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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-28266
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HEARTPORT, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 94-3222307
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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200 CHESAPEAKE DRIVE, REDWOOD CITY, CA 94063
Address of Principal Executive Offices) (Zip Code)
(650) 306-7900
Registrant's Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1998: approximately $192,336,000 (based on the last
reported sale price of $13.50 per share on March 20, 1998 on the Nasdaq National
Market).
The number of shares of Common Stock outstanding as of March 20, 1998 was
24,967,117.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT FORM 10-K REFERENCE
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Proxy Statement for Registrant's Annual Meeting to be held on May 7, Part III, Items
1998 11-13
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TABLE OF CONTENTS
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Part I
Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 27
Item 3. Legal Proceedings...................................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders.................................... 27
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 27
Item 6. Selected Financial Data................................................................ 29
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................. 29
Item 8. Financial Statements and Supplementary Data............................................ F-1
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... F-15
Part III
Item 10. Directors and Executive Officers of the Registrant..................................... III-1
Item 11. Executive Compensation................................................................. III-3
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... III-3
Item 13. Certain Relationships and Related Transactions......................................... III-3
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... IV-1
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Heartport, the Heartport logo and EndoCPB are registered trademarks of the
Company. Port-Access is a trademark of the Company. Port-Access Partnership is a
service mark of the Company.
PART I
ITEM 1. BUSINESS.
The discussion in this Item and elsewhere in this Annual Report on Form 10-K
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors."
INTRODUCTION
Heartport, Inc. ("Heartport" or the "Company") has developed and is
marketing proprietary systems and novel procedures that are designed to enable
cardiac surgeons to perform a wide range of heart surgeries in a minimally
invasive manner through small incisions, or "ports," between the ribs without
the need to crack open the chest as required in conventional heart surgery.
Although fundamentally changing the means of providing access to the heart, the
Company's Port-Access-TM- surgical procedures closely parallel the conventional
procedures that have been used in heart surgery since the mid-1950s. The Company
believes, based on the limited clinical experience to date, that its systems and
procedures have the potential to offer efficacy equal to that of conventional
heart surgery, but with the benefits of reduced trauma and complications,
reduced pain and suffering, shorter hospital stays, reduced convalescence time,
and lower overall cost. The Company believes that its Port-Access systems and
procedures will have a significant impact on the field of heart surgery in the
same way that minimally invasive surgical procedures such as laparoscopy
impacted general surgery and arthroscopy impacted orthopedic surgery. As of
March 16, 1998, the Company believes that over 3,500 Port-Access procedures have
been performed.
The Company markets its Port-Access systems with a direct sales force in the
United States and Europe. Once a purchase order from a hospital or medical
center is received, the Company trains the surgical team in Port-Access systems
and procedures. The Company has a 50,000 sq. ft. cardiovascular research and
training facility in Utah for training surgical teams.
BACKGROUND
Cardiovascular disease is the leading cause of death in the United States
and many other developed countries. Two of the principal types of cardiovascular
disease are coronary artery disease ("CAD") and valvular heart disease ("VHD").
In CAD, one or more coronary arteries are narrowed, resulting in the risk of
insufficient blood flow to the heart muscle. In VHD, one or more heart valves
are dysfunctional, resulting in suboptimal pumping of blood. Conventional
open-chest heart surgery (commonly referred to as "open-heart" surgery) is one
of the leading methods of treating CAD, VHD, and other types of cardiovascular
disease.
Heart surgery is widely regarded as one of the most important medical
advances of the twentieth century. This field of surgery was made possible
during the 1950s by the development of technology that enabled physicians to
perform cardiopulmonary bypass ("CPB") and stop the heart during surgery. CPB
protects the patient by taking over the function of the heart in circulating
oxygenated blood throughout the patient's organs and tissues, thereby permitting
the heart to be safely stopped. The procedure of placing the patient on CPB and
stopping the heart is the standard of care in heart surgery because it offers
several critical advantages. First, stopping the heart allows the surgeon to
achieve a high degree of surgical accuracy and precision, which is directly
related to the length and quality of the patient's life following surgery.
Second, stopping the heart protects the heart muscle during surgery. The stopped
heart requires virtually no blood flow, whereas the beating heart requires a
constant supply of oxygenated blood and will sustain damage if that supply is
interrupted. Third, the majority of cardiac surgery procedures are
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extremely difficult to perform if the heart is not stopped. For example, in most
multi-vessel coronary artery bypass surgeries, the heart must be turned and
manipulated to access the three major vascular beds of the heart and to operate
upon the various coronary arteries, a nearly impossible task while the heart is
beating. In valve repair and replacement, the heart itself must be opened to
repair or replace the diseased valve since the valves are located inside the
heart. Opening a beating heart poses a high risk of death. Thus, placing the
patient on CPB and stopping the heart is necessary to enable surgeons to safely
and accurately perform the full range of surgical procedures anywhere on the
surface or the interior of the heart.
Since heart surgery was pioneered in the mid-1950s, remarkable advances have
occurred in the surgical treatment of cardiovascular disease. CAD is most
effectively treated by CABG procedures, in which an artery or vein is used to
bypass the narrowing in a coronary artery and restore blood flow downstream of
the narrowing. The treatment for VHD involves either repairing the diseased
heart valve, most commonly with the implantation of a prosthetic annuloplasty
ring, or replacing it with a prosthetic mechanical or tissue valve. Until the
introduction of Heartport's technology, CABG and valve repair and replacement
procedures were virtually always performed in a highly invasive surgery in which
the patient's chest is opened widely to gain access to the heart, the patient is
placed on CPB, and the patient's heart is stopped. Worldwide, approximately
800,000 CABG and valve procedures are performed each year in this manner.
Although highly efficacious, open-chest heart surgery is extremely traumatic
and painful, typically requires a lengthy period of convalescence, and is
expensive. The heart sits in the middle of the chest, protected by skeletal
armor consisting of the sternum or "breast bone," the rib cage, and the spine.
In conventional heart surgery, the heart is accessed by means of a sternotomy,
whereby a surgeon makes a 12-to 18-inch incision in the patient's chest, the
sternum is cut in half with a bone saw, and the rib cage is then spread open
with a steel retractor. The procedure is highly traumatic, resulting in a
lengthy and painful recovery period. In 1995, open-chest heart surgery patients
in the United States remained in the hospital for an average of ten days and
required a significant period of convalescence following discharge. Conventional
cardiac surgery is also expensive, and per-patient charges on average for a CABG
procedure are approximately $40,000 per patient and for a valve procedure are
approximately $50,000 per patient. In addition, substantial costs are incurred
during convalescence. With approximately 400,000 open-chest heart surgeries
performed in the United States each year, the total cost to the U.S. healthcare
system is substantial.
The development and widespread adoption of minimally invasive surgical
approaches have revolutionized many surgical fields, including general surgery,
orthopedics, gynecology, urology, and neurosurgery. Notable examples include
laparoscopic procedures in the field of general surgery and arthroscopic
procedures in the field of orthopedic surgery. Such procedures are designed to
be as efficacious as conventional surgery, but with substantially reduced
trauma, thereby decreasing complications, reducing pain and suffering, speeding
recovery, and decreasing costs associated with many aspects of patient care.
This movement toward minimally invasive surgery has been driven by advances in
both device technology and surgical technique. A minimally invasive approach is
most advantageous in cases in which significant trauma results from gaining
surgical access to an affected organ or site. Cardiac surgery represents a
particularly significant opportunity for a minimally invasive approach due to
the extreme trauma associated with opening the chest. Heartport has demonstrated
that its Port-Access minimally invasive surgical approach has the potential to
significantly reduce complications, pain and suffering, convalescence, and
expense, while maintaining the high efficacy of conventional open-chest surgery.
Less-invasive alternatives to conventional heart surgery began to emerge in
the early 1980s. For example, percutaneous transluminal coronary angioplasty
("PTCA"), or balloon angioplasty, was developed as an alternative to CABG
surgery. In a PTCA procedure, the cardiologist inserts a small balloon catheter
into the narrowed coronary artery and inflates the balloon to expand the
narrowed section, thereby increasing the internal diameter of the vessel to
increase blood flow. A PTCA procedure is less traumatic, requires less time in
the hospital, and involves a shorter recuperation period than a conventional
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open-chest CABG procedure. As a result, a PTCA procedure in the United States is
less expensive on a per-procedure basis, with costs of approximately $16,000 in
1994. In 1995, approximately 460,000 PTCA procedures were performed in the
United States, and an additional 450,000 such procedures were performed
elsewhere in the world.
Although PTCA is less invasive than conventional CABG, a major drawback of
PTCA is the high rate of restenosis, or renarrowing of the blood vessel at the
treatment site. Restenosis within six months following a PTCA procedure occurs
at rates ranging from 15% to 50%. The majority of PTCA patients eventually
undergo another PTCA procedure or require CABG surgery. Although the cost of a
single PTCA procedure may be substantially less than a conventional CABG
procedure, a recent study indicated that three years after the procedure, PTCA
has no cost advantage over conventional open-chest CABG due to the need for
subsequent interventions. Furthermore, another recent study concluded that the
quality of life, post intervention, is higher for conventional open-heart
surgery patients because of the follow-up interventions required in PTCA. The
Company believes that the dramatic reduction in trauma associated with the
Port-Access approach will magnify this advantage. More recently, clinicians have
begun to employ mechanical coronary artery stents, metal prostheses designed to
hold open arteries, as a means of preventing restenosis. Although long-term
clinical data is not yet available, stents appear to reduce but not eliminate
the problem of restenosis associated with non-surgical treatment of CAD.
Restenosis rates for conventional open-chest CABG are significantly lower
than those for non-surgical approaches. Studies indicate that open-chest
coronary artery bypass grafts have 17-year patency rates (the maintenance of
sufficient blood flow through the affected artery) of 92% when the left internal
mammary artery ("IMA") graft is used, 85% when the right IMA graft is used, and
10-year patency rates of approximately 60% when a saphenous vein graft from the
patient's leg is used. In addition, a Duke University study suggests that
patients with three-vessel CAD and patients with severe two-vessel CAD have
improved survival after conventional open-chest CABG surgery in comparison to
PTCA and other medical treatments. Thus, conventional open-chest CABG remains
the preferred treatment for severe CAD because of these higher long-term success
rates.
Another less-invasive alternative to conventional open-chest CABG surgery is
the use of low-technology surgical tools to perform minimally invasive CABG
surgery on the beating heart. Such beating heart surgery, whether open-chest or
minimally invasive, has generally been, and the Company believes is likely to
continue to be, limited to the small percentage of cases in which the heart does
not need to be opened, turned, or manipulated and in which the patient is able
to tolerate the stress of undergoing heart surgery without the support of CPB
and the benefits resulting from stopping the heart.
The Company believes that to achieve the high efficacy and patient safety
and broad scope of conventional open-chest cardiac surgery, the patient must be
placed on CPB and the heart stopped. As a result, conventional open-chest heart
surgery represents the standard of care for the treatment of CAD, VHD, and other
cardiac conditions. To date, the only way to place the patient on CPB and stop
the heart has been to crack the patient's chest. Heartport was formed with the
objective of developing a minimally invasive approach to cardiac surgery that
would permit surgeons to perform the full range of highly efficacious cardiac
surgeries, with the patient on CPB and the heart stopped, but without the trauma
associated with a sternotomy and reducing the complications associated with
traditional CPB.
THE HEARTPORT SOLUTION
Heartport has developed proprietary systems for performing several different
types of minimally invasive heart surgery. These systems and devices have been
cleared or exempted by the Food and Drug Administration ("FDA") for commercial
sale in the United States and by a Notified Body in Europe. Heartport's core
platform is an endovascular cardiopulmonary bypass ("EndoCPB") system, which
allows surgeons to place the patient on CPB and stop and protect the patient's
heart without the need for a sternotomy. Using the Company's EndoCPB-Registered
Trademark- platform and procedure-specific application systems, the
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surgeon is able to perform cardiac surgery by accessing the heart through one or
more small incisions, or "ports," placed between the patient's ribs. The
Company's first several application systems comprise reusable and disposable
devices for Port-Access CABG and for Port-Access mitral valve repair and mitral
valve replacement (collectively, "MVR") surgeries. Application systems for
performing additional cardiac surgery procedures, including Port-Access aortic
valve replacement ("AVR"), are also under development. These future systems will
require regulatory clearances or exemptions prior to commercial distribution.
Although fundamentally changing the means of providing access to the heart, the
Port-Access surgical procedures closely parallel the conventional procedures
that have been used in heart surgery since the mid-1950s. The Company believes
that its systems and procedures have the potential to offer efficacy equal to
that of conventional open-chest surgery, but with the benefits of reduced trauma
and complications, reduced pain and suffering, shorter hospital stays, reduced
convalescence time, and lower overall cost. See "Risk Factors--No Assurance of
Market Acceptance" and "--No Assurance of Regulatory Clearance or Approval;
Significant Domestic and International Regulation."
MARKETS AND APPLICATIONS
Cardiovascular disease is the leading cause of death in the United States
and other developed countries. In the United States, it causes approximately one
million deaths per year, which represents over 40% of all deaths. CAD is one of
the most common forms of cardiovascular disease, affecting more than 13 million
people in the United States. If untreated, CAD can cause a myocardial infarction
or "heart attack." Each year, approximately 1.5 million people experience heart
attacks in the United States, resulting in approximately 500,000 deaths. Each
year on a worldwide basis, approximately 600,000 CAD patients undergo
conventional open-chest CABG surgery, over 800,000 CAD patients undergo PTCA or
other non-surgical interventions, and approximately 200,000 VHD patients undergo
open-chest valve repair or replacement procedures. MVRs represent approximately
30% and AVRs represent approximately 65% of valve surgery procedures.
Per-patient charges of these heart surgery procedures in the United States
averages approximately $16,000 for PTCA, $40,000 for conventional CABG, and
$50,000 for conventional valve surgery. The Company has demonstrated that its
Port-Access EndoCPB platform and procedure-specific Port-Access application
systems provide a minimally invasive surgical alternative for CABG and MVR
procedures.
CORONARY ARTERY BYPASS GRAFTING--CABG. Currently, the most efficacious
treatment for CAD is conventional open-chest CABG surgery. In a conventional
open-chest CABG, a 12- to 18-inch incision is made in the patient's chest, the
patient's sternum is cut in half with a bone saw, and the rib cage is spread
open with a steel retractor. Blood is re-routed past a narrowing in one or more
coronary arteries by either grafting an artery from the chest wall to the
coronary artery below the narrowing, or grafting a section of artery or vein
from another part of the body both to the aorta (which serves as a source of
oxygenated blood) and to a point below the narrowed segment on the affected
coronary artery, or both. Using the IMA from the chest wall is the most
efficacious procedure given its long term patency in such open-chest procedures.
The IMA is dissected free from the chest wall and prepared for grafting to the
coronary artery. Large tubes, or cannulae, are inserted directly through the
walls of the heart and the aorta in order to place the patient on CPB, the aorta
is compressed closed with an external cross-clamp, and a catheter is used to
administer the cardioplegic solution that stops the heart. The artery from the
chest wall is then sutured in place on the affected coronary artery, which sits
motionless atop the stopped heart, enabling the highest degree of surgical
accuracy and precision. The patient's chest is closed and the sternum is held
together with steel wire. Afterward, the patient has a long and painful
recovery. In the United States, open-chest CABG patients spend an average of ten
days in the hospital, and the Company estimates that up to two or more days are
spent in the intensive care unit ("ICU"). For some period following surgery, a
ventilator breathes for the patient because the trauma to the rib cage and
sternum makes unassisted breathing extremely painful.
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Each step in the Company's Port-Access CABG procedure parallels a
corresponding step in conventional CABG. Instead of accessing the heart through
a 12- to 18-inch opening in the chest, however, the procedure is accomplished
through small incisions, or "ports" between the patient's ribs. During the
procedure, the Company's EndoCPB-Registered Trademark- System, a series of
proprietary catheters inserted via certain of the patient's peripheral vessels,
circulates oxygenated blood throughout the body and stops and protects the
heart. The Company's Port-Access-TM- CABG System is designed to enable the
surgeon to access the heart and its associated vessels, visualize the interior
of the thoracic cavity, access and prepare the arterial or venous grafts, attach
the grafts to the diseased coronary artery resting motionless atop the stopped
heart, and do various other supporting activities. Upon completion of the
surgical procedure, the heart is allowed to spontaneously resume normal activity
and CPB is discontinued. The patient leaves the operating room with the heart
revascularized in the same manner as in a conventional open-chest CABG
procedure, but with the port incisions sutured closed rather than with the chest
held together with steel wire.
VALVE REPAIR AND REPLACEMENT. A leading treatment for VHD is the surgical
replacement or repair of the diseased heart valve. In conventional open-chest
MVR surgery, the heart is accessed via a sternotomy, the patient is placed on
CPB, the patient's heart is stopped, and the heart is drained of blood. The
diseased valve is then accessed through an incision in the left atrium, one of
the upper chambers of the heart, and the valve is either repaired, most commonly
with the implantation of a prosthetic annuloplasty ring, or is removed and
replaced with a mechanical or tissue prosthetic valve.
Similar to Port-Access CABG, each step in the Company's Port-Access MVR
procedure closely parallels the corresponding step in a conventional MVR
procedure, but no sternotomy is required. The Company's Port-Access-TM- MVR
System utilizes the EndoCPB System to place the patient on CPB, stop and protect
the heart, and empty the heart of blood. The Company's Port-Access MVR System is
designed to permit the surgeon to visualize the interior of the thoracic cavity,
open the left atrium of the heart to gain access to the mitral valve, visualize
the interior of the heart, assess valve function, repair or remove the diseased
valve, size the prosthesis (either a prosthetic heart valve or annuloplasty
ring), deliver and attach the prosthesis, close the heart, allow the heart to
spontaneously resume normal activity, and then discontinue CPB. The patient
leaves the operating room with the heart valve repaired or replaced in the same
manner as in a conventional, open-chest MVR procedure, but with the port
incisions sutured closed rather than the chest held together with steel wire.
OTHER PROCEDURES. The Company believes that its Port-Access technology and
approach to cardiac surgery may also enable it to develop systems to treat a
range of cardiovascular disease in addition to CAD and mitral valve diseases.
The Company is currently developing Port-Access systems to treat aortic valve
disease and other cardiac diseases.
STRATEGY
The Company's objective is to become the global leader in research,
development, and commercialization of systems for minimally invasive cardiac
surgery. Key elements of the Company's strategy include:
ESTABLISH PORT-ACCESS MINIMALLY INVASIVE CARDIAC SURGERY AS A STANDARD OF
CARE FOR CAD AND VHD. The Company believes that it is the first to design,
develop, and receive FDA-clearance for devices and systems for the minimally
invasive surgical treatment of CAD and VHD. The Company is currently introducing
its proprietary technology to leading cardiac surgery centers in the United
States and Europe. As of March 16, 1998, over 200 cardiac surgery teams had been
trained to perform Port-Access surgery. Prior to shipment, the Company provides
its customers with extensive training on the EndoCPB, Port-Access CABG System
and Port-Access MVR System and procedures at the Heartport Research and Training
Center ("HRTC") in Utah. In addition, the Company intends to support clinically
driven research efforts to prove the efficacy and benefits of Port-Access
minimally invasive cardiac surgery. In this regard, in 1997 the Company
established the Port-Access International Registry, a multi-center registry
designed
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to improve patient outcomes and advance Port-Access minimally invasive cardiac
surgery by sharing aggregate knowledge maintained in the registry database.
MARKET TO HIGH VOLUME CARDIAC SURGERY CENTERS WITH DIRECT SALES FORCE. The
cardiac surgery market in the United States and Europe is highly concentrated,
with 300 centers responsible for over 50% of the more than 500,000 open-chest
surgeries performed annually in the two geographies. The Company believes that
rapid penetration of these high volume centers is achievable with a relatively
small direct sales force. As of March 16, 1998 the Company has 22 cardiovascular
sales specialists in the United States and 5 cardiovascular sales specialists in
Europe with extensive experience selling cardiac surgery and cardiology
products.
PROMOTE PORT-ACCESS PARTNERSHIPS. The Company has developed a procedural
selling approach to market its systems to cardiac surgeons, called the
Port-Access Partnership-SM-. The Company intends to utilize its Port-Access
Partnership to promote customer loyalty. In the partnership, the Company trains
a center's surgical team, supplies patient and referring physician educational
materials, supports local market media efforts and furnishes proprietary
reusable devices for Port-Access procedures in exchange for a purchase order for
Port-Access disposable products necessary to perform Port-Access cardiac
surgery.
EXPAND PORT-ACCESS APPLICATIONS BY LEVERAGING CORE TECHNOLOGY. The Company
has developed its EndoCPB System to enable minimally invasive Port-Access CABG,
Port-Access MVR, and other Port-Access heart surgeries, with the patient on CPB
and the heart stopped. The Company intends to expand the use of its EndoCPB
platform to address other types of heart surgery. See "Risk Factors--No
Assurance of Market Acceptance" and "--No Assurance of Regulatory Clearance or
Approval; Significant Domestic and International Regulation."
PROTECT AND ENHANCE PROPRIETARY POSITION. The Company currently holds
issued and allowed patents covering a number of fundamental aspects of the
Company's EndoCPB System and procedure-specific Port-Access systems. As of March
16, 1998, the Company owns 59 issued or allowed United States patents, and one
issued foreign patent. In addition, as of March 16, 1998, the Company has 84
pending United States patent applications and has filed 45 patent applications
that are currently pending in Europe, Japan, Australia, and Canada. The Company
intends to continue to pursue its patent filing strategy and to vigorously
defend its intellectual property position against infringement. See "Risk
Factors--Uncertainty Regarding Patents and Protection of Proprietary Technology;
Risks of Future Litigation."
TARGET INTERNATIONAL MARKETS. The Company intends to continue to devote
resources to penetrate international markets given the substantial size and
economic attractiveness of these markets. The Company has received the necessary
regulatory approvals in Europe, and is pursuing approvals in Canada, Australia,
and Asia to market its EndoCPB and Port-Access systems. In addition, the Company
has trained surgical teams from leading centers in England, Scotland, Germany,
France, Spain, Belgium, Sweden, Canada, Australia, India, and Malaysia in the
use of Port-Access techniques. In December 1997 the Company entered into a
distribution, training and supply agreement with Getz Bros. Co., Ltd. ("Getz")
under which Getz will be the Company's exclusive distributor of Port-Access
minimally invasive cardiac surgery systems in Japan. See "Strategic
Relationships."
COMPLEMENT INTERNAL PRODUCT DEVELOPMENT WITH STRATEGIC ALLIANCES. The
Company intends to leverage its technology platform through strategic alliances
with corporate partners. In September 1995, the Company formed a strategic
relationship with St. Jude Medical, Inc. ("St. Jude Medical"), the world's
leading producer of prosthetic heart valves, for the joint development of
prosthetic valve and annuloplasty ring delivery systems for Port-Access
delivery. The Company receives royalties from St. Jude Medical upon sale of
certain St. Jude Medical products that incorporate the Company's proprietary
technology. The Company expects to pursue additional strategic relationships
with corporations and research institutions with respect to the research,
development, regulatory approval, manufacturing and marketing of certain of its
potential products and procedures. See "Strategic Relationships."
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TECHNOLOGY
The Company believes it is currently the only company marketing a technology
designed to permit minimally invasive cardiac surgery to be performed on a
stopped heart with CPB support. The Company's systems for minimally invasive
cardiac surgery consist of a common platform, the EndoCPB System, and
procedure-specific application systems comprising proprietary reusable and
disposable devices.
ENDOVASCULAR CARDIOPULMONARY BYPASS. The EndoCPB System is a series of
proprietary catheters used to place the patient on CPB and to stop and protect
the heart during cardiac surgery, without performing a sternotomy. There are
five key components: the Endoaortic Clamp-TM-, a saline-filled balloon catheter,
occludes the ascending aorta, stops and cools the heart via delivery of
cardioplegic solution, monitors aortic root pressures, and drains excess blood
from the heart; the Endovenous Drainage-TM- cannula removes deoxygenated blood
from the body; the Endoarterial Return-TM- cannula returns oxygenated blood to
the body; the Endopulmonary Vent-TM- drains excess blood from the heart via the
pulmonary artery; and the Endocoronary Sinus-TM- Catheter provides an
alternative route for delivery of cardioplegic solution. Each component of the
EndoCPB System is positioned within the vascular system via peripheral vascular
access.
PORT-ACCESS CORONARY ARTERY BYPASS GRAFTING. The Port-Access CABG System
currently consists of 25-30 reusable and disposable devices designed to perform
the entire CABG procedure in a minimally invasive manner. The system includes
devices for accessing the heart and its associated vessels, visualizing the
interior of the thoracic cavity, accessing and preparing the arterial and venous
grafts, attaching the grafts to the diseased coronary artery, and various other
supporting activities. The devices are designed to permit the surgeon to operate
through ports with the same surgical precision and accuracy as is possible using
conventional cardiac surgical instruments through a sternotomy.
PORT-ACCESS MITRAL VALVE REPAIR AND MITRAL VALVE REPLACEMENT. The
Port-Access MVR System currently consists of 25-30 reusable and disposable
devices. This system is designed to be compatible with existing implantable
prosthetic heart valves and prosthetic annuloplasty rings. They permit the
surgeon to perform mitral valve surgery in a minimally invasive manner, and
offer the surgeon the ability to visualize the interior of the thoracic cavity,
open the left atrium of the heart to gain access to the mitral valve, visualize
the interior of the heart, assess valve function, repair or remove the diseased
valve, size the prosthesis (either a prosthetic heart valve or annuloplasty
ring), deliver and attach the prosthesis and close the heart. The Port-Access
MVR System is designed to permit precise and accurate surgery to be performed
through small ports.
PORT-ACCESS AORTIC VALVE REPLACEMENT AND OTHER PROCEDURES. The Company is
in the process of developing a Port-Access AVR system. In addition, the Company
is actively developing systems for performing other Port-Access cardiac surgery
procedures. There can be no assurance, however, that any such systems will be
successfully developed, be granted required regulatory clearances or approvals,
or achieve any significant level of market acceptance.
REGULATORY STATUS
UNITED STATES
In October 1996, the Company received 510(k) clearance from the FDA to
market its EndoCPB system and several proprietary Class II disposable surgical
devices for its Port-Access surgery systems. In addition, the Company received
premarket notification exemptions clearing its core reusable and disposable
surgical devices to be labeled and used for minimally invasive cardiovascular
surgery. These clearances and exemptions allowed the Company to commercially
launch its Port-Access CABG System and Port-Access MVR System in early 1997.
Since that time the Company has received additional clearances and exemptions
from the FDA for other devices and enhancements to its system.
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The Company continues to submit 510(k) notifications for additional
enhancements to its EndoCPB System and for additional specialty disposable
devices to further enhance performance of the Port-Access CABG and MVR
procedures. Additional 510(k) submissions are planned for 1998 for devices to
facilitate Port-Access procedures other than CABG and MVR. There can be no
assurance that the FDA will act favorably or quickly on the Company's 510(k)
submissions, and significant difficulties and costs may be encountered by the
Company in its efforts to obtain these additional FDA clearances that could
delay or preclude the Company from marketing and selling products for additional
procedures. See "Risk Factors-- No Assurance of Regulatory Clearance or
Approval; Significant Domestic and International Regulations," and "Government
Regulation."
INTERNATIONAL
In January 1997, the Company received CE Mark clearance for its EndoCPB
System which allows the sale of its Port-Access CABG and MVR systems in all
countries of the European Union. The Company has also submitted amendments to
its Product Dossiers for enhancements to its EndoCPB System to further enhance
performance of the Port-Access CABG and MVR procedures. Additional CE Mark
submissions are planned for 1998 for devices to facilitate Port-Access
procedures other than CABG and MVR. See "Risk Factors--No Assurance of
Regulatory Clearance or Approval; Significant Domestic and International
Regulations," and "Government Regulation."
SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board composed of
individuals with expertise in the field of cardiac surgery. The Scientific
Advisory Board periodically reviews the Company's clinical progress and product
development plans and identifies potential applications of the Company's
technology. In addition, members of the Scientific Advisory Board will be
available on an individual basis to consult with the Company as needed. The
members of the Scientific Advisory Board are consultants to the Company and have
substantial constraints on the amount of time they can devote to Company
matters. The members of the Scientific Advisory Board are as follows:
<TABLE>
<CAPTION>
NAME OCCUPATION/TITLE
- ---------------------------------- -----------------------------------------------------------------
<S> <C>
William A. Baumgartner, M.D. Professor of Surgery, Cardiac Surgeon In-Charge, Johns Hopkins
Hospital
Lawrence H. Cohn, M.D. Professor of Surgery, Harvard Medical School, Chief, Division of
Cardiac Surgery, Brigham and Women's Hospital
Delos M. Cosgrove, M.D. Chairman, Department of Thoracic and Cardiovascular Surgery, The
Cleveland Clinic Foundation
James L. Cox, M.D. Professor and Chairman, Cardiovascular and Thoracic Surgery,
Surgical Director, Georgetown University Cardiovascular
Institute, Georgetown University Medical Center
Bruce A. Reitz, M.D. Professor and Chairman, Department of Cardiothoracic Surgery,
Stanford University School of Medicine
</TABLE>
STRATEGIC RELATIONSHIPS
The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, regulatory
approval, manufacturing, and marketing of certain of its potential products and
procedures.
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ST. JUDE MEDICAL, INC.
The Company has formed a strategic relationship with St. Jude Medical, the
world's leading producer of prosthetic heart valves, for the joint development
of prosthetic valve and annuloplasty ring delivery systems for Port-Access MVR
and a prosthetic valve system for Port-Access AVR. Under the terms of an
agreement entered into in September 1995 and amended in January 1997, the
Company granted St. Jude Medical a non-exclusive, worldwide, royalty bearing
license to make, use, and sell a minimally invasive prosthetic valve system
incorporating a Port-Access delivery system and a St. Jude Medical valve or
annuloplasty ring prosthesis for use in Port-Access heart valve repair and
replacement procedures. St. Jude Medical has no minimum purchase obligations
under the agreement. In addition, the Company borrowed $3.0 million from St.
Jude Medical. As of December 31, 1996, the entire amount of the loan had been
converted to prepaid royalty payments.
GETZ BROS. CO., LTD.
In December 1997, the Company entered into a distribution, training and
supply agreement with Getz Bros. Co., Ltd. ("Getz") under which Getz will be the
Company's exclusive distributor of Port-Access minimally invasive cardiac
surgery systems in Japan. Pursuant to the agreement, Getz is responsible for
obtaining regulatory approvals and government reimbursement in Japan for the
Company's products. Getz is also responsible for marketing and sales, which will
be overseen by a committee of Heartport and Getz representatives. The Company
recognized $1.0 million in fees from Getz upon the execution of this agreement
in December 1997.
Although the Company intends to pursue additional strategic relationships in
the future, there can be no assurance that the Company will be successful in
establishing or maintaining any such relationships or that any such relationship
will be successful. See "Risk Factors--Reliance on Strategic Relationships."
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend in large part on
its ability to develop and introduce clinically advanced Port-Access minimally
invasive cardiac surgery systems that are effective, easy to use, safe, and
reliable. The Company's research and development department focuses upon the
continued development and refinement of its existing Port-Access devices,
systems, and procedures as well as upon the development of new devices, systems,
and procedures for treating other cardiac diseases.
To date, the Company has developed systems for Port-Access CABG and
Port-Access MVR surgery. A system for Port-Access aortic valve replacement is
currently under development. In collaboration with its clinical advisory board
and consultants, the Company is actively developing methods and devices for
future Port-Access surgical procedures, as well as continuing development of
reusable, disposable, and implantable devices to further refine current
Port-Access procedures. The Company believes that its EndoCPB and Port-Access
technologies are potentially applicable to a wide variety of other cardiac
surgical procedures. There can be no assurance, however, that the Company will
be successful in developing devices or systems for such procedures, or that such
devices or systems, if any, will be granted required regulatory clearances or
approvals, or achieve any significant level of market acceptance. See "Risk
Factors--No Assurance of Market Acceptance" and "--Significant Competition;
Rapid Technological Change."
MANUFACTURING
The Company is committed to producing high-quality products and expects to
manufacture internally the most proprietary, value-added components and products
and to outsource less critical manufacturing jobs. The Company manufactures its
products at its Redwood City, California, facilities. The Company believes that
its facilities have sufficient capacity to meet the Company's anticipated
manufacturing needs through the end of 1998. See "Item 2 Properties."
9
<PAGE>
The Company manufactures its products based on forecasted product orders,
and purchases subassemblies and components prior to receipt of purchase orders
from customers. Lead times for materials and components ordered by the Company
vary significantly, and depend on factors such as the business practices of the
specific supplier, contract terms, and general demand for a component at a given
time. Certain components used in the Company's products have long lead times or
must be ordered on non-cancelable terms. As a result, there is a risk of excess
or inadequate inventory if orders do not match forecasts, as well as potential
costs from non-cancelable orders.
To meet anticipated demand, the Company must increase the rate by which it
manufactures its products. To date the Company's manufacturing activities have
consisted primarily of manufacturing low volume quantities for initial
commercial sales. The manufacture of the Company's products is complex,
involving a number of separate processes and components. The Company does not
have experience in manufacturing its products in higher volume commercial
quantities. Although the Company is scaling up its capacity to produce products
in higher volume, there can be no assurance that it will be able to successfully
scale-up its production to meet commercial demand for its products in a timely
manner. In addition, the Company believes that cost reductions in its
manufacturing operations will be required for it to commercialize its systems on
a profitable basis. Certain manufacturing processes are labor-intensive, and
achieving significant cost reductions will depend, in part, upon reducing the
time required to complete these processes. Medical device manufacturers often
encounter difficulties in scaling up manufacturing of new products, including
problems involving product yields, quality control and assurance, component and
service availability, adequacy of control policies and procedures, lack of
qualified personnel, compliance with FDA regulations, and the need for further
FDA approval of new manufacturing processes and facilities. To date, the Company
has experienced variable yields in scaling up manufacturing of certain of its
product components, and there can be no assurance that such variability will not
continue or will not adversely impact the Company's ability to meet demand for
its products. The Company has considered and will continue to consider as
appropriate the internal manufacture of components currently provided by third
parties, as well as the implementation of new production processes. There can be
no assurance that manufacturing yields or costs will not be adversely affected
by the transition to in-house production or to new production processes when
such efforts are undertaken, and that such a transition would not materially and
adversely affect the Company's business, financial condition, and results of
operations. While the Company has received ISO 9001 certification, to date, the
FDA has not inspected the Company's compliance with Good Manufacturing Practices
("GMP") requirements, which include testing, control, and documentation
requirements, although the Company expects such inspections to be made in the
near future. There can be no assurance that FDA GMP requirements will be met.
The Company uses or relies on certain components and services used in its
devices that are provided by sole source suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, a material adverse effect on its business, financial condition, and
results of operations. See "Risk Factors--Limited Manufacturing Experience;
Dependence on Key Suppliers."
The regulatory clearances received to date by the Company require compliance
with FDA regulations for GMP. Even after the FDA has cleared or approved a
device, it will periodically inspect the manufacturing facilities and processes
for compliance with GMP. In addition, in the event that additional manufacturing
sites are added or manufacturing processes are changed, such new facilities and
processes are also subject to FDA inspection for compliance with GMP. The
Company's manufacturing facilities and processes have not yet been inspected by
the FDA for compliance with GMP. See "Risk Factors--No Assurance of Regulatory
Clearance or Approval; Significant Domestic and International Regulation."
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<PAGE>
SALES, MARKETING, TRAINING, AND DISTRIBUTION
The Company's EndoCPB and Port-Access systems in the United States are
marketed both to cardiac surgeons and to cardiac surgery centers. In the United
States, there are approximately 900 cardiac surgery centers and approximately
2,500 cardiac surgeons. The Company believes it can market its products in the
United States with a moderately sized direct sales organization. Outside the
United States, there are approximately 2,500 cardiac surgeons. In Europe, the
Company is building a direct sales force. In Japan, the Company intends to
market and sell its products through its exclusive distribution, training and
supply agreement with Getz. In other geographic regions the Company will
evaluate direct and indirect sales channels as appropriate. The Company
currently has a limited sales and marketing organization in the United States
and Europe. Establishment of a sales force capable of effectively
commercializing the Company's EndoCPB and Port-Access systems will require
substantial efforts and require significant management and financial resources.
There can be no assurance that the Company will be able to establish such a
sales capability on a timely basis, if at all. See "Risk Factors--Limited Sales,
Marketing, and Distribution Experience."
The Company has developed a procedural selling approach to market its
systems to cardiac surgeons, called the Port-Access Partnership-SM-. The Company
intends to utilize its Port-Access Partnership to promote customer loyalty. In
the partnership, Heartport trains a center's surgical team, supplies patient and
referring physicians educational materials, supports local market media efforts
and furnishes proprietary reusable devices for Port-Access procedures in
exchange for a purchase order for Port-Access disposable products necessary to
perform Port-Access cardiac surgery.
The effective and rapid training of surgical teams in the use of Heartport's
systems and devices is critical to the Company's efforts to develop its
business. To that end, in October 1996, the Company acquired substantially all
of the assets of Utah Biomedical Test Laboratory ("UBTL"). UBTL's Utah facility
was established in the early 1970s to be the home of the United States
government's artificial heart program. This 50,000 square foot facility, now
called the Heartport Research and Training Center ("HRTC"), is a
state-of-the-art cardiovascular research and training center. Surgical teams
began training at HRTC in January 1997. The Company also plans to work with
selected cardiac surgery centers to enhance the Company's technology and broaden
its applicability to treat CAD, VHD, and other cardiovascular diseases. In
addition, the Company intends to support rigorous, clinically driven research
efforts to prove the efficacy and benefits of Port-Access minimally invasive
cardiac surgery. In this regard, in 1997 the Company established the Port-Access
International Registry, a multi-center registry designed to improve patient
outcomes and advance Port-Access minimally invasive cardiac surgery by sharing
aggregate knowledge maintained in the registry database.
The Company's sales and marketing strategy includes developing and
maintaining a close working relationship with its customers in order to assess
and satisfy their needs for products and services. The Company meets with its
Scientific Advisory Board and other clinical consultants periodically to share
ideas regarding the marketplace, existing products, products under development,
and existing or proposed research projects.
COMPETITION
The Company expects that the market for minimally invasive cardiac surgery,
which is currently in the early stages of development, will become intensely
competitive. Competitors are likely to include a variety of different companies
that currently specialize in devices for conventional cardiac surgery, as well
as those that specialize in non-cardiac minimally invasive surgery. The Company
believes that a number of large companies, including Baxter International Inc.,
the Ethicon Endosurgery division of Johnson & Johnson, Genzyme Corporation,
Guidant Corporation, Medtronic, Inc., United States Surgical Corporation, and
others with significantly greater financial, manufacturing, marketing,
distribution, and technical resources and experience than the Company, may be
focusing on the development of minimally invasive cardiac
11
<PAGE>
surgery technology. In addition, new companies have been and are likely to
continue to be started to pursue opportunities in this market. Several companies
have announced interest in and development of products for the minimally
invasive cardiac surgery field. For example, there are companies pursuing
minimally invasive cardiac surgery on a beating heart, which, if successful,
could materially adversely affect the Company's ability to establish a market
for its technology.
Cardiovascular diseases that can be treated with the Company's Port-Access
systems can also be treated by pharmaceuticals or other medical devices and
procedures, including PTCA, intravascular stents, atherectomy catheters and
lasers. Many of these alternative treatments are widely accepted in the medical
community and have a long history of use. In addition, technological advances
with other therapies for heart disease such as drugs or future innovations in
cardiac surgery techniques could make such other therapies more effective or
lower in cost than the Company's Port-Access procedures and could render the
Company's technology obsolete. There can be no assurance that physicians will
use Port-Access procedures to replace or supplement established treatments, such
as conventional open-chest heart surgery and PTCA, or that the Company's
Port-Access systems will be competitive with current or future technologies.
