UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
Commission file number 0-27802
ARTERIAL VASCULAR ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3144218
(State of incorporation) (I.R.S. Employer Identification No.)
3576 Unocal Place, Santa Rosa, California 95403
(Address of principal executive offices) (Zip code)
(707) 525-0111
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding
Common Stock, $0.001 par value 31,283,674 as of January 13, 1998
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INDEX TO FORM 10-Q
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1997 3
and June 30, 1997
Condensed Consolidated Statements of Operations for the three 4
and six months ended December 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows for the 5
six months ended December 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Change in Securities and Use of Proceeds 19
Item 4. Submissions of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 22
2
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PART I FINANCIAL INFORMATION
<TABLE>
Item 1. Financial Statements
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<CAPTION>
December 31, June 30,
1997 1997
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,471 $ 25,036
Short-term investments 68,920 62,192
Trade accounts receivable, net 34,778 22,850
Inventories 13,590 7,302
Deferred income tax 2,413 2,413
Prepaid expenses and other current assets 6,074 4,472
------------- -------------
Total current assets 140,246 124,265
Deferred income tax 1,598 1,598
Property, plant and equipment, net 41,666 21,759
Purchased technology, net 292 357
------------- -------------
Total assets $183,802 $147,979
============= =============
LIABILITIES
Current liabilities:
Short-term borrowings $ 10,148 $ -
Accounts payable 7,933 4,035
Accrued expenses 8,417 5,744
Income taxes payable 995 -
------------- -------------
Total current liabilities 27,493 9,779
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STOCKHOLDERS' EQUITY
Common stock 31 31
Additional paid-in capital 97,974 93,021
Treasury stock (390) (390)
Cumulative translation adjustment (1,672) (1,364)
Retained earnings 60,366 46,902
------------- -------------
Total stockholders' equity 156,309 138,200
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Total liabilities and stockholders' equity $183,802 $147,979
============= =============
<FN>
See accompanying notes
</FN>
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3
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- ------------------------------
1997 1996 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $38,303 $18,228 $64,565 $36,796
Cost of sales 7,656 3,733 13,145 6,644
----------- ----------- ------------ ------------
Gross profit 30,647 14,495 51,420 30,152
----------- ----------- ------------ ------------
Operating expenses:
Research and development 7,920 2,259 13,398 4,114
Selling, general and administrative 11,897 6,204 19,414 9,335
----------- ----------- ------------ ------------
Total operating expenses 19,817 8,463 32,812 13,449
----------- ----------- ------------ ------------
Operating income
10,830 6,032 18,608 16,703
Interest and other income 1,099 1,054 2,106 2,329
----------- ----------- ------------ ------------
Income before provision for income taxes 11,929 7,086 20,714 19,032
Provision for income taxes 4,175 2,480 7,250 6,661
----------- ----------- ------------ ------------
Net income $ 7,754 $ 4,606 $13,464 $ 12,371
=========== =========== ============ ============
Net income per share--basic $ 0.25 $ 0.15 $ 0.43 $ 0.40
Net income per share--diluted $ 0.24 $ 0.15 $ 0.42 $ 0.39
Shares used to calculate net income per share:
Basic 31,215 30,959 31,140 30,910
Diluted 32,503 31,590 32,370 31,611
<FN>
See accompanying notes
</FN>
4
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Six Months Ended
December 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,464 $ 12,371
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,549 736
Provision for doubtful accounts 1,415 111
Provision for obsolete inventory 97 13
Amortization of deferred compensation - 27
Income tax reduction relating to stock plans 3,867 763
Changes in assets and liabilities:
Short-term investments (6,729) (30,737)
Accounts receivable (13,582) (5,566)
Inventories (6,454) (2,602)
Prepaids and other current assets (1,912) (281)
Accounts payable 3,911 654
Accrued liabilities 2,723 467
Income taxes payable 1,289 (5,625)
----------- -----------
Net cash used in operating activities (362) (29,669)
----------- -----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (21,425) (7,761)
----------- -----------
Net cash used in investing activities (21,425) (7,761)
----------- -----------
Cash flows from financing activities:
Increase in short-term borrowings 10,148 -
Proceeds from issuance of common stock 1,086 50
Acquisition of treasury stock - (390)
----------- -----------
Net cash provided by (used in) financing activities 11,234 (340)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (12) (149)
Net decrease in cash and cash equivalents (10,565) (37,919)
Cash and cash equivalents, at beginning of period 25,036 59,238
----------- -----------
Cash and cash equivalents, at end of period $ 14,471 $ 21,319
=========== ===========
<FN>
See accompanying notes
</FN>
5
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<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements included
herein have been prepared by the Company, without audit, in
accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of management,
all adjustments (consisting of only normal recurring adjustments)
considered necessary to present fairly the financial position,
results of operations and cash flows have been included. These
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements contained in the
Company's Form 10-K for the fiscal year ended June 30, 1997.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. The year-end balance sheet data was derived from audited
financial statements, but does not include disclosures required by
generally accepted accounting principles.
Operating results for the three- and six-month periods ended
December 31, 1997 are not necessarily indicative of the results to be
expected for any other interim period or for the full fiscal year.
2. Inventories (in thousands):
December 31, June 30,
1997 1997
------------ -----------
Raw materials $ 1,933 $ 925
Work in process 4,414 3,044
Finished goods 7,243 3,333
------------ -----------
$ 13,590 $ 7,302
============ ===========
3. Computation of Net Income Per Share
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share. Statement 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings
per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements.
6
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Stock Repurchase Program
During the first quarter of fiscal 1997, the Board of
Directors authorized a stock repurchase program pursuant to which
the Company may repurchase shares of its common stock with an
aggregate value of up to $10 million. The repurchases were made from
time to time on the open market at prevailing market prices or in
negotiated transactions off the market. In November 1997 the program
was discontinued by the Board of Directors. As of the termination of
the program, the Company had repurchased 30,000 shares of its common
stock at an aggregate cost of $390,000.
5. Contingencies
ESS Litigation. Effective as of October 1992, a subsidiary of
the Company purchased substantially all the assets of Endothelial
Support Systems, Inc. (subsequently known as Endovascular Support
Systems, Inc.) ("ESS") in consideration of certain royalty payments
payable by the Company based on the net sales of products using or
adapted from such assets. The Company was informed that the
shareholders of ESS ratified the transaction on May 27, 1993. The
purchased assets included an application for a stent patent which
resulted in a patent owned by the Company. Following such asset
purchase, the Company between June 1993 and March 1995 purchased in
several transactions 100% of the shares of capital stock of ESS from
its shareholders in consideration of shares of common stock of the
Company and, in certain instances, other consideration, and ESS was
merged into the Company. In June 1996, the Company received notice of
a lawsuit filed by Dr. Azam Anwar and Benito Hidalgo, each of whom is
a former shareholder of ESS (who together held approximately 48% of
ESS's outstanding shares of common stock) and each of whom currently
holds shares of common stock of the Company, in the District Court of
Dallas County, Texas. The suit names as defendants the Company,
Bradly A. Jendersee and John D. Miller, each a director, officer and
principal stockholder of the Company, Dr. Simon H. Stertzer, a
director and principal stockholder of the Company, and Dr. Gerald
Dorros, a principal stockholder of the Company. In January 1997, the
plaintiffs filed an amended petition alleging common law fraud,
negligent misrepresentation, securities fraud pursuant to the Texas
Securities Act, fraud pursuant to the Texas Business and Commercial
Code, control person liability, aider and abetter liability of the
individual defendants, civil conspiracy, breach of fiduciary duty,
and constructive fraud in connection with the Company's acquisition
of ESS and the Company's acquisition of shares of ESS capital stock
from the plaintiffs. The plaintiffs seek $395 million in damages,
rescission of the Company's acquisition of the ESS assets and its
subsequent acquisition of the ESS stock, reconstitution of ESS,
punitive damages, interest and attorneys' fees and other relief. On
February 10 and 12, 1997, the court overruled defendants' special
appearances and denied motions objecting to jurisdiction, motions to
dismiss based on forum non conveniens, and motions to abate or stay
the Texas proceedings. The defendants, including the Company, have
filed an answer denying the plaintiffs' claims, and also filed a
counterclaim against the plaintiffs. The counterclaim alleges claims
against Mr. Hidalgo for specific performance, breach of contract,
breach of the implied covenant of good faith and fair dealing, and
declaratory relief based on comparative indemnity, contribution and
absence of fraud. The counterclaim alleges claims against
7
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Dr. Anwar for intentional and negligent interference with contract,
equitable estoppel and declaratory relief based on absence of fraud.
A trial date of February 1, 1998 had been scheduled for the Texas
action. As of the date of this Form 10-Q, however, the trial date had
been continued for at least three weeks, and the parties were
discussing whether to continue such date further and to drop the
Consolidated Action (as defined below) in California. The Company
believes it has meritorious defenses to the claims alleged by the
plaintiffs, and that it has meritorious claims against the
plaintiffs, in the Texas action. However, no assurance can be given
as to the outcome of the action. The inability of the Company to
prevail in the action, including the loss or impairment of the right
to produce products based on the Company's issued patents, could have
a material adverse effect on the Company's business, financial
condition and results of operations.
The Company also received notice in August 1996 of a lawsuit
filed by Messrs. Anwar and Hidalgo in the Superior Court of Sonoma
County, California, which names the same defendants as in the Texas
action and alleges claims for securities fraud and unregistered
securities under the California securities laws, breach of fiduciary
duty and fraud. The plaintiffs seek unspecified damages, rescission
of the Company's acquisition of the ESS assets and its subsequent
acquisition of the ESS stock, reconstitution of ESS and other relief.
The defendants, including the Company, have filed an answer denying
plaintiff's claims, and also filed a cross-complaint against the
plaintiffs. The cross-complaint alleges claims against Mr. Hidalgo
for specific performance, breach of contract, breach of the implied
covenant of good faith and fair dealing, and declaratory relief based
on comparative indemnity, contribution and absence of fraud. The
cross-complaint alleges claims against Dr. Anwar for intentional and
negligent interference with contract, equitable estoppel and
declaratory relief based on absence of fraud. Mr. Hidalgo and Dr.
Anwar have filed an answer generally denying the claims contained in
the cross-complaint.
On July 11, 1996, the Company, along with the individual
defendants named in the Texas and Sonoma County actions, filed two
actions against Mr. Hidalgo in the Superior Court of San Mateo
County, California. The first action alleges claims for specific
performance, breach of contract, breach of the implied covenant of
good faith and fair dealing, and declaratory relief based on
indemnity. These claims arise out of a stock exchange agreement
entered into between Mr. Hidalgo and the Company, and out of Mr.
Hidalgo's actions as a director of ESS. The second action alleges
claims for specific performance, breach of contract, and breach of
the implied covenant of good faith and fair dealing. These claims
arise out of a separation and release agreement entered into between
Mr. Hidalgo and the Company.
On December 6, 1996, the Superior Court of Sonoma County,
California, pursuant to the stipulation of the parties, transferred
the Sonoma County action to the Superior Court of San Mateo County.
On December 11, 1996, the Superior Court of San Mateo County,
pursuant to the stipulation of the parties, consolidated all three
pending California actions into a single action (the "Consolidated
Action"), and ordered that the pleadings from the Sonoma County
action shall be the operative pleadings in the Consolidated Action. A
motion by the Company and the individual defendants for summary
judgment against Mr. Hidalgo in the Consolidated Action was denied by
the Superior Court of San Mateo County on May 5, 1997 with respect to
each of the
8
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
plaintiffs' claims. A trial date of March 2, 1998 has been scheduled
for the Consolidated Action. The Company believes that it has
meritorious defenses to the claims alleged by the plaintiffs, and
that it has meritorious claims against the plaintiffs, in the
Consolidated Action. However, no assurance can be given as to the
outcome of the Consolidated Action. The inability of the Company to
prevail in the Consolidated Action, including the loss or impairment
of the right to produce products based on the Company's issued
patents, could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has agreed to indemnify each of the individuals
named as defendants in the lawsuits against the Company relating to
the ESS transaction.
