<PAGE>
4. Balance Sheet Detail (in thousands):
<TABLE>
<CAPTION>
January 3, December 28,
1998 1996
---------- ----------
<S> <C> <C>
Inventories:
Raw materials...................... $ 921 $ 345
Work-in-process.................... 165 32
Finished goods..................... 933 382
---------- ----------
$ 2,019 $ 759
========== ==========
Prepaid expenses and other current assets:
Prepaid insurance.................. $ 125 $ 45
Prepaid rent....................... 28 34
Other.............................. 57 76
---------- ----------
$ 210 $ 155
========== ==========
Property and equipment:
Machinery and equipment............ $ 1,123 $ 877
Tooling and molds.................. 216 258
Computer equipment................. 898 732
Furniture and fixtures............. 205 165
Leasehold improvements............. 148 25
---------- ----------
2,590 2,057
Less accumulated depreciation and
amortization....................... (1,178) (573)
---------- ----------
$ 1,412 $ 1,484
========== ==========
Equipment acquired under capital leases included in property and equipment
above:
Machinery and equipment............ $ 109 $ 109
Less accumulated depreciation...... (85) (54)
---------- ----------
$ 24 $ 55
========== ==========
Accrued liabilities:
Accrued professional fees.......... $ 164 $ 163
Accrued compensation............... 1,314 777
Accrued warranty................... 316 123
Other.............................. 193 182
---------- ----------
$ 1,987 $ 1,245
========== ==========
</TABLE>
5. Commitments:
CAPITAL LEASE
The company leases certain of its office and computer equipment from finance
companies under capital lease agreements which expire in November 1998. At
January 3, 1998, the total future minimum payments under capital leases for
1998 is $18,000 with $1,000 representing interest.
OPERATING LEASE
The company rents its office facility under an operating lease which expires
in February 2002. Under the terms of the lease, the company is responsible for
taxes, insurance and maintenance expenses. At January 3, 1998, total future
minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998.................... $ 302
1999.................... 341
2000.................... 354
2001.................... 367
2002.................... 62
----------
$ 1,426
==========
</TABLE>
Rent expense for the years ended January 3, 1998, December 28, 1996 and
December 31, 1995 was $349,000, $345,000 and $263,000, respectively.
<PAGE>
6. Supplemental Cash Flow Disclosures (in thousands):
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
January 3, December 28, December 31,
1998 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Non-cash financing and investing activities:
Additions to property and equipment
acquired under capital lease $ -- $ -- $ 113
Common stock issued for note
receivable $ -- $ -- $ 104
Common stock issued in exchange for
intellectual property rights $ -- $ -- $ 160
Conversion of preferred stock to
common stock in connection with the
company's initial public offering $ -- $ -- $15,750
Change in unrealized gain on
available-for-sale securities $ 1 $ 9 $ --
Cash paid during the period for:
Interest $ 5 $ 9 $ 7
Income Tax $ 1 $ 1 $ --
</TABLE>
7. Stockholders' Equity:
PREFERRED STOCK
Under the company's Articles of Incorporation, the company is authorized to
issue preferred stock. At January 3, 1998, 5,000,000 shares of preferred stock
were authorized and no preferred stock was issued and outstanding as the
previously outstanding preferred stock was converted into common stock in
connection with the company's initial public offering effective February 5,
1996.
STOCK OPTION PLANS
In May 1993, the company approved the 1993 Stock Plan (1993 Plan) under which
the Board of Directors of the company is authorized and directed to enter into
stock option agreements with selected individuals. 136,000 shares were
authorized at the inception of the Plan with 250,000 and 1,150,000 additional
shares authorized in 1994 and 1995, respectively. Options granted under the
1993 Plan generally become exercisable over a 48- month period.
Activity under the 1993 Plan is as follows (in thousands, except per share
data):
<PAGE>
<TABLE>
<CAPTION>
Shares Outstanding Options
Available -------------------------------------
For Number Exercise Aggregate
Grant Of Shares Price Price
-------- -------- ---------------- ----------
<S> <C> <C> <C> <C>
Balances, December 31, 1994 225 153 $0.20-$ 0.32 $ 36
Additional shares authorized 1,150 -- -- --
Options granted (363) 363 $0.32-$ 9.00 826
Options exercised -- (16) $0.32-$ 1.60 (24)
Options canceled 9 (9) $0.32-$ 3.00 (5)
-------- -------- ----------
Balances, December 31, 1995 1,021 491 $0.20-$ 9.00 833
Options granted (218) 218 $9.50-$24.25 2,867
Options exercised -- (107) $0.20-$ 5.00 (34)
Options canceled 58 (58) $0.20-$24.25 (225)
-------- -------- ----------
Balances, December 28, 1996 861 544 $0.20-$24.25 3,441
Options granted (723) 723 $6.25-$11.88 6,147
Options exercised -- (74) $0.32-$11.00 (201)
Options canceled 162 (162) $0.40-$24.25 (881)
-------- -------- ----------
Balances, January 3, 1998 300 1,031 $0.20-$24.25 $ 8,506
======== ======== ==========
</TABLE>
At January 3, 1998, 314,000 options were exercisable under the 1993 Plan.
In December 1995, the company adopted the Director Option Plan (Director Plan)
and reserved 100,000 shares of common stock for issuance to directors under
this plan. The plan allows for an initial grant and automatic annual grants
of options to outside directors of the company. As of January 3, 1998 and
December 28, 1996, outstanding options under the Director Plan were 24,000 and
12,000, respectively, with 13,000 options exercisable as of January 3, 1998.
In February 1995, pursuant to a restricted stock purchase agreement, 100,000
shares of common stock were purchased by an officer of the company at $0.32
per share. The restricted stock purchase agreement contains provisions for
the repurchase of common stock by the company in the event of termination of
employment during the four years following the date of the agreement. At
January 3, 1998, 21,667 shares were subject to repurchase under this
restricted stock purchase agreement. Those shares will be released ratably
over the following 13 months.
In August 1995, 90,000 shares of common stock were purchased by an officer of
the company at $0.80 per share pursuant to a restricted stock purchase
agreement. The restricted stock purchase agreement contains provisions for the
repurchase of common stock by the company in the event of termination of
employment during the four years following the date of the agreement. At
January 3, 1998, 29,688 shares were subject to repurchase under this
restricted stock purchase agreement. These shares will be released ratably
over the following 19 months.
EMPLOYEE STOCK PURCHASE PLAN
In December 1995, the company approved the Employee Stock Purchase Plan and
reserved 150,000 shares of common stock for issuance under this plan. For the
years ended January 3, 1998 and December 28, 1996, 16,865 shares and 10,101
shares of common stock were sold under the Employee Stock Purchase Plan,
respectively.
SHAREHOLDERS RIGHTS PLAN
In November 1996, the Board of Directors approved a Shareholders Rights Plan
declaring a dividend distribution of one Preferred Share Purchase Right for
each outstanding share of the company's Common Stock. Each right will entitle
stockholders to buy one-thousandth of one share of the company's Series A
Participating Preferred Stock at an exercise price of $50.00. This Plan was
designed to assure that the company's stockholders receive fair and equal
treatment in the event of any proposed takeover of the company and to guard
against partial tender offers and other abusive tactics to gain control of
the company without paying all stockholders the fair value of their shares,
including a "control premium."
STOCK-BASED COMPENSATION
The company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." Had compensation cost for the 1993
Plan, the Director Plan and the Employee Stock Purchase Plan been determined
based on the fair value at the grant date for awards in fiscal year 1997,
1996 and 1995 consistent with the provisions of SFAS No. 123, the company's
net loss per common share and per common share- assuming dilution for the years
ended January 3, 1998, December 28, 1996 and December 31, 1995 would have
been increased to the pro forma amounts indicated below (in thousands, except
per share data):
<PAGE>
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------
January 3, December 28, December 31,
1998 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net loss as reported $ 7,688 $ 7,705 $ 6,950
Net loss pro forma $ 8,466 $ 7,962 $ 6,959
Net loss per common share and per common
share-assuming dilution as reported $ 0.87 $ 0.97 $ 1.82
Net loss per common share and per common
share-assuming dilution pro forma $ 0.96 $ 1.00 $ 1.83
</TABLE>
The effects of the pro forma disclosure of applying SFAS No. 123 are not
likely to be representative of the effects of the pro forma disclosures of
future years. Because SFAS No. 123 reflects only options granted after January
1, 1995, the pro forma effect will not be fully reflected until 1999.
The fair value of each option grant is estimated on the date of grant using
the Black Scholes model with the following weighted average assumptions:
Risk-free interest rate 4.98%-7.13%
Expected life 4 years
Expected dividends --
Expected volatility 50%
The options outstanding and currently exercisable by exercise price for both
the 1993 Plan and the Director Plan at January 3, 1998 are as follows (in
thousands, except per share data and contractual life):
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Currently Exercisable
- ------------------------------------------------------ ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
- ----------------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 0.20 43 5.4 $ 0.20 43 $ 0.20
$ 0.32-$ 0.40 58 7.3 $ 0.39 38 $ 0.39
$ 0.80 9 7.5 $ 0.80 5 $ 0.80
$ 1.60 40 7.6 $ 1.60 23 $ 1.60
$ 3.00 5 7.7 $ 3.00 3 $ 3.00
$ 5.00-$ 7.38 204 9.0 $ 6.90 68 $ 6.77
$ 8.00-$11.88 627 9.2 $ 9.39 120 $ 9.64
$14.00-$19.75 36 8.3 $16.87 13 $16.62
$24.25 33 8.3 $24.25 14 $24.25
------------ ------------
1,055 8.8 $ 8.37 327 $ 6.82
============ ============
</TABLE>
Deferred compensation recognized as a result of stock options granted and
common stock issued subject to repurchase provisions as of January 3, 1998
and December 28, 1996 is $887,000. Deferred compensation is generally
amortized over vesting periods of one to four years, which resulted in
compensation expense of $160,000, $167,000 and $332,000 recognized in the
years ended January 3, 1998, December 28, 1996 and December 31, 1995,
respectively. As of December 28, 1996, options to purchase 147,000 shares of
common stock were exercisable at a weighted average exercise price of $2.09
per share.
8. Related Parties:
In connection with the formation of the company, several of the founders and a
partnership of the founders entered into a licensing agreement to facilitate
patent transfers. As a result, the company acquired an exclusive worldwide
perpetual royalty-free license, with right of sublicense, to make, use and
sell products and use patent methods covered by the patent rights limited to
surgical orthopedic and arthroscopic applications.
Also in connection with its incorporation, the company entered into a
consulting agreement with a consulting and research firm, which is headed by
one of the company's founders. This consulting and research firm was
contracted to perform research related to the development of hand-held
instruments used in arthroscopic procedures. Research and development costs
incurred on this contract in fiscal 1997, 1996 and 1995 were approximately
$457,000, $456,000 and $481,000, respectively.
In January 1995, the company loaned to an officer $120,000 pursuant to a
provision in the officer's employment agreement. The resulting promissory
note bears interest at 6% per annum and is due on the earlier of January 31,
1999 or termination of employment. At January 3, 1998, $142,000 of principal
and interest was outstanding on this note. In February 1995, the company
agreed to loan this officer up to an additional $144,000 in monthly
increments of $3,000 at 6% per annum. In December 1997, the company amended
this officer's employment agreement to terminate the increments effective
January 31, 1998 and forgive 10% of the principal and interest at the end of
each fiscal year in which the officer is employed by the company and in which
the company meets certain performance targets. In fiscal 1997, $11,000 of
principal and interest was forgiven. At January 3, 1998, $103,000 of
principal and interest was outstanding on this note. Both aforementioned
notes are secured by shares of the company's common stock and a mortgage on
the officer's residence.
On March 31, 1995, the company issued 400,000 shares of common stock for $0.40
per share and $100,000 cash in exchange for certain intellectual property
rights of a related research firm headed by several of the company's
directors and co-founders. This transaction was accounted for as a non-
recurring charge to operating expense.
In December 1995, the company loaned an employee $62,000 pursuant to a
provision in the employee's employment agreement. The resulting promissory
note bears interest at the rate of 6% per annum and is due on the earlier of
July 24, 2000 or the termination of employment. The note also permits the
company to loan this employee up to an additional $34,000 in $2,000 monthly
increments. The aforementioned notes are secured by a pledge of this
employee's option for 50,000 shares of the company's common stock and any
shares issued upon exercise of such options. In May 1997, all principal and
interest were repaid in full.
In June 1997, the company loaned an officer $500,000 pursuant to a provision
in the officer's employment agreement. The promissory note, which bears no
interest, is secured by a mortgage on the officer's residence and is due and
payable upon either the officer's termination of employment or the sale of the
officer's residence. If the officer is terminated by the company or the
company is acquired, the loan is due and payable within 12 months thereafter.
As of January 3, 1998, $500,000 of principal was outstanding on this note.
In November 1997, the company issued a relocation loan of $130,000 to an
employee. This loan is secured by the employee's residence and is due and
payable upon either the sale or transfer of the property or the termination
of the officer's employment with the company. As of January 3, 1998, $130,000
of principal was outstanding on this loan.
9. Income Taxes:
At January 3, 1998, the company has approximately $16,000,000 and $4,500,000
in federal and state net operating loss carryforwards, respectively, which
expire in the years 2004 through 2013. The Tax Reform Act of 1986
substantially changed the rates relative to net operating loss and tax credit
carryforwards in the case of an "ownership change" of a corporation. Any
ownership changes, as defined, may restrict utilization of carryforwards.
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
January 3, December 28,
1998 1996
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,612 $ 2,167
Capitalized research and development costs 1,154 3,036
Capitalized start-up costs 499 710
Purchased patents -- 104
Research and development credit 567 446
Allowances and reserves 1,806 699
Other -- 130
Less: valuation allowance (9,638) (7,292)
---------- -----------
Net deferred tax assets $ -- $ --
========== ===========
</TABLE>
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is more likely
than not that a tax benefit may not be realized from the asset in the future.
The company has established a valuation allowance to the extent of its
deferred tax assets since it is more likely than not that a benefit can not be
realized in the future due to the company's recurring operating losses. The
company's valuation allowance increased from $7,292,000 at December 28, 1996
to $9,638,000 at January 3, 1998.
10. Employee Benefit Plan:
The company maintains a Retirement Savings and Investment Plan (401(k) Plan)
which covers substantially all employees. Eligible employees may defer salary
(before tax) up to a specified maximum. The company, at its discretion, may
make matching contributions on behalf of the participants in the 401(k) Plan.
To date, the company has not made any contributions to the 401(k) Plan.
11. Subsequent Events:
In February 1998, the company entered into a partnership agreement with Boston
Scientific Corporation (BSC) in which BSC will develop and market the
company's proprietary Coblation (TM) technology for use in myocardial
revascularization. Under the agreement, BSC acquires exclusive licensing
rights to the company's intellectual property in this field. BSC will pay a
licensing fee, a portion of which will be treated as prepaid royalties, to
the company upon achievement of certain milestones and pay royalties on sales
of any resulting product.
In March 1998 the company entered into a 47- month operating lease agreement
for an additional office and manufacturing facility in Sunnyvale. Under the
agreement, the company is responsible for taxes, insurance and maintenance
expenses. Total future minimum payments over the term of the lease is $963,000
which is subject to annual increases based on changes in the Consumer Price
Index.
<PAGE>
SCHEDULE II
ARTHROCARE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Statement of at end
of Year Operations Deductions of Year
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Year ended January 3, 1998
Deducted from asset accounts:
Allowance for doubtful
accounts and product returns $318 $276 $ -- $594
Allowance for excess and
obsolete inventory $100 $249 $ -- $349
Year ended December 28, 1996
Deducted from asset accounts:
Allowance for doubtful
accounts and product returns $5 $313 $ -- $318
Allowance for excess and
obsolete inventory $50 $50 $ -- $100
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful
accounts and product returns $-- $5 $ -- $5
Allowance for excess and
obsolete inventory $-- $50 $ -- $50
</TABLE>
<PAGE>
REPORT OF INDEPENTANT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
In connection with our audit of the financial statements of ArthroCare
Corporation as of January 3, 1998 and December 28, 1996 and for each of the
three years in the period ended January 3, 1998 which financial statements are
included in this Annual Report on Form 10-K, we have also audited the
financial statement schedule listed in item 14 (a) herein.
In our opinion, the financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 27, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized:
ARTHROCARE CORPORATION
a Delaware Corporation
/s/ MICHAEL A. BAKER
- -------------------------------
Michael A. Baker
President and Chief Executive Officer
Date: April 2, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Michael A Baker and Christine E. Hanni
as his attorney-in-fact for him, in any and all capacities, to sign each
amendment to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact or his substitute or substitutes may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------- ---------------------------------- -------------
<S> <C> <C>
/s/ MICHAEL A. BAKER President, Chief Executive Officer April 2, 1998
- ------------------------------- and Director (Principal Executive
Michael A. Baker Officer)
/s/ CHRISTINE E. HANNI Chief Financial Officer and April 2, 1998
- ------------------------------- Assistant Secretary (Principal
Christine E. Hanni Financial and Accounting Officer)
/s/ HIRA V. THAPLIYAL Director April 2, 1998
- -------------------------------
Hira V. Thapliyal
/s/ ANNETTE J. CAMPBELL-WHITE Director April 2, 1998
- -------------------------------
Annette J. Campbell-White
/s/ PHILIP E. EGGERS Director April 2, 1998
- -------------------------------
Philip E. Eggers
/s/ C. RAYMOND LARKIN, Jr. Director April 2, 1998
- -------------------------------
C. Raymond Larkin, Jr.
/s/ JOHN S. LEWIS Director April 2, 1998
- -------------------------------
John S. Lewis
/s/ ROBERT R. MOMSEN Director April 2, 1998
- -------------------------------
Robert R. Momsen
</TABLE>
<PAGE>
ARTHROCARE CORPORATION
Report on Form 10-K for
the year ended January 3, 1998
INDEX TO EXHIBITS*
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT NAME
-------- -----------------------------------------------------------
<S> <C>
10.26++ License Agreement dated February 9, 1998, between the
Registrant and Boston Scientific Corporation.
10.27++ Development and Supply Agreement Agreement dated February
9, 1998, between the Registrant and Boston Scientific
Corporation.
10.28 Lease Agreement date March 25, 1998 between the Registrant
and Aetna Life Insurance Company for the Registrant's
facility located at 840 Del Rey Avenue, Sunnyvale,
California 94086.
23.1 Consent of Coopers & Lybrand L.L.P., Independent Public
Accountants.
24.1 Power of Attorney (see Page 34).
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule (1996).
27.3 Restated Financial Data Schedule (1997).
</TABLE>
* Only exhibits actually filed are listed. Exhibits incorporated by
reference are set forth in the exhibit listing included in Item 14 of
the Report on Form 10-K.
++ Confidential treatment requested.
CONSENT OF COOPERS & LYBRAND L.L.P.,
INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
ArthroCare Corporation on Form S-8 (file No. 333-06297) of our report dated
January 27, 1998, except for Note 11 for which the date is March 25, 1998, on
our audits of the financial statements and financial statement schedule of
ArthroCare Corporation as of January 3, 1998 and December 28, 1996, and for
each of the three years in the period ended January 3, 1998, which reports are
included in this Annual Report on Form 10-K
COOPERS & LYBRAND L.L.P.
San Jose, California
April 2, 1998
<PAGE>
DEVELOPMENT AND SUPPLY AGREEMENT
This Development and Supply Agreement (the "Agreement") effective as of
February 9, 1998 (the "Effective Date") is entered into by and between
ArthroCare Corporation, a Delaware corporation having an address at 595 North
Pastoria Avenue, Sunnyvale, California 94086 ("ArthroCare"), and Boston
Scientific Corporation, on its own behalf and on behalf of its affiliates
("BSC"), a Delaware corporation having an address at One Boston Scientific
Place, Natick, Massachusetts 01760-1537.
BACKGROUND
A. ArthroCare owns certain technology relating to the Field (as
such term is defined in Article 1);
B. BSC is a worldwide leader in the sale of medical devices to
the interventional cardiology market through its subsidiary, SCIMED Life
Systems, Inc., and in the sale of textile vascular grafts to the
cardio-thoracic surgery market through BSC's subsidiary, Meadox Medicals,
Inc.;
C. BSC and ArthroCare desire that ArthroCare manufacture Controllers and
certain Disposable Products (as such terms are defined in Article 1) for BSC
for use in the Field, all on the terms and conditions set forth herein; and
D. On even date herewith, the parties are entering into a License
Agreement pursuant to which ArthroCare grants BSC a worldwide exclusive
license under certain patent rights relating to the Field (the "License
Agreement").
NOW, THEREFORE, in consideration of the promises and the mutual covenants
contained herein, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 "Affiliate" means any corporation or other entity which is directly or
indirectly controlling, controlled by or under the common control with a
party hereto. For the purpose of this Agreement, "control" shall mean the
direct or indirect ownership of at least 50% of the outstanding shares or
other voting rights of the subject entity to elect directors, or if not
meeting the preceding definition, any entity owned or controlled by or owning
or controlling at the maximum control or ownership right permitted in the
country where such entity exists.
1.2 "ArthroCare Product" shall mean a Product sold by ArthroCare
hereunder, and "ArthroCare Products" shall mean Products sold by ArthroCare
hereunder.
1.3 "BSC's Intellectual Property" shall have the meaning set forth in
Section 9.5.A.
1.4 "Confidential Information" shall mean any: (i) information or
material in tangible form disclosed hereunder or under the License Agreement
that is marked as "Confidential" at the time it is delivered to the receiving
party; or (ii) information disclosed orally hereunder which is identified as
confidential or proprietary when disclosed and such disclosure of
confidential information is confirmed in writing within 30 days after
disclosure by the disclosing party.
1.5 "Controller" shall mean an RF power supply, which is designed for use
with the Disposable Products in Revascularization procedures.
1.6 "Disposable Product(s)" shall mean medical instruments and components
of such medical instruments, designed for use in Revascularization
procedures, certain of which may have one or more electrode(s) and electrical
connection(s) for coupling the electrode(s) to a Controller.
1.7 "FDA" shall mean the U.S. Food and Drug Administration.
1.8 "Field" shall mean the use of RF energy in a procedure that is
intended to promote Revascularization of the heart or other muscle tissues.
1.9 "Product" shall mean either a Controller or a Disposable
Product, and "Products" shall mean Controllers and Disposable Products.
1.10 [*****]
1.11 "RF" shall mean radiofrequency.
1.12 "Specifications" shall have the meaning set forth in Section 3.1.A.
ARTICLE 2
PRODUCT MANUFACTURING AND SALE
2.1 Purchase and Sale of Controllers.
A. Subject to the terms and conditions of this Agreement, including
without limitation Sections 2.1.B. through 2.1.D., from the Effective Date
through [*****], ArthroCare agrees to manufacture and sell to BSC, and BSC
agrees to exclusively purchase from ArthroCare, BSC's requirements for
Controllers for use in the Field during the periods, and for the transfer
prices, set forth below:
Periods Transfer Price per Controller
------- -----------------------------
[*****] [*****]
After [*****], ArthroCare shall manufacture Controllers, but only as may be
requested by BSC, at mutually agreed upon fair and reasonable prices.
B. Such transfer prices shall be firm for any Controller having
Specifications which do not require any engineering design work to be
performed by ArthroCare. If any such engineering design work is required to
be performed by ArthroCare, the parties shall promptly discuss such work in
good faith and ArthroCare shall make any modifications requested by BSC,
provided that BSC agrees to pay the reasonable costs of such work. Prior to
performing any such work, ArthroCare will prepare and submit to BSC for its
approval a budget for the direct cost of such work on a time and materials
basis. The time will include the fully burdened rate for each employee
involved in the work plus [*****] of the fully burdened cost to account for
overhead.
C. Notwithstanding Section 2.1.A, if BSC desires to manufacture some or
all of the Controllers internally prior to [*****], BSC may do so by
providing [*****] prior written notice to ArthroCare. For each such
Controller that is internally manufactured by BSC prior to [*****], BSC shall
make a payment to ArthroCare in the amount specified for the applicable
period:
Periods Payment per Controller
------- ----------------------
[*****] [*****]
If BSC internally manufactures Controllers after [*****], no payments therefor
shall be due to ArthroCare under this Section 2.1.C.
D. Notwithstanding anything to the contrary in this Agreement, BSC shall
not be [*****].
2.2 First Right of Negotiation. Beginning on [*****] and on every [*****]
thereafter during the term of this Agreement, if BSC desires to have the
Controllers manufactured by a third party, BSC shall give 90 days prior
written notice to ArthroCare. ArthroCare will have the first right of
negotiation on a Most Favored Nations basis for the manufacture of BSC's
Controllers for use in the Field for the next [*****] commencing on such
[*****]; provided that ArthroCare commits in writing to manufacture the
Controllers on such pricing and other terms within 30 days after BSC gives the
notice referenced in the preceding sentence; and (ii) all terms and
conditions set forth in this Agreement shall continue to apply, other than
those terms that are modified because of the terms offered by ArthroCare to
meet the terms offered by the third party. Most Favored Nations means that
ArthroCare will have the right to manufacture and supply Controllers to BSC
at transfer prices at least as favorable to BSC as the terms offered by a
third party, as long as the quality of the Controllers and all other terms
and conditions relating to such transactions are on terms at least as
favorable to BSC as those offered by such third party. If BSC desires to
internally manufacture the Controllers, it shall give ArthroCare 90 days
prior written notice, and BSC shall not be required to offer ArthroCare an
opportunity to manufacture the Controllers at a comparable cost, subject to
Section 2.1.C.
2.3 Purchase and Sale of Disposable Products. Upon request by BSC,
ArthroCare shall manufacture and sell to BSC such Disposable Products within
the Field as may be requested by BSC. Pricing for each Disposable Product
sold by ArthroCare to BSC shall be mutually agreed upon, in writing, and
adjusted annually, in writing, in December of each calendar year for the next
calendar year. Initial pricing will be set within 60 days after the Effective
Date of this Agreement. Pricing will be [*****]. If ArthroCare is
manufacturing any Disposable Product for BSC and BSC determines, in its sole
discretion, that it desires to internally manufacture or have manufactured by
a third party any such Disposable Product or any component thereof, BSC shall
give ArthroCare 90- days prior written notice of its intent to discontinue
purchasing from ArthroCare such Disposable Product or component thereof.[*****].
2.4 Technology Transfer. If BSC elects to shift the manufacture of the
Controllers in accordance with Section 2.1 or Section 2.9, or the Disposable
Products from ArthroCare to BSC or a third party, ArthroCare shall promptly
transfer the necessary technology (including without limitation manufacturing
know-how) to BSC or the third party to enable BSC or such third party to
manufacture the Controllers or the Disposable Products, as the case may be, in
accordance with the Specifications. BSC will reimburse ArthroCare for such
technology transfer on a time and materials basis. Time will include the
fully burdened rate for each employee involved in the technology transfer
plus [*****] of the burdened cost to account for overhead. ArthroCare shall
also promptly transfer such technology pursuant to this Section 2.4 if BSC
requires a second source for Controllers as described in Section 2.9. Any
technology transfer referenced in this Section 2.4 shall be for the purpose of
allowing BSC to make and/or procure the ArthroCare Products intended for use
in the Field. The third party receiving such technology transfer shall be
required to maintain the confidentiality of such information and technology
for the benefit of both BSC and ArthroCare.
2.5 Orders. BSC may initiate purchases under this Agreement (the
"Orders") by telephone contact, telex, fax or by sending written purchase
orders to ArthroCare at the address noted in Section 13.5. Any Order
initiated by telephone, fax or telex order must be confirmed within 10 working
days by a written purchase order. The delivery date set forth in each Order
shall be consistent with the then- current forecast. Orders shall be binding
when accepted by ArthroCare. ArthroCare shall acknowledge each Order in
writing within 10 business days of receipt. By written notice given within
such 10-day period, ArthroCare may reject any Order, but only to the extent
that the Order exceeds the applicable, then-current forecast, consistent with
Section 5.1. Notice of rejection must be given within 10 days to BSC by
telex or fax, followed by notification in writing. Once an Order is accepted
by ArthroCare, BSC may cancel or reschedule such Order only with approval of
ArthroCare.
2.6 Delivery and Acceptance. Upon delivery to BSC of the Product,
including related documentation, BSC shall evaluate such Products for
conformity to the Specifications. Within 30 days after delivery of such
Products, BSC shall provide ArthroCare with written acceptance thereof, or a
statement of defects to be corrected. At ArthroCare's expense, ArthroCare
shall promptly correct such defects and return (or replace) the corrected
Products for retesting and reevaluation, and BSC shall within 30 days after
such redelivery provide ArthroCare with written acceptance of such corrected
Products. No partial shipment of an Order shall constitute acceptance of the
entire Order, absent the written acceptance by BSC of such Order. BSC may
not return Products to ArthroCare that do not contain defects without the
prior written approval of ArthroCare. If ArthroCare approves of the return of
any Products without defects, BSC will pay a restocking fee of [*****] of the
transfer price of such Products. ArthroCare will use its best efforts to
obtain and maintain all licenses and approvals necessary to ship any Products
to an international destination.
2.7 Handling and Shipping. ArthroCare shall manufacture, store and
transport all Products consistent with all applicable laws, regulations and
requirements to ensure the quality of the Products, including without
limitation all requirements relating to storage, handling, temperature,
humidity controls, etc. ArthroCare shall pack all Products for shipment in
containers adequate to insure safe arrival of the goods at BSC's designated
delivery destination, properly addressed for delivery to the address
specified in BSC's Order or such other address as BSC shall specify in
writing, and delivered to a carrier or forward agent chosen by BSC. BSC will
reimburse ArthroCare for all actual, reasonable transportation, shipping and
related insurance expenses. In the event that BSC requests special packaging
or finishing for any Order, BSC shall pay the incremental cost for such
special packaging or finishing; provided, however, that ArthroCare shall
include any special documentation regarding the Products as may be requested
by BSC, at [*****] charge. Shipment will be [*****]. All shipping papers
and/or invoices shall include the Order number and serial numbers of Products
shipped.