Such competition could have a material adverse effect on the Company's business,
financial condition, and results of operations. Any product developed by the
Company that gains regulatory approval will have to compete for market
acceptance and market share. An important factor in such competition may be the
timing of market introduction of competitive products. Accordingly, the relative
speed with which the Company can develop products, complete clinical testing and
regulatory approval processes, train physicians in the use of its products, gain
reimbursement acceptance, and supply commercial quantities of the product to the
market are expected to be important competitive factors. In addition, the
Company believes that the primary competitive factors in the market for
Port-Access systems will be safety, efficacy, ease of use, quality and
reliability, cost-effectiveness, training support, innovation, breadth of
product line, and price. The Company also believes that physician relationships
and customer support are important competitive factors. The Company has
experienced delays in completing the development and introduction of new
products, product variations and product features, and there can be no assurance
that such delays will not continue or recur in the future. Such delays could
result in a loss of market acceptance and market share. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors. Failure to do so would have a material adverse effect
upon the Company's business, financial condition, and results of operations. See
"Risk Factors--Significant Competition; Rapid Technological Change."
GOVERNMENT REGULATION
UNITED STATES
The Company's Port-Access systems are regulated in the United States as
medical devices. As such, the Company is subject to extensive regulation by the
FDA. Pursuant to the Federal Food, Drug, and Cosmetic Act of 1938, as amended,
and the regulations promulgated thereunder (the "FDC Act"), the FDA regulates
the clinical testing, manufacture, labeling, distribution and promotion of
medical devices. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant pre market clearance or premarketmarket approval for devices,
withdrawal of marketing approvals, a recommendation by the FDA that the Company
not be permitted to enter into government contracts and criminal prosecution.
The FDA also has the authority to request repair, replacement or refund of the
cost of any device manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes, Class I, II, or III, on the basis of the controls deemed by the FDA to
be necessary to reasonably ensure their safety and effectiveness. Class I
devices are subject to general controls (e.g., labeling, premarket notification
and adherence to GMPs). Class II devices are subject to general controls and to
special controls (e.g., performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices
12
<PAGE>
are those that must receive premarket approval by the FDA to ensure their safety
and effectiveness (e.g., life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices), and require clinical testing to ensure safety and
effectiveness and FDA approval prior to marketing and distribution. A premarket
approval ("PMA") application usually must be filed if the proposed device is not
substantially equivalent to a legally marketed predicate device or if it is a
Class III device for which the FDA has called for such applications.
Before a new device can be introduced into the market, the manufacturer must
generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act or a PMA application under Section 515 of the FDC
Act. A 510(k) clearance typically will be granted if the submitted information
establishes that the device is "substantially equivalent" to a legally marketed
Class I or II medical device or to a Class III medical device for which the FDA
has not called for PMAs. A 510(k) notification must contain information to
support a claim of substantial equivalence, which may include laboratory test
results or the results of clinical studies of the device in humans. Commercial
distribution of a device for which a 510(k) notification is required can begin
only after the FDA issues an order finding the device to be "substantially
equivalent" to a predicate device. The FDA has recently been requiring a more
rigorous demonstration of substantial equivalence than in the past and is more
likely to require the submission of human clinical trial data. It generally
takes from four to twelve months from the date of submission to obtain FDA
clearance of a 510(k) notification, but it may take longer. The FDA may
determine that a proposed device is not substantially equivalent to a legally
marketed device, or that additional information is needed before a substantial
equivalence determination can be made. A PMA application usually must be filed
if a proposed device is not substantially equivalent to a legally marketed Class
I or Class II device or if it is a Class III device for which the FDA has called
for PMAs. A PMA application must be supported by valid scientific evidence that
typically includes extensive data, including preclinical and human clinical
trial data to demonstrate the safety and efficacy of the device. Under recent
amendments to the FDC Act, a person who obtains a "not substantially equivalent"
determination after submitting a 510(k) notification has the option of
requesting a review of that automatic Class III classification, and must provide
data and information to the FDA to support the requested classification of the
device into Class I or Class II. If the FDA determines the device should remain
in Class III, a PMA will be required. A "not substantially equivalent"
determination, or a request for additional information, could delay the market
introduction of new products that fall into this category. See "Risk Factors--No
Assurance of Regulatory Clearance or Approval; Significant Domestic and
International Regulation."
If human clinical trials of a device are required in support of either a
510(k) notification or a PMA application, and the device presents a "significant
risk," the sponsor of the trial (usually the manufacturer or the distributor of
the device) is required to file an investigational device exception ("IDE")
application with the FDA prior to commencing human clinical trials. A
"significant risk" device is defined to include a device that is an implant, is
life-supporting or life-sustaining, or is of substantial importance in
diagnosing or treating disease or preventing impairment of human health, and
that presents a potential for serious risk to the health, safety, or welfare of
the patient. The IDE application must be supported by data, typically including
the results of animal and laboratory testing. If the IDE application is approved
by the FDA and one or more appropriate institutional review boards ("IRBs"),
human clinical trials may begin at a specific number of investigational sites
with a specific number of patients, as approved by the FDA. If the device
presents a "nonsignificant risk" to the patient, a sponsor may begin the
clinical trial after obtaining approval for the study by one or more appropriate
IRBs, but not the FDA. Sponsors of clinical trials are permitted to charge for
those devices distributed in the course of the study provided such compensation
does not exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA before
a sponsor or an investigator may make a change to the investigational plan that
may affect its scientific soundness or the rights, safety or welfare of human
subjects.
13
<PAGE>
A PMA application must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling, advertising literature and training methods (if required).
Upon receipt of a PMA application, the FDA makes a threshold determination as to
whether the application is sufficiently complete to permit a substantive review.
If the FDA determines that the PMA application is sufficiently complete to
permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the PMA application. An FDA review of a PMA application generally takes one to
three years from the date the PMA application is accepted for filing, but may
take significantly longer. The review time is often significantly extended by
the FDA asking for more information or clarification of information already
provided in the submission. During the review period, an advisory committee,
typically a panel of clinicians, will likely be convened to review and evaluate
the application and provide recommendations to the FDA as to whether the device
should be approved. The FDA is not bound by the recommendations of the advisory
panel. Toward the end of the PMA application review process, the FDA generally
will conduct an inspection of the manufacturer's facilities to ensure that the
facilities are in compliance with the applicable GMP requirements.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will either issue an approval letter or an
"approvable letter" containing a number of conditions which must be met in order
to secure final approval of the PMA application. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue an
approval of the PMA application, authorizing commercial marketing of the device
for certain indications. If the FDA's evaluation of the PMA application or
manufacturing facilities is not favorable, the FDA will deny approval of the PMA
application or issue a "not approvable letter." The FDA may also determine that
additional clinical trials are necessary, in which case the PMA could be delayed
for several years while additional clinical trials are conducted and submitted
in an amendment to the PMA application. The PMA process can be expensive,
uncertain, and lengthy, and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing.
Use of a medical device for applications not covered in a 510(k)
notification or a PMA, or modifications to a device that has been cleared to
market through a 510(k) notification or an approved PMA, its labeling, or its
manufacturing process, may require submission of a new 510(k) notification, a
new PMA application, or a PMA application supplement. New 510(k) notifications,
PMA applications, or PMA supplements often require the submission of the same
type of information required for the original submission except that it is
generally limited to that information needed to support the proposed change from
the product covered by the original submission.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including record-keeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA and certain
state agencies, and are subject to periodic inspections by the FDA and certain
state agencies. The FDC Act requires devices to be manufactured in accordance
with GMP regulations that impose certain procedural and documentation
requirements upon the Company with respect to manufacturing and quality
assurance activities. Toward the end of the clearance or approval process, the
FDA generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with the applicable GMP
requirements. New quality system regulations were enacted in 1997 which effected
major changes in device GMP regulations. The FDA is currently implementing these
changes to the GMP regulations that, among other things, require design controls
and maintenance of service records, and will likely increase the cost of
complying with GMP requirements.
Labeling and promotion activities are subject to scrutiny by the FDA and in
certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for
14
<PAGE>
unapproved uses. The Company and its products are also subject to a variety of
state laws and regulations in those states or localities where its products are
or will be marketed. Any applicable state or local regulations may hinder the
Company's ability to market its products in those states or localities. The
Company is also subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control, and disposal of hazardous or potentially
hazardous substances. There can be no assurance that the Company will not be
required to incur significant costs to comply with such laws and regulations now
or in the future.
Changes in existing requirements or adoption of new requirements or policies
could adversely affect the ability of the Company to comply with regulatory
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition, and
results of operations. There can be no assurance that the Company will not be
required to incur significant costs to comply with laws and regulations in the
future. See "Risk Factors--No Assurance of Regulatory Clearance or Approval;
Significant Domestic and International Regulation."
INTERNATIONAL
In order for the Company to market Port-Access systems in Europe, Japan and
certain other foreign jurisdictions, the Company must obtain required regulatory
approvals and clearances and otherwise comply with extensive regulations
regarding safety and manufacturing processes and quality. These regulations,
including the requirements for approvals or clearance to market and the time
required for regulatory review, vary from country to country. There can be no
assurance that the Company will obtain regulatory approvals in such countries or
that it will not be required to incur significant costs in obtaining or
maintaining its foreign regulatory approvals. Delays in receipt of approvals to
market the Company's products, failure to receive these approvals or future loss
of previously received approvals could have a material adverse effect on the
Company's business, financial condition, and results of operations.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
premarket approval, and the FDA must approve exports of devices that require a
PMA but are not yet approved domestically. The current rules provide that, in
order to obtain FDA export approval, the Company must provide the FDA with
documentation from the medical device regulatory authority of the importing
country stating that the import of the device is not a violation of that
country's medical device laws.
The European Community has promulgated rules that require that medical
products receive by mid-1998 the right to affix the CE Mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. The Company received the CE Mark
in January 1997, which allows it to sell its Port-Access CABG System and
Port-Access MVR System in member countries of the European Union. Although the
European directives are intended to insure free movement within the European
Union of medical devices that bear the CE Mark, some European countries have
imposed additional requirements for approvals or premarket notifications. In
addition, regulatory authorities in European countries can demand evidence on
which conformity assessments for CE-Marked devices are based and in certain
circumstances can prohibit the marketing of products that bear the CE Mark. Many
European countries maintain systems to control the purchase and reimbursement of
medical equipment under national health care programs, and the CE Mark does not
affect these systems.
The Company's products have not received regulatory approval in Japan, nor
have they been approved for government reimbursement in Japan.
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INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company believes that its competitive position will be dependent in
significant part on its ability to protect its intellectual property. The
Company's policy is to seek to protect its proprietary position by, among other
methods, filing United States and foreign patent applications related to its
technology, inventions and improvements that are important to the development of
its business. As of March 16, 1998, the Company owns 59 issued or allowed United
States patents, and one issued foreign patent. In addition, as of March 16, 1998
the Company has 84 pending United States patent applications, and has filed 45
patent applications that are currently pending in Europe, Japan, Australia, and
Canada. There can be no assurance that the Company's issued patents, or any
patents that may be issued in the future, will effectively protect the Company's
technology or provide a competitive advantage. There can be no assurance that
any of the Company's patents or patent applications will not be challenged,
invalidated, or circumvented in the future. In addition, there can be no
assurance that competitors, many of which have substantially more resources than
the Company and have made substantial investments in competing technologies,
will not seek to apply for and obtain patents that will prevent, limit or
interfere with the Company's ability to make, use, or sell its products either
in the United States or internationally.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements in
connection with their employment, consulting, or advisory relationships with the
Company. There can be no assurance, however, that these agreements will not be
breached or that the Company will have adequate remedies for any breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. The Company is
aware of patents issued to third parties that contain subject matter related to
the Company's technology. Based, in part, on advice of its patent counsel, the
Company believes that the technologies employed by the Company in its devices
and systems do not infringe the claims of any such patents. There can be no
assurance, however, that third parties will not seek to assert that the
Company's devices and systems infringe their patents or seek to expand their
patent claims to cover aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular, has
been characterized by substantial competition and litigation regarding patent
and other intellectual property rights. Any such claims, whether with or without
merit, could be time-consuming and expensive to respond to and could divert the
Company's technical and management personnel. The Company may be involved in
litigation to defend against claims of infringement by other patent holders, to
enforce patents issued to the Company, or to protect trade secrets of the
Company. If any relevant claims of third-party patents are upheld as valid and
enforceable in any litigation or administrative proceeding, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the patent owners of each such patent, or to
redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be
available on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement.
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Accordingly, an adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition, and results of
operations. The Company intends to vigorously protect and defend its
intellectual property. Costly and time-consuming litigation brought by the
Company may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. See
"Risk Factors--Uncertainty Regarding Patents and Protection of Proprietary
Technology; Risks of Future Litigation."
THIRD-PARTY REIMBURSEMENT
The Company expects that sales volumes and prices of the Company's products
will be heavily dependent on the availability of reimbursement from third-party
payors and that individuals seldom, if ever, will be willing or able to pay
directly for the costs associated with the use of the Company's products. The
Company's products typically are purchased by clinics, hospitals, and other
users, which bill various third-party payors, such as governmental programs and
private insurance plans, for the healthcare services provided to their patients.
Third-party payors carefully review and increasingly challenge the prices
charged for medical products and services. Reimbursement rates from private
companies vary depending on the procedure performed, the third-party payor, the
insurance plan, and other factors. Medicare reimburses hospitals a prospectively
determined fixed amount for the costs associated with an in-patient
hospitalization based on the patient's discharge diagnosis, and reimburses
physicians a prospectively determined fixed amount based on the procedure
performed, regardless of the actual costs incurred by the hospital or physician
in furnishing the care and unrelated to the specific devices used in that
procedure. Medicare and other third-party payors are increasingly scrutinizing
whether to cover new products and the level of reimbursement for covered
products.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans, and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have an adverse effect on market acceptance of the
Company's products in the international markets in which such approvals are
sought.
The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. The Company believes that the overall escalating cost of
medical products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by the Company. There
can be no assurance as to either United States or foreign markets that
third-party reimbursement and coverage will be available or adequate, that
current reimbursement amounts will not be decreased in the future or that future
legislation, regulation, or reimbursement policies of third-party payors will
not otherwise adversely affect the demand for the Company's products or its
ability to sell its products on a profitable basis, particularly if the
Company's systems are more expensive than competing cardiac surgery procedures.
If third-party payor coverage or reimbursement is unavailable or inadequate, the
Company's business, financial condition, and results of operations could be
materially adversely affected. See "Risk Factors--Limitations on Third-Party
Reimbursement."
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EMPLOYEES
As of December 31, 1997, the Company had a total of 393 employees. The
Company maintains compensation, benefit, equity participation, and work
environment policies intended to assist in attracting and retaining qualified
personnel. The Company believes that the success of its business will depend, in
significant part, on its ability to attract and retain such personnel. None of
the Company's employees is represented by a collective bargaining agreement, nor
has the Company experienced any work stoppage. The Company considers its
relations with its employees to be good.
RISK FACTORS
This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from those discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, the following:
EARLY STAGE OF UTILIZATION; NO ASSURANCE OF SAFETY AND EFFICACY
The Company's EndoCPB System, Port-Access CABG System, and Port-Access MVR
System and related devices are at an early stage of clinical utilization, and
there can be no assurance as to their clinical safety and efficacy. Port-Access
minimally invasive cardiac surgery has many of the risks of open-chest heart
surgery, including bleeding from the wound or internal organs, irregular
heartbeat, formation of blood clots and related complications, infection, heart
attack, heart failure, stroke, and death. Port-Access minimally invasive cardiac
surgery also has additional risks compared to open-chest surgery, including
tearing or splitting of major blood vessels, damage to blood vessels in the
groin, and groin pain. Although there can be no assurance in this regard, the
Company believes, based on the limited clinical experience to date, that
mortality and morbidity rates associated with Port-Access surgical procedures
are comparable to mortality and morbidity rates experienced with conventional
open-chest procedures. If, with further experience, any of the Company's systems
do not prove to be safe and effective or if the Company is otherwise unable to
commercialize them successfully, the Company's business, financial condition,
and results of operations will be materially adversely affected and the
Company's business could cease.
NO ASSURANCE OF MARKET ACCEPTANCE
There can be no assurance that the Company's EndoCPB and Port-Access systems
will gain any significant degree of market acceptance among physicians,
patients, and health care payors. The Company believes that physicians'
acceptance and healthcare payors' reimbursement of Port-Access procedures will
be essential for market acceptance of its systems, and there can be no assurance
that any such recommendations or approvals will be obtained. Physicians will not
recommend Port-Access procedures unless they conclude, based on clinical data,
ease of use, operative time and other factors, that Port-Access procedures are
an attractive alternative to other treatments for cardiovascular disease. Most
patients with cardiovascular disease first consult with a cardiologist, who may
treat the patient with pharmaceuticals or non-surgical interventions such as
percutaneous transluminal coronary angioplasty ("PTCA") and intravascular
stents, or may refer the patient to a cardiac surgeon for open-chest surgery.
Cardiologists may not recommend Port-Access procedures until such time, if any,
as Port-Access procedures can be successfully demonstrated to be as safe and
cost-effective as other accepted treatments. In addition, cardiac surgeons may
elect not to recommend Port-Access procedures until such time, if any, as the
efficacy of the Company's Port-Access procedures can be successfully
demonstrated as compared to conventional, open-chest surgery methods, which have
become widely adopted by cardiac surgeons since the initial use of such surgery
in the mid-1950s. Even if the clinical efficacy of Port-Access procedures is
established, cardiologists, cardiac surgeons, and other physicians may elect not
to recommend the procedures for any number of other reasons. The Company
believes that procedure volume by trained cardiac surgery teams has been
negatively impacted by ease of use issues, the significant physician learning
curve, and longer procedure
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times associated with Port-Access surgery. Although the Company has recently
re-focused its training and sales efforts on addressing these issues, there can
be no assurance that it will be successful in increasing procedure volume or
that the products will obtain any significant degree of market acceptance.
Failure of the Company to increase procedural volume by trained teams or failure
of the Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
FLUCTUATIONS IN OPERATING RESULTS
Results of operations may vary significantly from quarter to quarter and
year to year depending upon numerous factors, including the following: demand
for the Company's products; the number of cardiac surgery teams trained in the
use of the Company's systems and the number of procedures performed by those
teams; the number of hospitals that begin using the Company's products; the
ability of the Company to manufacture, test and deliver its products in
commercial volumes; health care reform and reimbursement policies; delays
associated with the FDA and other regulatory approval processes; changes in
pricing policies by the Company or its competitors; the number, timing, and
significance of product enhancements and new product announcements by the
Company and its competitors; the ability of the Company to develop, introduce,
and market new and enhanced versions of the Company's products on a timely
basis; customer order deferrals in anticipation of enhancements or new products
offered by the Company or its competitors; product quality problems; personnel
changes; and the level of international sales. In addition, the Company's
operating results are affected by seasonality (principally during each fourth
quarter due to fewer operating days and fewer elective cardiovascular surgeries
scheduled over the holidays). Furthermore, the Company is continuing to develop
its direct sales force. The timing of such development and the rate at which new
sales people become productive could also cause material fluctuations in the
Company's quarterly operating results.
Operating results have been and will continue to be difficult to forecast.
Future revenue, if any, is also difficult to forecast because the market for
minimally invasive cardiac surgery systems is rapidly evolving, because of the
inherent risks associated with new medical device technology, and due to the
uncertainty as to whether the Company's efforts to increase procedure volume by
trained cardiac surgery teams will be successful. Accordingly, the Company
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. Failure by the Company, for any reason, to increase revenue from
sales of its products would have a material adverse effect on the Company's
business, operating results, and financial condition. Due to the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Research and Development,"
"Manufacturing," "Competition," "Government Regulation," and "Third-Party
Reimbursement."
CUSTOMER CONCENTRATION
Approximately 36% of the Company's net sales in 1997 were derived from sales
to 20 customers. However, the Company believes that these customers actually
performed a substantially higher percentage of the Port-Access procedures
performed during 1997. The Company believes that during 1998 this customer
concentration will continue as the Company focuses on strengthening its
relationships with active, higher volume customers. There can be no assurance
that the Company's principal customers will continue to purchase products from
the Company at current levels, if at all. The loss of, or a significant adverse
change in, the relationship between the Company and any major customer would
have a material adverse effect on the Company's business, financial condition
and results of operations.
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RISKS ASSOCIATED WITH NEW SURGICAL PROCEDURE; EXTENSIVE TRAINING
REQUIREMENTS
Use of the Company's EndoCPB System, Port-Access CABG System, and
Port-Access MVR System to date has shown that, as with any novel surgical
procedure, there is a substantial learning process involved for surgeons and
other members of the cardiac surgery team. Typically, a significant amount of
time and effort spent in training as well as completion of a number of
Port-Access procedures is required before a cardiac surgery team becomes
proficient with the Company's products. In addition, certain patients requiring
heart surgery cannot be treated with the present Port-Access systems, depending
upon their anatomy, what kind of condition they have and how severe it is. These
patients include people with severe peripheral vascular disease
(arteriosclerosis), a poorly functioning aortic valve, an enlarged heart, or
certain types of chest scarring. Broad use of the Company's systems will require
extensive training of numerous physicians, and the time required to begin and
complete such training could adversely affect market acceptance. There can be no
assurance that the Company will be able to rapidly train physicians in numbers
sufficient to generate adequate demand for the Company's products and systems.
Any delay in training or delay in trained surgical teams' ability to become
proficient with the Company's products would have a material adverse effect on
the demand for the Company's products and systems and, therefore, a material
adverse effect on its business, financial condition, and results of operations.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON KEY SUPPLIERS
To meet anticipated demand, the Company must increase the rate by which it
manufactures its products. To date, the Company's manufacturing activities have
consisted primarily of manufacturing low volume quantities for initial
commercial sales. The manufacture of the Company's products is complex,
involving a number of separate processes and components. The Company does not
have experience in manufacturing its products in higher volume commercial
quantities. Although the Company is scaling up its capability to produce
products in higher volume, there can be no assurance that it will be able to
successfully scale-up its production to meet commercial demand for its products
in a timely manner. In addition, the Company believes that cost reductions in
its manufacturing operations will be required for it to commercialize its
systems on a profitable basis. Certain manufacturing processes are
labor-intensive, and achieving significant cost reductions will depend, in part,
upon reducing the time required to complete these processes. Medical device
manufacturers often encounter difficulties in scaling up manufacturing of new
products, including problems involving product yields, quality control and
assurance, component and service availability, adequacy of control policies and
procedures, lack of qualified personnel, compliance with FDA regulations, and
the need for further FDA approval of new manufacturing processes and facilities.
To date, the Company has experienced variable yields in scaling up manufacturing
of certain of its product components, and there can be no assurance that such
variability will not continue or will not adversely impact the Company's ability
to meet demand for its products. The Company has considered and will continue to
consider as appropriate the internal manufacture of components currently
provided by third parties, as well as the implementation of new production
processes. There can be no assurance that manufacturing yields or costs will not
be adversely affected by the transition to in-house production or to new
production processes when such efforts are undertaken, and that such a
transition would not materially and adversely affect the Company's business,
financial condition, and results of operations. Although the Company has
received ISO 9001 certification, to date, the FDA has not inspected the
Company's compliance with GMP requirements, which include testing, control, and
documentation requirements, although the Company expects such inspections to be
made in the near future. There can be no assurance that FDA GMP requirements
will be met. See "Manufacturing."
The Company uses or relies on a number of components and services used in
its devices that are provided by sole source suppliers. Although the Company is
in the process of identifying alternative sources for certain of such components
and services, the qualification of additional or replacement vendors for certain
components or services is a lengthy process. Any significant supply interruption
would have a
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material adverse effect on the Company's ability to manufacture its products
and, therefore, a material adverse effect on its business, financial condition,
and results of operations.
The Company manufactures its products based on forecasted product orders,
and purchases subassemblies and components prior to receipt of purchase orders
from customers. Lead times for materials and components ordered by the Company
vary significantly, and depend on factors such as the business practices of the
specific supplier, contract terms, and general demand for a component at a given
time. Certain components used in the Company's products have long lead times or
must be ordered on non-cancelable terms. As a result, there is a risk of excess
or inadequate inventory if orders do not match forecasts, as well as potential
costs from non-cancelable orders.
The Company plans to move its present Redwood City, California operations,
including its manufacturing operations, to a new Redwood City facility in late
1998. Although the Company is preparing to make this move in a manner designed
to mitigate the impact on its manufacturing operations, there can be no
assurance that it will be able to successfully transition its manufacturing
process to the new facility in a manner that does not materially and adversely
affect its business, financial condition, and results of operations.
SIGNIFICANT COMPETITION; RAPID TECHNOLOGICAL CHANGE
The Company expects that the market for minimally invasive cardiac surgery,
which is currently in the early stages of development, will be intensely
competitive. Competitors are likely to include a variety of different companies
that currently specialize in devices for conventional cardiac surgery, as well
as those that specialize in non-cardiac minimally invasive surgery. The Company
believes that a number of large companies, including Baxter International Inc.,
the Ethicon Endosurgery division of Johnson & Johnson, Genzyme Corporation,
Guidant Corporation, Medtronic, Inc., United States Surgical Corporation and
others with significantly greater financial, manufacturing, marketing,
distribution, and technical resources and experience than the Company, may be
focusing on the development of minimally invasive cardiac surgery technology. In
addition, new companies have been and will continue to be formed to pursue
opportunities in this market. Several companies have announced interest in and
development of products for the minimally invasive cardiac surgery field. For
example, there are companies pursuing minimally invasive cardiac surgery on a
beating heart, which, if successful, could materially adversely affect the
Company's ability to establish a market for its technology.
Cardiovascular diseases that can be treated with the Company's Port-Access
systems can also be treated by pharmaceuticals or other medical devices and
procedures including PTCA, intravascular stents, atherectomy catheters and
lasers. Many of these alternative treatments are widely accepted in the medical
community and have a long history of use. In addition, technological advances
with other therapies for heart disease such as drugs or future innovations in
cardiac surgery techniques could make such other therapies more effective or
lower in cost than the Company's Port-Access procedures and could render the
Company's technology obsolete. There can be no assurance that physicians will
use Port-Access procedures to replace or supplement established treatments, such
as conventional open-chest heart surgery, PTCA, or intravascular stents, or that
the Company's Port-Access systems will be competitive with current or future
technologies. Such competition could have a material adverse effect on the
Company's business, financial condition, and results of operations.
The Company's current products and any future products developed by the
Company that gain regulatory clearance or approval will have to compete for
market acceptance and market share. An important factor in such competition may
be the timing of market introduction of competitive products. Accordingly, the
relative speeds with which the Company can develop products, complete clinical
testing and regulatory approval processes, train physicians in the use of its
products, gain reimbursement acceptance, and supply commercial quantities of the
product to the market are expected to be important competitive factors. The
Company has in the past experienced delays in completing the development and
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introduction of new products, product variations and product features, and there
can be no assurance that such delays will not continue or recur in the future.
Such delays could result in a loss of market acceptance and market share. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors. Failure to do so would have a material
adverse effect upon the Company's business, financial condition, and results of
operations. See "Competition."
SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL REQUIREMENTS
Since its inception in May 1991, the Company has been engaged in the
research and development of minimally invasive cardiac surgery systems and
related technology. In December 1996, the Company commercially introduced its
Port-Access systems and is now engaged in extensive physician training and
selling activities. Through its Port-Access Partnership program, the Company has
adopted a sales model in which the Company trains a center's surgical team,
supplies patient and referring physician educational materials, supports local
market media efforts and furnishes proprietary reusable devices for Port-Access
procedures in exchange for a purchase order for Port-Access disposable products
necessary to perform Port-Access cardiac surgery.
The Company has only generated revenue from the sale of products since
December 1996, and it has been unprofitable since inception. For the period from
inception to December 31, 1997, the Company has incurred cumulative net losses
of approximately $101.9 million. For at least the next 18 months, the Company
expects to continue to incur significant losses. There can be no assurance that
the Company will achieve or sustain profitability in the future. Failure to
achieve significant commercial revenues or profitability would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
The Company believes that it may require additional debt and/or equity
financing. The Company's future liquidity and capital requirements will depend
upon numerous factors, including but not limited to the following: the extent to
which the Company's products gain market acceptance; the timing and costs of
future product introductions; the extent of the Company's ongoing research and
development programs; the costs of training physicians to become proficient in
the use of the Company's products and procedures; the costs of expanding
manufacturing capacity; the costs of developing marketing and distribution
capabilities; the progress and scope of clinical trails required for any future
products; the timing and costs of filing future regulatory submissions; the
timing and costs required to receive both domestic and international
governmental approvals for any future products; and the costs of protecting and
defending its intellectual property. Issuance of additional equity or
convertible debt securities could result in dilution to stockholders. There can
be no assurance that additional financing will be available on terms acceptable
to the Company, or at all. The Company's inability to fund its capital
requirements would have a material adverse effect on the Company's business,
financial condition, and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY;
RISKS OF FUTURE LITIGATION
The Company believes that its competitive position will be dependent in
significant part on its ability to protect its intellectual property. The
Company's policy is to seek to protect its proprietary position by, among other
methods, filing United States and foreign patent applications related to its
technology, inventions, and improvements that are important to the development
of its business. As of March 16, 1997, the Company owns 59 issued or allowed
United States patents, and one issued foreign patent. In addition, as of March
16, 1998, the Company has 84 pending United States patent applications and has
filed 45 patent applications that are currently pending in Europe, Japan,
Australia, and Canada. There can be no assurance that the Company's issued
patents, or any patents that may be issued in the future, will effectively
protect the Company's technology or provide a competitive advantage. There can
be no assurance that any of the Company's patents or patent applications will
not be challenged, invalidated, or circumvented in the future. In addition,
there can be no assurance that competitors, many of which have
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substantially more resources than the Company and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit, or interfere with the Company's ability to
make, use, or sell its products either in the United States or internationally.
The Company also relies upon trade secrets, technical know-how, and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements in
connection with their employment, consulting, or advisory relationships with the
Company. There can be no assurance, however, that these agreements will not be
breached or that the Company will have adequate remedies for any breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. The Company is
aware of patents issued to third parties that contain subject matter related to
the Company's technology. Based, in part, on advice of its patent counsel, the
Company believes that the technologies employed by the Company in its devices
and systems do not infringe the claims of any such patents. There can be no
assurance, however, that third parties will not seek to assert that the
Company's devices and systems infringe their patents or seek to expand their
patent claims to cover aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular, has
been characterized by substantial competition and litigation regarding patent
and other intellectual property rights. Any such claims, whether with or without
merit, could be time-consuming and expensive to respond to and could divert the
Company's technical and management personnel. The Company may be involved in
litigation to defend against claims of infringement by other patent holders, to
enforce patents issued to the Company, or to protect trade secrets of the
Company. If any relevant claims of third-party patents are upheld as valid and
enforceable in any litigation or administrative proceeding, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the patent owners of each such patent, or to
redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be
available on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would have a
material adverse effect on the Company's business, financial condition, and
results of operations. The Company intends to vigorously protect and defend its
intellectual property. Costly and time-consuming litigation brought by the
Company may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company, or to determine the
enforceability, scope, and validity of the proprietary rights of others. There
can be no assurance that such litigation if commenced by the Company, would be
successful. See "Intellectual Property and Other Proprietary Rights" and
"Competition."
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RELIANCE ON STRATEGIC RELATIONSHIPS
The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, regulatory
approval, and marketing of certain of its potential products and procedures. The
Company's future success may depend, in part, on its relationships with third
parties, including, for example, the Company's relationships with St. Jude
Medical, Inc. and Getz Bros. Co., Ltd., their strategic interest in the
potential products or procedures under development and, eventually, their
success in marketing such products or procedures or willingness to purchase any
such products. The Company anticipates that these third parties may have the
unilateral right to terminate any such relationship without significant penalty.
There can be no assurance that the Company will be successful in establishing or
maintaining any such strategic relationships in the future or that any such
relationships will be successful. See "Strategic Relationships."
RISK OF PRODUCT LIABILITY
The Company faces an inherent and significant business risk of exposure to
product liability claims in the event that the use of its products results in
personal injury or death and there can be no assurance that the Company will not
experience any material product liability losses in the future. Also, in the
event that any of the Company's products prove to be defective, the Company may
be required to recall or redesign such products. The Company maintains limited
insurance against certain product liability claims, but there can be no
assurance that such coverage will continue to be available on terms acceptable
to the Company or that such coverage will be adequate for any liabilities
actually incurred. A successful claim brought against the Company in excess of
available insurance coverage, or any claim or product recall that results in
significant adverse publicity against the Company, may have a material adverse
effect on the Company's business, financial condition, and results of
operations.
LIMITED SALES, MARKETING, AND DISTRIBUTION EXPERIENCE
The Company currently has a limited sales and marketing organization in the
United States and Europe and believes that it must expand its direct sales force
to effectively market its products. Establishment of a sales force capable of
effectively commercializing the Company's EndoCPB and Port-Access systems will
require substantial efforts and require significant management and financial
resources. There can be no assurance that the Company will be able to establish
and maintain such a sales capability on a timely basis. See "Sales, Marketing,
Training, and Distribution."
DEPENDENCE ON KEY PERSONNEL
The Company's future business and operating results depend in significant
part upon the continued contributions of its key technical and senior management
personnel, many of whom would be difficult to replace and certain of whom
perform important functions for the Company beyond those functions suggested by
their respective job titles or descriptions. The Company's business and future
operating results also depend in significant part upon its ability to attract
and retain qualified management, manufacturing, technical, marketing, and sales
and support personnel for its operations. Competition for such personnel is
intense, particularly in the geographic region of California where the Company's
principal office is located, and there can be no assurance that the Company will
be successful in attracting or retaining such personnel. The loss of any key
employee, the failure of any key employee to perform in his or her current
position, or the Company's inability to attract and retain skilled employees, as
needed, could materially adversely affect the Company's business, financial
condition, and results of operations.
NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC AND
INTERNATIONAL REGULATION
The Company's individual devices are subject to regulatory clearances or
approvals by the FDA. The Company believes that most of its devices and systems
will be subject to United States regulatory clearance
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through the 510(k) premarket notification process rather than a more extensive
PMA submission. Although the Company has received clearance from the FDA to
market the EndoCPB System and several proprietary Class II disposable surgical
devices for its Port-Access CABG and MVR surgery systems in the United States,
securing FDA approvals and clearances for additional Port-Access devices and
other products under development by the Company will require submission to the
FDA of extensive technical information and may require submission of extensive
clinical data. There can be no assurance that the FDA will act favorably or
quickly on the Company's 510(k) or other submissions, and significant
difficulties and costs may be encountered by the Company in its efforts to
obtain FDA clearance that could delay or preclude the Company from marketing and
selling its products in the United States. Furthermore, there can be no
assurance that the FDA will not request additional data, require that the
Company conduct further clinical studies, or require a more extensive PMA
submission, causing the Company to incur substantial costs and delays. The
Company's business, financial condition, and results of operations are
critically dependent upon FDA clearance or approval of the Company's systems.
Failure to obtain such clearances or approvals, or to obtain such clearances or
approvals on a timely basis, would have a material adverse effect on the
Company's business, financial condition, and results of operations, and could
result in postponement of the commercialization of the Company's products or
even cessation of the Company's business in the United States.
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter than that required for FDA clearance or approval, and the requirements
may differ. Although the Company's EndoCPB System and Port-Access CABG and MVR
Systems bear the CE Mark under the European Community medical device directive,
some European countries may impose additional requirements for commercialization
of those products. Other products under development by the Company will require
additional approvals or assessments, and there can be no assurance that these
approvals or assessments will be received on a timely basis, if at all. Most
other countries in which the Company intends to operate either do not currently
regulate medical systems or have minimal regulatory requirements, although these
countries may adopt more extensive regulations in the future that could impact
the Company's ability to market its systems. In addition, significant costs and
requests for additional information may be encountered by the Company in its
efforts to obtain regulatory approvals. Any such events could substantially
delay or preclude the Company from marketing its systems internationally.
In addition, the FDA and certain foreign regulatory authorities impose
numerous other requirements with which medical device manufacturers must comply.
Product approvals can be withdrawn for failure to comply with regulatory
standards or because of the occurrence of unforeseen problems following initial
marketing. The Company will also be required to adhere to applicable FDA
regulations setting forth current GMP requirements, which include testing,
control, and documentation requirements. Ongoing compliance with GMP and other
applicable regulatory requirements is monitored through periodic inspections by
state and federal agencies, including the FDA, and by comparable agencies in
other countries. To date, the FDA has not inspected the Company's compliance
with GMP requirements, although the Company expects such inspections to be made
in the near future. Failure to comply with applicable regulatory requirements
can result in fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, denial or withdrawal of
premarket clearance or premarket approval for devices, and criminal prosecution.
Furthermore, changes in existing regulations or adoption of new regulations or
policies could delay or even prevent the Company from obtaining future
regulatory approvals or clearances. For example, the FDA is currently
implementing new quality system regulations, that, among other things, require
design controls and maintenance of service records, and will likely increase the
cost of complying with GMP requirements. Such revisions could have a material
adverse effect on the Company's business, financial condition, and results of
operations. See "Government Regulation."
25
<PAGE>
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
The Company expects that sales volumes and prices of the Company's products
will be heavily dependent on the availability of reimbursement from third-party
payors and that individuals seldom, if ever, will be willing or able to pay
directly for the costs associated with the use of the Company's products. The
Company's products are typically purchased by clinics, hospitals, and other
users, which bill various third-party payors, such as governmental programs and
private insurance plans, for the healthcare services provided to their patients.
Third-party payors carefully review and increasingly challenge the prices
charged for medical products and services. Reimbursement rates from private
companies vary depending on the procedure performed, the third-party payor, the
insurance plan, and other factors. Medicare reimburses hospitals a prospectively
determined fixed amount for the costs associated with an in-patient
hospitalization based on the patient's discharge diagnosis, and reimburses
physicians a prospectively determined fixed amount based on the procedure
performed, regardless of the actual costs incurred by the hospital or physician
in furnishing the care and unrelated to the specific devices used in that
procedure. Medicare and other third-party payors are increasingly scrutinizing
whether to cover new products and the level of reimbursement for covered
products.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans, and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have an adverse effect on market acceptance of the
Company's products in the international markets in which such approvals are
sought.
The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. The Company believes that the overall escalating cost of
medical products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by the Company. There
can be no assurance as to either United States or foreign markets that
third-party reimbursement and coverage will be available or adequate, that
current reimbursement amounts will not be decreased in the future or that future
legislation, regulation, or reimbursement policies of third-party payors will
not otherwise adversely affect the demand for the Company's products or its
ability to sell its products on a profitable basis, particularly if the
Company's systems are more expensive than competing cardiac surgery procedures.
If third-party payor coverage or reimbursement is unavailable or inadequate, the
Company's business, financial condition, and results of operations could be
materially adversely affected. See "Third-Party Reimbursement."
PRICE VOLATILITY OF COMMON STOCK
The Company's stock price has been, and is likely to continue to be, highly
volatile. The market price of the Company's Common Stock has fluctuated
substantially in recent periods, rising from $21.00 at the Company's initial
public offering on April 25, 1996 to a high of $43.75 on May 15, 1996 and to a
low of $12.50 on February 2, 1998. On March 20, 1998 the price of the Company's
Common Stock was $13.50. The market price of the shares of Common Stock may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcements of technological innovations, new
products or new contracts by the Company or its competitors, developments with
respect to patents or proprietary rights, conditions and trends in the medical
device and other technology industries, adoption of new accounting standards
affecting the medical device industry, changes in financial estimates by
securities analysts, general market conditions, and other factors. In addition,
the stock market has experienced extreme price and volume fluctuations that have
particularly affected the market price for many high technology companies and
that have often been unrelated to the operating performance of these
26
<PAGE>
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock, and there can be no assurance that the market
price of the Common Stock will not decline. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against that company. Such
litigation, if brought against the Company, could result in substantial costs
and a diversion of management's attention and resources.
POSSIBLE ACQUISITIONS
The Company may make acquisitions of complementary businesses, products and
technology in the future, and regularly evaluates such opportunities. Product
and technology acquisitions entail numerous risks, including difficulties in the
assimilation of acquired operations and products, diversion of management's
attention to other business concerns, amortization of acquired intangible assets
and potential loss of key employees of acquired companies. The Company's
management has had limited experience in assimilating acquired organizations and
products into the Company's operations. No assurance can be given as to the
ability of the Company to integrate successfully any operations, personnel or
products that might be acquired in the future, and the failure of the Company to
do so could have a material adverse effect on the Company's results of
operations.
CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
The present directors, executive officers, and principal stockholders of the
Company and their affiliates beneficially own approximately 45% of the
outstanding Common Stock. As a result, these stockholders will be able to
continue to exert significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may have the effect of
delaying or preventing a change in control of the Company.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF RIGHTS PLAN,
CERTIFICATE OF INCORPORATION, BYLAWS, AND DELAWARE LAW
The Company's Board of Directors has the authority to issue up to 20,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting and conversion rights of such
shares, without any further vote or action by the Company's stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock could have the effect of making
it more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. Other than the Series A Preferred Stock issuable
under the stockholder rights plan, the Company has no current plans to issue
shares of Preferred Stock. In addition, the Company's Certificate of
Incorporation provides for a classified Board of Directors such that
approximately only one-third of the members of the Board are elected at each
annual meeting of stockholders. Classified Boards may have the effect of
delaying, deferring, or discouraging changes in control of the Company. Further,
the Company has adopted a stockholder rights plan that, in conjunction with
certain provisions of the Company's Certificate of Incorporation and Bylaws and
of Delaware law, could delay or make more difficult a merger, tender offer, or
proxy contest involving the Company.
27
<PAGE>
ITEM 2. PROPERTIES.
The Company's principal administrative, sales, manufacturing, and research
and development facility occupies approximately 85,000 square feet in four
adjacent buildings in an office park in Redwood City, California, pursuant to
leases which expire between April 1999 and July 1999. The Company has entered
into a 12 year lease for a 133,000 square foot building under construction in
Redwood City, California. The Company plans to move its present Redwood City
operations to this new facility upon completion, which is currently scheduled
for late 1998. The Heartport Research and Training Center occupies approximately
50,000 square feet in Utah. The initial term of the lease on this facility
expires in December 2001.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
28
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has traded publicly on the Nasdaq National Market
under the symbol "HPRT" since April 26, 1996. The Company's initial public
offering price was $21.00 per share. The following table sets forth, for the
periods indicated, the high and low closing sale prices for the Company's Common
Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Second Quarter (from April 26, 1996, the first trading date)....................... $ 41.00 $ 26.88
Third Quarter...................................................................... 30.25 21.25
Fourth Quarter..................................................................... 36.50 22.88
YEAR ENDED DECEMBER 31, 1997:
First Quarter...................................................................... 31.88 21.38
Second Quarter..................................................................... 26.00 17.63
Third Quarter...................................................................... 25.13 16.63
Fourth Quarter..................................................................... 29.75 18.38
YEAR-ENDED DECEMBER 31, 1998
First Quarter (through March 20, 1998)............................................. 23.75 12.50
</TABLE>
On March 20, 1998, the last sale price of the Company's Common Stock as
reported by the Nasdaq National Market was $13.50 per share. There were 345
holders of record of the Company's Common Stock as of March 20, 1998. See "Risk
Factors--Price Volatility of Common Stock"
The Company has never declared or paid cash dividends on its Common Stock
and currently does not anticipate paying cash dividends in the foreseeable
future. In addition, the Company's debt facility restricts the ability to pay
cash dividends.
29
<PAGE>
As required by Rule 463, the Registrant provides the following information
with respect to the use of proceeds from the sale of its Common Stock on April
25, 1996, pursuant to a registration statement filed with and declared effective
by the Commission ($ in thousands):
<TABLE>
<C> <S> <C>
(i) The offering has terminated; the offering did not terminate before the sale of all
securities required.
(ii) The managing underwriters of the offering were:
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Alex. Brown & Sons Incorporated
Cowen & Company
(iii) Class of securities registered: Common Stock
(iv) Amount registered: 5,750,000
Shares
Aggregate price of offering amount registered: $120,750
Amount sold: 5,750,000
Shares
Aggregate offering price of amount sold: $120,750
(v) Estimated amount of expenses incurred for the Issuers' account in
connection with the issuance and distribution of the securities: $ 9,949
(vi) Estimated net offering proceeds: $110,801
(vii) Estimated use of net offering proceeds through December 31, 1997:
Construction of plant, building and facilities $ 6,254
Purchase and installation of machinery and equipment $ 8,470
Purchase of real estate $ 0
Acquisition of other businesses $ 0
Repayment of indebtedness $ 925
Working capital $ 72,111
Short-term investments $ 15,713
Money Market funds $ 7,328
</TABLE>
30
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The statement of operations data for the three years
in the period ended December 31, 1997, and the balance sheet data at December
31, 1997 and 1996 are derived from the audited financial statements included
elsewhere herein. The statement of operations data for the years ended December
31, 1994 and 1993, and the balance sheet data at December 31, 1995, 1994 and
1993 are derived from audited financial statements not included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales.............................................. $ 23,421 $ 624 $ -- $ -- $ --
Cost of sales.......................................... 15,395 561 -- -- --
----------- ---------- ---------- --------- ---------
Gross profit........................................... 8,026 63 -- -- --
Operating expenses:
Research and development............................. 18,005 21,059 8,477 4,207 1,493
Selling, general and administrative.................. 43,005 11,223 1,229 734 364
Patent acquisition................................... -- 5,216 -- -- --
----------- ---------- ---------- --------- ---------
Loss from operations................................... (52,984) (37,435) (9,706) (4,941) (1,857)
Interest income........................................ 6,563 3,973 542 120 58
Interest expense and other............................. (4,910) (592) (189) -- --
----------- ---------- ---------- --------- ---------
Net loss............................................... $ (51,331) $ (34,054) $ (9,353) $ (4,821) $ (1,799)
----------- ---------- ---------- --------- ---------
----------- ---------- ---------- --------- ---------
Basic and diluted net loss per share (pro forma in 1996
and 1995)............................................ $ (2.29) $ (1.79) $ (0.78)
----------- ---------- ----------
----------- ---------- ----------
Supplemental net loss per share data (unaudited)(1).... $ (2.08) $ (1.52) $ (0.62)
----------- ---------- ----------
----------- ---------- ----------
CONSOLIDATED BALANCE SHEET DATA:
Current assets......................................... $ 124,848 $ 94,226 $ 12,692 $ 1,721 $ 696
Working capital........................................ 113,923 87,561 11,234 1,089 505
Total assets........................................... 142,810 101,852 14,266 2,621 983
Long-term obligations, less current portion............ 89,868 4,717 4,034 61 10
Accumulated deficit.................................... (101,930) (50,599) (16,545) (7,192) (2,371)
Total stockholders' equity............................. 42,017 90,470 8,775 1,928 781
</TABLE>
- ------------------------
(1) Supplemental net loss per share data (unaudited) is computed assuming
nonvested shares were outstanding for the purposes of calculating basic and
diluted net loss per share in 1997 and pro forma net loss per share in 1996
and 1995. For additional disclosures related to nonvested shares, see Note 6
to the financial statements.
31
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Since its inception in May 1991, Heartport has been engaged in the research
and development of Port-Access minimally invasive cardiac surgery systems and
related technology. In December 1996, the Company commercially introduced its
Port-Access systems and since that time has engaged in extensive surgical team
training, marketing and selling activities, and continued research and
development. Through its "Port-Access Partnership" program, the Company has
adopted a procedural sales model in which the Company trains a center's surgical
team, supplies patient and referring physician educational materials, supports
local market media efforts and furnishes proprietary reusable devices for
Port-Access procedures in exchange for a purchase order for Port-Access
disposable products necessary to perform Port-Access cardiac surgery.
The Company has only been generating revenue from the sale of products since
December 1996, and it has been unprofitable since inception. For the period from
inception to December 31, 1997, the Company has incurred cumulative net losses
of approximately $101.9 million. For at least the next 18 months, the Company
expects to continue to incur significant losses.
The foregoing and the discussion appearing elsewhere in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors--Early Stage of
Utilization; No Assurance of Safety and Efficacy," "--No Assurance of Market
Acceptance," "--Risks Associated with New Surgical Procedure; Extensive Training
Requirements," "--Customer Concentration," "--Fluctuations in Operating
Results," and "--Limited Manufacturing Experience; Dependence on Key Suppliers."
RESULTS OF OPERATIONS
NET SALES. Net sales were $23.4 million and $0.6 million in the years ended
December 31, 1997 and 1996, respectively. There were no comparable sales in the
year ended December 31, 1995 as the Company commenced product sales in December
1996. Included in net sales for the year ended December 31, 1997, is a $1.0
million fee received from Getz Bros. Co., Ltd., who will act as the exclusive
distributor of the Company's products in Japan. International net sales
represented 12% of net sales in 1997. The Company estimates that approximately
one-third of total 1997 net sales represented shipments that remained in
customer inventory at December 31, 1997 against purchase orders under the
Port-Access Partnership program. Net sales consist primarily of sales of the
Company's disposable devices in its EndoCPB, Port-Access CABG and Port-Access
MVR systems. Revenue from product sales is recognized upon product shipment.
COST OF SALES. Cost of sales was $15.4 million in the year ended December
31, 1997, compared to $0.6 million in 1996. Cost of sales consists primarily of
material, labor and overhead costs associated with manufacturing the Company's
disposable and reusable devices in its EndoCPB, Port-Access CABG, and
Port-Access MVR systems.
As cost of sales includes the cost of the Company's reusable devices, for
which the Company receives no corresponding revenue under the Company's
Port-Access Partnership sales model, the Company's gross margin may vary
significantly based upon the mix of reusable and disposable devices shipped.
During periods where net sales to new centers in the Port-Access Partnership
program constitute a significant percentage of total net sales, and as a result,
reusable devices shipped by the Company account for a significant percentage of
total devices shipped, the Company's gross profit will be adversely impacted.
Gross margin was 34% and 10% in 1997 and 1996, respectively. The increase
primarily reflects efficiencies obtained as a result of higher production volume
in the first full year of product sales.
32
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$18.0 million, $21.1 million and $8.5 million in the years ended December 31,
1997, 1996 and 1995, respectively. The decrease in 1997 from 1996 was primarily
due to manufacturing development costs incurred in 1996 for the design,
construction and testing of pre-production prototypes and models and other
related pre-launch costs. The increase in 1996 from 1995 was attributable to an
increase in physician training and in manufacturing expenses related to the
production of products for physician training and clinical trials, as well as to
an increase in research and development staffing. Heartport has maintained a
significant level of research and development spending directed towards product
improvements and new product development and anticipates that it will continue
to devote substantial resources to research and development activities.
Research and development expenses consist primarily of personnel costs,
consulting fees and other costs in support of product development, clinical
trials, and regulatory submissions, as well as costs incurred in producing
products for research and development activities, the cost of acquiring
intellectual property, and the cost of prosecuting United States and foreign
patent applications relating to the Company's technology. In addition, prior to
commercialization of the Company's products, costs incurred in physician
training were included in the Company's research and development expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $43.0 million in 1997 from $11.2 million in
1996 and $1.2 million in 1995. These increases were primarily due to the hiring
of additional sales, marketing and administrative personnel, higher physician
training costs, increased expenses necessary to support the Company's product
launch and ongoing sales activities, and higher expenses necessary to manage and
support the Company's increased scale of operations. Use of the Company's
products requires a substantial training curriculum both at the Heartport
Research and Training Center and at each customer's hospital. These costs are
accounted for as sales and marketing expenses and will continue to be
significant. The Company believes that its selling, general and administrative
expenses will increase substantially as it continues to expand its physician
training activities, build its sales force, marketing staff and administrative
staff, and incur other costs in connection with commercialization of its
products and the support of its growing operations.
Selling, general and administrative expenses consist primarily of costs for
sales, marketing and administrative personnel, as well as legal, accounting and
other professional fees. Since commercialization of the Company's products,
physician training costs have also been included in the Company's selling,
general and administrative expenses.
PATENT ACQUISITION EXPENSES. Patent acquisition expenses consist of the
cost to acquire a United States patent, several pending U.S. Patent
applications, and related rights from Endosurgical Development Corporation in
July 1996 in exchange for shares of Common Stock and cash. Patent and other
intellectual property acquisitions deemed to be in the normal course of business
are accounted for as research and development expenses.
INTEREST INCOME. Interest income increased to $6.6 million in 1997 from
$4.0 million in 1996 and $0.5 million in 1995. The increase in each year was
primarily due to the Company's higher average investment balances resulting from
the Company's initial public offering in 1996 and the issuance of convertible
subordinated notes in 1997.
INTEREST EXPENSE AND OTHER. Interest expense and other increased to $4.9
million in 1997 from $0.6 million in 1996 and $0.2 million in 1995. The increase
in 1997 was primarily attributable to interest expense related to the Company's
convertible subordinated notes that were issued in April 1997.
INCOME TAXES. Due to operating losses and the inability to recognize the
benefits therefrom, there is no provision or benefit for income taxes for 1997,
1996 or 1995.
33
<PAGE>
Realization of deferred tax assets is dependent on future earnings, if any,
the amount and timing of which are uncertain. Accordingly, a valuation allowance
has been established in an amount equal to the net deferred tax assets of the
Company to reflect these uncertainties.
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $93.0 million for federal income tax purposes and $59.0 million
for state income tax purposes, which will expire at various dates through 2012
if not utilized. The Company also has research and development tax credit
carryforwards available to reduce future federal and state income taxes, if any,
of approximately $1.3 million and $1.2 million, respectively, which will expire
in the years 2007 through 2012 if not used. The Internal Revenue Code of 1986
and state tax statutes contain provisions that may limit the net operating loss
carryforwards and research and development credits available for use in any
given year should certain events occur, including additional sales of equity
securities and other changes in ownership. Such events could limit the eventual
utilization of these carryforwards. See Note 7 of Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Heartport has funded its operations and investments in
property and equipment primarily through the private sale of preferred stock,
totaling approximately $25.1 million, through an initial public offering of
Common Stock in April 1996, totaling approximately $110.8 million, and through a
private placement of convertible subordinated notes to qualified institutional
investors in April 1997, totaling approximately $82.8 million. The Company also
has a $25.0 million debt facility with a commercial bank. No amount was
outstanding under this facility at December 31, 1997. At December 31, 1997,
Heartport had approximately $112.6 million in cash, cash equivalents, and
short-term investments. Working capital totaled $113.9 million at December 31,
1997.
Net cash used in operating activities was approximately $51.8 million, $28.6
million and $8.4 million in 1997, 1996 and 1995, respectively. For such periods,
net cash used in operating activities resulted primarily from increasing net
losses. For 1997, net cash used in operating activities also resulted from
increases in accounts receivable of $5.4 million which reflect the Company's
increasing product sales. Net cash used in investing activities was
approximately $30.5 million, $57.3 million and $5.0 million in 1997, 1996 and
1995, respectively. Net cash used in investing activities in 1997 was primarily
attributable to net purchases of $20.4 million of short-term investments as a
result of increased cash balances and additions of $10.2 million of property and
equipment to outfit manufacturing and training facilities. Net cash provided by
financing activities was approximately $84.7 million, $111.9 million and $20.4
million in 1997, 1996 and 1995, respectively. The net cash provided in 1997 was
primarily attributable to net proceeds of $82.8 million from the sale of
convertible subordinated notes and net cash provided in 1996 was primarily
attributable to the Company's initial public offering of Common Stock.
Capital expenditures for equipment and leasehold improvements to support the
Company's expanded operations increased to $10.2 million in 1997 from $6.1
million in 1996 and $0.9 million in 1995. The expenditures in 1997 were
primarily related to training facility improvements, acquisition of equipment
for research and development and the expansion of the Company's manufacturing
capacity and facilities. The expenditures in 1996 were primarily related to the
acquisition of equipment for research and development and physician training and
the expansion of the Company's administrative facilities and manufacturing
capacity. In September 1997, the Company entered into a 12-year lease for a
133,000 square foot building which is currently under construction. The Company
plans to move its present operations to this new facility in late 1998. The
Company expects that its capital expenditures in 1998 will be higher than 1997
primarily due to this new facility. The Company believes that it has the
financial resources through its current level of liquid assets and credit
facilities to meet business requirements in 1998.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEARTPORT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Stockholders' Equity............................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Heartport, Inc.
We have audited the accompanying consolidated balance sheets of Heartport,
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a)(2). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Heartport, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Jose, California
January 26, 1998
F-2
<PAGE>
HEARTPORT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 35,805 $ 33,445
Short-term investments.................................................................. 76,780 56,407
Accounts receivable, net of allowances of $923 in 1997 ($98 in 1996).................... 5,925 550
Inventories............................................................................. 4,878 2,107
Other current assets.................................................................... 1,460 1,717
---------- ----------
Total current assets...................................................................... 124,848 94,226
---------- ----------
Property and equipment:
Equipment............................................................................... 8,967 4,908
Furniture and fixtures.................................................................. 1,924 1,372
Leasehold improvements.................................................................. 6,991 1,699
---------- ----------
17,882 7,979
Accumulated depreciation and amortization............................................... 4,474 1,584
---------- ----------
13,408 6,395
Other assets.............................................................................. 4,554 1,231
---------- ----------
Total assets.............................................................................. $ 142,810 $ 101,852
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 4,752 $ 4,570
Accrued compensation and related benefits............................................... 4,324 1,433
Accrued interest........................................................................ 1,042 --
Current portion of long-term debt....................................................... 807 662
---------- ----------
Total current liabilities................................................................. 10,925 6,665
---------- ----------
Noncurrent liabilities:
Long-term debt, less current portion.................................................... 86,842 1,334
Other long-term liabilities............................................................. 65 383
Deferred royalty income................................................................. 2,961 3,000
---------- ----------
Total noncurrent liabilities.............................................................. 89,868 4,717
---------- ----------
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value; 20,000 shares authorized, none issued and
outstanding........................................................................... -- --
Common stock, $0.001 par value:
Authorized shares--100,000
Issued and outstanding shares--24,902 in 1997 (24,415 in 1996)........................ 25 24
Additional paid-in capital.............................................................. 144,824 142,018
Notes receivable from stockholders...................................................... (902) (973)
Accumulated deficit..................................................................... (101,930) (50,599)
---------- ----------
Total stockholders' equity................................................................ 42,017 90,470
---------- ----------
Total liabilities and stockholders' equity................................................ $ 142,810 $ 101,852
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
HEARTPORT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales..................................................................... $ 23,421 $ 624 $ --
Cost of sales................................................................. 15,395 561 --
---------- ---------- ----------
Gross profit.................................................................. 8,026 63 --
Operating expenses:
Research and development.................................................... 18,005 21,059 8,477
Selling, general and administrative......................................... 43,005 11,223 1,229
Patent acquisition.......................................................... -- 5,216 --
---------- ---------- ----------
Loss from operations.......................................................... (52,984) (37,435) (9,706)
Interest income............................................................... 6,563 3,973 542
Interest expense and other.................................................... (4,910) (592) (189)
---------- ---------- ----------
Net loss...................................................................... $ (51,331) $ (34,054) $ (9,353)
---------- ---------- ----------
---------- ---------- ----------
Basic and diluted net loss per share (pro forma in 1996 and 1995)............. $ (2.29) $ (1.79) $ (0.78)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes
F-4
<PAGE>
HEARTPORT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------------ PAID-IN NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.................... 6,671 $ 7 5,959 $ 6 $ 9,151 $ (44)
Issuances of convertible preferred stock...... 2,566 2 -- -- 15,982 --
Issuances of preferred stock warrants......... -- -- -- -- 29 --
Exercises of common stock options............. -- -- 3,093 3 1,211 (1,049)
Issuances of common stock..................... -- -- 32 -- 22 --
Net loss...................................... -- -- -- -- -- --
----------- --- ----------- --- ----------- -----------
Balance at December 31, 1995.................... 9,237 9 9,084 9 26,395 (1,093)
Conversion of convertible preferred stock into
common stock................................ (9,237) (9) 9,237 9 -- --
Repurchases of common stock................... -- -- (184) -- (69) 69
Payments of stockholders' notes receivable.... -- -- -- -- -- 51
Exercises of common stock options............. -- -- 327 -- 67 --
Issuances of common stock..................... -- -- 5,951 6 115,425 --
Issuances of warrants......................... -- -- -- -- 200 --
Net loss...................................... -- -- -- -- -- --
----------- --- ----------- --- ----------- -----------
Balance at December 31, 1996.................... -- -- 24,415 24 142,018 (973)
Payments of stockholders' notes receivable.... -- -- -- -- -- 71
Exercises of common stock options............. -- -- 413 -- 940 --
Issuances of common stock..................... -- -- 74 1 1,563 --
Issuances of stock options to non-employees... -- -- -- -- 303 --
Net loss...................................... -- -- -- -- -- --
----------- --- ----------- --- ----------- -----------
Balance at December 31, 1997.................... -- $ -- 24,902 $ 25 $ 144,824 $ (902)
----------- --- ----------- --- ----------- -----------
----------- --- ----------- --- ----------- -----------
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Balance at December 31, 1994.................... $ (7,192) $ 1,928
Issuances of convertible preferred stock...... -- 15,984
Issuances of preferred stock warrants......... -- 29
Exercises of common stock options............. -- 165
Issuances of common stock..................... -- 22
Net loss...................................... (9,353) (9,353)
------------ -------------
Balance at December 31, 1995.................... (16,545) 8,775
Conversion of convertible preferred stock into
common stock................................ -- --
Repurchases of common stock................... -- --
Payments of stockholders' notes receivable.... -- 51
Exercises of common stock options............. -- 67
Issuances of common stock..................... -- 115,431
Issuances of warrants......................... -- 200
Net loss...................................... (34,054) (34,054)
------------ -------------
Balance at December 31, 1996.................... (50,599) 90,470
Payments of stockholders' notes receivable.... -- 71
Exercises of common stock options............. -- 940
Issuances of common stock..................... -- 1,564
Issuances of stock options to non-employees... -- 303
Net loss...................................... (51,331) (51,331)
------------ -------------
Balance at December 31, 1997.................... $ (101,930) $ 42,017
------------ -------------
------------ -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
HEARTPORT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................................................... $ (51,331) $ (34,054) $ (9,353)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................... 2,896 1,084 330
Common stock and warrants issued for services rendered and certain
technology................................................................ 459 4,355 --
Compensation related to stock options....................................... 303 183 --
Loss on disposal of equipment............................................... 262 -- --
Changes in operating assets and liabilities:
Accounts receivable....................................................... (5,375) (550) --
Inventories............................................................... (2,771) (2,107) --
Other assets.............................................................. -- (2,666) 103
Accounts payable, accrued expenses, and other liabilities................. 3,758 5,201 541
---------- ---------- ----------
Net cash used in operating activities......................................... (51,799) (28,554) (8,379)
---------- ---------- ----------
INVESTING ACTIVITIES
Purchases of short-term investments........................................... (90,166) (120,629) (5,198)
Maturities and sales of short-term investments................................ 69,793 69,420 1,092
Purchases of property and equipment........................................... (10,165) (6,104) (875)
---------- ---------- ----------
Net cash used in investing activities......................................... (30,538) (57,313) (4,981)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from issuances of preferred stock.................................... -- -- 15,984
Proceeds from issuances of common stock....................................... 2,045 111,159 165
Proceeds from payments of stockholders' notes receivable...................... 71 51 --
Proceeds from long-term borrowings............................................ 83,240 1,155 4,519
Repayment of long-term borrowings............................................. (659) (465) (261)
---------- ---------- ----------
Net cash provided by financing activities..................................... 84,697 111,900 20,407
---------- ---------- ----------
Net increase in cash and cash equivalents..................................... 2,360 26,033 7,047
Cash and cash equivalents at beginning of year................................ 33,445 7,412 365
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 35,805 $ 33,445 $ 7,412
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION
Cash paid for interest........................................................ $ 3,573 $ 346 $ 182
NONCASH FINANCING ACTIVITIES
Issuance of preferred stock warrants in connection with debt financing........ $ -- $ -- $ 29
Issuance of common stock for notes receivable................................. $ -- $ -- $ 1,049
Issuance of common stock for technology....................................... $ -- $ 4,155 $ 22
Repurchase of common stock through forgiveness of notes receivable from
stockholders................................................................ $ -- $ 69 $ --
Conversion of long-term debt to deferred royalty income....................... $ -- $ 3,000 $ --
Conversion of preferred stock to common stock................................. $ -- $ 9 $ --
</TABLE>
See accompanying notes.
F-6
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Heartport, Inc. (the Company) is engaged principally in the research,
development, manufacturing and sale of minimally invasive cardiac surgery
systems and related technology. The Company's customers are cardiac surgery
centers in the United States and Europe. The consolidated accounts include the
accounts of Heartport, Inc. and its wholly owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated.
Certain amounts for 1996 and 1995 have been reclassified to conform to the
1997 financial statement presentation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with insignificant
interest rate risk and with an original maturity of three months or less when
purchased to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes product revenue upon shipment. Deferred royalty
income includes advances received but unearned under an agreement with St. Jude
Medical, Inc. Fees from distribution right agreements are recognized as relevant
contractual milestones are attained.
ADVERTISING
The Company expenses advertising costs as incurred. For the years ended
December 31, 1997, 1996 and 1995 advertising expenses were $504,000, $67,000 and
$0, respectively.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist
principally of investments and accounts receivable. By policy, the Company
places its investments only with high credit quality financial institutions and
corporations and, other than its investments in U.S. Government Treasury
instruments, limits the amounts invested in any one institution or type of
investment vehicle. In addition, the Company performs credit evaluations of its
customers' financial condition and generally requires no collateral. At December
31, 1997, approximately 15% of accounts receivable related to a distribution
agreement (see Note 5), and no direct customer represented more than 4% of the
total accounts receivable balance. During 1997 and 1996, sales to international
customers were approximately 12% and 26% of net sales, respectively. All sales
are denominated in U.S. dollars.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of investments is based on quoted market prices or pricing
models using current market rates (see Note 3).
F-7
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The fair value of the Company's long-term debt is estimated using a
discounted cash flow analysis based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements (see Note 4).
INVESTMENTS
All investments are designated as available-for-sale. Available-for-sale
securities are carried at fair value with unrealized gains and losses, net of
tax, reported in a separate component of stockholders' equity. The amortized
cost of available-for-sale debt securities is adjusted for the amortization of
premiums and the accretion of discounts to maturity. Such amortization is
included in interest income. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Materials and purchased parts.............................................. $ 2,235 $ 1,625
Work in progress........................................................... 456 84
Finished goods............................................................. 2,187 398
--------- ---------
Total inventories.......................................................... $ 4,878 $ 2,107
--------- ---------
--------- ---------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets, ranging from
three to nine years or over the term of the lease, if shorter. Amortization of
assets recorded under capital leases is included in depreciation expense.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary and fully diluted earnings per share, outstanding nonvested shares are
not included in the computations of basic and diluted earnings per share until
the time-based vesting restriction has lapsed. However, for the purposes of
computing diluted earnings per share in periods with a profit, the dilutive
effect of outstanding nonvested shares is included using the treasury stock
method. For periods with a profit, basic earnings per share excludes the
dilutive effect of options, warrants, and convertible securities that would have
been included in the primary earnings per share calculation. In addition, in
February 1998, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 98, EARNINGS PER SHARE. Staff Accounting Bulletin No. 98 affected
the treatment of certain stock and warrants ("cheap stock") issued within a
one-year period prior to an initial public offering. Upon
F-8
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the adoption of Statement 128, the staff generally does not continue to believe
that such stock and warrants should be treated as outstanding for all reporting
periods. Earnings per share amounts presented have been restated to conform to
the Statement 128 and Staff Accounting Bulletin No. 98 requirements. The
following table sets forth the computation of net loss per share:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Numerator for basic, diluted and pro forma net loss per share:
Net loss.............................................................. $ (51,331) $ (34,054) $ (9,353)
Denominator:
Weighted-average common shares........................................ 24,687 19,502 6,873
Weighted-average nonvested shares subject to repurchase............... (2,266) (3,362) (3,163)
---------- ---------- ----------
Denominator for basic and diluted net loss per share.................... 22,421 16,140 3,710
----------
----------
Convertible preferred shares............................................ 2,910 8,237
---------- ----------
Denominator for pro forma net loss per share............................ 19,050 11,947
---------- ----------
---------- ----------
Basic and diluted net loss per share.................................... $ (2.29)
----------
----------
Pro forma net loss per share............................................ $ (1.79) $ (0.78)
---------- ----------
---------- ----------
</TABLE>
The Company has securities outstanding that could dilute basic earnings per
share in the future that were not included in the computation of diluted net
loss per share in the periods presented as their effect is antidilutive. For
additional disclosures regarding potentially dilutive stock options, warrants,
nonvested shares, convertible debentures and convertible preferred stock, see
Notes 4 and 6.
Pro forma net loss per share has been computed as above and also assumes the
conversion of convertible preferred shares not included above that automatically
converted upon the completion of the Company's initial public offering (using
the if-converted method) from the original date of issuance.
Outstanding nonvested shares represent shares subject to repurchase at the
option of the Company. Supplemental net loss per share data (unaudited) computed
assuming nonvested shares were outstanding for the purposes of calculating basic
and diluted net loss per share in 1997 and pro forma net loss per share in 1996
and 1995 is $(2.08), $(1.52), and $(0.62), respectively.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options using the intrinsic value
method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. In accordance with SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company has adopted the pro forma
disclosure of accounting for employee options under the fair value method. For
options or other stock based compensation issued to non-employees, the Company
recognizes compensation expense under the fair value method.
F-9
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, REPORTING COMPREHENSIVE INCOME. This statement requires that all items that
are to be required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement is effective
for fiscal years beginning after December 15, 1997, and will be adopted by the
Company for the year ended December 31, 1998.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS 131 is
effective for fiscal years beginning after December 15, 1997, and will be
adopted by the Company for the year ended December 31, 1998. The adoption of
SFAS 131 will have no impact on the Company's consolidated results of
operations, financial position or cash flows.
2. COMMITMENTS
The Company leases its facilities under noncancelable operating leases that
expire in the years 1999 through 2010. Rental expense was $1,937,000, $959,000
(net of sublease income of $14,000), and $435,000 (net of sublease income of
$161,000) for the years ended December 31, 1997, 1996 and 1995, respectively.
The future minimum lease payments as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
-------------
<S> <C>
1998........................................................................... $ 2,230
1999........................................................................... 4,521
2000........................................................................... 4,071
2001........................................................................... 4,166
2002........................................................................... 3,706
Thereafter..................................................................... 31,064
-------------
$ 49,758
-------------
-------------
</TABLE>
F-10
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
Investments as of December 31, including cash equivalents and short-term
investments, were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Money market funds.................................................... $ 2,014 $ 7,959
Commercial paper...................................................... 27,398 18,289
Auction rate preferred stock.......................................... 6,600 8,000
Corporate notes....................................................... 29,718 35,462
U.S. government agency securities..................................... 39,990 12,945
Mortgage backed securities............................................ 2,222 --
---------- ----------
Total available-for-sale investments.................................. 107,942 82,655
Amounts classified as cash equivalents................................ (31,162) (26,248)
---------- ----------
Short-term investments................................................ $ 76,780 $ 56,407
---------- ----------
---------- ----------
</TABLE>
There were no material realized or unrealized gains or losses in any
category of investment in 1997, 1996 or 1995.
The estimated fair value of investments in debt securities at December 31,
1997, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
-------------
<S> <C>
Due in 1 year or less.......................................................... $ 85,645
Due in 1-2 years............................................................... 20,075
-------------
105,720
Mortgage-backed securities..................................................... 2,222
-------------
Total investments in debt securities........................................... $ 107,942
-------------
-------------
</TABLE>
4. DEBT
Debt at December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Convertible subordinated notes, due in 2004 at 7.25%..................... $ 86,250 $ --
Equipment financing and other debt....................................... 1,399 1,996
--------- ---------
Total long-term debt..................................................... 87,649 1,996
Current portion of long-term debt........................................ (807) (662)
--------- ---------
Long-term debt, less current portion..................................... $ 86,842 $ 1,334
--------- ---------
--------- ---------
</TABLE>
In April 1997, the Company issued an aggregate principal amount of $86.3
million of convertible subordinated notes. The notes are due in 2004, bear
annual interest at 7.25%, and are convertible at the option of the holder into
the Company's common stock at a price of $28.958 per share. Issuance costs of
F-11
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT (CONTINUED)
approximately $3.4 million are included in other assets and are being amortized
over the life of the notes. The carrying value of the Company's long-term debt
approximates its fair value.
As of December 31, 1997, aggregate debt maturities were as follows (in
thousands):
<TABLE>
<S> <C>
1998............................................................... $ 807
1999............................................................... 428
2000............................................................... 122
2001............................................................... 33
Thereafter......................................................... 86,259
---------
$ 87,649
---------
---------
</TABLE>
As of December 31, 1997, the Company has an unused credit facility with a
commercial bank of $15.0 million. In March 1998, the credit facility was
extended to $25.0 million. The annual commitment fee is 0.25% for the unused
portion of the line of credit.
5. DISTRIBUTION AGREEMENT
In December 1997, the Company entered into an agreement with Getz Bros. Co.,
Ltd. to assign exclusive rights to distribute the Company's products in Japan.
During 1997, the Company recognized $1.0 million in non-refundable fees upon the
signing of the agreement. Additional non-refundable fees can be received and
earned upon the achievement of certain milestones, including product approval
and certification in Japan.
6. STOCKHOLDERS' EQUITY
NONVESTED SHARES
At December 31, 1997, 1,912,000 shares of outstanding common stock owned by
employees of and consultants to the Company were subject to repurchase, at the
option of the Company, at the original purchase price in the event of the
termination of their employment or consulting relationship.
STOCK OPTION PLANS
Under the 1993 Stock Option Plan (the 1993 Plan), the Company may grant
incentive and nonstatutory stock options to purchase up to 6,720,000 shares of
common stock to directors, employees and consultants. Options may be granted at
an exercise price of not less than 85% of the fair value of the stock at the
date of grant for nonstatutory stock options and 100% of the fair value of the
stock at the date of grant for incentive stock options as determined by the
Board of Directors. Generally, options vest under such conditions as determined
by the Board of Directors, typically over a five year period, and expire after
ten years. During 1996, the Company adopted the 1996 Stock Option Plan (the 1996
Plan), under which the Company reserved 2,110,000 shares of common stock for
issuance to employees, consultants and directors of the Company in addition to
the 3,390,000 shares incorporated from the 1993 plan. The Company had 607,000
shares available for grant under the plans as of December 31,1997.
In addition, during 1996 the Company issued 940,000 nonstatutory options
outside of the plans to employees.
F-12
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option transactions is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE
(IN THOUSANDS) PRICE
--------------- -------------
<S> <C> <C>
December 31, 1994.............................................. 1,558 $ 0.22
Options granted.............................................. 3,586 $ 0.44
Options exercised............................................ (3,093) $ 0.39
Options canceled............................................. (48) $ 0.21
------ ------
December 31, 1995.............................................. 2,003 $ 0.34
Options granted.............................................. 3,100 $ 16.39
Options exercised............................................ (327) $ 0.20
Options canceled............................................. (399) $ 2.62
------ ------
December 31, 1996.............................................. 4,377 $ 12.02
Options granted.............................................. 1,933 $ 20.64
Options exercised............................................ (413) $ 2.26
Options canceled............................................. (629) $ 10.84
------ ------
December 31, 1997.............................................. 5,268 $ 16.08
------ ------
------ ------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE
(IN THOUSANDS) PRICE
--------------- -------------
<S> <C> <C>
Options exercisable at:
December 31, 1995............................................ 845 $ 0.27
December 31, 1996............................................ 801 $ 3.21
December 31, 1997............................................ 1,530 $ 9.88
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- ------------------------------------- ----------- --------------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
$ 0.06 - $ 7.50...................... 1,636 7.5 $ 3.79 1,079 $ 4.70
$ 7.51 - $15.00...................... 185 8.2 $ 12.62 60 $ 12.53
$15.01 - $25.00...................... 2,566 9.1 $ 20.26 275 $ 21.63
$25.01 - $35.00...................... 816 8.9 $ 26.51 97 $ 26.71
$35.01 - $45.00...................... 65 8.4 $ 38.81 19 $ 38.85
--
----- ----------- ----- -----------
5,268 8.5 $ 16.08 1,530 $ 9.88
--
--
----- ----------- ----- -----------
----- ----------- ----- -----------
</TABLE>
F-13
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK BASED COMPENSATION
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield........................................ 0% 0% 0%
Expected stock price volatility................................ 65% 67% 67%
Risk-free interest rate........................................ 5.35% 5.97% 5.97%
Expected life of options....................................... 3 years 3 years 3 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had the
Company elected to recognize compensation expense based on the fair value of the
options granted at grant dates as prescribed by SFAS No. 123, net loss and loss
per share would have been increased to the pro forma amounts indicated in the
table below (in thousands except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net loss--as reported..................................... $ (51,331) $ (34,054) $ (9,353)
Net loss--pro forma....................................... $ (62,112) $ (38,166) $ (9,501)
Loss per share--as reported............................... $ (2.29) $ (1.79) $ (0.78)
Loss per share--pro forma................................. $ (2.77) $ (2.00) $ (0.80)
</TABLE>
The weighted average fair value of options granted in 1997, 1996 and 1995
was $9.75, $7.41 and $0.22 per share, respectively.
The pro forma effect on net income for 1997 is not representative of the pro
forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995.
STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan (the Purchase Plan), employees
may purchase common stock at the lower of 85% of the fair market value of the
common stock at the beginning or end of each six month offering period of up to
an aggregate total of 240,000 shares of the Company's common
F-14
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
stock. During the years ended December 31, 1997 and 1996, 53,000 and 19,000
shares, respectively, were issued under the Purchase Plan.
SHAREHOLDER RIGHTS PLAN
On March 26, 1996, the Board of Directors of the Company declared a dividend
of one preferred share purchase right (Right) for each outstanding share of
common stock outstanding on the effective date of the Offering. Each Right will
entitle stockholders to purchase 1/1000 of a share of Series A Junior
participating preferred stock of the Company, a designated series of preferred
stock for which each 1/1000 of a share has economic attributes and voting rights
equivalent to one share of the Company's common stock, at an exercise price of
$0.001 per share. The Rights only become exercisable in certain limited
circumstances involving acquisitions of or tender offers for 20% or more of the
Company's capital stock. At any time prior to the announcement of any such
acquisition or offer, the Rights are redeemable by the Company at a price of
$0.001 per Right. For a limited period of time after the announcement of any
such acquisition or offer, each Right becomes exercisable or, at the discretion
of Board, may be exchanged for one share of common stock per Right. The Rights
expire in the year 2006.
COMMON STOCK RESERVED
At December 31, 1997, the Company has reserved shares of common stock for
future issuances as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
Stock option plans............................................................. 4,935
Stock options outside the plans................................................ 940
Stock purchase plan............................................................ 168
Stock warrants................................................................. 18
-----
Total...................................................................... 6,061
-----
-----
</TABLE>
STOCK SPLIT
On April 25, 1996, the Company effected a 1.6-for-1 split of the Company's
common stock. All outstanding share and per share amounts have been
retroactively adjusted to reflect the stock split.
7. INCOME TAXES
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision or benefit for income taxes for 1997, 1996 or
1995.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-15
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
purposes. Significant components of the Company's deferred tax assets as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................................... $ 34,300 $ 16,900
Tax credit carryforwards............................................ 2,400 900
Capitalized research and development................................ 400 500
Acquired patent..................................................... 1,900 1,800
Other temporary differences......................................... 2,600 600
---------- ----------
Total deferred tax assets......................................... 41,600 20,700
Valuation allowance................................................... (41,600) (20,700)
---------- ----------
Net deferred tax assets............................................... $ -- $ --
---------- ----------
---------- ----------
</TABLE>
Approximately $1.7 million of the valuation allowance is attributable to tax
deductions, the benefit of which will be credited to additional paid in capital
when realized. Realization of deferred tax assets is dependent upon future
earnings, the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax asset as of December 31,
1997 and 1996 has been established to reflect these uncertainties. The increases
in the valuation allowance were approximately $20.9 million, $13.9 million and
$3.9 million for fiscal years 1997, 1996 and 1995, respectively.
As of December 31, 1997, the Company had net operating loss carryforwards
for federal and California tax purposes of approximately $93.0 million and $59.0
million, respectively, which will expire from 1999 through 2012. As of December
31, 1997, the Company also had research and development tax credit carryforwards
of approximately $1.3 million and $1.2 million, respectively, for federal and
California tax purposes, which will expire in years 2007 through 2012 if not
used.
Utilization of net operating loss and credit carryforwards may be subject to
an annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
8. PATENT ACQUISITION
Patent acquisition expenses consist of the cost to acquire a United States
patent, several pending U.S. patent applications, and related rights from
Endosurgical Development Corporation in July 1996 in exchange for shares of
Common Stock and cash.