U.S. Patent Litigation. Two of the Company's competitors have
filed claims against the Company with respect to their alleged
intellectual property rights. The Company has filed for declatory and
injunctive relief in connection with one of the claims.
On October 21, 1997, the Company received notice that it had
been named as an additional defendant, along with Boston Scientific
Corporation and SCIMED Life Systems, Inc., in a lawsuit originally
filed by Cordis Corporation ("Cordis") against Guidant Corporation
and Advanced Cardiovascular Systems, Inc. in federal district court
in Delaware. Cordis alleges, among other things, that the sale by the
Company of its stents in the United States would infringe on certain
patents licensed by Cordis. The complaint seeks declaratory and
injunctive relief, unspecified damages, attorneys' fees and other
relief. On November 6, 1997, the Company filed a motion to dismiss
Cordis' complaint. The Company believes that it has meritorious
defenses to the claims alleged by Cordis in the action. However, no
assurance can be given as to the outcome of the action. The inability
of the Company to prevail in the action, including the loss or
impairment of the right to produce products in the United States,
could have a material adverse effect on the Company's business,
financial condition and results of operations.
On December 24, 1997, the Company received notice that
Advanced Cardiovascular Systems, Inc. ("ACS"), a subsidiary of
Guidant Corporation, had filed a lawsuit against the Company in
federal district court in San Jose, California. ACS alleges, among
other things, that the Company is selling in the United States stents
that infringe on certain patents of ACS. The complaint seeks
injunctive relief, unspecified damages, attorneys' fees and other
relief. The Company believes that it has meritorious defenses to the
claims alleged by ACS in the action. However, no assurance can be
given as to the outcome of the action. The inability of the Company
to prevail in the action, including the loss or impairment of the
right to produce products in the United States, could have a material
adverse effect on the Company's business, financial condition and
results of operations.
On December 26, 1997, the Company filed an action against
Johnson & Johnson, Cordis and Expandable Grafts Partnership in
federal district court in Delaware. The action seeks (i) a
declaration that certain patents are invalid, void, unenforceable and
not infringed by the Company's activities with respect to its stent
systems in the United States, (ii) an injunction prohibiting the
defendants from asserting infringement of such patents against the
Company and (iii) a declaration that the defendants have violated
certain antitrust laws. The Company believes that it has meritorious
claims against the defendants. However, no assurance can be given as
to the outcome of the action.
Claims of Terminated Distributors. In connection with the
Company's termination of certain distributor relationships, several
of such distributors have filed claims against the Company with
respect to such terminations.
In November 1996, in connection with the Company's termination
of its distribution relationship with Alfatec-Medicor N.V.
("Alfatec-Medicor") and Medicor
9
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Nederland B.V. ("Medicor Nederland") in Belgium and The Netherlands,
respectively, effective September 30, 1996, the Company received
notice of a lawsuit filed by Alfatec-Medicor in the Second Chamber of
the Commercial Court of Brussels, Belgium, alleging insufficient
notice of termination of a distribution agreement between the
parties, promotion costs, personnel restructuring claims and
additional compensation. Alfatec-Medicor seeks compensation of
BF189,389,135 (approximately $5.1 million using current exchange
rates), of which BF30,000,000 (approximately $810,000) is sought as a
provisional payment. The Company has entered counterclaims for
$257,000 in unpaid accounts receivable and has requested from
Alfatec-Medicor information that would support its claims for
indemnification, but has not yet received such information. Following
a hearing on April 18, 1997, the court postponed further
consideration of the matter until the parties have conducted an
appropriate exchange of information and prepared written pleadings. A
pleadings hearing is scheduled for April 24, 1998. On February 20,
1997, the Company commenced an action against Medicor Nederland
before the Amsterdam District Court for payment of $269,000 in unpaid
accounts receivable. On July 23, 1997, Medicor Nederland filed a
statement of defense and entered a counterclaim for DG2,284,379
(approximately $1.1 million using current exchange rates) on the
grounds of insufficient notice of termination of a distribution
agreement between the parties and unjust enrichment. On October 29,
1997, the Company filed a reply and answer to the counterclaim. On
December 24, 1997, Medicor Nederland filed a statement of rejoinder
and reply to the counterclaim.
On August 19, 1996, in connection with the Company's
termination of its distribution relationship in Switzerland with
Medicor AG, effective September 30, 1996, such distributor filed an
action against the Company in the United States District Court for
the Northern District of California alleging breach of written, oral
and implied-in-fact contracts, inducement to breach an employment
contract with one of such distributor's employees, intentional
interference with contractual relations, intentional and negligent
interference with prospective economic advantage, misappropriation of
trade secrets, and intentional and negligent misrepresentation. On
October 11, 1996, the court denied the distributor's request for
preliminary and temporary injunctive relief. On January 30, 1997, the
court entered an order dismissing the entire action on forum non
conveniens grounds. As part of the dismissal, AVE has agreed to
submit to the jurisdiction of the appropriate forum in Switzerland,
waive any defense of statute of limitations to any substantially
similar claims made there, make available witnesses and documents
there and satisfy any judgment entered against it there. The
distributor has appealed the court's dismissal of the action. On
January 27, 1997, the Company filed an action in the debt collection
office of Cham, Switzerland against the distributor for $93,000 plus
accrued interest in connection with unpaid accounts receivable from
the distributor relationship. The distributor obtained a preliminary
stay on the debt collection proceedings and a hearing with respect to
the Company's motion to lift such stay was held on March 11, 1997. On
July 14, 1997, the District Court of Zug denied the Company's motion
to lift such stay in a summary proceeding. The Company is in the
process of filing a claim in ordinary court proceedings with the
District Court of Zug to have the stay lifted and to be compensated
for attorneys' fees incurred by the Company in the U.S. proceedings.
10
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
In connection with the Company's termination of its
distribution relationship in France with Medi Service,
S.A.R.L./Fournitures Hospitalieres S.A. effective September 30, 1996,
the Company received notice from such distributor that it had filed
an action before the Tribunal de Grande Instance of Mulhouse in
France seeking compensation for breach of an alleged exclusive
distribution agreement for an indeterminate period between the
parties. The action included a claim for compensation equal to the
total value of such distributor's business, which the distributor
valued at FF400,000,000 (approximately $67 million using current
exchange rates). The Company counterclaimed for unpaid accounts
receivable of approximately $1.8 million and for damages for abusive
legal proceedings. On September 23, 1996, the Tribunal rejected the
distributor's claims for damages for unlawful termination as well as
the Company's counterclaim for abusive legal proceedings. The
Tribunal reserved judgement with respect to the repurchase of the
distributor's inventory of AVE products and the payment of unpaid
accounts receivable sought by the Company. The parties have submitted
briefs on these issues and a procedural hearing was held on March 10,
1997, at which time the distributor filed an additional brief. A
procedural hearing was held on May 9, 1997, at which time the Company
added a counterclaim for unfair competition. Oral argument took place
on December 15, 1997, and the Tribunal is expected to render its
decision on February 2, 1998. On February 10, 1997, the distributor
filed an appeal of the Tribunal's decision of September 23, 1996 with
the Court of Appeals of Colmar, and the parties have exchanged briefs
in the appellate proceeding.
The Company has terminated a distributor relationship in South
Korea. The Company is in ongoing discussions with the distributor
with respect to approximately $491,000 in accounts receivable due the
Company, and the Company has filed a writ of attachment on certain of
the distributor's assets in connection therewith.
With respect to each of the aforementioned distributors, the
Company has consulted with local counsel in the applicable country
and believes that the termination of each of the distributor
relationships was lawful. The Company understands that under the laws
of certain countries, including Belgium and The Netherlands, under
certain circumstances, certain indemnities may be claimed by
distributors for insufficient notice of termination and/or goodwill
compensation. The Company intends to vigorously defend itself against
pending claims and any other claims that may be brought by such
distributors and to pursue claims for unpaid accounts receivable
against such distributors. However, no assurance can be given as to
the outcome of any pending or threatened litigation, and any
successful claim for damages or injunctive relief by one or more of
such distributors, or the failure by the Company to succeed on its
claims against its former French distributor, could have a material
adverse effect on the Company's business, financial condition and
results of operations.
Employee Hiring Litigation. In connection with the hiring by
the Company of employees in the United States, several of the former
employers of such employees have filed, or have threatened to file,
claims against the Company with respect to alleged noncompetition
obligations of such employees.
11
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
On October 6, 1997, the Company received notice that Cordis
Corporation, a subsidiary of Johnson & Johnson ("Cordis"), had filed
a claim in federal district court in Buffalo, New York against the
Company and Charles J. Soles in connection with the Company's hiring
of Mr. Soles and several other former Cordis employees. The complaint
alleges breach of contract by Mr. Soles and tortious interference by
the Company with Cordis' alleged contractual rights. Cordis seeks
preliminary and permanent injunctive relief, compensatory and
punitive damages, attorneys' fees and other relief. The Company has
answered the complaint and moved for summary judgment on the grounds
that the agreement at issue is inapplicable and unenforceable as a
matter of law. The District Court held a hearing on Cordis' motion
for preliminary injunction in late October 1997, and further briefs
and oral arguments were completed in December 1997. The Company has
agreed to limit its contact with Mr. Soles pending the District
Court's determination on preliminary injunctive relief. The Company
believes that it has meritorious defenses to the claims alleged by
Cordis in the action. However, no assurance can be given as to the
outcome of the action.
On November 18, 1997, the Company received notice that United
States Surgical Corporation, Inc. ("USSC"), had filed a claim in
federal district court in Hartford, Connecticut against the Company
in connection with the Company's hiring of Gregory F. Toso. The
complaint alleges tortious interference with USSC's alleged
contractual rights and unfair business competition. USSC seeks
permanent injunctive relief, compensatory and punitive damages,
attorneys' fees and other relief. The Company believes that it has
meritorious defenses to the claims alleged by USSC in the action.
However, no assurance can be given as to the outcome of the action.
From time to time, the Company is involved in other legal
proceedings arising in the ordinary course of its business. As of the
date hereof, the Company is not a party to any other legal
proceedings with respect to which an adverse outcome would, in
management's opinion, have a material adverse effect on the Company's
business, financial condition or results of operations.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The statements contained in this Form 10-Q that are not
historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding the
Company's expectations, beliefs, intentions or strategies regarding
the future. Forward-looking statements made herein include, without
limitation, statements regarding manufacturing scale-up, the
intellectual property positions of competitors, the anticipated
outcome of litigation, the extent and timing of new product
introductions, future revenues, customer demand, competition, pricing
pressure, regulatory approvals, expenditures and margin levels, and
the establishment of direct sales forces in targeted countries. All
forward-looking statements in this document are based on information
available to the Company as of the date hereof, and the Company
assumes no obligation to update any such forward-looking statement.
It is important to note that the Company's actual results could
differ materially from those in such forward-looking statements.
Additional risk factors include those discussed in the reports filed
by the Company from time to time on Forms 10-K, 10-Q and 8-K.
The Company is engaged in the design, development,
manufacturing and marketing of stent systems and percutaneous
transluminal coronary angioplasty ("PTCA") catheters designed to be
utilized in connection with less invasive treatment of
cardiovascular disease. The Company began commercial sales of its
PTCA catheters in October 1993, its coronary stent systems in
October 1994, and its peripheral stent systems in December 1996. In
June 1997, the Company's Japanese distributor received regulatory
approval for the sale in Japan of the Company's coronary stent
systems; however, as of the date hereof, such distributor had not
yet received the related reimbursement approval. The Company does
not expect reimbursement approval in Japan prior to February 1998,
and there can be no assurance when or if such approval will be
obtained. In December 1997, the Company received a pre-market
approval ("PMA") from the United States Food and Drug Administration
(the "FDA") in connection with its commencement of commercial sales
of its coronary stent systems in the United States. Prior to that
time, international sales accounted for substantially all of the
Company's revenues.