2.8 Terms and Conditions. This Agreement contains the exclusive terms and
conditions which shall apply to all purchases of Controllers and Disposable
Products by BSC. In ordering and delivering Products, ArthroCare and BSC
will use their standard forms but nothing in such forms shall amend or modify
the terms of this Agreement. In case of conflict between such forms and this
Agreement, the terms of this Agreement shall control.
2.9 Second Source. Notwithstanding Section 2.1 above, in the event that,
within [*****], ArthroCare is unable to or fails to meet BSC's Controller
requirements as specified in the then-current forecast either: (i) once, for
a period in excess of [*****]; or (ii) twice, for periods of at least
[*****] each, then in each case BSC shall have the right to manufacture such
additional Controllers itself or purchase such additional Controllers from a
second source and BSC shall not owe ArthroCare the price described in Section
2.1.C. for any such Controllers manufactured by BSC or a third party;
provided, however, that: (a) before internally manufacturing or placing a
purchase order with any third party for such Controllers, BSC shall notify
ArthroCare, and provided that, as soon as BSC determines in good faith that
ArthroCare is capable of meeting BSC's Controller requirements, BSC shall
resume its exclusive purchase of such Controllers from ArthroCare subject to
Section 2.1; and (b) the periods referenced in clause (i) and (ii) above
shall not be subject to extension due to Force Majeure as referenced in
Section 11.2.C. Notwithstanding the foregoing, the parties acknowledge and
agree that they shall cooperate with one another to assure sufficient source
of Products to BSC and its customers.
ARTICLE 3
SPECIFICATIONS; MODIFICATIONS
3.1 Establishment of Specifications.
A. BSC will establish the specifications for the Controllers (including
at a minimum those set forth on Exhibit A hereto) and the Disposable Products
as BSC refines the Revascularization procedures based on animal and human
testing, subject to change upon 90 days prior written notice by BSC (the
"Specifications"). After the Specifications have been established, ArthroCare
will develop the Products according to the Specifications. BSC and
ArthroCare will mutually agree on a schedule for completion of the Products
for clinical trials.
B. ArthroCare shall ensure that all Products supplied by ArthroCare meet
all standards and Specifications established by BSC, and shall comply with
all applicable international, federal, state and local laws and regulations,
including those relating to manufacturing, packaging, labeling and sale of the
Products, Good Manufacturing Practices and ISO 9001 standards.
3.2 Requested Modifications. BSC may request or ArthroCare may suggest
changes to improve the design or operation of the Products, or the
reliability or serviceability of the Products. The parties shall promptly
discuss such modifications in good faith and ArthroCare shall perform the
engineering design work to modify the Specifications as requested by BSC,
provided that BSC agrees to pay the reasonable costs of such work. If the
changes require engineering design work on the Specifications, ArthroCare
will prepare and submit to BSC for its approval a budget for the direct cost
of making such work on a time and materials basis. The time will include the
fully burdened rate for each employee involved in such work plus [*****] of
the fully burdened cost to account for overhead.
3.3 Approvals. ArthroCare shall cooperate and provide such documents and
information as may be required to obtain a CE Mark, U.S. FDA approval and any
other applicable governmental or regulatory approvals or consents for each
Product.
ARTICLE 4
PAYMENTS
ArthroCare shall issue to BSC individual invoices for each Product shipped.
BSC shall pay each invoice within 45 days after receipt of such invoice or
the delivery date of the applicable Products, whichever is later. Late
payments shall bear interest at the lower of: (i) [*****]; and (ii) the
maximum interest rate permitted under applicable law. Notwithstanding the
foregoing, upon the request of any subsidiary of BSC, ArthroCare shall
directly invoice such subsidiary for, and such subsidiary shall directly be
responsible for payment of, Products ordered by such subsidiary.
ARTICLE 5
FORECASTS; NO BACKORDERS
5.1 Forecasts. BSC shall furnish ArthroCare a 12-month forecast with
estimated purchase dates and quantities of Products (including Controllers as
well as any Disposable Products that BSC desires to purchase from ArthroCare),
and shall deliver an updated forecast on a rolling basis on the first day of
each month. Such forecasts shall include monthly delivery schedules. Based
on the then current forecast, ArthroCare will maintain its production
capability and adequate materials and labor to meet the forecasted monthly
delivery schedule for Products. ArthroCare shall release Products on a
monthly basis in accordance with the delivery schedule set forth on the then
current forecast; provided, however, that: (a) BSC may make changes to the
delivery schedule and the quantities requested on the then current forecast
at any time up to 90 days prior to a scheduled delivery; (b) in the event that
BSC desires to increase the volume of any Products on an Order with less than
90 days notice to ArthroCare, ArthroCare shall use its best efforts to supply
such increased volume of Products; and (c) ArthroCare shall not be required
to accept any Order for a Product to the extent that it is based on a forecast
that shows an increase in the volume of Product ordered that exceeds 25% of
the average volume of such Product ordered during the preceding 90- day
period; provided that (c) shall not apply to the three months following the
Effective Date or for the first three months following initial
commercialization of the Controller. BSC may place additional, unforecasted
Orders for Products subject to ArthroCare's acceptance, which acceptance
shall not be unreasonably withheld. [*****]. It is understood that BSC
shall use all reasonable efforts to make each forecast as accurate as
possible, particularly as it pertains to the 90 days immediately following the
date of such forecast.
5.2 No Backorders. ArthroCare shall plan production schedules and provide
the Products, without backorders, in accordance with the Orders, to the
extent that such Orders are consistent with the then current forecast. At
all times during the term of this Agreement, ArthroCare shall maintain not
less than a one- month inventory of each Product, calculated based on the
previous three months' purchases of such Products; provided that initial
required stock levels shall be based on BSC's initial forecast.
ARTICLE 6
PRODUCT QUALITY; PRODUCT SUPPORT AND SERVICE
6.1 Quality Assurance.
A. ArthroCare shall maintain ongoing quality assurance and testing
procedures to assure the quality of Products through the use of a formal
quality assurance program reasonably acceptable to BSC and sufficient to
satisfy: (i) ISO 9001 standards; (ii) ArthroCare's quality assurance
policies and procedures; (iii) any applicable regulatory requirements; and
(iv) BSC's standard requirements to be approved as a vendor. During the term
of this Agreement, BSC shall have the right to audit such quality assurance
program, at its expense, during regular business hours. If BSC determines
that any Products are subject to review and periodic audits of supplied data,
with each lot of such Products, ArthroCare shall supply data of the nature and
in the form as may be reasonably requested by BSC, which data shall verify
compliance with minimum levels of conformance established by BSC. Upon BSC's
request, ArthroCare shall perform any failure analyses and take any necessary
corrective action with respect to any defects in any Product.
B. ArthroCare agrees to trace and maintain written records regarding the
source and lot number of each Product. ArthroCare agrees to maintain such
records for not less than five years after the termination or expiration of
this Agreement. ArthroCare shall label each Product as indicated by BSC.
6.2 Inspection and Acceptance. BSC and its representatives shall have
the right, during regular business hours, to enter upon and examine the
plants and other facilities where the Products are manufactured, packaged
and/or stored, and to make any further examination reasonably necessary to
properly ascertain compliance with Specifications and this Agreement.
ArthroCare shall cooperate to the fullest extent practicable with respect to
such inspections. Final inspection and acceptance of Products shall be at
BSC's facility, and shall be performed within 30 days after BSC's receipt of
the Products. ArthroCare agrees to provide BSC with copies of all: (a)
requested documentation related to Products, Specifications, manufacturing
processes and proof of manufacturability (including packaging and labeling);
and (b) U.S. and international regulatory approvals, regulatory inspections,
and other communications with regulatory authorities related to the Products.
BSC may observe and examine all operating methods, quality control procedures
and production and inventory records relevant to the business conducted
pursuant to this Agreement.
6.3 Required Notification.
A. ArthroCare shall give BSC immediate notice, by telecopy, with
confirming notice by U.S. mail, if ArthroCare becomes aware of any defect or
condition which in any way alters the Specifications or quality of any Product
supplied by ArthroCare or which may render any such Product ineffective,
dangerous and/or in violation of any applicable law or regulation, including
the Federal Food, Drug, and Cosmetic Act and the Occupational Safety and
Health Act. ArthroCare shall fully cooperate with BSC as to any field action
taken with respect to any Product.
B. ArthroCare shall, at least six months prior to making any substantial
changes in the processing, composition, Specifications, manufacturing
processes, or performance characteristics of any Product thereof, or changing
any vendor of a subcomponent or critical raw material: (i) give written notice
to BSC of such proposed change; and (ii) provide a sample of the affected
Product, incorporating such proposed change, for BSC's review and approval.
ArthroCare shall not implement any such change without BSC's prior written
approval, which may be withheld by BSC as it deems necessary or desirable.
6.4 Support. ArthroCare shall provide prompt, professional, competent and
courteous support for BSC and its Affiliates and their respective customers
relating to the Products. BSC shall reimburse ArthroCare for any reasonable
costs it incurs in providing such support, provided that such costs represent
fair market value for the support provided.
6.5 Service. ArthroCare shall service any Products that are returned to
ArthroCare for maintenance or repair. If such repair is the responsibility
of ArthroCare as set forth in Articles 6 or 8, ArthroCare shall provide such
support at its own expense. If it is not the responsibility of ArthroCare,
BSC shall reimburse ArthroCare for any costs that it reasonably incurs in
providing such service, provided that such costs represent fair market value
for the services provided.
ARTICLE 7
ADDITIONAL COVENANTS
7.1 Financial Statements. From time to time as requested by BSC (but not
more frequently than once per calendar year), ArthroCare will provide BSC
with copies of audited financial statements and such other information
reasonably requested by BSC to demonstrate ArthroCare's financial ability to
perform under this Agreement. All information provided to BSC under this
Section 6.3 will be treated confidentially, unless such information is
otherwise publicly available.
7.2 Exclusivity. Subject to Section 11.4.D., unless otherwise agreed by
the parties, during the term of this Agreement, ArthroCare shall not be
involved with the design, manufacture and/or sale, to or on behalf of any
other person or entity, of any equipment or supplies which are intended to be
used as a power supply, medical instrument or disposable device for
Revascularization procedures in the Field.
7.3 ArthroCare's Assets. ArthroCare shall not sell, transfer, assign,
pledge, grant a security interest in, or otherwise encumber or allow any
third party to obtain an interest in, any prints, designs, tools, fixtures,
raw materials, moldings or other equipment used or useful in manufacturing
and/or supplying the Products without giving BSC at least 60 days prior
written notice.
7.4 Change of Control of ArthroCare. For purposes of this Agreement
"Change in Control" means:
(a) the sale, lease, exchange or other transfer, directly or indirectly,
of substantially all of the assets of ArthroCare (in one transaction or in a
series of related transactions) to one or more persons or entities that are
not Affiliates of ArthroCare;
(b) the approval by the shareholders of ArthroCare of any plan or proposal
for its liquidation or dissolution;
(c) a merger or consolidation to which ArthroCare is a party if the
shareholders of ArthroCare immediately prior to the effective date of such
merger or consolidation have beneficial ownership, immediately following the
effective date of such merger or consolidation, of securities of the surviving
corporation representing 50% or less of the combined voting power of the
surviving corporation's then outstanding securities ordinarily having the
right to vote at elections of directors; or
(d) any other change in control of ArthroCare of a nature that would be
required to be reported pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, whether or not ArthroCare is then subject to
such reporting requirements.
To the extent not prohibited under applicable law, ArthroCare shall gave BSC
not less than 30 days' prior written notice of any Change of Control, and
shall provide BSC with such information regarding the proposed Change of
Control as it may reasonably request. All such information shall be treated
as ArthroCare's Confidential Information hereunder, and BSC acknowledges that
such Confidential Information may constitute "inside" information.
Notwithstanding any such Change of Control, ArthroCare shall continue to be
obligated to perform its obligations under this Agreement. However, BSC
would have the option to terminate this Agreement upon any such Change of
Control, and in such event:
(i) BSC shall be required to pay for all Products that are scheduled for
release within 60 days after such termination based on the then current
forecast, provided that such Products are provided on a timely basis and in
accordance with the terms and conditions of this Agreement;
(ii) ArthroCare shall cooperate with BSC to ensure a continuous and
sufficient supply of Products during a reasonable transition period; and
(iii) ArthroCare shall transfer the necessary technology to BSC and/or a
third-party designated by BSC to enable BSC or such third party to
manufacture the Products in accordance with the Specifications. BSC would be
required to reimburse ArthroCare for such technology transfer consistent with
the terms of Section 2.4.
ARTICLE 8
REPRESENTATIONS AND WARRANTIES
8.1 Limited Warranty. ArthroCare hereby represents and warrants to BSC
that:
(a) on the date of shipment, all ArthroCare Products will be new, of good
and merchantable quality, suitable for use as Controllers for
Revascularization Procedures in the Field, and will comply with the
Specifications for such Products;
(b) all ArthroCare Products shall be free from any defects in material or
workmanship; provided, however, that such warranty shall apply only for
[*****] from the date of ArthroCare's shipment of such Product in the
case of a defect which does not result in any personal injury or damage, or in
any field action, or retrieval or recall action;
(c) ArthroCare shall ensure that all ArthroCare Products shall: (i)
conform in all respects with the requirements of this Agreement and the
applicable Order; (ii) meet all standards and Specifications established by
BSC; and (ii) comply with all applicable international, federal, state and
local laws and regulations, including those relating to manufacturing,
packaging, labeling and sale of the Products, Good Manufacturing Practices and
ISO 9001 standards;
(d) title to all ArthroCare Products shall pass to BSC free and clear of
any security interest, lien or other encumbrance, or any other defect in
title;
(e) the ArthroCare Products shall have been manufactured, packaged and
stored in facilities which are approved by the FDA and/or other applicable
regulatory authorities at the time of such manufacture, packaging and storage
to the extent such approval is required by law;
(f) the ArthroCare Products shall have been manufactured in accordance
with "Good Manufacturing Practices" as required by any regulatory authority,
ISO 9001 standards, and all other applicable international, federal, state,
and other laws, rules and regulations, including without limitation the Fair
Labor Standards Act and all regulations and orders issued thereunder; and
(g) the Controllers sold by ArthroCare hereunder shall operate fully and
without interruption, [*****], without significant repair or maintenance
expense, in the case of [*****] of such Controllers; provided, however, that
if the Controllers do not meet such standards [*****] of the time: (i)
ArthroCare shall pay the costs of such repair and maintenance; or (ii) if
less than [*****] of such Controllers meet such standards, BSC may declare a
breach of this Agreement as a ground for termination of this Agreement under
Section 11.2.A., in addition to other remedies which may be available.
The foregoing representations and warranties shall survive inspection,
delivery, and payment of the applicable Products, and shall be for the
benefit of BSC and its customers. The above limited warranty is contingent on
proper use of the Products in the applications in which they are intended as
indicated in the Product label claims. The above limited warranty does not
apply to any product that has been, after dispatch from the F.O.B. shipping
point: (1) altered; (2) not maintained in accordance with the handling,
storage or transportation instructions supplied by ArthroCare; (3) damaged by
negligence or accident; or (4) damaged by acts of nature, vandalism, burglary,
neglect or misuse.
8.2 Effect of Warranty; Field Actions.
A. If any ArthroCare Products do not meet the warranties specified
herein, BSC may, at its option: (i) require ArthroCare (at ArthroCare's
option) to replace or correct at no cost to BSC any defective or nonconforming
Products, or (ii) return any nonconforming Products to ArthroCare at
ArthroCare's expense and recover from ArthroCare the full transfer price
thereof.
B. Notwithstanding anything to the contrary in this Article 8, ArthroCare
shall indemnify and reimburse BSC for any field action, recall, retrieval or
other type of removal or alteration which is required due to any failure of
the Products to meet the Specifications.
8.3 Exclusions. EXCEPT AS OTHERWISE STATED IN THIS AGREEMENT OR THE
LICENSE AGREEMENT, ARTHROCARE AND ITS THIRD PARTY SUPPLIERS GRANT NO OTHER
WARRANTIES AND CONDITIONS, EXPRESS OR IMPLIED, BY STATUTE OR OTHERWISE, WITH
RESPECT TO THE PRODUCTS, AND ARTHROCARE AND ITS THIRD PARTY SUPPLIERS
SPECIFICALLY DISCLAIM ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, AND NON-INFRINGEMENT. OTHER THAN AS EXPRESSLY SET FORTH
IN ARTICLE 8 AND/OR ARTICLE 10, ARTHROCARE SHALL NOT BE LIABLE TO BSC OR ANY
THIRD PARTY FOR LOST PROFITS, OR FOR ANY SPECIAL, CONSEQUENTIAL, OR INCIDENTAL
DAMAGES FOR BREACH OF WARRANTY.
8.4 Representations and Warranties of BSC. BSC hereby represents and
warrants to ArthroCare and its Affiliates that: (a) BSC is a corporation
duly organized, validly existing and in good standing under the laws of the
state of Delaware; (b) it has full power and authority required to enter
into, execute and deliver this Agreement and to carry out its obligations
under this Agreement and to perform the transactions contemplated herein; (c)
this Agreement has been duly executed and delivered by, is the valid and
binding obligation of, and is enforceable against it in accordance with its
terms; (d) the execution, delivery and performance of this Agreement by it
does not violate any other agreement to which it is a party or by which it is
bound, or any applicable law to which it is bound or subject; and (e) it has
the unrestricted right to disclose any information it submits to ArthroCare,
free of all claims of third parties, and that such disclosures do not breach
or conflict with any confidentiality provisions of any agreement to which it
is a party.
8.5 Other Representations and Warranties of ArthroCare. ArthroCare hereby
represents and warrants to BSC and its Affiliates that: (a) ArthroCare is a
corporation duly organized, validly existing and in good standing under the
laws of the state of Delaware; it has full power and authority required to
enter into, execute and deliver this Agreement and to carry out its
obligations under this Agreement and to perform the transactions contemplated
herein; (c) this Agreement has been duly executed and delivered by, is the
valid and binding obligation of and is enforceable against it in accordance
with its terms; (d) the execution, delivery and performance of this Agreement
by it does not violate any other agreement to which it is a party or by which
it is bound, or any applicable law to which it is bound or subject; (e) it has
the unrestricted right to disclose any information it submits to BSC, free of
all claims of third parties, and that such disclosures do not breach or
conflict with any confidentiality provisions of any agreement to which it is
a party; and (f) any and all consents, waivers, authorizations and approvals
of any federal, state, local or foreign governmental or regulatory authority
and of any other person, firm or corporation, required in connection with the
execution, delivery and performance of this Agreement or any of the
transactions contemplated under this Agreement will have been duly obtained
and be in full force and effect as of the date that such consents, waivers,
authorizations and approvals are required for ArthroCare to perform its
obligations under this Agreement.
ARTICLE 9
CONFIDENTIALITY; PROTECTION OF BSC'S INTELLECTUAL PROPERTY
9.1 Confidential Information. Except as expressly provided herein, the
parties agree that, for the term of this Agreement and for [*****]
thereafter, the receiving party shall keep completely confidential and shall
not publish or otherwise disclose and shall not use for any purpose except
for the purposes contemplated by this Agreement any Confidential Information
furnished to it by the disclosing party hereto, except that to the extent that
it can be established by the receiving party by written proof that such
Confidential Information:
(i) was already known to the receiving party, other than under an
obligation of confidentiality, at the time of disclosure;
(ii) was available to the public or otherwise part of the public
domain at the time of its disclosure to the receiving party;
(iii) became available to the public or otherwise part of the public
domain after its disclosure and other than through any act or omission of the
receiving party in breach of this Agreement;
(iv) was subsequently lawfully disclosed to the receiving party by
a person other than a party hereto; or
(v) was independently developed by a person having no knowledge of
or access to any of the other party's Confidential Information.
9.2 Permitted Use and Disclosures. Each party hereto may use or disclose
information disclosed to it by the other party to the extent such use or
disclosure is reasonably necessary in complying with applicable law or
governmental regulations, conducting clinical trials, or exercising its
rights hereunder to develop or commercialize Licensed Products, provided that
if a party is required to make any such disclosure of another party's
confidential information, other than pursuant to a confidentiality agreement,
it will give reasonable advance notice to the latter party of such disclosure
and, will use its best efforts to secure confidential treatment of such
information prior to its disclosure (whether through protective orders or
otherwise).
9.3 Confidential Terms. Except as expressly provided herein, each party
agrees not to disclose any terms of this Agreement to any third party without
the consent of the other party; provided, disclosures may be made as required
by securities or other applicable laws, or to Affiliates, or to a party's
accountants, attorneys and other professional advisors provided that such
accountants, attorneys and other professional advisors are bound to retain
the terms of this Agreement confidential. Disclosure to prospective corporate
partners or Affiliates is prohibited absent written consent from the
non-disclosing party. Neither party shall issue a press release or other
public announcement concerning this Agreement, the transactions contemplated
herein or the relationship between BSC and ArthroCare without the prior
consent of an authorized representative of the other party.
9.4 Other Prohibited Uses. Neither party shall appropriate or use the
other party's Confidential Information other than in furtherance of its
obligations under this Agreement and/or the License Agreement. Neither party
shall, by virtue of this Agreement alone, obtain any title to, or any interest
or license in, any of the other party's Confidential Information.
9.5 Protection of BSC's Intellectual Property.
A. ArthroCare acknowledges and agrees that BSC has the sole and exclusive
rights to use all trademarks, service marks, trade names, patents, copyrights
and trade secrets owned by, registered in the name of, licensed to or used in
BSC's business (collectively, "BSC's Intellectual Property").
B. ArthroCare hereby acknowledges and agrees that it does not now have
and shall not gain any right, title, or interest in BSC's Intellectual
Property, other than the limited right to incorporate certain BSC Intellectual
Property, as directed by BSC, in connection with its manufacture of the
Products solely for the benefit of BSC as set forth in this Agreement or in
the License Agreement. Any use by ArthroCare of BSC's Intellectual Property
shall be in accordance with this Agreement and the License Agreement, and
shall be solely for the benefit of BSC and deemed a use by BSC.
C. ArthroCare shall not manufacture, supply and/or sell, for any party
other than BSC, any products which use or bear any of BSC's Intellectual
Property. ArthroCare shall cooperate with BSC to protect BSC's and its
Affiliates' rights to BSC's Intellectual Property. ArthroCare shall not, and
it shall not permit any of its Affiliates to, take any action or fail to take
any action which would in any way infringe upon or compromise BSC's or any of
its corporate Affiliates' rights in BSC's Intellectual Property.
ARTICLE 10
INDEMNIFICATION; INSURANCE
10.1 BSC Indemnity. BSC agrees to indemnify, defend and hold ArthroCare
and its directors, officers, employees, insurers, shareholders and agents
harmless from and against any and all liabilities, claims, suits, demands,
expenses (including, without limitation, attorneys and professional fees and
other costs of handling such claim or litigation), losses or causes of action
(each, a "Liability") arising out of or based upon: (a) injury to or death of
any person or damage to property arising out of or in connection with the
distribution or use of any Products (unless such injury or death arises from
or relates to any matter which would give rise to a claim by BSC of indemnity
from ArthroCare under Section 10.2); (b) any material breach of this
Agreement by BSC; or (c) BSC's negligence or misconduct, or violation of any
state, federal, or international law or regulation, in connection with the
performance of its obligations hereunder; provided, however, that ArthroCare
shall: (i) give BSC prompt notice of any such Liability; (ii) permit BSC to
participate in the defense of the same through its counsel; (iii) give BSC all
information in its possession relating to such Liability; and (iv) give its
authorization for and assistance in such defense.
10.2 ArthroCare Indemnity. ArthroCare agrees to indemnify, defend and hold
BSC and its Affiliates, and its and their respective directors, officers,
employees, insurers, shareholders, and agents harmless from and against any
and all Liabilities arising out of or relating in any way to: (a) any failure
of any ArthroCare Product to meet the Specifications, or any defect in any
ArthroCare Product; (b) ArthroCare's negligence or misconduct, or violation
of any state, federal, or international law or regulation, in connection with
the performance of its obligations hereunder; or (c) any material breach of
this Agreement by ArthroCare; provided, however, that BSC shall: (i) give
ArthroCare prompt notice of any such Liability; (ii) permit ArthroCare to
participate in the defense of the same through its counsel; (iii) give
ArthroCare all information in its possession relating to such Liability; and
(iv) give its authorization for and assistance in such defense.
10.3 Insurance. ArthroCare shall purchase and maintain in full force and
effect, during the term hereof and for a period of 10 years after the
termination or expiration of this Agreement, comprehensive general liability
insurance, in an amount not less than $5 million in the aggregate and $1
million per occurrence, and product liability insurance, in an amount not
less than $5 million in the aggregate and $5 million per occurrence, and
shall name BSC, its officers, directors, agents, employees, shareholders,
Affiliates and customers, as additional insureds on such policies.
ArthroCare shall direct its insurer to notify BSC immediately in writing upon
receipt from ArthroCare of, or upon the insurer's giving to ArthroCare, any
notice relating to the cancellation or reduction in coverage of such
insurance. ArthroCare shall, upon request from BSC from time to time, provide
BSC with certificates of insurance showing compliance with the foregoing
provisions.
ARTICLE 11
TERM AND TERMINATION
11.1 Term. The term of this Agreement shall commence on the Effective Date
of this Agreement and shall have a term of [*****] unless earlier
terminated in accordance with this Article 11. This Agreement may be extended
by mutual written agreement of the parties.
11.2 Termination for Cause.
A. Either party may terminate this Agreement in the event the other party
has materially breached or defaulted in the performance of any of its
obligations hereunder, and such default has continued for 60 days after
written notice thereof was provided to the breaching party by the
nonbreaching party. Any termination shall become effective at the end of such
60-day period unless the breaching party has cured any such breach or default
prior to the expiration of such period. Notwithstanding the above, in the
case of a failure to pay any amount due hereunder that is not disputed by BSC,
the period for cure of any such default following notice thereof shall be 10
days, but only if such notice is given via facsimile and overnight courier,
otherwise such period shall be 30 days and, unless payment is made within such
period, the termination shall become effective at the end of such period.
B. Notwithstanding Section 11.1 hereof, BSC shall also have the right to
terminate this Agreement immediately upon notice to ArthroCare if BSC
believes in good faith that any breach by ArthroCare hereunder does or may
negatively affect patient safety.
C. Notwithstanding Section 11.1 hereof, neither party shall be in default
in the performance of its obligations under this Agreement if such
performance is prevented or delayed because of war or similar unrest, labor
dispute or strike, transportation difficulties, unavailability of necessary
raw materials, epidemic, fire, natural disaster, any law, rule or regulation
of any governmental or other authority, acts of God, or other similar cause,
that is beyond the control of the party whose performance is affected;
provided, however, that if such delay continues for 90 days or more, then BSC
may give ArthroCare written notice of default under Section 11.2.A.
D. This Agreement shall automatically terminate upon any termination of
the License Agreement. The termination of this Agreement shall not
automatically terminate the License Agreement.
11.3 Termination for Insolvency. If voluntary or involuntary proceedings
by or against a party are instituted in bankruptcy under any insolvency law,
or a receiver or custodian is appointed for such party, or proceedings are
instituted by or against such party for corporate reorganization or the
dissolution of such party, which proceedings, if involuntary, shall not have
been dismissed within 60 days after the date of filing, or if such party makes
an assignment for the benefit of creditors, or substantially all of the assets
of such party are seized or attached and not released within 60 days
thereafter, the other party may immediately terminate this Agreement effective
upon notice of such termination.
11.4 Effect of Termination.
A. Termination of this Agreement for any reason shall not release any
party hereto from any liability which, at the time of such termination, has
already accrued to the other party or which is attributable to a period prior
to such termination nor preclude either party from pursuing any rights and
remedies it may have hereunder or at law or in equity with respect to any
breach of this Agreement. It is understood and agreed that monetary damages
may not be a sufficient remedy for any breach of this Agreement and that the
non-breaching party may be entitled to injunctive relief as a remedy for any
such breach. Such remedy, in addition to any other remedies provided in this
Agreement, shall not be deemed to be the exclusive remedy for any such breach
of this Agreement, but shall be in addition to all other remedies available
at law or in equity.
B. Upon any termination or expiration of this Agreement, BSC and
ArthroCare shall promptly return to the other party all Confidential
Information, copies of which may be retained for archival purposes.
C. Any Orders placed by BSC and accepted by ArthroCare upon or after
termination of this Agreement shall be subject to the terms and conditions of
this Agreement, unless BSC and ArthroCare expressly agree in writing on other
terms of sale. Upon termination of this Agreement, BSC and ArthroCare shall
cooperate with one another to ensure a smooth transition, and also to ensure
that BSC has a reasonably adequate inventory of Products. If the parties do
not renew this Agreement, ArthroCare shall promptly make available for
purchase by BSC, at BSC's option and request, not less than a three- month
inventory of each Product (based on the previous three months' average
purchases of each Product), and any such purchases made by BSC shall be at a
price equal to the price in effect for such Products immediately prior to
termination/expiration of this Agreement.
D. If BSC terminates this Agreement for cause due to a breach by
ArthroCare, ArthroCare's exclusivity obligations under Section 7.2 shall
remain in effect for the one- year period immediately following any such
termination.
11.5 Survival. Section 7.2 and Articles 1, 4, 6, 8, 9, 10, 11 and 13 of
this Agreement shall survive the expiration or termination of this Agreement
for any reason.
ARTICLE 12
CONDITIONS TO EFFECTIVENESS OF AGREEMENT
The obligations of the parties to consummate the transactions
contemplated in this Agreement are conditioned on each of the parties
executing and delivering to the other party both executed copies of this
Agreement and the License Agreement via facsimile no later than 6:00 p.m.
(Central time) on February 9, 1998. Such delivery shall constitute effective
delivery of such Agreements, and such Agreements shall then be immediately
binding on the parties. In addition, the parties shall execute and exchange
multiple original copies of the Agreements; provided, however, that the
parties' delay or failure to so exchange such documents shall not affect the
validity or enforceability of the Agreements and it shall not negate the
validity of the execution and delivery that were accomplished via the
execution and delivery of the Agreements by facsimile.
ARTICLE 13
MISCELLANEOUS PROVISIONS
13.1 Governing Law; Venue. This Agreement and any dispute, including
without limitation any arbitration, arising from the performance or breach
hereof shall be governed by and construed and enforced in accordance with the
laws of the Commonwealth of Massachusetts, without reference to conflicts of
laws principles.