9. EMPLOYEE BENEFIT PLAN
The Company has a savings plan which qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, participating employees may defer up to
20% of their pre-tax salary, up to statutory limits. All regular U.S. employees
are eligible to participate. The Company currently does not match employee
contributions made to the savings plan.
F-16
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
OFFICERS AND DIRECTORS
The officers and directors of the Company, and their ages as of December 31,
1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Wesley D. Sterman, M.D. 37 President, Chief Executive Officer, Director, and Co-Founder
Richard B. Brewer 46 Chief Operating Officer
John H. Stevens, M.D. 37 Chief Technical Officer, Director and Co-Founder
David B. Singer 35 Senior Vice President and Chief Financial Officer
Bradford J. Shafer 37 General Counsel and Secretary
Steven E. Johnson 39 Senior Vice President of Manufacturing
Casey M. Tansey 40 Senior Vice President of Sales and Marketing
Hanson S. Gifford, III 37 Vice President of Research and Development
Luis J. Jimenez 42 Vice President of Quality Assurance and Regulatory Affairs
C. Richard Neely, Jr. 43 Vice President, Finance and Controller
Ajit S. Shah, Ph.D. 37 Vice President of Corporate Development
Lawrence C. Siegel, M.D. 40 Vice President of Clinical Affairs
Robert V. Gunderson, Jr.(2) 46 Director
Joseph S. Lacob(2) 42 Director
Petri T. Vainio, M.D., Ph.D.(1) 38 Director
Steven C. Wheelwright, Ph.D.(1)(2) 54 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
WESLEY D. STERMAN, M.D. founded the Company with Dr. Stevens in May, 1991,
and has served as a director and the Company's President and Chief Executive
Officer since that time. Prior to founding the Company, Dr. Sterman was founder,
President and Chief Executive Officer of EndoVascular Technologies, Inc., a
medical device manufacturer, from July, 1989 to September, 1991. Dr. Sterman has
B.S. degrees both in Biology and in Chemistry from Stanford University. Dr.
Sterman received an M.D. from the Stanford University School of Medicine and an
M.B.A. from the Graduate School of Business at Stanford University, where he was
an Arjay Miller Scholar.
RICHARD B. BREWER has been Chief Operating Officer of the Company since
January 22, 1997 and served as Executive Vice President of Operations of the
Company since February, 1996. Prior to joining the Company, Mr. Brewer served in
various capacities with Genentech, Inc., a biotechnology company, from 1984 to
1995, most recently as Senior Vice President, U.S. Sales and Marketing,
Genentech Europe Ltd., and Genentech Canada, Inc. Mr. Brewer earned a B.S. from
Virginia Polytechnic Institute and an M.B.A. from Northwestern University.
III-1
<PAGE>
JOHN H. STEVENS, M.D. founded the Company with Dr. Sterman in May, 1991, and
has been a director of the Company since that time. Dr. Stevens joined Heartport
as Chief Technical Officer in July, 1997 and has been Consulting Assistant
Professor of Cardiac Surgery at Stanford University School of Medicine since
that time. From August, 1996 until he joined the Company, Dr. Stevens was
Assistant Professor of Cardiothoracic Surgery at Stanford and prior to that he
served as Chief Resident of the Department of Cardiothoracic Surgery at
Stanford, and as Senior Registrar in Cardiothoracic Surgery at the Great Ormond
Street Hospital for Sick Children in London, England from July, 1995 to March,
1996. Dr. Stevens earned B.U.S. and B.S. degrees in Communications and
Psychology from the University of Utah and an M.D. from Stanford University.
DAVID B. SINGER has been Senior Vice President, Finance and Chief Financial
Officer of the Company since June, 1996. Prior to joining the Company, Mr.
Singer served as President, Chief Executive Officer and a Director of
Affymetrix, Inc., a genomics and diagnostic company. From November, 1990 to
February, 1993, Mr. Singer served in various senior management roles of Affymax
N.V., a biotechnology company, including Vice President, Finance and Treasurer.
From 1988 to 1990, Mr. Singer was an assistant to various senior officers of
Baxter Healthcare Corporation ("Baxter"), a medical supply company. Mr. Singer
serves on the Board of Directors of Affymetrix, Inc. Mr. Singer holds a B.A.
from Yale University and an M.B.A. from the Graduate School of Business at
Stanford University.
BRADFORD J. SHAFER has been General Counsel and Secretary of the Company
since July, 1996. From July, 1985 until July, 1996, he was an attorney with the
law firm of Brobeck, Phleger & Harrison LLP, where he was a partner since
January, 1993. Mr. Shafer holds a B.A. from the University of the Pacific and a
J.D. from the University of California, Hastings College of the Law.
STEVEN E. JOHNSON has been Senior Vice President of Manufacturing of the
Company since January 1998 and prior to that was Vice President of Manufacturing
of the Company since August, 1994. Prior to joining the Company, Mr. Johnson
served in various capacities with Advanced Cardiovascular Systems, Inc., a
medical device company, from 1983 to 1994, most recently as Vice President,
Manufacturing. Mr. Johnson earned a B.S. in Industrial Engineering from GMI
Engineering and Management Institute.
CASEY M. TANSEY has been Senior Vice President of Sales and Marketing of the
Company since January 1998 and prior to that was Vice President of Sales and
Marketing of the Company since December, 1995. From 1988 until joining the
Company in 1995, Mr. Tansey served in various capacities with the Edwards C.V.S.
Division of Baxter. Mr. Tansey's most recent position at Baxter/Edwards was Vice
President, North American Sales. Mr. Tansey earned a B.S. in Business
Administration and an M.B.A. from the College of Notre Dame.
HANSON S. GIFFORD, III, has been Vice President of Research and Development
of the Company since February, 1996. Prior to that time, Mr. Gifford served as
the Company's Director of Research and Development beginning in July, 1993. From
1992 to 1993, he served as Managing Director of Bavaria Medizin Technologie,
GmbH, a German medical device company. From 1990 to 1991, he served as President
of Cardiovascular Therapeutic Technologies, Inc., a medical device company. From
1985 to 1990, he served in various research and development, clinical research,
and marketing capacities at Devices for Vascular Intervention, Inc., a medical
device company. Mr. Gifford earned a B.S. in Mechanical Engineering from Cornell
University.
LUIS J. JIMENEZ has been Vice President, Quality Assurance and Regulatory
Affairs of the Company since September, 1997. Prior to joining the Company, Mr.
Jimenez was employed by Boston Scientific Corporation (formerly Heart
Technology, Inc.) from 1993 to 1997, most recently as Senior Director, Program
Management/Quality. Mr. Jimenez served in various quality assurance and quality
engineering capacities with Baxter International, Inc. from 1984 to 1993. Mr.
Jimenez earned a B.S. from the University of Puerto Rico and an M.B.A. from the
University of Southern California, Los Angeles.
III-2
<PAGE>
C. RICHARD NEELY, JR. has been Vice President, Finance and Controller of the
Company since December, 1996. Prior to joining the Company, Mr. Neely served as
Vice President and Chief Financial Officer of Sanmina Corporation, an
electronics manufacturing company, from April, 1996 to August, 1996. Mr. Neely
served in various capacities with Advanced Micro Devices, Inc., a semiconductor
company, from 1980 to April, 1996, most recently as Director and Group
Controller. Mr. Neely earned a B.A. in Economics from Whitman College and a
M.B.A. from the University of Chicago.
LAWRENCE C. SIEGEL, M.D. has been Vice President of Clinical Affairs of the
Company since November, 1996. Prior to joining the Company, Dr. Siegel served in
various capacities with the Stanford University School of Medicine from 1986 to
1996, most recently as Associate Professor of Anesthesia and Chief of
Cardiovascular Anesthesiology. Dr. Siegel earned a B.S. in Electrical
Engineering from Massachusetts Institute of Technology and a M.D. from Harvard
Medical School. Dr. Siegel is a board certified anesthesiologist.
AJIT S. SHAH, PH.D. has been Vice President of Corporate Development of the
Company since April, 1997. Prior to joining the Company, Dr. Shah served in
various capacities with Stanford Research Institute (SRI International) from
1988 to 1997, most recently as the Executive Director of the Advanced Technology
Division. Dr. Shah earned a B.S. in Mechanical Engineering from the University
of California, Berkeley, a M.S. from Stanford University in Electrical
Engineering and a Ph.D. in Biomedical Engineering awarded jointly by the School
of Medicine, University of California, San Francisco and College of Engineering,
University of California, Berkeley.
ROBERT V. GUNDERSON, JR. has been a director of the Company since May, 1995.
Mr. Gunderson has been a partner of the law firm of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, since its formation in September, 1995.
From May, 1988, until September, 1995, Mr. Gunderson was a partner of the law
firm of Brobeck, Phleger & Harrison, LLP. Mr. Gunderson holds an M.A. from
Stanford University, an M.B.A. in finance from the Wharton School, University of
Pennsylvania and a J.D. from the University of Chicago.
JOSEPH S. LACOB has been a director of the Company since April, 1992. Mr.
Lacob is a general partner of Kleiner Perkins Caufield & Byers ("Kleiner
Perkins"), a venture capital firm he joined in 1987. Prior to joining Kleiner
Perkins, he was Marketing Manager for Cetus Corporation, a biotechnology
company. Mr. Lacob serves as Chairman of the Board of Directors of CellPro,
Inc., and is a director of Cardima, Inc., Corixa Corporation, Microcide
Pharmaceuticals, Inc., Pharmacyclics, Inc., and five privately held companies.
Mr. Lacob holds a B.S. in Biochemistry from the University of California at
Irvine, a Masters in Public Health from the University of California at Los
Angeles, and an M.B.A. from the Graduate School of Business at Stanford
University.
PETRI T. VAINIO, M.D., PH.D. has been a director of the Company since April,
1992. Dr. Vainio is a general partner of Sierra Ventures, a venture capital firm
he joined in 1988. He currently serves on the Board of Directors of Symphonix
Devices, Inc., a medical device company, and six privately held companies. Dr.
Vainio holds M.D. and Ph.D. degrees from the University of Helsinki, Finland,
and an M.B.A. from the Graduate School of Business at Stanford University.
STEVEN C. WHEELWRIGHT, PH.D. has been a director of the Company since
January, 1995. Dr. Wheelwright currently serves as a senior associate dean at
the Graduate School of Business, Harvard University, where he has been a
professor since July, 1988. Dr. Wheelwright also served as a professor of the
Graduate School of Business, Harvard University, from August, 1985, to August,
1986. From August, 1986 to August, 1988, Dr. Wheelwright served as a professor
at the Graduate School of Business at Stanford University. Dr. Wheelwright is
also a member of the Board of Directors of Quantum Corporation, a mass storage
device company, T.J. International Corporation, an engineered wood products
company, and Franklin Covey, an organizational tools company.
III-3
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the
Proxy Statement for the Registrant's Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
Proxy Statement for the Registrant's Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
Proxy Statement for the Registrant's Annual Meeting of Stockholders.
III-4
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1+ Agreement and Plan of Merger dated April 3, 1995, for the reincorporation merger of Stanford Surgical
Technology, Inc., a California corporation, into Heartport, Inc., a Delaware corporation.
3.1+ Restated Certificate of Incorporation.
3.2+ Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2+ Specimen Common Stock certificate.
4.3+ Third Amended and Restated Rights Agreement among Registrant and the Founders and Investors specified
therein dated April 17, 1995.
4.4# Rights Agreement between the Registrant and the First National Bank of Boston dated April 25, 1996.
10.1+ Form of Indemnification Agreement entered into by and between Registrant and its officers and
directors.
10.2+ 1993 Stock Option Plan and forms of agreements thereunder.
10.3# 1996 Stock Option Plan as amended and restated October 21, 1996.
10.4# Employee Stock Purchase Plan, as amended and restated October 21, 1996.
10.5+ Real Property Lease between the Registrant and Metropolitan Insurance Company dated September 21,
1992, as amended.
10.6+ Equipment Financing Agreement between the Registrant and Lease Management Services, Inc. dated
February 23, 1995.
10.7+* Agreement between the Company and St. Jude Medical, Inc. dated September 11, 1995.
10.8# Third Amendment to Lease Agreement between Heartport Research and Training Center, Inc. and
University of Utah Research Foundation dated as of October 25, 1996.
10.9#* Amendment to agreement between Registrant and St. Jude Medical, Inc. dated January 31, 1997.
10.10 Amended and Restated Loan and Security Agreement dated March 20, 1998 between the Registrant, Silicon
Valley Bank and Banque Nationale de Paris.
10.11 Industrial Build-To-Suit Lease dated September 19, 1997 between Registrant and Chestnut Bay LLC.
(without exhibits)
10.12 First Amendment to Industrial Build-To-Suit Lease dated February 10, 1998 between Registrant and
Chestnut Bay LLC.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Confidential treatment has been requested for certain portions of this
exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.
+ Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (File No. 333-1906)
# Previously filed.
IV-1
<PAGE>
(a)(2) SCHEDULES
The following financial statement schedules required by Regulation S-X are
filed herewith:
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
- ----------------- ---------------------------------------
<S> <C>
II Valuation and Qualifying Accounts
</TABLE>
All other schedules are not applicable.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
December 31, 1996.
(c) EXHIBITS
See paragraph (a).
IV-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in Redwood City, California, on this 27th day of March, 1998.
HEARTPORT, INC.
By: /s/ DAVID B. SINGER
-----------------------------------------
David B. Singer
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints, Wesley D. Sterman and David B. Singer,
and each of them, his true and lawful attorneys-in-fact and agents with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and all documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated:
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President, Chief Executive
/s/ WESLEY D. STERMAN, M.D. Officer and Director
- ------------------------------ (Principal Executive March 27, 1998
Wesley D. Sterman, M.D. Officer)
Senior Vice President and
/s/ DAVID B. SINGER Chief Financial Officer
- ------------------------------ (Principal Financial and March 27, 1998
David B. Singer Accounting Officer)
/s/ ROBERT V. GUNDERSON, JR.
- ------------------------------ Director March 27, 1998
Robert V. Gunderson, Jr.
/s/ JOSEPH S. LACOB
- ------------------------------ Director March 27, 1998
Joseph S. Lacob
/s/ JOHN H. STEVENS, M.D.
- ------------------------------ Director March 27, 1998
John H. Stevens, M.D.
/s/ PETRI T. VAINIO, M.D.,
PH.D.
- ------------------------------ Director March 27, 1998
Petri T. Vainio, M.D., Ph.D.
/s/ STEVEN C. WHEELWRIGHT,
PH.D.
- ------------------------------ Director March 27, 1998
Steven C. Wheelwright, Ph.D.
IV-3
<PAGE>
SCHEDULE II
HEARTPORT, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO
BEGINNING COSTS AND BALANCE END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Allowance for doubtful accounts................................. $ 33 $ 281 $ -- $ 314
Allowance for sales returns..................................... $ 65 $ 589 $ 45 $ 609
Year Ended December 31, 1996
Allowance for doubtful accounts................................. $ -- $ 33 $ -- $ 33
Allowance for sales returns..................................... $ -- $ 65 $ -- $ 65
Year Ended December 31, 1995
Allowance for doubtful accounts................................. $ -- $ -- $ -- $ --
</TABLE>
IV-4
<PAGE>
- -----------------------------------------------------------------------------
HEARTPORT, INC.
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
- -----------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS AND CONSTRUCTION...................................... 1
1.1 Definitions............................................... 1
1.2 Accounting Terms.......................................... 8
2. LOANS AND TERMS OF PAYMENT........................................ 8
2.1 Advances.................................................. 8
2.2 Interest Rates, Payments, and Calculations................ 10
2.3 Crediting Payments........................................ 11
2.4 Fees...................................................... 11
2.5 Additional Costs.......................................... 11
2.6 Term...................................................... 12
2.7 Conversion/Continuation of Advances....................... 12
2.8 Additional Requirements/Provisions Regarding
LIBOR Rate Advances..................................... 13
3. CONDITIONS OF LOANS............................................... 14
3.1 Conditions Precedent to Initial Advance................... 14
3.2 Conditions Precedent to all Advances...................... 14
4. CREATION OF SECURITY INTEREST..................................... 15
4.1 Grant of Security Interest................................ 15
4.2 Delivery of Additional Documentation Required............. 15
4.3 Right to Inspect.......................................... 15
5. REPRESENTATIONS AND WARRANTIES.................................... 15
5.1 Due Organization and Qualification........................ 15
5.2 Due Authorization; No Conflict............................ 15
5.3 No Prior Encumbrances..................................... 16
5.4 Name; Location of Chief Executive Office.................. 16
5.5 Litigation................................................ 16
5.6 No Material Adverse Change in Financial Statements........ 16
5.7 Solvency.................................................. 16
5.8 Regulatory Compliance..................................... 16
5.9 Environmental Condition................................... 16
5.10 Taxes..................................................... 17
5.11 Subsidiaries.............................................. 17
5.12 Government Consents....................................... 17
5.13 Full Disclosure........................................... 17
6. AFFIRMATIVE COVENANTS............................................. 17
6.1 Good Standing............................................. 17
6.2 Government Compliance..................................... 17
6.3 Financial Statements, Reports, Certificates............... 17
6.4 Taxes..................................................... 18
6.5 Insurance................................................. 18
6.6 Principal Depository...................................... 18
6.7 Debt-Net Worth Ratio...................................... 19
6.8 Tangible Net Worth........................................ 19
6.9 Minimum Liquidity......................................... 19
6.10 Co-Borrowers; Further Assurances.......................... 19
i
<PAGE>
7. NEGATIVE COVENANTS................................................ 19
7.1 Dispositions.............................................. 19
7.2 Change in Business........................................ 19
7.3 Mergers or Acquisitions................................... 19
7.4 Indebtedness.............................................. 20
7.5 Encumbrances.............................................. 20
7.6 Distributions............................................. 20
7.7 Investments............................................... 20
7.8 Transactions with Affiliates.............................. 20
7.9 Subordinated Debt......................................... 20
7.10 Compliance................................................ 20
8. EVENTS OF DEFAULT................................................. 20
8.1 Payment Default........................................... 20
8.2 Covenant Default.......................................... 20
8.3 Material Adverse Change................................... 21
8.4 Attachment................................................ 21
8.5 Insolvency................................................ 21
8.6 Other Agreements.......................................... 21
8.7 Subordinated Debt......................................... 21
8.8 Judgments................................................. 21
8.9 Misrepresentations........................................ 21
9. BANKS' RIGHTS AND REMEDIES........................................ 22
9.1 Rights and Remedies....................................... 22
9.2 Power of Attorney......................................... 23
9.3 Accounts Collection....................................... 23
9.4 Bank Expenses............................................. 23
9.5 Servicing Agent's Liability for Collateral................ 23
9.6 Remedies Cumulative....................................... 23
9.7 Demand; Protest........................................... 24
10. NOTICES........................................................... 24
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER........................ 24
12. INTERCREDITOR PROVISIONS.......................................... 25
12.1 Proportionate Interests.................................. 25
12.2 Designation of Service Agent............................. 25
12.3 Resignation.............................................. 25
12.4 Servicing Agent as Bank.................................. 25
12.5 No Agency................................................ 25
12.6 No Reliance.............................................. 25
13. GENERAL PROVISIONS................................................ 25
13.1 Successors and Assigns................................... 25
13.2 Indemnification.......................................... 26
13.3 Time of Essence.......................................... 26
13.4 Severability of Provisions............................... 26
13.5 Amendments in Writing, Integration....................... 26
13.6 Counterparts............................................. 26
13.7 Survival................................................. 26
13.8 Confidentiality.......................................... 26
13.9 Amended and Restated Agreement........................... 26
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This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into as
of March 20, 1998, by and between SILICON VALLEY BANK ("SVB") as Servicing
Agent and a Bank and BANQUE NATIONALE DE PARIS ("BNP"); SVB and BNP are
sometimes referred to herein individually as a "Bank" and, collectively, as
the "Banks") and HEARTPORT, INC. ("Borrower").
RECITALS
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Borrower and Banks are parties to a Loan and Security Agreement dated as
of December 31, 1996, as amended from time to time. Borrower wishes to
continue to obtain credit from time to time from Banks, and Banks desire to
continue to extend credit to Borrower. This Agreement sets forth the terms
on which Banks will advance credit to Borrower, and Borrower will repay the
amounts owing to Banks.
AGREEMENT
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The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering
of services by Borrower, whether or not earned by performance, and any and
all credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing.
"Advance" or "Advances" means a cash advance under the
Revolving Facility.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls
or is controlled by or is under common control with such Person, and each of
such Person's senior executive officers, directors, and partners.
"Agency Agreement" means that certain Agency Agreement dated
as of even date herewith, between the Banks and the Servicing Agent,
concerning the administration of this Agreement by them.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection
with the preparation, negotiation, administration, and enforcement of the
Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred
in amending, enforcing or defending the Loan Documents (including fees and
expenses of appeal), whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Business Day" means any day that is not a Saturday, Sunday,
or other day on which banks in the State of California are authorized or
required to close.
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"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on EXHIBIT A
attached hereto.
"Committed Line" means Twenty Five Million Dollars
($25,000,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold
with recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all net
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business.
The amount of any Contingent Obligation shall be deemed to be an amount equal
to the stated or determined amount of the primary obligation in respect of
which such Contingent Obligation is made or, if not stated or determinable,
the maximum reasonably anticipated liability in respect thereof as determined
by such Person in good faith; provided, however, that such amount shall not
in any event exceed the maximum amount of the obligations under the guarantee
or other support arrangement.
"Daily Balance" means the principal amount of the Obligations
owed at the end of a given day.
"Effective Date" means the date on which Liquidity is less
than either (i) two (2.0) times the outstanding principal balance hereunder
(including the face amount of outstanding Letters of Credit) or (ii) the
amount equal to nine (9) times the then applicable Remaining Months Liquidity.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money
or the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds
and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments, (c) all capital lease obligations and (d)
all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
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"Interest Period" means for each LIBOR Rate Advance, a period
of approximately one, two, three or six months as Borrower may elect,
PROVIDED that the last day of an Interest Period for a LIBOR Rate Advance
shall be determined in accordance with the practices, of the LIBOR interbank
market as from time to time in effect, PROVIDED, FURTHER, in all cases such
period shall expire not later than the Maturity Date.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished
products intended for sale or lease or to be furnished under a contract of
service, of every kind and description now or at any time hereafter owned by
or in the custody or possession, actual or constructive, of Borrower,
including such inventory as is temporarily out of its custody or possession
or in transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above,
and Borrower's Books relating to any of the foregoing.
"Investment" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Issuing Bank" means the Bank issuing a Letter of Credit
pursuant to Section 2.1.1. SVB shall be the issuing bank, except that BNP
shall be the Issuing Bank if (i) SVB is unable to issue a Letter of Credit or
(ii) a Letter of Credit issued by SVB would require confirmation by another
bank under circumstances in which a Letter of Credit issued by BNP would not
require confirmation.
"Letter of Credit" means a Letter of Credit issued pursuant to
Section 2.1.1.
"LIBOR Base Rate" means, for any Interest Period for a LIBOR
Rate Advance, the rate of interest per annum determined by Servicing Agent to
be the per annum rate of interest at which deposits in United States Dollars
are or would be offered to Servicing Agent in the London interbank market at
11:00 A.M. (local time in such interbank market) three (3) Business Days
before the first day of such Interest Period for a period approximately equal
to such Interest Period and in an amount approximately equal to the amount of
such Advance.
"LIBOR Rate" shall mean, for any Interest Period for a LIBOR
Rate Advance, a rate per annum (rounded upwards, if necessary, to the nearest
1/16 of 1%) equal to (i) the LIBOR Base Rate for such Interest Period divided
by (ii) 1 minus the Reserve Requirement for such Interest Period.
"LIBOR Rate Advances" means any Advances made or a portion
thereof on which interest is payable based on the LIBOR Rate in accordance
with the terms hereof.
"Lien" means any mortgage, lien, deed of trust, charge,
pledge, security interest or other encumbrance.
"Liquidity" means, at any date of determination, the sum of
Borrower's cash, cash equivalents, and short term investments, less any cash
and cash equivalent balances that are held in a sinking fund for the
retirement of debt or capital stock or that are held in pledge for another
creditor, plus fifty percent (50%) of Borrower's net trade Accounts (not to
exceed $5,000,000).
"Loan Documents" means, collectively, this Agreement, any note
or notes executed by Borrower, and any other agreement entered into between
Borrower and any Bank the
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Servicing Agent or the Issuing Bank in connection with this Agreement, all as
amended or extended from time to time.
"Material Adverse Effect" means a material adverse effect on
(i) the business operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole or (ii) the ability of Borrower to
repay the Obligations or otherwise perform its obligations under the Loan
Documents.
"Maturity Date means March 19, 2000.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and
Borrower's Books relating to any of the foregoing.
"Net Cash Losses" means, with respect to any date of
determination, determined on a consolidated basis in accordance with GAAP for
Borrower and its consolidated Subsidiaries, the average reduction in cash
from operations (excluding non-recurring charges) during the fiscal quarter
ending prior to such date of determination or if the date of determination is
the last day of a fiscal quarter, during the fiscal quarter then ending (or,
if monthly reporting is required pursuant to Section 6.3(b), during the three
fiscal months ending prior to such date of determination).
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to the Servicing Agent or the Banks by
Borrower pursuant to this Agreement or any other agreement, whether absolute
or contingent, due or to become due, now existing or hereafter arising,
including any interest that accrues after the commencement of an Insolvency
Proceeding and including any debt, liability, or obligation owing from
Borrower to others that any Bank may have obtained by assignment or otherwise.
"Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay
to any Bank pursuant to the terms and provisions of any Loan Document.
"Percentage Share" means, as to each Bank, the percentage
calculated in accordance with Section 12.1 hereof.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Banks arising
under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and
disclosed in the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the
ordinary course of business;
(e) Indebtedness secured by Permitted Liens;
(f) Indebtedness of any Subsidiary to Borrower and
Contingent Obligations of any Subsidiary with respect to obligations of
Borrower (provided that the primary obligations are not prohibited hereby);
provided that the incurrence of such Indebtedness or
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Contingent Obligations, as the case may be, does not result in a violation of
Section 7.7 as a consequence of the provisos set forth in paragraph (d) of
the definition of "Permitted Investments;"
(g) Indebtedness of Borrower to any Subsidiary and
Contingent Obligations of Borrower with respect to obligations of any
Subsidiary (provided that the primary obligations are not prohibited hereby),
and Indebtedness of any Subsidiary to any other Subsidiary and Contingent
Obligations of any Subsidiary with respect to obligations of any other
Subsidiary (provided that the primary obligations are not prohibited hereby);
(h) Indebtedness in connection with capital leases:
(i) Extensions, renewals and refinancings of the
Indebtedness of the Borrower or any of its Subsidiaries of the type referred
to in clause (b) or (h) above, PROVIDED that the principal amount of such
Indebtedness being extended, renewed or refinanced does not increase; and
(j) Indebtedness consisting of guarantees resulting from
endorsement of negotiable instruments for collection by the Borrower or any
such Subsidiary in the ordinary course of business.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in
the Schedule;
(b) any investments selected by the Borrower in accordance
with its Investment Policy as adopted by the Borrower on December 19, 1996
(as the same may be amended from time to time with the approval of the
Banks); and
(c) Investments consisting of the endorsement of
negotiable instruments for deposit or collection or similar transactions in
the ordinary course of business;
(d) Investments (whether consisting of the purchase of
securities, loans, capital contributions or otherwise) of Borrower in or to
Subsidiaries and Investments by Borrower in or to companies which
simultaneously with such Investments become Subsidiaries, provided that the
sum of (i) all such Investments by Borrower in or to Subsidiaries, plus (ii)
Contingent Obligations by Borrower outstanding at any time with respect to
the obligations of Subsidiaries, minus the sum of (x) Investments by
Subsidiaries in or to Borrower, plus (y) payments to Borrower on account of
Investments of Borrower in or to Subsidiaries, plus (z) distributions or
dividends by Subsidiaries to Borrower, in each case, made, incurred or
arising on or after the date hereof, does not exceed Five Million Dollars
($5,000,000) outstanding at any time, provided an Event of Default does not
exist immediately before or would not exist after giving effect to such
Investments;
(e) Investments (whether consisting of the purchase of
securities, loans, capital contributions, or otherwise) of Subsidiaries in or
to other Subsidiaries or in Borrower;
(f) Investments consisting of receivables owing to
Borrower or its Subsidiaries by Persons and advances to customers or
suppliers, in each case, if created, acquired or made in the ordinary course
of business; provided that this paragraph (f) shall not apply to Investments
owing by Subsidiaries to Borrower;
(g) Investments consisting of (i) compensation of
employees, officers and directors of Borrower or its Subsidiaries so long as
the Board of Directors of Borrower determines that such compensation is in
the best interests of Borrower, (ii) travel advances, employee relocation
loans and other employee loans and advances in the ordinary course of
business; (iii) loans to employees, officers or directors relating to the
purchase of equity securities of Borrower or its Subsidiaries;
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(h) Investments pursuant to or arising under currency
agreements or interest rate agreements entered into in the ordinary course of
business for bona fide hedging purposes and not for speculation;
(i) Investments permitted under Section 7.3;
(j) Investments consisting of deposit accounts of Borrower
maintained in the ordinary course of business;
(k) Investments consisting of deposit accounts of any
Subsidiaries maintained in the ordinary course of business;
(l) Investments accepted in connection with Transfers
permitted by Section 7.1;
(m) Investments in an amount not to exceed an aggregate of
Twenty Million Dollars ($20,000,000) in Heartport Research and Training
Center Inc., provided an Event of Default does not exist immediately before
or would exist after giving effect to such Investments; and
(n) Investments in the form of warrants for common stock
of Vista Medical Technologies, Inc. (and the stock into which such warrants
may be exercised).
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in
the Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings;
(c) Liens (i) upon or in any equipment or real property
acquired or held by Borrower or any of its Subsidiaries to secure the purchase
price of such equipment or indebtedness incurred solely for the purpose of
financing the acquisition of such equipment, or (ii) arising in connection
with the leasing of equipment or real property, or (iii) existing on such
equipment at the time of its acquisition, PROVIDED that the Lien is confined
solely to the property so acquired and improvements thereon, and the proceeds
of such equipment;
(d) Liens incurred in connection with the extension,
renewal or refinancing of the indebtedness secured by Liens of the type
described in clauses (a) through (c) above, PROVIDED that any extension,
renewal or replacement Lien shall be limited to the property encumbered by
the existing Lien and the principal amount of the indebtedness being
extended, renewed or refinanced does not increase;
(e) Liens of materialmen, mechanics, warehousemen,
carriers, or other similar liens arising in the ordinary course of business
and securing obligations which are not delinquent or which are being
contested in good faith by appropriate proceedings;
(f) Liens in favor of customs and revenue authorities
which secure payment of customs duties in connection with the importation of
goods;
(g) Liens which constitute rights of set-off of a
customary nature or banker's liens on amounts on deposit, whether arising by
contract or by operation of law, in connection with arrangements entered into
with depository institutions in the ordinary course of business; and
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(h) Any judgment, attachment or similar lien in connection
with any event or circumstance described in Section 8.4 that is not an Event
of Default hereunder.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently announced from time to time by Servicing Agent, as its "prime
rate," whether or not such announced rate is the lowest rate available from
Servicing Agent.
"Prime Rate Advances" means any Advances made or a portion
thereof on which interest is payable based on the Prime Rate in accordance
with the terms hereof.
"Regulatory Change" means, with respect to a Bank, any change
on or after the date of this Agreement in United States federal, state or
foreign laws or regulations, including Regulation D, or the adoption or
making on or after such date of any written interpretations, directives or
requests applying to a class of lenders including Bank of or under any United
States federal or state, or any foreign, laws or regulations (whether or not
having the force of law) by any court or governmental or monetary authority
charged with the interpretation or administration thereof.
"Reserve Requirement" means, for any Interest Period, the
average maximum rate at which reserves (including any marginal, supplemental
or emergency reserves) are required to be maintained during such Interest
Period under Regulation D against "Eurocurrency liabilities" (as such term is
used in Regulation D) by member banks of the Federal Reserve System. Without
limiting the effect of the foregoing, the Reserve Requirement shall reflect
any other reserves required to be maintained by a Bank by reason of any
Regulatory Change against (i) any category of liabilities which includes
deposits by reference to which the LIBOR Rate is to be determined as provided
in the definition of "LIBOR Base Rate" or (ii) any category of extensions of
credit or other assets which include Advances.
"Remaining Months Liquidity" means, as at the end of each
fiscal quarter, or if monthly reporting is required pursuant to Section
6.3(b), as at the end of each fiscal month, the ratio of (i) Liquidity at
such time to (ii) the monthly average of Net Cash Losses.
"Responsible Officer" means each of the Chief Executive
Officer, Chief Operating Officer, the Chief Financial Officer, the Vice
President of Finance and Controller and the Treasurer of Borrower.
"Revolving Facility" means the facility under which Borrower
may request cash advances, as specified in Section 2.1 hereof.
"Schedule" means the schedule of exceptions attached hereto,
if any.
"Servicing Agent" means SVB in its capacity as agent for the
Banks under this Agreement and the Agency Agreement, or any successor
Servicing Agent under the Agency Agreement and Section 12 hereof.
"Subordinated Debt" means the outstanding convertible
subordinated notes of the Borrower due 2004 and any other debt incurred by
Borrower that is subordinated to the debt owing by Borrower hereunder on
terms acceptable to Banks (and identified as being such by Borrower and
Banks).
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"Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than 50% of the stock of which
by the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through
an Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrower and
its Subsidiaries MINUS, without duplication, (i) the sum of any amounts
attributable to (a) goodwill, (b) intangible items such as unamortized debt
discount and expense, patents, trade and service marks and names, copyrights
and research and development expenses except prepaid expenses, and (c) all
reserves not already deducted from assets, AND (ii) Total Liabilities.
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of
Borrower, including in any event all Indebtedness, but specifically excluding
Subordinated Debt.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
2. LOANS AND TERMS OF PAYMENT
--------------------------
2.1 ADVANCES. Subject to the terms and conditions of this
Agreement, each Bank severally will make Advances to Borrower as set forth
herein. Each Bank severally will make its Percentage Share of Advances such
that the aggregate principal amount of each Bank's Advances under this
Agreement shall not exceed at any time such Bank's Percentage Share of the
Committed Line minus the face amount of all outstanding Letters of Credit.
Subject to the terms and conditions of this Agreement, amounts borrowed
pursuant to this Section 2.1 may be repaid and reborrowed at any time prior to
the Maturity Date.
(a) REQUESTS FOR ADVANCES. Whenever Borrower desires an
Advance, Borrower will notify Servicing Agent by facsimile transmission or
telephone no later than 11:00 a.m. California time on the Business Day that a
Prime Rate Advance is to be made, and noon California time on the Business
Day that is three (3) Business Days prior to the Business Day on which a
LIBOR Rate Advance is to be made. Servicing Agent shall promptly deliver
such notice to the Banks. Each Bank may make Advances under this Agreement,
based upon instructions received by Servicing Agent from a Responsible
Officer, or without instructions if in Servicing Agent's discretion such
Advances are necessary to meet Obligations under this Agreement which have
become due and remain unpaid. Each Bank shall be entitled to rely on any
notice by telephone or otherwise given by a person who Servicing Agent
reasonably believes to be a Responsible Officer, and Borrower shall indemnify
and hold such Bank harmless for any damages or loss suffered by such Bank as
a result of such reliance. Such Bank will wire or credit, as appropriate,
the amount of its Percentage Share of Advances in United States Dollars
requested to be made under this Section 2.1 to Borrower's deposit account
held by Servicing Agent or such other account as Borrower may specify from
time to time.
Each such notice shall specify:
(i) the date such Advance is to be made, which
shall be a Business Day;
(ii) the amount of such Advance;
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(iii) whether such Advance is to be a Prime Rate Advance or a LIBOR Rate
Advance; and
(iv) if the Advance is to be a LIBOR Rate Advance, the Interest Period
for such Advance.
Each written request for an Advance, and each confirmation of a telephone
request for such an Advance, shall be in the form of a Borrowing Certificate
in the form of Exhibit B-1 or Exhibit B-2 executed by Borrower.
(b) PRIME RATE ADVANCES. Each Prime Rate Advance shall be in
an amount not less than Five Hundred Thousand Dollars ($500,000). The
outstanding principal balance of each Prime Rate Advance shall bear interest
until principal is due (computed daily on the basis of a 360 day year and
actual days elapsed), at a fluctuating rate per annum equal to the Prime
Rate. Borrower shall pay the entire outstanding principal amount of each
Prime Rate Advance and in any event on the Maturity Date.
(c) LIBOR RATE ADVANCES. Each LIBOR Rate Advance shall be in
an amount of not less than Five Hundred Thousand Dollars ($500,000). The
outstanding principal balance of each LIBOR Rate Advance shall bear interest
until principal is due (computed daily on the basis of a 360 day year and
actual days elapsed) at a rate per annum equal to the LIBOR Rate plus 150
basis points for such LIBOR Rate Advance. The entire outstanding principal
amount of each LIBOR Rate Advance shall be due and payable on the last day of
the Interest Period for such LIBOR Rate Advance and in any event on the
Maturity Date.
(d) PREPAYMENT OF THE ADVANCES. Borrower may at any time
prepay any Prime Rate Advance or any LIBOR Rate Advance, in full or in part.
Each partial prepayment for a LIBOR Rate Advance shall be in an amount not
less than Two Hundred Fifty Thousand Dollars ($250,000). Each prepayment
shall be made upon the irrevocable written or telephone notice of Borrower
received by Servicing Agent not later than 10:00 a.m. California time on the
date of the prepayment of a Prime Rate Advance and not less than three (3)
Business Days prior to the date of the prepayment of a LIBOR Rate Advance.
The notice of prepayment shall specify the date of the prepayment, the amount
of the prepayment, and the Advance or Advances to be prepaid. Each
prepayment of a LIBOR Rate Advance shall be accompanied by the payment of
accrued interest on the amount prepaid and any amount required by Section 2.9.
2.1.1 LETTERS OF CREDIT.
(a) At Borrower's written request, Issuing Bank shall
issue Letters of Credit for Borrower's account. Each Bank severally agrees
to participate in Letters of Credit, in accordance with such Bank's
Percentage Share.
(b) Issuing Bank shall issue the Letter of Credit upon
receipt of Borrower's written request and Issuing Bank's standard form of
application, stating (a) the date Borrower wishes to receive the Letter of
Credit (which shall be a Business Day); (b) the requested amount of such
Letter of Credit; (c) the aggregate principal amount of all Advances and
Letters of Credit then outstanding; (d) if appropriate, the conditions
requested by Borrower under which the Letter of Credit may be drawn upon; and
(e) any other information Issuing Bank might need to issue the Letter of
Credit. Issuing Bank shall promptly notify all of the Banks upon receipt of
a request for a Letter of Credit.
(c) The maximum aggregate principal obligation at any one
time for undrawn and drawn but unreimbursed Letters of Credit shall be Five
Million Dollars ($5,000,000). Each Letter of Credit shall be issued pursuant
to the terms and conditions of this Agreement and of the Issuing Bank's
standard form of application and security agreement for letters of credit.
Each Letter of Credit shall be issued pursuant to the terms and conditions
of this Agreement and of the Issuing Bank's standard form of application
and security agreement for letters of credit. Each Letter of Credit
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shall (a) expire no later than the Maturity Date; and (b) be otherwise in
form and substance satisfactory to Issuing Bank. Upon issuing a Letter of
Credit, the Issuing Bank shall immediately notify Banks of such issuance and
shall, on a continuing basis, keep the Banks informed of the drawn and
undrawn but unreimbursed amount of each Letter of Credit for so long as such
Letter of Credit is outstanding. Borrower shall pay Servicing Agent
quarterly in arrears on the last day of each March, June, September and
December a fee equal to one and one-half percent (1.5%) per annum of the face
amount of each Letter of Credit issued hereunder during the period from the
date of issuance until expiration, which shall be shared by Banks in
accordance with the Agency Agreement. On the day on which Issuing Bank
honors any drawing made by the beneficiary of a Letter of Credit, Borrower
shall pay to Issuing Bank the full amount of the drawing so honored, or at
Borrower's option, shall treat the amount of such drawing as an Advance under
Section 2.1. The obligation to reimburse Issuing Bank for the amount of such
drawing is absolute, unconditional, and irrevocable.