The Company has a limited history of operations. The increase
in the Company's sales to date has primarily been due to greater
demand for the Company's coronary stent systems. The Company believes
that it is currently one of the leading providers of coronary stent
systems internationally. In order to support increased levels of
sales in the future and to augment its long term competitive
position, the Company anticipates that it will be required to make
continuing significant additional expenditures in manufacturing,
research and development (including clinical study and regulatory
costs), sales and marketing, and administration, both in absolute
dollars and as a percentage of net sales. The Company also expects to
incur significant legal expenses relating to ongoing litigation,
including patent litigation.
Generally, the Company manufactures and ships product shortly
after the receipt of orders, and anticipates that it will do so in
the future. The Company developed a
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significant short-term backlog during January 1997 in connection with
the scale-up of manufacturing of its GFX(TM) stent product. Such
backlog was significantly reduced during the same fiscal quarter in
which it arose. The Company is currently manufacturing over-the-wire
models of its coronary stent systems for sale in the United States,
unlike the rapid exchange models generally manufactured for
international markets. There can be no assurance that the Company
will be successful in scaling up production of new or modified
products or that it will not experience manufacturing difficulties or
develop backlogs in the future, particularly with respect to the
potentially significant demands of the U.S. market. The Company has
produced and continues to produce inventory for the short-term supply
of the potential U.S. market, and is constructing a 130,000 square
foot building adjacent to its corporate headquarters in Santa Rosa,
California, at an estimated cost of $20 million, which, when
completed, will be largely devoted to manufacturing activities.
However, there can be no assurance that such new manufacturing
facility will be completed in time, or will be sufficient, to allow
the Company to adequately supply the potentially significant demands
of the U.S. market on a long-term basis, or that such new facility or
other potentially necessary facilities will pass regulatory
inspection for compliance with applicable U. S. and international
regulations.
Since the commencement of sales of its coronary stent systems
in the United States, several of the Company's competitors have filed
claims against the Company alleging, among other things, that such
stent systems infringe on certain patents of such competitors.
Although the Company continually reviews the scope of relevant U.S.
and foreign patents and related litigation, the question of
infringement involves complex legal and factual issues and is highly
uncertain. There can be no assurance that any conclusion reached by
the Company regarding infringement will be consistent with the
resolution of such issue by a court. If the Company's products are
determined to infringe such patents and it cannot obtain a license on
commercially reasonable terms or modify its current technology or
develop new products to avoid infringement, such outcome could
require the Company to cease its commercial activities and sales of
the affected products in the United States and could have a material
adverse affect on the Company's business, financial condition and
results of operations. See Note 5 to the unaudited Condensed
Consolidated Financial Statements in Item 1.
The increasing number of devices in the international stent
market and the desire of companies to obtain market share has
resulted in increased price competition, particularly in the second
and third quarters of fiscal 1997. Such competition has, in the
past, caused the Company to reduce prices on its stent systems. The
Company expects that, as the stent industry develops, competition
and pricing pressures will increase. If the Company is forced to
effect further price reductions, such reductions would reduce net
sales in future periods if not offset by increased unit sales or
other factors.
Until April 1996, substantially all of the Company's sales
were to international distributors who resell products to health
care providers. The Company terminated its relationship with
distributors in Germany and the United Kingdom in April and May
1996, respectively, and in France, Switzerland, Belgium and The
Netherlands effective September 30, 1996. Moreover, in October 1997
the Company established a direct sales force in Canada and largely
completed the development of a sales force in the United States for
the direct sales of its coronary stent systems. The Company believes
that the establishment and maintenance of direct sales forces in
Canada, France, Germany, the Netherlands (servicing the Benelux
countries), Switzerland, the United Kingdom and the United States
has required and will continue to require significant ongoing
expenditures, additional management resources and has resulted, and
may continue to result, in additional costs to eliminate existing
distributor relationships (including costs relating to litigation
with former distributors). See Note 5 to the unaudited Condensed
Consolidated Financial Statements in Item 1.
The Company anticipates that its results of operations may
fluctuate for the foreseeable future due to several factors,
including variations in operating expenses, the costs and the
outcome of litigation, competition (including pricing pressures),
fluctuations in international currency exchange rates, costs of
establishing direct sales operations, the timing of research and
development expenses (including clinical trial related
expenditures), the timing of new product introductions or
transitions to new products, sales by distributors, the mix of sales
among distributors and the Company's direct sales force, timing of
regulatory and third party reimbursement approvals, the level of
third-party reimbursement, the Company's ability to manufacture its
products efficiently, and seasonal factors impacting the number of
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elective angioplasty or stent procedures. In addition, the Company's
results of operations could be affected by the timing of orders from
its distributors, changes in the Company's distributor network
(including expenses in connection with termination of former
distributors), the ability of the Company's distributors to
effectively promote the Company's products and the ability of the
Company to quickly and cost-effectively establish an effective
direct sales force in targeted countries. The Company's limited
operating history makes accurate prediction of future operating
results difficult or impossible. Although the Company has
experienced growth in recent years, there can be no assurance that,
in the future, the Company will sustain revenue growth or remain
profitable on a quarterly or annual basis or that its growth will be
consistent with predictions made by securities analysts. The Company
has experienced, and may experience in one or more future quarters,
operating results that are below the expectations of public market
analysts and investors. In such event, the price of the Company's
common stock has been, and would likely be, materially and adversely
affected.
Results of Operations - Three and Six Months Ended December 31, 1997
and 1996
Net sales. For the three months ended December 31, 1997, net
sales increased to $38.3 million from $18.2 million in the
comparable period in fiscal 1997. For the six months ended December
31, 1997, net sales increased to $64.6 million from $36.8 million in
the comparable period in fiscal 1997. The increase in net sales was
due to significant increases in sales of the Company's stent
systems, particularly the GFX family of products. The GFX was
released in certain countries internationally in September 1996, and
the GFX 2.5(TM) and the GFX XL(TM) were released in certain
countries internationally in June 1997.
The Company anticipates that coronary stent system sales will
continue to constitute the vast majority of total net sales for the
near future. In the second quarter of fiscal 1997 the Company began
selling directly in France, Switzerland, and the Netherlands (to
service the Benelux countries). In the three and six months ended
December 31, 1997, these direct sales operations, together with those
established previously in Germany and the United Kingdom, produced a
significant portion of the Company's total net sales. On December 23,
1997, the Company received pre-market approval to commence sales of
its coronary stent systems in the United States. The Company expects
that its direct sales operations in the United States will produce a
significant portion of the Company's total net sales in the future.
All other commercial sales made by the Company were to unaffiliated
distributors, with a significant portion of total net sales for the
three and six months ended December 31, 1997 attributable to orders
from the Company's Japanese distributor. The Company believes that it
may be forced to effect price reductions, for one or more of its
distributors in Asia as a result of the recent fluctuations in the
exchange rates of many Asian currencies. Such reductions would reduce
net sales in future periods if not offset by increased unit sales or
other factors.
Cost of Sales. Cost of sales increased to $7.7 million in the
three months ended December 31, 1997 from $3.7 million in the
comparable period in fiscal 1997, and decreased as a percentage of
net sales to 20.0% in the fiscal 1998 period from 20.5% in the
fiscal 1997 period. Cost of sales increased to $13.1 million in the
six months ended December 31, 1997 from $6.6 million in the
comparable period in fiscal 1997, and increased as a percentage of
net sales to 20.4% in the fiscal 1998 period from 18.1% in the
fiscal 1997 period. The increase in absolute dollars during the
three- and six-month periods, and the increase as a percentage of
sales during the six-month period, was primarily a result of the
increased volume of products sold and, to a lesser extent, the costs
of additional manufacturing capacity and personnel necessary to
support increased
15
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sales volume. The decrease as a percentage of net sales during the
three-month period was primarily the result of leveraging certain
fixed overhead expenses across a higher base of sales.
The Company expects cost of sales to continue to increase in
absolute dollars as the Company increases the volume of products
sold and adds additional manufacturing capacity and personnel.
Research and Development. Research and development expenses,
which include clinical study and regulatory costs, increased to $7.9
million in the three months ended December 31, 1997 from $2.3
million in the comparable period in fiscal 1997, and increased as a
percentage of net sales to 20.7% in the fiscal 1998 period from
12.4% in the fiscal 1997 period. Research and development expenses
increased to $13.4 million in the six months ended December 31, 1997
from $4.1 million in the comparable period in fiscal 1997, and
increased as a percentage of net sales to 20.8% in the fiscal 1998
period from 11.2% in the fiscal 1997 period. The increase in
absolute dollars and in percentage of sales during the three- and
six-month periods was primarily due to the addition of research and
development personnel, increased levels of spending in connection
with clinical studies relating to the GFX, the Micro Stent II and
Micro Stent II XL systems and costs incurred in connection with the
development of additional products.
The Company expects research and development expenses to
continue to increase in absolute dollars as the Company increases
clinical trial activities and pursues development of next generation
products.
Selling, General and Administrative. Selling, general and
administrative expenses increased in absolute dollars to $11.9
million in the three months ended December 31, 1997 from $6.2 million
in the comparable period in fiscal 1997, and decreased as a
percentage of net sales to 31.1% in the 1998 period from 34.0% in the
1997 period. Selling, general and administrative expenses increased
in absolute dollars to $19.4 million in the six months ended December
31, 1997 from $9.3 million in the comparable period in fiscal 1997,
and increased as a percentage of net sales to 30.1% in the 1998
period from 25.4% in the 1997 period. The increase during the three-
and six-month periods in absolute dollars, and the increase as a
percentage of net sales for the six-month period, primarily reflected
additional costs of marketing and other personnel necessary to
support the Company's higher level of operations, including the
commencement of direct sales operations in the United States in late
December 1997. Additionally, the increase reflects increased legal
costs relating primarily to litigation with former shareholders of
Endothelial Support Systems, Inc., subsequently known as Endovascular
Support Systems, Inc. ("ESS"), patent litigation and certain
distributor terminations, which together resulted in related legal
expenses of $1.3 million for the three months ended December 31,
1997. The decrease in percentage of sales for the three-month period
was primarily the result of leveraging sales, general and
administrative expenses across a higher base of sales.
The Company expects selling, general and administrative costs
to continue to increase in absolute dollars in the future primarily
due to increased levels of sales, product support and manufacturing
operations, as well as increases in finance, legal and administrative
costs relating to, among other things, ongoing litigation, including
patent litigation.
Interest and Other Income. The Company had interest and other
income of $1.1 million in the three months ended December 31, 1997,
compared to $1.1 million in the
16
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comparable period in fiscal 1997. The Company had interest and other
income of $2.1 million in the six months ended December 31, 1997,
compared to $2.3 million in the comparable period in fiscal 1997.
The decrease during the six-month period was primarily due to
greater short-term investment balances in the prior period.
Provision for Income Taxes. The Company's provision for income
taxes was $4.2 million in the three months ended December 31, 1997,
compared to $2.5 million in the comparable period in fiscal 1997.
The Company's provision for income taxes was $7.2 million in the six
months ended December 31, 1997, compared to $6.7 million in the
comparable period in fiscal 1997. The increase in this provision
during the three- and six-month periods was a result of the
Company's higher earnings during the fiscal 1998 periods.
Net Income. The Company had net income of $7.8 million, or
20.2% of net sales, in the three months ended December 31, 1997
compared to net income of $4.6 million, or 25.3% of net sales, for
the comparable period in fiscal 1997. The Company had net income of
$13.5 million, or 20.9% of net sales, in the six months ended
December 31, 1997 compared to net income of $12.4 million, or 33.6%
of net sales, for the comparable period in fiscal 1997.
Liquidity and Capital Resources
Net cash used in operating activities was $362,000 for the six
months ended December 31, 1997. Excluding the effect of transactions
in short-term investments, the Company had net cash provided by
operating activities of $6.4 million for the six-month period,
principally arising as a result of positive net income for the
period. Cash, cash equivalents and short-term investments totaled
$83.4 million at December 31, 1997 as compared to $87.2 million at
June 30, 1997. Working capital decreased to $112.8 million at
December 31, 1997 as compared to $114.5 million at June 30, 1997.