13.2 Assignment. The parties may not transfer or assign this Agreement or
any of the parties' rights or obligations hereunder to any non- Affiliated
person without the written consent of the other party. Any such attempted
transfer or assignment shall be void. This Agreement shall be binding upon
and inure to the benefit of the parties and their present and past agents,
servants, officers, directors, partners, related companies, and the
predecessors, employees, franchisees, trustees, representatives,
shareholders, successors and assigns of each. In addition, BSC's rights under
this Agreement are intended to be for the benefit of BSC as well as its
Affiliates.
13.3 Waiver. No waiver of any rights, shall be effective unless consented
to in writing by the party to be charged and the waiver of any breach of
default shall not constitute a waiver of any other right hereunder or any
subsequent breach or default.
13.4 Severability. In the event that any provisions of this Agreement are
determined to be invalid or unenforceable by a court of competent
jurisdiction, the remainder of this Agreement shall remain in full force and
effect without said provision.
13.5 Notices. All notices, requests and other communications hereunder
shall be in writing and shall be personally delivered or sent by telecopy or
other electronic facsimile transmission or by certified mail-return receipt
requested, postage prepaid, or delivered by a nationally recognized courier
who guarantees next-day delivery in each case to the respective address
specified below, or such other address as may be specified in writing to the
other parties hereto:
BSC: Boston Scientific Corporation
One Boston Scientific Place,
Natick, Massachusetts 01760-1537
Attn: John Pedersen
Fax: 508/650-8922
with a copy to:
SCIMED Life Systems, Inc.
One SCIMED Place
Maple Grove, Minnesota 55311-1566
Attn: Jean Fitterer Lance
Fax: 612/494-2616
ArthroCare: ArthroCare Corporation
595 North Pastoria Avenue
Sunnyvale, California 94086
Attn: Michael Baker, C.E.O.
Fax: 408/732-2752
with a copy to:
John Raffle
ArthroCare Corporation
595 North Pastoria Avenue
Sunnyvale, California 94086
Fax: 408/736-0226 (cover page marked confidential)
13.6 Independent Contractors. Both parties are independent contractors
under this Agreement. Nothing contained in this Agreement is intended nor is
to be construed so as to constitute ArthroCare or BSC as partners or joint
venturers with respect to this Agreement. Neither party shall have any
express or implied right or authority to assume or create any obligations on
behalf of or in the name of the other party or to bind the other party to any
other contract, agreement, or undertaking with any third party.
13.7 Patent Marking. BSC agrees to mark (or give directions to ArthroCare
and/or any other manufacturer to mark) all Products sold pursuant to this
Agreement in accordance with the applicable statute or regulations relating to
patent marking in the country or countries of manufacture and sale thereof.
13.8 Compliance with Laws. In performing their respective obligations
under this Agreement, the parties shall fully comply in all material respects
with the requirements of any and all applicable laws, regulations, rules and
orders of any governmental body having jurisdiction over the exercise of
rights under this Agreement.
13.9 Use of Name. Other than as expressly set forth in this Agreement or
the License Agreement, neither party shall use the name or trademarks of the
other party without the prior written consent of such other party.
13.10 Entire Agreement; Amendment. This Agreement constitutes the entire
and exclusive Agreement between the parties with respect to the subject
matter hereof and supersedes and cancels all previous discussions, agreements,
commitments and writings in respect thereof except for the License Agreement.
No amendment or addition to this Agreement shall be effective unless reduced
to writing and executed by the authorized representatives of the parties.
13.11 Counterparts. This Agreement may be executed in any number of
counterparts and on separate signature pages by each party, each copy of
which shall for all purposes be deemed an original.
IN WITNESS WHEREOF, ArthroCare and BSC have executed this Agreement in
duplicate originals by duly authorized officers.
ARTHROCARE CORPORATION BOSTON SCIENTIFIC CORPORATION
By: /s/Michael A. Baker By: /s/Michael Berman
- ---------------------------- --------------------------
Print Name: Michael A. Baker Print Name: Michael Berman
- ---------------------------- --------------------------
Title: President & CEO Title: President, SciMed
- ---------------------------- --------------------------
<PAGE>
EXHIBIT A
Minimum Specifications
At a minimum, the Controller shall have the capabilities of ArthroCare's
currently commercially available RF generator to meet worldwide regulatory
requirements for commercial release of an intracardiac medical electronic
device (CF rating). The Controller must be designed and manufactured to
operate fully and without interruption, at a minimum, for a [*****] period
with average use, without significant repair or maintenance expense, in the
case of [*****] of all Controllers supplied by ArthroCare; provided, however,
that the remedies applicable to a failure by ArthroCare to meet such [*****]
standard shall be as set forth in clause (g) of Section 8.1.
- --------------------------------------------
***** Certain information in this document has been omitted and filed
separately with the Commission. Confidential treatment has been requested
with respect to the omitted portions.
LICENSE AGREEMENT
This License Agreement (the "Agreement") effective as of February 9, 1998 (the
"Effective Date") is entered into by and between ArthroCare Corporation, on
its own behalf and on behalf of its Affiliates ("ArthroCare"), a Delaware
corporation having an address at 595 North Pastoria Avenue, Sunnyvale,
California 94086, and Boston Scientific Corporation, on its own behalf and on
behalf of its Affiliates ("BSC"), a Delaware corporation having an address at
One Boston Scientific Place, Natick, Massachusetts 01760- 1537,
BACKGROUND
A. ArthroCare owns certain Patent Rights (as defined in Article 1)
relating to radio frequency ("RF") energy and Revascularization;
B. BSC is a worldwide leader in the sale of medical devices to the
interventional cardiology market through its subsidiary SCIMED Life Systems,
Inc., and in the sale of textile vascular grafts to the cardio-thoracic
surgery market through its subsidiary Meadox Medicals, Inc.;
C. BSC desires to obtain a license under the Patent Rights in order to
commercialize RF based Revascularization (as such terms are defined in
Article 1) products, and ArthroCare desires to grant such a license to BSC,
all on the terms and conditions set forth herein; and
D. On even date herewith, the parties are entering into a Development and
Supply Agreement pursuant to which ArthroCare shall be BSC's exclusive third
party contract manufacturer for certain products and/or components of such
products (the "Development and Supply Agreement").
NOW, THEREFORE, in consideration of the promises and the mutual covenants
contained herein, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 "Affiliate" means any corporation or other entity which is directly or
indirectly controlling, controlled by or under the common control with a party
hereto. For the purpose of this Agreement, "control" shall mean the direct
or indirect ownership of at least 50% of the outstanding shares or other
voting rights of the subject entity to elect directors, or if not meeting the
preceding definition, any entity owned or controlled by or owning or
controlling at the maximum control or ownership right permitted in the
country where such entity exists.
1.2 "Confidential Information" shall mean any: (i) information or material
in tangible form disclosed hereunder that is marked as "Confidential" at the
time it is delivered to the receiving party; or (ii) information disclosed
orally hereunder which is identified as confidential or proprietary when
disclosed and such disclosure of confidential information is confirmed in
writing within 30 days after disclosure by the disclosing party.
1.3 "Controller(s)" shall mean an RF power supply, which is specifically
designed for use in Revascularization procedures.
1.4 "Dominating Patent" shall mean an unexpired patent which is owned by a
third party covering Licensed Products made or sold by BSC or its sublicensee
under circumstances such that, in BSC's reasonable opinion, it would be most
commercially reasonable for BSC to obtain a license under such patent in order
to make, use or commercialize a Licensed Product under this Agreement.
1.5 "Field" shall mean the use of RF energy in a procedure that is
intended to promote Revascularization of the heart or other muscle tissue.
1.6 "Licensed Product" will mean any product within the scope of a Valid
Claim as determined on the date of sale, any product sold for use in
practicing a process within the scope of a Valid Claim as determined on the
date of sale or any product produced using any method within the scope of a
Valid Claim as determined on the date of sale in each case, in the country of
manufacture or sale.
1.7 "Net Sales" shall mean revenues on an accrual basis, in accordance
with U.S. generally accepted accounting principles, as follows: the invoice
price of Licensed Products sold by BSC or its sublicensees to third parties
(including sales made in connection with clinical trials), less, to the extent
included in such invoice price the total of: (a) ordinary and customary trade
discounts actually allowed; (b) credits, rebates and returns (including, but
not limited to, wholesaler and retailer returns); (c) freight, postage,
insurance and duties paid for and separately identified on the invoice or
other documentation maintained in the ordinary course of business, and (d)
excise taxes, other consumption taxes, customs duties and compulsory payments
to governmental authorities actually paid and separately identified on the
invoice or other documentation maintained in the ordinary course of business.
Net Sales shall also include the fair market value of all other consideration
received by BSC in respect of Licensed Products, whether such consideration is
in cash, payment in kind, exchange or another form, provided, however, that if
such consideration would constitute royalty payments under a sublicense from
BSC, such royalty payments to BSC shall not be included in Net Sales, but
shall instead be subject to sublicense payments under Section 3.5 of this
Agreement.
1.8 "Patent Rights" shall mean all patents and patent applications in the
Field owned by or licensed to ArthroCare, including the patent applications
and patents listed on Exhibit A hereto; all priority applications,
divisionals, continuations, continuations-in-part, and substitutions thereof;
all patent applications and patents relating to improvements thereof; all
foreign patent applications corresponding to the preceding applications; and
all U.S. and foreign patents issuing on any of the preceding applications,
including extensions, reissues, and re-examinations.
1.9 [*****]
1.10 "RF" shall mean radiofrequency.
1.11 "Trademark Rights" shall mean all registered trademarks, trademark
applications, common law trademarks, domestic or foreign, to the marks listed
in Exhibit B, and all marks similar thereto.
1.12 "Valid Claim" shall mean a claim of an issued and unexpired patent
included within the Patent Rights which has not been held invalid or
unenforceable in a final decision of a court or government agency of competent
jurisdiction and which has not been disclaimed or admitted to be invalid or
unenforceable through reissue or otherwise; provided, however, that if the
holding of such court or agency is later reversed by a court or agency with
overriding authority, the claim shall be reinstated as a Valid Claim with
respect to Net Sales made after the date of such reversal.
ARTICLE 2
LICENSE
2.1 Grant. Subject to the terms and conditions of this Agreement,
ArthroCare and its Affiliates hereby grant to BSC and its Affiliates an
exclusive, non-transferable, worldwide license under the Patent Rights, with
the right to grant and authorize sublicenses, to make, have made, import, have
imported, use, offer for sale and sell Licensed Products in the Field.
ArthroCare hereby grants to BSC and its Affiliates an exclusive,
non-transferable, worldwide license under the Trademark Rights, with the right
to grant sublicenses and to use marks within the Trademark Rights in
connection with the sale of Licensed Products in the Field.
2.2 No Implied Rights. Only the license granted pursuant to the express
terms of this Agreement shall be of any legal force or effect. No other
license rights shall be granted or created by implication, estoppel or
otherwise.
ARTICLE 3
CONSIDERATION
3.1 License Fee. In partial consideration for the license granted herein,
BSC shall pay ArthroCare a license fee of [*****] within five business days
after the Effective Date.
3.2 Milestone Payments. Within 30 days following the first achievement by
BSC of each of the following milestones, BSC shall make the applicable
payments to ArthroCare as follows:
Milestone Payment
----------- ----------
[*****] [*****]
Each of such payments are due only upon the first achievement of the
respective milestone. Each of such payments shall be deemed prepaid
royalties, which shall be applied against royalties due from BSC as described
in Section 4.2.
3.3 Royalties.
A. As additional consideration of the rights and licenses granted by
ArthroCare to BSC herein, BSC shall pay to ArthroCare the following running
royalties on Net Sales of Licensed Products sold by BSC or any of its
Affiliates in the countries where a Valid Claim covering a Licensed Product
is established, subject to clauses (i) through (v) below:
Cumulative Royalties Royalty Rate
---------------------- ---------------
[*****] [*****]
(i) If and when ArthroCare establishes and for so long as
ArthroCare maintains a Valid Claim covering a Licensed Product in the United
States , BSC shall pay royalties on Net Sales of Licensed Products sold in
the United States.
(ii) If and when ArthroCare establishes and for as long as
ArthroCare maintains a Valid Claim covering a Licensed Product in Europe
[*****], BSC shall pay royalties on Net Sales of Licensed Products sold in
Europe.
(iii) If and when ArthroCare establishes and for as long as
ArthroCare maintains a Valid Claim covering a Licensed Product in Japan, BSC
shall pay royalties on Net Sales of Licensed Products sold in Japan.
(iv) If and when ArthroCare establishes and for as long as
ArthroCare maintains a Valid Claim covering a Licensed Product in each of the
United States, Japan and Europe [*****] , BSC shall pay royalties on Net Sales
of Licensed Products sold anywhere in the world.
(v) If ArthroCare fails to establish or if ArthroCare fails to
maintain a Valid Claim covering a Licensed Product in at least one of the
United States, Japan and Europe [*****] , BSC shall not pay any royalties.
B. BSC will have no obligation to pay any royalties on the Net Sales of
any Controllers with respect to any Controller that is: (i) manufactured by
ArthroCare and sold to BSC or any of its Affiliates under the Development and
Supply Agreement; or (ii) manufactured by BSC or any of its Affiliates and
with respect to which a payment has been made to ArthroCare pursuant to
Section 2.1.C. of the Development and Supply Agreement.
3.4 Minimum Annual Royalty. In addition, commencing on the [*****] and
annually thereafter, BSC will pay an annual minimum royalty payment of
[*****]. Such first annual minimum royalty payment shall be due within 60
days of the end of the calendar year [*****] and prorated based on the actual
number of days from the date of [*****]l to the end of such calendar year.
Thereafter, annual minimum royalty payments shall be due within 60 days of the
end of each calendar year following [*****]. Prior to the earlier date
referenced in the last sentence of this Section 3.4, BSC may elect not to make
any minimum annual royalty payment, in which case, after written notice to
BSC and an opportunity to pay the minimum annual royalty within 30 days of
such notice, ArthroCare shall have the right to purchase from BSC, at any time
prior to the termination of this Agreement, for [*****], a worldwide non-
exclusive license under the Patent Rights, with the right to grant and
authorize sublicenses, to make, have made, import, have imported, use, offer
for sale and sell Licensed Products in the Field, but all royalties which have
been prepaid prior to any such purchase shall continue to be applied against
royalties due thereafter as described in Section 4.2. No further annual
minimum royalties shall be due upon the earlier to occur of the date that:
(i) the last Valid Claim in the United States, Europe [*****] [*****] and
Japan covering a Licensed Product expires; or (ii) until BSC's sales of
Licensed Products reach [*****] in any trailing 12- month period.
3.5 Sublicense Payments. In addition to the payments made under Sections
3.1, 3.2, 3.3 and 3.4 above, BSC shall pay to ArthroCare [*****] of royalties,
license fees, milestone fees or other compensation received by BSC or its
Affiliates from sublicensees to the Patent Rights within the Field.
3.6 Royalty Term. Royalties due under this Article 3 shall be payable
until the last to expire of a Valid Claim in the United States, Europe [*****]
or Japan covering a Licensed Product.
ARTICLE 4
PAYMENTS
4.1 Payments; Currency. All payments due hereunder shall be paid by wire
transfer in United States dollars in immediately available funds to an account
designated by ArthroCare. If any currency conversion shall be required in
connection with the payment of any royalties hereunder, such conversion shall
be made by using BSC's financial accounting practices applicable to sales by
its foreign Affiliates which are then in effect and used by BSC for financial
reporting purposes. Royalty payments due hereunder shall be payable annually
within 60 days of the end of each calendar year following [*****] as
referenced in Section 3.4 of this Agreement.
4.2 Prepaid Royalties. The following payments shall be considered
prepayments of royalties due from BSC under Section 3.3.A and 3.5: (i) all
payments made by BSC under Section 3.2; and (ii) that portion of any payment
made by BSC under Section 3.4 which exceeds the actual amount of royalties
due for the applicable year. Such prepaid royalties may be applied by BSC
against any royalties due from BSC; provided, however, that the first [*****]
in royalties due from BSC during each year that the minimum royalty payments
are due as described in Section 3.4 shall be paid by BSC by wire transfer and
only those royalties due in excess of such [*****] shall be offset by the
prepaid royalties.
ARTICLE 5
REPORTS AND RECORDS
5.1 Royalty Reports and Payments. After the first commercial sale of a
Licensed Product on which royalties are required hereunder, BSC shall make
quarterly written reports to ArthroCare within 60 days after the end of each
calendar quarter, stating in each such report, by region, the number,
description, and aggregate Net Sales of each Licensed Product sold during the
calendar quarter. ArthroCare shall treat all such reports as Confidential
Information of BSC. Concurrently with the making of such reports, BSC shall
pay ArthroCare the royalties specified in Article 3.
5.2 Records; Inspection. BSC shall keep complete, true and accurate books
of account and records for the purpose of determining the royalty amounts
payable under this Agreement. Such books and records shall be kept for at
least five years following the end of the calendar quarter to which they
pertain and will be open for inspection during such period by a representative
of ArthroCare for the purpose of verifying the royalty reports and payments.
Such inspections shall be made during ordinary business hours. The
representative may be obliged to execute a reasonable confidentiality
agreement prior to commencing any such inspection. Inspections conducted
under this Section 5.2 shall be at the expense of ArthroCare, unless an
underpayment exceeding [*****] of the amount stated for any period covered by
the inspection is identified, in which case all costs relating to the
inspection and any unpaid amounts will be paid by BSC, with interest from the
date such amounts were due at [*****].
ARTICLE 6
DUE DILIGENCE
6.1 Obligation to Commercialize. BSC shall use reasonable efforts to
develop at least one commercially viable Licensed Product, in a manner
consistent with other BSC development programs, and thereafter to: (i)
maintain and obtain such approvals as may be necessary for the sales of at
least one Licensed Product in commercially significant countries; and (ii)
use reasonable efforts to produce and sell reasonable quantities of at least
one Licensed Product and maintain and obtain such approvals as may be
necessary for the sale of at least one Licensed Product in commercially
significant countries. [*****] In such cases, ArthroCare will not be
required to refund any license fees, milestone payments or royalties under
Article 3.
6.2 Reports to ArthroCare. During the term of this Agreement, BSC shall
keep ArthroCare fully informed of its activities subject to this Agreement,
including without limitation, the achievement of the milestones set forth in
Section 6.1 and the commercialization of the Licensed Products. On or around
January 31 of each year following the Effective Date of this Agreement, BSC
shall either: (a) provide ArthroCare with a written report detailing such
events and activities; or (b) meet with ArthroCare and orally report such
events and activities. When the registration package requesting approval for
commercial sale of the Licensed Product is first filed in each of the U.S.,
the European Union and Japan, and in each case when approval is received
therefor, BSC will promptly notify ArthroCare. BSC shall notify ArthroCare
within 30 days after the first commercial sale of each Licensed Product.
ARTICLE 7
CONFIDENTIALITY
7.1 Confidential Information. Except as expressly provided herein, the
parties agree that, for the term of this Agreement and for [*****]
thereafter, the receiving party shall keep completely confidential and shall
not publish or otherwise disclose and shall not use for any purpose except
for the purposes contemplated by this Agreement any Confidential Information
furnished to it by the disclosing party hereto, except that to the extent that
it can be established by the receiving party by written proof that such
Confidential Information:
(i) was already known to the receiving party, other than under an
obligation of confidentiality, at the time of disclosure;
(ii) was available to the public or otherwise part of the public
domain at the time of its disclosure to the receiving party;
(iii) became available to the public or otherwise part of the public
domain after its disclosure and other than through any act or omission of the
receiving party in breach of this Agreement;
(iv) was subsequently lawfully disclosed to the receiving party by
a person other than a party hereto; or
(v) was independently developed by a person having no knowledge of
or access to any of the other party's Confidential Information.
7.2 Permitted Use and Disclosures. Each party hereto may use or disclose
information disclosed to it by the other party to the extent such use or
disclosure is reasonably necessary in complying with applicable law or
governmental regulations, conducting clinical trials, or exercising its
rights hereunder to develop or commercialize Licensed Products, provided that
if a party is required to make any such disclosure of another party's
confidential information, other than pursuant to a confidentiality agreement,
it will give reasonable advance notice to the latter party of such disclosure
and, will use its best efforts to secure confidential treatment of such
information prior to its disclosure (whether through protective orders or
otherwise).
7.3 Confidential Terms. Except as expressly provided herein, each party
agrees not to disclose any terms of this Agreement to any third party without
the consent of the other party; provided, disclosures may be made as required
by securities or other applicable laws, or to Affiliates, or to a party's
accountants, attorneys and other professional advisors provided that such
accountants, attorneys and other professional advisors are bound to retain the
terms of this Agreement as confidential. Disclosure to prospective corporate
partners or Affiliates is prohibited absent written consent from the
non-disclosing party. Neither party shall issue a press release or other
public announcement concerning this Agreement, the transactions contemplated
herein or the relationship between BSC and ArthroCare without the prior
written consent of an authorized representative of the other party.
7.4 Other Prohibited Uses. Other than as contemplated by this Agreement
or the Development and Supply Agreement, neither party shall appropriate or
use the other party's Confidential Information in its own manufacture of
products or for any other purpose. Other than as contemplated by this
Agreement or the Development and Supply Agreement, neither party shall, by
virtue of either this Agreement or the Development and Supply Agreement,
obtain any title to, or any interest or license in, any of the other party's
Confidential Information.
ARTICLE 8
INTELLECTUAL PROPERTY
8.1 Enforcement. If either party hereto becomes aware that any Patent
Rights in the Field are being or have been infringed by any third party, such
party shall promptly notify the other party hereto in writing describing the
facts relating thereto in reasonable detail. BSC shall have the initial
right, but not the obligation, to institute, prosecute and control any action,
suit or proceeding with respect to such infringement, including any
declaratory judgment action (each an "Action"), at its expense, using counsel
of its choice. In any such event, ArthroCare shall cooperate reasonably with
BSC, at BSC's expense; including without limitation, by joining such Action as
a party if requested by BSC. Any amounts recovered by BSC in such Action
shall be used first to reimburse ArthroCare and BSC for the expenses and fees
incurred in connection with such Action and any remainder shall be subject to
Sublicense Payments pursuant to Section 3.5. In the event BSC fails to
initiate or defend any Action involving the Patent Rights within four months
of receiving notice of any infringement, ArthroCare shall have the right, but
not the obligation, to initiate and control such an Action, at its expense
provided, however, that the four month period shall be extended up to four
additional months if BSC elects to initiate negotiations with the infringing
party. In any such event, BSC shall cooperate reasonably with ArthroCare in
connection with any such Action, at ArthroCare's expense; including without
limitation, by joining such Action as a party if requested by ArthroCare.
8.2 Infringement Claims. If the practice by BSC of the license granted
herein results in any allegation or claim of infringement of an intellectual
property right of any third party against BSC, BSC shall have the exclusive
right to defend any such claim, suit or proceeding, at its own expense, by
counsel of its own choice and shall have the sole right and authority to
settle any such suit; provided, however, ArthroCare shall cooperate with BSC,
at BSC's reasonable request and expense, in connection with the defense of
such claim.
8.3 [*****]
8.4 Prosecution of Patent Applications. BSC will have the right to
access, obtain copies, review and comment on the prosecution of any patent
applications directly related to the Patent Rights within the Field.
ArthroCare shall cooperate with BSC's patent counsel and proactively provide
copies of all papers relating to patent applications directly related to the
Patent Rights within the Field. ArthroCare will follow the reasonable advice
of BSC's patent counsel regarding such prosecution, and BSC will have the
right to control patent prosecution if patent applications primarily related
to the Field within the Patent Rights are jeopardized in any country. In the
event that BSC elects to control the patent prosecution of any patent
applications under the Patent Rights, BSC will pay for all costs related to
such patent prosecution. ArthroCare shall not abandon, disclaim, or otherwise
jeopardize any Patent Rights primarily related to the Field. ArthroCare shall
establish and maintain Patent Rights related to the Field in all commercially
significant countries, including, but not limited to the United States,
Germany, France and Japan.
8.5 Other Intellectual Property.
A. ArthroCare acknowledges and agrees that BSC has the sole and exclusive
rights to use all trademarks, service marks, trade names, patents, copyrights
and trade secrets owned by, registered in the name of, licensed to or used in
BSC's business (collectively, "BSC's Intellectual Property"), other than as
expressly contemplated by this Agreement or the Development and Supply
Agreement. ArthroCare also acknowledges and agrees that it does not now have
and shall not gain any right, title, or interest in BSC's Intellectual
Property, other than as expressly contemplated by this Agreement or the
Development and Supply Agreement. Any use by ArthroCare of BSC's Intellectual
Property shall be in accordance with this Agreement and the Development and
Supply Agreement.
B. BSC acknowledges and agrees that ArthroCare has the sole and exclusive
rights to use all trademarks, service marks, trade names, patents, copyrights
and trade secrets owned by, registered in the name of, licensed to or used in
ArthroCare's business (collectively, "ArthroCare's Intellectual Property"),
other than as expressly contemplated by this Agreement or the Development and
Supply Agreement. BSC also acknowledges and agrees that it does not now have
and shall not gain any right, title, or interest in ArthroCare's Intellectual
Property, other than as expressly contemplated by this Agreement or the
Development and Supply Agreement. Any use by BSC of ArthroCare's Intellectual
Property shall be in accordance with this Agreement and the Development and
Supply Agreement.
8.6 Inventions.
A. All ideas, discoveries and inventions, whether patentable or not,
related to the Field which are conceived by either BSC or ArthroCare after the
Effective Date and are based on collaborative work between BSC and ArthroCare
shall be jointly owned by BSC and ArthroCare and subject to the exclusive
license provided in Section 2.1 of this Agreement.
B. All ideas, discoveries and inventions, whether patentable or not,
related to the Field which are conceived by ArthroCare after the Effective
Date and are not based on collaborative work between BSC and ArthroCare shall
be exclusively owned by ArthroCare and subject to the exclusive license
provided in Section 2.1 of this Agreement.
C. All ideas, discoveries and inventions, whether patentable or not,
related to the Field which are conceived by BSC after the Effective Date and
are not based on collaborative work between BSC and ArthroCare shall be
exclusively owned by BSC.
ARTICLE 9
REPRESENTATIONS AND WARRANTIES
9.1 Representations and Warranties. ArthroCare represents and warrants,
to the best of its knowledge, that: (i) it is the sole and exclusive owner of
all right, title and interest in the Patent Rights and the Trademark Rights;
(ii) it has the right to grant the rights and licenses granted herein; (iii)
it has not previously granted any right, license or interest in and to the
Patent Rights or the Trademark Rights inconsistent with the license granted to
BSC herein; (iv) as of the Effective Date, there are no threatened or pending
actions, suits, claims or proceedings against ArthroCare relating to the
Patent Rights or the Trademark Rights; (v) it has disclosed to BSC's patent
counsel all material matters relating to the prosecution and maintenance of
the Patent Rights prior to the Effective Date; (vi) the subject matter
disclosed in U.S. serial no. 562,331 is pending in a U.S. patent application
claiming priority to U.S. serial no. 562,331; (vii) [*****]; (viii) the
Patent Rights and the Trademark Rights remain enforceable or pending in all
countries as indicated in Exhibit A for the Patent Rights and Exhibit B for
the Trademark Rights; (ix) its execution and delivery of this Agreement will
not result in a violation of or default under the policies of ArthroCare's
employees' past employers or under the terms of any employment, consulting,
nondisclosure, confidentiality, research or other agreement to which
ArthroCare or its employees are or may become a party; (x) it independently
developed the subject matter described and claimed in the Patent Rights, which
subject matter was not copied from a third party; and (xi) to the best of its
knowledge and belief, there is no other person, firm or corporation claiming
to have, through ArthroCare, any title or interest in or to any of the Patents
Rights or the Trademark Rights.
9.2 Representations and Warranties of BSC. BSC hereby represents and
warrants to ArthroCare and its Affiliates that: (a) BSC is a corporation duly
organized, validly existing and in good standing under the laws of the state
of Delaware; (b) it has full power and authority required to enter into,
execute and deliver this Agreement and to carry out its obligations under this
Agreement and to perform the transactions contemplated therein; (c) this
Agreement has been duly executed and delivered by, is the valid and binding
obligation of and is enforceable against it in accordance with its terms; (d)
the execution, delivery and performance of this Agreement by it does not
violate any other agreement to which it is a party or by which it is bound,
or any applicable law to which it is bound or subject; and (e) it has the
unrestricted right to disclose any information it submits to ArthroCare, free
of all claims of third parties, and that such disclosures do not breach or
conflict with any confidentiality provisions of any agreement to which it is a
party.
9.3 Other Representations and Warranties of ArthroCare. ArthroCare hereby
represents and warrants to BSC and its Affiliates that: (a) ArthroCare is a
corporation duly organized, validly existing and in good standing under the
laws of the state of Delaware; it has full power and authority required to
enter into, execute and deliver this Agreement and to carry out its
obligations under this Agreement and to perform the transactions contemplated
therein; (c) this Agreement has been duly executed and delivered by, is the
valid and binding obligation of and is enforceable against it in accordance
with its terms; (d) the execution, delivery and performance of this Agreement
by it does not violate any other agreement to which it is a party or by which
it is bound, or any applicable law to which it is bound or subject; (e) it has
the unrestricted right to disclose any information it submits to BSC, free of
all claims of third parties, and that such disclosures do not breach or
conflict with any confidentiality provisions of any agreement to which it is a
party; (f) to the best of its knowledge, any and all consents, waivers,
authorizations and approvals of any federal, state, local or foreign
governmental or regulatory authority and of any other person, firm or
corporation, required in connection with the execution, delivery and
performance of this Agreement or any of the transactions contemplated under
this Agreement have been duly obtained and are in full force and effect as of
the Effective Date; and (g) to the best of its knowledge, there is not in
effect on the Effective Date any statutes, rule, regulation, decree, executive
order, preliminary or permanent injunction or other order issued, promulgated
or enacted by any governmental or regulatory authority or court which
declares this Agreement invalid in any respect or prevents the transactions
contemplated under this Agreement, or which materially and adversely affects
the assets, properties, operations, prospects, net income or financial
condition of ArthroCare; and no action or proceeding before any federal,
state, local or foreign court or regulatory or governmental authority shall
have been instituted or threatened by any federal, state, local or foreign
governmental or regulatory authority, or by an other person, entity or
organization which seeks to prevent or delay the transactions contemplated by
this Agreement or any term or provision of this Agreement.