(d) Borrower may request that Issuing Bank issue a Letter
of Credit payable in a currency other than United States Dollars. If a
demand for payment is made under any such Letter of Credit, Issuing Bank
shall treat payment on such demand as an Prime Rate Advance to Borrower of
the equivalent amount in United States Dollars. Upon the issuance of any
Letter of Credit payable in a currency other than United States Dollars,
Banks shall create a reserve under the Committed Line for letters of credit
against fluctuations in currency exchange rates, in an amount equal to ten
percent (10%) of the Dollar equivalent of the face amount of such Letter of
Credit at issuance. The amount of such reserve may be amended by Banks from
time to time to account for fluctuations in the exchange rate. The
availability of funds under the Committed Line shall be reduced by the amount
of such reserve for so long as such Letter of Credit remains outstanding.
2.2 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATE. Except as set forth in Section 2.2(b)
and subject to the following sentence, all outstanding Advances shall bear
interest, on the average Daily Balance thereof, at a rate equal to the rates
specified in the provisions relating to each facility hereunder.
(b) DEFAULT RATE. All Obligations shall bear interest,
from and after the occurrence of an Event of Default, at a rate equal to four
(4) percentage points above the interest rate applicable immediately prior to
the occurrence of the Event of Default. In the case of a LIBOR Rate Advance,
upon the expiration of the applicable Interest Period following and during
the continuance of an Event of Default, such rate will be four (4) percentage
points above the Prime Rate.
(c) PAYMENTS. All interest that accrues hereunder shall
be due and payable on last day of each March, June, September and December
during the term hereof. Bank shall, at its option, charge such interest, all
Bank Expenses, and all Periodic Payments against any of Borrower's deposit
accounts or against the Committed Line, in which case those amounts shall
thereafter accrue interest at the rate then applicable hereunder. Any
interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate
then applicable hereunder. All principal and interest shall be paid in U.S.
dollars and shall be due and payable without demand on the Maturity Date.
(d) COMPUTATION. In the event the Prime Rate is changed
from time to time hereafter, the applicable rate of interest shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate
is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis
of a three hundred sixty (360) day year for the actual number of days elapsed.
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2.3 CREDITING PAYMENTS. Prior to the occurrence and continuance of
an Event of Default, Servicing Agent shall credit a wire transfer of funds,
check or other item of payment to such deposit account or Obligation as
Borrower specifies. After the occurrence and during the continuance of an
Event of Default, the receipt by Servicing Agent of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or
unless and until such check or other item of payment is honored when
presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Servicing Agent after 12:00
noon California time shall be deemed to have been received by Servicing Agent
as of the opening of business on the immediately following Business Day.
Whenever any payment to Servicing Agent under the Loan Documents would
otherwise be due (except by reason of acceleration) on a date that is not a
Business Day, such payment shall instead be due on the next Business Day, and
additional fees or interest, as the case may be, shall accrue and be payable
for the period of such extension.
2.4 FEES. Borrower shall pay to Servicing Agent the following to
be shared by Banks in accordance with the Agency Agreement:
(a) FACILITY FEE. Facility fees equal to (i) Sixty Two
Thousand Five Hundred Dollars ($62,500), which fee shall be due on the
Closing Date and shall be fully earned and nonrefundable and (ii) one quarter
of one percent (.25%) per annum of the unused portion of the Committed Line
per year payable quarterly in arrears on the last day of each March, June,
September and December for each quarter until the Maturity Date, which fee,
when paid, shall be fully earned and non-refundable;
(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Banks,
customary fees and out-of-pocket expenses for Banks, audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Banks or their agents;
(c) BANK EXPENSES. Upon the date hereof, all Bank
Expenses incurred through the Closing Date, including reasonable attorneys'
fees and expenses (not to exceed $10,000), and, after the date hereof, all
Bank Expenses, including reasonable attorneys' fees and expenses, as and when
they become due.
2.5 ADDITIONAL COSTS. In case any change in any law, regulation,
treaty or official directive or the interpretation or application thereof by
any court or any governmental authority charged with the administration
thereof or the compliance with any guideline or request of any central bank
or other governmental authority (whether or not having the force of law or
any other Regulatory Change), in each case after the date of this Agreement:
(a) subjects any Bank to any United States of America tax
(including any tax imposed by any political subdivision of the United States
of America) with respect to payments of principal or interest or any other
amounts payable hereunder by Borrower or otherwise with respect to the
transactions contemplated hereby (except for taxes on the overall net income
of such Bank) and provided that Bank shall take all reasonable steps to
mitigate or limit any such taxes;
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets
held by, or deposits in or for the account of, or loans by, any Bank; or
(c) imposes upon any Bank any other condition with
respect to its performance under this Agreement,
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and the result of any of the foregoing is to increase the cost to such Bank,
reduce the income receivable by such Bank or impose any expense upon such
Bank with respect to any loans, Bank shall notify Borrower thereof. Borrower
agrees to pay to such Bank the amount of such increase in cost, reduction in
income or additional expense as and when such cost, reduction or expense is
incurred or determined, upon presentation by such Bank of a statement of the
amount and setting forth such Bank's calculation thereof, all in reasonable
detail, which statement shall be deemed true and correct absent manifest
error.
2.6 TERM. This Agreement shall become effective on the Closing
Date and, subject to Section 13.7, shall continue in full force and effect
for a term ending on the Maturity Date, provided that Banks may, in their
discretion, agree to a request from Borrower to extend the term for one
additional year. To request such extension, Borrower shall give Servicing
Agent and Banks written notice thereof not less than sixty (60) days' prior
to the first anniversary of the Closing Date. Notwithstanding the
foregoing, each Bank shall have the right to terminate its obligation to make
Advances or to issue any Letter of Credit under this Agreement immediately
upon the occurrence and during the continuance of an Event of Default.
Notwithstanding termination, the Lien of the Servicing Agent and the Banks on
the Collateral shall remain in effect for so long as any Obligations (other
than inchoate Obligations) are outstanding.
2.7 CONVERSION/CONTINUATION OF ADVANCES.
(a) Borrower may from time to time submit in writing a
request to Servicing Agent that Prime Rate Advances be converted to LIBOR
Rate Advances or that any existing LIBOR Rate Advances continue for an
additional Interest Period. Such request shall specify the amount of the
Prime Rate Advances which will constitute LIBOR Rate Advances (subject to the
limits set forth below) and the Interest Period to be applicable to such
LIBOR Rate Advances. Each written request for a conversion to a LIBOR Rate
Advance or a continuation of a LIBOR Rate Advance shall be substantially in
the form of a LIBOR Rate Conversion/Continuation Certificate as set forth on
EXHIBIT B-2, which shall be duly executed by a Responsible Officer. Subject
to the terms and conditions contained herein, three (3) Business Days after
Servicing Agent's receipt of such a request from Borrower, such Prime Rate
Advances shall be converted to LIBOR Rate Advances or such LIBOR Rate
Advances shall continue, as the case may be provided that:
(i) no Event of Default or event which with
notice or passage of time or both would constitute an Event of Default exists;
(ii) no party hereto shall have sent any notice
of termination of the Agreement;
(iii) Borrower shall have complied with such
customary procedures as Banks have established from time to time for
Borrower's requests for LIBOR Rate Advances;
(iv) Subject to the limitations of Section 2, the
amount of a Prime Rate Advance shall be $500,000 or more, and the amount of a
LIBOR Rate Advance shall be $500,000 or such greater amount which is an
integral multiple of $50,000; and
(v) Servicing Agent shall have determined that
the Interest Period or LIBOR Rate is available to Banks as of the date of the
request for such LIBOR Rate Advance.
Any request by Borrower to convert Prime Rate Advances to LIBOR Rate
Advances or continue any existing LIBOR Rate Advances shall be irrevocable
and must be received by Servicing agent at least three (3) business days
before the requested effective date of conversion to a LIBOR rate Advance or
continuation of a LIBOR Rate Advance. Notwithstanding anything to the
contrary contained herein, Banks shall not be required to purchase United
States Dollar deposits in the London
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interbank market or other applicable LIBOR Rate market to fund any LIBOR Rate
Advances, but the provisions hereof shall be deemed to apply as if Banks had
purchased such deposits to fund the LIBOR Rate Advances.
(b) Any LIBOR Rate Advances shall automatically convert to
Prime Rate Advances upon the last day of the applicable Interest Period,
unless Servicing Agent has received and approved a complete and proper
request to continue such LIBOR Rate Advance at least three (3) Business Days
prior to such last day in accordance with the terms hereof. Any LIBOR Rate
Advances shall, at Banks' option, convert to Prime Rate Advances in the event
that an Event of Default shall exist and as such shall be subject to Section
2.2(b). Borrower shall pay to Banks, upon demand by Banks (or Servicing
Agent may, at its option, charge Borrower's deposit account) any amounts
required to compensate Banks for any loss (including loss of anticipated
profits), cost or expense incurred by such person, as a result of the
conversion of LIBOR Rate Advances to Prime Rate Advances following an Event
of Default.
2.8 ADDITIONAL REQUIREMENTS/PROVISIONS REGARDING LIBOR RATE ADVANCES.
(a) If for any reason (including voluntary or mandatory
prepayment or acceleration), Banks receive all or part of the principal
amount of a LIBOR Rate Advance prior to the last day of the Interest Period
for such LIBOR Rate Advance, Borrower shall on demand by Servicing Agent
which shall be made at the request of any Bank, pay Servicing Agent the
amount (if any) by which (i) the additional interest which would have been
payable on the amount so received had it not been received until the last day
of such Interest Period or term exceeds (ii) the interest which would have
been recoverable by Banks by placing the amount so received on deposit in the
certificate of deposit markets or the offshore currency interbank markets or
United States Treasury investment products, as the case may be, for a period
starting on the date on which it was so received and ending on the last day
of such Interest Period at the interest rate determined by Servicing Agent in
its reasonable discretion. Servicing Agent's determination as to such amount
shall be conclusive absent manifest error.
(b) Borrower shall pay to a Bank, upon the request of such
Bank, such amount or amounts as shall be sufficient as determined by such
Bank to be necessary to compensate it for any loss, costs or expense incurred
by it as a result of any failure by Borrower to borrow a LIBOR Rate Advance
on the date for such borrowing specified in the relevant timely notice of
borrowing hereunder.
(c) If a Bank shall determine that the adoption or
implementation of any applicable law, rule, regulation or treaty regarding
capital adequacy, or any change therein, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof,
or compliance by Bank (or its applicable lending office) with any respect or
directive regarding capital adequacy (whether or not having the force of law)
of any such authority, central bank or comparable agency, in each case, on or
after the date hereof, has or would have the effect of reducing the rate of
return on capital of such Bank or any person or entity controlling Bank (a
"Parent") as a consequence of its obligations hereunder to a level below that
which Bank (or its Parent) could have achieved but for such adoption, change
or compliance (taking into consideration its policies with respect to capital
adequacy) by an amount deemed by Bank to be material, then from time to time,
within 15 days after demand by such Bank, Borrower shall pay to Bank such
additional amount or amounts as will compensate such Bank for such reduction.
A statement of such Bank claiming compensation under this Section and
setting forth the additional amount or amounts to be paid to it hereunder
shall be conclusive absent manifest error.
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(d) If at any time a Bank, in its sole and absolute
discretion, determines that: (i) the amount of the LIBOR Rate Advances for
periods equal to the corresponding Interest Periods or any other period are
not available to such Bank in the offshore currency interbank markets, or
(ii) the LIBOR Rate does not accurately reflect the cost to Bank of lending
the LIBOR Rate Advance, then such Bank shall promptly give notice thereof to
Borrower, and upon the giving of such notice such Bank's obligation to make
the LIBOR Rate Advances shall terminate, unless Banks and Borrower agree in
writing to a different interest rate applicable to LIBOR Rate Advances. If
it shall become unlawful for a Bank to continue to fund or maintain any
Advances, or to perform its obligations hereunder, upon demand by such Bank,
Borrower shall prepay the Advances in full with accrued interest thereon and
all other amounts payable by Borrower hereunder (including, without
limitation, any amount payable in connection with such prepayment pursuant to
Section 2.9(a)).
3. CONDITIONS OF LOANS
-------------------
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of
Bank to make the initial Advance is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory to Bank, the
following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with
respect to incumbency and resolutions authorizing the execution and delivery
of this Agreement;
(c) negative pledge agreement in substantially the form of
EXHIBIT D hereto;
(d) financing statement (Form UCC-1) or UCC-2 as the Banks
may require, naming the Servicing Agent and the banks as secured parties, in
form and substance acceptable to the Servicing Agent and the Banks;
(e) insurance certificate;
(f) payment of the fees and Bank Expenses then due as
specified in Section 2.5 hereof; and
(g) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of Banks
to make each Advance, including the initial Advance, is further subject to
the following conditions:
(a) timely receipt by Servicing Agent of the
Payment/Advance Form and/or LIBOR Rate Advance Form as provided in Section
2.1; and
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form or LIBOR Rate Advance Form and on the
effective date of each Advance as though made at and as of each such date,
and no Event of Default shall have occurred and be continuing, or would
result from such Advance. The making of each Advance shall be deemed to be a
representation and warranty by Borrower on the date of such Advance as to the
accuracy of the facts referred to in this Section 3.2(b).
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4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 GRANT OF SECURITY INTEREST.
(a) Borrower grants and pledges to Servicing Agent,
for itself and as agent for Banks and to each Bank, a continuing security
interest in all presently existing and hereafter acquired or arising
Collateral in order to secure prompt repayment of any and all Obligations and
in order to secure prompt performance by Borrower of each of its covenants
and duties under the Loan Documents. Except as set forth in the Schedule,
such security interest will constitute a valid, first priority security
interest in the Collateral except for Permitted Liens as of the Effective
Date.
(b) Notwithstanding anything contained in this
Agreement to the contrary, the grant of security interest contained herein
shall not be effective or otherwise deemed given until the Effective Date, at
which date the terms of Sections 4.1 and 4.2 shall become immediately
effective without notice or action by Servicing Agent or any Bank. Servicing
Agent may file the financing statement referred to in Section 3.1(d) with the
California Secretary of State on or after, but not before, the Effective Date.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED.
Borrower shall from time to time execute and deliver to Servicing Agent, at
the request of Servicing Agent, all Negotiable Collateral on or after the
Effective Date, all financing statements and other documents that Servicing
Agent may reasonably request, in form satisfactory to Servicing Agent, to
perfect and continue perfected Servicing Agent's security interests in the
Collateral and in order to fully consummate all of the transactions
contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Servicing Agent and Banks (through
any of its officers, employees, or agents) shall have the right, upon
reasonable prior notice, from time to time during Borrower's usual business
hours, to inspect Borrower's Books and to make copies thereof and to check,
test, and appraise the Collateral in order to verify Borrower's financial
condition or the amount, condition of, or any other matter relating to, the
Collateral.
4.4 REQUIREMENT FOR CASH COLLATERAL. If Borrower does not
comply with any covenant contained in Sections 6.7, 6.8 or 6.9 herein, then
Borrower shall pledge cash or a certificate of deposit to Servicing Agent in
an amount equal to one hundred five percent (105%) of the aggregate amount
without duplication of (i) all the outstanding Advances and (ii) all
outstanding Letters of Credit, in each case to the extent not already
cash-secured. Servicing Agent agrees to release the cash pledged pursuant to
this Section 4.4 upon Borrower's achieving compliance with the covenant
giving rise to the pledge hereunder. Notwithstanding anything to the
contrary in this Agreement, failure to comply with any such covenant shall
not be a default or an Event of Default so long as the Borrower complies with
this Section 4.4 on the next Business Day after the Borrower becomes aware of
the noncompliance with any such covenant.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws
of its state of incorporation and qualified and licensed to do business in,
and is in good standing in, any state in which the conduct of its business or
its ownership of property requires that it be so qualified, except to the
extent that failure to so qualify would not have a Material Adverse Effect on
the Borrower.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution,
delivery, and performance of the Loan Documents are within Borrower's powers,
have been duly authorized, and are not in conflict
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with nor constitute a breach of any provision contained in Borrower's
Articles of Incorporation or Bylaws, nor will they constitute an event of
default under any material agreement to which Borrower is a party or by which
Borrower is bound. Borrower is not in default under any agreement to which
it is a party or by which it is bound, which default could have a Material
Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and
indefeasible title to the Collateral, free and clear of Liens, except for
Permitted Liens.
5.4 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as
disclosed in the Schedule, Borrower has not done business under any name
other than that specified on the signature page hereof. The chief executive
office of Borrower is located at the address indicated in Section 10 hereof.
5.5 LITIGATION. Except as set forth in the Schedule,
there are no actions or proceedings pending by or against Borrower or any
Subsidiary before any court or administrative agency in which an adverse
decision could have a Material Adverse Effect or a material adverse effect on
Borrower's interest or Servicing Agent's and the Banks' security interest in
the Collateral. Borrower does not have knowledge of any such pending or
threatened actions or proceedings.
5.6 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements related to Borrower and any Subsidiary
that have been delivered by Borrower to Servicing Agent and Banks fairly
present in all material respects Borrower's consolidated financial condition
as of the date thereof and Borrower's consolidated results of operations for
the period then ended. Except as disclosed to the Servicing Agent or the
Borrower's public filings and announcements, there has not been a material
adverse change in the consolidated financial condition of Borrower since the
date of the most recent of such financial statements submitted to Bank.
5.7 SOLVENCY. Borrower is solvent and able to pay its
debts (including trade debts) as they mature.
5.8 REGULATORY COMPLIANCE. Borrower and each Subsidiary
have met the minimum funding requirements of ERISA with respect to any
employee benefit plans subject to ERISA. No event has occurred resulting
from Borrower's failure to comply with ERISA that is reasonably likely to
result in Borrower's incurring any liability that could have a Material
Adverse Effect. Borrower is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940. Borrower is not engaged principally, or as one of the
important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations G, T
and U of the Board of Governors of the Federal Reserve System). Borrower has
complied with all the provisions of the Federal Fair Labor Standards Act, and
Borrower has not violated any statutes, laws, ordinances or rules applicable
to it, noncompliance with which or violation of which could have a Material
Adverse Effect.
5.9 ENVIRONMENTAL CONDITION. Except as set forth in the
Schedule, none of Borrower's or any Subsidiary's properties or assets has
ever been used by Borrower or any Subsidiary or, to the best of Borrower's
knowledge, by previous owners or operators, in the disposal of, or to
produce, store, handle, treat, release, or transport, any hazardous waste or
hazardous substance other than in accordance with applicable law; to the best
of Borrower's knowledge, none of Borrower's properties or assets has ever
been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site,
or a candidate for closure pursuant to any environmental protection statute;
no lien arising under any environmental protection statute has attached to
any revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or
any other federal, state or other governmental agency concerning any action
or omission by Borrower or any Subsidiary
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resulting in the releasing, or otherwise disposing of hazardous waste or
hazardous substances into the environment.
5.10 TAXES. Borrower and each Subsidiary have filed or
caused to be filed all tax returns required to be filed, and has paid, or has
made adequate provision for the payment of, all taxes reflected therein,
except for taxes the amount or validity of which Borrower is contesting in
good faith by appropriate proceedings and with respect to which Borrower has
taken adequate reserves in accordance with GAAP.
5.11 SUBSIDIARIES. As of the date hereof, Borrower does
not own any stock, partnership interest or other equity securities of any
Person, except for Permitted Investments.
5.12 GOVERNMENT CONSENTS. Borrower and each Subsidiary
have obtained all consents, approvals and authorizations of, made all
declarations or filings with, and given all notices to, all governmental
authorities that are necessary for the continued operation of Borrower's
business as currently conducted, except to the extent that failure to do so
would not have a Material Adverse Effect on Borrower.
5.13 FULL DISCLOSURE. No representation, warranty or
other statement made by Borrower in any certificate or written statement
furnished to Servicing Agent or any Bank in connection with this Agreement
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such
certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of
all outstanding Obligations, and for so long as Bank may have any commitment
to make an Advance hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each
of its Subsidiaries' corporate existence and good standing in its
jurisdiction of incorporation and maintain qualification in each jurisdiction
in which the failure to so qualify could have a Material Adverse Effect.
Borrower shall maintain, and shall cause each of its Subsidiaries to
maintain, to the extent consistent with prudent management of Borrower's
business, in force all licenses, approvals and agreements, the loss of which
could have a Material Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall
cause each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Borrower shall
comply, and shall cause each Subsidiary to comply, with all statutes, laws,
ordinances and government rules and regulations to which it is subject,
noncompliance with which could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower shall deliver to Servicing Agent for
distribution to the Banks: (a) as soon as available, but in any event within
ninety (90) days after the end of Borrower's fiscal year, audited
consolidated financial statements of Borrower prepared in accordance with
GAAP, consistently applied, together with an unqualified opinion on such
financial statements of an independent certified public accounting firm
reasonably acceptable to the Banks; (b) within ten (10) days upon becoming
available, copies of all statements, reports and notices sent or made
available generally by Borrower to its security holders or to any holders of
Subordinated Debt and all reports on Form 10-K and 10-Q filed with the
Securities and Exchange Commission; (c) promptly upon receipt of
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notice thereof, a report of any legal actions pending or threatened against
Borrower or any Subsidiary that could result in damages or costs to Borrower
or any Subsidiary of Five Hundred Thousand Dollars ($500,000) or more; and
(d) such financial information as Bank may reasonably request from time to
time.
(b) If at any time and during such time that
Borrower's Liquidity is less than (i) two and one quarter (2.25) times the
outstanding Obligations hereunder or (ii) an amount equal to twelve (12)
times the then applicable Remaining Months Liquidity, Borrower shall deliver
to Servicing Agent for distribution to the Banks a company prepared
consolidated balance sheet and income statement covering Borrower's
consolidated operations for the relevant month, certified by a Responsible
Officer within thirty (30) days after the last day of each calendar month.
(c) Borrower shall deliver to Servicing Agent for
distribution to the Banks with each of the quarterly or monthly financial
statement required above a Compliance Certificate signed by a Responsible
Officer in substantially the form of EXHIBIT C hereto.
6.4 TAXES. Borrower shall make, and shall cause each
Subsidiary to make, due and timely payment or deposit of all material
federal, state, and local taxes, assessments, or contributions required of it
by law, and will execute and deliver to Servicing Agent, on demand,
appropriate certificates attesting to the payment or deposit thereof; and
Borrower will make, and will cause each Subsidiary to make, timely payment or
deposit of all material tax payments and withholding taxes required of it by
applicable laws, including, but not limited to, those laws concerning
F.I.C.A., F.U.T.A., state disability, and local, state, and federal income
taxes, and will, upon request, furnish Servicing Agent with proof
satisfactory to the Banks indicating that Borrower or a Subsidiary has made
such payments or deposits; provided that Borrower or a Subsidiary need not
make any payment if the amount or validity of such payment is contested in
good faith by appropriate proceedings and is reserved against (to the extent
required by GAAP) by Borrower.
6.5 INSURANCE.
(a) Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion,
sprinklers, and all other hazards and risks, and in such amounts, as
ordinarily insured against by other owners in similar businesses conducted in
the locations where Borrower's business is conducted on the date hereof.
Borrower shall also maintain insurance relating to Borrower's ownership and
use of the Collateral in amounts and of a type that are customary to
businesses similar to Borrower's.
(b) All such policies of insurance shall be in
such form, with such companies, and in such amounts as reasonably
satisfactory to the Banks. After the Effective Date only, all such policies
of property insurance shall contain a lender's loss payable endorsement, in a
form satisfactory to the Banks, showing Servicing Agent and the Banks as an
additional loss payee thereof and all liability insurance policies shall show
the Servicing Agent and the Banks as an additional insured, and shall specify
that the insurer must give at least twenty (20) days notice to Bank before
canceling its policy for any reason. After the Effective Date only, upon
Servicing Agent's request, Borrower shall deliver to Servicing Agent
certified copies of such policies of insurance and evidence of the payments
of all premiums therefor. After the Effective Date only, all proceeds
payable under any such policy shall, at the option of Servicing Agent, be
payable to Servicing Agent to be applied on account of the Obligations.
6.6 PRINCIPAL DEPOSITORY. Borrower shall either (i)
maintain its principal domestic depository and operating accounts with
Servicing Agent or (ii) shall maintain a minimum balance of no less than Four
Million Dollars ($4,000,000) in a deposit account with Servicing Agent.
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6.7 DEBT-NET WORTH RATIO. Subject to the following
sentence, Borrower shall maintain, as of the last day of each of Borrower's
fiscal quarters, a ratio of Total Liabilities less Subordinated Debt to
Tangible Net Worth plus Subordinated Debt of not more than 0.75 to 1.00. At
any time Borrower is subject to the monthly reporting requirements of Section
6.3(b), Borrower shall maintain, as of the last day of each calendar month, a
ratio of Total Liabilities less Subordinated Debt to Tangible Net Worth plus
Subordinated Debt of not more than 0.75 to 1.00.
6.8 TANGIBLE NET WORTH. Subject to the following
sentence, Borrower shall maintain, as of the last day of each of Borrower's
fiscal quarters, a Tangible Net Worth of not less than Fifty Million Dollars
($50,000,000). At any time Borrower is subject to the monthly reporting
requirements of Section 6.3(b), Borrower shall maintain, as of the last day
of each calendar month, a Tangible Net Worth of not less than Fifty Million
Dollars ($50,000,000).
6.9 MINIMUM LIQUIDITY. Borrower shall maintain, as of the
last day of each of Borrower's fiscal quarters, a minimum Liquidity of the
greater of (a) one and three quarters (1.75) times the amount of outstanding
obligations hereunder OR (b) an amount equal to six (6) time the then
applicable Remaining Months Liquidity.
6.10 CO-BORROWERS; FURTHER ASSURANCES. At any time and
from time to time, Borrower shall, at Servicing Agent's request in the
exercises of the Banks' sole discretion, cause any Subsidiary to become party
to this Agreement as a co-borrower and to grant a security interest in its
assets to secure the Obligations, all on terms acceptable to the Banks. At
any time and from time to time Borrower shall execute and deliver such
further instruments and take such further action as may reasonably be
requested by the Banks to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations
or for so long as the Banks may have any commitment to make any Advances or
to issue or make any payment under any Letter of Credit, Borrower will not do
any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or
otherwise dispose of (collectively, a "Transfer"), or permit any of its
Subsidiaries to Transfer, all or any part of its business or property, other
than: (i) Transfers of Inventory and other assets in the ordinary course of
business; (ii) Transfers of non-exclusive licenses and similar arrangements
for the use of the property of Borrower or its Subsidiaries and exclusive and
non-exclusive license entered into in good faith in connection with the
distribution of Borrower's products; (iii) Transfers of worn-out or obsolete
Equipment; or (iv) as disclosed in writing to the Banks prior to date hereof.
7.2 CHANGE IN BUSINESS. Engage in any business, or permit
any of its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
related thereto (or incidental thereto). Borrower will not, without thirty
(30) days prior written notification to the Banks and Servicing Agent,
relocate its chief executive office.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or
permit any of its Subsidiaries to merge or consolidate, with or into any
other business organization, or acquire, or permit any of its Subsidiaries to
acquire, all or substantially all of the capital stock or property of another
Person except (i) if Borrower is the surviving entity of any such merger or
consolidation (except for the merger or consolidation of one Subsidiary into
another Subsidiary) and (ii) no Event of Default has occurred and is
continuing or would result from such action.
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7.4 INDEBTEDNESS. Create, incur, assume or be or remain
liable with respect to any Indebtedness, or permit any Subsidiary so to do,
other than Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to
exist any Lien with respect to any of its property, or assign or otherwise
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or
purchase of any capital stock, except (i) repurchases from current or former
employees, directors or consultants of the Borrower under the terms of any
stock option or stock purchase plans or agreements up to a maximum of
$500,000 in any one fiscal year (provided an Event of Default has not
occurred and is continuing at the time of such repurchase or would exist
after giving effect to such repurchase), and (ii) dividends payable solely in
common stock.
7.7 INVESTMENTS. Directly or indirectly acquire or own,
or make any Investment in or to any Person, or permit any of its Subsidiaries
so to do, other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly
enter into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of
Borrower's business, upon fair and reasonable terms that are no less
favorable to Borrower than would be obtained in an arm's length transaction
with a nonaffiliated Person.
7.9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such
payment, except in compliance with the terms of such Subordinated Debt, or
amend any provision contained in any documentation relating to the
Subordinated Debt.
7.10 COMPLIANCE. Become an "investment company"
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for
such purpose. Fail to meet the minimum funding requirements of ERISA, permit
a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur,
fail to comply with the Federal Fair Labor Standards Act or violate any law
or regulation, which violation could have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Bank's Lien on
the Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay the
principal of, or any interest on, any Advances or fails to repay any amount
paid under any Letter of Credit when due and payable; or fails to pay any
portion of any other Obligations not constituting such principal or interest,
including without limitation Bank Expenses, within thirty (30) days of
receipt by Borrower of an invoice for such other Obligations;
8.2 COVENANT DEFAULT. If Borrower fails to timely perform
any obligation under Sections 4.4, 6.7, 6.8 or 6.9 or violates any of the
covenants contained in Article 7 of this Agreement, or fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or
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future agreement between Borrower and any Bank and as to any default under
such other term, provision, condition, covenant or agreement that can be
cured, has failed to cure such default within twenty (20) days after Borrower
receives notice thereof or any officer of Borrower becomes aware thereof;
provided, however, that if the default cannot by its nature be cured within
the twenty (20) day period or cannot after diligent attempts by Borrower be
cured within such twenty (20) day period, and such default is likely to be
cured within a reasonable time, then Borrower shall have an additional
reasonable period (which shall not in any case exceed thirty (30) days) to
attempt to cure such default, and within such reasonable time period the
failure to have cured such default shall not be deemed an Event of Default
(provided that no Advances will be required to be made during such cure
period);
8.3 MATERIAL ADVERSE CHANGE. If there occurs a material
adverse change in Borrower's business or consolidated financial condition, or
if there is a material impairment of the prospect of repayment of any portion
of the Obligations or a material impairment of the value or priority of
Servicing Agent's and the Banks' security interests in the Collateral;
8.4 ATTACHMENT. If any material portion of Borrower's
assets is attached, seized, subjected to a writ or distress warrant, or is
levied upon, or comes into the possession of any trustee, receiver or person
acting in a similar capacity and such attachment, seizure, writ or distress
warrant or levy has not been removed, discharged or rescinded within ten (10)
days, or if Borrower is enjoined, restrained, or in any way prevented by
court order from continuing to conduct all or any material part of its
business affairs, or if a judgment or other claim becomes a lien or
encumbrance upon any material portion of Borrower's assets, or if a notice of
lien, levy, or assessment is filed of record with respect to any of
Borrower's assets by the United States Government, or any department, agency,
or instrumentality thereof, or by any state, county, municipal, or
governmental agency, and the same is not paid within ten (10) days after
Borrower receives notice thereof, provided that none of the foregoing shall
constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower
(provided that no Advances will be required to be made during such cure
period) or to the extent that such Lien is a Permitted Lien;
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency
Proceeding is commenced against Borrower and is not dismissed or stayed
within twenty (20) days (provided that no Advances will be made prior to the
dismissal of such Insolvency Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any
agreement to which Borrower is a party with a third party or parties
resulting in a right by such third party or parties, whether or not
exercised, to accelerate the maturity of any Indebtedness in an amount in
excess of Five Hundred Thousand Dollars ($500,000) or that could have a
Material Adverse Effect;
8.7 SUBORDINATED DEBT. If Borrower makes any payment on
account of Subordinated Debt, except to the extent such payment is allowed
under any subordination agreement entered into with the Banks;
8.8 JUDGMENTS. If a judgment or judgments for the payment
of money, the uninsured amount of which is, individually or in the aggregate,
at least Five Hundred Thousand Dollars ($500,000), shall be rendered against
Borrower and shall remain unsatisfied and unstayed for a period of thirty
(30) days (provided that no Advances will be made prior to the satisfaction
or stay of such judgment); or
8.9 MISREPRESENTATIONS. If there exists any material
misrepresentation or material misstatement on or as of the date made in any
warranty or representation set forth herein or in any certificate delivered
to Servicing Agent or any Bank by any Responsible Officer pursuant to this
Agreement or to induce the Banks to enter into this Agreement or any other
Loan Document.
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9. BANKS' RIGHTS AND REMEDIES
--------------------------
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during
the continuance of an Event of Default, Servicing Agent may, at the election
and direction of the Banks in accordance with the Agency Agreement, without
notice of its election and without demand, do any one or more of the
following, all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any such declaration);
(b) Cease advancing money or extending credit to
or for the benefit of Borrower under this Agreement and the Issuing Bank may
cease issuing Letters of Credit;
(c) Settle or adjust disputes and claims directly
with account debtors for amounts, upon terms and in whatever order that
Servicing Agent reasonably considers advisable;
(d) Without notice to or demand upon Borrower,
make such payments and do such acts as Servicing Agent considers necessary or
reasonable to protect the Banks' security interest in the Collateral.
Borrower agrees to assemble the Collateral if Servicing Agent so requires,
and to make the Collateral available to Servicing Agent as Servicing Agent
may designate. Borrower authorizes Servicing Agent to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrance, charge, or lien which in Servicing Agent's determination
appears to be prior or superior to its security interest and to pay all
expenses incurred in connection therewith. With respect to any of Borrower's
owned premises, Borrower hereby grants Servicing Agent a license to enter
into possession of such premises and to occupy the same, without charge, in
order to exercise any of Servicing Agent's rights or remedies provided
herein, at law, in equity, or otherwise;
(e) Without notice to Borrower set off and apply
to the Obligations any and all (i) balances and deposits of Borrower held by
any Bank, or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by any Bank;
(f) Ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale, and sell (in the
manner provided for herein) the Collateral. Servicing Agent is hereby
granted a license or other right, solely pursuant to the provisions of this
Section 9.1, to use, without charge, Borrower's labels, patents, copyrights,
rights of use of any name, trade secrets, trade names, trademarks, service
marks, and advertising matter, or any property of a similar nature, as it
pertains to the Collateral, in completing production of, advertising for
sale, and selling any Collateral and, in connection with Servicing Agent's
exercise of its rights under this Section 9.1, Borrower's rights under all
licenses and all franchise agreements shall inure to Servicing Agent's
benefit;
(g) Sell the Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions, for
cash or on terms, in such manner and at such places (including Borrower's
premises) as Servicing Agent determines is commercially reasonable, and apply
any proceeds to the Obligations in whatever manner or order Bank deems
appropriate;
(h) Any Bank may credit bid and purchase at any
public sale; and
(i) Any deficiency that exists after disposition
of the Collateral as provided above will be paid immediately by Borrower.
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9.2 POWER OF ATTORNEY. At any time after the Effective
Date, but effective only upon the occurrence and during the continuance of an
Event of Default, Borrower hereby irrevocably appoints Servicing Agent (and
any of Servicing Agent's designated officers, or employees) as Borrower's
true and lawful attorney to: (a) send requests for verification of Accounts
or notify account debtors of Servicing Agent's security interest in the
Accounts; (b) endorse Borrower's name on any checks or other forms of payment
or security that may come into Servicing Agent's possession; (c) sign
Borrower's name on any invoice or bill of lading relating to any Account,
drafts against account debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to account debtors; (d) make, settle,
and adjust all claims under and decisions with respect to Borrower's policies
of insurance; and (e) settle and adjust disputes and claims respecting the
accounts directly with account debtors, for amounts and upon terms which
Servicing Agent determines to be reasonable; provided Servicing Agent may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default
has occurred. The appointment of Servicing Agent as Borrower's attorney in
fact, and each and every one of Servicing Agent's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have
been fully repaid and performed and the Banks' obligation to provide Advances
hereunder and the Issuing Bank's obligation to issue and make any payments
under Letters of Credit is terminated.
9.3 ACCOUNTS COLLECTION. At any time from the Effective
Date, Servicing Agent may notify any Person owing funds to Borrower of
Servicing Agent's and the Banks' security interest in such funds and verify
the amount of such Account. Borrower shall collect all amounts owing to
Borrower for Servicing Agent, receive in trust all payments as Servicing
Agent's trustee, and immediately deliver such payments to Servicing Agent in
their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 BANK EXPENSES. If Borrower fails to pay any amounts
or furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Servicing Agent may do any
or all of the following: (a) make payment of the same or any part thereof;
or (b) obtain and maintain insurance policies of the type discussed in
Section 6.5 of this Agreement, and take any action with respect to such
policies as Servicing Agent deems prudent. Any amounts so paid or deposited
by Servicing Agent shall constitute Bank Expenses, shall be immediately due
and payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by
Servicing Agent shall not constitute an agreement by Servicing Agent to make
similar payments in the future or a waiver by Servicing Agent of any Event of
Default under this Agreement.
9.5 SERVICING AGENT'S LIABILITY FOR COLLATERAL. So long
as Servicing Agent complies with reasonable banking practices, Servicing
Agent shall not in any way or manner be liable or responsible for: (a) the
safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the
value thereof; or (d) any act or default of any carrier, warehouseman,
bailee, forwarding agency, or other person whomsoever. All risk of loss,
damage or destruction of the Collateral shall be borne by Borrower.
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Servicing Agent and each Bank shall have all other rights and
remedies not inconsistent herewith as provided under the Code, by law, or in
equity. No exercise by Servicing Agent or a Bank of one right or remedy
shall be deemed an election, and no waiver of any Event of Default on
Borrower's part shall be deemed a continuing waiver. No delay by Servicing
Agent or a Bank shall constitute a waiver, election, or acquiescence by it.
No waiver shall be effective unless made in a written document signed on
behalf of Servicing Agent and each Bank, as appropriate and then shall be
effective only in the specific instance and for the specific purpose for
which it was given.
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9.7 DEMAND; PROTEST. Borrower waives demand, protest,
notice of protest, notice of default or dishonor, notice of payment and
nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees at any time held by a Bank on
which Borrower may in any way be liable.
10. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement
entered into in connection herewith shall be in writing and (except for
financial statements and other informational documents which may be sent by
first-class mail, postage prepaid) shall be personally delivered or sent by a
recognized overnight delivery service, certified mail, postage prepaid,
return receipt requested, or by telefacsimile as follows:
If to Borrower: Heartport, Inc.
200 Chesapeake Drive
Redwood City, CA 94063
Attn: Ms. Rebecca Kuhn
FAX: (650) 482-4439
If to SVB: Silicon Valley Bank
(as a Bank or 1731 Embarcadero Road, Suite 220
as Servicing Agent) Palo Alto, CA 94303
Attn: Mr. Gary Reagan
FAX: (650) 812-0640
If to BNP: Banque Nationale de Paris
180 Montgomery Street
San Francisco, CA 94104
Attn: Ms. Katherine Wolfe
FAX: (415) 296-8954
Each of the parties hereto may change the address at which it is to
receive notices hereunder, by notice in writing in the foregoing manner given
to the other parties.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of California, without regard
to principles of conflicts of law. Each of Borrower, Servicing Agent and
each Bank hereby submits to the exclusive jurisdiction of the state and
Federal courts located in the County of Santa Clara, State of California.
BORROWER, SERVICING AGENT AND EACH BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING
OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND
ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES
THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER
INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED
THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY
WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
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12. INTERCREDITOR PROVISIONS
------------------------
12.1 PROPORTIONATE INTERESTS. Except as otherwise
provided in this Agreement, the rights, interests, and obligations of each
Bank under this Agreement and the Loan Documents at any time shall be
severally shared in the ratio of (a) the maximum amount the Bank has
committed to advance as set forth on the signature page signed by the Bank to
(b) the Committed Line. Any reference in this Agreement or the Loan
Documents to an allocation between or sharing by the Banks of any right,
interest, or duty "ratably," "proportionally," "pro rata," or in similar
terms shall refer to this ratio. No Bank is obligated to advance any funds
in lieu of or for the account of the other Bank if the latter Bank fails to
make such Advance.
12.2 DESIGNATION OF SERVICE AGENT. To facilitate the
administration of this Agreement, SVB shall act as "Servicing Agent" for
itself and all Banks. Servicing Agent shall have only such duties as are
expressly set forth in this Agreement and the Agency Agreement, or as
otherwise agreed in writing by the Banks. Servicing Agent shall be deemed to
act on behalf of all Banks whenever Servicing Agent acts under this Agreement.