Inventories increased to $13.6 million at December 31, 1997 from
$7.3 million at June 30, 1996, primarily due to increased levels of
sales activity. Included in accounts receivable at December 31, 1997
is approximately $2.4 million due from former distributors of the
Company that have threatened or commenced litigation in connection
with the termination of distribution relationships. The Company has
commenced litigation against such terminated distributors to collect
such amounts. See Note 5 to the Condensed Consolidated Financial
Statements in Item 1. The Company expects accounts receivable and
inventories to increase in absolute dollar amounts as sales
increase.
In August 1997, the Company entered into a bank credit
agreement for a revolving credit facility of $20 million. Such
revolving credit facility is secured by certain of the Company's
short-term investments and is due and payable on August 31, 1998.
The bank credit agreement contains no material restrictive
covenants. As of December 31, 1997, the Company had drawn down
approximately $10.1 million of such revolving credit facility. The
interest rate on such facility is LIBOR plus one-half of one
percent.
The Company expects to incur substantial additional costs,
including costs relating to capital equipment and other costs
associated with expansion of the Company's manufacturing
capabilities, increased sales and marketing activities (including
the establishment of direct sales forces internationally), and
increased research and development expenditures in connection with
seeking regulatory approvals and
17
<PAGE>
conducting additional clinical trials. Among other things, the
Company expects to spend approximately $20 million on a new
manufacturing facility currently under construction in Santa Rosa,
California. The Company may require additional equity or debt
financing to address its working capital needs or to provide funding
for capital expenditures in the future. Furthermore, any additional
equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants. However, there can
be no assurance that events in the future will not require the
Company to seek additional capital or, if so required, that it will
be available on terms acceptable to the Company.
18
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 5 to the Condensed
Consolidated Financial Statements in this Form
10-Q.
Item 2. Change in Securities and Use of Proceeds
The effective date of the Company's
registration statement filed on Form S-1 under the
Securities Act of 1933 (No. 333-00824) was April 2,
1996 (the "Registration Statement"). The class of
securities registered was Common Stock. The
offering commenced on April 2, 1996 and all
securities were sold in the offering. The managing
underwriters for the offering were Cowen & Company,
Bear, Stearns & Co. Inc. and J.P. Morgan & Co.
Pursuant to the Registration Statement, the
Company sold 4,250,000 shares of Common Stock for
its own account, for an aggregate offering price of
$89,250,000, and 1,500,000 shares of Common Stock
for the account of certain selling stockholders,
for an aggregate offering price of $31,500,000.
The Company incurred expenses of
approximately $7,897,500 in connection with the
offering, of which $6,247,500 represented
underwriting discounts and commissions and
$1,650,000 represented estimated other expenses.
All such expenses were direct or indirect payments
to others. The net offering proceeds to the Company
after total expenses was approximately $81,352,000.
The Company has used approximately
$12,800,000 of the net proceeds of the offering, of
which $6,200,000 represents payments relating to
the construction of plant, building and facilities
and $6,600,000 represents payments relating to the
purchase of real estate. All such payments were
direct or indirect payments to others. All other
net proceeds of the offering have been invested in
various short-term investments. The use of the
proceeds of the offering does not represent a
material change in the use of proceeds described in
the prospectus that formed a part of the
Registration Statement.
19
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Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was
held on October 29, 1997, to consider and vote upon
four matters. The first matter related to the
election of five director nominees: Bradly A.
Jendersee, Scott J. Solano, John D. Miller, Dr.
Simon H. Stertzer and Craig E. Dauchy. The votes
cast and withheld for such nominees were as
follows:
Name For Withheld
---- --- --------
Bradly A. Jendersee 27,395,212 97,144
Scott J. Solano 27,420,804 71,552
John D. Miller 27,395,062 97,294
Dr. Simon H. Stertzer 27,423,562 68,794
Craig E. Dauchy 27,420,892 71,464
The second matter related to the approval of an
amendment to the Company's 1996 Equity Incentive
Plan to increase the shares issuable thereunder by
1,000,000. 19,927,987 votes were cast for approval,
4,042,940 were cast against, and there were 18,952
abstentions and 3,502,477 broker nonvotes. The
third matter related to the approval of the
Company's 1997 Employee Stock Purchase Plan.
21,299,461 votes were cast for approval, 2,672,791
were cast against, and there were 17,627
abstentions and 3,502,477 broker nonvotes. The
fourth matter related to the ratification of the
appointment of Ernst & Young LLP as independent
auditors of the Company for fiscal 1997. 27,479,867
votes were cast for approval, 5,462 were cast
against and there were 7,027 abstentions.
Based on these voting results, each of the
directors nominated was elected and the second,
third and fourth matters were passed.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.32 Lease, dated as of October 29, 1997,
between the Company and SBR Development
concerning the facility at 7975 Cameron
Center Drive, Building 200, Windsor,
California.
10.33 Third Amendment, dated as of December 22,
1997, to that certain International
Distributorship Agreement, dated as of
January 22, 1997, as amended, between the
Company and Japan Lifeline Co., Ltd.
(Confidential treatment has been requested
for certain information contained in this
document. Such information has been
omitted and filed separately with the
Securities and Exchange Commission
pursuant to Rule 24b-2 promulgated under
the Securities and Exchange Act of 1934,
as amended.)
11.1 Statement regarding calculation of net
income per share.
27 Financial Data Schedule.
20
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(b) Reports on Form 8-K
On October 23, 1997, the Company filed a Form 8-K
with respect to its being named as an additional
defendant, along with Boston Scientific Corporation
and SCIMED Life Systems, Inc., in a lawsuit
originally filed by Cordis Corporation against
Guidant Corporation and Advanced Cardiovascular
Systems, Inc. in federal district court in
Delaware. The lawsuit alleges infringement or
potential infringement of one or more U.S. patents
held by Cordis.
Report Date: October 21, 1997
Filing Date: October 23, 1997
Item 5 - Other Events
Item 7 - Exhibits
21
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
ARTERIAL VASCULAR ENGINEERING, INC.
Date: January 15, 1998 /s/ John D. Miller
------------------
John D. Miller
Vice President of Finance, Chief Financial Officer
(Principal Financial and Accounting Officer)
22
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INDEX TO EXHIBITS
Exhibit
10.32 Lease, dated as of October 29, 1997, between the Company and
SBR Development concerning the facility at 7975 Cameron Center
Drive, Building 200, Windsor, California.
10.33 Third Amendment, dated as of December 22, 1997, to that
certain International Distributorship Agreement, dated as of
January 22, 1997, as amended, between the Company and Japan
Lifeline Co., Ltd. (Confidential treatment requested for
certain information contained in this document. Such
information has been omitted and filed separately with the
Securities and Exchange Commission pursuant to Rule 24b-2
promulgated under the Securities and Exchange Act of 1934, as
amended).
11.1 Statement regarding computation of net income per share.
27 Financial Data Schedule
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
LOGO
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
October 29, 1997, is made by and between SBR Development, A California General
Partnership ("Lessor") and Arterial Vascular Engineering, Inc. ("Lessee"),
(collectively the "Parties," or individually a "Party").
1.2(a) Premises: That cetain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 7975 Cameron Center Dr., Bldg 200,
located in the City of Windsor, County of Sonoma, State of California, with zip
code 95492, as outlined on Exhibit A attached hereto ("Premises"). The
"Building" is that certain building containing the Premises and generally
described as (describe briefly the nature of the Building): Approximately 7,110
s.f. warehouse shell, the Lessee will be responsible to construct and pay for
Lessee's tenant improvement work - See Addendum #1, Paragraph 55. In addition to
Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee
shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7
below) as hereinafter specified, but shall not have any rights to the roof,
exterior walls or utility raceways of the Building or to any other buildings in
the Industrial Center. The Premises, the Building, the Common Areas, the land
upon which they are located, along with all other buildings and improvements
thereon, are herein collectively referred to as the "Industrial Center". (Also
see Paragraph 2.)
1.2(b) Parking: 0 unreserved vehicle parking spaces ("Unreserved Parking
Spaces"); and 18 reserved vehicle parking spaces ("Reserved Parking Spaces").
(Also see Paragraph 2.6.) See Addendum No. __, Paragraph 53.
1.3 Term: 5 years and 0 months ("Original Term") commencing February 1,
1998 ("Commencement Date") and ending January 31, 2003 ("Expiration Date").
(Also see Paragraph 3.)
1.4 Early Possession: See Addendum #1 Paragraph 58. ("Early Possession
Date"). (Also see Paragraphs 3.2 and 3.3.)
1.5 Base Rent: $4,200 per month ("Base Rent"), payable on the first day of
each month commencing February 1, 1998. (Also see Paragraph 4.)
[ ] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum 60, attached hereto.
1.6(a) Base Rent Paid Upon Execution: $4,200 as Base Rent for the period
February 1, 1998.
1.6(b) Lessee's Share of Common Area Operating Expenses: one hundred
percent (100%) ("Lessee's Share") as determined by [ ] prorata square footage of
the Premises as compared to the total square footage of the Building or [ ]
other criteria as described in Addendum __.
1.7 Security Deposit: $4,000 ("Security Deposit"). (Also see Paragraph 5.)
1.8 Permitted Use: General purpose warehouse/manufacturing with ancillary
office and lab functions ("Permitted Use"). (Also see Paragraph 6.)
1.9 Insuring Party. Lessor is the "Insuring Party." (Also see Paragraph 8.)
1.10(a) Real Estate Brokers. The following real estate broker(s)
collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[ ] ___________________ represents Lessor exclusively ("Lessor's Broker");
[ ] _________________ represents Lessee exclusively ("Lessee's Broker"); or
[x] Keegan & Coppin Company, Inc. represents both Lessor and Lessee ("Dual
Agency"). (Also see Paragraph 15.)
1.10(b) Payment to Brokers. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of
$_________ for brokerage services rendered by said Broker(s) in connection with
this transaction.
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 60, and Exhibits A through E, all of which
constitute a part of this Lease. No Paragraph 49 or 63.
2. Premises, Parking and Common Areas.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental and/or Common Area Operating Expenses, is
an approximation which Lessor and Lessee agree is reasonable and the rental and
Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning,
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given with six (6) months following the Commencement
Date and setting forth with specificity the nature and extent of such
non-compliance, take such action, at Lessor's expense, as may be reasonable or
appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "Applicable Laws") and the
present and future suitability of the Premises for Lessee's intended use; (b)
that Lessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any non-
compliance of the Premises with said warranties.
<PAGE>
2.6 Vehicle Parking. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called "Permitted Size
Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide the
parking facilities required by Applicable Law.
2.7 Common Areas--Definition. The form "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general non-
exclusive use of Lessor, Lessee and other Lessors of the Industrial Control and
their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 Common Areas--Lessee's Rights. Lessor hereby grants to Lessee, for the
benefit of Lessee and its employees, suppliers, shippers, contractors, customers
and invitees, during the term of this Lease, the non-exclusive right to use, in
common with others entitled to such use, the Common Areas as they exist from
time to time, subject to any rights, powers, and privileges reserved by Lessor
under the terms hereof or under the terms of any rules and regulations or
restrictions governing the use of the Industrial Center. Under no circumstances
shall the right herein granted to use the Common Areas be deemed to include the
right to store any property, temporarily or permanently, in the Common Areas.