9.4 Disclaimer. Except as expressly provided in this Agreement or the
Development and Supply Agreement, nothing in this Agreement is or shall be
construed as: (i) a warranty or representation by ArthroCare as to the
validity or scope of any claim or patent within the Patent Rights; (ii) a
warranty or representation that anything made, used, sold, or otherwise
disposed of under any license granted in this Agreement is or will be free
from infringement of any patent rights or other intellectual property right of
any third party; (iii) an obligation to bring or prosecute actions or suits
against third parties for infringement of any of the Patent Rights; or (iv)
granting by implication, estoppel, or otherwise any licenses or rights under
patents or other rights of ArthroCare or third parties, regardless of whether
such patents or other rights are dominant or subordinate to any patent within
the Patent Rights.
9.5 No Warranties. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT OR THE
DEVELOPMENT AND SUPPLY AGREEMENT, ARTHROCARE GRANTS NO WARRANTIES WITH RESPECT
TO THE PATENT RIGHTS EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF
LAW, BY STATUE OR OTHERWISE, AND ARTHROCARE SPECIFICALLY DISCLAIMS ANY EXPRESS
OR IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE,
VALIDITY OF THE PATENT RIGHTS OR NON-INFRINGEMENT OF THE INTELLECTUAL
PROPERTY RIGHTS OF ANY THIRD PARTY.
ARTICLE 10
INDEMNIFICATION; INSURANCE
10.1 BSC Indemnity. BSC agrees to indemnify, defend and hold ArthroCare
and its directors, officers, employees, insurers, shareholders and agents
harmless from and against any and all liabilities, claims, suits, demands,
expenses (including, without limitation, attorneys and professional fees and
other costs of handling such claim or litigation), losses or causes of action
(each, a "Liability") arising out of or based upon: (a) injury to or death of
any person or damage to property arising out of or in connection with the
distribution or use of any Products (unless such injury or death arises from
or relates to any matter which would give rise to a claim by BSC of indemnity
from ArthroCare under Section 10.2 of this License Agreement or Section 10.2
of the Development and Supply Agreement); (b) any material breach of this
Agreement by BSC; or (c) BSC's negligence or misconduct, or violation of any
state, federal, or international law or regulation, in connection with the
performance of its obligations hereunder; provided, however, that ArthroCare
shall: (i) give BSC prompt notice of any such Liability; (ii) permit BSC to
participate in the defense of the same through its counsel; (iii) give BSC all
information in its possession relating to such Liability; and (iv) give its
authorization for and assistance in such defense.
10.2 ArthroCare Indemnity. ArthroCare agrees to indemnify, defend and hold
BSC and its Affiliates, and its and their respective directors, officers,
employees, insurers, shareholders, and agents harmless from and against any
and all Liabilities arising out of or relating in any way to: (a) any
misrepresentation or knowing omission of any fact necessary to make true any
statement contained in Article 9; (b) ArthroCare's negligence or misconduct,
or violation of any state, federal, or international law or regulation, in
connection with the performance of its obligations hereunder; or (c) any
material breach of this Agreement by ArthroCare, except to the extent, in each
case, that such Liability is caused by the negligence or willful misconduct
by BSC as determined by a court of competent jurisdiction; provided, however,
that BSC shall: (i) give ArthroCare prompt notice of any such Liability; (ii)
permit ArthroCare to participate in the defense of the same through its
counsel; (iii) give ArthroCare all information in its possession relating to
such Liability; and (iv) give its authorization for and assistance in such
defense.
ARTICLE 11
TERM AND TERMINATION
11.1 Term. The term of this Agreement will commence on the Effective Date
of this Agreement and remain in full force and effect until the expiration of
the last patent within the Patent Rights, unless earlier terminated in
accordance with this Article 11.
11.2 Permissive Termination. BSC may terminate this Agreement at any time
by providing ArthroCare notice in writing at least 60 days prior to the
effective date of termination. Upon permissive termination of this Agreement
by BSC, ArthroCare shall retain all payments and prepaid royalties paid by BSC
as of the date of termination.
11.3 Termination for Cause. Either party may terminate this Agreement in
the event the other party has materially breached or defaulted in the
performance of any of its obligations hereunder, and such default has
continued for 60 days after written notice thereof was provided to the
breaching party by the non-breaching party. Any termination shall become
effective at the end of such 60-day period unless the breaching party has
cured any such breach or default prior to the expiration of such period.
Notwithstanding the above, in the case of a failure to pay any amount due
hereunder the period for cure of any such default following notice thereof
shall be 60 days and, unless payment is made within such period, the
termination shall become effective at the end of such period. A termination
of the Development and Supply Agreement shall not give either party the right
to terminate this Agreement.
11.4 Termination for Insolvency. If voluntary or involuntary proceedings
by or against a party are instituted in bankruptcy under any insolvency law,
or a receiver or custodian is appointed for such party, or proceedings are
instituted by or against such party for corporate reorganization or the
dissolution of such party, which proceedings, if involuntary, shall not have
been dismissed within 60 days after the date of filing, or if such party
makes an assignment for the benefit of creditors, or substantially all of the
assets of such party are seized or attached and not released within 60 days
thereafter, the other party may immediately terminate this Agreement
effective upon notice of such termination.
11.5 Effect of Termination.
A. Accrued Rights and Obligations. Termination of this Agreement for any
reason shall not release any party hereto from any liability which, at the
time of such termination, has already accrued to the other party or which is
attributable to a period prior to such termination nor preclude either party
from pursuing any rights and remedies it may have hereunder or at law or in
equity with respect to any breach of this Agreement. It is understood and
agreed that monetary damages may not be a sufficient remedy for any breach of
this Agreement and that the non-breaching party may be entitled to injunctive
relief as a remedy for any such breach. Such remedy, in addition to any other
remedy provided in this Agreement, shall not be deemed to be the exclusive
remedy for any such breach of this Agreement, but shall be in addition to all
other remedies available at law or in equity. ArthroCare will not be
required, under any circumstances, to refund any license fees, milestone
payments, royalties or other compensation to BSC upon Termination of this
Agreement.
B. Return of Confidential Information. Upon any termination or
expiration of this Agreement, BSC and ArthroCare shall promptly return to the
other party all Confidential Information and copies of which may be retained
for archival purposes.
C. Stock on Hand. In the event this Agreement is terminated for any
reason, BSC shall have the right to sell or otherwise dispose of the stock of
any Licensed Product then on hand until six months after such termination,
subject to Articles 3 and 4 and the other applicable terms of this Agreement.
D. Licenses.
(i) If this Agreement terminates for cause under Section 11.3 due
to material and substantial breach by ArthroCare, or if this Agreement
terminates due to ArthroCare's insolvency under Section 11.4, then, in
addition to other remedies available at law, BSC shall retain the exclusive
license granted under Section 2.1 of this Agreement.
(ii) If this Agreement terminates for cause under Section 11.3 due
to material and substantial breach by BSC, or if this Agreement terminates
due to BSC's insolvency under Section 11.4, then, in addition to other
remedies available at law, ArthroCare shall obtain a non- exclusive license to
the exclusive license granted under Section 2.1 of this Agreement.
11.6 Dispute Resolution. The parties shall make all reasonable efforts to
resolve any dispute concerning this Agreement, its construction or its actual
or alleged breach by face-to-face negotiations. Should such negotiation fail
to resolve the matter, the matter shall be finally decided by arbitration by
and in accordance with the Rules then in effect of the American Arbitration
Association, and judgment upon the award rendered may be entered in the
highest court of the forum, state or federal, having jurisdiction. Any
arbitration will be conducted in the Chicago, Illinois metropolitan area and
the arbitrator shall be mutually agreed upon. If the parties cannot agree on
a single arbitrator, the dispute shall be arbitrated by a three member panel,
with each party selecting one arbitrator who shall mutually agree upon and
select the third arbitrator.
11.7 Force Majeure. Neither party shall be in default in the performance
of its obligations under this Agreement if such performance is prevented or
delayed because of war or similar unrest, labor dispute or strike,
transportation difficulties, unavailability of necessary raw materials,
epidemic, fire, natural disaster, any law, rule or regulation of any
governmental or other authority, acts of God, or other similar cause, that is
beyond the control of the party whose performance is affected.
11.8 Survival. Sections 2.1 (in the case of clause (i) of Section
11.5.D.), 2.2, 5.2, 8.5, 8.6, 11.5, 11.6, 11.7 and 11.8, and Articles 1, 4, 7,
9, 10 and 12, of this Agreement shall survive the expiration or termination of
this Agreement for any reason.
ARTICLE 12
MISCELLANEOUS PROVISIONS
12.1 Governing Law; Venue. This Agreement and any dispute, including
without limitation any arbitration, arising from the performance or breach
hereof shall be governed by and construed and enforced in accordance with the
laws of the Commonwealth of Massachusetts, without reference to conflicts of
laws principles.
12.2 Assignment. BSC may not transfer or assign this Agreement or any of
BSC's rights hereunder to non-Affiliates without the written consent of
ArthroCare. Any such attempted transfer or assignment shall be void.
ArthroCare may assign this Agreement or its rights hereunder. This Agreement
shall be binding upon and inure to the benefit of the parties and their
present and past agents, servants, officers, directors, partners, related
companies, and the predecessors, employees, franchisees, trustees,
representatives, shareholders, successors and assigns of each. In addition,
BSC's rights under this Agreement are intended to be for the benefit of BSC as
well as its Affiliates.
12.3 Waiver. No waiver of any rights, shall be effective unless consented
to in writing by the party to be charged and the waiver of any breach of
default shall not constitute a waiver of any other right hereunder or any
subsequent breach or default.
12.4 Severability. In the event that any provisions of this Agreement are
determined to be invalid or unenforceable by a court of competent
jurisdiction, the remainder of the Agreement shall remain in full force and
effect without said provision.
12.5 Notices. All notices, requests and other communications hereunder
shall be in writing and shall be personally delivered or sent by telecopy or
other electronic facsimile transmission or by registered or certified mail,
return receipt requested, postage prepaid, in each case to the respective
address specified below, or such other address as may be specified in writing
to the other parties hereto:
BSC: Boston Scientific Corporation
One Boston Scientific Place,
Natick, Massachusetts 01760-1537
Attn: John Pedersen
Fax: 508-650-8922
with a copy to:
SCIMED Life Systems, Inc.
One SCIMED Place
Maple Grove, MN 55311-1566
Attn: Jean Lance
Fax: 612-494-2616
ArthroCare: ArthroCare Corporation
595 North Pastoria Avenue
Sunnyvale, California 94086
Attn: Michael Baker, C.E.O.
Fax: 408-732-2752
with a copy to:
ArthroCare Corporation
595 North Pastoria Avenue
Sunnyvale, California 94086
Attn: John Raffle
Fax: 408-736-0226 (cover page marked confidential)
12.6 Independent Contractors. Both parties are independent contractors
under this Agreement. Nothing contained in this Agreement is intended nor is
to be construed so as to constitute ArthroCare or BSC as partners or joint
venturers with respect to this Agreement. Neither party shall have any
express or implied right or authority to assume or create any obligations on
behalf of or in the name of the other party or to bind the other party to any
other contract, agreement, or undertaking with any third party.
12.7 Patent Marking. BSC agrees to mark (or cause to be marked) all
Licensed Products sold pursuant to this Agreement in accordance with the
applicable statute or regulations relating to patent marking in the country or
countries of manufacture and sale thereof.
12.8 Compliance with Laws. In performing their respective obligations
under this Agreement , the parties shall fully comply in all material respects
with the requirements of any and all applicable laws, regulations, rules and
orders of any governmental body having jurisdiction over the exercise of
rights under this Agreement.
12.9 Use of Name. Neither party shall use the name or trademarks of the
other party without the prior written consent of such other party.
12.10 Entire Agreement; Amendment. This Agreement constitutes the entire
and exclusive Agreement between the parties with respect to the subject matter
hereof and supersedes and cancels all previous discussions, agreements,
commitments and writings in respect thereof except the Development and Supply
Agreement. No amendment or addition to this Agreement shall be effective
unless reduced to writing and executed by the authorized representatives of
the parties.
12.11 Conditions to Effectiveness of Agreement. The obligations of the
parties to consummate the transactions contemplated in this Agreement are
conditioned on each of the parties executing and delivering to the other party
both executed copies of this Agreement and the Development and Supply
Agreement via facsimile no later than 6:00 p.m. (Central time) on February 9,
1998. Such delivery shall constitute effective delivery of such Agreements,
and such Agreements shall then be immediately binding on the parties. In
addition, the parties shall execute and exchange multiple original copies of
the Agreements; provided, however, that the parties' delay or failure to so
exchange such documents shall not affect the validity or enforceability of
the Agreements and it shall not negate the validity of the execution and
delivery of the Agreements that were accomplished via the delivery by
facsimile.
12.12 Counterparts. This Agreement may be executed in any number of
counterparts and on separate signature pages by each party, each copy of which
shall for all purposes be deemed an original.
IN WITNESS WHEREOF, ArthroCare and BSC have executed this Agreement in
duplicate originals by duly authorized officers.
ARTHROCARE CORPORATION BOSTON SCIENTIFIC CORPORATION
By: /s/Michael A. Baker By: /s/Michael Berman
- ---------------------------- --------------------------
Print Name: Michael A. Baker Print Name: Michael Berman
- ---------------------------- --------------------------
Title: President & CEO Title: President, SciMed
- ---------------------------- --------------------------
<PAGE>
EXHIBIT A
PATENT RIGHTS
U.S. PATENTS:
[*****]
[*****]
[*****]
[*****]
[*****]
[*****]
U.S. APPLICATIONS:
[*****]
INTERNATIONAL PATENTS
AU 33357/93 (4-1)
NZ 246503 (4-1)
AU 68296/94 (4-4)
NZ 266678 (4-4)
INTERNATIONAL APPLICATIONS
CA 2129745 (4-1)
EP 93901090.6 (4-1)
CA 2162395 (4-4)
EP 94916716.7 (4-4)
JP 6-525637 (4-4)
AU 24724/97 (4-4-1)
NZ 314153 (4-4-1)
PCT 96/32051 (AU CA EP JP NZ) (4-5)
PCT 96/08077 (JP,CA,EP,AU) (-6)
PCT 96/18505 (JP,CA,EP,AU,NZ) (-7)
PCT 96/18651 (JP,CA,EP,AU,NZ) (-22)
<PAGE>
EXHIBIT B
TRADEMARK RIGHTS
Trademark Registration No.
--------- ----------------
[*****] [*****]
[*****] [*****]
- --------------------------------------------
***** Certain information in this document has been omitted and filed
separately with the Commission. Confidential treatment has been requested
with respect to the omitted portions.
Exhibit 10.28
LEASE AGREEMENT
By And Between
Aetna Life Insurance Company,
a Connecticut corporation
As Landlord
And
Arthrocare Corporation,
a California corporation
As Tenant
Dated March 25, 1998
<PAGE>
Table Of Contents
Basic Lease Information
1. Demise
2. Premises
3. Term
4. Rent
5. Utility Expenses
6. Late Charge
7. Security Deposit
8. Possession
9. Use Of Premises
10. Acceptance Of Premises
11. Surrender
12. Alterations And Additions
13. Maintenance and Repairs Of Premises
14. Landlord's Insurance
15. Tenant's Insurance
16. Indemnification
17. Subrogation
18. Signs
19. Free From Liens
20. Entry By Landlord
21. Destruction And Damage
22. Condemnation
23. Assignment And Subletting
24. Tenant's Default
25. Landlord's Remedies
26. Landlord's Right to Perform Tenant's Obligations
27. Attorney's Fees
28. Taxes
29. Effect Of Conveyance
30. Tenant's Estoppel Certificate
31. Subordination
32. Environmental Covenants
33. Notices
34. Waiver
35. Holding Over
36. Successors And Assigns
37. Time
38. Brokers
39. Limitation Of Liability
40. Financial Statements
41. Rules And Regulations
42. Mortgagee Protection
43. Entire Agreement
44. Interest
45. Construction
46. Representations And Warranties Of Tenant
47. Security
48. Jury Trial Waiver
Exhibit
A Diagram of the Premises
B Commencement Date Memorandum
C Rules and Regulations
D Sign Criteria
E Hazardous Materials Disclosure Certificate
<PAGE>
Lease Agreement
Basic Lease Information
Lease Date: March 25, 1998
Landlord: Aetna Life Insurance Company,
a Connecticut corporation
Landlord's Address: c/o Allegis Realty Investors LLC
455 Market Street, Suite 1540
San Francisco, California 94105
All notices sent to Landlord under this Lease shall be sent to the above
address, with copies to:
Insignia Commercial Group, Inc.
160 West Santa Clara Street, Suite 1350
San Jose, California 95113
Tenant: Arthrocare Corporation,
a California corporation
Tenant's Contact Person: Christine Hanni, VP Finance and CFO
Tenant's Address 595 Pastoria Avenue
and Telephone Number: Sunnyvale, California 94086
(408) 736-0224
Premises Square Footage: Approximately ten thousand (10,000) rentable
square feet
Premises Address: 840 Del Rey Avenue
Sunnyvale, California
Project: 840 Del Rey Avenue and 846 Del Rey Avenue,
Sunnyvale, California,
together with the land on which the Project is
situated and all Common Areas
Building (if not the
same as the Project): Same as the Project
Tenant's Proportionate
Share of Project: 50%
Tenant's Proportionate
Share of Building: 50%
Length of Term: Commencement Date to February 28, 2002
Estimated Commencement Date: June 15, 1998
Expiration Date: February 28, 2002
Monthly Base Rent:
Months Sq. Ft. Mo. Base Rate Monthly Base Rent
----------- ------- ------------- -----------------
1-12 10,000 x $1.75 = $ 17,500.
13-Exp.Date Monthly Base Rent to be increased in accordance with the
Consumer Price Index Price (see Paragraph 4(a) of the
Lease)
Prepaid Rent: Seventeen Thousand Five Hundred Dollars ($17,500.00)
Prepaid Additional Rent: One Thousand Nine Hundred Thirty-Nine Dollars
($1,939.00)
Month to which Prepaid
Base Rent and Additional
Rent will be Applied: First (1st) month of the Term
Security Deposit: Thirty-Five Thousand Dollars ($35,000.00)
Permitted Use: General office use and storage, research and
development, manufacturing, distribution and
marketing of medical devices
Unreserved Parking Spaces: Thirty-five (35) nonexclusive and undesignated
parking spaces
Brokers: Randy Arrillaga and Mark Daschbach
of Cornish & Carey Commercial (Landlord's Broker)
Jeff Arrillaga
of Cornish & Carey Commercial(Tenant's Broker)
<PAGE>
Lease Agreement
This Lease Agreement is made and entered into by and between Landlord and
Tenant on the Lease Date. The defined terms used in this Lease which are
defined in the Basic Lease Information attached to this Lease Agreement
("Basic Lease Information") shall have the meaning and definition given them
in the Basic Lease Information. The Basic Lease Information, the exhibits,
the addendum or addenda described in the Basic Lease Information, and this
Lease Agreement are and shall be construed as a single instrument and are
referred to herein as the "Lease".
1. Demise
In consideration for the rents and all other charges and payments payable by
Tenant, and for the agreements, terms and conditions to be performed by Tenant
in this Lease, Landlord does hereby lease to Tenant, and Tenant does hereby
hire and take from Landlord, the Premises described below (the "Premises"),
upon the agreements, terms and conditions of this Lease for the Term
hereinafter stated.
2. Premises
The Premises demised by this Lease is located in that certain building (the
"Building") specified in the Basic Lease Information, which Building is
located in that certain real estate development (the "Project") specified in
the Basic Lease Information. The Premises has the address and contains the
square footage specified in the Basic Lease Information. The location and
dimensions of the Premises are depicted on Exhibit A, which is attached hereto
and incorporated herein by this reference; provided, however, that any
statement of square footage set forth in this Lease, or that may have been
used in calculating any of the economic terms hereof, is an approximation
which Landlord and Tenant agree is reasonable and, except as expressly set
forth in Paragraph 4(c)(3) below, no economic terms based thereon shall be
subject to revision whether or not the actual square footage is more or less.
Tenant shall have the non-exclusive right (in common with the other tenants,
Landlord and any other person granted use by Landlord) to use the Common Areas
(as hereinafter defined), except that, with respect to parking, Tenant shall
have only a license to use the number of non-exclusive and undesignated
parking spaces set forth in the Basic Lease Information in the Project's
parking areas (the "Parking Areas"); provided, however, that Landlord shall
not be required to enforce Tenant's right to use such parking spaces; and,
provided further, that the number of parking spaces allocated to Tenant
hereunder shall be reduced on a proportionate basis in the event any of the
parking spaces in the Parking Areas are taken or otherwise eliminated as a
result of any Condemnation (as hereinafter defined) or casualty event
affecting such Parking Areas. No easement for light or air is incorporated in
the Premises. For purposes of this Lease, the term "Common Areas" shall mean
all areas and facilities outside the Premises and within the exterior
boundary line of the Project that are provided and designated by Landlord for
the non-exclusive use of Landlord, Tenant and other tenants of the Project and
their respective employees, guests and invitees.
Landlord has the right, in its sole discretion, from time to time, to:
(a) make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, ingress, egress, direction of
driveways, entrances, corridors and walkways;
(b) close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) add additional buildings and improvements to the Common Areas
or remove existing buildings or improvements therefrom;
(d) use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Project or any portion thereof; and
(e) do and perform any other acts or make any other changes in, to
or with respect to the Common Areas and the Project as Landlord may, in its
sole discretion, deem to be appropriate; provided, however, that in making the
changes described in this subparagraph (e) and subparagraphs(a) through(d)
above, Landlord shall not unreasonably interfere with Tenant's use of the
Premises, materially diminish Tenant's parking rights or materially increase
Tenant's obligations under the Lease.
3. Term
The term of this Lease (the "Term") shall be for the period specified in the
Basic Lease Information, commencing on the date Landlord delivers possession
of the Premises to Tenant (the "Commencement Date"); provided, however, in no
event shall the Commencement Date occur prior to the Estimated Commencement
Date specified in the Basic Lease Information. In the event the actual
Commencement Date is a date other than the Estimated Commencement Date, then
Landlord and Tenant shall promptly execute a Commencement Date Memorandum in
the form attached hereto as Exhibit B, wherein the parties shall specify the
Commencement Date.
4. Rent
(a) Base Rent. Tenant shall pay to Landlord, in advance on the
first day of each month, without further notice or demand and without offset,
rebate, credit or deduction for any reason whatsoever, the monthly
installments of rent specified in the Basic Lease Information (the "Base
Rent").
The Base Rent under this Paragraph 4(a) shall be adjusted, as stated below, on
the first anniversary of the Commencement Date, and each anniversary
thereafter, to reflect percentage increases in the cost of living. The
Consumer Price Index (U.S. Department of Labor Consumer Price Index (all
items) for Urban Wage Earners and Clerical Workers, San Francisco Bay Area
(1982-1984=100), hereinafter referred to as the "Index") published for the
month immediately preceding each such adjustment date (each, an "Adjustment
Index") and the Index published for the month immediately preceding the
Commencement Date of this Lease ("Base Index") shall be compared and the
percentage difference between the Adjustment Index and the Base Index shall
be determined. The initial Base Rent specified in the Basic Lease Information
shall be increased by adding to said initial Base Rent the percentage amount
of said initial Base Rent equal to the percentage difference between the Base
Index and the applicable Adjustment Index; provided, however, in no event
shall the initial Base Rent hereunder be increased by less than four percent
(4%) or more than seven percent (7%) for any one year. When the adjusted Base
Rent is determined after each adjustment date, Landlord shall give Tenant
written notice indicating the amount thereof and the method of computation.
If the Consumer Price Index is changed or discontinued, Landlord shall
substitute an official index published by the Bureau of Labor Statistics or
its successor or similar governmental agency as may then be in existence and
shall be most nearly equivalent thereto.
Upon execution of this Lease, Tenant shall pay to Landlord the Prepaid Rent
and first monthly installment of estimated Additional Rent (as hereinafter
defined) specified in the Basic Lease Information to be applied toward Base
Rent and Additional Rent for the month of the Term specified in the Basic
Lease Information.
(b) Additional Rent. This Lease is intended to be a triple-net
Lease with respect to Landlord; and subject to Paragraph 13(b) below and
except as otherwise expressly set forth herein, the Base Rent owing hereunder
is (1) to be paid by Tenant absolutely net of all costs and expenses relating
to Landlord's ownership and operation of the Project and the Building, and (2)
not to be reduced, offset or diminished, directly or indirectly, by any cost,
charge or expense payable hereunder by Tenant or by others in connection with
the Premises, the Building and/or the Project or any part thereof. The
provisions of this Paragraph 4(b) for the payment of Tenant's Proportionate
Share(s) of Expenses (as hereinafter defined) are intended to pass on to
Tenant its share of all such costs and expenses except as expressly set forth
herein. Except as expressly set forth herein, in addition to the Base Rent,
Tenant shall pay to Landlord, in accordance with this Paragraph 4, Tenant's
Proportionate Share(s) of all costs and expenses paid or incurred by Landlord
in connection with the ownership, operation, maintenance, management and
repair of the Premises, the Building and/or the Project or any part thereof
(collectively, the "Expenses"), including, without limitation, all the
following items (the "Additional Rent"):
(1) Taxes and Assessments. All real estate taxes and
assessments, which shall include any form of tax, assessment, fee, license
fee, business license fee, levy, penalty (if a result of Tenant's
delinquency), or tax (other than net income, estate, succession, inheritance,
transfer or franchise taxes), imposed by any authority having the direct or
indirect power to tax, or by any city, county, state or federal government or
any improvement or other district or division thereof, whether such tax is (i)
determined by the area of the Premises, the Building and/or the Project or any
part thereof, or the Rent and other sums payable hereunder by Tenant or by
other tenants, including, but not limited to, any gross income or excise tax
levied by any of the foregoing authorities with respect to receipt of Rent
and/or other sums due under this Lease; (ii) upon any legal or equitable
interest of Landlord in the Premises, the Building and/or the Project or any
part thereof; (iii) upon this transaction or any document to which Tenant is a
party creating or transferring any interest in the Premises, the Building
and/or the Project; (iv) levied or assessed in lieu of, in substitution for,
or in addition to, existing or additional taxes against the Premises, the
Building and/or the Project, whether or not now customary or within the
contemplation of the parties; or (v) surcharged against the parking area.
Tenant and Landlord acknowledge that Proposition 13 was adopted by the voters
of the State of California in the June, 1978 election and that assessments,
taxes, fees, levies and charges may be imposed by governmental agencies for
such purposes as fire protection, street, sidewalk, road, utility construction
and maintenance, refuse removal and for other governmental services which may
formerly have been provided without charge to property owners or occupants.
It is the intention of the parties that all new and increased assessments,
taxes, fees, levies and charges due to any cause whatsoever are to be included
within the definition of real property taxes for purposes of this Lease.
"Taxes and assessments" shall also include legal and consultants' fees, costs
and disbursements incurred in connection with proceedings to contest,
determine or reduce taxes, Landlord specifically reserving the right, but not
the obligation, to contest by appropriate legal proceedings the amount or
validity of any taxes.
(2) Insurance. All insurance premiums for the Building
and/or the Project or any part thereof, including premiums for "all risk" fire
and extended coverage insurance, commercial general liability insurance, rent
loss or abatement insurance, earthquake insurance, flood or surface water
coverage, and other insurance as Landlord deems necessary in its sole
discretion, and any deductibles paid under policies of any such insurance.
(3) Utilities. The cost of all Utilities (as hereinafter
defined) serving the Premises, the Building and the Project that are not
separately metered to Tenant, any assessments or charges for Utilities or
similar purposes included within any tax bill for the Building or the
Project, including without limitation, entitlement fees, allocation unit fees,
and/or any similar fees or charges and any penalties (if a result of Tenant's
delinquency) related thereto, and any amounts, taxes, charges, surcharges,
assessments or impositions levied, assessed or imposed upon the Premises, the
Building or the Project or any part thereof, or upon Tenant's use and
occupancy thereof, as a result of any rationing of Utility services or
restriction on Utility use affecting the Premises, the Building and/or the
Project, as contemplated in Paragraph 5 below (collectively, "Utility
Expenses").
(4) Common Area Expenses. All costs to operate, maintain,
repair, replace, supervise, insure and administer the Common Areas, including
supplies, materials, labor and equipment used in or related to the operation
and maintenance of the Common Areas, including parking areas (including,
without limitation, all costs of resurfacing and restriping parking areas),
signs and directories on the Building and/or the Project, landscaping
(including maintenance contracts and fees payable to landscaping
consultants), amenities, sprinkler systems, sidewalks, walkways, driveways,
curbs, lighting systems and security services, if any, provided by Landlord
for the Common Areas, and any charges, assessments, costs or fees levied by
any association or entity of which the Project or any part thereof is a
member or to which the Project or any part thereof is subject.
(5) Parking Charges. Any parking charges or other costs
levied, assessed or imposed by, or at the direction of, or resulting from
statutes or regulations, or interpretations thereof, promulgated by any
governmental authority or insurer in connection with the use or occupancy of
the Building or the Project.
(6) Maintenance and Repair Costs. Except for costs which
are the responsibility of Landlord pursuant to Paragraph 13(b) below or are
assumed by Tenant pursuant to Paragraph 13(a) below, all costs to maintain,
repair, and replace the Premises, the Building and/or the Project or any part
thereof, including without limitation, (i) all costs paid under maintenance,
management and service agreements such as contracts for janitorial, security
and refuse removal, (ii) all costs to maintain, repair and replace the roof
coverings of the Building or the Project or any part thereof, (iii) all costs
to maintain, repair and replace the heating, ventilating, air conditioning,
plumbing, sewer, drainage, electrical, fire protection, life safety and
security systems and other mechanical and electrical systems and equipment
serving the Premises, the Building and/or the Project or any part thereof
(collectively, the "Systems").