12.3 RESIGNATION. Servicing Agent may resign as Servicing
Agent, upon thirty (30) day's written notice to the other Banks and to
Borrower and appointment of a successor Servicing Agent in accordance with
the Agency Agreement. Upon receipt of notice of resignation, the Banks shall
appoint a successor Servicing Agent in accordance with the Agency Agreement.
The resigning Servicing Agent shall cooperate fully in delivering to the
successor Servicing Agent the Loan Documents and copies of all records
relating to the Advances and payments made hereunder that the successor
Servicing Agent reasonably requests.
12.4 SERVICING AGENT AS BANK. SVB shall have the same
rights and powers under this Agreement as any other Bank and may exercise the
same as though it were not Servicing Agent. The term "Banks" includes
Servicing Agent in Servicing Agent's individual capacity. Servicing Agent
and its Subsidiaries and Affiliates may accept deposits from, lend money to,
act as agent or trustee for other lenders to, and generally engage in any
kind of banking, trust, or other business with, the Borrower or any
Subsidiary or Affiliates as if Servicing Agent were not Servicing Agent.
12.5 NO AGENCY. EXCEPT AS SPECIFIED HEREIN, NEITHER BANK
IS AN AGENT OF THE OTHER. NEITHER BANK HAS ANY AUTHORITY TO ACT OR FAIL TO
ACT FOR THE OTHER. THE OBLIGATIONS OF EACH BANK HEREUNDER ARE SEVERAL. NO
BANK SHALL BE LIABLE FOR THE FAILURE OF ANY OTHER BANK TO PERFORM ITS
OBLIGATIONS HEREUNDER.
12.6 NO RELIANCE. The provisions of this Article 12 are
solely for the benefit of Banks in specifying their rights and obligations
with respect to each other, and not for the benefit of any Borrower or its
assigns or successors. In the event of any conflict between the terms of the
Agency Agreement and the terms of this Article 12, the terms of the Agency
Agreement shall control.
13. GENERAL PROVISIONS
------------------
13.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind
and inure to the benefit of the respective successors and permitted assigns
of each of the parties; PROVIDED, HOWEVER, that neither this Agreement nor
any rights hereunder may be assigned by Borrower without the Banks' prior
written consent, which consent may be granted or withheld in the exercise of
the Bank's sole discretion. Each Bank shall have the right without the
consent of or notice to Borrower to sell, transfer, negotiate, or grant
participation in all or any part of, or any interest in, such Bank's
obligations, rights and benefits hereunder.
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13.2 INDEMNIFICATION. Borrower shall defend, indemnify
and hold harmless Servicing Agent and each Bank and its officers, employees,
and agents against: (a) all obligations, demands, claims, and liabilities
claimed or asserted by any other party in connection with the transactions
contemplated by this Agreement; and (b) all losses or Bank Expenses in any
way suffered, incurred, or paid by Servicing Agent or any Bank as a result of
or in any way arising out of, following, or consequential to transactions
between Servicing Agent or any Bank and Borrower under the Loan Documents
(including without limitation reasonable attorneys fees and expenses), except
for losses caused by Servicing Agent's or such Bank's gross negligence or
willful misconduct.
13.3 TIME OF ESSENCE. Time is of the essence for the
performance of all obligations set forth in this Agreement.
13.4 SEVERABILITY OF PROVISIONS. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
13.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement
cannot be amended or terminated orally. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties hereto with respect to the subject matter of this Agreement, if any,
are merged into this Agreement and the Loan Documents.
13.6 COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts,
each of which, when executed and delivered, shall be deemed to be an
original, and all of which, when taken together, shall constitute but one and
the same Agreement.
13.7 SURVIVAL. All covenants, representations and
warranties made in this Agreement shall continue in full force and effect so
long as any Obligations remain outstanding. The obligations of Borrower to
indemnify the parties with respect to the expenses, damages, losses, costs
and liabilities described in Section 13.2 shall survive until all applicable
statute of limitations periods with respect to actions that may be brought
against Banks or Servicing Agent have run.
13.8 CONFIDENTIALITY. In handling any confidential
information Servicing Agent and each Bank shall exercise the same degree of
care that it exercises with respect to its own proprietary information of the
same types to maintain the confidentiality of any non-public information
thereby received or received pursuant to this Agreement except that
disclosure of such information may be made (i) to the subsidiaries or
affiliates of Servicing Agent or such Bank in connection with their present
or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Advances and Letters of
Credit, provided that they have entered into a comparable confidentiality
agreement in favor of Borrower and have delivered a copy to Borrower, (iii)
as required by law, regulations, rule or order, subpoena, judicial order or
similar order, (iv) as may be required in connection with the examination,
audit or similar investigation of Servicing Agent or such Bank and (v) as
Servicing Agent or such Bank may determine in connection with the enforcement
of any remedies hereunder. Confidential information hereunder shall not
include information that either: (a) is in the public domain or in the
knowledge or possession of Servicing Agent or such Bank when disclosed to
Servicing Agent or such Bank, or becomes part of the public domain after
disclosure to Servicing Agent or such Bank through no fault of Servicing
Agent or such Bank; or (b) is disclosed to Servicing Agent or such Bank by a
third party, provided Servicing Agent or such Bank does not have actual
knowledge that such third party is prohibited from disclosing such
information.
13.9 AMENDED AND RESTATED AGREEMENT. This Agreement
amends and restates, and supercedes in its entirety, that certain Loan and
Security Agreement, dated as of December 31, 1996 between SVB and the
Borrower, and SVB's successors and assigns, pursuant to the terms of which
there are no amounts outstanding as of the date of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
HEARTPORT, INC.
By:______________________________________
Title:___________________________________
SILICON VALLEY BANK, as Servicing Agent
By:______________________________________
Title:___________________________________
SILICON VALLEY BANK, as Bank
By:______________________________________
Title:___________________________________
Percentage Share: Fifty Percent (50%)
BANQUE NATIONALE DE PARIS
By:______________________________________
Title:___________________________________
By:______________________________________
Title:___________________________________
Percentage Share: Fifty Percent (50%)
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EXHIBIT A
---------
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor
vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
(a) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above,
and Borrower's Books relating to any of the foregoing;
(b) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, claims, literature, reports, catalogs, income
tax refunds, payments of insurance and rights to payment of any kind;
(c) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned by
performance, and any and all credit insurance, guaranties, and other security
therefor, as well as all merchandise returned to or reclaimed by Borrower and
Borrower's Books relating to any of the foregoing;
(d) All documents, cash, deposit accounts, securities, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing; and
(e) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not include any
copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; any patents,
trademarks, servicemarks and applications therefor; any trade secret rights,
including any rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information, now owned or
hereafter acquired or any other intellectual property rights; or any claims
for damages by way of any past, present and future infringement of any of the
foregoing; provided the foregoing shall not restrict the security interest of
Servicing Agent and Banks in Accounts arising from the sale of Borrower's
products in the ordinary course of business that relate directly or
indirectly to the use of intellectual property rights.
Notwithstanding the foregoing, the Collateral shall not include any
equipment or related general intangibles that are the subject of an equipment
lease to the extent that and for so long as, such equipment lease prohibits
the granting of a security interest in such equipment and related general
intangibles.
28
<PAGE>
EXHIBIT B-1
-----------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING OF PRIME ADVANCE IS 11:00 A.M., PACIFIC TIME
DEADLINE FOR LIBOR RATE ADVANCE IS 12:00 P.M., PACIFIC TIME
3 BUSINESS DAYS IN ADVANCE
DEADLINE FOR SAME DAY REPAYMENT PROCESSING IS 12:00 P.M., PACIFIC TIME
TO: CENTRAL CLIENT SERVICE DIVISION DATE: ____________________
FAX#: (408) 496-2426 TIME: ____________________
- --------------------------------------------------------------------------------
FROM: Heartport, Inc.
---------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
--------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
------------------------------------------------------
PHONE NUMBER:
--------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
----------------------- -----------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $ _________________________________
PRINCIPAL PAYMENT (ONLY) $ _________________________________
INTEREST PAYMENT (ONLY) $ _________________________________
PRINCIPAL AND INTEREST (PAYMENT) $ _________________________________
OTHER INSTRUCTIONS: ________________________________________________________
____________________________________________________________________________
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the
date of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in
all material respects as of such date.
- --------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
- ------------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
__________________________________ __________________________________
Authorized Requester Phone #
__________________________________ __________________________________
Received By (Bank) Phone #
___________________________
Authorized Signature (Bank)
- --------------------------------------------------------------------------------
29
<PAGE>
EXHIBIT B-2
LIBOR RATE ADVANCE/CONVERSION/CONTINUATION CERTIFICATE
The undersigned hereby certifies as follows:
I,_____________________, am the duly elected and acting __________________
of Heartport, Inc. ("Borrower"), a Responsible Officer (as defined in the
Agreement hereafter defined).
This certificate is delivered on behalf of Borrower to Silicon Valley
Bank, as Servicing Agent, pursuant to Section 2.8 of that certain Amended and
Restated Loan Agreement dated as of _____________, 1998, between Borrower and
Banks named therein (the "Agreement"). The terms used in this LIBOR Rate
Conversion/Continuation Certificate which are defined in the Agreement have
the same meaning herein as ascribed to them therein.
Borrower hereby requests on _______________, 19__ a LIBOR Rate Advance
(the "Advance") as follows:
(a) _____ (i) A new LIBOR Rate Advance; or
_____ (ii) A rate conversion of an existing Prime Rate Advance from
a Prime Rate Advance to a LIBOR Rate Advance; or
_____ (iii) A continuation of an existing LIBOR Rate Advance as a
LIBOR Rate Advance.
[CHECK (i) OR (ii) OR (iii) ABOVE]
(b) The date on which the Advance is to be made is _________________, 19__.
(c) The amount of the Advance is to be ($___________), for an Interest
Period of ______ month(s).
All representations and warranties of Borrower stated in the Agreement
are true, correct and complete in all material respects as of the date of this
request for a loan; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
IN WITNESS WHEREOF, this LIBOR Rate Conversion/Continuation Certificate
is executed by the undersigned as of this ____day of ________________, 19__.
HEARTPORT, INC.
By:_________________________________
Title:______________________________
FOR INTERNAL BANK USE ONLY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date
- -------------------------------------------------------------------------------
___%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
30
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK, AS SERVICING AGENT
FROM: HEARTPORT, INC.
The undersigned authorized officer of Heartport, Inc. hereby certifies
that in accordance with the terms and conditions of the Amended and Restated
Loan and Security Agreement, dated as of ___________, 1998, between Borrower
and the Banks named therein (the "Agreement"), (i) Borrower is in complete
compliance for the period ending ______________ with all financial covenants
except as noted below, (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct in all material respects as of
the date hereof, provided however, that those representations and warranties
expressly referring to another date shall be true and complete in all material
respects as of such date, and (iii) he/she is a Responsible Officer under the
Agreement. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS
BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
Monthly financial statements Monthly within 30 days(1) Yes No
Annual (CPA Audited) FYE within 90 days Yes No
10K & 10Q Within 10 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
Maintain on a Quarterly/
Monthly(2) Basis:
Liquidity (3) _________ Yes No
Minimum Tangible Net Worth $50,000,000 $________ Yes No
Maximum Debt/Tangible Net Worth .75:1.00 _____:1.00 Yes No
(1) Only required if Liquidity is less than 2.25x loan balance or RML is
less than 12 months.
(2) Tested Quarterly unless Liquidity is less than 2.25x loan balance or
RML is less than 12 months.
(3) 1.75x outstanding obligations or 6x Remaining Months Liquidity
COMMENTS REGARDING EXCEPTIONS: See Attached.
Sincerely,
_____________________________________________
SIGNATURE
_____________________________________________
TITLE
_____________________________________________
DATE
- ---------------------------------------------
BANK USE ONLY
Received by:_______________________________
AUTHORIZED SIGNER
Date:______________________________________
Verified:__________________________________
AUTHORIZED SIGNER
Date:______________________________________
Compliance Status: Yes No
- ---------------------------------------------
31
<PAGE>
EXHIBIT D
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of March 20, 1998, by and among
HEARTPORT, INC. ("Borrower") and SILICON VALLEY BANK, as Servicing Agent
("Servicing Agent").
In connection with the Loan Documents being concurrently executed between
Borrower, Servicing Agent and the Banks named therein, Borrower agrees as
follows:
1. Borrower shall not sell, transfer, assign, mortgage, pledge, lease,
grant a security interest in, or encumber any of Borrower's intellectual
property, including, without limitation, the following:
a. Any and all copyright rights, copyright applications,
copyright registrations and like protection in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not
the same also constitutes a trade secret, now or hereafter existing, created,
acquired or held (collectively, the "Copyrights");
b. Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
c. Any and all design rights which may be available to Borrower
now or hereafter existing, created, acquired or held;
d. All patents, patent applications and like protections,
including, without limitation, improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same,
including, without limitation, the patents and patent applications
(collectively, the "Patents");
e. Any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower connected
with and symbolized by such trademarks (collectively, the "Trademarks");
f. Any and all claims for damages by way of past, present and
future infringements of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
g. All licenses or other rights to use any of the Copyrights,
Patents or Trademarks and all license fees and royalties arising from such use
to the extent permitted by such license or rights;
h. All amendments, extensions, renewals and extensions of any of
the Copyrights, Patents or Trademarks; and
i. All proceeds and products of the foregoing, including,
without limitation, all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
Notwithstanding the foregoing, Borrower may sell, license and otherwise
dispose of the foregoing (i) to the extent set forth in the Loan Documents,
and (ii) in the ordinary course of business.
2. It shall be an Event of Default under the Loan Documents if there is
a breach of any term of this Negative Pledge Agreement.
3. Capitalized items used herein without definition shall have the same
meanings as set forth in the Amended and Restated Loan and Security Agreement
of even date herewith.
HEARTPORT, INC. SILICON VALLEY BANK, AS SERVICING AGENT
By:_________________________________ By:_____________________________________
Title:______________________________ Title:__________________________________
32
<PAGE>
CHESTNUT BAY LLC,
a California limited liability company
and
HEARTPORT, INC.,
a Delaware corporation
INDUSTRIAL BUILD-TO-SUIT LEASE
Dated
September 19, 1997
<PAGE>
INDUSTRIAL BUILD-TO-SUIT LEASE
Schedule of Exhibits and Exhibit Document ................................ ii
Basic Lease Information .................................................. iii
Section 1. Premises ..................................................... 1
Section 2. Term ......................................................... 1
Section 3. Rent ......................................................... 5
Section 4. Utilities .................................................... 5
Section 5. Taxes ........................................................ 6
Section 6. Net Lease; Common Areas; Audit Rights ........................ 8
Section 7. Insurance and Indemnity ...................................... 11
Section 8. Repairs and Maintenance ...................................... 14
Section 9. Alterations .................................................. 16
Section 10. Use .......................................................... 18
Section 11. Environmental Provisions ..................................... 19
Section 12. Damage and Destruction ....................................... 27
Section 13. Eminent Domain ............................................... 29
Section 14. Default ...................................................... 30
Section 15. Assignment and Subletting .................................... 32
Section 16. Estoppel ..................................................... 34
Section 17. Attornment ................................................... 34
Section 18. Subordination ................................................ 34
Section 19. Entry ........................................................ 35
Section 20. Late Charges and Interest .................................... 35
Section 21. Security ..................................................... 35
Section 22. Entire Agreement ............................................. 36
Section 23. Time of Essence .............................................. 36
Section 24. Attorney Fees ................................................ 36
Section 25. Severable .................................................... 37
Section 26. Governing Law ................................................ 37
Section 27. No Option .................................................... 37
Section 28. Successors and Assigns ....................................... 37
Section 29. No Third-Party Beneficiaries ................................. 37
Section 30. Memorandum of Lease and Quitclaim ............................ 37
Section 31. No Agency, Partnership, or Joint Venture ..................... 38
Section 32. No Merger .................................................... 38
Section 33. Signs ........................................................ 38
Section 34. No Waiver .................................................... 38
Section 35. Financial Statements ......................................... 39
Section 36. Limitation of Liability ...................................... 39
Section 37. Notices ...................................................... 39
Section 38. Brokerage Commission ......................................... 40
Section 39. Authorization ................................................ 40
Section 40. Extension Option ............................................. 40
Section 41. Holding Over ................................................. 43
Section 42. Tenant Right to Terminate .................................... 43
Section 43. Surrender .................................................... 43
Section 44. Mortgagee Protection ......................................... 43
Section 45. Right of First Lease Offer ................................... 44
Section 46. Joint and Several ............................................ 45
Section 47. Covenants and Conditions ..................................... 45
i
<PAGE>
Schedule of Exhibits and Exhibit Document
The Exhibits listed below are set forth in the document entitled
"CHESTNUT BAY LLC, a California limited liability company and HEARTPORT, INC.,
a Delaware corporation INDUSTRIAL BUILD-TO-SUIT LEASE EXHIBIT DOCUMENT", (the
"Exhibit Document") of even date herewith, which Exhibit Document is
incorporated into this Lease as though permanently attached hereto and any
interpretation of any term of this Lease referencing any one or more of the
Exhibits listed below shall reference the documents attached to the Exhibit
Document.
Schedule of Exhibits
Exhibit A. Real Property Description, Adjacent Real Property Description,
Common Areas, Roadway Easement
Exhibit B. Site Plan
Exhibit C. Work Letter
Exhibit D. Commencement Date Memorandum
Exhibit G. Schedule of Known Contaminants
Exhibit I. Environmental Documents
Exhibit I-1. R&H Landlord Redacted Purchase Agreement
Exhibit I-2 R&H Access Agreement
Exhibit J. Estoppel Certificate
Exhibit J-1. R&H SAND
Exhibit K. Landlord's Completion Certificate
Exhibit L. Short Form Memorandum
ii
<PAGE>
Basic Lease Information
Effective Date: September 19, 1997
Landlord: Chestnut Bay LLC, a California limited liability company
Landlord's Address For Notice ("Landlord's Address"): c/o The Nicholson
Company, 75 Cristich Lane, Campbell, CA 95008 Attn: Michael Newbro
Tenant: Heartport, Inc., a Delaware corporation
Tenant's Address For Notice ("Tenant's Address"): Heartport Building, Woodside
Technology Center, 800 Chestnut Street, Redwood City, CA 94063
Real Property ("Real Property"): the approximately 5.98 acre parcel of land
situated in the City of Redwood City, County of San Mateo, State of
California, described in attached Exhibit A which shows the intended lot line
adjustment between the Real Property and Adjacent Real Property. In the event
the lot line adjustment is not accomplished prior to the Commencement Date,
the Real Property will be considered to be fifty-one and four tenths percent
(51.4%) of the total square footage of the combined 11.64 acres of the
combined Real Property and Adjacent Real Property parcels (as shown in Exhibit
A) until such time as the lot line adjustment is accomplished in substantial
accordance with Exhibit A.
Adjacent Real Property ("Adjacent Real Property"): the approximately 5.66 acre
parcel of land situated adjacent to the Real Property in the City of Redwood
City, County of San Mateo, State of California, described in attached Exhibit
A. which shows the intended lot line adjustment between the Real Property and
Adjacent Real Property. In the event the lot line adjustment is not
accomplished prior to the Commencement Date, the Adjacent Real Property will
be considered to be forty-eight and six tenths percent (48.6%) of the total
square footage of the combined 11.64 acres of the combined Real Property and
Adjacent Real Property parcels (as shown in Exhibit A) until such time as the
lot line adjustment is accomplished in substantial accordance with Exhibit A.
Premises ("Premises"): all that rentable area contained within and including
the Shell Improvements, together with Tenant's rights under this Lease to use
and enjoy the parking, landscaping and facilities on the Common Area.
Approved Reciprocal Easement Agreement ("AREA"): Any agreement(s) placed upon
the Real Property and the Adjacent Property and approved in writing by Tenant
(which approval shall not be unreasonably withheld or delayed), and any
amendments, additions or supplements thereto so approved, which provides for
reciprocal easements and/or covenants, conditions and restrictions pertaining
to the common areas located on the Real Property and the Adjacent Real
Property, which agreements shall not materially interfere with Tenant's rights
under this Lease or with Tenant's access to the Premises (collectively
"AREA"). If a conflict between any such AREA and this Lease occurs, the
provisions of the AREA shall prevail provided that the AREA is
iii
<PAGE>
recorded in the Official Records of the County of San Mateo and is binding
upon the Adjacent Real Property as well as the Real Property.
Common Area ("Common Area"): The area shown on Exhibit A hereto, located on
the Real Property to be improved by Landlord for parking and landscaping
purposes including without limitation parking areas which include the minimum
number of parking spaces required by the City of Redwood City for Tenant's use
of the Premises. The terms of any AREA may modify the Common Area to include
areas covered by the AREA, in which event Tenant shall be entitled to the
greater of a) the minimum number of parking spaces required by the City of
Redwood City for Tenant's use of the Premises, or (b) a share of the total
parking spaces in the Common Area proportionate to the minimum number of
parking spaces required by the City of Redwood City for each tenant's use of
the Project. Until execution of an AREA, the Common Area shall include the
Roadway Easement.
Exhibit Document ("Exhibit Document"): The document of Exhibits listed in the
Schedule of Exhibits above, of even date herewith, which with each Exhibit
attached thereto is incorporated into this Lease by this reference.
Project ("Project"): Woodside Technology Center located on the Real Property
and the Adjacent Real Property.
Shell Improvements ("Shell Improvements"): a two story office and light
industrial building shell, to be constructed by Landlord as provided in this
Lease, and to contain approximately 132,726 rentable square feet and other
improvements as shown on the Site Plan attached as Exhibit B.
Roadway Easement ("Roadway Easement"): a ten foot (10') wide strip of land
located along the eastern border of the Real Property and contained within the
Adjacent Real Property for the non-exclusive ingress and egress of Tenant for
the Term of this Lease as shown in Exhibit A.
Term ("Term"): Twelve (12) years, subject to extension as provided in this
Lease.
Estimated Shell Substantial Completion Date ("Estimated Shell Substantial
Completion Date"): July 15, 1998
Initial Base Rent Per Month ("Base Rent"): $1.56 per rentable square foot per
month.
Security Deposit ("Security Deposit"): Two Hundred Eighty-Six Thousand Dollars
($286,000.00).
Security ("Security"): Additional collateral in the form of: a cash deposit
to be held in an escrow account under instructions affording Landlord the
absolute right to withdraw funds on Landlord's sworn statement of, and in the
amount of, any Tenant default; or if required by Landlord's senior lender for
the loan selected by Landlord, an irrevocable letter of credit issued by a
bank reasonably acceptable to Landlord and Landlord's lender and naming
Landlord as beneficiary.
iv
<PAGE>
The maximum amount of the Security and an agreement for reductions in such
amount upon Tenant's achievement of certain financial milestones, is set forth
in that certain confidential letter agreement ("Confidential Letter
Agreement") executed between Landlord and Tenant of even date herewith and
incorporated herein by reference.
Broker ("Broker"): CB Commercial Real Estate Group, Inc.
Lease Year ("Lease Year"): During the Term, each period of approximately 365
days. The first period will commence on the Commencement Date and end on the
day prior to the first anniversary of that period and each successive period,
unless Landlord and Tenant agree to some other period.
Permitted Use ("Permitted Use"): Uses typical to a high technology research
and development light industrial park and related ancillary office uses. No
other uses are permitted without the Landlord's prior written consent, which
shall not be unreasonably withheld, delayed or conditioned.
The terms and provisions in the Basic Lease Information above and the
incorporated Exhibit Document and the Confidential Letter Agreement") are a
part of the following Lease. The definitions in the Basic Lease Information
apply to all references in this Lease to those terms and provisions. If this
Lease and the Basic Lease Information contain conflicting definitions, the
Basic Lease Information definition will control.
Landlord (______landlord's initials) and Tenant (______tenant's initials)
agree.
v
<PAGE>
LEASE
This Industrial Build-to-Suit Lease ("Lease") dated as of September 19,
1997, is entered into between Chestnut Bay LLC, a California limited liability
company ("Landlord") and Heartport, Inc., a Delaware corporation ("Tenant").
Section 1. Premises.
Landlord leases to Tenant the Premises. The Real Property will be improved
with the Shell Improvements to be constructed by Landlord. The Shell
Improvements are described in the Work Letter, attached as Exhibit C. The
building rentable area within and the Shell Improvements shall be determined
by Landlord's architect as of the Commencement Date and provided to Tenant in
writing (including the detail of Landlord's architects calculations) within
ten (10) days of the Commencement Date. The term "Building Rentable Area"
shall mean the floor area with measurements from the line identified in
Exhibit A along the outside of the exterior walls of the Shell Improvements as
the "Building Rentable Area Boundary" and shall include Tenant's exclusive
covered loading dock bays. Tenant shall have the right for thirty (30) days
after the receipt of Landlord's architects calculations, to have Tenant's
architect measure the square footage of the Building Rentable Area within the
Premises and to confirm Landlord's architects calculations. If Tenant elects
to measure the Premises and delivers to Landlord a notice stating that Tenant
disagrees with Landlord's architect's measurement of the Building Rentable
Area of the Premises, Landlord and Tenant and their architects shall meet
within ten (10) days following Landlord's receipt of such notice and attempt
to resolve the dispute. If the parties are unable to resolve such dispute
within such ten (10) day period, Landlord's and Tenant's architects shall
select a neutral architect, not previously employed in any capacity by either
party or their respective architects, who is qualified and licensed to make
such measurement and calculation, which neutral architect shall be mutually
acceptable to Landlord and Tenant, in their reasonable judgment and Landlord
and Tenant shall make available to the neutral architect all information,
including without limitation CAD drawings, requested by the neutral architect,
and shall cause such neutral architect to measure the Building Rentable Area
of the Premises, measured as set forth above, as soon as practicable. Such
neutral architect's measurement shall be the final determination of the
Building Rentable Area of the Premises. The cost of the measurement by the
neutral architect shall be shared equally by the parties, unless either
party's initial measurement differs from the final measurement by more than
five percent (5%) of the final measurement, in which event such cost shall be
paid by the party whose initial measurement is furthest from the final
measurement.
Section 2. Term.
(a) Commencement Date. The Term of this Lease will commence ("Commencement
Date") on the earliest of the following dates: (i) the date of Shell
Substantial Completion (defined in Exhibit C); or (ii) the date which would
have been the date of Shell Substantial Completion but for Tenant Delays
(defined in Exhibit C). The Term of the Lease will continue for the period of
1
<PAGE>
time specified as the Term or until this Lease is terminated as otherwise
provided for in the Lease.
(b) Rental Commencement Date: The payment of Rent shall commence ("Rental
Commencement Date") on the earliest of the following dates: (i) One Hundred
Twenty (120) days following the Commencement Date, plus any Landlord Delay as
defined in Exhibit C (the "Outside Rental Commencement Date"); or (ii) the
date Tenant occupies the Premises for the conduct of business. Determination
of the Rental Commencement Date shall not affect the parties' rights to Rent
or Rent credit pursuant to 2(d) below.
(c) Commencement Date Memorandum. Following the Rental Commencement Date,
Tenant will execute and deliver to Landlord a memorandum of the Commencement
Date and Rental Commencement Date in the form of attached Exhibit D
("Commencement Date Memorandum"). The Commencement Date Memorandum must
acknowledge: (i) the Commencement Date; (ii) the Rental Commencement Date;
(iii) the final square footage of the Premises; and (iv) Tenant's acceptance
of the Premises subject to completion of any punch list items.
(d) Delays. If Shell Substantial Completion has not occurred on the Estimated
Shell Substantial Completion Date, as it may be extended by any Unavoidable
Delays (defined in Exhibit C) and Tenant Delays, this Lease will not terminate
but Tenant shall receive a Rent credit of one day free rent for each day of
delay until the earlier to occur of: thirty (30) days following the Estimated
Shell Substantial Completion Date; or the Shell Substantial Completion Date.
If Shell Substantial Completion has not occurred for thirty (30) days after
the Estimated Shell Substantial Completion Date, as it may be extended by any
Unavoidable Delays and Tenant Delays, this Lease will not terminate but Tenant
shall receive a Rent credit of two days free rent for each day of delay
following the thirtieth day of delay until Shell Substantial Completion. The
Rent credits provided in this Section 2(d) and Tenant's rights under Section
2(f) shall serve as Tenant's sole and exclusive remedy for any delay of Shell
Substantial Completion.
(e) Early Entry. With the prior written consent of Landlord, not to be
unreasonably withheld, delayed or conditioned, Tenant may, at Tenant's own
risk, enter the Shell Improvements prior to the date of Shell Substantial
Completion. The entry may be made solely to install the Tenant Improvements,
Tenant's trade fixtures and equipment and shall be subject to the following
terms and conditions: (i) Tenant's early entry may not interfere with the
construction of any Shell Improvements or cause labor difficulties; (ii)
Tenant's early entry must be on all the terms and conditions of this Lease,
other than the obligation to pay Base Rent; (iii) Tenant must provide evidence
of insurance that is satisfactory to Landlord; (iv) Tenant must indemnify,
defend, and hold harmless Landlord and Landlord's agents, employees, and
contractors against all claims, liability, and damages arising from the early
entry; (v) Tenant's early entry does not constitute the commencement of the
Lease; and (vi) Tenant must pay utility charges reasonably allocated by
Landlord. The date which Tenant enters the Premises for the commencement of
construction of Tenant Improvements (other than work relating to utilities or
other matters under or affecting the slab to be installed by Landlord) shall
be identified in Landlord's approval as the "Early Entry Date."
2
<PAGE>
(f) Outside Shell Completion Date and Tenant Purchase Option. Notwithstanding
anything to the contrary in this Lease, if Shell Substantial Completion has
not occurred by April 30, 1999, plus any delays that are Tenant Delays, either
Landlord or Tenant shall have the right by written notice to the other party,
with a copy to Landlord's construction lender, within thirty (30) days
thereafter to terminate this Lease and this Lease shall thereupon terminate,
provided, however, that notice terminating this Lease shall be ineffective if
within thirty (30) days after such termination notice Landlord's construction
lender gives Tenant written notice that Landlord's construction lender elects
in writing to cause the construction of the Shell Improvements to be
completed, by foreclosure on the Real Property or otherwise, and thereafter
promptly proceeds with such completion and Shell Substantial Completion occurs
no later than July 31, 1999, plus any delays that are Unavoidable Delays or
Tenant Delays.
(i) In the event of a Landlord election to terminate this Lease pursuant
to this subsection 2(f), Tenant shall have the right, for a period of thirty
(30) days following Landlord's termination notice, to purchase the Real
Property and completed Common Area improvements and Shell Improvements (the
"Option Property") at their then Fair Market Purchase Price (defined herein).
Tenant shall exercise such right by delivering to Landlord during said
thirty day period Tenant's proposed purchase contract which shall include
reasonable and customary terms for the acquisition of similarly situated real
property and improvements (which at a minimum shall provide for close of
escrow no later than forty-five days following the date of execution of the
agreement and shall relieve Landlord of all liability with respect to the
Option Property following close of escrow) (the "Purchase Agreement") and
shall state Tenant's proposed Fair Market Value Purchase Price (collectively,
"Tenant's Purchase Notice"). As used in this Section, "Fair Market Purchase
Price" shall be deemed to mean the arm's length purchase price between
parties of equal bargaining position for real property and improvements of a
similar type, design, and quality as the Real Property, Common Area
improvements and Shell Improvements, in the same or similar-quality
geographic area in the mid Peninsula, Highway 101 corridor market area in
which the Premises are situated under market conditions existing at that time
in the mid Peninsula, Highway 101 corridor market area. In determining the
Fair Market Purchase Price the parties or their appraiser(s) shall consider
cost replacement analysis, income analysis as well as sales of comparable
real property and improvements analysis for light industrial and office
purposes comparable in size, location, and type of building, age, quality,
layout and condition of the Shell Improvements and Real Property, with
comparable parking rights and landscaping. Sales of comparable property that
are not arms-length negotiated transactions (as with a tenant that owns
equity in a building) shall not be considered in determining the Fair Market
Purchase Price. The Fair Market Purchase Price shall not include any amount
attributable to Tenant's Tenant Improvements, Tenant's Alterations (defined
herein), or other improvements made or paid for by Tenant (whether by
amortization during the initial Lease Term or otherwise), and the Fair Market
Purchase Price shall take into account whether there is any brokerage
commission payable by Landlord upon sale. If the parties cannot agree on the
Fair Market Purchase Price of the Option Property within thirty (30) days of
Tenant's purchase notice, each party, at its cost and by giving notice to the
other party, shall, within ten (10) days thereafter, appoint a real estate
appraiser with at least five (5) years' full-time commercial appraisal
experience in the geographic area in which the Option Property is located, to
appraise and determine the then Fair Market Purchase Price and the Fair
Market Purchase Price shall be conclusively determined as
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follows:
(ii) If one party does not appoint an appraiser within the time period
in Section 2(f)(i), the appraiser appointed by the other party shall be the
sole appraiser and shall determine the Fair Market Purchase Price.
Notwithstanding this Section, either party shall have the right to appoint a
replacement appraiser if the appraiser originally selected becomes unable to
perform as required hereunder.
(iii) If the two (2) appraisers are so appointed by the parties, they
shall meet promptly and attempt to appraise and determine the Fair Market
Purchase Price. If they are unable to agree within thirty (30) days after
the second appraiser has been appointed, they shall attempt to select a third
appraiser who meets the qualifications stated in Section 2(f)(i) within ten
(10) days after the last day the two appraisers are given to determine the
Fair Market Purchase Price. If they are unable to agree on a third
appraiser, either of the parties to this Lease, by giving ten (10) days'
notice to the other party, can apply to the presiding judge of the Superior
Court for the county in which the Premises are located for the selection of a
third appraiser who meets the qualifications stated in Section 2(f)(i). Each
of the parties shall bear one-half (1/2) of the cost of appointing the third
appraiser and of the third appraiser's fee. The third appraiser, however
selected, shall be a person who has not previously acted in any capacity for
either party.
(iv) Within twenty (20) days after appointment of the third appraiser,
each party's appraiser shall submit to the third appraiser a written
statement of such appraisers determination of the Fair Market Purchase Price
of the Option Property, determined as provided in this Lease, together with
written information relating to comparable transactions and adjustments,
replacement cost estimates, income analysis and other relevant information
used in making such determination, and a copy of such submission shall be
provided to the other party. Within five (5) days thereafter , each party
shall have the right to submit a response to the other party's submission.
Within ten (10) days after the last of such responses are received, the third
appraiser shall select either the Fair Market Purchase Price determined by
Landlord's appraiser or the Fair Market Purchase Price determined by Tenant's
appraiser as the Fair Market Purchase. If the third party appraiser
considers information not submitted by either party in making such
determination, the third party appraiser shall advise each of the parties'
appraisers and permit them to comment on such information before making such
determination. The third appraiser may not determine a Fair Market Purchase
Price other than a Fair Market Purchase Price submitted by one of the
parties. The Fair Market Purchase Price chosen by the third appraiser shall
be the Fair Market Price for the sale of the Real Property and Shell
Improvements to Tenant.
(g) After the Fair Market Price is determined, Landlord and Tenant shall
execute a Purchase Agreement reflecting the Fair Market Purchase Price. If
the parties cannot agree on the terms of the Purchase Agreement within one
hundred sixty (160) days of Tenant's Purchase Notice despite diligent good
faith efforts at negotiating such contract and the determination of a Fair
Market Purchase Price, Landlord shall provide Tenant with Landlord's good
faith final counter offer which may be rejected or accepted by Tenant within
ten (10) days' of receipt from Landlord. In the event Tenant rejects or fails
to respond to Landlord's final counter offer within
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said ten day period this Lease shall terminate and the parties shall have no
further obligation to each other hereunder except as specifically set forth
herein.
Section 3. Rent.
(a) Initial Base Rent. Tenant will pay to Landlord, at any address that
Landlord may designate in writing to Tenant (which, on request of Tenant,
shall be a bank account to which Tenant may make wire transfers), the Base
Rent. The rent must be paid, without the need for notice, demand, offset, or
deduction, commencing on the Rent Commencement Date and continuing thereafter
on the first day of each calendar month during the Term. If the Term
commences or ends on a date other than the first or last day of a month,
Tenant must pay on the Rent Commencement Date or the first day of the last
month a Base Rent prorated on a per diem basis with respect to the portion of
the month within the Term. All sums other than Base Rent that Tenant is
obligated to pay under this Lease will be deemed to be additional rent due,
regardless of whether those sums are designated as "additional rent." The term
"Rent" means the Base Rent and all additional rent payable under this Lease.
(b) Scheduled Base Rent Increases. The Base Rent shall be subject to
adjustment on each anniversary of the Commencement Date during the initial
term (the "Adjustment Date(s)") by the annual percentage increase of the
Consumer Price Index, All Urban Consumers (CPI-U), San Francisco-Oakland-San
Jose Area, All items (standard reference base period 1982-84 = 100) published
by the United States Department of Labor, Bureau of Labor Statistics (the
"Index") for the twelve month period preceding the month of the Adjustment
Date in question. In no case shall the Base Rent increase less than three
percent (3%) nor more than six percent (6%) on any Adjustment Date. If the
Index is changed so that the base year differs from that in effect when the
term commences, the Index shall be converted in accordance with the conversion
factor published by the United States Department of Labor, Bureau of Labor
Statistics. If the Index is discontinued or revised during the term, such
other government index or computation with which it is replaced shall be used
in order to obtain substantially the same result as would be obtained if the
Index had not been discontinued or revised.
(c) Shell Upgrade Costs. Tenant may incur Shell Upgrade Costs which shall be
amortized and included in Base Rent by amendment to this Lease pursuant to
Section 5(c) of Exhibit C hereto.
Section 4. Utilities.
Landlord shall, at its expense, provide connections for utilities in
accordance with the Building Shell Definition (defined in and attached to
Exhibit C hereto) and Approved Working Drawings (defined in Exhibit C).
Tenant will make all arrangements and pay all charges for water, sewer,
telephone, gas, electricity, and other utilities supplied to or used on the
Premises including, without limitation, paying any meter deposits and fees for
the connection of Tenant's service through the utility connections provided by
Landlord in accordance with the Building Shell Definition. Commencing on the
Commencement Date, Tenant will arrange for service in its
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name and pay all charges for water, sewer, telephone, gas, electricity, and
other utilities supplied to or used on the Premises. Landlord will not be
liable to Tenant for any interruption in or curtailment of any utility
service, nor will any interruption or curtailment constitute constructive
eviction or grounds for abatement of rent.
Section 5. Taxes.
(a) Real Property Taxes. Landlord will pay to the proper taxing authorities,
as they become due, all Real Property Taxes applicable to the Real Property
and the Adjacent Real Property, and commencing one hundred twenty (120) days
following the Early Entry Date, plus any Landlord Delays or any days that
Tenant's work on Tenant's Improvements is voluntarily interrupted by Landlord
pursuant to Section 2(e)(i) (and in any case no later than the Rent
Commencement Date), Tenant will reimburse Landlord for Real Property Taxes
imposed on the Real Property during the Lease Term, as it may be extended, as
provided in clause (b) below. The term "Real Property Taxes" includes the
following to the extent that they are imposed by or payable to a governmental
or quasi governmental entity, are a lien or assessment on, are measured by the
value of or income from, or are imposed on account of the ownership or
operation of, the Real Property and improvements or any interest therein: (i)
real property taxes; (ii) possessory interest taxes; (iii) business, license,
or use fees, (iv) excises; (v) transit charges; (vi) housing fund assessments;
(vii) open space charges; (viii) childcare fees; (ix) school fees; (x) any
other assessments, levies, fees, or charges, general and special, ordinary and
extraordinary, unforeseen and foreseen (including fees "in-lieu" of any tax or
assessment) that are assessed, levied, charged, confirmed, or imposed by any
public authority upon the Real Property (including the Premises thereon) or
its operations; (xi) all taxes, assessments, or other fees imposed by any
public authority on or measured by any Rent or other charges payable under
this Lease, including any gross income tax or excise tax levied by the local
government authority, the federal government, or any other governmental body
with respect to receipt of rent, or upon, with respect to, or by reason of,
the possession, leasing, operation, management, maintenance, Tenant
improvement, post Commencement Date alteration, repair, use, or occupancy by
Tenant of the Premises or any portion of the Real Property, or on this
transaction or any document to which Tenant is a party creating or
transferring an interest in the Premises or Real Property; and (xii) any tax
imposed in substitution, partially or totally, of any tax previously included
within the definition or any additional tax, the nature of which was
previously included within the definition, together with the costs and
expenses (including attorney fees) of changing any taxes or seeking the
reduction in or abatement, redemption, or return of any Real Property Taxes
imposed on the Real Property during the Term, as it may be extended, but only
to the extent of any reduction, abatement, redemption, or return.