Any such storage shall be permitted only by the prior written consent of Lessor
or Lessor's designated agent, which consent may be revoked at any time. In the
event that any unauthorized storage shall occur then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it may
have, to remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
2.9 Common Areas--Rules and Regulations. Lessor or such other person(s) as
Lessor may appoint shall have the exclusive control and management of the Common
Areas and shall have the right, from time to time, to establish, modify, amend
and enforce reasonable Rules and Regulations with respect thereto in accordance
with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and
Regulations, and to cause its employees, suppliers, shippers, customers,
contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.10 Common Areas--Changes. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without limitation,
changes in the location, size, shape and number of driveways, entrances, parking
spaces, parking areas, loading and unloading areas, ingress, egress, direction
of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the Industrial
Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof;
and
(f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Industrial Center as Lessor may, in
the exercise of sound business judgment, deem to be appropriate.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If an Early Possession Date is specified in Paragraph
1.4 and if Lessee totally or partially occupies the Premises after the Early
Possession Date but prior to the Commencement Date, the obligation to pay Base
Rent shall be abated for the period of such early occupancy. All other terms of
this Lease, however, (including but not limited to the obligations to pay
Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 Delay in Possession. If for any reason Lessor cannot deliver possession
of the Premises to Lessee by the Early Possession Date, if one is specified in
Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement
Date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease, or the obligations of Lessee
hereunder, or extend the term hereof, but in such case, lessee shall not, except
as otherwise provided herein, be obligated to pay rent or perform any other
obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date. Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written, notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the
same may be adjusted from time to time, to Lessor in lawful money of the United
States, without offset or deduction, on or before the day on which it is due
under the terms of this Lease. Base Rent and all other rent and charges for any
period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes of this
Lease, as all costs incurred by Lessor relating to the ownership and operation
of the Industrial Center, including, but not limited to, the following:
(i) The operation, repair and maintenance, in neat, clean, good
order and condition, of the following:
(ii) The cost of water, gas, electricity and telephone to service
the Common Areas.
(iii) Trash disposal.
(iv) Omitted
(v) Any increase above the Base Real Property Taxes (as defined
in Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase" (as defined in Paragraph 8.1).
(vii) Omitted
(viii) Omitted
(ix) Omitted
(b) Any Common Area Operating Expenses and Real Property Taxes that are
specifically attributable to the Building or to any other building in the
Industrial Center or to the operation, repair and maintenance thereof, shall be
allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable
by Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of annual
Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12 month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessee shall be credited the amount of each over-
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payment against Lessee's Share of Common Area Operating Expenses next becoming
due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year
were less than Lessee's Share as indicated on said statement, Lessee shall pay
to Lessor the amount of the deficiency within ten (10) days after delivery by
Lessor to Lessee of said statement.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1). Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Lessor shall not be required to keep all or
any part of the Security Deposit separate from its general accounts. Lessor
shall, at the expiration or earlier termination of the term hereof and after
Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to
the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be considered
to be held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the Permitted Use
set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, and for no other purpose. Lessee shall not use or permit the
use of the Premises in a manner that is unlawful, creates waste or a nuisance,
or that disturbs owners and/or occupants of, or causes damage to the Premises or
neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conlict with uses by
other lessees, is not significantly more burdensome to the Premises or the
Building and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within
five (5) business days after such request give a written notification of same,
which notice shall include an explanation of Lessor's reasonable objections to
the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as
used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof other than
as set forth in Exhibit E, Lessee shall not engage in any activity in or about
the Premises which constitutes a Reportable Use (as hereinafter defined) of
Hazardous Substances without the express prior written consent of Lessor and
compliance in a timely manner (at Lessee's sole cost and expense) with all
Applicable Requirements (as defined in Paragraph 6.3). "Reportable Use" shall
mean (i) the installation or use of any above or below ground storage tank, (ii)
the generation, possession, storage, use, transportation, or disposal of a
Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with, any
governmental authority, and (iii) the presence in, on or about the Premises of a
Hazardous Substance with respect to which any Applicable Laws require that a
notice be given to persons entering or occupying the Premises or neighboring
properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior
consent, but upon notice to Lessor and in compliance with all Applicable
Requirements, use any ordinary and customary materials reasonably required to be
used by Lessee in the normal course of the Permitted Use, so long as such use is
not a Reportable Use and does not expose the Premises or neighboring properties
to any meaningful risk of contamination or damage or expose Lessor to any
liability therefor. In addition, Lessor may (but without any obligation to do
so) condition its consent to any Reportable Use of any Hazardous Substance by
Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its
reasonable discretion, deems necessary to protect itself, the public, the
Premises and the environment against damage, contamination or injury and/or
liability therefor, including but not limited to the installation (and, at
Lessor's option, removal on or before Lease expiration or earlier termination)
of reasonably necessary protective modifications to the Premises (such as
concrete encasements) and/or the deposit of an additional Security Deposit under
Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Lessor, Lessee shall immediately give Lessor written notice thereof, and shall
make available a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous Substance
including but not limited to all such documents as may be involved in any
Reportable Use involving the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including, without limitation, through the plumbing or sanitary sewer
system).
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement
6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to
employ experts and/or consultants in connection therewith to advise Lessor with
respect to Lessee's activities, including but not limited to Lessee's
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance on or from the Premises. The costs and expenses of any such
inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies available to Lessor, in customary form and
substance for and with a contractor specializing and experienced in the
inspection, maintenance and service of the heating, air conditioning and
ventilating systems for the Premises.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, shall keep in good order,
condition and repair the foundations, exterior walls, structural condition of
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas)
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systems and equipment, fire hydrants, parking lots, walkways, parkways,
driveways, landscaping, fences, signs and utility systems serving the Common
Areas and all parts thereof, as well as providing the services for which there
is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not
be obligated to paint the exterior or interior surfaces of exterior walls nor
shall Lessor be obligated to maintain, repair or replace windows, doors or plate
glass of the Premises. Lessee expressly waives the benefit of any statute now or
hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Building, Industrial Center or Common Areas in good order,
condtion and repair.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility Installations" is
used in this Lease to refer to all air lines, power panels, electrical
distribution, security, fire protection systems, communications systems,
lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "Alterations" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a) except as set forth in this lease, Lessee
shall not make nor cause to be made any Alterations or Utility Installations in,
on, under or about the Premises without Lessor's prior written consent. Lessee
may, however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof) without Lessor's consent but upon notice to Lessor
so long as they are not visible from the outside of the Premises, do not involve
puncturing, relocating or removing the roof or any existing walls, or changing
or interfering with the fire sprinkler or fire detection systems and the
cumulative cost thereof during the term of this Lease as extended does not
exceed $2,500.00.
(b) Consent. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with detailed plans. All consents given by Lessor,
whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall
be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as built plans and specifications therefor. Lessor may, (but without obligation
to do so) condition its consent to any requested Alteration or Utility
Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation.
(c) Lien Protection. Lessee shall pay when due all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on, or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense, defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof
against the Lessor or the Premises. If Lessor shall require, Lessee shall
furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one
and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In addition,
Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 Ownership, Removal, Surrender, and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal and
to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Unless otherwise instructed per Subparagraph 7.4(b) hereof or
elsewhere in this lease, all Lessee-Owned Alterations and Utility Installations
shall, at the expiration or earlier termination of this Lease, become the
property of Lessor and remain upon the Premises and be surrendered with the
Premises by Lessee.
(b) Removal. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee-Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding that their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, clean and
free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Except
as otherwise agreed or specified herein, the Premises, as surrendered, shall
include the Alterations and Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Lessee-Owned Alterations and Utility Installations, as well as the removal of
any storage tank installed by or for Lessee, and the removal replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all as
may then be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease.
8. Insurance; Indemnity.
8.1 Payment of Premium Increases.
(a) As used herein, the term "Insurance Cost Increase" is defined as
any increase in the actual cost of the insurance applicable to the Building and
required to be carried by Lessor pursuant to Paragraphs 8.2(b), 8.3(a) and
8.3(b), ("Required Insurance"), over and above the Base Premium, as hereinafter
defined, calculated on an annual basis. "Insurance Cost Increase" shall include,
but not be limited to, requirements of the holder of a mortgage or deed of trust
covering the Premises, increased valuation of the Premises, and/or a general
premium rate increase. The term "Insurance Cost Increase" shall not, however,
include any premium increases resulting from the nature of the occupancy of any
other lessee of the Building. If the parties insert a dollar amount in Paragraph
1.9, such amount shall be considered the "Base Premium." If a dollar amount has
not been inserted in Paragraph 1.9 and if the Building has been previously
occupied during the twelve (12) month period immediately preceding the
Commencement Date, the "Base Premium" shall be the annual premium applicable to
such twelve (12) month period. If the Building was not fully occupied during
such twelve (12) month period, the "Base Premium" shall be the lowest annual
premium reasonably obtainable for the Required Insurance as of the Commencement
Date, assuming the most nominal use possible of the Building. In no event,
however, shall Lessee be responsible for any portion of the premium cost
attributable to liability insurance coverage in excess of $1,000,000 procured
under Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost Increase to Lessor pursuant to
Paragraph 4.2. Premiums for policy periods commencing prior to, or extending
beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during the
term of this Lease a Commercial General Liability policy of insurance protecting
Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in
writing (as additional insureds) against claims for bodily injury, personal
injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "insured contract"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) Carried by Lessor. Lessor shall also maintain liability insurance
described in Paragaph 8.2(a) above, in addition to and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and to any Lender(s), insuring against loss or damage to
the Premises. Such insurance shall be for full replacement cost, as the same
shall exist from time to time, or the amount required by any Lender(s), but in
no event more than the commercially reasonable and available insurable value
thereof if, by reason of the unique nature or age of the improvements involved,
such latter amount is less than full replacement cost. Lessee-Owned Alterations
and Utility Installations, Trade Fixtures and Lessee's personal property shall
be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and
commercially appropriate, Lessor's policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender or included in the Base Premium),
including coverage for any additional costs resulting from debris removal and
reasonable amounts of coverage for the enforcement of any ordinance or law
regulating the reconstruction or replacement of any undamaged sections of the
Building required to be demolished or removed by reason of the enforcement of
any building, zoning, safety or land use laws as the result of a covered loss,
but not including plate glass insurance. Said policy or policies shall also
contain an agreed valuation provision in lieu of any co-insurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located.
(b) Rental Value. Lessor shall also obtain and keep in force during the
term of this Lease a policy or policies in the name of Lessor, with loss payable
to Lessor and any Lender(s), insuring the loss of the full rental and other
charges payable by all lessees of the Building to Lessor for one year (including
all Real Property Taxes, insurance costs, all Common Area Operating Expenses and
any scheduled rental increases). Said insurance may provide that in the event
the Lease is terminated by reason of an insured loss, the period of indemnity
for such coverage shall be extended beyond the date of the completion of repairs
or replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any co-insurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income, Real
Property Taxes, insurance premium costs and other expenses, if any, otherwise
payable, for the next 12-month period. Common Area Operating Expenses shall
include any deductible amount in the event of such loss.
(c) Adjacent Premises. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas or
other buildings in the Industrial Center if said increase is caused by Lessee's
negligent or wrongful acts, omissions, use or occupancy of the Premises.
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(d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor
shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance
shall be full replacement cost coverage with a deductible not to exceed $1,000
per occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property and the restoration of Trade Fixtures and
Lessee-Owned Alterations and Utility Installations. Upon request from Lessor,
Lessee shall provide Lessor with written evidence that such insurance is in
force.
8.5 Insurance Policies. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B+, V, or such other rating as may be required by a Lender, as set forth
in the most current issue of "Best's Insurance Guide." Lessee shall not do or
permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or "insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages (whether in contract or in tort) against the
other, for loss or damage to their property arising out of or incident to the
perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timley manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbling, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center except to the extent such liability arises
from Lessor's negligence or willful misconduct and is not covered by Lessee's
insurance.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent (50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destructions.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is fifty percent (50%) or more of the
then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and
Utility Installations and Trade Fixtures) immediately prior to such damage and
destruction. In addition, damage and destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any
lessees of the Building, the cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premise Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to the Premises,
other than Lessee-Owned Alterations and Utility Installations and Trade
Fixtures, which was caused by an event required to be covered by the insurance
described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage
limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Premises Partial Damage-Insured Loss. If Premises Partial Damage that
is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect. In the event, however, that there is a shortage of
insurance proceeds and such shortage is due to the fact that, by reason of the
unique nature of the improvements in the Premises, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, Lessor shall complete them as soon as reasonably possible and this
Lease shall remain in full force and effect. If Lessor does not receive such
funds or assurance within said period, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to make such restoration and
repair as is commercially reasonable with Lessor paying any shortage in
proceeds, in which case this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within such ten (10) day period,
and if Lessor does not so elect to restore and repair, then this Lease shall
terminate sixty (60) days following the occurence of the damage or destruction.
Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 Partial Damage-Uninsured Loss. If Premises Partial Damage that is not
an Insured Loss occures, unless caused by a negligent or willful act of Lessee
(in which event Lessee shall make the repairs at Lessee's expense and this Lease
shall continue in full force and effect), Lessor may at Lessor's option, either
(i) repair such damage as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) give
written notice to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such damage of Lessor's desire to terminate this
Lease as of the date sixty (60) days following the date of such notice. In the
event Lessor elects to give such notice of Lessor's intention to terminate this
Lease, Lessee shall have the right within (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
repair of such damage totally at Lessee's expense and without reimbursement from
Lessor. Lessee shall provide Lessor with the required funds or satisfactory
assurance thereof with thirty (30) days following such commitment from Lessee.
In such event this Lease shall continue in full force and effect, and Lessor
shall proceed to make such repairs as soon as reasonably possible after the
required funds are available. If Lessee does not give such notice and provide
the funds or assurance thereof within the times specified above, this Lease
shall terminate as of the date specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 Damage Near End of Term. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's
option, terminate this Lease effective sixty (60) days following the date of
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous Substance
Condition for which Lessee is not legally responsible, the Base Rent, Common
Area Operating Expenses and other charges, if any, payable by Lessee hereunder
for the period during which such damage or condition, its repair, remediation or
restoration continues, shall be abated in proportion to the degree to which
Lessee's use of the Premises is impaired, but not in excess of proceeds from
insurance required to be carried under Paragraph 8.3(b). Except for abatement of
Base Rent, Common Area Operating Expenses and other charges, if any, as
aforesaid, all other obligations of Lessee hereunder shall be performed by
Lessee, and Lessee shall have no claim against Lessor for any damage suffered by
reason of any such damage, destruction, repair, remediation or restoration.
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(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or Lender commences the repair or restoration of the
Premises within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "Commence" as used in this Paragraph
9.6 shall mean either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises, whichever
occurs first.
9.7 Hazaradous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 Termination--Advance Payments. Upon termination of this Lease pursuant
to this Paragraph 9, Lessor shall return to Lessee any advance payment made by
Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is
not then required to be, used by Lessor under the terms of this Lease.
9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is inconsistent
herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined
in Paragraph 10.2(a), applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2. *Any Real
Property Tax increase attributable to a sale of the building shall not be
included in the calculation of Common Area Operating Expenses.
10.2 Real Property Tax Definitions.
(a) As used herein, the term "Real Property Taxes" shall include any
form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage, or other improvement
district thereof, levied against any legal or equitable interest of Lessor in
the Industrial Center or any portion thereof, Lessor's right to rent or other
income therefrom, and/or Lessor's business of leasing the Premises. The term
"Real Property Taxes" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring, or
changes in Applicable Law taking effect, during the term of this Lease,
including but not limited to a change in the ownership of the Industrial Center
or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties.
(b) As used herein, the term "Base Real Property Taxes" shall be the
amount of Real Property Taxes, which are assessed against the Premises, Building
or Common Areas in the calendar year during which the Lease is executed. In
calculating Real Property Taxes for any calendar year, the Real Property Taxes
for any real estate tax year shall be included in the calculation of Real
Property Taxes for such calendar year based upon the number of days which such
calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and services supplied
to the Premises, including but not limited to electricity, telephone, security,
gas and cleaning of the Premises, together with any taxes thereon. If any such
utilities or services are not separately metered to the Premises or separately
billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be
determined by Lessor of all such charges jointly metered or billed with other
premises in the Building, in the manner and within the time periods set forth in
Paragraph 4.2(d).
12. Assignment and Subletting. See Addendum #1, Paragraph 61
12.1 Lessor's Consent Required.
(a) Lessee shall not assign, mortgage or otherwise encumber
(collectively, "assign") or sublet all or any part of Lessee's interest in this
Lease or in the Premises without Lessor's prior written consent given under and
subject to the terms of Paragraph 36.
(b) Omitted
(c) Omitted
(d) A permitted assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall, at Lessor's option,
be a Default curable after notice per Paragraph 13.1, or a non-curable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a non-curable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days' written notice ("Lessor's Notice"), increase the monthly Base Rent
for the Premises to the greater of the then fair market rental value of the
Premises, as reasonably determined by Lessor, or one hundred ten percent (110%)
of the Base Rent then in effect. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and rental
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
as reasonably determined by Lessor (without the Lease being considered an
encumbrance or any deduction for depreciation of obsolescence, and considering
the Premises at its highest and best use and in good condition) or one hundred
ten percent (110%) of the price previously in effect, (ii) any index-oriented
rental or price adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the index applicable
to the time of such adjustment, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease term shall be increased in the same ratio as
the new rental bears to the Base Rent in effect immediately prior to the
adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, nor (iii) alter the primary liablity of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable under this Lease or the sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or the sublease.
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(d) In the event of any Default or Breach of Lessee's obligation under
this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone
else responsible for the performance of the Lessee's obligations under this
Lease, including any sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor.
(e) Each request for consent to an assignment of subletting shall be in
writing, accompanied by information relevant to Lessor's determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together as reasonable
consideration for Lessor's considering and processing the request for consent.
Lessee agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason of
accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.1 shall
give Lessor the right (but not the obligation) to require that the Security
Deposit be increased by an amount equal to six (6) times the then monthly Base
Rent, and Lessor may make the actual receipt by Lessor of the Security Deposit
increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment schedule of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment schedule for property similar to the Premises as then constituted, as
determined by Lessor.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein up to and to the extent
of Lessee's obligations under this Lease:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of the foregoing
provision or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon recept of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior defaults
or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have the right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurence for
legal services and costs in the preparation and service of a notice of Default,
and that Lessor may include the cost of such services and costs in said notice
as rent due and payable to cure said default. A "Default" by Lessee is defined
as a failure by Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "Breach"
by Lessee is defined as the occurence of any one or more of the following
Defaults, and, where a grace period for cure after notice is specified herein,
the failure by Lessee to cure such Default prior to the expiration of the
applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent, Lessee's Share of Common Area
Operating Expenses, or any other monetary payment required to be made by Lessee
hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor upon request with reasonable written evidence of (i)
compliance with Applicable Requirements per Paragraph 6.3, (ii) the inspection,
maintenance and service contracts required under Paragraph 7.1(b), (iii) the
rescission of an unauthorized assignment or subletting per Paragraph 12.1, (iv)
a Tenancy Statement per Paragraph 16 or 37, (v) the subordination or
non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the
performance of Lessee's obligations under this Lease if required under
Paragraphs 1.11 and 37, (vii) the execution of any document requested under
Paragraph 42 (easements), or (viii) any other documentation or information which
Lessor may reasonably require of Lessee under the terms of this lease, where any
such failure continues for a period of ten (10) days following written notice by
or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurence of any of the following events: (i) the making by
Lessee of any general arrangement or assigment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within (30) days, or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provisions of this Subparagraph 13.1(e) is contrary to any applicable law, such
provisions shall be of no force or effect, and shall not affect the validity of
the remaining provisions.
(f) The discovery by Lessor that any financial statement of Lessee or
of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially
false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurances of security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the Guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining or reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, as its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessee (as defined in Paragraph 13.1), with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, resonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District
in which the Premises are located at the time of awards plus one percent (1%).
Efforts by Lessor to mitigate damages caused be Lessee's Default or Breach of
this Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such pro-
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ceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for such
rent and/or damages. If a notice and grace period required under Subparagraph
13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or
to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also constitute
the applicable notice for grace period purposes required by Subparagraph
13.1(b), (c) or (d). In such case, the applicable grace period under the
unlawful detainer statue shall run concurrently after the one such statutory
notice, and the failure of Lessee to cure the Default within the greater of the
two (2) such grace periods shall constitute both an unlawful detainer and a
Breach of this Lease entitling Lessor to the remedies provided for in this Lease
and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
recover the rent as it becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitations. Lessor and Lessee agree that the
limitations on assignment and subletting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under this Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture In Event of Breach. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor, as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of
such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notices to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by any Lender(s) whose name and address shall have been furnished to Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for its performance, then Lessor shall not be in
breach of this Lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is
not terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal and
other expenses incurred by Lessor in the condemnation matter, repair any damage
to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. Brokers' Fees.
15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 Omitted.
15.3 Omitted.
15.4 Representations and Warranties. Lessee and Lessor each represent and
warrant to the other that it has had no dealing with any person, firm, broker or
finder other than as named in Paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the Indemnifying Party, including any costs, expenses, and/or attorneys' fees
reasonably incurred with respect thereto.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ten
(10) days after written notice from the other Party (the "Requesting Party")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "Tenancy Statement" form published by
the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
16.2 Financial Statement. If Lessor desires to finance, refinance, or sell
the Premises or the Building, or any part thereof, Lessee and all Guarantors
shall deliver to any potential lender or purchaser designated by Lessor such
financial statements of Lessee and such Guarantors as may be reasonably required
by such lender or purchaser, including but not limited to Lessee's financial
statments for the past three (3) years. All such financial statements shall be
received by Lessor and such lender or purchaser in confidence and shall be used
only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises. In the event of
a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within ten (10) days following
the date on which it was due, shall bear interest from the date due at the prime
rate charged by the largest state chartered bank in the state in which the
Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended third party beneficiary
of the provisions of this Paragraph 22.
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23. Notices.
23.1 Notice Requirements. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission
during normal business hours, and shall be deemed sufficiently given if served
in a manner specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering notices to Lessee. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail, the notice shall be deemed given forty eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantees next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Postal Service or courier. If any
notice is transmitted by facsimile transmission or similar means, the same shall
be deemed served or delivered upon telephone or facsimile confirmation of
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a legal
holiday, it shall be deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorney's Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereinafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability of Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the exterior of the Premises or
the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2 (e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgement that no Default or Breach by Lessee of this Lease exists, nor
shall such consent by deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this Lease per
Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor
shall be in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations as
Lessee under this lease, including but not limited to the obligation to provide
the Tenancy Statement and information required in Paragraph 16.
-9-
<PAGE>
37.2 Additional Obligations of Guarantor. It shall constitute a Default of
the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. Options.
39.1 Definition. As used in this Lease, the word "Option" has the following
meaning: (a) the right to extend the term of this Lease or to renew this Lease
or to extend or renew any lease that Lessee has on other property of Lessor; (b)
the right of first refusal to lease the Premises or the right of first offer to
lease the Premises or the right of first refusal to lease other property of
Lessor or the right of first offer to lease other property of Lessor; (c) the
right to purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the right to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor, or the right of first offer to purchase other property
of Lessor.
39.2 Options Personal to Original Lessee. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month period immediately preceding the exercise of the Option, whether or
not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a)
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S
REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS,
UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS
TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE
OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON
THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF
THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN
ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Windsor, CA Executed at: Santa Rosa, CA
on: Nov. 25, 1997 on: Dec. 1, 1997
By LESSOR: By LESSEE:
SBR, A California General Partnership Arterial Vascular Engineering, Inc.
7700 Bell Road, 3576 Unocal Place,
Suite A, Windsor Santa Rosa, CA
By: /s/ Randal P. Lewis By: /s/ Lawrence J. Fassler
Name Printed: Randal P. Lewis Name Printed: Lawrence J. Fassler
Title: Managing General Part. Title: General Counsel and Secretary
By: ______________________________ By: ______________________________
Name Printed: ____________________ Name Printed: ____________________
Title: ___________________________ Title: ___________________________
Address: _________________________ Address: _________________________
__________________________________ __________________________________
Telephone: (707) 838-6633 Telephone:
Facsimile: (707) 838-7921 Facsimile:
BROKER: BROKER:
Executed at: _____________________ Executed at: _____________________
on: ______________________________ on: ______________________________
By: ______________________________ By: ______________________________
Name Printed: ____________________ Name Printed: ____________________
Title: ___________________________ Title: ___________________________
Address: _________________________ Address: _________________________
__________________________________ __________________________________
Telephone: ( ) __________________ Telephone: ( ) __________________
Facsimile: ( ) __________________ Facsimile: ( ) __________________
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 South Flower
Street, Suite 600, Los Angeles, CA 90017. (213) 687-8777.