(7) Life Safety Costs. All costs to install, maintain,
repair and replace all life safety systems, including, without limitation, all
fire alarm systems, serving the Premises, the Building and/or the Project or
any part thereof (including all maintenance contracts and fees payable to
life safety consultants) whether such systems are or shall be required by
Landlord's insurance carriers, Laws (as hereinafter defined) or otherwise.
(8) Management and Administration. All costs for
management and administration of the Premises, the Building and/or the Project
or any part thereof, including, without limitation, a property management fee
(the "Management Fee"), accounting, auditing, billing, postage, salaries and
benefits for clerical and supervisory employees, whether located on the
Project or off-site, payroll taxes and legal and accounting costs and fees for
licenses and permits related to the ownership and operation of the Project;
provided, however, that if Landlord shall sell or otherwise convey the
Building to a person or entity other than an Aetna Affiliate (as hereinafter
defined), then the Management Fee shall not exceed a customary, market- based
property management fee for the market in which the Building is located (the
"Relevant Market"). As used herein, "Aetna Affiliate" means any person or
entity affiliated, either directly or indirectly, with (i) Aetna Life
Insurance Company ("Aetna"), (ii) Allegis Realty Investors LLC ("Allegis"),
(iii) any fund, account or entity established by Aetna or Allegis to hold
title to the Building, or (iv) any affiliate of any of the foregoing.
Notwithstanding anything in this Paragraph 4(b) to the contrary, with respect
to all sums payable by Tenant as Additional Rent under this Paragraph 4(b) for
the replacement of any item or the construction of any new item in connection
with the physical operation of the Premises, the Building or the Project
(i.e., HVAC, roof membrane or coverings and parking area) which is a capital
item the replacement of which would be capitalized under Landlord's
commercial real estate accounting practices, Tenant shall be required to pay
only its Proportionate Share(s) of the cost of the item falling due within the
Term (including any Renewal Term) based upon the amortization of the same over
the useful life of such item, as reasonably determined by Landlord.
(c) Exclusions from Additional Rent. Notwithstanding anything to
the contrary contained in Paragraph 4(b) above, the following items shall be
specifically excluded from the definition of "Expenses":
(1) Except as provided in Paragraph 4(c)(2) above, costs
occasioned by fire, acts of God, or other casualties or by the exercise of the
power of eminent domain;
(2) Costs incurred to respond to any claim of Hazardous
Material (as hereinafter defined) contamination or damage, costs to remove any
Hazardous Materials from the Project and any judgments or other costs
resulting from any Hazardous Material releases; and
(3) Costs to install fire sprinklers in the Premises;
provided, however, that if the installation of such sprinklers is required as
a result of Tenant's actual use of the Premises (as opposed to mere
occupancy), then Tenant shall pay directly or shall reimburse Landlord for
one hundred percent (100%) of the costs to procure and install such sprinklers.
Nothing contained in this Paragraph 4(c) shall be deemed to limit, modify or
otherwise affect Tenant's obligations under any other provision of this Lease,
including, without limitation, Paragraphs 16, 21, 22 and 32.
(d) Payment of Additional Rent.
(1) Upon commencement of this Lease, Landlord shall submit
to Tenant an estimate of monthly Additional Rent for the period between the
Commencement Date and the following December 31 and Tenant shall pay such
estimated Additional Rent on a monthly basis, in advance, on the first day of
each month. Tenant shall continue to make said monthly payments until
notified by Landlord of a change therein. If at any time or times Landlord
determines that the amounts payable under Paragraph 4(b) for the current year
will vary from Landlord's estimate given to Tenant, Landlord, by notice to
Tenant, may revise the estimate for such year, and subsequent payments by
Tenant for such year shall be based upon such revised estimate. By April 1 of
each calendar year, Landlord shall endeavor to provide to Tenant a statement
("Expense Statement") showing the actual Additional Rent due to Landlord for
the prior calendar year, to be prorated during the first year from the
Commencement Date. If the total of the monthly payments of Additional Rent
that Tenant has made for the prior calendar year is less than the actual
Additional Rent chargeable to Tenant for such prior calendar year, then Tenant
shall pay the difference in a lump sum within ten (10) days after receipt of
such Expense Statement from Landlord. Any overpayment by Tenant of Additional
Rent for the prior calendar year shall be credited towards the Additional Rent
next due.
(2) Landlord's then-current annual operating and capital
budgets for the Building and the Project or the pertinent part thereof shall
be used for purposes of calculating Tenant's monthly payment of estimated
Additional Rent for the current year, subject to adjustment as provided
above. Landlord shall make the final determination of Additional Rent for the
year in which this Lease terminates as soon as possible after termination of
such year. Even though the Term has expired and Tenant has vacated the
Premises, Tenant shall remain liable for payment of any amount due to Landlord
in excess of the estimated Additional Rent previously paid by Tenant, and,
conversely, Landlord shall promptly return to Tenant any overpayment. Failure
of Landlord to submit Expense Statements as called for herein shall not be
deemed a waiver of Tenant's obligation to pay Additional Rent as herein
provided.
(3) With respect to Expenses which Landlord allocates to
the Building, Tenant's "Proportionate Share" shall be the percentage set forth
in the Basic Lease Information as Tenant's Proportionate Share of the
Building, as adjusted by Landlord from time to time for a remeasurement of or
increases in the physical size of the Premises or the Building, or a decrease
in the size of the Premises or Building resulting from casualty or
condemnation. With respect to Expenses which Landlord allocates to the
Project as a whole or to only a portion of the Project, Tenant's
"Proportionate Share" shall be, with respect to Expenses which Landlord
allocates to the Project as a whole, the percentage set forth in the Basic
Lease Information as Tenant's Proportionate Share of the Project and, with
respect to Expenses which Landlord allocates to only a portion of the Project,
a percentage calculated by Landlord from time to time in its sole discretion
and furnished to Tenant in writing, in either case as adjusted by Landlord
from time to time for a remeasurement of or increases in the physical size of
the Premises or the Project, or a decrease in the size of the Premises or
Building resulting from casualty or condemnation. Notwithstanding the
foregoing, Landlord may equitably adjust Tenant's Proportionate Share(s) for
all or part of any item of expense or cost reimbursable by Tenant that relates
to a repair, replacement, or service that benefits only the Premises or only
a portion of the Building and/or the Project or that varies with the occupancy
of the Building and/or the Project. Without limiting the generality of the
foregoing, Tenant understands and agrees that Landlord shall have the right to
adjust Tenant's Proportionate Share(s) of any Utility Expenses based upon
Tenant's use of the Utilities or similar services as reasonably estimated and
determined by Landlord based upon factors such as size of the Premises and
intensity of use of such Utilities by Tenant such that Tenant shall pay the
portion of such charges reasonably consistent with Tenant's use of such
Utilities and similar services. If Tenant disputes any such estimate or
determination of Utility Expenses, then Tenant shall either pay the estimated
amount or cause the Premises to be separately metered at Tenant's sole expense.
(e) Audit Rights. Provided Tenant is not in Default under the
terms of this Lease (nor is any event occurring which with the giving of
notice or the passage of time, or both, would constitute a Default hereunder),
Tenant, at its sole expense subject to the last sentence of this Paragraph
4(e), shall have the right within thirty (30) days after the delivery of each
Expense Statement to review and audit Landlord's books and records regarding
such Expense Statement for the sole purpose of determining the accuracy of
such Expense Statement. Such review or audit shall be performed by a
nationally recognized accounting firm that calculates its fees with respect to
hours actually worked and that does not discount its time or rate (as opposed
to a calculation based upon percentage of recoveries or other incentive or
contingent arrangement), shall take place during normal business hours in the
office of Landlord or Landlord's property manager and shall be completed
within three (3) business days after the commencement thereof. If Tenant
does not so review or audit Landlord's books and records, Landlord's Expense
Statement shall be final and binding upon Tenant. In the event that Tenant
determines on the basis of its review of Landlord's books and records that
the amount of Expenses paid by Tenant pursuant to this Paragraph 4 for the
period covered by such Expense Statement is less than or greater than the
actual amount properly payable by Tenant under the terms of this Lease, Tenant
shall promptly pay any deficiency to Landlord or, if Landlord concurs with the
results of such audit, Landlord shall promptly refund any excess payment to
Tenant, as the case may be.
(f) General Payment Terms. The Base Rent, Additional Rent and all
other sums payable by Tenant to Landlord hereunder, any late charges assessed
pursuant to Paragraph 6 below and any interest assessed pursuant to Paragraph
45 below, are referred to as the "Rent". All Rent shall be paid without
deduction, offset or abatement in lawful money of the United States of
America. Checks are to be made payable to Aetna Life Insurance Company and
shall be mailed to: Aetna Life Insurance Company, Allegis Business Center,
Department #44820, San Francisco, California 94144- 4820 or to such other
person or place as Landlord may, from time to time, designate to Tenant in
writing. The Rent for any fractional part of a calendar month at the
commencement or termination of the Lease term shall be a prorated amount of
the Rent for a full calendar month based upon a thirty (30) day month.
5. Utility Expenses
(a) Tenant shall pay the cost of all water, sewer use, sewer
discharge fees and permit costs and sewer connection fees, gas, heat,
electricity, refuse pick-up, janitorial service, telephone and all materials
and services or other utilities (collectively, "Utilities") billed or metered
separately to the Premises and/or Tenant, together with all taxes,
assessments, charges and penalties added to or included within such cost.
Tenant acknowledges that the Premises, the Building and/or the Project may
become subject to the rationing of Utility services or restrictions on
Utility use as required by a public utility company, governmental agency or
other similar entity having jurisdiction thereof. Tenant acknowledges and
agrees that its tenancy and occupancy hereunder shall be subject to such
rationing or restrictions as may be imposed upon Landlord, Tenant, the
Premises, the Building and/or the Project, and Tenant shall in no event be
excused or relieved from any covenant or obligation to be kept or performed by
Tenant by reason of any such rationing or restrictions. Tenant agrees to
comply with energy conservation programs implemented by Landlord by reason of
rationing, restrictions or Laws.
(b) Landlord shall not be liable for any loss, injury or damage to
property caused by or resulting from any variation, interruption, or failure
of Utilities due to any cause whatsoever, or from failure to make any repairs
or perform any maintenance. No temporary interruption or failure of such
services incident to the making of repairs, alterations, improvements, or due
to accident, strike, or conditions or other events shall be deemed an eviction
of Tenant or relieve Tenant from any of its obligations hereunder. In no
event shall Landlord be liable to Tenant for any damage to the Premises or for
any loss, damage or injury to any property therein or thereon occasioned by
bursting, rupture, leakage or overflow of any plumbing or other pipes
(including, without limitation, water, steam, and/or refrigerant lines),
sprinklers, tanks, drains, drinking fountains or washstands, or other similar
cause in, above, upon or about the Premises, the Building, or the Project.
6. Late Charge
Notwithstanding any other provision of this Lease, Tenant hereby acknowledges
that late payment to Landlord of Rent, or other amounts due hereunder will
cause Landlord to incur costs not contemplated by this Lease, the exact amount
of which will be extremely difficult to ascertain. If any Rent or other sums
due from Tenant are not received by Landlord or by Landlord's designated agent
within five (5) days after their due date, then Tenant shall pay to Landlord a
late charge equal to ten percent (10%) of such overdue amount, plus any costs
and attorneys' fees incurred by Landlord by reason of Tenant's failure to pay
Rent and/or other charges when due hereunder. Landlord and Tenant hereby agree
that such late charges represent a fair and reasonable estimate of the cost
that Landlord will incur by reason of Tenant's late payment and shall not be
construed as a penalty. Landlord's acceptance of such late charges shall not
constitute a waiver of Tenant's default with respect to such overdue amount or
estop Landlord from exercising any of the other rights and remedies granted
under this Lease.
Initials: Landlord /s/C.S. Tenant /s/C.H.
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7. Security Deposit
Concurrently with Tenant's execution of the Lease, Tenant shall deposit with
Landlord the Security Deposit specified in the Basic Lease Information as
security for the full and faithful performance of each and every term,
covenant and condition of this Lease. Landlord may use, apply or retain the
whole or any part of the Security Deposit as may be reasonably necessary (a)
to remedy Tenant's default in the payment of any Rent, (b) to repair damage to
the Premises caused by Tenant, (c) to clean the Premises upon termination of
this Lease, (d) to reimburse Landlord for the payment of any amount which
Landlord may reasonably spend or be required to spend by reason of Tenant's
default, or (e) to compensate Landlord for any other loss or damage which
Landlord may suffer by reason of Tenant's default. Should Tenant faithfully
and fully comply with all of the terms, covenants and conditions of this
Lease, within thirty (30) days following the expiration of the Term, the
Security Deposit or any balance thereof shall be returned to Tenant or, at
the option of Landlord, to the last assignee of Tenant's interest in this
Lease. Landlord shall not be required to keep the Security Deposit separate
from its general funds and Tenant shall not be entitled to any interest on
such deposit. If Landlord so uses or applies all or any portion of said
deposit, within five (5) days after written demand therefor Tenant shall
deposit cash with Landlord in an amount sufficient to restore the Security
Deposit to the full extent of the above amount, and Tenant's failure to do so
shall be a default under this Lease. In the event Landlord transfers its
interest in this Lease, Landlord shall transfer the then remaining amount of
the Security Deposit to Landlord's successor in interest, and thereafter
Landlord shall have no further liability to Tenant with respect to such
Security Deposit.
8. Possession
(a) Tenant's Right of Possession. Landlord shall deliver
possession of the Premises to Tenant upon the Commencement Date.
(b) Delay in Delivering Possession. If for any reason whatsoever
Landlord cannot deliver possession of the Premises to Tenant on or before the
Estimated Commencement Date, this Lease shall not be void or voidable, nor
shall Landlord, or Landlord's agents, advisors, employees, partners,
shareholders, directors, invitees or independent contractors (collectively,
"Landlord's Agents"), be liable to Tenant for any loss or damage resulting
therefrom. Tenant shall not be liable for Rent until Landlord delivers
possession of the Premises to Tenant. Notwithstanding anything to the
contrary in this Lease, in the event that Landlord shall fail to deliver
possession of the Premises to Tenant by August 31, 1998, Tenant may, at its
discretion, and as its sole and exclusive remedy for such failure, terminate
this Lease by written notice to Landlord given not later than September 10,
1998.
9. Use Of Premises
(a) Permitted Use. The use of the Premises by Tenant and Tenant's
agents, advisors, employees, partners, shareholders, directors, invitees and
independent contractors (collectively, "Tenant's Agents") shall be solely for
the Permitted Use specified in the Basic Lease Information and for no other
use. Tenant shall not permit any objectionable or unpleasant odor, smoke,
dust, gas, noise or vibration to emanate from or near the Premises. The
Premises shall not be used to create any nuisance or trespass, for any illegal
purpose, for any purpose not permitted by Laws, for any purpose that would
invalidate the insurance or increase the premiums for insurance on the
Premises, the Building or the Project or for any purpose or in any manner that
would interfere with other tenants' use or occupancy of the Project. If any
of Tenant's office machines or equipment disturb any other tenant in the
Building, then Tenant shall provide adequate insulation or take such other
action as may be necessary to eliminate the noise or disturbance. Tenant
agrees to pay to Landlord, as Additional Rent, any increases in premiums on
policies resulting from Tenant's Permitted Use or any other use or action by
Tenant or Tenant's Agents which increases Landlord's premiums or requires
additional coverage by Landlord to insure the Premises. Tenant agrees not to
overload the floor(s) of the Building.
(b) Compliance with Governmental Regulations and Private
Restrictions. Tenant and Tenant's Agents shall, at Tenant's expense,
faithfully observe and comply with (1) all municipal, state and federal laws,
statutes, codes, rules, regulations, ordinances, requirements, and orders
(collectively, "Laws"), now in force or which may hereafter be in force
pertaining to the Premises or Tenant's use of the Premises, the Building or
the Project, provided, however, that except as provided in Paragraph 9(c)
below, Tenant shall not be required to make or, except as provided in
Paragraph 4 above, pay for, structural changes to the Premises or the Building
(including, without limitation, seismic reinforcement and related alterations,
and the removal of asbestos) not related to Tenant's specific use of the
Premises unless the requirement for such changes is imposed as a result of any
improvements or additions made or proposed to be made at Tenant's request; (2)
all recorded covenants, conditions and restrictions affecting the Project
("Private Restrictions") now in force or which may hereafter be in force; and
(3) any and all rules and regulations set forth in Exhibit C and any other
rules and regulations now or hereafter promulgated by Landlord related to
parking or the operation of the Premises, the Building and/or the Project
(collectively, the "Rules and Regulations"). The judgment of any court of
competent jurisdiction, or the admission of Tenant in any action or proceeding
against Tenant, whether Landlord be a party thereto or not, that Tenant has
violated any such Laws or Private Restrictions, shall be conclusive of that
fact as between Landlord and Tenant.
(c) Compliance with Americans with Disabilities Act. Landlord and
Tenant hereby agree and acknowledge that the Premises, the Building and/or the
Project may be subject to, among other Laws, the requirements of the Americans
with Disabilities Act, a federal law codified at 42 U.S.C. 12101 et seq.,
including, but not limited to Title III thereof, and all regulations and
guidelines related thereto, together with any and all laws, rules,
regulations, ordinances, codes and statutes now or hereafter enacted by local
or state agencies having jurisdiction thereof, including all requirements of
Title 24 of the State of California, as the same may be in effect on the date
of this Lease and may be hereafter modified, amended or supplemented
(collectively, the "ADA"). Any Tenant Improvements to be constructed
hereunder shall be in compliance with the requirements of the ADA, and all
costs incurred for purposes of compliance therewith shall be a part of and
included in the costs of the Tenant Improvements. Tenant shall be solely
responsible for conducting its own independent investigation of this matter
and for ensuring that the design of all Tenant Improvements strictly complies
with all requirements of the ADA. Subject to reimbursement pursuant to
Paragraph 4 above, if any barrier removal work or other work is required to
the Building, the Common Areas or the Project under the ADA, then such work
shall be the responsibility of Landlord; provided, if such work is required
under the ADA as a result of Tenant's use of the Premises or any work or
Alteration (as hereinafter defined) made to the Premises by or on behalf of
Tenant, then such work shall be performed by Landlord at the sole cost and
expense of Tenant. Except as otherwise expressly provided in this provision,
Tenant shall be responsible at its sole cost and expense for fully and
faithfully complying with all applicable requirements of the ADA, including
without limitation, not discriminating against any disabled persons in the
operation of Tenant's business in or about the Premises, and offering or
otherwise providing auxiliary aids and services as, and when, required by the
ADA. Within ten (10) days after receipt, Tenant shall advise Landlord in
writing, and provide Landlord with copies of (as applicable), any notices
alleging violation of the ADA relating to any portion of the Premises, the
Building or the Project; any claims made or threatened orally or in writing
regarding noncompliance with the ADA and relating to any portion of the
Premises, the Building, or the Project; or any governmental or regulatory
actions or investigations instituted or threatened regarding noncompliance
with the ADA and relating to any portion of the Premises, the Building or the
Project. Tenant shall and hereby agrees to protect, defend (with counsel
acceptable to Landlord) and hold Landlord and Landlord's Agents harmless and
indemnify Landlord and Landlord's Agents from and against all liabilities,
damages, claims, losses, penalties, judgments, charges and expenses (including
attorneys' fees, costs of court and expenses necessary in the prosecution or
defense of any litigation including the enforcement of this provision) arising
from or in any way related to, directly or indirectly, Tenant's or Tenant's
Agents' violation or alleged violation of the ADA. Tenant agrees that the
obligations of Tenant herein shall survive the expiration or earlier
termination of this Lease
10. Acceptance Of Premises
(a) By entry hereunder, Tenant accepts the Premises as suitable
for Tenant's intended use and as being in good and sanitary operating order,
condition and repair, AS IS, and without representation or warranty by
Landlord as to the condition, use or occupancy which may be made thereof. Any
exceptions to the foregoing must be by written agreement executed by Landlord
and Tenant.
(b) Notwithstanding the terms of Paragraph 10(a) above, Landlord
shall cause the HVAC, electrical and plumbing systems serving the Premises to
be in good working order and the roof on the Building to be in good condition
on the Commencement Date. Any claims by Tenant under the preceding sentence
shall be made in writing not later than the fifteenth (15th) day after the
Commencement Date. In the event Tenant fails to deliver a written claim to
Landlord on or before such fifteenth (15th) day, then Landlord shall be
conclusively deemed to have satisfied its obligations under this Paragraph 10.
(c) Prior to the Commencement Date, Landlord shall paint the
interior of the Premises with Building-standard paint and install
Building-standard floor coverings therein. Except for the foregoing, Landlord
shall have no obligation to remodel, improve or otherwise alter the Premises
prior to or after the Commencement Date.
11. Surrender
Tenant agrees that on the last day of the Term, or on the sooner termination
of this Lease, Tenant shall surrender the Premises to Landlord (a) in good
condition and repair (damage by acts of God, fire, and normal wear and tear
excepted), but with all interior walls painted or cleaned so they appear
painted, any carpets cleaned, all floors cleaned and waxed, all non-working
light bulbs and ballasts replaced and all roll-up doors and plumbing fixtures
in good condition and working order, and (b) otherwise in accordance with
Paragraph 32(h). Normal wear and tear shall not include any damage or
deterioration to the floors of the Premises arising from the use of forklifts
in, on or about the Premises (including, without limitation, any marks or
stains on any portion of the floors), and any damage or deterioration that
would have been prevented by proper maintenance by Tenant, or Tenant otherwise
performing all of its obligations under this Lease. On or before the
expiration or sooner termination of this Lease, (i) Tenant shall remove all of
Tenant's Property (as hereinafter defined) and Tenant's signage from the
Premises, the Building and the Project and repair any damage caused by such
removal, and (ii) Landlord may, by notice to Tenant given not later than
ninety (90) days prior to the Expiration Date (except in the event of a
termination of this Lease prior to the scheduled Expiration Date, in which
event no advance notice shall be required), require Tenant at Tenant's expense
to remove any or all Alterations and to repair any damage caused by such
removal. Any of Tenant's Property not so removed by Tenant as required herein
shall be deemed abandoned and may be stored, removed, and disposed of by
Landlord at Tenant's expense, and Tenant waives all claims against Landlord
for any damages resulting from Landlord's retention and disposition of such
property; provided, however, that Tenant shall remain liable to Landlord for
all costs incurred in storing and disposing of such abandoned property of
Tenant. All Tenant Improvements and Alterations except those which Landlord
requires Tenant to remove shall remain in the Premises as the property of
Landlord. If the Premises are not surrendered at the end of the Term or
sooner termination of this Lease, and in accordance with the provisions of
this Paragraph 11 and Paragraph 32(h) below, Tenant shall continue to be
responsible for the payment of Rent (as the same may be increased pursuant to
Paragraph 35 below) until the Premises are so surrendered in accordance with
said Paragraphs (except to the extent that such defaults of Tenant are
deminimis and can be fully cured with the Security Deposit then held by
Landlord), and in any event Tenant shall indemnify, defend and hold Landlord
harmless from and against any and all loss or liability resulting from delay
by Tenant in so surrendering the Premises including, without limitation, any
loss or liability resulting from any claim against Landlord made by any
succeeding tenant or prospective tenant founded on or resulting from such
delay and losses to Landlord due to lost opportunities to lease any portion
of the Premises to any such succeeding tenant or prospective tenant, together
with, in each case, actual attorneys' fees and costs.
12. Alterations And Additions
(a) Tenant shall not make, or permit to be made, any alteration,
addition or improvement (hereinafter referred to individually as an
"Alteration" and collectively as the "Alterations") to the Premises or any
part thereof without the prior written consent of Landlord, which consent
shall not be unreasonably withheld; provided, however, that Landlord shall
have the right in its sole and absolute discretion to consent or to withhold
its consent to any Alteration which affects the structural portions of the
Premises, the Building or the Project or the Systems serving the Premises, the
Building and/or the Project or any portion thereof (such Alterations described
in this proviso being herein referred to as "Structural Alterations").
Notwithstanding the foregoing, Tenant shall have the right to make Alterations
(specifically excluding, however, Structural Alterations) to the Premises with
prior notice to but without the consent of Landlord, provided that such
Alterations are constructed and performed in full compliance with the terms of
Paragraphs 12(b) through (f) below and do not exceed two thousand five hundred
dollars ($2,500) in cost on an individual basis or five thousand dollars
($5,000) in the aggregate over the Term of this Lease.
(b) Any Alteration to the Premises shall be at Tenant's sole cost
and expense, in compliance with all applicable Laws and all requirements
requested by Landlord, including, without limitation, the requirements of any
insurer providing coverage for the Premises or the Project or any part
thereof, and in accordance with plans and specifications approved in writing
by Landlord, and shall be constructed and installed by a contractor approved
in writing by Landlord, which approval shall not be unreasonably withheld or
delayed. As a further condition to giving consent, Landlord may require
Tenant to provide Landlord, at Tenant's sole cost and expense, a payment and
performance bond in form acceptable to Landlord, in a principal amount not
less than one and one-half times the estimated costs of such Alterations, to
ensure Landlord against any liability for mechanic's and materialmen's liens
and to ensure completion of work. Before Alterations may begin, valid
building permits or other permits or licenses required must be furnished to
Landlord, and, once the Alterations begin, Tenant will diligently and
continuously pursue their completion. Landlord may monitor construction of
the Alterations and Tenant shall reimburse Landlord for its reasonable costs
(including, without limitation, the costs of any construction manager retained
by Landlord) in reviewing plans and documents and in monitoring construction.
Tenant shall maintain during the course of construction, at its sole cost and
expense, builders' risk insurance for the amount of the completed value of the
Alterations on an all-risk non-reporting form covering all improvements under
construction, including building materials, and other insurance in amounts and
against such risks as Landlord shall reasonably require in connection with
the Alterations. In addition to and without limitation on the generality of
the foregoing, Tenant shall ensure that its contractor(s) procure and maintain
in full force and effect during the course of construction a "broad form"
commercial general liability and property damage policy of insurance naming
Landlord, Tenant and Landlord's lenders as additional insureds. The minimum
limit of coverage of the aforesaid policy shall be in the amount of not less
than One Million Dollars ($1,000,000.00) for injury or death of one person in
any one accident or occurrence and in the amount of not less than One Million
Dollars ($1,000,000.00) for injury or death of more than one person in any one
accident or occurrence, and shall contain a severability of interest clause
or a cross liability endorsement. Such insurance shall further insure
Landlord and Tenant against liability for property damage of at least One
Million Dollars ($1,000,000.00).
(c) All Alterations, including, but not limited to, heating,
lighting, electrical, air conditioning, fixed partitioning, drapery, wall
covering and paneling, built-in cabinet work and carpeting installations made
by Tenant, together with all property that has become an integral part of the
Premises or the Building, shall at once be and become the property of
Landlord, and shall not be deemed trade fixtures or Tenant's Property. If
requested by Landlord, Tenant will pay, prior to the commencement of
construction, an amount determined by Landlord necessary to cover the costs
of demolishing such Alterations and/or the cost of returning the Premises and
the Building to its condition prior to such Alterations.
(d) No private telephone systems and/or other related computer or
telecommunications equipment or lines may be installed without Landlord's
prior written consent, which consent shall not be unreasonably withheld;
provided, however, that Landlord shall have the right in its sole and
absolute discretion to consent or to withhold its consent to any such
installation which affects the structural portions of the Premises, the
Building or the Project or the Systems serving the Premises, the Building
and/or the Project or any portion thereof. If Landlord gives such consent,
all equipment must be installed within the Premises and, at the request of
Landlord made at any time prior to the expiration of the Term, removed upon
the expiration or sooner termination of this Lease and the Premises restored
to the same condition as before such installation.
(e) Notwithstanding anything herein to the contrary, before
installing any equipment or lights which generate an undue amount of heat in
the Premises, or if Tenant plans to use any high-power usage equipment in the
Premises, Tenant shall obtain the written permission of Landlord. Landlord
may refuse to grant such permission unless Tenant agrees to pay the costs to
Landlord for installation of supplementary air conditioning capacity or
electrical systems necessitated by such equipment.
(f) Tenant agrees not to proceed to make any Alterations,
notwithstanding consent from Landlord to do so, until Tenant notifies Landlord
in writing of the date Tenant desires to commence construction or installation
of such Alterations and Landlord has approved such date in writing, in order
that Landlord may post appropriate notices to avoid any liability to
contractors or material suppliers for payment for Tenant's improvements.
Tenant will at all times permit such notices to be posted and to remain posted
until the completion of work.
13. Maintenance and Repairs Of Premises
(a) Maintenance by Tenant. Throughout the Term, Tenant shall, at
its sole expense, (1) keep and maintain in good order and condition the
Premises, and repair and replace every part thereof, including glass, windows,
window frames, window casements, skylights, interior and exterior doors, door
frames and door closers; interior lighting (including, without limitation,
light bulbs and ballasts), the plumbing and electrical systems exclusively
serving the Premises, all communications systems serving the Premises,
Tenant's signage, interior demising walls and partitions, equipment, interior
painting and interior walls and floors, and the roll-up doors, ramps and dock
equipment, including, without limitation, dock bumpers, dock plates, dock
seals, dock levelers and dock lights located in or on the Premises (excepting
only those portions of the Building or the Project to be maintained by
Landlord, as provided in Paragraph 13(b) below), (2) furnish all expendables,
including light bulbs, paper goods and soaps, used in the Premises, and (3)
keep and maintain in good order and condition, repair and replace all of
Tenant's security systems in or about or serving the Premises and, except to
the extent that Landlord notifies Tenant in writing of its intention to
arrange for such monitoring, cause the fire alarm systems serving the Premises
to be monitored by a monitoring or protective services firm approved by
Landlord in writing. Tenant shall not do nor shall Tenant allow Tenant's
Agents to do anything to cause any damage, deterioration or unsightliness to
the Premises, the Building or the Project.