Notwithstanding any other Lease provision, nothing contained in this Lease
will require Tenant to pay (s) any franchise, corporate, succession, estate,
or inheritance, transfer, sales, or use tax of Landlord; (t) any income,
profits, or revenue tax or charge on or measured by the general or net income
of Landlord (as opposed to rents, receipts, or income attributable to
operation or ownership of the Real Property); (u) any pre-Commencement Date
imposition, fee, cost, expense or payment (whether paid prior to the
Commencement Date or imposed prior to the Commencement Date and paid through
ongoing installments during the Term), required to obtain the entitlements
necessary for the subdivision or resubdivision of the
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Real Property or Adjacent Real Property, the initial construction or financing
of the Shell Improvements or improvements to the Real Property or the Common
Area, including those relating to or arising under any development agreement,
any government permit, or other approval or agreement, specifically including
payment of costs made in connection with any traffic demand management
programs or transportation impact mitigation fees imposed prior to the
Commencement Date; (v) any Real Property Taxes applicable to the Adjacent Real
Property (except as modified by the AREA); (w) any Real Property Taxes
applicable to periods not within the Term, as it may be extended; or (x) any
interest or penalties imposed in connection with Landlord's failure to pay
such taxes, assessments, levies and other charges prior to delinquency (and
not caused by a default of Tenant hereunder).
(b) Tax Reimbursements. During the Lease Term, as it may be extended, Tenant
will pay to Landlord an amount equal to the Real Property Taxes on the Real
Property then due within fifteen (15) days after delivery to Tenant by
Landlord of an invoice (or, as to real property taxes, no later than twenty
(20) days prior to delinquency, if later). Landlord may, at Landlord's
option, deliver statements from different taxing authorities at different
times or deliver all statements at one time. If Tenant has previously
defaulted in payment of any Real Property Tax, or in the event of Tenant's
transfer of all or more than fifty percent (50%) by area of its interest in
this Lease, other than to an Affiliate (defined herein), or as to any
transferee of Tenant of any part of the Premises (other than an Affiliate)
Landlord may elect to collect Real Property Taxes from Tenant in advance, on a
monthly or quarterly basis, based upon Landlord's reasonable estimate of the
Real Property Taxes. In such event, if the amount of monthly or quarterly
payments for estimated Real Property Taxes received by Landlord from Tenant
are more or less than the actual Real Property Taxes due, an itemized
statement of which (together with receipted tax bills for all items) shall be
delivered to Tenant by Landlord within sixty (60) days after close of each
fiscal tax year during the Lease Term, or as soon as reasonably possible
thereafter, and an appropriate adjustment will be made by Landlord and Tenant
and any balance due paid or refunded within thirty (30) days after such
reconciliation. Landlord may also elect to have Real Property Tax invoices
sent directly by the taxing authority to Tenant if the Premises are the sole
rentable Improvements on the Real Property, in which case Tenant shall pay
such invoices in full and in a timely manner to avoid penalty with a copy of
evidence of payment to Landlord. Real Property Taxes for partial tax fiscal
years, if any, falling within the Term, will be prorated per diem, based on
the amount of any Real Property Tax applicable during the Term, as it may be
extended. Tenant's obligations for Real Property Taxes for the last full or
partial year of the Term will survive the expiration or earlier termination of
this Lease. If Landlord voluntarily prepays any assessment or Real Property
Tax that would otherwise have been payable in installments during the Term, as
it may be extended, Tenant shall nevertheless have the right to pay such
assessment or Real Property Tax in installments when and as it would have been
due absent such prepayment.
(c) Contesting Real Property Taxes. Landlord shall promptly provide Tenant
with copies of all current Real Property Tax bills and assessments upon
receipt or upon Tenant's request. Tenant shall have the right to contest in
good faith any material increase in any Real Property Tax or assessment with
the appropriate government authorities, provided that Tenant takes appropriate
measure to protect Landlord's property from liens relating to such disputed
tax and has
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reimbursed Landlord for any such tax actually paid by Landlord as set forth
above. Landlord agrees to cooperate with Tenant in prosecuting any appeal
taken by Tenant as a result of such increase, at no cost or expense to
Landlord, and shall promptly pay to Tenant any refund or reduction received by
Landlord (less any cost to Landlord in securing the refund or reduction) that
was previously paid or reimbursed to Landlord by Tenant.
(d) Re-Appraisal on Transfer. Real Property Taxes include any increase in
Real Property Taxes attributable to a reappraisal of the Real Property on
account of a sale, foreclosure, or other financing (including without
limitation ground leases) or change of ownership of the Real Property
(including, without limitation, transfers of ownership interests in Landlord)
by Landlord within the meaning of Article XIIIA of the California Constitution
and applicable law ("Transfer Re-Appraisal Increase"). The foregoing
notwithstanding, Landlord shall be obligated to pay, at Landlord's expense, a
portion of any such Transfer Re-Appraisal Increase for any transfer which
occurs after the fifth (5th) Lease Year. The portion of the Transfer
Re-Appraisal Increase to be paid by Landlord shall be equal to eighty percent
(80%) of the Transfer Re-Appraisal Increase due and paid for the first
12-month period after such increase, sixty percent (60%) of the Transfer
Re-Appraisal Increase due and paid for the second 12-month period after such
increase, forty percent (40%) of the Transfer Re-Appraisal Increase due and
paid for the third 12-month period after such increase and twenty percent
(20%) of the Transfer Re-Appraisal Increase due and paid for the fourth
12-month period after such increase. Following the fourth 12-month period
after such increase, all of the Transfer Re-Appraisal Increase shall be
included in annual Real Property Taxes paid by Tenant under this Lease.
(e) Personal Property Taxes. During the Term, as it may be extended, and prior
to delinquency, Tenant will pay all taxes and assessments levied on trade
fixtures, Alterations, additions, improvements, inventories, and other
personal property located or installed on the Premises by Tenant. Tenant will
also provide Landlord copies of receipts for payment of all those taxes and
assessments. To the extent any taxes are not separately assessed or billed to
Tenant, Tenant will pay the amount as invoiced by Landlord. Tenant's
obligations for Personal Property Taxes for the last full or partial year of
the Term will survive the expiration or earlier termination of this Lease
Section 6. Net Lease; Common Areas; Audit Rights.
(a) Net Lease. This is a "net lease" and the Rent will be paid by Tenant and
be received by Landlord without any deduction or offset whatsoever by Tenant,
foreseeable or unforeseeable. Except as expressly provided to the contrary in
this Lease, Landlord will not be required to make any expenditure, incur any
obligation, or incur any liability of any kind in connection with this Lease
or the maintenance, operation, or repair of the Premises during the Term.
Nothing in this Lease shall obligate Tenant to pay or reimburse Landlord for
Landlord's costs incurred in the development, construction, or financing of
the Property except as expressly set forth herein.
(b) Common Areas.
(i) Landlord covenants that the Common Areas shall be available without
further charge to
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Tenant for the nonexclusive use (as defined in Section 6(b)(iv) of Tenant
during the full Term of this Lease or any extension of the Term, provided that
the condemnation or other taking by any public authority, or sale in lieu of
condemnation, of any of the Common Areas shall not constitute a violation of
this covenant. Landlord shall also provide up to ten (10) parking spaces in a
number and location reasonably adjacent to the Building as reasonably
designated by Landlord which shall be signed as reserved exclusively for
Tenant's visitors to the Premises. Landlord specifically reserves the right
to change the location, size, configuration, design, layout, and any other
aspects of the parking provided such changes do not reduce the number of
spaces below the minimum number of parking spaces provided in the definition
of "Common Area" nor materially impair Tenant's ability to use the Premises as
set forth in Section 10. Landlord may temporarily close off or restrict
access to parking from time to time as necessary to enable construction,
environmental remediation, alteration, or improvements, without incurring any
liability to Tenant and without any abatement of Rent under this Lease
provided any such temporary access restriction shall be so accomplished as to
minimize inconvenience to Tenant and the least possible interference with
Tenant's truck access to the Premises. Tenant's continued right to use the
parking spaces is conditioned on Tenant's abiding by all rules and regulations
prescribed from time to time for the orderly operation and use of the Project
parking. Tenant shall use all reasonable efforts to ensure that Tenant's
employees and visitors also comply with such rules and regulations. This
Lease shall be subordinate to those items listed as Exceptions 1 through 12 of
that Title Policy for the Real Property dated as of April 29, 1997 and any
subsequently executed AREA.
(ii) Landlord shall keep or cause to be kept all Common Areas in a neat,
clean, orderly and well maintained condition, properly lighted and landscaped,
and shall promptly repair any damage to their facilities, but all expenses in
connection with the Common Areas ("Common Area Expenses ") shall be charged in
the manner set forth in Section 6(b)(iii). Common Area Expenses shall include
but shall not be limited to all sums expended by Landlord in connection with
the Common Areas for all general maintenance and repairs, resurfacing,
painting, restriping, cleaning, sweeping, and janitorial services; refuse
removal; competitively priced management fees, which shall not exceed five
percent (5%) of the Common Area Expenses; planting and landscaping; lighting
and other utilities; directional signs and other markers and bumpers;
personnel to implement these services and to police the Common Areas; required
fees or charges levied pursuant to any governmental requirements; public
liability and property damage insurance on the Common Areas, which shall be
carried and maintained by Landlord with limits as reasonably determined by
Landlord; and, where charged to Landlord, all expenses in Sections 5, 7, and
8, provided that no expense excluded from Tenant's reimbursement obligations
under Section 5(a) or any other provision of this Lease shall be included and
provided further that no expense paid by Landlord shall be double counted for
Tenant reimbursement purposes, and Real Property Taxes shall be determined and
paid as provided in Section 5. Landlord shall exercise reasonable diligence
to obtain reasonable prices for all sums expended by Landlord for Common Area
Expenses.
(iii) In December of each calendar year, or as soon as reasonably possible
thereafter, Landlord shall send Tenant an itemized statement, setting forth in
reasonable detail Landlord's reasonable estimate of Tenant's Common Area
Expenses for the following calendar year on a monthly or
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quarterly basis, at Landlord's option and Tenant agrees to pay Landlord
Tenant's Common Area Expenses then due within fifteen (15) days after receipt
of the statement and to make monthly or quarterly payments of Tenant's share
of Common Area Expenses thereafter. Any Common Area Expenses for the year in
which this Lease commences or ends shall be apportioned and adjusted based
upon the number of months or portions of months in which Tenant occupies the
Premises, commencing one hundred twenty (120) days following the Early Entry
Date, provided that Tenant's work on the Tenant Improvements has not been
interrupted or delayed by Landlord Delays or any days that Tenant's work on
Tenant's Improvements is voluntarily interrupted by Landlord pursuant to
Section 2(e)(i) (and in any case no later than the Rent Commencement Date)
and, provided Tenant is not in default hereunder, expiring when Tenant vacates
the Premises (and otherwise upon expiration of the Term), disregarding any
changes in such charges attributable to a period before or after the Lease
Term. If the amount of monthly or quarterly payments for Common Area Expenses
received by Landlord from Tenant are more or less than the actual Common Area
Expenses due for any Calendar Year, an itemized statement of which shall be
delivered to Tenant by Landlord within one hundred twenty (120) days following
the end of each Calendar Year, or a soon as reasonably possible thereafter, an
appropriate adjustment will be made by Landlord and Tenant and any balance due
paid or refunded within thirty (30) days after such reconciliation. All
charges in Section 6 for Common Area Expenses may be superseded and governed
by any AREA adopted for the Real Property and Adjacent Real Property.
(iv) For the use and benefit of Tenant, Tenant's agents, employees, customers,
licensees, and subtenants shall have the nonexclusive right in common with
Landlord's representatives, agents employees, customers and contractors
performing Landlord's obligations under this Lease, and other present and
future owners and tenants of the Real Property (and, to the extent set forth
in any AREA recorded for the Adjacent Real Property), and their agents,
employees, customers, licensees, and subtenants, to use the Common Areas
during the entire Term of this Lease, or any extension of the Term, for
ingress and egress, roadway, sidewalk, and automobile parking, provided that
Tenant and Tenant's employees shall park their automobiles in those areas
reasonably designated by Landlord from time to time (in consultation with
Tenant) for Tenant parking. To the extent practicable and within Landlord's
reasonable control, and except as may be set forth above or in any AREA,
Tenant shall at all times have 24-hour vehicular access to the Premises
including, without limitation, truck access.
(v) Tenant, in the use of the Common Areas, agrees to comply with the
reasonable rules and regulations as Landlord may adopt from time to time for
the orderly and proper operation of the Common Areas, which rules and
regulations shall not be inconsistent with this Lease and shall not interfere
with Tenant's right of vehicular and truck access to the Premises or Tenant's
other rights under this Lease.
(vi) Unless Landlord elects to provide trash collection as a part of the
Common Area maintenance, Tenant shall at Tenant's expense arrange for the
collection of trash in the Common Areas located on the Real Property, in which
event Landlord shall not charge Tenant for any costs of trash removal on the
Real Property and Adjacent Real Property.
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(vii) Landlord grants Tenant a non-exclusive access Ad for ingress and egress
over the Roadway Easement for the Term of this Lease, as it may be extended,
or until such time as an AREA is executed for the Real Property and Adjacent
Real Property granting Tenant similar access over the Roadway Easement. For
purposes of this Lease, and until superseded by an AREA, the Roadway Easement
shall be considered part of the Common Area under this Lease, provided,
however that Landlord may include no more than fifty-one and four tenths
percent (51.4%) of the common area expenses (as defined in 6(b)(ii)), of such
Roadway Easement in Common Area Expenses and no more fifty-one and four tenths
percent (51.4%) of Real Property Taxes (as defined in 5(a)) of such Roadway
Easement in Real Property Taxes. Upon completion of improvements to the
Adjacent Real Property, Tenant's contribution to Common Area Expenses and Real
Property Taxes for the Roadway Easement shall be equitably reduced, eliminated
or reciprocated by the occupants of the Adjacent Real Property.
(c) Tenant's Audit Rights. Landlord shall maintain accurate books and records
showing all costs and expenditures relating to the Real Property, the
Premises, and the Common Area, for a period of not less than three (3) years
following each applicable calendar year. Following Landlord's delivery of
Landlord's statement of such costs for the previous calendar year Tenant shall
have the right, by written request to Landlord given no later than ninety (90)
days following the delivery of Landlord's statement, at Tenant's sole cost and
expense, to examine, to copy and to have an audit conducted of all books and
records of Landlord pertaining to Common Area Expenses and Real Estate Taxes
for the preceding three year period as they apply to Tenant's review of the
current Landlord statement only. Any audit shall be conducted by an
independent auditing firm, reasonably and timely approved by Landlord and
retained by Tenant on a non-contingency fee basis. All expenses of the audit
shall be borne by Tenant unless such audit discloses an overstatement of
Tenant's share of Common Area Expenses or Real Estate Taxes of five percent
(5%) or more, in which case Landlord shall within thirty (30) days reimburse
Tenant for the reasonable cost of the audit. If the auditing firm determines
that Tenant has made an underpayment or overpayment, an appropriate adjustment
will be made by Landlord and Tenant and any balance due paid or refunded
within thirty (30) days after such determination. Absent a timely Tenant
request and audit, or in the event any such audit is not completed and
presented to Landlord within one hundred twenty (120) days of delivery of
Landlord's statement, Landlord's statement shall be deemed conclusively
binding between the parties.
Section 7. Insurance and Indemnity.
(a) Tenant's Obligations. Tenant will, at Tenant's expense, obtain and keep in
force at all times the following insurance:
(i)Trade Fixtures, Personal Property and Equipment. Casualty insurance
insuring all Tenant trade fixtures, personal property, furniture and
equipment, ("Tenant's Property") against fire, and extended coverage
(including "all risk", expediting expense, business interruption and law and
ordinance coverage), for the full replacement cost of Tenant's Property,
including electronic data processing equipment, (new without deduction for
depreciation) including boiler and machinery comprehensive form, if
applicable, covering damage to or loss of any equipment of Tenant with
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deductibles and the form and endorsements of the coverage as selected by
Tenant and reasonably and timely approved by Landlord, together with, at
Landlord's option, business income insurance against loss of business income
in an amount equal to the amount of business income for a period of twelve
(12) months commencing on the date of loss. The parties acknowledge that
Tenant, and not Landlord, shall be responsible for providing such insurance
coverage for Tenant's trade fixtures which may otherwise be Alterations
hereunder. If the property of Tenant's invitees is to be kept in the
Premises, the insurance should include warehouser's legal liability or bailee
customers' insurance for the full replacement cost of the property belonging
to invitees and located in the Premises.
(ii) General Liability Insurance. A policy or policies of commercial general
liability insurance (occurrence form) having a combined single limit of not
less than Five Million Dollars ($5,000,000) per occurrence and aggregate,
providing coverage for, among other things, blanket contractual liability,
premises, products and completed operations, and personal and advertising
injury coverage.
(iii) Workers' Compensation and Employer's Liability Insurance. Workers'
compensation insurance having limits not less than those required by state
statute and federal statute, if applicable, and covering all persons employed
by Tenant in the conduct of Tenant's operations on the Premises. This must
include the all states endorsement and, if applicable, the volunteer's
endorsement, together with employer's liability insurance coverage in the
amount of at least One Million Dollars ($1,000,000).
(b) Shell Improvements, Tenant Improvements, Common Area Improvements,
Alterations and Additional Insurance. Landlord shall maintain fire and
extended coverage (including "all risk", expediting expense coverage and law
and ordinance coverage), and at Landlord's option, earthquake insurance,
throughout the Term in an amount equal to the full replacement cost of the
Shell Improvements, Tenant Improvements, Common Area Improvements and
Alterations (new without deduction for depreciation), rental interruption or
equivalent loss of use insurance against loss of Rent in an amount equal to
the amount of Rent for a period of twelve (12) months commencing on the date
of loss, together with other insurance as may be required by Landlord's
lender, in its reasonable discretion, or by any governmental agency. The
parties acknowledge that Tenant, and not Landlord, shall be responsible for
insuring Tenant's trade fixtures which are otherwise Alterations hereunder.
Tenant will pay to Landlord an amount equal to the premiums due on insurance
within fifteen (15) days after delivery to Tenant by Landlord of an invoice
for any premiums. If Tenant has previously defaulted in payment of any
insurance premiums, or in the event of Tenant's transfer of all or more than
fifty percent (50%) by area of its interest in this Lease, other than to an
Affiliate (defined herein), or as to any transferee of Tenant of any part of
the Premises (other than an Affiliate) Landlord may, at Landlord's option,
elect to collect the premiums from Tenant in advance, on a monthly or
quarterly basis, based on Landlord's reasonable estimate of the premiums. If
the amount of monthly or quarterly payments for estimated premiums received by
Landlord from Tenant are more or less than the actual premiums due, an
appropriate adjustment will be made promptly by Landlord and Tenant. Landlord
shall exercise reasonable diligence to obtain competitively priced insurance
coverage for all insurance to be reimbursed by Tenant.
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(c) General Insurance Provisions.
(i) Insurance Companies. Insurance required to be maintained by Tenant and
Landlord will be written by companies licensed to do business in the state in
which the Premises are located and having a "General Policyholders Rating" of
at least A and financial standing of VIII, or a higher rating if required by a
lender having the first lien on the Premises, as set forth in the most current
issue of "Best's Insurance Guide."
(ii) Certificates of Insurance. Tenant and Landlord will deliver to the other
party certificates of insurance for all insurance required to be maintained by
Tenant or Landlord no later than seven (7) days prior to the date of
possession of the Premises. Each party will, at least five (5) days prior to
expiration of the policy required under this Lease, furnish the other party
with certificates of renewal or "binders." Each certificate will expressly
provide that the policies are not cancelable except after thirty (30) days'
prior written notice to Landlord and Tenant and any parties named as
additional insureds in this Lease. However, in the case of cancellation for
nonpayment of premium, the cancellation will not take effect until at least
(10) days' notice has been given to Landlord and Tenant. If Landlord or Tenant
fails to maintain any insurance required in this Lease, such party will be
liable for all losses and costs resulting from that failure, the other party
(the "Curing Party") will have the right, but not the obligation, to obtain
insurance on behalf of the party obligated to carry such insurance. In the
event Landlord is the Curing Party, Tenant will immediately on demand pay
Landlord the premiums on the insurance; and Landlord may declare a default
under this Lease. In the event Tenant is the Curing Party, premiums paid by
Tenant will be credited toward premiums due Landlord under this Section.
(iii) Additional Insureds. Landlord, any lender designated by Landlord in
writing and any property management company of Landlord for the Premises must
be named as additional insureds under all of the policies required by Section
7(a)(ii). which must provide for severability of interest. Tenant shall be
named as an additional insured under all policies required under Section 7(b).
(iv) Primary Coverage. All insurance to be maintained by Tenant must, except
for workers' compensation and employer's liability insurance, be primary,
without right of contribution from insurance of Landlord and any umbrella
liability policy or excess liability policy must provide primary insurance.
All insurance maintained by Landlord must be primary, without right of
contribution from insurance of Tenant. The limits of insurance maintained by
Landlord or Tenant will not limit Landlord's or Tenant's liability under this
Lease.
(v) Waiver of Subrogation. Tenant waives any right of recovery from the
Landlord, Landlord's officers and employees, and Landlord waives any right of
recovery from Tenant, Tenant's officers or employees, for any loss or damage
(including consequential loss) resulting from any of the perils insured
against under insurance required to be or actually carried by either party
under this Lease. This fully waives, for the benefit of Landlord and Tenant,
any rights and claims that might give rise to a right of subrogation in favor
of any insurance carrier. The coverage obtained by Landlord and Tenant
pursuant to this Lease must include, without limitation, a waiver of
subrogation endorsement.
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(d) Indemnification by Tenant. Landlord will not be liable for any loss or
damage to person or property caused by theft, fire, acts of God, acts of a
public enemy, riot, strike, insurrection, war, court order, requisition, or
order of government body or authority, or for any damage or inconvenience that
may arise through repair or alteration of any part of the Premises or failure
to make any repair, unless such damage or inconvenience is due to the gross
negligence or willful misconduct of Landlord. Tenant will indemnify and defend
Landlord, by counsel acceptable to Landlord, against any liabilities,
including reasonable attorney fees and court costs, arising out of or relating
to the following:
(i) claims of injury to or death of persons or, except to the extent covered
by Landlord's insurance, damage to property occurring or resulting directly or
indirectly from the use or occupancy of the Premises, or from activities of
Tenant, Tenant's invitees, or anyone about the Premises, or from any other
cause, except to the extent caused by Landlord's gross negligence or willful
misconduct;
(ii) claims for work or labor performed, or for materials or supplies
furnished to or at the request of Tenant in connection with performance of any
work done for the account of Tenant within the Premises; and
(iii) claims arising from any breach or default on the part of Tenant in the
performance of any covenant contained in this Lease.
The provisions of this Section 7(d) will survive the expiration or termination
of this Lease with respect to any claims or liability occurring prior to the
expiration or termination.
Section 8. Repairs and Maintenance.
(a) Landlord's Obligations. Subject to the terms of this Section, Landlord
shall, at its expense not to be reimbursed by Tenant under any provision of
this Lease, maintain all structural portions of the Shell Improvements,
including without limitation the structural portions of the roof, foundation,
and load-bearing portions of walls of the Shell Improvements, (excluding wall
coverings, painting, glass, and doors), and all structural portions of
improvements to the Common Area, including without limitation underground
utilities serving the Premises (excluding utilities in the floor beneath the
Shell Improvements other than the sewer trunk line) or the Common Area, and
soil compaction and subgrade preparation for the Common Area. Landlord will
not be required to make any repair resulting from:
(i) any alteration or modification to the Shell Improvements or to mechanical
equipment within the Shell Improvements performed after the Commencement Date
by, for, or because of Tenant or to special equipment or systems installed by,
for, or because of Tenant;
(ii) the installation, use, or operation of Tenant's Property, systems and
equipment within the Shell Improvements;
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(iii) the moving of Tenant's Property in or out of the Shell Improvements or
in and about the Premises;
(iv) Tenant's use or occupancy of the Premises in violation of Section 10 of
this Lease;
(v) the acts or omissions of Tenant and Tenant's employees, agents, invitees,
subtenants, licensees, or contractors;
(vi) fire and other casualty, except as provided by Section 12 of this Lease;
or
(vii) condemnation, except as provided in Section 13 of this Lease.
(vii) any cause, other than latent defects in the Shell Improvements, in any
floor quadrant (as shown in attached Exhibit B) in which Tenant has conducted
boring or drilling completely through the floor following the Commencement
Date.
Landlord shall have no obligation to make repairs under this Section until a
reasonable time after receipt of written notice from Tenant of the need for
repairs. Landlord shall diligently commence and continuously pursue such
repairs under this Section, subject only to Unavoidable Delays or Tenant
Delays as defined in Exhibit C. Tenant waives any right to repair at the
expense of Landlord under any applicable governmental laws, ordinances,
statutes, orders, or regulations now or later in effect. The foregoing
notwithstanding, in the event Landlord has not commenced any repair
specifically identified to Landlord by Tenant's written notice within ten (10)
business days following Tenant's notice, Tenant shall have the right following
five (5) business days additional notice to Landlord specifying the actions to
be taken by Tenant, to commence any such repair at Tenant's expense (subject
to Tenant's right to seek recovery of such expense as provided in the
following sentence), and provided further that if the repair is identified in
Tenant's notice to Landlord as an emergency repair posing an immediate and
serious threat to life safety or a material breach of the security of the
building Tenant shall have the right to commence temporary emergency repairs
at Tenant's expense (subject to Tenant's right to seek recovery of such
expense as provided in the following sentence) if Landlord has not commenced
such repairs within six (6) hours after receipt of Tenant's notice. Tenant
shall not have the right to deduct the cost of repair from Rent due hereunder
but shall otherwise have all remedies available to Tenant in law and equity to
recover the cost of any such repair. In addition to the foregoing, Landlord
shall have the obligation at Landlord's sole expense to seed and maintain in a
clean and sightly condition the Adjacent Real Property in the event that
construction has not commenced on the Adjacent Real Property prior to June 1,
1998.
(b) Tenant's Obligations. Except for the portions of the Premises expressly
required to be maintained by Landlord under Section 8(a) Section 8(c), Tenant,
at Tenant's expense, will maintain the Premises in good order including,
without limitation roof membrane, floor coverings, walls and wall coverings,
mechanical, electrical, and plumbing systems, doors, windows, truck aprons,
gutters, and downspouts and any signage. Tenant will enter into preventive
maintenance and service contracts with maintenance contractors for regularly
scheduled maintenance that are reasonably acceptable to Landlord for servicing
all hot water,
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heating, and air-conditioning systems and equipment in the Premises. If Tenant
fails, in the reasonable judgment of Landlord, to maintain the Premises in
good order after written notice from Landlord demanding that Tenant do so and
specifying in reasonable detail Tenant's failure, Landlord may perform the
maintenance, repairs, refurnishing, or repairing at Tenant's expense. Tenant
shall be responsible for replacement of the roof membrane, at Tenant's sole
cost and expense, when required by the condition of the roof.
(c) Warranties and Defective Work. Landlord shall obtain commercially
reasonable or standard warranties from all contractors engaged in constructing
the Shell Improvements and Common Areas. Tenant shall not be responsible for
the repair of any work that is covered by such warranties. Tenant shall give
Landlord written notice of any repairs described in this Section 8(c).
Landlord shall promptly and diligently seek to cause Landlord's contractors to
repair or replace any such defective work. Tenant waives any claims against
Landlord for work covered by such contractor warranties. Upon written request
by Tenant, Landlord shall assign to Tenant, on a non-exclusive basis and
without detriment to Landlord's right to enforce such claim, Landlord's
contractor warranty for any specific repair sought by Tenant covered by such
warranty and Tenant shall thereafter be responsible for the enforcement of
such warranty repair claim against contractor.
Section 9. Alterations.
(a) Trade Fixtures and Alterations. Following the completion of Tenant's
initial Tenant Improvements, Tenant will not make or allow any additions,
alterations, installations, or improvements in or to the Premises
(collectively, "Alterations") in excess of Fifty Thousand Dollars ($50,000) in
any twelve (12) month period without the prior written consent of Landlord,
which will not be unreasonably withheld, delayed or conditioned. Unless
Landlord has waived this requirement in writing, with respect to any
Alteration, (including the initial Tenant Improvements) Tenant must submit
details about design concept, plans and specifications, names of proposed
contractors, and financial and other pertinent information about any
contractors (including, without limitation, the labor organization affiliation
or lack of affiliation of any contractors as reasonably required by Landlord
to avoid an actual conflict of labor for work Landlord is conducting on the
Real Property or Adjacent Real Property), certificates of insurance to be
maintained by Tenant's contractors, hours of construction, and information
promptly and reasonably requested by Landlord regarding proposed construction
methods, and details about the quality of the proposed work. If Landlord
reasonably believes that the cost of the work may exceed Tenant's ability to
perform its obligations hereunder to keep title to the Real Property free of
liens arising from such work, Landlord may require evidence of security (such
as payment and performance bonds) to assure timely completion of the work by
the contractor and payment by the contractor of all costs of the work. For
any Alteration that is visible from outside the Premises, the proposed
Alteration must, in the reasonable opinion of Landlord, also be
architecturally and aesthetically harmonious with the remainder of the
Project. If a Notice of Completion is required for the work, Tenant must file
it and provide Landlord with a copy. Tenant must provide Landlord with a set
of "as-built" drawings for any work.
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(b) Complex Alterations. Tenant shall seek Landlord's approval, which
approval shall not be unreasonably withheld, delayed or conditioned, of
Tenant's architects and engineers who design any Alteration which by the
nature of its volume or complexity may adversely affect the Shell
Improvements. If Tenant's architect or engineer is not approved by Landlord,
for any such Alteration, Tenant may nevertheless employ such architect or
engineer for such purpose, and Landlord within Landlord's reasonable judgment,
may consult with an independent architect, engineer, or other consultant with
respect to such alteration and Tenant will reimburse Landlord for the
reasonable fees and expenses incurred by Landlord. If any Alteration will
affect the basic mechanical, electrical, or plumbing systems of the
Improvements, Landlord may require that the work be reviewed by consultants
designated by Landlord at Tenant's reasonable expense.
(c) Standard of Work. All work to be performed by or for Tenant pursuant to
the Lease will be performed diligently, in a first-class manner, and in
compliance with all applicable laws, ordinances, regulations, and rules of any
public authority having jurisdiction over the Premises and Tenant and (if
applicable) Landlord's insurance carriers. Landlord will have the right, but
not the obligation, to periodically inspect the work on the Premises and, if
any work fails to conform to approved plans and specifications, may require
changes in the method or quality of the work to conform to such approved plans
and specifications.
(d) Damage and Removal. Tenant assumes the risk of damage to any of Tenant's
Improvements and Alterations except to the extent directly caused by the gross
negligence of Landlord or its contractors. Tenant will repair all damage to
the Premises caused by the installation or removal of these items. Upon the
termination of this Lease, Tenant will remove any Alterations not approved by
Landlord, trade fixtures, personal property, equipment made or installed by
Tenant and restore the Premises to their condition existing prior to the
construction of these items, reasonable wear and tear and any casualty which
is covered by Section 12 excluded. Tenant shall also remove those Alterations
approved by Landlord which Landlord has specified in writing at the time of
Landlord's approval of such Alteration must be removed at the expiration of
the Term. Tenant shall not be obligated to remove the initial Tenant
Improvements, but Tenant shall have the right to remove any Tenant personal
property, equipment or trade fixtures included in such initial Tenant
Improvements provided Tenant repairs, at Tenant's cost and to Landlord's
reasonable satisfaction, any damage caused by such removal. Landlord may
require, upon written notice to Tenant given no later than ninety (90) days
prior to expiration of the Lease Term, that Tenant not remove any Alterations
and improvements Tenant is so obligated to remove (excluding any Tenant
personal property, equipment or trade fixtures). In that case, such items
will be the property of Landlord when the Lease terminates. All removals and
restoration will be accomplished in a good manner so as not to cause any
damage to the Premises.
(e) Liens. Tenant will promptly pay and discharge all claims for labor
performed, supplies furnished, and services rendered at the request of Tenant
and will keep the Premises free from all mechanics' and materialmen's liens.
Tenant will provide at least ten (10) days' prior written notice to Landlord
before any labor is performed, supplies are furnished, or services are
rendered at the Premises, and Landlord will have the right to post notices of
nonresponsibility on the Premises. If any lien is filed and Tenant fails to
timely bond over the lien or otherwise cause it to be promptly removed,
Landlord may take any necessary action to remove the lien, and Tenant
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will pay Landlord any amounts expended by Landlord, together with interest at
the Applicable Interest Rate from the date of expenditure.
Section 10. Use.
The Premises will be used only for the Permitted Use and for no other uses.
The use will be otherwise consistent with any applicable governmental laws,
ordinances, statutes, orders, and regulations and any AREA or any supplement
to the AREA (approved by Tenant) that has been or will be recorded in any
official or public records concerning the Real Property or any portion of it,
including, but not limited to, all provisions of the Americans with
Disabilities Act [42 USC sections 12183 and 12204] (collectively "Legal
Requirements"). The foregoing notwithstanding, Landlord and Tenant acknowledge
that where improvements or alterations are initiated after the Commencement
Date by one party, that party shall be individually obligated for any
alterations or improvements to the Premises and/or Shell Improvements
resulting from Legal Requirements caused by the improvements or alterations
initiated by that party, whether such alterations or improvements are work to
be done by that party pursuant to this Lease, or are necessitated by defects
in the construction of Shell Improvements (as to Landlord's work), the Tenant
Improvements (as to Tenant's work) or other improvements installed by that
party. Legal requirements imposed subsequent to the completion and government
permitting or approval of improvements which are imposed and not the result of
either parties' initiation of improvements or alterations shall be the
obligation of Landlord with respect to the Shell Improvements and Common Area
Improvements, and the obligation of Tenant with respect to the Tenant
Improvements. The judgment of any court of competent jurisdiction, or the
admission of Tenant or Landlord in any action or proceeding, regardless of
whether the Landlord or Tenant is a party, that Tenant or Landlord, as the
case may be, has violated any Legal Requirement in the condition, use, or
occupancy of the Premises or the Shell Improvements, will be conclusive of
that fact as between Landlord and Tenant. Tenant will not commit waste,
overload the floors or structure of the Premises, subject the Premises or the
Project to any use that would cause damage or violate any insurance coverage,
permit any unreasonable and obnoxious odors, smoke, dust, gas, substances,
noise, or vibrations to emanate from the Premises, take any action that would
constitute a nuisance or would disturb, obstruct, or endanger any other
tenants of the Project, take any action that would abrogate any warranties, or
use or allow the Premises to be used for any unlawful purpose. Landlord will
not be liable to Tenant nor will this Lease be affected if any parking is
impaired by moratorium, initiative, referendum, or regulation (provided that
Tenant shall have such rights to any award in condemnation as may be afforded
under Section 13). Landlord will not be responsible for noncompliance by any
other Tenant or occupant of the Project with any of the AREA or any other
terms or provisions of that tenant's or occupant's lease, provided that
Landlord has made reasonable efforts (excluding litigation), on Tenant's
written request, to enforce such provisions. Tenant will promptly comply with
the reasonable requirements of any board of fire insurance underwriters or
other similar body now or later constituted.
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Section 11. Environmental Provisions.
(a) Definitions. As used in this Section, the following terms have the
following definitions:
"Access Agreement" means that Access Agreement dated as of April 29, 1997
between R&H and Landlord, a copy of which is attached hereto as Exhibit I-2
"Agencies" means any federal, state, or local governmental authorities,
agencies, or other administrative bodies with jurisdiction over Landlord,
Tenant or the Premises, the Real Property, or the Adjacent Real Property.
"Costs" shall have the same definition as the word "Costs" as set forth in
Section 9.1(a) of the R&H Indemnity (defined herein).
"Environmental Documents" means the studies, tests and reports listed in
Exhibit I.
"Environmental Laws" means any federal, state, or local environmental, health,
or safety-related laws, regulations, standards, court decisions, ordinances,
rules, codes, orders, decrees, directives, guidelines, permits, or permit
conditions, currently existing and as amended, enacted, issued, or adopted in
the future that are or become applicable to Tenant or the Premises.
"Existing Environmental Conditions" means the presence of Hazardous Materials
at, on, in, under or from the Property (including in soil, surface, or
groundwater) on or before the date on which this Lease is signed, including
without limitation the conditions disclosed in the reports set forth in the
Environmental Documents.
"Hazardous Materials" shall have the same definition as the word term
"Hazardous Materials" as set forth in Section 9.1(a) of the R&H Indemnity.
"Schedule of Known Contaminants" means the schedule of Prohibited Known
Contaminants, Permitted Known Contaminants, and Volume Constrained
Contaminants identified in attached Exhibit G.
"Landlord Parties" means Landlord's employees, agents, customers, visitors,
invitees, licensees, contractors, designees, or tenants.
"Remediation Order" means California Regional Water Quality Control Board
("CRWQCB") Order No. 93-004 and any amendments thereto.
"Remediation Work" means all environmental activities necessary in order for
R&H (or any other responsible party other than Tenant) to comply with the
Remediation Order and any subsequent order of any governmental agency
respecting the Existing Environmental Conditions which may include the removal
of contaminated soil, groundwater and installation, operation, maintenance,
repair, replacement and removal of wells, pumps, pipes, tanks and related
facilities and equipment for testing and monitoring environmental
contamination and effecting the
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correction, reduction or elimination of environmental contamination.
"R&H" means Rohm & Haas Company, prior owner of the Real Property and
responsible party for the Remediation Work and R&H Indemnity.
"R&H Indemnity" means that certain assignable indemnification by R&H of
Landlord with respect to Existing Environmental Conditions as set forth in
Article IX of that certain Purchase and Sale Agreement executed between
Landlord and R&H and dated February 10, 1997 (the "Purchase and Sale
Agreement") a redacted copy of which is attached hereto and incorporated
herein as Exhibit I-1. Landlord represents that, to the best of Landlord's
knowledge, the R&H Indemnity is in full force and effect.
"Tenant's Parties" means Tenant's employees, agents, customers, visitors,
invitees, licensees, contractors, designees, or subtenants.
(b) Disclosure, Remediation and Indemnification Regarding Existing Conditions.
(i) Environmental Disclosure. In accordance with Section 25359.7 of the
California Health and Safety Code, Landlord hereby gives notice to Tenant (i)
that releases of Hazardous Materials have come to be located on or beneath the
Real Property and (ii) of the matters set forth in the Environmental
Documents.
(ii) Ongoing Remediation. Tenant acknowledges that the Remediation Work
is being conducted on the Real Property and Landlord represents, warrants, and
agrees that the Remediation Work will be conducted at no direct cost to Tenant
during the Lease Term, and that no part of the direct or indirect costs of
such Remediation Work shall be reimbursed by Tenant to Landlord or any other
person under this Lease or otherwise. All parties conducting the Remediation
Work shall have the right to use the Real Property for the purposes of
performing the Remediation Work pursuant to the terms and conditions of the
Purchase and Sale Agreement and the Access Agreement until the Remediation
Work has been completed, provided, however, that Tenant shall have the right
to request, and (to the extent set forth in the Purchase and Sale Agreement
and Access Agreement) to require, that the Remediation Work be performed in a
manner that reduces to the maximum practicable extent any inconvenience to
Tenant and its use of the Premises and Common Area, and that does not
interfere with Tenant's access to the Premises, provided further, however,
that such right of Tenant is limited by the requirement that Tenant shall not
interfere with the conduct of the Remediation Work in a manner that is
contrary to the rights of R&H under the Purchase and Sale Agreement and the
Access Agreement.
(iii) Assignment of R&H Indemnification. Pursuant to Section 9.2(b)
thereto, Landlord hereby irrevocably assigns to Tenant, without in any way
limiting the indemnity as it applies to Landlord and the Landlord Indemnitees,
on a non-exclusive basis to the fullest extent possible, all rights provided
under the R&H Indemnity, it being the intention of the parties that Tenant
shall have rights to enforce the R&H Indemnity obligations as if Tenant were a
direct party to the R&H Indemnity, provided, however, that in no event shall
Tenant have any direct or indirect obligation or responsibility arising under
or with respect to the R&H Indemnity or any agreement
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of which it is a part or to which it relates.