<PAGE>
ADDENDUM TO STANDARD INDUSTRIAL MULTI-TENANT LEASE
Dated October 29, 1997
By and Between
SBR DEVELOPMENT, A CALIFORNIA GENERAL PARTNERSHIP (LESSOR)
And
ARTERIAL VASCULAR ENGINEERING, INC., (LESSEE)
PREMISES: 7975 Cameron Drive. Building 200, Windsor, CA
------------------------------------------------------
A. "This Lease is contingent upon the following conditions:"
49. Utilities and Other Services:
Lessee shall pay in addition to their rent their prorata share (100%) of
the cost of the utilities for the building. All other services, such as
security patrols, are at the discretion of the Lessor and Lessor is not
obligated to provide such services.
Refuse service shall be contracted and paid for directly by the Lessee.
Disposal of Lessee's trash is the Lessee's responsibility and cannot be
stacked or temporarily stored other than inside the Lessee's premises.
If Lessee fails to dispose of wood pallets or shipping containers properly,
Lessor may remove said items after three (3) days written notice to Lessee.
Lessor may charge Lessee for the costs of such removal.
50. Signage:
Lessee will provide the street number on the glass storefront door of the
Premises.
Lessee will provide lettering for Lessee's business name on the directory
sign (at Lessee's option). All lettering will be in white vinyl letters
conforming to the style and sizing approved by Lessor.
Lessor may place such signs as Lessor deems reasonable for the
advertisement of space available for lease in the building. FOR LEASE signs
to include canvas or wood banners or metal of real estate brokerage
companies contracted by the Lessor.
All other signage will be provided by Lessee and Lessee agrees to abide by
the sign program of the building.
51. Financial Statements:
Lessor has approved Lessee's financial statements.
52. Permits:
Lessee will obtain a use permit and a wastewater discharge permit if
required from the appropriate municipality within thirty (30) days of
acceptance hereof. Lessee shall use due diligence in pursuing such permits
and pay all costs associated with them. Lessee shall have the
responsibility to maintain any use permits and to comply with all terms and
conditions of said use permits during the term of this Lease. If Lessee's
application for a use permit is denied, Lessor or Lessee may declare this
lease void, in which event all deposits and prepaid rent shall be returned
to Lessee.
53. Parking Lot and Driveways:
Lessee is entitled to the use of the parking outlined on Exhibit A. Lessor
is hereby notified that Lessee intends to park a truck on Cameron Drive
adjacent to the building from time to time. Lessee is aware that Cameron
Drive is posted for no overnight parking.
54. Lessor's Improvements:
Lessor agrees to complete the following improvements at its sole cost prior
to lease commencement. A. Link the subject building with building 100, 7975
Cameron Center Drive via two underground conduits. Each conduit shall have
a 3 inch diameter and shall be constructed from either PVC or metal
materials. Provide access to the roof via an interior ladder to a lockable
roof hatch (Lessee agrees to pay the cost of this work + 15% for
supervision which shall not exceed a total cost of $4,000. This cost shall
be amortized over the term of the lease at a cost of 8% interest and paid
in addition to the rent).
<PAGE>
55. Lessee accepts the premises "as is" with the exception of the Lessor work
identified in Paragraph 54. Lessee shall be allowed to install building
improvements which they deem necessary for the operation of their business
such as building insulation, restrooms, offices, heating and
air-conditioning, electrical distribution, etc., provided Lessee obtains
the Lessor's approval for all work and any necessary use or building
permits. Lessee will be responsible for the installation and payment of
said improvements and any possible damage it could cause to the building.
Lessee intends to use the Building for air conditioned storage of their
medical products. Their required improvements include an office, toilets,
ceiling and wall insulation, HVAC system, lights, pallet racks and
electrical distribution. (see Exhibit F) Lessor approves of these
improvements. Lessee reserves the right to remove the warehouse clean room,
injection moulding and oven room HVAC units and warehouse clean room,
injection moulding and oven room lights.
56. Upon full execution of this lease, payment of Prepaid Rent and Security
Deposit, and issuance of an insurance certificate, Lessee shall be allowed
access to the building to design and construct interior improvements and
store materials and equipment to be used in proposed operation at this
facility. Lessee and Lessor shall coordinate their activities so that
Lessor can complete the shell building without delay. If Lessee completes
their improvement work and occupies the building before February 1, 1998,
then the commencement date shall be advanced to the date of occupancy.
57. Hazardous Waste:
"If Lessee uses, stores, or becomes aware of any hazardous waste or
substances as listed by Proposition 65, he will advise Lessor within three
(3) days of such existence and either obtain approval from Lessor and the
appropriate governing agencies within thirty (30) days from notice or
remove and clean up said hazardous waste to standards required by the
Lessor and the appropriate governing agencies within sixty (60) days from
notice."
"If Lessee, his invitees, employees, agents or associates cause or allow a
spill, or contamination of the premises, common area, soil or surrounding
area, then it will be the responsibility of Lessee to clean up said hazard
to the degree required and within the time frame set by any public entity
which has jurisdiction and particularly in response to the Super Fund Act
and Proposition 65."
58. Area Measurement:
Lessee has reviewed and approved the system of measurement, the useable and
rental square footage of the subject premises within fifteen (15) days of
acceptance hereof.
59. Associations and Expenses:
Lessee has reviewed and approved CC&R's, any common area association and
budget, rules, expenses, and use conditions pertaining thereto within 30
days of acceptance hereof.
The herein Addendum #1, upon its execution by both parties, its herewith
made an integral part of the aforementioned Agreement.
LESSEE LESSOR
Arterial Vascular Engineering, Inc. SBR A Calif Gen. Part.
By: /s/ Lawrence J. Fassler /s/ Randal P. Lewis
Date: 12/1/97 Date: 11/25/97
<PAGE>
ADDENDUM TO
STANDARD INDUSTRIAL LEASE
DATED: October 29, 1997
BY AND BETWEEN: SBR, a California General Partnership (Lessor) and Arterial
Vascular Engineering (Lessee)
ADDRESS: 7975 Cameron Center Drive, Building 200 Windsor, CA
60 RENT ESCALATIONS
(a) On the commencement of the second year of the Lease and every year
thereafter, the monthly rent payable under Paragraph 4 and 1.5 of the
attached lease shall be adjusted by the increase, if any, from the date
this lease commenced, in the Consumer Price Index of the Bureau of
Labor Statistics of the U.S. Department of Labor for all Urban
Consumers, San Francisco-Oakland, California (1982-1984 base period)
"All Items", herein referred to as "C.P.I."
(b) The monthly rent payable in accordance with paragraph (a) of this
Addendum shall be calculated as follows: the rent payable for the first
month of the term of this lease, as set forth in Paragraph 4 of the
attached lease, shall be multiplied by a fraction, the numerator of
which shall be the C.P.I. of the calendar month during which the
adjustment is to take effect, and the denominator of which shall be the
C.P.I. for the calendar month in which the original lease term
commences. The sum so calculated shall constitute the new monthly rent
hereunder, but in no event shall such new monthly rent be less than the
rent payable for the month immediately preceding the date for rent
adjustment.
(c) Pending receipt of the required C.P.I. and determination of the actual
adjustment, Lessee shall pay an estimated adjusted rental, as
reasonably determined by Lessor by reference to the then available
C.P.I. information. Upon notification of the actual adjustment after
publication of the required C.P.I. any overpayment shall be credited
against the next installment of rent due, and any underpayment shall be
immediately due and payable by Lessee. Lessor's failure to request
payment of an estimated or actual rent adjustment shall not constitute
a waiver of the right to any adjustment provide for in the lease or
this addendum.
(d) In the event the compilation and/or publication of the C.P.I. shall be
transferred to any other governmental department or bureau or agency or
shall be discontinued, then the index most nearly the same as the
C.P.I. shall be used to make such calculation. In the event that Lessor
and Lessee cannot agree on such alternative index, then the matter
shall be submitted for decision to the American Arbitration Association
in accordance with the then rules of said association and the decision
of the arbitrators shall be binding upon the parties. The cost of said
Arbitrators shall be paid equally by Lessor and Lessee.
<PAGE>
EXHIBIT A1
ARCHITECTURAL MAP OF CAMERON CENTER / WINDSOR CALIFORNIA
<PAGE>
EXHIBIT A2
[BLDG. C-FLOOR PLAN]
<PAGE>
EXHIBIT B
STANDARD LEASE DISCLOSURE ADDENDUM
Notice to Owners, Buyers and Tenants Regarding Hazardous Wastes or Substances
and Underground Storage Tanks
Comprehensive federal and state laws and regulations have been enacted in the
last few years in an effort to develop controls over the use, storage, handling,
cleanup, removal and disposal of hazardous wastes or substances. Some of these
laws and regulations, such as, for example, the so-called "Super Fund Act",
provide for broad liability schemes wherein an owner, tenant or other user of
the property may be liable for cleanup costs and damages regardless of fault.
Other laws and regulations set standards for the handling of asbestos or
establish requirements for the use, modification, abandonment, or closing of
underground storage tanks.
It is not practical or possible to list all such laws and regulations in this
Notice. Therefore, lessors amid lessees are urged to consult legal counsel to
determine their respective rights and liabilities with respect to the issues
described in this Notice as well as other aspects of the proposed transaction.
If various materials that have been or may be in the future determined to be
toxic, hazardous or undesirable, or are going to be used, stored, handled or
disposed of on the property, or if the property has or may have underground
storage tanks for storage of such hazardous materials, or that such materials
may be in the equipment, improvements or soil, it is essential that legal and
technical advice be obtained to determine, among other things, what permits and
approvals have been or may be required, if any, the estimated costs and expenses
associated with the use, storage, handling, cleanup, removal or disposal of the
hazardous wastes or substances and what contractual provisions and protection
are necessary or desirable. It may also be important to obtain expert assistance
for site investigations and building inspections. The past uses of the property
may provide valuable information as to the likelihood of hazardous wastes or
substances, or underground storage tanks being on the property.
The term "hazardous wastes or substances" is used in this Notice in its very
broadest sense and includes, but is not limited to, all those listed under
Proposition 65, petroleum base products, paints and solvents, lead, cyanide,
DDT, printing inks, acids, pesticides, ammonium compounds, asbestos, PCBs and
other chemical products. Hazardous wastes or substances and underground storage
tanks may be present on all types of real property. This Notice is, therefore,
meant to apply to any transaction involving any type of real property, whether
improved or unimproved.
Although Keegan & Coppin Co., Inc. or its salespeople, will disclose any
knowledge it actually possesses with respect to the existence of hazardous
wastes or substances, or underground storage tanks on the property, Keegan &
Coppin Co., Inc. has not made investigations or obtained reports regarding the
subject matter of this Notice, except as may be described in a separate written
document, studies or investigation by experts. Therefore, unless there are
additional documents or studies attached to this notice, lease or contract, this
will serve as notification that Keegan & Coppin Co., Inc. or its salespeople
make no representation regarding the existence or non-existence of hazardous
wastes or substances, or underground storage tanks on the property. You should
contact a professional, such as a civil enigineer, geologist, industrial
hygienist or other persons with experience in these matters to advise you
concerning the property.
Americans with Disabilities Act (ADA)
On July 26, 1991, the federal legislation known as the Amnenicans with
Disabilities Act (ADA) was signed into law by President Bush. The purpose of the
ADA is to integrate persons with disabilities into the economic and social
mainstream of American life. Title III of the ADA applies to Lessors and Lessees
of "places of public accommodation" and "commercial facilities", and requires
that places of public accommodation undertake "readily achievable" removal of
communication and access barriers to the disabled. This requirement of Title III
of the ADA is effective January 26, 1992.
It is important that building owners identify and undertake "readily achievable"
removal of any such barriers in the common areas, sidewalks, parking lots and
other areas of the building under their control.