(b) Maintenance by Landlord. Subject to the provisions of
Paragraphs 13(a), 21 and 22, and further subject to Tenant's obligation under
Paragraph 4 to reimburse Landlord, in the form of Additional Rent, for
Tenant's Proportionate Share(s) of the cost and expense of the following
items, Landlord agrees to repair and maintain the following items: the roof
coverings (provided that Tenant installs no additional air conditioning or
other equipment on the roof that damages the roof coverings, in which event
Tenant shall pay all costs resulting from the presence of such additional
equipment); the Systems serving the Premises and the Building, excluding the
plumbing and electrical systems exclusively serving the Premises; and the
Parking Areas, pavement, landscaping, sprinkler systems, sidewalks, driveways,
curbs, and lighting systems in the Common Areas. Subject to the provisions of
Paragraphs 13(a), 21 and 22, Landlord, at its own cost and expense, agrees to
repair and maintain the following items: the structural portions of the roof
(specifically excluding the roof coverings), the foundation, the footings, the
floor slab, and the load bearing walls and exterior walls of the Building
(excluding any glass and any routine maintenance, including, without
limitation, any painting, sealing, patching and waterproofing of such walls).
Notwithstanding anything in this Paragraph 13 to the contrary, Landlord shall
have the right to either repair or to require Tenant to repair any damage to
any portion of the Premises, the Building and/or the Project caused by or
created due to any act, omission, negligence or willful misconduct of Tenant
or Tenant's Agents and to restore the Premises, the Building and/or the
Project, as applicable, to the condition existing prior to the occurrence of
such damage; provided, however, that in the event Landlord elects to perform
such repair and restoration work, Tenant shall reimburse Landlord upon demand
for all costs and expenses incurred by Landlord in connection therewith.
Landlord's obligation hereunder to repair and maintain is subject to the
condition precedent that Landlord shall have received written notice of the
need for such repairs and maintenance and a reasonable time to perform such
repair and maintenance. Tenant shall promptly report in writing to Landlord
any defective condition known to it which Landlord is required to repair, and
failure to so report such defects shall make Tenant responsible to Landlord
for any liability incurred by Landlord by reason of such condition.
(c) Tenant's Waiver of Rights. Tenant hereby expressly waives all
rights to make repairs at the expense of Landlord or to terminate this Lease,
as provided for in California Civil Code Sections 1941 and 1942, and 1932(1),
respectively, and any similar or successor statute or law in effect or any
amendment thereof during the Term.
14. Landlord's Insurance
Landlord shall purchase and keep in force fire, extended coverage and "all
risk" insurance covering the Building and the Project. Tenant shall, at its
sole cost and expense, comply with any and all reasonable requirements
pertaining to the Premises, the Building and the Project of any insurer
necessary for the maintenance of reasonable fire and commercial general
liability insurance, covering the Building and the Project. Landlord, at
Tenant's cost, may maintain "Loss of Rents" insurance, insuring that the Rent
will be paid in a timely manner to Landlord for a period of at least twelve
(12) months if the Premises, the Building or the Project or any portion
thereof are destroyed or rendered unusable or inaccessible by any cause
insured against under this Lease.
15. Tenant's Insurance
(a) Commercial General Liability Insurance. Tenant shall, at
Tenant's expense, secure and keep in force a "broad form" commercial general
liability insurance and property damage policy covering the Premises, insuring
Tenant, and naming Landlord, Landlord's investment advisors and agents from
time to time, including, without limitation, Allegis Realty Investors LLC, and
Landlord's lenders as additional insureds, against any liability arising out
of the ownership, use, occupancy or maintenance of the Premises. The minimum
limit of coverage of such policy shall be in the amount of not less than Three
Million Dollars ($3,000,000.00) for injury or death of one person in any one
accident or occurrence and in the amount of not less than Three Million
Dollars ($3,000,000.00) for injury or death of more than one person in any one
accident or occurrence, shall include an extended liability endorsement
providing contractual liability coverage (which shall include coverage for
Tenant's indemnification obligations in this Lease), and shall contain a
severability of interest clause or a cross liability endorsement. Such
insurance shall further insure Landlord and Tenant against liability for
property damage of at least Three Million Dollars ($3,000,000.00). Landlord
may from time to time require reasonable increases in any such limits if
Landlord believes that additional coverage is necessary or desirable. The
limit of any insurance shall not limit the liability of Tenant hereunder. No
policy maintained by Tenant under this Paragraph 15(a) shall contain a
deductible greater than two thousand five hundred dollars ($2,500.00). No
policy shall be cancelable or subject to reduction of coverage without thirty
(30) days prior written notice to Landlord, and loss payable clauses shall be
subject to Landlord's approval. Such policies of insurance shall be issued as
primary policies and not contributing with or in excess of coverage that
Landlord may carry, by an insurance company authorized to do business in the
State of California for the issuance of such type of insurance coverage and
rated A:XIII or better in Best's Key Rating Guide.
(b) Personal Property Insurance. Tenant shall maintain in full
force and effect on all of its personal property, furniture, furnishings,
trade or business fixtures and equipment (collectively, "Tenant's Property")
on the Premises, a policy or policies of fire and extended coverage insurance
with standard coverage endorsement to the extent of the full replacement cost
thereof. No such policy shall contain a deductible greater than two thousand
five hundred dollars ($2,500.00). During the term of this Lease the proceeds
from any such policy or policies of insurance shall be used for the repair or
replacement of the fixtures and equipment so insured. Landlord shall have no
interest in the insurance upon Tenant's equipment and fixtures and will sign
all documents reasonably necessary in connection with the settlement of any
claim or loss by Tenant. Landlord will not carry insurance on Tenant's
possessions.
(c) Worker's Compensation Insurance; Employer's Liability
Insurance. Tenant shall, at Tenant's expense, maintain in full force and
effect worker's compensation insurance with not less than the minimum limits
required by law, and employer's liability insurance with a minimum limit of
coverage of One Million Dollars ($1,000,000).
(d) Evidence of Coverage. Tenant shall deliver to Landlord
certificates of insurance and true and complete copies of any and all
endorsements required herein for all insurance required to be maintained by
Tenant hereunder at the time of execution of this Lease by Tenant. Tenant
shall, at least thirty (30) days prior to expiration of each policy, furnish
Landlord with certificates of renewal or "binders" thereof. Each certificate
shall expressly provide that such policies shall not be cancellable or
otherwise subject to modification except after thirty (30) days prior written
notice to Landlord and the other parties named as additional insureds as
required in this Lease (except for cancellation for nonpayment of premium, in
which event cancellation shall not take effect until at least ten (10) days
notice has been given to Landlord).
16. Indemnification
(a) Of Landlord. Tenant shall indemnify and hold harmless
Landlord and Landlord's Agents against and from any and all claims,
liabilities, judgments, costs, demands, causes of action and expenses
(including, without limitation, reasonable attorneys' fees) arising from (1)
the use of the Premises, the Building or the Project by Tenant or Tenant's
Agents, or from any activity done, permitted or suffered by Tenant or Tenant's
Agents in or about the Premises, the Building or the Project, and (2) any act,
neglect, fault, willful misconduct or omission of Tenant or Tenant's Agents,
or from any breach or default in the terms of this Lease by Tenant or Tenant's
Agents, and (3) any action or proceeding brought on account of any matter in
items (1) or (2), except in each instance solely to the extent arising out of
the gross negligence or willful misconduct of Landlord. If any action or
proceeding is brought against Landlord by reason of any such claim, upon
notice from Landlord, Tenant shall defend the same at Tenant's expense by
counsel reasonably satisfactory to Landlord. As a material part of the
consideration to Landlord, Tenant hereby releases Landlord and Landlord's
Agents from responsibility for, waives its entire claim of recovery for and
assumes all risk of (i) damage to property or injury to persons in or about
the Premises, the Building or the Project from any cause whatsoever (except
that which is caused by the gross negligence or willful misconduct of
Landlord or Landlord's Agents or by the failure of Landlord to observe any of
the terms and conditions of this Lease, if such failure has persisted for an
unreasonable period of time after written notice of such failure), or (ii)
loss resulting from business interruption or loss of income at the Premises.
The obligations of Tenant under this Paragraph 16 shall survive any
termination of this Lease.
(b) No Impairment of Insurance. The foregoing indemnity shall not
relieve any insurance carrier of its obligations under any policies required
to be carried by either party pursuant to this Lease, to the extent that such
policies cover the peril or occurrence that results in the claim that is
subject to the foregoing indemnity.
17. Subrogation
Notwithstanding anything to the contrary in this Lease, Landlord and Tenant
hereby mutually waive any claim against the other and its Agents for any loss
or damage to any of their property located on or about the Premises, the
Building or the Project that is caused by or results from perils covered by
property insurance required to be carried by the respective parties pursuant
to this Lease, to the extent of the proceeds of such insurance actually
received with respect to such loss or damage, whether or not due to the
negligence of the other party or its Agents. Because the foregoing waivers
will preclude the assignment of any claim by way of subrogation to an
insurance company or any other person, each party now agrees to immediately
give to its insurer written notice of the terms of these mutual waivers and
shall have their insurance policies endorsed to prevent the invalidation of
the insurance coverage because of these waivers. Nothing in this Paragraph 17
shall relieve a party of liability to the other for failure to carry
insurance required by this Lease.
18. Signs
Tenant shall not place or permit to be placed in, upon, or about the Premises,
the Building or the Project any exterior lights, decorations, balloons, flags,
pennants, banners, advertisements or notices, or erect or install any signs,
windows or door lettering, placards, decorations, or advertising media of any
type which can be viewed from the exterior the Premises without obtaining
Landlord's prior written consent or without complying with Landlord's signage
criteria specified on Exhibit D hereto, as the same may be modified by
Landlord from time to time, and with all applicable Laws, and will not
conduct, or permit to be conducted, any sale by auction on the Premises or
otherwise on the Project. Subject to the foregoing, Tenant shall be entitled
to place an identification sign on the existing monument in front of the
Building. Tenant shall remove any sign, advertisement or notice placed on the
Premises, the Building or the Project by Tenant upon the expiration of the
Term or sooner termination of this Lease, and Tenant shall repair any damage
or injury to the Premises, the Building or the Project caused thereby, all at
Tenant's expense. If any signs are not removed, or necessary repairs not
made, Landlord shall have the right to remove the signs and repair any damage
or injury to the Premises, the Building or the Project at Tenant's sole cost
and expense.
19. Free From Liens
Tenant shall keep the Premises, the Building and the Project free from any
liens arising out of any work performed, material furnished or obligations
incurred by or for Tenant. In the event that Tenant shall not, within ten
(10) days following the imposition of any such lien, cause the lien to be
released of record by payment or posting of a proper bond, Landlord shall have
in addition to all other remedies provided herein and by law the right but not
the obligation to cause same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All such
sums paid by Landlord and all expenses incurred by it in connection therewith
(including, without limitation, attorneys' fees) shall be payable to Landlord
by Tenant upon demand. Landlord shall have the right at all times to post
and keep posted on the Premises any notices permitted or required by law or
that Landlord shall deem proper for the protection of Landlord, the Premises,
the Building and the Project, from mechanics' and materialmen's liens.
Tenant shall give to Landlord at least five (5) business days' prior written
notice of commencement of any repair or construction on the Premises.
20. Entry By Landlord
Tenant shall permit Landlord and Landlord's Agents to enter into and upon the
Premises at all reasonable times, upon twenty-four (24) hours notice (except
in the case of an emergency, for which no notice shall be required), and
subject to Tenant's reasonable security arrangements, for the purpose of
inspecting the same or showing the Premises to prospective purchasers, lenders
or tenants or to alter, improve, maintain and repair the Premises or the
Building as required or permitted of Landlord under the terms hereof, or for
any other business purpose, without any rebate of Rent and without any
liability to Tenant for any loss of occupation or quiet enjoyment of the
Premises thereby occasioned (except for actual damages resulting from the
gross negligence or willful misconduct of Landlord); and Tenant shall permit
Landlord to post notices of non- responsibility and ordinary "for sale" or "for
lease" signs. No such entry shall be construed to be a forcible or unlawful
entry into, or a detainer of, the Premises, or an eviction of Tenant from the
Premises. Landlord may temporarily close entrances, doors, corridors,
elevators or other facilities without liability to Tenant by reason of such
closure in the case of an emergency and when Landlord otherwise deems such
closure necessary.
21. Destruction And Damage
(a) If the Premises are damaged by fire or other perils covered by
extended coverage insurance, Landlord shall, at Landlord's option:
(1) In the event of total destruction (which shall mean
destruction or damage in excess of thirty-three percent (33%) of the full
insurable value thereof) of the Premises, elect either to commence promptly to
repair and restore the Premises and prosecute the same diligently to
completion, in which event this Lease shall remain in full force and effect;
or not to repair or restore the Premises, in which event this Lease shall
terminate. Landlord shall give Tenant written notice of its intention within
sixty (60) days after the date (the "Casualty Discovery Date") Landlord
obtains actual knowledge of such destruction. If Landlord elects not to
restore the Premises, this Lease shall be deemed to have terminated as of the
date of such total destruction.
(2) In the event of a partial destruction (which shall
mean destruction or damage to an extent not exceeding thirty-three percent
(33%) of the full insurable value thereof) of the Premises for which Landlord
will receive insurance proceeds sufficient to cover the cost to repair and
restore such partial destruction and, if the damage thereto is such that the
Premises may be substantially repaired or restored to its condition existing
immediately prior to such damage or destruction within one hundred eighty
(180) days from the Casualty Discovery Date, Landlord shall commence and
proceed diligently with the work of repair and restoration, in which event the
Lease shall continue in full force and effect. If such repair and
restoration requires longer than one hundred eighty (180) days or if the
insurance proceeds therefor (plus any amounts Tenant may elect or is obligated
to contribute) are not sufficient to cover the cost of such repair and
restoration, Landlord may elect either to so repair and restore, in which
event the Lease shall continue in full force and effect, or not to repair or
restore, in which event the Lease shall terminate. In either case, Landlord
shall give written notice to Tenant of its intention within sixty (60) days
after the Casualty Discovery Date. If Landlord elects not to restore the
Premises, this Lease shall be deemed to have terminated as of the date of such
partial destruction.
(3) Notwithstanding anything to the contrary contained in
this Paragraph, in the event of damage to the Premises occurring during the
last twelve (12) months of the Term, Landlord may elect to terminate this
Lease by written notice of such election given to Tenant within thirty (30)
days after the Casualty Discovery Date.
(b) If the Premises are damaged by any peril not covered by
extended coverage insurance, and the cost to repair such damage exceeds any
amount Tenant may agree to contribute, Landlord may elect either to commence
promptly to repair and restore the Premises and prosecute the same diligently
to completion, in which event this Lease shall remain in full force and
effect; or not to repair or restore the Premises, in which event this Lease
shall terminate. Landlord shall give Tenant written notice of its intention
within sixty (60) days after the Casualty Discovery Date. If Landlord elects
not to restore the Premises, this Lease shall be deemed to have terminated as
of the date on which Tenant surrenders possession of the Premises to Landlord,
except that if the damage to the Premises materially impairs Tenant's ability
to continue its business operations in the Premises, then this Lease shall be
deemed to have terminated as of the date such damage occurred.
(c) Notwithstanding anything to the contrary in this Paragraph 22,
Landlord shall have the option to terminate this Lease, exercisable by notice
to Tenant within sixty (60) days after the Casualty Discovery Date, in each of
the following instances:
(1) If more than thirty-three percent (33%) of the full
insurable value of the Building or the Project is damaged or destroyed,
regardless of whether or not the Premises are destroyed.
(2) If the Building or the Project or any portion thereof
is damaged or destroyed and the repair and restoration of such damage requires
longer than one hundred eighty (180) days from the Casualty Discovery Date.
(3) If the Building or the Project or any portion thereof
is damaged or destroyed and the insurance proceeds therefor are not sufficient
to cover the costs of repair and restoration.
(4) If the Building or the Project or any portion thereof
is damaged or destroyed during the last twelve (12) months of the Term.
(d) In the event of repair and restoration as herein provided, the
monthly installments of Base Rent shall be abated proportionately as
reasonably determined by Landlord in the ratio which Tenant's use of the
Premises is impaired during the period of such repair or restoration;
provided, however, that Tenant shall not be entitled to such abatement to the
extent that such damage or destruction resulted from the acts of Tenant or
Tenant's Agents. Except as expressly provided in the immediately preceding
sentence with respect to abatement of Base Rent, Tenant shall have no claim
against Landlord for, and hereby releases Landlord and Landlord's Agents from
responsibility for and waives its entire claim of recovery for any cost, loss
or expense suffered or incurred by Tenant as a result of any damage to or
destruction of the Premises, the Building or the Project or the repair or
restoration thereof, including, without limitation, any cost, loss or expense
resulting from any loss of use of the whole or any part of the Premises, the
Building or the Project and/or any inconvenience or annoyance occasioned by
such damage, repair or restoration.
(e) If Landlord is obligated to or elects to repair or restore as
herein provided, Landlord shall repair or restore only the initial tenant
improvements, if any, constructed by Landlord in the Premises pursuant to the
terms of this Lease, substantially to their condition existing immediately
prior to the occurrence of the damage or destruction; and Tenant shall
promptly repair and restore, at Tenant's expense, Tenant's Alterations which
were not constructed by Landlord.
(f) Notwithstanding anything to the contrary in this Paragraph 21,
(i) Landlord shall notify Tenant within forty- five (45) days following the
Casualty Discovery Date of the length of time Landlord reasonably estimates to
be necessary for repair or restoration of any damage or destruction; and (ii)
Tenant shall have the right to terminate the Lease within fifteen (15) days
following receipt of such notice if restoration or repair of the Premises is
estimated by Landlord to take more than one hundred eighty (180) days.
(g) Tenant hereby waives the provisions of California Civil Code
Section 1932(2) and Section 1933(4) which permit termination of a lease upon
destruction of the leased premises, and the provisions of any similar law now
or hereinafter in effect, and the provisions of this Paragraph 22 shall govern
exclusively in case of such destruction.
22. Condemnation
(a) If twenty-five percent (25%) or more of either the Premises,
the Building or the Project or the parking areas for the Building or the
Project is taken for any public or quasi-public purpose by any lawful
governmental power or authority, by exercise of the right of appropriation,
inverse condemnation, condemnation or eminent domain, or sold to prevent such
taking (each such event being referred to as a "Condemnation"), Landlord may,
at its option, terminate this Lease as of the date title vests in the
condemning party. If twenty-five percent (25%) or more of the Premises is
taken and if the Premises remaining after such Condemnation and any repairs by
Landlord would be untenantable for the conduct of Tenant's business
operations, as reasonably determined by Tenant, Tenant shall have the right to
terminate this Lease as of the date title vests in the condemning party. If
either party elects to terminate this Lease as provided herein, such election
shall be made by written notice to the other party given within thirty (30)
days after the nature and extent of such Condemnation have been finally
determined. If neither Landlord nor Tenant elects to terminate this Lease to
the extent permitted above, Landlord shall promptly proceed to restore the
Premises, to the extent of any Condemnation award received by Landlord, to
substantially the same condition as existed prior to such Condemnation,
allowing for the reasonable effects of such Condemnation, and a proportionate
abatement shall be made to the Base Rent corresponding to the time during
which, and to the portion of the floor area of the Premises (adjusted for any
increase thereto resulting from any reconstruction) of which, Tenant is
deprived on account of such Condemnation and restoration, as reasonably
determined by Landlord. Except as expressly provided in the immediately
preceding sentence with respect to abatement of Base Rent, Tenant shall have
no claim against Landlord for, and hereby releases Landlord and Landlord's
Agents from responsibility for and waives its entire claim of recovery for any
cost, loss or expense suffered or incurred by Tenant as a result of any
Condemnation or the repair or restoration of the Premises, the Building or the
Project or the parking areas for the Building or the Project following such
Condemnation, including, without limitation, any cost, loss or expense
resulting from any loss of use of the whole or any part of the Premises, the
Building, the Project or the parking areas and/or any inconvenience or
annoyance occasioned by such Condemnation, repair or restoration. The
provisions of California Code of Civil Procedure Section 1265.130, which
allows either party to petition the Superior Court to terminate the Lease in
the event of a partial taking of the Premises, the Building or the Project or
the parking areas for the Building or the Project, and any other applicable
law now or hereafter enacted, are hereby waived by Tenant.
(b) Landlord shall be entitled to any and all compensation,
damages, income, rent, awards, or any interest therein whatsoever which may be
paid or made in connection with any Condemnation, and Tenant shall have no
claim against Landlord for the value of any unexpired term of this Lease or
otherwise; provided, however, that Tenant shall be entitled to receive any
award separately allocated by the condemning authority to Tenant for Tenant's
relocation expenses or the value of Tenant's Property (specifically excluding
fixtures, Alterations and other components of the Premises which under this
Lease or by law are or at the expiration of the Term will become the property
of Landlord), provided that such award does not reduce any award otherwise
allocable or payable to Landlord.
23. Assignment And Subletting
(a) Tenant shall not voluntarily or by operation of law,
(1)mortgage, pledge, hypothecate or encumber this Lease or any interest
herein, (2) assign or transfer this Lease or any interest herein, sublease the
Premises or any part thereof, or any right or privilege appurtenant thereto,
or allow any other person (the employees and invitees of Tenant excepted) to
occupy or use the Premises, or any portion thereof, without first obtaining
the written consent of Landlord, which consent shall not be withheld
unreasonably provided that (i) Tenant is not then in Default under this Lease
nor is any event then occurring which with the giving of notice or the passage
of time, or both, would constitute a Default hereunder, and (ii) Tenant has
not previously assigned or transferred this Lease or any interest herein or
subleased the Premises or any part thereof. When Tenant desires Landlord's
consent to such assignment or subletting, it shall notify Landlord of such
request in writing (a "Request Notice") and shall provide to Landlord in the
Request Notice the name and address of the proposed assignee or subtenant and
the nature and character of the business of the proposed assignee or subtenant
and shall provide current and prior financial statements for the proposed
assignee or subtenant, which financial statements shall be audited to the
extent available and shall in any event be prepared in accordance with
generally accepted accounting principles. Tenant shall also provide Landlord
with a copy of the proposed sublease or assignment agreement, including all
material terms and conditions thereof. Except in the case of an assignment or
sublease to a Tenant Affiliate (as hereinafter defined), Landlord shall have
the option, to be exercised within thirty (30) days of receipt of the
foregoing, to (1) terminate this Lease as of the commencement date stated in
the proposed sublease or assignment, (2) sublease or take an assignment, as
the case may be, from Tenant of the interest, or any portion thereof, in this
Lease and/or the Premises that Tenant proposes to assign or sublease, on the
same terms and conditions as stated in the proposed sublet or assignment
agreement, (3) consent to the proposed assignment or sublease, or (4) refuse
its consent to the proposed assignment or sublease, providing that such
consent shall not be unreasonably withheld so long as Tenant is not then in
Default under this Lease nor is any event then occurring which with the giving
of notice or the passage of time, or both, would constitute a Default
hereunder. Notwithstanding the foregoing, in the event Landlord elects to
terminate this Lease or enter into a sublease or assignment with Tenant as
provided in the foregoing clauses (1) and (2), respectively, then Tenant
shall have ten (10) days to rescind its Request Notice by delivery to Landlord
of a notice of rescission (a "Rescission Notice"). If Tenant fails to deliver
a Rescission Notice to Landlord in a timely manner as provided herein, then
in addition to terminating this Lease or entering into a sublease or
assignment with Tenant, as the case may be, Landlord shall have the additional
right to negotiate directly with Tenant's proposed assignee or subtenant and
to enter into a direct lease or occupancy agreement with such party on such
terms as shall be acceptable to Landlord in its sole and absolute discretion,
and Tenant hereby waives any claims against Landlord related thereto,
including, without limitation, any claims for any compensation or profit
related to such lease or occupancy agreement.
(b) Notwithstanding anything to the contrary contained in
Paragraph 23(a) above, Tenant shall have the right with the consent of
Landlord, which consent shall not be unreasonably withheld, to assign this
Lease or to sublease the Premises or any part thereof to a Tenant Affiliate.
In the event Tenant proposes to enter into an assignment or sublease with a
Tenant Affiliate, then Tenant shall provide Landlord with the information
required to be delivered pursuant to said Paragraph 23(a). Landlord shall
have the option, to be exercised within thirty (30) days of receipt of the
foregoing, to (1) consent to the proposed assignment or sublease, or (2)
refuse its consent to the proposed assignment or sublease, providing that such
consent shall not be unreasonably withheld. For purposes of this Paragraph
23, a "Tenant Affiliate" shall mean an entity that controls, is controlled by
or is under common control with, Tenant; and a party shall be deemed to
"control" another party for purposes of the aforesaid definition only if the
first party owns more than fifty percent (50%) of the stock or other
beneficial interests of the second party.
(c) Without otherwise limiting the criteria upon which Landlord
may withhold its consent under Paragraphs 23(a) and (b) above, Landlord shall
be entitled to consider all reasonable criteria including, but not limited to,
the following: (1) whether or not the proposed subtenant or assignee is
engaged in a business which, and the use of the Premises will be in an manner
which, is in keeping with the then character and nature of all other tenancies
in the Project, (2) whether the use to be made of the Premises by the
proposed subtenant or assignee will conflict with any so-called "exclusive"
use then in favor of any other tenant of the Building or the Project, and
whether such use would be prohibited by any other portion of this Lease,
including, but not limited to, any rules and regulations then in effect, or
under applicable Laws, and whether such use imposes a greater load upon the
Premises and the Building and Project services then imposed by Tenant, (3) the
business reputation of the proposed individuals who will be managing and
operating the business operations of the assignee or subtenant, and the
long-term financial and competitive business prospects of the proposed
assignee or subtenant, and (4) the creditworthiness and financial stability
of the proposed assignee or subtenant in light of the responsibilities
involved. In any event, Landlord may withhold its consent to any assignment
or sublease, if (i) the actual use proposed to be conducted in the Premises
or portion thereof conflicts with the provisions of Paragraph 9(a) or (b)
above or with any other lease which restricts the use to which any space in
the Building or the Project may be put, or (ii) the proposed assignment or
sublease requires alterations, improvements or additions to the Premises or
portions thereof.
(d) If Landlord approves an assignment or subletting as herein
provided, Tenant shall pay to Landlord, as Additional Rent, the difference, if
any, between (1) the Base Rent plus Additional Rent allocable to that part of
the Premises affected by such assignment or sublease pursuant to the
provisions of this Lease, and (2) the rent and any additional rent actually
paid by the assignee or sublessee to Tenant, less reasonable and customary
market-based leasing commissions and reasonable legal fees, if any, incurred
by Tenant in connection with such assignment or sublease, which costs shall,
for purposes of the aforesaid calculation, be amortized on a straight-line
basis over the term of such assignment or sublease. Tenant shall use its
best efforts to collect all sums due from said assignee or sublessee. The
assignment or sublease agreement, as the case may be, after approval by
Landlord, shall not be amended without Landlord's prior written consent, and
shall contain a provision directing the assignee or subtenant to pay the rent
and other sums due thereunder directly to Landlord upon receiving written
notice from Landlord that Tenant is in default under this Lease with respect
to the payment of Rent. In the event that, notwithstanding the giving of
such notice, Tenant collects any rent or other sums from the assignee or
subtenant, then Tenant shall hold such sums in trust for the benefit of
Landlord and shall immediately forward the same to Landlord. Landlord's
collection of such rent and other sums shall not constitute an acceptance by
Landlord of attornment by such assignee or subtenant. A consent to one
assignment, subletting, occupation or use shall not be deemed to be a consent
to any other or subsequent assignment, subletting, occupation or use, and
consent to any assignment or subletting shall in no way relieve Tenant of any
liability under this Lease. Any assignment or subletting without Landlord's
consent shall be void, and shall, at the option of Landlord, constitute a
Default under this Lease.
(e) Notwithstanding any assignment or subletting, Tenant and any
guarantor or surety of Tenant's obligations under this Lease shall at all
times remain fully responsible and liable for the payment of the Rent and for
compliance with all of Tenant's other obligations under this Lease
(regardless of whether Landlord's approval has been obtained for any such
assignment or subletting).
(f) Tenant shall pay Landlord's reasonable fees (including,
without limitation, the fees of Landlord's counsel), not to exceed $1,500 per
transaction, incurred in connection with Landlord's review and processing of
documents regarding any proposed assignment or sublease.
(g) Notwithstanding anything in this Lease to the contrary, in the
event Landlord consents to an assignment or subletting by Tenant in accordance
with the terms of this Paragraph 23, Tenant's assignee or subtenant shall have
no right to further assign this Lease or any interest therein or thereunder
or to further sublease all or any portion of the Premises. In furtherance of
the foregoing, Tenant acknowledges and agrees on behalf of itself and any
assignee or subtenant claiming under it (and any such assignee or subtenant
by accepting such assignment or sublease shall be deemed to acknowledge and
agree) that no sub-subleases or further assignments of this Lease shall be
permitted at any time.
(h) Tenant acknowledges and agrees that the restrictions,
conditions and limitations imposed by this Paragraph 23 on Tenant's ability to
assign or transfer this Lease or any interest herein, to sublet the Premises
or any part thereof, to transfer or assign any right or privilege appurtenant
to the Premises, or to allow any other person to occupy or use the Premises or
any portion thereof, are, for the purposes of California Civil Code Section
1951.4, as amended from time to time, and for all other purposes, reasonable
at the time that the Lease was entered into, and shall be deemed to be
reasonable at the time that Tenant seeks to assign or transfer this Lease or
any interest herein, to sublet the Premises or any part thereof, to transfer
or assign any right or privilege appurtenant to the Premises, or to allow any
other person to occupy or use the Premises or any portion thereof.