The lessor and lessee is responsible for compliance with ADA relating to removal
of barriers within the workplace i.e., arrangement of interior furnishings and
access within the premises, and any improvements installed by lessor amid
lessee.
Keegan & Coppin Company, Inc. recommends that both parties seek expert advice
regarding the implications of the Act as affects this agreement.
Alquist-Priolo:
"The property which is the subject of this contract may be situated in a Special
Study Zone as designated under the Alquist-Priolo Geologic Hazard Act, Sections
2621-2625, inclusive, of the California Public Resources Code; and, as such, the
construction or development on this property of any structure for human
occupancy may be subject to the findings of a geologic report prepared by a
geologist registered in the State of California, unless such report is waived by
the City or County under the terms of that act. No representations on the
subject are made by the lessor or agent, and the lessee should make his own
inquiry or investigation."
Flood Hazard Area Disclosure:
The subject property may be situated in a "Special Flood Hazard Area" as set
forth on a Federal Emergency Managemnt Agency (FEMA) "Flood Insurance Rate Map"
(FIRM) or "Flood Hazard Boundary Map" (FHBM). The law provides that, as a
condition of obtaining financing on most structures located in a "Special Floods
Hazard Area", lender requires flood insurance where the property or its
attachments are security for a loan. Lessee should consult with experts
concerning the possible risk of flooding.
Acknowledgment:
Lessee: /s/ LF Date: 12/1/97
---------- ----------
Lessor: /s/ RPL Date: 11/25/97
---------- ----------
<PAGE>
EXHIBIT C
ARBITRATION OF DISPUTES
FOR LEASE
PROPERTY ADDRESS: 7975 Cameron Center Drive Building 200, Windsor, CA
--------------------------------------------------------------
Any dispute or claim in law or equity arising out of this contract or any
resulting transaction shall be decided by neutral binding arbitration in
accordance with the rules of the American Arbitration Association, and not by
court action except as provided by California law for judicial review of
arbitration proceedings. Judgment upon the award rendered by the arbitrator(s)
may be entered in any court having jurisdiction thereof. The parties shall have
the right to discovery in accordance with Code of Civil Procedure Section
1283.05. The following matters are excluded from arbitration hereunder: (a) a
judicial or non-judicial foreclosure or other action or proceeding to enforce a
deed of trust, mortgage, or real property sales contract as defined in Civil
Code Section 2985, (b) an unlawful detainer action, (c) the filing or
enforcement of a mechanic's lien, (d) any matter which is within the
jurisdiction of a probate court, or small claims court, or an action for bodily
injury or wrongful death, or for latent or patent defects to which Code of Civil
Procedure Section 337.1 or Section 337.15 applies. The filing of a judicial
action to enable the recording of a notice of pending action, for order of
attachment, receivership, injunction, or other provisional remedies, shall not
constitute a waiver of the right to arbitrate under this provision.
Any dispute or claim by or against broker(s) and/or associate licensee(s)
participating in this transaction shall be submitted to arbitration consistent
with the provision above only if the broker(s) and/or associate licensee(s)
making the claim or against whom the claim is made shall have agreed to submit
it to arbitration consistent with this provision.
"NOTICE: BY INITIALLING IN THE SPACE BELOW, YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION
DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW, AND YOU ARE GIVING
UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN COURT OR JURY
TRIAL. BY INITIALLING IN THE SPACE BELOW, YOU ARE GIVING UP YOUR JUDICIAL RIGHTS
TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE
'ARBITRATION OF DISPUTES' PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY."
"WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING
OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION TO
NEUTRAL ARBITRATION."
(/s/LF) ( ) Lessee agrees ( ) ( ) Lessee does not agree
(/s/RL) ( ) Lessor agrees ( ) ( ) Lessor does not agree
( ) ( ) Lessee's Broker agrees
( ) ( ) Lessor's Broker agrees
<PAGE>
EXHIBIT D
AGENT REPRESENTING BOTH LANDLORD AND TENANT
A real estate agent either acting directly or through one or more associate
licenses, can legally be the agent of both the Landlord and the Tenant in a
transaction, but only with the knowledge and consent of both the Landlord and
the Tenant.
In a dual agency situation, the agent has the following affirmative obligations
to both the Landlord and the Tenant.
(a) A fiduciary duty of utmost care, integrity, honest and loyalty in the
dealings with either Landlord or Tenant.
(b) Other duties to the Landlord and the Tenant as stated above in their
respective sections.
In representing both Landlord and Tenant, the agent may not, without the express
permission of the respective party, disclose to the other party that the
Landlord will accept a rent less than the listed rent or that the Tenant will
pay a rent greater than the rent offered.
The above duties of the agent in a real estate transaction do not relieve a
Landlord or Tenant from the responsibility to protect their own interest. You
should carefully read all agreements to assure that they adequately express your
understanding of the transaction. A real estate agent is a person qualified to
advise about real estate. If legal or tax advise is desired, consult a competent
professional.
You should read its contents each time it is presented to you, considering the
relationship between you and the real estate agent in your specific transaction.
I/We acknowledge receipt of a copy of this disclosure.
/s/ Randal P. Lewis Date 11-25-97
- ------------------------------ --------------------------
(Landlord)
/s/ Lawrence J. Fassler Date 12-1-97
- ------------------------------ --------------------------
(Tenant)
DECLARATION REGARDING REAL ESTATE AGENCY RELATIONSHIP
Keegan & Coppin Company, Inc., is the agent of (check one)
(Name of Listing Agent)
The Landlord exclusively; or
- --
X Both the Tenant and Landlord
- --
CONFIRMED AND ACKNOWLEDGED:
/s/ Randal P. Lewis Date 11-25-97
- ------------------------------ --------------------------
(Tenant)
Date
- ------------------------------ --------------------------
(Landlord)
By:
- ------------------------------ --------------------------
(Agent)
- --------------------------------------------------------------------------------
Keegan & Coppin Company, Inc., is the agent (check one)
- -- The Tenant exclusively; or
The Landlord exclusively; or
- --
X Both the Tenant and Landlord
- --
CONFIRMED AND ACKNOWLEDGED:
/s/ Randal P. Lewis Date 11-25-97
- ------------------------------ --------------------------
(Tenant)
/s/ Lawrence J. Fassler Date 12-1-97
- ------------------------------ --------------------------
(Landlord)
By:
- ------------------------------ --------------------------
(Agent)
<PAGE>
EXHIBIT E
PERMITTED HAZARDOUS MATERIALS
Lessee may, at any time and from time to time, engage in a Reportable Use (as
defined in Section 6.2) with respect to any of the following substances:
Isopropanol
Nitric Acid
Sulfuric Acid
Phosphoric Acid
Synergy cleaner (citrus-based organic)
Oxalic acid
Cidex (gluteraldehyde)
Epoxy
Lessee acknowledges and agrees that the Sonoma County Department of
Environmental Health and the Department of Emergency Services require that a
Hazardous Material Management Plan ("HMMP") be filed if the total amount of
hazardous materials exceeds 25 gallons. AVE covenants to Lessor to file an HMMP
with the aforementioned agencies if at any time the amount of hazardous
materials stored on the property exceeds such amount.
<PAGE>
EXHIBIT F
Proposal Lessee Improvements
[Floor Plan-Bldg.200]
THIRD AMENDMENT, dated as of December 22, 1997, to that certain
International Distributorship Agreement, dated as of January 22, 1997, as
amended (as so amended, the "Distributorship Agreement") between Arterial
Vascular Engineering, Inc., a Delaware corporation ("AVE") and Japan Lifeline
Co., Ltd., a company organized under the laws of Japan (the "Distributor").
WHEREAS, AVE and the Distributor desire to amend certain provisions of
the Distributorship Agreement;
NOW, THEREFORE, in consideration of the premises and for other valuable
consideration, receipt of which is hereby acknowledged, the parties hereto
hereby agree as follows:
1. Section 3.6 is hereby amended by inserting the following after
the words "September 30, 1998" and before the words "in connection with":
"and the amount of * on January 1, 1998, for use by the
Distributor during the period between January 1, 1998 and
December 31, 1998,"
2. Schedule B is hereby amended by revising the proviso to
the end of the sentence under the heading "Coronary Stent Systems," which
proviso shall be and read as follows:
"; provided, however, that for the quarterly period beginning
October 1, 1997 and ending December 31, 1997, Distributor
shall purchase at least * coronary stent systems".
3. Schedule B is hereby further amended by adding an additional
paragraph under the heading "Coronary Stent Systems", which paragraph shall be
and read as follows:
"Inaddition to the minimum quarterly purchases specified above, Distributor
shall also purchase an aggregate of * GFX(TM) coronary stent systems, with
purchases of portions of such aggregate amount to be at such times as AVE
shall require; provided, however, that Distributor shall not be required to
purchase more than * of such additional GFX(TM) coronary stent systems in any
one quarterly period; and provided further that Distributor shall not be
required to purchase any such additional GFX(TM)coronary stent systems prior
to the date of grant of Japanese insurance reimbursement for such Products;
and provided further that Distributor shall not be required to place an order
for a portion of such additional GFX(TM) coronary stent systems within the
three-month period immediately preceding the introduction to the Japanese
market of an improved version of the GFX(TM) coronary stent; and provided
further that Distributor shall not be required to purchase more than *
GFX(TM) coronary stent systems in the aggregate (including the otherwise
required minimum quarterly purchases) in any single 12-month period following
the date of grant of Japanese insurance reimbursement for such Products."
-------------
* Confidential treatment has been requested for certain information contained
in this document. Such information has been omitted and filed separately
with the Securities and Exchange Commission pursuant to Rule 24b-2
promulgated under the Securities Exchange Act of 1934, as amended.
<PAGE>
4. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Distributorship Agreement.
5. From and after the date hereof, all references in the
Distributorship Agreement shall be deemed to be references to the
Distributorship Agreement as modified hereby.
6. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of California applicable to contracts
executed in and to be performed in that State.
IN WITNESS WHEREOF, AVE and the Distributor have caused this Amendment
to be duly executed as of the date first written above by their respective
officers thereunto duly authorized.
ARTERIAL VASCULAR ENGINEERING, INC. JAPAN LIFELINE CO., LTD.
/s/ Scott J. Solano /s/ Takeshi Masumoto
- -------------------------------------- -------------------------
Scott J. Solano Takeshi Masumoto
President and Chief Executive Officer President
EXHIBIT 11.1
<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
1997 1996 1997 1996
------- ------ ------ ------
<S> <C> <C> <C> <C>
Basic
Weighted average common shares outstanding 31,215 30.959 31,140 30,910
------- ------- ------- -------
Shares used in calculation of net income per share - basic 31,215 30,959 31,140 30,910
======= ======= ======= =======
Net income $ 7,754 $ 4,606 $13,464 $12,371
======= ======= ======= =======
Net income per share - basic $ 0.25 $ 0.15 $ 0.43 $ 0.40
======= ======= ======= =======
Diluted
Weighted average common shares outstanding 31,215 30,959 31,140 30,910
Weighted average common equivalent shares assuming
conversion of stock options under the treasury
stock method 1,288 631 1,230 701
------- ------- ------- -------
Shares used in calculation of net income per share - diluted 32,503 31,590 32,370 31,611
======= ======= ======= =======
Net income $ 7,754 $ 4,606 $13,464 $12,371
======= ======= ======= =======
Net income per share - diluted $ 0.24 $ 0.15 $ 0.42 $ 0.39
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,471
<SECURITIES> 68,920
<RECEIVABLES> 37,266
<ALLOWANCES> 2,488
<INVENTORY> 13,590
<CURRENT-ASSETS> 140,246
<PP&E> 45,711
<DEPRECIATION> 4,045
<TOTAL-ASSETS> 183,802
<CURRENT-LIABILITIES> 27,493
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 156,278
<TOTAL-LIABILITY-AND-EQUITY> 183,802
<SALES> 64,565
<TOTAL-REVENUES> 64,565
<CGS> 13,145
<TOTAL-COSTS> 13,145
<OTHER-EXPENSES> 32,812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 20,714
<INCOME-TAX> 7,250
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,464
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
</TABLE>