24. Tenant's Default
The occurrence of any one of the following events shall constitute an event of
default on the part of Tenant ("Default"):
(a) The vacation or abandonment of the Premises by Tenant for a
period of ten (10) consecutive days or any vacation or abandonment of the
Premises by Tenant which would cause any insurance policy to be invalidated or
otherwise lapse, or the failure of Tenant to continuously operate Tenant's
business in the Premises, in each of the foregoing cases irrespective of
whether or not Tenant is then in monetary default under this Lease. Tenant
agrees to notice and service of notice as provided for in this Lease and
waives any right to any other or further notice or service of notice which
Tenant may have under any statute or law now or hereafter in effect;
(b) Failure to pay any installment of Rent or any other monies due
and payable hereunder, said failure continuing for a period of three (3) days
after the same is due;
(c) A general assignment by Tenant or any guarantor or surety of
Tenant's obligations hereunder (collectively, "Guarantor") for the benefit of
creditors;
(d) The filing of a voluntary petition in bankruptcy by Tenant or
any Guarantor, the filing by Tenant or any Guarantor of a voluntary petition
for an arrangement, the filing by or against Tenant or any Guarantor of a
petition, voluntary or involuntary, for reorganization, or the filing of an
involuntary petition by the creditors of Tenant or any Guarantor, said
involuntary petition remaining undischarged for a period of sixty (60) days;
(e) Receivership, attachment, or other judicial seizure of
substantially all of Tenant's assets on the Premises, such attachment or other
seizure remaining undismissed or undischarged for a period of sixty (60) days
after the levy thereof;
(f) Death or disability of Tenant or any Guarantor, if Tenant or
such Guarantor is a natural person, or the failure by Tenant or any Guarantor
to maintain its legal existence, if Tenant or such Guarantor is a corporation,
partnership, limited liability company, trust or other legal entity;
(g) Failure of Tenant to execute and deliver to Landlord any
estoppel certificate, subordination agreement, or lease amendment within the
time periods and in the manner required by Paragraphs 30 or 31 or 42, and/or
failure by Tenant to deliver to Landlord any financial statement within the
time period and in the manner required by Paragraph 40;
(h) An assignment or sublease, or attempted assignment or
sublease, of this Lease or the Premises by Tenant contrary to the provision of
Paragraph 24, unless such assignment or sublease is expressly conditioned upon
Tenant having received Landlord's consent thereto;
(i) Failure of Tenant to restore the Security Deposit to the
amount and within the time period provided in Paragraph 7 above;
(j) Failure in the performance of any of Tenant's covenants,
agreements or obligations hereunder (except those failures specified as events
of Default in subparagraphs (b), (l) or (m) above or any other subparagraphs
of this Paragraph 25, which shall be governed by such other Paragraphs),
which failure continues for ten (10) days after written notice thereof from
Landlord to Tenant, provided that, if Tenant has exercised reasonable
diligence to cure such failure and such failure cannot be cured within such
ten (10) day period despite reasonable diligence, Tenant shall not be in
default under this subparagraph so long as Tenant thereafter diligently and
continuously prosecutes the cure to completion and actually completes such
cure within forty-five (45) days after the giving of the aforesaid written
notice;
(k) Chronic delinquency by Tenant in the payment of Rent, or any
other periodic payments required to be paid by Tenant under this Lease.
"Chronic delinquency" shall mean failure by Tenant to pay Rent, or any other
payments required to be paid by Tenant under this Lease within three (3) days
after written notice thereof for any three (3) months (consecutive or
nonconsecutive) during any period of twelve (12) months. In the event of a
Chronic delinquency, in addition to Landlord's other remedies for Default
provided in this Lease, at Landlord's option, Landlord shall have the right to
require that Rent be paid by Tenant quarterly, in advance;
(l) Chronic overuse by Tenant or Tenant's Agents of the number of
undesignated parking spaces set forth in the Basic Lease Information.
"Chronic overuse" shall mean use by Tenant or Tenant's Agents of a number of
parking spaces greater than the number of parking spaces set forth in the
Basic Lease Information more than three (3) times during the Term after
written notice by Landlord;
(m) Any insurance required to be maintained by Tenant pursuant to
this Lease shall be canceled or terminated or shall expire or be reduced or
materially changed, except as permitted in this Lease; and
(n) Any failure by Tenant to discharge any lien or encumbrance
placed on the Project or any part thereof in violation of this Lease within
ten (10) days after the date such lien or encumbrance is filed or recorded
against the Project or any part thereof.
Tenant agrees that any notice given by Landlord pursuant to Paragraph 25(j),
(k) or (l) above shall satisfy the requirements for notice under California
Code of Civil Procedure Section 1161, and Landlord shall not be required to
give any additional notice in order to be entitled to commence an unlawful
detainer proceeding.
25. Landlord's Remedies
(a) Termination. In the event of any Default by Tenant, then in
addition to any other remedies available to Landlord at law or in equity and
under this Lease, Landlord shall have the immediate option to terminate this
Lease and all rights of Tenant hereunder by giving written notice of such
intention to terminate. In the event that Landlord shall elect to so
terminate this Lease then Landlord may recover from Tenant:
(1) the worth at the time of award of any unpaid Rent and
any other sums due and payable which have been earned at the time of such
termination; plus
(2) the worth at the time of award of the amount by which
the unpaid Rent and any other sums due and payable which would have been
earned after termination until the time of award exceeds the amount of such
rental loss Tenant proves could have been reasonably avoided; plus
(3) the worth at the time of award of the amount by which
the unpaid Rent and any other sums due and payable for the balance of the term
of this Lease after the time of award exceeds the amount of such rental loss
that Tenant proves could be reasonably avoided; plus
(4) any other amount necessary to compensate Landlord for
all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course would be likely
to result therefrom, including, without limitation, (A) any costs or expenses
incurred by Landlord (1) in retaking possession of the Premises; (2) in
maintaining, repairing, preserving, restoring, replacing, cleaning, altering,
remodeling or rehabilitating the Premises or any affected portions of the
Building or the Project, including such actions undertaken in connection with
the reletting or attempted reletting of the Premises to a new tenant or
tenants; (3) for leasing commissions, advertising costs and other expenses of
reletting the Premises; or (4) in carrying the Premises, including taxes,
insurance premiums, utilities and security precautions; (B) any unearned
brokerage commissions paid in connection with this Lease; (C) reimbursement of
any previously waived or abated Base Rent or Additional Rent or any free rent
or reduced rental rate granted hereunder; and (D) any concession made or paid
by Landlord to the benefit of Tenant in consideration of this Lease including,
but not limited to, any moving allowances, contributions, payments or loans
by Landlord for tenant improvements or build-out allowances or assumptions by
Landlord of any of Tenant's previous lease obligations; plus
(5) such reasonable attorneys' fees incurred by Landlord
as a result of a Default, and costs in the event suit is filed by Landlord to
enforce such remedy; and plus
(6) at Landlord's election, such other amounts in addition
to or in lieu of the foregoing as may be permitted from time to time by
applicable law.
As used in subparagraphs (1) and (2) above, the "worth at the time of award"
is computed by allowing interest at an annual rate equal to twelve percent
(12%) per annum or the maximum rate permitted by law, whichever is less. As
used in subparagraph (3) above, the "worth at the time of award" is computed
by discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of award, plus one percent (1%). Tenant waives
redemption or relief from forfeiture under California Code of Civil Procedure
Sections 1174 and 1179, or under any other pertinent present or future Law, in
the event Tenant is evicted or Landlord takes possession of the Premises by
reason of any Default of Tenant hereunder.
(b) Continuation of Lease. In the event of any Default by Tenant,
then in addition to any other remedies available to Landlord at law or in
equity and under this Lease, Landlord shall have the remedy described in
California Civil Code Section 1951.4 (Landlord may continue this Lease in
effect after Tenant's Default and abandonment and recover Rent as it becomes
due, provided Tenant has the right to sublet or assign, subject only to
reasonable limitations). In addition, Landlord shall not be liable in any
way whatsoever for its failure or refusal to relet the Premises. For purposes
of this Paragraph 26(b), the following acts by Landlord will not constitute
the termination of Tenant's right to possession of the Premises:
(1) Acts of maintenance or preservation or efforts to
relet the Premises, including, but not limited to, alterations, remodeling,
redecorating, repairs, replacements and/or painting as Landlord shall consider
advisable for the purpose of reletting the Premises or any part thereof; or
(2) The appointment of a receiver upon the initiative of
Landlord to protect Landlord's interest under this Lease or in the Premises.
(c) Re-entry. In the event of any Default by Tenant, Landlord
shall also have the right, with or without terminating this Lease, in
compliance with applicable law, to re-enter the Premises and remove all
persons and property from the Premises; such property may be removed and
stored in a public warehouse or elsewhere at the cost of and for the account
of Tenant.
(d) Reletting. In the event of the abandonment of the Premises by
Tenant or in the event that Landlord shall elect to re-enter as provided in
Paragraph 26(c) or shall take possession of the Premises pursuant to legal
proceeding or pursuant to any notice provided by law, then if Landlord does
not elect to terminate this Lease as provided in Paragraph 26(a), Landlord may
from time to time, without terminating this Lease, relet the Premises or any
part thereof for such term or terms and at such rental or rentals and upon
such other terms and conditions as Landlord in its sole discretion may deem
advisable with the right to make alterations and repairs to the Premises in
Landlord's sole discretion. In the event that Landlord shall elect to so
relet, then rentals received by Landlord from such reletting shall be applied
in the following order: (1) to reasonable attorneys' fees incurred by Landlord
as a result of a Default and costs in the event suit is filed by Landlord to
enforce such remedies; (2) to the payment of any indebtedness other than Rent
due hereunder from Tenant to Landlord; (3) to the payment of any costs of such
reletting; (4) to the payment of the costs of any alterations and repairs to
the Premises; (5) to the payment of Rent due and unpaid hereunder; and (6) the
residue, if any, shall be held by Landlord and applied in payment of future
Rent and other sums payable by Tenant hereunder as the same may become due
and payable hereunder. Should that portion of such rentals received from such
reletting during any month, which is applied to the payment of Rent hereunder,
be less than the Rent payable during the month by Tenant hereunder, then
Tenant shall pay such deficiency to Landlord. Such deficiency shall be
calculated and paid monthly. Tenant shall also pay to Landlord, as soon as
ascertained, any costs and expenses incurred by Landlord in such reletting or
in making such alterations and repairs not covered by the rentals received
from such reletting.
(e) Termination. No re-entry or taking of possession of the
Premises by Landlord pursuant to this Paragraph 26 shall be construed as an
election to terminate this Lease unless a written notice of such intention is
given to Tenant or unless the termination thereof is decreed by a court of
competent jurisdiction. Notwithstanding any reletting without termination by
Landlord because of any Default by Tenant, Landlord may at any time after such
reletting elect to terminate this Lease for any such Default.
(f) Cumulative Remedies. The remedies herein provided are not
exclusive and Landlord shall have any and all other remedies provided herein
or by law or in equity.
(g) No Surrender. No act or conduct of Landlord, whether
consisting of the acceptance of the keys to the Premises, or otherwise, shall
be deemed to be or constitute an acceptance of the surrender of the Premises
by Tenant prior to the expiration of the Term, and such acceptance by
Landlord of surrender by Tenant shall only flow from and must be evidenced by
a written acknowledgment of acceptance of surrender signed by Landlord. The
surrender of this Lease by Tenant, voluntarily or otherwise, shall not work a
merger unless Landlord elects in writing that such merger take place, but
shall operate as an assignment to Landlord of any and all existing subleases,
or Landlord may, at its option, elect in writing to treat such surrender as a
merger terminating Tenant's estate under this Lease, and thereupon Landlord
may terminate any or all such subleases by notifying the sublessee of its
election so to do within five (5) days after such surrender.
26. Landlord's Right to Perform Tenant's Obligations
(a) Without limiting the rights and remedies of Landlord contained
in Paragraph 25 above, if Tenant shall be in Default in the performance of any
of the terms, provisions, covenants or conditions to be performed or complied
with by Tenant pursuant to this Lease, then Landlord may at Landlord's option,
without any obligation to do so, and without notice to Tenant perform any such
term, provision, covenant, or condition, or make any such payment and
Landlord by reason of so doing shall not be liable or responsible for any loss
or damage thereby sustained by Tenant or anyone holding under or through
Tenant or any of Tenant's Agents.
Without limiting the rights of Landlord under Paragraph 26(a) above, Landlord
shall have the right at Landlord's option, without any obligation to do so, to
perform any of Tenant's covenants or obligations under this Lease without
notice to Tenant in the case of an emergency, as determined by Landlord in its
sole and absolute judgment, or if Landlord otherwise determines in its sole
discretion that such performance is necessary or desirable for the protection
or preservation of property or the preservation of the rights and interests or
safety of other tenants of the Building or the Project.
(b) If Landlord performs any of Tenant's obligations hereunder in
accordance with this Paragraph 26, the full amount of the cost and expense
incurred or the payment so made or the amount of the loss so sustained shall
immediately be owing by Tenant to Landlord, and Tenant shall promptly pay to
Landlord upon demand, as Additional Rent, the full amount thereof with
interest thereon from the date of payment by Landlord at the lower of (1) ten
percent (10%) per annum, or (2) the highest rate permitted by applicable law.
27. Attorney's Fees
(a) If either party hereto fails to perform any of its obligations
under this Lease or if any dispute arises between the parties hereto
concerning the meaning or interpretation of any provision of this Lease, then
the defaulting party or the party not prevailing in such dispute, as the case
may be, shall pay any and all costs and expenses incurred by the other party
on account of such default and/or in enforcing or establishing its rights
hereunder, including, without limitation, court costs and reasonable
attorneys' fees and disbursements. Any such attorneys' fees and other
expenses incurred by either party in enforcing a judgment in its favor under
this Lease shall be recoverable separately from and in addition to any other
amount included in such judgment, and such attorneys' fees obligation is
intended to be severable from the other provisions of this Lease and to
survive and not be merged into any such judgment.
(b) Without limiting the generality of Paragraph 27(a) above, if
Landlord utilizes the services of an attorney for the purpose of collecting
any Rent due and unpaid by Tenant or in connection with any other breach of
this Lease by Tenant, Tenant agrees to pay Landlord's actual attorneys' fees,
regardless of the fact that no legal action may be commenced or filed by
Landlord.
28. Taxes
Tenant shall be liable for and shall pay, prior to delinquency, all taxes
levied against Tenant's Property. If any Alteration installed by Tenant or any
of Tenant's Property is assessed and taxed with the Project or Building,
Tenant shall pay such taxes to Landlord within ten (10) days after delivery to
Tenant of a statement therefor.
29. Effect Of Conveyance
The term "Landlord" as used in this Lease means, from time to time, the then
current owner of the Building or the Project containing the Premises, so that,
in the event of any sale of the Building or the Project, Landlord shall be
and hereby is entirely freed and relieved of all covenants and obligations of
Landlord hereunder, and it shall be deemed and construed, without further
agreement between the parties and the purchaser at any such sale, that the
purchaser of the Building or the Project has assumed and agreed to carry out
any and all covenants and obligations of Landlord hereunder so long as such
purchaser assumes in writing at the time of such purchase the covenants and
obligations of Landlord hereunder arising from and after the date of purchase.
30. Tenant's Estoppel Certificate
From time to time, upon written request of Landlord, Tenant shall execute,
acknowledge and deliver to Landlord or its designee, a written certificate
stating (a) the date this Lease was executed, the Commencement Date of the
Term and the date the Term expires; (b) the date Tenant entered into
occupancy of the Premises; (c) the amount of Rent and the date to which such
Rent has been paid; (d) that this Lease is in full force and effect and has
not been assigned, modified, supplemented or amended in any way (or, if
assigned, modified, supplemented or amended, specifying the date and terms of
any agreement so affecting this Lease); (e) that this Lease represents the
entire agreement between the parties with respect to Tenant's right to use and
occupy the Premises (or specifying such other agreements, if any); (f) that
all obligations under this Lease to be performed by Landlord as of the date of
such certificate have been satisfied (or specifying those as to which Tenant
claims that Landlord has yet to perform); (g) that all required contributions
by Landlord to Tenant on account of Tenant's improvements have been received
(or stating exceptions thereto); (h) that on such date there exist no defenses
or offsets that Tenant has against the enforcement of this Lease by Landlord
(or stating exceptions thereto); (i) that no Rent or other sum payable by
Tenant hereunder has been paid more than one (1) month in advance (or stating
exceptions thereto); (j) that security has been deposited with Landlord,
stating the original amount thereof and any increases thereto; and (k) any
other matters evidencing the status of this Lease that may be required either
by a lender making a loan to Landlord to be secured by a deed of trust
covering the Building or the Project or by a purchaser of the Building or the
Project. Any such certificate delivered pursuant to this Paragraph 30 may be
relied upon by a prospective purchaser of Landlord's interest or a mortgagee
of Landlord's interest or assignee of any mortgage upon Landlord's interest in
the Premises. If Tenant shall fail to provide such certificate within ten (10)
days of receipt by Tenant of a written request by Landlord as herein
provided, such failure shall, at Landlord's election, constitute a Default
under this Lease, and Tenant shall be deemed to have given such certificate as
above provided without modification and shall be deemed to have admitted the
accuracy of any information supplied by Landlord to a prospective purchaser or
mortgagee.
31. Subordination
Landlord shall have the right to cause this Lease to be and remain subject and
subordinate to any and all mortgages, deeds of trust and ground leases, if any
("Encumbrances") that are now or may hereafter be executed covering the
Premises, or any renewals, modifications, consolidations, replacements or
extensions thereof, for the full amount of all advances made or to be made
thereunder and without regard to the time or character of such advances,
together with interest thereon and subject to all the terms and provisions
thereof; provided only, that in the event of termination of any such ground
lease or upon the foreclosure of any such mortgage or deed of trust, so long
as Tenant is not in default, the holder thereof ("Holder") shall agree to
recognize Tenant's rights under this Lease as long as Tenant shall pay the
Rent and observe and perform all the provisions of this Lease to be observed
and performed by Tenant. Within ten (10) days after Landlord's written
request, Tenant shall execute, acknowledge and deliver any and all reasonable
documents required by Landlord or the Holder to effectuate such subordination.
If Tenant fails to do so, such failure shall constitute a Default by Tenant
under this Lease. Notwithstanding anything to the contrary set forth in this
Paragraph 31, Tenant hereby attorns and agrees to attorn to any person or
entity purchasing or otherwise acquiring the Premises at any sale or other
proceeding or pursuant to the exercise of any other rights, powers or remedies
under such Encumbrance.
32. Environmental Covenants
(a) Prior to executing this Lease, Tenant has completed, executed
and delivered to Landlord a Hazardous Materials Disclosure Certificate
("Initial Disclosure Certificate"), a fully completed copy of which is
attached hereto as Exhibit E and incorporated herein by this reference.
Tenant covenants, represents and warrants to Landlord that the information on
the Initial Disclosure Certificate is true and correct and accurately
describes the Hazardous Materials which will be manufactured, treated, used
or stored on or about the Premises by Tenant or Tenant's Agents. Tenant
shall, on each anniversary of the Commencement Date and at such other times as
Tenant desires to manufacture, treat, use or store on or about the Premises
new or additional Hazardous Materials which were not listed on the Initial
Disclosure Certificate, complete, execute and deliver to Landlord an updated
Disclosure Certificate (each, an "Updated Disclosure Certificate") describing
Tenant's then current and proposed future uses of Hazardous Materials on or
about the Premises, which Updated Disclosure Certificates shall be in the same
format as that which is set forth in Exhibit E or in such updated format as
Landlord may require from time to time. Tenant shall deliver an Updated
Disclosure Certificate to Landlord not less than thirty (30) days prior to the
date Tenant intends to commence the manufacture, treatment, use or storage of
new or additional Hazardous Materials on or about the Premises, and Landlord
shall have the right to approve or disapprove such new or additional Hazardous
Materials in its sole and absolute discretion. Tenant shall make no use of
Hazardous Materials on or about the Premises except as described in the
Initial Disclosure Certificate or as otherwise approved by Landlord in writing
in accordance with this Paragraph 32(a).
(b) As used in this Lease, the term "Hazardous Materials" shall
mean and include any substance that is or contains (1) any "hazardous
substance" as now or hereafter defined in 101(14) of the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended
("CERCLA") (42 U.S.C. 9601 et seq.) or any regulations promulgated under
CERCLA; (2) any "hazardous waste" as now or hereafter defined in the Resource
Conservation and Recovery Act, as amended ("RCRA") (42 U.S.C. 6901 et seq.)
or any regulations promulgated under RCRA; (3) any substance now or hereafter
regulated by the Toxic Substances Control Act, as amended ("TSCA") (15 U.S.C.
2601 et seq.) or any regulations promulgated under TSCA; (4) petroleum,
petroleum by-products, gasoline, diesel fuel, or other petroleum hydrocarbons;
(5) asbestos and asbestos- containing material, in any form, whether friable or
non- friable; (6) polychlorinated biphenyls; (7) lead and lead- containing
materials; or (8) any additional substance, material or waste (A) the presence
of which on or about the Premises (i) requires reporting, investigation or
remediation under any Environmental Laws (as hereinafter defined), (ii) causes
or threatens to cause a nuisance on the Premises or any adjacent area or
property or poses or threatens to pose a hazard to the health or safety of
persons on the Premises or any adjacent area or property, or (iii) which, if
it emanated or migrated from the Premises, could constitute a trespass, or (B)
which is now or is hereafter classified or considered to be hazardous or toxic
under any Environmental Laws.
(c) As used in this Lease, the term "Environmental Laws" shall
mean and include (1) CERCLA, RCRA and TSCA; and (2) any other federal, state
or local laws, ordinances, statutes, codes, rules, regulations, orders or
decrees now or hereinafter in effect relating to (A) pollution, (B) the
protection or regulation of human health, natural resources or the
environment, (C) the treatment, storage or disposal of Hazardous Materials, or
(D) the emission, discharge, release or threatened release of Hazardous
Materials into the environment.
(d) Tenant agrees that during its use and occupancy of the
Premises it will (1) not (A) permit Hazardous Materials to be present on or
about the Premises except in a manner and quantity necessary for the ordinary
performance of Tenant's business or (B) release, discharge or dispose of any
Hazardous Materials on, in, at, under, or emanating from, the Premises, the
Building or the Project; provided, however, that Tenant shall have the right
to use and dispose of de minimis amounts of cleaning materials, toner fluids
and other typical office and janitorial supplies, provided that the same are
necessary for the conduct of Tenant's business operations in the Premises and
are used and disposed of at all times in full compliance with all
Environmental Laws; (2) comply with all Environmental Laws relating to the
Premises and the use of Hazardous Materials on or about the Premises and not
engage in or permit others to engage in any activity at the Premises in
violation of any Environmental Laws; and (3) immediately notify Landlord of
(A) any inquiry, test, investigation or enforcement proceeding by any
governmental agency or authority against Tenant, Landlord or the Premises,
Building or Project relating to any Hazardous Materials or under any
Environmental Laws or (B) the occurrence of any event or existence of any
condition that would cause a breach of any of the covenants set forth in this
Paragraph 32.
(e) If Tenant's use of Hazardous Materials on or about the
Premises results in a release, discharge or disposal of Hazardous Materials
on, in, at, under, or emanating from, the Premises, the Building or the
Project, Tenant agrees to investigate, clean up, remove or remediate such
Hazardous Materials in full compliance with (1) the requirements of (A) all
Environmental Laws and (B) any governmental agency or authority responsible
for the enforcement of any Environmental Laws; and (2) any additional
requirements of Landlord that are reasonably necessary to protect the value of
the Premises, the Building or the Project.
(f) Upon reasonable notice to Tenant, Landlord may inspect the
Premises and surrounding areas for the purpose of determining whether there
exists on or about the Premises any Hazardous Material or other condition or
activity that is in violation of the requirements of this Lease or of any
Environmental Laws. Such inspections may include, but are not limited to,
entering the Premises or adjacent property with drill rigs or other machinery
for the purpose of obtaining laboratory samples. Landlord shall not be
limited in the number of such inspections during the Term of this Lease. In
the event (1) such inspections reveal the presence of any such Hazardous
Material or other condition or activity in violation of the requirements of
this Lease or of any Environmental Laws, or (2) Tenant or its Agents
contribute or knowingly consent to the presence of any Hazardous Materials in,
on, under, through or about the Premises, the Building or the Project or
exacerbate the condition of or the conditions caused by any Hazardous
Materials in, on, under, through or about the Premises, the Building or the
Project, Tenant shall reimburse Landlord for the cost of such inspections
within ten (10) days of receipt of a written statement therefor. Tenant will
supply to Landlord such historical and operational information regarding the
Premises and surrounding areas as may be reasonably requested to facilitate
any such inspection and will make available for meetings appropriate personnel
having knowledge of such matters. Tenant agrees to give Landlord at least
sixty (60) days' prior notice of its intention to vacate the Premises so that
Landlord will have an opportunity to perform such an inspection prior to such
vacation. The right granted to Landlord herein to perform inspections shall
not create a duty on Landlord's part to inspect the Premises, or liability on
the part of Landlord for Tenant's use, storage, treatment or disposal of
Hazardous Materials, it being understood that Tenant shall be solely
responsible for all liability in connection therewith.
(g) Landlord shall have the right, but not the obligation, prior
or subsequent to a Default, without in any way limiting Landlord's other
rights and remedies under this Lease, to enter upon the Premises, or to take
such other actions as it deems necessary or advisable, to investigate, clean
up, remove or remediate any Hazardous Materials or contamination by Hazardous
Materials present on, in, at, under, or emanating from, the Premises, the
Building or the Project in violation of Tenant's obligations under this Lease
or under any Environmental Laws. Notwithstanding any other provision of this
Lease, Landlord shall also have the right, at its election, in its own name or
as Tenant's agent, to negotiate, defend, approve and appeal, at Tenant's
expense, any action taken or order issued by any governmental agency or
authority with regard to any such Hazardous Materials or contamination by
Hazardous Materials. All costs and expenses paid or incurred by Landlord in
the exercise of the rights set forth in this Paragraph 32 shall be payable by
Tenant upon demand.
(h) Tenant shall surrender the Premises to Landlord upon the
expiration or earlier termination of this Lease free of debris, waste or
Hazardous Materials placed on, about or near the Premises by Tenant or
Tenant's Agents, and in a condition which, with respect to Tenant's use and
occupancy of the Premises, complies with all Environmental Laws and any
additional requirements of Landlord that are reasonably necessary to protect
the value of the Premises, the Building or the Project, including, without
limitation, the obtaining of any closure permits or other governmental
permits or approvals related to Tenant's use of Hazardous Materials in or
about the Premises. Tenant's obligations and liabilities pursuant to the
provisions of this Paragraph 32 shall survive the expiration or earlier
termination of this Lease. If it is determined by Landlord that the
condition of all or any portion of the Premises, the Building, and/or the
Project is not in compliance with the provisions of this Lease with respect to
Hazardous Materials, including, without limitation, all Environmental Laws,
at the expiration or earlier termination of this Lease, then at Landlord's
sole option, Landlord may require Tenant to hold over possession of the
Premises until Tenant can surrender the Premises to Landlord in the condition
in which the Premises existed as of the Commencement Date and prior to the
appearance of such Hazardous Materials except for normal wear and tear,
including, without limitation, the conduct or performance of any closures as
required by any Environmental Laws. The burden of proof hereunder shall be
upon Tenant. For purposes hereof, the term "normal wear and tear" shall not
include any deterioration in the condition or diminution of the value of any
portion of the Premises, the Building, and/or the Project in any manner
whatsoever related to directly, or indirectly, Hazardous Materials. Any such
holdover by Tenant will be with Landlord's consent, will not be terminable by
Tenant in any event or circumstance and will otherwise be subject to the
provisions of Paragraph 35 of this Lease.
(i) Tenant agrees to indemnify and hold harmless Landlord from and
against any and all claims, losses (including, without limitation, loss in
value of the Premises, the Building or the Project), liabilities and expenses
(including attorney's fees) sustained by Landlord attributable to (1) any
Hazardous Materials placed on or about the Premises, the Building or the
Project by Tenant or Tenant's Agents, or (2) Tenant's breach of any provision
of this Paragraph 32.
(j) Notwithstanding anything in this Paragraph 32 to the contrary,
Tenant shall not be responsible for the removal or remediation of, and shall
not be required to indemnify Landlord against any claims or losses resulting
from, (i) any Hazardous Materials placed or disposed of on the Premises by
third parties prior to the Commencement Date, or (ii) any Hazardous Materials
that migrate on to the Premises from adjacent properties during the Term of
this Lease, except in either case to the extent that Tenant or Tenant's
Agent's exacerbate the condition of or the conditions caused by such Hazardous
Materials.
(k) The provisions of this Paragraph 32 shall survive the
expiration or earlier termination of this Lease.
33. Notices
All notices and demands which are required or may be permitted to be given to
either party by the other hereunder shall be in writing and shall be sent by
United States mail, postage prepaid, certified, or by personal delivery or
overnight courier, addressed to the addressee at Tenant's Address or
Landlord's Address as specified in the Basic Lease Information, or to such
other place as either party may from time to time designate in a notice to the
other party given as provided herein. Copies of all notices and demands
given to Landlord shall additionally be sent to Landlord's property manager at
the address specified in the Basic Lease Information or at such other address
as Landlord may specify in writing from time to time. Notice shall be deemed
given upon actual receipt (or attempted delivery if delivery is refused ), if
personally delivered, or one (1) business day following deposit with a
reputable overnight courier that provides a receipt, or on the third (3rd) day
following deposit in the United States mail in the manner described above.
34. Waiver
The waiver of any breach of any term, covenant or condition of this Lease
shall not be deemed to be a waiver of such term, covenant or condition or of
any subsequent breach of the same or any other term, covenant or condition
herein contained. The subsequent acceptance of Rent by Landlord shall not be
deemed to be a waiver of any preceding breach by Tenant, other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of
such Rent. No delay or omission in the exercise of any right or remedy of
Landlord in regard to any Default by Tenant shall impair such a right or
remedy or be construed as a waiver. Any waiver by Landlord of any Default
must be in writing and shall not be a waiver of any other Default concerning
the same or any other provisions of this Lease.
35. Holding Over
Any holding over after the expiration of the Term, without the express written
consent of Landlord, shall constitute a Default and, without limiting
Landlord's remedies provided in this Lease, such holding over shall be
construed to be a tenancy at sufferance, at a rental rate equal to the greater
of one hundred fifty percent (150%) of the fair market rental value for the
Premises as determined by Landlord or two hundred percent (200%) of the Base
Rent last due in this Lease, plus Additional Rent, and shall otherwise be on
the terms and conditions herein specified, so far as applicable; provided,
however, in no event shall any renewal or expansion option or other similar
right or option contained in this Lease be deemed applicable to any such
tenancy at sufferance. If the Premises are not surrendered at the end of the
Term or sooner termination of this Lease, and in accordance with the
provisions of Paragraphs 11 and 32(h), Tenant shall indemnify, defend and hold
Landlord harmless from and against any and all loss or liability resulting
from delay by Tenant in so surrendering the Premises including, without
limitation, any loss or liability resulting from any claim against Landlord
made by any succeeding tenant or prospective tenant founded on or resulting
from such delay and losses to Landlord due to lost opportunities to lease any
portion of the Premises to any such succeeding tenant or prospective tenant,
together with, in each case, actual attorneys' fees and costs.
36. Successors And Assigns
The terms, covenants and conditions of this Lease shall, subject to the
provisions as to assignment, apply to and bind the heirs, successors,
executors, administrators and assigns of all of the parties hereto. If Tenant
shall consist of more than one entity or person, the obligations of Tenant
under this Lease shall be joint and several.
37. Time
Time is of the essence of this Lease and each and every term, condition and
provision herein.
38. Brokers
Landlord and Tenant each represents and warrants to the other that neither it
nor its officers or agents nor anyone acting on its behalf has dealt with any
real estate broker except the Brokers specified in the Basic Lease Information
in the negotiating or making of this Lease, and each party agrees to indemnify
and hold harmless the other from any claim or claims, and costs and expenses,
including attorneys' fees, incurred by the indemnified party in conjunction
with any such claim or claims of any other broker or brokers to a commission
in connection with this Lease as a result of the actions of the indemnifying
party.
39. Limitation Of Liability
Tenant agrees that, in the event of any default or breach by Landlord with
respect to any of the terms of the Lease to be observed and performed by
Landlord (1) Tenant shall look solely to the then-current landlord's interest
in the Building for the satisfaction of Tenant's remedies for the collection
of a judgment (or other judicial process) requiring the payment of money by
Landlord; (2) no other property or assets of Landlord, its partners,
shareholders, officers, directors, employees, investment advisors, or any
successor in interest of any of them (collectively, the "Landlord Parties")
shall be subject to levy, execution or other enforcement procedure for the
satisfaction of Tenant's remedies; (3) no personal liability shall at any time
be asserted or enforceable against the Landlord Parties; and (4) no judgment
will be taken against the Landlord Parties. The provisions of this section
shall apply only to the Landlord and the parties herein described, and shall
not be for the benefit of any insurer nor any other third party.
40. Financial Statements
Within ten (10) days after Landlord's request, Tenant shall deliver to
Landlord the then current financial statements of Tenant (including interim
periods following the end of the last fiscal year for which annual statements
are available), prepared or compiled by a certified public accountant,
including a balance sheet and profit and loss statement for the most recent
prior year, all prepared in accordance with generally accepted accounting
principles consistently applied.
41. Rules And Regulations
Tenant agrees to comply with such reasonable rules and regulations as Landlord
may adopt from time to time for the orderly and proper operation of the
Building and the Project. Such rules may include but shall not be limited to
the following: (a) restriction of employee parking to a limited, designated
area or areas; and (b) regulation of the removal, storage and disposal of
Tenant's refuse and other rubbish at the sole cost and expense of Tenant. The
then current rules and regulations shall be binding upon Tenant upon delivery
of a copy of them to Tenant. Landlord shall not be responsible to Tenant for
the failure of any other person to observe and abide by any of said rules and
regulations. Landlord's current rules and regulations are attached to this
Lease as Exhibit C.
42. Mortgagee Protection
(a) Modifications for Lender. If, in connection with obtaining
financing for the Project or any portion thereof, Landlord's lender shall
request reasonable modifications to this Lease as a condition to such
financing, Tenant shall not unreasonably withhold, delay or defer its consent
to such modifications, provided such modifications do not materially
adversely affect Tenant's rights or increase Tenant's obligations under this
Lease.
(b) Rights to Cure. Tenant agrees to give to any trust deed or
mortgage holder ("Holder"), by registered mail, at the same time as it is
given to Landlord, a copy of any notice of default given to Landlord, provided
that prior to such notice Tenant has been notified, in writing, (by way of
notice of assignment of rents and leases, or otherwise) of the address of such
Holder. Tenant further agrees that if Landlord shall have failed to cure such
default within the time provided for in this Lease, then the Holder shall
have an additional twenty (20) days after expiration of such period, or after
receipt of such notice from Tenant (if such notice to the Holder is required
by this Paragraph 42(b)), whichever shall last occur within which to cure such
default or if such default cannot be cured within that time, then such
additional time as may be necessary if within such twenty (20) days, any
Holder has commenced and is diligently pursuing the remedies necessary to cure
such default (including but not limited to commencement of foreclosure
proceedings, if necessary to effect such cure), in which event this Lease
shall not be terminated.
43. Entire Agreement
This Lease, including the Exhibits and any Addenda attached hereto, which are
hereby incorporated herein by this reference, contains the entire agreement of
the parties hereto, and no representations, inducements, promises or
agreements, oral or otherwise, between the parties, not embodied herein or
therein, shall be of any force and effect.
44. Interest
Any installment of Rent and any other sum due from Tenant under this Lease
which is not received by Landlord within ten (10) days from when the same is
due shall bear interest from the date such payment was originally due under
this Lease until paid at an annual rate equal to ten percent (10%). Payment
of such interest shall not excuse or cure any Default by Tenant. In addition,
Tenant shall pay all costs and attorneys' fees incurred by Landlord in
collection of such amounts.
45. Construction
This Lease shall be construed and interpreted in accordance with the laws of
the State of California. The parties acknowledge and agree that no rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall be employed in the interpretation of this Lease,
including the Exhibits and any Addenda attached hereto. All captions in this
Lease are for reference only and shall not be used in the interpretation of
this Lease. Whenever required by the context of this Lease, the singular
shall include the plural, the masculine shall include the feminine, and vice
versa. If any provision of this Lease shall be determined to be illegal or
unenforceable, such determination shall not affect any other provision of this
Lease and all such other provisions shall remain in full force and effect.
46. Representations And Warranties Of Tenant
Tenant hereby makes the following representations and warranties, each of
which is material and being relied upon by Landlord, is true in all respects
as of the date of this Lease, and shall survive the expiration or termination
of the Lease.
(a) If Tenant is an entity, Tenant is duly organized, validly
existing and in good standing under the laws of the state of its organization
and the persons executing this Lease on behalf of Tenant have the full right
and authority to execute this Lease on behalf of Tenant and to bind Tenant
without the consent or approval of any other person or entity. Tenant has
full power, capacity, authority and legal right to execute and deliver this
Lease and to perform all of its obligations hereunder. This Lease is a
legal, valid and binding obligation of Tenant, enforceable in accordance with
its terms.
(b) Tenant has not (1) made a general assignment for the benefit
of creditors, (2) filed any voluntary petition in bankruptcy or suffered the
filing of an involuntary petition by any creditors, (3) suffered the
appointment of a receiver to take possession of all or substantially all of
its assets, (4) suffered the attachment or other judicial seizure of all or
substantially all of its assets, (5) admitted in writing its inability to pay
its debts as they come due, or (6) made an offer of settlement, extension or
composition to its creditors generally.
47. Security
(a) Tenant acknowledges and agrees that, while Landlord may engage
security personnel to patrol the Building or the Project, Landlord is not
providing any security services with respect to the Premises, the Building or
the Project and that Landlord shall not be liable to Tenant for, and Tenant
waives any claim against Landlord with respect to, any loss by theft or any
other damage suffered or incurred by Tenant in connection with any
unauthorized entry into the Premises or any other breach of security with
respect to the Premises, the Building or the Project.
(b) Tenant hereby agrees to the exercise by Landlord and
Landlord's Agents, within their sole discretion, of such security measures as,
but not limited to, the evacuation of the Premises, the Building or the
Project for cause, suspected cause or for drill purposes, the denial of any
access to the Premises, the Building or the Project and other similarly
related actions that it deems necessary to prevent any threat of property
damage or bodily injury. The exercise of such security measures by Landlord
and Landlord's Agents, and the resulting interruption of service and
cessation of Tenant's business, if any, shall not be deemed an eviction or
disturbance of Tenant's use and possession of the Premises, or any part
thereof, or render Landlord or Landlord's Agents liable to Tenant for any
resulting damages or relieve Tenant from Tenant's obligations under this Lease.
48. Jury Trial Waiver
Tenant hereby waives any right to trial by jury with respect to any action or
proceeding (i) brought by Landlord, Tenant or any other party, relating to (A)
this Lease and/or any understandings or prior dealings between the parties
hereto, or (B) the Premises, the Building or the Project or any part thereof,
or (ii) to which Landlord is a party. Tenant hereby agrees that this Lease
constitutes a written consent to waiver of trial by jury pursuant to the
provisions of California Code of Civil Procedure Section 631, and Tenant does
hereby constitute and appoint Landlord its true and lawful attorney-in-fact,
which appointment is coupled with an interest, and Tenant does hereby
authorize and empower Landlord, in the name, place and stead of Tenant, to
file this Lease with the clerk or judge of any court of competent
jurisdiction as a statutory written consent to waiver of trial by jury.
Landlord and Tenant have executed and delivered this Lease as of the Lease
Date specified in the Basic Lease Information.
Landlord: Aetna Life Insurance Company,
a Connecticut corporation
By: Allegis Realty Investors LLC
Its Investment Advisor and Agent
By: /s/ Cynithia Stevenin
-----------------------
Print Name: Cynthia Stevenin
Its: Vice President
Tenant: Arthrocare Corporation,
a California corporation
By: /s/ Christine Hanni
-----------------------
Print Name: Christine Hanni
Its: V.P. Finance and Chief Financial Officer
By: /s/ Michael A. Baker
-----------------------
Print Name: Michael A. Baker
Its: President and Chief Executive Officer
<PAGE>
Exhibit A
Diagram Of The Premises
[Diagram depicting layout of premises.]
<PAGE>
Exhibit B
Commencement Date Memorandum
Landlord: Aetna Life Insurance Company
Tenant: Arthrocare Corporation
Lease Date: March 25, 1998
Premises: Located at 840 Del Rey Avenue, Sunnyvale, California
Tenant hereby accepts the Premises as being in the condition required under
the Lease.
The Commencement Date of the Lease is hereby established as March 25, 1998.
Tenant: Arthrocare Corporation,
a California corporation
By: /s/ Christine Hanni
-----------------------
Print Name: Christine Hanni
Its: V.P. Finance and Chief Financial Officer
Approved and Agreed:
Landlord: Aetna Life Insurance Company,
a Connecticut corporation
By: Allegis Realty Investors LLC
Its Investment Advisor and Agent
By: /s/ Cynithia Stevenin
-----------------------
Print Name: Cynthia Stevenin
Its: Vice President
<PAGE>
Exhibit C
Rules and Regulations
This exhibit, entitled "Rules and Regulations," is and shall constitute
Exhibit C to the Lease Agreement, dated as of the Lease Date, by and between
landlord and Tenant for the Premises. The terms and conditions of this
Exhibit C are hereby incorporated into and are made a part of the Lease.
Capitalized terms used, but not otherwise defined, in this Exhibit C have the
meanings ascribed to such terms in the Lease.
(1) Tenant shall not use any method of heating or air conditioning other
than that supplied by Landlord without the consent of Landlord.
(2) All window coverings installed by Tenant and visible from the outside
of the building require the prior written approval of Landlord.
(3) Tenant shall not use, keep or permit to be used or kept any foul or
noxious gas or substance or any flammable or combustible materials on or
around the Premises, except to the extent that Tenant is permitted to use the
same under the terms of Paragraph 32 of the Lease.
(4) Tenant shall not alter any lock or install any new locks or bolts on
any door at the Premises without the prior consent of Landlord.
(5) Tenant shall not make any duplicate keys without the prior consent of
Landlord.
(6) Tenant shall park motor vehicles in parking areas designated by
Landlord except for loading and unloading. During those periods of loading
and unloading, Tenant shall not unreasonably interfere with traffic flow
around the Building or the Project and loading and unloading areas of other
tenants. Tenant shall not park motor vehicles in designated parking areas
after the conclusion of normal daily business activity.
(7) Tenant shall not disturb, solicit or canvas any tenant or other
occupant of the Building or Project and shall cooperate to prevent same.
(8) No person shall go on the roof without Landlord's permission.
(9) Business machines and mechanical equipment belonging to Tenant which
cause noise or vibration that may be transmitted to the structure of the
Building, to such a degree as to be objectionable to Landlord or other
tenants, shall be placed and maintained by Tenant, at Tenant's expense, on
vibration eliminators or in noise-dampening housing or other devices
sufficient to eliminate noise or vibration.
(10) All goods, including material used to store goods, delivered to the
Premises of Tenant shall be immediately moved into the Premises and shall not
be left in parking or receiving areas overnight.
(11) Tractor trailers which must be unhooked or parked with dolly wheels
beyond the concrete loading areas must use steel plates or wood blocks under
the dolly wheels to prevent damage to the asphalt paving surfaces. No
parking or storing of such trailers will be permitted in the auto parking
areas of the Project or on streets adjacent thereto.
(12) Forklifts which operate on asphalt paving areas shall not have solid
rubber tires and shall only use tires that do not damage the asphalt.
(13) Tenant is responsible for the storage and removal of all trash and
refuse. All such trash and refuse shall be contained in suitable receptacles
stored behind screened enclosures at locations approved by Landlord.
(14) Tenant shall not store or permit the storage or placement of goods or
merchandise in or around the common areas surrounding the Premises. No
displays or sales of merchandise shall be allowed in the parking lots or other
common areas.
(15) Tenant shall not permit any animals, including but not limited to, any
household pets, to be brought or kept in or about the Premises, the Building,
the Project or any of the common areas.
Initials:
Tenant: /s/C.H.
-------
Landlord: /s/C.S.
-------
<PAGE>
Exhibit D
Sign Criteria
[Diagram, Descrption and Criteria of Sign]
<PAGE>
Exhibit E
Hazardous Materials Disclosure Certificate
Your cooperation in this matter is appreciated. Initially, the information
provided by you in this Hazardous Materials Disclosure Certificate is
necessary for the Landlord to evaluate your proposed uses of the premises (the
"Premises") and to determine whether to enter into a lease agreement with you
as tenant. If a lease agreement is signed by you and the Landlord (the "Lease
Agreement"), on an annual basis in accordance with the provisions of Paragraph
32 of the Lease Agreement, you are to provide an update to the information
initially provided by you in this certificate. Any questions regarding this
certificate should be directed to, and when completed, the certificate should
be delivered to:
Landlord: Aetna Life Insurance Company
c/o Allegis Realty Investors LLC
455 Market Street, Suite 1540
San Francisco, California 94105
Attention: Cynthia Stevenin
Phone: (415) 538-4800
Name of (Prospective) Tenant: Arthrocare Corporation
Mailing Address: 595 N. Pastoria Avenue
Sunnyvale , CA 94086
Contact Person, Title and Telephone Number(s):
Christine Hanni, VP Finance and CFO
(408) 736-0224
Contact Person for Hazardous Waste Materials Management and Manifests and
Telephone Number(s): Gwen Taylor
(408) 736-0224
Address of (Prospective) Premises:
840 Del Rey Avenue
Sunnyvale , CA 94086
Length of (Prospective) initial Term:
Until February 28, 2002
<PAGE>
1. General Information:
Describe the proposed operations to take place in, on, or about the Premises,
including, without limitation, principal products processed, manufactured or
assembled, and services and activities to be provided or otherwise conducted.
Existing tenants should describe any proposed changes to on- going operations.
Research and development and manufacturing of disposable medical devices as
well as general and administrative activities.
2. Storage and Disposal of Hazardous Materials:
2.1 Will any Hazardous Materials (as hereinafter defined) be used,
generated, treated, stored or disposed of in, on or about the
Premises? Existing tenants should describe any Hazardous
Materials which continue to be used, generated, treated,
stored or disposed of in, on or about the Premises.
Wastes X Yes _____ No
Chemical Products X Yes _____ No
Other _____ Yes _____ No
If Yes is marked, please explain: Various chemicals are
used in the R&D areas - acetone, various adhesives, alcohol,
and saline.
2.2 If Yes is marked in Section 2.1, attach a list of any
Hazardous Materials to be used, generated, treated, stored or
disposed of in, on or about the Premises, including the
applicable hazard class and an estimate of the quantities of
such Hazardous Materials to be present on or about the
Premises at any given time; estimated annual throughput; the
proposed location(s) and method of storage (excluding nominal
amounts of ordinary household cleaners and janitorial supplies
which are not regulated by any Environmental Laws, as
hereinafter defined); and the proposed location(s) and
method(s) of treatment or disposal for each Hazardous Material,
including, the estimated frequency, and the proposed
contractors or subcontractors. Existing tenants should attach
a list setting forth the information requested above and such
list should include actual data from on-going operations and
the identification of any variations in such information from
the prior year's certificate.
On attached list, the locations marked C and E are to be moved
to the Del Rey premises.
3. Storage Tanks and Sumps
3.1 Is any above or below ground storage or treatment of gasoline,
diesel, petroleum, or other Hazardous Materials in tanks or
sumps proposed in, on or about the Premises? Existing tenants
should describe any such actual or proposed activities.
_____ Yes X No
If Yes is marked, please explain:
4 Waste Management
4.1 Has your company been issued an EPA Hazardous Waste Generator
I.D. Number? Existing tenants should describe any additional
identification numbers issued since the previous certificate.
X Yes _____ No
4.2 Has your company filed a biennial or quarterly reports as a
hazardous waste generator? Existing tenants should describe
any new reports filed.
X Yes _____ No
If yes, attach a copy of the most recent report filed.
5. Wastewater Treatment and Discharge
5.1 Will your company discharge wastewater or other wastes to:
_____ storm drain?
_____ sewer?
_____ surface water?
X no wastewater or other wastes discharged.
Existing tenants should indicate any actual discharges. If so,
describe the nature of any proposed or actual discharge(s).
5.2 Will any such wastewater or waste be treated before discharge?
N/A
If yes, describe the type of treatment proposed to be
conducted. Existing tenants should describe the actual
treatment conducted.
6. Air Discharges
6.1 Do you plan for any air filtration systems or stacks to be
used in your company's operations in, on or about the Premises
that will discharge into the air; and will such air emissions
be monitored? Existing tenants should indicate whether or
not there are any such air filtration systems or stacks in use
in, on or about the Premises which discharge into the air and
whether such air emissions are being monitored.
_____ Yes X No
If yes, please describe:
6.2 Do you propose to operate any of the following types of
equipment, or any other equipment requiring an air emissions
permit? Existing tenants should specify any such equipment
being operated in, on or about the Premises.
_____ Spray booth(s)
_____ Incinerator(s)
_____ Dip tank(s)
_____ Other (Please describe)
_____ Drying oven(s)
X No Equipment Requiring Air Permits
If yes, please describe:
6.3 Please describe (and submit copies of with this Hazardous
Materials Disclosure Certificate) any reports you have filed
in the past thirty-six months with any governmental or quasi-
governmental agencies or authorities related to air discharges
or clean air requirements and any such reports which have been
issued during such period by any such agencies or authorities
with respect to you or your business operations.
N/A
7. Hazardous Materials Disclosures
7.1 Has your company prepared or will it be required to prepare a
Hazardous Materials management plan ("Management Plan") or
Hazardous Materials Business Plan and Inventory ("Business
Plan") pursuant to Fire Department or other governmental or
regulatory agencies' requirements? Existing tenants should
indicate whether or not a Management Plan is required and has
been prepared.
X Yes _____ No
If yes, attach a copy of the Management Plan or Business Plan.
Existing tenants should attach a copy of any required updates
to the Management Plan or Business Plan.
7.2 Are any of the Hazardous Materials, and in particular
chemicals, proposed to be used in your operations in, on or
about the Premises listed or regulated under Proposition 65?
Existing tenants should indicate whether or not there are any
new Hazardous Materials being so used which are listed or
regulated under Proposition 65.
X Yes _____ No
If yes, please explain: IPA is used as a sterilizer/cleaner
for work surfaces; glutaraldehyde is used as a decontamination
sterilizer but will not be used in 840 Del Rey building.
8. Enforcement Actions and Complaints
8.1 With respect to Hazardous Materials or Environmental Laws, has
your company ever been subject to any agency enforcement
actions, administrative orders, or consent decrees or has
your company received requests for information, notice or
demand letters, or any other inquiries regarding its
operations? Existing tenants should indicate whether or not
any such actions, orders or decrees have been, or are in the
process of being, undertaken or if any such requests have been
received.
_____ Yes X No
If yes, describe the actions, orders or decrees and any
continuing compliance obligations imposed as a result of these
actions, orders or decrees and also describe any requests,
notices or demands, and attach a copy of all such documents.
Existing tenants should describe and attach a copy of any new
actions, orders, decrees, requests, notices or demands not
already delivered to Landlord pursuant to the provisions of
Paragraph 32 of the Lease Agreement.
8.2 Have there ever been, or are there now pending, any lawsuits
against your company regarding any environmental or health and
safety concerns?
_____ Yes X No
If yes, describe any such lawsuits and attach copies of the
complaint(s), cross-complaint(s), pleadings and other
documents related thereto as requested by Landlord. Existing
tenants should describe and attach a copy of any new
complaint(s), cross-complaint(s), pleadings and other related
documents not already delivered to Landlord pursuant to the
provisions of Paragraph 32 of the Lease Agreement.
8.3 Have there been any problems or complaints from adjacent
tenants, owners or other neighbors at your company's current
facility with regard to environmental or health and safety
concerns? Existing tenants should indicate whether or not
there have been any such problems or complaints from adjacent
tenants, owners or other neighbors at, about or near the
Premises and the current status of any such problems or
complaints.
_____ Yes X No
If yes, please describe. Existing tenants should describe any
such problems or complaints not already disclosed to Landlord
under the provisions of the signed Lease Agreement and the
current status of any such problems or complaints.
9. Permits and Licenses
9.1 Attach copies of all permits and licenses issued to your
company with respect to its proposed operations in, on or
about the Premises, including, without limitation, any
Hazardous Materials permits, wastewater discharge permits,
air emissions permits, and use permits or approvals. Existing
tenants should attach copies of any new permits and licenses
as well as any renewals of permits or licenses previously
issued.
As used herein, "Hazardous Materials" shall mean and include any substance
that is or contains (a) any "hazardous substance" as now or hereafter defined
in 101(14) of the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA") (42 U.S.C. 9601 et seq.) or any
regulations promulgated under CERCLA; (b) any "hazardous waste" as now or
hereafter defined in the Resource Conservation and Recovery Act, as amended
("RCRA") (42 U.S.C. 6901 et seq.) or any regulations promulgated under
RCRA; (c) any substance now or hereafter regulated by the Toxic Substances
Control Act, as amended ("TSCA") (15 U.S.C. 2601 et seq.) or any regulations
promulgated under TSCA; (d) petroleum, petroleum by-products, gasoline, diesel
fuel, or other petroleum hydrocarbons; (e) asbestos and asbestos-containing
material, in any form, whether friable or non-friable; (f) polychlorinated
biphenyls; (g) lead and lead-containing materials; or (h) any additional
substance, material or waste (A) the presence of which on or about the
Premises (i) requires reporting, investigation or remediation under any
Environmental Laws (as hereinafter defined), (ii) causes or threatens to cause
a nuisance on the Premises or any adjacent property or poses or threatens to
pose a hazard to the health or safety of persons on the Premises or any
adjacent property, or (iii) which, if it emanated or migrated from the
Premises, could constitute a trespass, or (B) which is now or is hereafter
classified or considered to be hazardous or toxic under any Environmental
Laws; and "Environmental Laws" shall mean and include (a) CERCLA, RCRA and
TSCA; and (b) any other federal, state or local laws, ordinances, statutes,
codes, rules, regulations, orders or decrees now or hereinafter in effect
relating to (i) pollution, (ii) the protection or regulation of human health,
natural resources or the environment, (iii) the treatment, storage or disposal
of Hazardous Materials, or (iv) the emission, discharge, release or threatened
release of Hazardous Materials into the environment.
The undersigned hereby acknowledges and agrees that this Hazardous Materials
Disclosure Certificate is being delivered to Landlord in connection with the
evaluation of a Lease Agreement and, if such Lease Agreement is executed,
will be attached thereto as an exhibit. The undersigned further acknowledges
and agrees that if such Lease Agreement is executed, this Hazardous Materials
Disclosure Certificate will be updated from time to time in accordance with
Paragraph 32 of the Lease Agreement. The undersigned further acknowledges and
agrees that the Landlord and its partners, lenders and representatives may,
and will, rely upon the statements, representations, warranties, and
certifications made herein and the truthfulness thereof in entering into the
Lease Agreement and the continuance thereof throughout the term, and any
renewals thereof, of the Lease Agreement. I [print name] Christine Hanni,
acting with full authority to bind the (proposed) Tenant and on behalf of the
(proposed) Tenant, certify, represent and warrant that the information
contained in this certificate is true and correct.
Arthrocare Corporation,
a California corporation
By: /s/ Christine Hanni
---------------------
Title: Vice President, Finance and Chief Financial Officer
Date: March 25, 1998
Initials:
Tenant: /s/ C.H.
--------
Landlord: /s/ C.S.
--------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in
the company's Form 10-K for the year ended January 3, 1998 and
is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Jan-03-1998
<PERIOD-START> Dec-29-1996
<PERIOD-END> Jan-03-1998
<PERIOD-TYPE> 12-MOS
<CASH> 8,188
<SECURITIES> 10,674
<RECEIVABLES> 2,223
<ALLOWANCES> 0
<INVENTORY> 2,019
<CURRENT-ASSETS> 23,314
<PP&E> 1,412
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,675
<CURRENT-LIABILITIES> 2,972
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 23,537
<TOTAL-LIABILITY-AND-EQUITY> 26,675
<SALES> 12,796
<TOTAL-REVENUES> 12,796
<CGS> 8,495
<TOTAL-COSTS> 8,495
<OTHER-EXPENSES> 13,406
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,687)
<INCOME-TAX> 1
<INCOME-CONTINUING> (7,688)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,688)
<EPS-PRIMARY> ($0.87)
<EPS-DILUTED> ($0.87)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains restated summary financial information
extracted from the Balance Sheet and Statement of Operations
included in the company's Form 10-K for the year ended
December 28, 1996 and in the company's Form 10-Q's for the
quarters ended March 30, June 29, and September 28, 1996 and is
qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<FISCAL-YEAR-END> Dec-28-1996 Dec-28-1996 Dec-28-1996 Dec-28-1996
<PERIOD-START> Jan-01-1996 Jan-01-1996 Jan-01-1996 Jan-01-1996
<PERIOD-END> Dec-28-1996 Mar-30-1996 Jun-29-1996 Sep-28-1996
<PERIOD-TYPE> 12-MOS 3-MOS 6-MOS 9-MOS
<CASH> 11,359 24,801 20,705 12,067
<SECURITIES> 12,281 8,240 9,518 13,949
<RECEIVABLES> 1,251 863 1,176 1,144
<ALLOWANCES> 176 0 0 0
<INVENTORY> 759 1,143 1,301 1,022
<CURRENT-ASSETS> 25,805 35,402 33,034 28,438
<PP&E> 1,484 1,090 1,477 1,462
<DEPRECIATION> 370 0 158 0
<TOTAL-ASSETS> 33,297 38,388 36,449 34,783
<CURRENT-LIABILITIES> 2,337 1,699 1,442 1,599
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 9 9 9 9
<OTHER-SE> 33,288 36,473 34,800 32,983
<TOTAL-LIABILITY-AND-EQUITY> 33,297 38,388 36,449 34,783
<SALES> 6,022 1,159 2,565 4,139
<TOTAL-REVENUES> 6,022 1,159 2,565 4,139
<CGS> 5,242 1,065 2,301 3,666
<TOTAL-COSTS> 5,242 1,065 2,301 3,666
<OTHER-EXPENSES> 9,980 2,098 4,447 6,981
<LOSS-PROVISION> 155 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> (7,704) (1,741) (3,476) (5,408)
<INCOME-TAX> 1 2 2 2
<INCOME-CONTINUING> (7,705) (1,743) (3,478) (5,410)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (7,705) (1,743) (3,478) (5,410)
<EPS-PRIMARY> ($0.97) ($0.30) ($0.49) ($0.71)
<EPS-DILUTED> ($0.97) ($0.30) ($0.49) ($0.71)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains restated summary financial information
extracted from the Balance Sheet and Statement of Operations
included in the company's Form 10-Q's for the quarters ended
March 29, June 28, and September 27, 1997 and is qualified in
its entirety by reference to such Financial Statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<FISCAL-YEAR-END> Jan-03-1998 Jan-03-1998 Jan-03-1998
<PERIOD-START> Dec-29-1996 Dec-29-1996 Dec-29-1996
<PERIOD-END> Mar-29-1997 Jun-28-1997 Sep-27-1997
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<CASH> 17,851 17,143 11,591
<SECURITIES> 4,162 7,972 11,105
<RECEIVABLES> 1,256 1,229 1,492
<ALLOWANCES> 0 0 0
<INVENTORY> 944 1,276 1,678
<CURRENT-ASSETS> 24,340 23,113 24,604
<PP&E> 1,466 1,473 1,421
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 30,921 29,714 28,383
<CURRENT-LIABILITIES> 2,082 2,741 3,211
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 9 9 9
<OTHER-SE> 28,659 26,801 25,000
<TOTAL-LIABILITY-AND-EQUITY> 30,921 29,714 28,383
<SALES> 2,261 5,093 8,459
<TOTAL-REVENUES> 2,261 5,093 8,459
<CGS> 1,679 3,673 5,874
<TOTAL-COSTS> 1,679 3,673 5,874
<OTHER-EXPENSES> 3,136 6,322 9,718
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 387 746 0
<INCOME-PRETAX> (2,167) (4,156) (6,056)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (2,167) (4,156) (6,056)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (2,167) (4,156) (6,056)
<EPS-PRIMARY> ($0.25) ($0.47) ($0.69)
<EPS-DILUTED> ($0.25) ($0.47) ($0.69)
</TABLE>