(c) Tenant Use of Hazardous Materials. Tenant will not use or allow the use of
the Premises in a manner that causes Hazardous Materials to be released or to
become present on, under, or about the Premises or other properties in the
vicinity of the Premises. Notwithstanding any other provision to the contrary
in this Lease or any other agreement, nothing in this Lease shall be construed
as imposing upon Tenant any obligation, liability or responsibility with
respect to any Existing Condition or any other release of Hazardous Materials
that: (i) occurred before execution of this Lease from any cause; or (ii) that
occurred after execution of this Lease except to the extent caused by
contributed to or exacerbated by Tenant or Tenant's Parties.
(d) Tenant Compliance Obligations
(i) Tenant and Tenant's Parties will not, at any time during the Term,
cause any Prohibited Known Contaminants listed in the Schedule of Known
Contaminants to be brought upon, stored, manufactured, generated, blended,
handled, recycled, treated, disposed, or used on, under, or about the Premises
or the Real Property for any purpose. Tenant and Tenant's Parties will not,
at any time during the Term, cause any Permitted Known Contaminants listed in
the Schedule of Known Contaminants to be brought upon, stored, manufactured,
generated, blended, handled, recycled, treated, disposed, or used on, under,
or about the Premises or the Real Property for any purpose without the prior
written approval of Landlord which approval shall not be unreasonably
withheld, conditioned or delayed. Tenant and Tenant's Parties will not, at any
time during the Term, cause any Volume Constrained Known Contaminants listed
in the Schedule of Known Contaminants to be brought upon, stored,
manufactured, generated, blended, handled, recycled, treated, disposed, or
used on, under, or about the Premises or the Real Property for any purpose in
excess of the volumes set forth in the Schedule of Contaminants without the
prior written approval of Landlord which approval shall not be unreasonably
withheld, conditioned or delayed.
(ii) Tenant and Tenant's Parties will not, at any time during the Term,
cause any Hazardous Materials to be brought upon, stored, manufactured,
generated, blended, handled, recycled, treated, disposed, or used on, under,
or about the Premises or the Real Property for any purpose, except in full
compliance with Environmental Laws.
(iii) During the Term, if Tenant has knowledge of the need for such
steps, or if requested by Landlord, Tenant will take reasonable steps to
protect against intentional or negligent acts or omissions of third parties
that might result directly or indirectly in the release, disposal, or other
placement of Hazardous Materials on or under the Premises or interfere with
the Remediation Work.
(iv) No asbestos-containing materials will be manufactured or installed
for any purposes on or as part of the Premises, whether as part of Tenant's or
Tenant's Parties' business operations or as tenant improvements, unless
specifically approved in advance in writing by Landlord, whose approval will
not be unreasonably withheld, delayed or conditioned.
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(v) Subject to Landlord's obligations under k(ii) herein, Tenant will
keep, operate, and maintain the Premises in compliance with all, and will not
cause or knowingly permit the Premises to be in violation of any,
Environmental Laws due to the acts or omissions of Tenant and Tenant's
Parties.
(vi) Neither Tenant nor any of Tenant's Parties will install or use any
underground storage tanks on the Premises.
(e) Landlord's Right of Entry and Testing. Landlord and Landlord's designees
and representatives have the right, but not the obligation, at any reasonable
time to enter onto and to inspect the Premises and to conduct reasonable
testing and analysis to determine if Hazardous Materials are present on,
under, or about the Premises and to review and copy any documents, materials,
data, inventories, financial data, or notices or correspondence to or from
private parties or governmental authorities pertaining to the use or release
of Hazardous Materials in the Premises (collectively, "Inspection"), provided,
however, that (i) Tenant shall have the opportunity to accompany Landlord at
all times, (ii) any testing (including drilling or destructive or intrusive
testing) shall be done in a manner to minimize any inconvenience to Tenant
(iii) no drilling, destructive or intrusive testing shall be done unless there
are reasonable grounds for believing that a release of Hazardous Materials may
have occurred, (iv) copies of the results of any testing shall promptly be
provided to Tenant, (v) Landlord's right of inspection shall not extend to
confidential proprietary information of Tenant previously identified in
writing to Landlord, and (vi) Landlord shall keep strictly confidential any
documents copied pursuant to any Inspection, except only to the extent
Landlord is legally required to report such information to an Agency, and in
such event Landlord shall give Tenant no less than fifteen (15) days advance
notice of its intention to make such a report so that Tenant shall have the
right to seek judicial or other relief if Tenant disagrees with Landlord's
right or obligation to take such action. If the Investigation indicates the
presence of any environmental condition that occurred during the Term as a
result of Tenant's or Tenant's Parties' activities, or failure to act where
Tenant had a duty to act, in connection with the Premises, Tenant will
reimburse Landlord for the cost of conducting the tests.
(f) Environmental Assessment. Landlord may retain, at Landlord's expense
(except as set forth below), a duly licensed environmental consultant that
will perform an environmental compliance audit of the Premises and Tenant's
and Tenant's Parties' business activities and compliance with the provisions
of Section 11. Landlord will provide a copy of the report from the consultant
to Tenant upon receipt, and upon request must provide to Tenant a copy of all
data, documents, and other information prepared or gathered in connection with
the report. In the event such audit reveals that Tenant or Tenant's Parties'
are not in substantial compliance with Section 11, Tenant shall reimburse
Landlord for the cost of such audit upon thirty (30) days' invoice. Tenant
acknowledges that Tenant has been provided an adequate opportunity to conduct
Tenant's own environmental investigation of the Premises with independent
environmental experts and consultants.
(g) Notification.
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(i) Tenant must give prompt written notice to Landlord of:
(A) any enforcement, remediation, or other regulatory action or order, taken
or threatened, by any Agency regarding, or in connection with, the presence,
release, or threat of release of any Hazardous Material on, under, about, or
from the Premises resulting from Tenant's use of the Premises;
(B) all demands or claims made or threatened by any third party against Tenant
or Tenant's Parties or the Premises relating to any liability, loss, damage,
or injury resulting from the presence, release, or threat of release of any
Hazardous Materials on, under, about, or from the Premises resulting from
Tenant's use of the Premises;
(C) any significant spill, release, or discharge of a Hazardous Material on,
under, about, or from the Premises resulting from Tenant's use of the
Premises, including, without limitation, any spill, release, or discharge
required to be reported to any Agency under applicable Environmental Laws; and
(D) all incidents or matters where Tenant and Tenant's Parties are required to
give notice to any Agency pursuant to applicable Environmental Laws.
(F) copies of all Hazardous Materials Business Plans, Hazardous Waste
Management Plans, Chemical Hygiene Plans and any and all other plans or
reports, and any and all required periodic or special updates to such reports,
which Tenant is required to file with governmental agencies regulating
Tenant's use of Hazardous Materials on the Premises.
(ii) Tenant must promptly provide to Landlord copies of all materials,
reports, technical data, Agency inspection reports, notices and
correspondence, and other information or documents relating to incidents or
matters subject to notification under Section 11(g)(i). Also, Tenant must
promptly furnish to Landlord copies of all permits, approvals, and
registrations Tenant receives or submits with respect to Tenant's operations
on the Premises, including, without limitation, installation permits, and
closure permits.
(iii) Landlord must give prompt written notice to Tenant of:
(A) any enforcement, remediation, or other regulatory action or order, taken
or threatened, by any Agency regarding, or in connection with, the presence,
release, or threat of release of any Hazardous Material on, under, about, or
from the Premises;
(B) all demands or claims made or threatened by any third party against
Landlord or Landlord's Parties or the Premises relating to any liability,
loss, damage, or injury resulting from the presence, release, or threat of
release of any Hazardous Materials on, under, about, or from the Premises;
(C) any significant spill, release, or discharge of a Hazardous Material on,
under, about, or from the Premises, whether originating on or off of the
Premises, including, without limitation, any
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spill, release, or discharge required to be reported to any Agency under
applicable Environmental Laws; and
(D) all incidents or matters where Landlord and Landlord's Parties are
required to give notice to any Agency pursuant to applicable Environmental
Laws.
(iv) Landlord shall arrange with R&H to continue to receive, and shall
promptly after receipt deliver to Tenant, the following:
(A) copies of reports to any Agency or other information on the progress of
the Remediation Work,
(B) all monitoring data relating to the presence of Hazardous Materials in the
soils, ground water, or air on or about the Premises and the Real Property or
Adjacent Real Property,
(C) any amendments to the Remediation Order or communications from the CRWQCB
or other Agency regarding the Remediation Work or the presence or release of
Hazardous Materials on or about the Premises, Real Property, or Adjacent Real
Property.
(iv) In the event that Landlord is required to and does submit to the CRWQCB
or any other agency a Health and Safety Plan in connection with any proposal
to perform any grading, excavation, or construction of the Adjacent Real
Property, Landlord will promptly (and in any event no less than ten (10)
business days) prior to commencement of such work) provide Tenant with a copy
of such Health and Safety Plan and shall contractually require Landlord's
general contractor to comply with such Health and Safety Plan to the extent
required by applicable law.
(h) Remediation due to Tenant's Activities.
(i) If any Hazardous Materials are released or found on, under, or about the
Premises caused by, contributed to or exacerbated by Tenant's or Tenant's
parties activities, or failure to act where Tenant had a duty to act, in
connection with the Premises, Tenant must promptly take all actions, at
Tenant's sole expense (except to the extent Tenant may seek reimbursement
under the R&H Indemnity or contribution from any other potentially responsible
party), necessary to investigate and remediate the release or presence of such
Hazardous Materials, to the extent caused, contributed to or exacerbated by
Tenant and Tenant's Parties or as required of Tenant by any governmental
agency, on, under, or about the Premises in accordance with Environmental
Laws and the requirements of all Agencies. However, unless an emergency
situation exists that requires immediate action, Landlord's written approval
of these actions will first be obtained, and the approval will not be
unreasonably withheld, delayed or conditioned. Landlord has the right, but not
the obligation, to assume control of any required remediation on the Premises
at Tenant's expense if Tenant fails to notify Landlord and obtain Landlord's
approvals as required under Section 11(h). Within thirty (30) days after
Tenant's completion of any remediation of the Premises, Tenant must deliver to
Landlord a letter from the applicable Agency stating that the remediation was
undertaken in accordance with all applicable Environmental Laws and that any
residual contamination remaining after the remediation does not pose a threat
to human health or
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the environment.
(ii) If Tenant or Tenant's Parties have caused a release of Hazardous
Materials that results in or threatens to result in Hazardous Materials
becoming present on, under, or about the Premises, threatens public health or
safety or the environment, or is in noncompliance with any applicable
Environmental Laws or requirements of Section 11, Landlord may demand that
Tenant promptly take action in accordance with Section 11(h)(i). If Tenant
does not respond within thirty (30) days (unless there is an emergency, in
which case Tenant must respond as soon as practicable, but not less than three
(3) business days), Landlord has the right, but not the obligation, to enter
onto the Premises and take all actions reasonably necessary to investigate and
fully remediate the release or noncompliance at Tenant's sole expense
(provided Tenant may seek reimbursement under the R&H Indemnity or
contribution from any other potentially responsible party) which sums will be
immediately due and payable upon receipt of an invoice and will constitute
additional rent under this Lease.
(j) Expiration and Termination Procedures. Upon expiration or termination of
this Lease and upon the request of Landlord, Tenant will perform: all
corrective, remedial, repair, or other work necessary to correct any
violations of Environmental Laws, deficiencies, or hazards caused by Tenant
and if applicable, in accordance with any remediation or clean up order by
any environmental governmental agency; and all steps necessary to terminate,
close, or transfer all environmental permits, licenses, and other approvals or
authorizations for the Premises obtained by Tenant or for Tenant activities,
equipment, or conditions on the Premises, in accordance with all Environmental
Laws.
(k) Liability.
(i) Tenant's Indemnification of Landlord. Subject to the limitation on
Tenant's liability stated in Section 11(b), Tenant will indemnify, protect,
defend, and hold harmless Landlord and Landlord's partners, directors,
officers, employees, shareholders, lenders, agents, contractors, and each of
their respective successors and assigns (individually and collectively
"Landlord Indemnitees") from all claims, judgments, causes of action, damages,
penalties, fines, taxes, costs, liabilities, losses, and expenses caused
(directly or indirectly), contributed to or exacerbated by (a) Tenant's or
Tenant's Parties' breach of any prohibition or provision of Section 11, to the
extent of such cause, contribution or exacerbation, or (bb) the presence of
any Hazardous Materials on or under the Premises during the Term or any
Hazardous Materials that migrate from the Premises to other properties, caused
(directly or indirectly), contributed to or exacerbated by Tenant's or
Tenant's Parties' activities, or failure to act where Tenant had a duty to act
to the extent of such cause, contribution or exacerbation.
This obligation by Tenant to indemnify, protect, defend, and hold harmless
Landlord Indemnitees includes, without limitation, costs and expenses incurred
for or in connection with any investigation, cleanup, remediation, monitoring,
removal, restoration, or closure work required by the Agencies because of any
Hazardous Materials present on, under, or about the Premises for causes
described in the immediately preceding subsection; the costs and expenses of
restoring, replacing, or acquiring the equivalent of damaged natural resources
if required under
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any Environmental Law; all foreseeable consequential damages; all reasonable
damages for the loss or restriction on use of rentable or usable space or of
any amenity of the Premises; all reasonable sums paid in settlement of claims;
reasonable attorney fees; litigation, arbitration, and administrative
proceeding costs; and reasonable expert, consultant, and laboratory fees.
Neither the written consent of Landlord to the presence of Hazardous Materials
on or under the Premises, nor the strict compliance by Tenant with all
Environmental Laws, will excuse Tenant from the indemnification obligation.
This indemnity will survive the expiration or termination of this Lease.
Further, if Landlord detects a deficiency in Tenant's performance under this
indemnity and Tenant fails to correct the deficiency within thirty (30) days
after receipt of written notice from Landlord, Landlord has the right to join
and participate in any legal proceedings or actions affecting the Premises
that are initiated in connection with any Environmental Laws. However, if the
correction of the deficiency takes longer than thirty (30) days, Landlord may
join and participate if Tenant fails to commence corrective action within the
thirty (30) day period and after that diligently proceeds to correct the
deficiency.
(ii) Landlord's Indemnification of Tenant. Landlord will indemnify, protect,
defend, and hold harmless Tenant and Tenant's partners, directors, officers,
employees, shareholders, lenders, agents, contractors, and each of their
respective successors and assigns (individually and collectively "Tenant
Indemnitees") against all claims, judgments, causes of action, damages,
penalties, fines, taxes, costs, liabilities, losses, and expenses caused
(directly or indirectly) by or in connection with (aa) any Existing
Environmental Condition, or (bb) the presence of any Hazardous Materials on
the Real Property or the Adjacent Real Property during the Term or any
Hazardous Materials that migrate from the Real Property or Adjacent Real
Property to other properties, caused (directly or indirectly) by Landlord or
Landlord's Parties' activities, or failure to act where Landlord had a duty to
act. This obligation by Landlord to indemnify, protect, defend, and hold
harmless Tenant Indemnitees includes, without limitation, costs and expenses
incurred for or in connection with any investigation, cleanup, remediation,
monitoring, removal, restoration, or closure work required by the Agencies
because of any Hazardous Materials present on the Premises, the Real Property
or the Adjacent Real Property; the costs and expenses of restoring, replacing,
or acquiring the equivalent of damaged natural resources if required under any
Environmental Law; all foreseeable consequential damages; all reasonable
damages for the loss or restriction on use of rentable or usable space or of
any amenity of the Premises, or the Real Property (and to the extent provided
for under any AREA, the Adjacent Real Property); all reasonable sums paid in
settlement of claims; reasonable attorney fees; litigation, arbitration, and
administrative proceeding costs; and reasonable expert, consultant, and
laboratory fees. The strict compliance by Landlord with all Environmental Laws
will not excuse Landlord from the indemnification obligation. This indemnity
will survive the expiration or termination of this Lease. If Tenant detects a
deficiency in Landlord's performance under this indemnity and Landlord fails
to correct the deficiency within thirty (30) days after receipt of written
notice from Tenant, Tenant will have the right to join and participate in any
legal proceedings or actions affecting the Premises initiated in connection
with any Environmental Laws. However, if the correction of the deficiency
takes longer than thirty (30) days, Tenant will have the right to join and
participate if Landlord fails to commence corrective action within the thirty
(30) day period and after that diligently proceeds to correct the deficiency.
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Section 12. Damage and Destruction.
(a) Casualty. If the Premises are damaged or destroyed by fire or other
casualty, Tenant will give prompt written notice to Landlord. Within thirty
(30) days after receipt, Landlord will notify Tenant whether repairs can
reasonably be made (1) within two hundred seventy (270) days or (2) if the
Premises are so damaged as to constitute total destruction as defined in
Section 12(a)(iv), or (3) if the damage is in the final Lease Year, within
sixty (60) days, from the date of such notice.
(i) Less Than 270 Days. If the Premises are damaged only to the extent that
rebuilding or repairs can be reasonably completed within two hundred seventy
(270) days after notice, this Lease will not terminate and, unless sufficient
insurance proceeds are not available to repair the Premises damage (and Tenant
elects not to pay any difference), Landlord will repair the Premises. However,
Landlord will not be required to rebuild, repair, or replace any of Tenant's
Property that may have been placed on the Premises for Tenant. The Rent will
be abated proportionately from the date Tenant vacates the Premises only to
the extent the Premises are unfit for Tenant's use.
(ii) Greater Than 270 Days. If the Premises are so damaged that rebuilding or
repairs cannot be completed within two hundred seventy (270) days after
Tenant's notice, either Landlord or Tenant may terminate by giving written
notice within thirty (30) days after such notice regarding the time period of
repair.
(aa) If neither party elects to terminate this Lease, Landlord will promptly
commence and diligently prosecute to completion the repairs to the Premises,
unless insurance proceeds are not available to repair the Premises damage (and
Tenant elects not to pay any difference). However, Landlord will not be
required to rebuild, repair, or replace any Tenant Property that may have been
placed on the Premises for the Tenant. During the time when Landlord is
prosecuting repairs to completion, the Rent will be abated proportionately
from the date Tenant vacates the Premises, only to the extent and only during
the period that the Premises are unfit for Tenant's use of the Premises.
(bb) If Landlord elects to terminate this Lease pursuant to this subsection
12(a)(ii) this Lease and the Rent shall be abated from the date Tenant vacates
the Premises, and Landlord shall provide Tenant with any insurance proceeds
actually received by Landlord allocable to the damaged Tenant Improvements and
Alterations, provided however, that if: (i) the damage or destruction occurs
after the expiration of the fifth Lease Year; (ii) Tenant elects to renew the
Lease for a minimum of ten (10) years from the date of the damage and
destruction under the same terms and conditions as an extension of the Term
under Section 40; and (iii) Tenant is not otherwise in default under the terms
of this Lease; then Tenant shall have the additional right upon written notice
to Landlord given with thirty (30) days following Landlord's notice of
termination, to repair the Premises at Tenant's expense. Tenant's election
may be subject to the condition that insurance proceeds are available for such
repairs provided such condition is removed or Tenant's election withdrawn no
later than sixty (60) days following Tenant's notice of repair to Landlord.
In the event Tenant elects to make such repairs, Tenant shall provide Landlord
a schedule of Tenant's intended construction within thirty (30)
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days following Tenant's notice of its intent to repair. Any such repair by
Tenant shall be conducted in as expeditious a manner as reasonably possible
and shall comply with all of the requirements of Section 9. Landlord shall
reasonably cooperate with Tenant in the conduct of Tenant's repairs at no cost
to Landlord. In the event of such election by Tenant, Landlord shall make
available to Tenant, subject to the rights of Landlord's lender, such
insurance proceeds as may be available to Landlord pursuant to the damage or
destruction of the Premises. Rent will be abated proportionately from the date
Tenant vacates the Premises only to the extent of rental abatement insurance
received by Landlord and only during the period that the Premises are unfit
for Tenant's use, provided, however, that such abatement shall not exceed a
period equal to the sum of twelve (12 ) months, whether or not the Premises
are fully repaired at the expiration of such period.
(iii) Damage in Final Lease Year. If the Premises or Tenant Improvements are
so damaged by casualty occurring in the final Lease Year that rebuilding or
repairs cannot be completed within sixty (60) days after notice, Landlord or
Tenant may terminate by giving written notice within thirty (30) days after
notice regarding the time period of repair, provided, however, that this
Section 12(a)(iii) shall be inapplicable if within such thirty (30) day period
for giving notice Tenant gives Landlord written notice exercising any right of
Tenant to extend the Lease Term as provided in Paragraph 40 below, which
Tenant shall have the right to do even if such exercise notice would otherwise
be premature under Paragraph 40 below. In the event, of termination under
this Section 12(a)(iii), this Lease and the Rent will be abated from the date
Tenant vacates the Premises. If neither party so elects to terminate this
Lease when this Subparagraph 12(a)(iii) is applicable, then the Premises shall
be repaired as provided in Subparagraph 12(a)(ii).
(iv) Total Destruction. If the Shell Improvements are so damaged that
rebuilding or repairs cannot be completed within one (1) year of the damage or
destruction, or the Premises are greater than fifty percent (50%) destroyed
either in terms of reconstruction cost to fair market value or total square
footage, either Landlord or Tenant may terminate this Lease by giving written
notice within thirty (30) days after such destruction, Rent will be abated
from the date Tenant vacates the Premises, Landlord shall provide Tenant with
any insurance proceeds actually received by Landlord allocable to the damaged
Tenant Improvements and Alterations and all rights and obligations will then
cease and terminate under this Lease. Tenant shall have no rights to rebuild
the Premises in the event of Landlord termination under this subsection
12(a)(iv). In the event neither party terminates the Lease due to a total
destruction, the Premises shall be repaired as provided in 12(a)(ii).
(b) Uninsured Casualty. Tenant is responsible for and will pay to Landlord any
deductible amount under the property insurance for the Premises up to a
maximum of Ten Thousand Dollars ($10,000). If any portion of the Premises is
damaged and is not fully covered by insurance proceeds received by Landlord
for any reason other than Landlord's failure to obtain insurance as required
under Section 7(b) (and Tenant elects not to pay any difference) or if the
holder of any indebtedness secured by the Premises requires that Landlord's
insurance proceeds be applied to the indebtedness, Landlord will have the
right to terminate this Lease by delivering written notice of termination to
Tenant within thirty (30) days after the date of Tenant's notice to Landlord
under 12(a). All rights and obligations will then cease and terminate under
this Lease, provided, however, that, (i) Landlord shall provide Tenant with
any insurance proceeds actually received
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by Landlord (or received by any Landlord lender with senior lien rights to
this Lease) allocable to the damaged Tenant Improvements and Alterations; and
(ii) subject to the rights of any Landlord lender with senior lien rights to
this Lease, Tenant shall have the right to exercise any right to rebuild the
Premises at Tenant's cost, and without the contribution of insurance proceeds,
to the extent that Tenant would otherwise maintain such right under
12(a)(ii)(bb) above.
(c) Waiver. With respect to any damage or destruction that Landlord is
obligated to repair or may elect to repair, Landlord and Tenant waive all
rights to terminate this Lease pursuant to rights otherwise presently or later
accorded by law.
Section 13. Eminent Domain.
(a) Total Condemnation. If all of the Premises are condemned by eminent
domain, inversely condemned, or sold in lieu of condemnation for any public or
quasi-public use or purpose, this Lease will terminate as of the earlier of
the date that possession is taken of the Premises or the date of title vesting
in the acquiring agency and the Rent will be abated from the date of
termination.
(b) Partial Condemnation. If any portion of the Premises is condemned by
eminent domain, inversely condemned, or sold in lieu of condemnation for any
public or quasi-public use or purpose and the partial condemnation renders the
Premises unusable for Tenant's business, this Lease will terminate as of the
earlier of the date that possession is taken of the Premises or the date of
title vesting in the acquiring agency and the Rent will be abated to the date
of termination. If the partial condemnation does not render the Premises
unusable for the business of Tenant and less than a substantial portion of the
Premises is condemned, Landlord must promptly restore the Premises to the
extent of any condemnation proceeds recovered by Landlord, excluding the
portion lost in the condemnation, and this Lease will continue in full force,
except that after the date of the title vesting, the Rent will be reduced as
follows: if the partial condemnation affects only the Premises and not the
Common Area, Rent shall be reduced proportionately to the area of the Premises
taken, or if any portion of the Common Area is taken then the Rent and any
Common Area Expenses shall be equitably reduced, as reasonably determined by
Landlord. If the condemnation of Common Area reduces the number of parking
spaces available to Tenant below the minimum number of spaces required by the
City of Redwood City for the Premises, unless Landlord provides reasonably
satisfactory alternate parking for the lost spaces, Tenant's annual rent shall
be reduced, to compensate for such loss, in an amount equal to the award paid
by the condemning authority for that number of parking spaces below the
minimum number of spaces required by the City of Redwood City which are taken,
amortized over a thirty (30) year period using a nine percent (9%) interest
rate.
(c) Award. If the Premises are wholly or partially condemned, Landlord will be
entitled to the entire award paid for the condemnation of the Real Property
and Shell Improvements. Tenant shall be entitled to recover from the
condemning authority any award for the taking of the unamortized or
undepreciated value of the Tenant Improvements, Alterations and Tenant's trade
fixtures and equipment owned by Tenant, paid for by Tenant and not removed
from the
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Premises. Tenant will also have the right to recover from the condemning
authority the value of any compensation that may be separately awarded to
Tenant in connection with costs in removing Tenant's Alterations, trade
fixtures, equipment, merchandise and furniture to a new location, loss of
goodwill and relocation costs under Government Code section 7262.
(d) Temporary Condemnation. In the event of a temporary condemnation, this
Lease will remain in effect, Tenant will continue to pay Rent, and Tenant will
receive any award made for the condemnation. If a temporary condemnation
remains in effect at the expiration or earlier termination of this Lease,
Tenant will pay Landlord the reasonable cost of performing any obligations
required of Tenant with respect to the surrender of the Premises. If a
temporary condemnation is for a period that extends beyond the Lease Term,
this Lease will terminate as of the date of occupancy by the condemning
authority (unless the taking is for a period shorter than the remaining
extension of the Lease Term and Tenant elects to exercise the remaining
extension), and any award will be distributed in accordance with Section 13(c).
Section 14. Default.
(a) Events of Default. The occurrence of any of the following events will, at
Landlord's option, constitute an event of default ("Event of Default"):
(i) failure to pay Rent on the date when due, the failure continuing for a
period of five (5) days after written notice to Tenant (given as provided in
this Lease) that payment is due; which five-day notice shall be in lieu of and
satisfy the requirements of the notice otherwise required by Code of Civil
Procedure section 1161 or any similar successor statute;
(ii) abandonment of the Premises as defined under California Civil Code
Section 1951.3;
(iii) failure to perform Tenant's covenants under this Lease (except default
in the payment of Rent); provided that if this default is susceptible of cure
and Tenant has promptly commenced the cure of this default and is diligently
prosecuting the cure to completion, then the default must remain uncured for
thirty (30) days after written notice from Landlord;
(iv) the making of a general assignment by Tenant for the benefit of
creditors, the filing of a voluntary petition by Tenant, or the filing of an
involuntary petition by any of Tenant's creditors seeking the rehabilitation,
liquidation, or reorganization of Tenant under any law relating to bankruptcy,
insolvency, or other relief of debtors and, in the case of an involuntary
action, the failure to remove or discharge the petition within sixty (60) days
of the filing, the appointment of a receiver or other custodian to take
possession of substantially all of Tenant's assets or this leasehold, Tenant's
insolvency or inability to pay Tenant's debts or failure generally to pay
Tenant's debts when due, any court entering a decree or order directing the
winding up or liquidation of Tenant or substantially all of Tenant's assets,
Tenant taking any action toward the dissolution or winding up of Tenant's
affairs, or the attachment, execution, or other judicial seizure of
substantially all of Tenant's assets or this leasehold; or
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(v) the knowing or intentional making of any material misrepresentation or
omission by Tenant in any materials delivered by or on behalf of Tenant to
Landlord pursuant to this Lease.
(b) Remedies.
(i) Termination. In the event of the occurrence of any Event of Default,
Landlord will have the right to give a written termination notice to Tenant
and, on the date specified in that notice, this Lease will terminate unless on
or before that date all arrears of Rent and all other sums payable by Tenant
under this Lease and all costs and expenses incurred by or on behalf of
Landlord have been paid by Tenant and all other Events of Default at the time
existing have been fully cured to the satisfaction of Landlord.
(A) Repossession. Following termination, without prejudice to other remedies
Landlord may have, Landlord may (1) peaceably re-enter the Premises on
voluntary surrender by Tenant; (2) remove Tenant and any other persons
occupying the Premises, using any legal proceedings that may be available; (3)
repossess the Premises or relet the Premises or any part of them for any term
(which may be for a term extending beyond the Term), at any rental and on any
other terms and conditions that Landlord in Landlord's sole discretion may
determine, with the right to make reasonable alterations and repairs to the
Premises; and (4) remove all personal property.
(B) Unpaid Rent. Landlord will have all the rights and remedies of a landlord
provided by applicable law, including the right to recover from Tenant (1) the
worth, at the time of award of the unpaid Rent that had been earned at the
time of termination; (2) the worth, at the time of award, of the amount by
which the unpaid Rent that would have been earned after the date of
termination until the time of award exceeds the amount of loss of rent that
Tenant proves could have been reasonably avoided; (3) 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 the loss of rent that Tenant
proves could have been reasonably avoided; and (4) any other amount, and court
costs, necessary to compensate Landlord for all detriment proximately caused
by Tenant's default (including reasonable attorneys fees and costs). The
phrase "worth, at the time of award," as used in clauses (1) and (2) above,
will be computed at the greater of ten percent (10%) per annum or five percent
(5%) per annum plus the federal discount rate on advances to member banks in
effect at the Federal Reserve Bank of San Francisco on the 25th day of the
month preceding the date of the Lease, and as used in clause (3) above, will
be computed by discounting that amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent (1%).
(ii) Continuation. Even though an Event of Default may have occurred, this
Lease will continue in effect for so long as Landlord does not terminate
Tenant's right to possession. Also, Landlord may enforce all of Landlord's
rights and remedies under this Lease, including the right to recover Rent as
it becomes due, and Landlord, without terminating this Lease, may, during the
period Tenant is in default, enter the Premises and relet them, or any portion
of them, to third parties for Tenant's account. Tenant will be liable to
Landlord for all costs Landlord incurs in reletting the Premises, including,
without limitation, brokers' commissions, expenses of remodeling the Premises,
and similar costs. Reletting may be for a period shorter or longer than the
remaining
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Term. Tenant will continue to pay the Rent on the date that it is due. No act
by Landlord under this Lease, including acts of maintenance, preservation, or
efforts to lease the Premises or the appointment of a receiver on application
of Landlord to protect Landlord's interest under this Lease, will terminate
this Lease unless Landlord notifies Tenant that Landlord elects to terminate
this Lease. In the event that Landlord elects to relet the Premises, the rent
that Landlord receives from reletting will be applied to pay the following in
the order listed:
(A) any indebtedness from Tenant to Landlord other than Base Rent, Real
Property Taxes, and other amounts owing to Landlord under this Lease;
(B) all costs, including maintenance, incurred by Landlord in reletting and
payable by Tenant hereunder; and
(C) Base Rent, Real Property Taxes, and other amounts owing to Landlord under
this Lease.
After deducting the payments referred to above, any sum remaining from the
rental Landlord receives from reletting will be held by Landlord and applied
in payment of future Rent as Rent becomes due under this Lease. In no event
will Tenant be entitled to any excess rent received by Landlord. If, on the
date Rent is due under this Lease, the rent received from the reletting is
less than the Rent due on that date, Tenant will pay to Landlord, in addition
to the remaining Rent due, all costs, including maintenance, that Landlord
incurred in reletting that remain after applying the rent received from
reletting. So long as this Lease is not terminated, Landlord will have the
right to remedy any default of Tenant, to maintain or improve the Premises, to
cause a receiver to be appointed to administer the Premises and new or
existing subleases, and to add to the Rent all of Landlord's reasonable costs
in so doing, with interest at the Applicable Interest Rate from the date of
the expenditure.
(c) Cumulative. Each right and remedy of Landlord provided for in this Lease
or now or later existing at law, in equity, by statute, or otherwise, will be
cumulative and will not preclude Landlord from exercising any other rights or
remedies provided for in this Lease or now or later existing at law or in
equity, by statute, or otherwise. No payment by Tenant of a lesser amount than
the Rent, or any endorsement on any check or letter accompanying any check or
payment as Rent, will be deemed an accord and satisfaction of full payment of
Rent. However, Landlord may accept this payment without prejudice to
Landlord's right to recover the balance of Rent or to pursue other remedies.
Section 15. Assignment and Subletting.
(a) Tenant will not assign the Lease or sublet, whether voluntarily or
involuntarily or by operation of law, the Premises or any part of the Premises
without Landlord's prior written approval, which will not be unreasonably
withheld, delayed or conditioned. If Tenant desires to assign this Lease or
sublet any or all of the Premises, Tenant must, as soon as reasonably
possible, and in any event no less than twenty (20) days prior to the
anticipated effective date transfer, give Landlord written notice of the
anticipated effective date of the assignment or
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sublease. Landlord will have a period of ten (10) business days following
receipt of notice from Tenant requesting Landlord's approval (and providing to
Landlord copies ) of all related documents and agreements associated with the
assignment or sublease, including, without limitation, the financial
statements of any proposed assignee or subtenant, to notify Tenant in writing
that Landlord elects (a) to permit Tenant to assign this Lease or sublet
space, subject however to Landlord's prior written approval (not to be
unreasonably withheld, delayed or conditioned) of the proposed assignee or
subtenant and of any related documents or agreements associated with the
assignment or sublease received by Landlord or reasonably requested by
Landlord; or (b) to disapprove the proposed assignment or subletting. If
Tenant's notice requesting approval of such documents contained a prominent
statement in solid capital letters stating, in substance, "WARNING: FAILURE TO
RESPOND TO THIS NOTICE WITHIN TEN (10) BUSINESS DAYS OF RECEIPT SHALL RESULT
IN DEEMED APPROVAL OF ASSIGNMENT OR SUBLETTING", and Tenant has written
evidence of receipt of such notice by the acting President or agent for
service of process of Landlord, and Landlord fails to notify Tenant in writing
of the election within ten (10) business days of such receipted notice,
Landlord will be deemed to have elected option (a); if Landlord's notice
contained no such statement Landlord will be deemed to have elected option
(b). It shall be reasonable for Landlord to object to any transferee due to
the transferee's intended use of the Premises if such use would impose
additional burdens on the Project with respect to traffic, Hazardous Materials
or vocal public opposition. In any analysis of the financial statements of a
proposed subtenant, Landlord shall take into account the fact that Tenant
shall remain liable under the Lease following the subletting. This Lease may
not be assigned by operation of law. Any purported assignment or subletting
contrary to the provisions of this Lease will be void. If Tenant receives rent
or other consideration for any transfer in excess of the Rent, or in case of
the sublease of a portion of the Premises, in excess of the Rent that is
proportionately allocable to that portion based on the area of such portion
and the Premises, after appropriate adjustments to assure that all other
required payments are appropriately taken into account, Tenant will pay
Landlord fifty percent (50%) of the difference between each payment of rent or
other consideration and the required Rent (such payments to commence only
after recovery by Tenant, from such excess, of reasonable brokerage fees or
alterations costs paid by Tenant in connection with such assignment or
subletting). Landlord may, without waiving any rights or remedies, collect
rent from the assignee, (and in the event of any Tenant default, from any
subtenant, or occupant), and apply the net amount collected to the Rent
reserved here and apportion any excess rent collected in accordance with the
terms of the preceding sentence. Tenant will continue to be liable as a
principal and not as a guarantor or surety to the same extent as though no
assignment or subletting had been made. No permitted transfer will be
effective until there has been delivered to Landlord a counterpart of the
transfer instrument in which the transferee agrees that such transfer is
subject to all of the terms and conditions of this Lease and acknowledging the
right of Landlord hereunder to collect rent directly from such transferee as
provided herein. Tenant will not do any act that will in any way encumber the
title of Landlord to the Premises or the Project.
(b) Notwithstanding any other provision of this Lease to the contrary,
Landlord's consent shall not be required for any assignment of the Lease or
subletting of the Premises to an Affiliate (as defined below) of Tenant,
provided that Landlord is given advance written notice of the assignment or
subletting and there has been delivered to Landlord a counterpart of the
instrument
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in which the subtenant or assignee agrees to be and remain jointly and
severally liable with Tenant for the payment of Rent pertaining to the space
transferred for the term of the transfer and for the performance of all the
terms and provisions of this Lease arising under the sublease or on or after
the date of the assignment. An Affiliate shall be any entity that controls,
is controlled by, or is under common control with Tenant, or which results
from the transfer of all or substantially all of Tenant's assets or stock, or
results from the merger or consolidation of Tenant with another entity.
Control means the direct or indirect ownership of more than 25% of the voting
securities or management rights of an entity if its securities are publicly
traded, and 50% of the voting securities or management rights of an entity if
its securities are not publicly traded. No merger or consolidation of Tenant
with another entity or transfer of any less than a controlling portion of
ownership interests, securities or stock in Tenant shall be deemed to be an
assignment of this Lease.
Section 16. Estoppel.
Within ten (10) days after request by Landlord, Tenant will deliver an
estoppel certificate duly executed (and acknowledged, if required by any
lender) in the form of attached Exhibit J, noting any exceptions to the
statements contained therein, to any proposed mortgagee, purchaser, or
Landlord. Tenant's failure to deliver this statement in that time period will
be an Event of Default under this Lease and it will be conclusive on Tenant
that (a) this Lease is in full force and effect, without modification except
as may be represented by Landlord; (b) there are no uncured defaults in
Landlord's performance and Tenant has no right of offset, counterclaim, or
deduction against Rent; and (c) no more than one period's Base Rent has been
paid in advance. Landlord reserves the right to substitute a different form of
estoppel certificate requiring substantially the same information from Tenant
on the request of any proposed mortgagee or purchaser.
Section 17. Attornment.
In the event of a foreclosure proceeding, the exercise of the power of sale
under any mortgage or deed of trust or the termination of a ground lease,
Tenant will, if requested, attorn to the purchaser and recognize that
purchaser as Landlord under this Lease. However, Tenant's obligation to attorn
to the purchaser will be conditioned on Tenant's receipt of a reasonable and
customary nondisturbance agreement.
Section 18. Subordination.
Tenant agrees to enter into financing industry standard Subordination,
Attornment and Non-Disturbance agreements required for this Lease to be made
subject and subordinate to the lien of all mortgages and deeds of trust that
hereafter affect the Premises or the Real Property. This Lease is subject to
those liens, ground leases or exceptions to title listed as Exceptions 1
through 12 in that Title Policy for the Real Property dated April 29, 1997,
and to all subdivision maps of the Project and any AREA on the Project.
Landlord agrees and shall reasonably assure that none
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of such Exceptions 1 through 12 or such maps or AREA shall materially
interfere with the proposed use of the Real Property and the Premises as shown
on the Preliminary Plans (defined in Exhibit C) and as provided in this Lease,
including, without limitation, Tenant's parking and access rights under this
Lease. Tenant will execute such standard documentation as may be required to
further effect the provision of this paragraph provided such documentation
provides that, so long as Tenant is not in default hereunder, Tenant's right
to occupy the Premises under this Lease shall not be disturbed. Landlord
represents that there are no existing ground lessors of the Premises, or
holders of liens on the Real Property or Adjacent Real Property as of the date
of this Lease except R&H. For the benefit of Tenant, within twenty (20) days
after execution of this Lease, a fully executed Subordination and
Non-Disturbance Agreement between Tenant and R&H ("R&H SAND") regarding the
senior lien against the Real Property, in form reasonably satisfactory to
Landlord and Tenant, shall be attached hereto as Exhibit J-1.
Section 19. Entry.
Landlord reserves the right to enter the Premises upon reasonable advance
notice to Tenant (except in case of an emergency, in which case no notice
would be required) to inspect the Premises or the performance by Tenant of the
terms and conditions of this Lease, and, during the last twelve (12) months of
the Term, show the Premises to prospective tenants.) Tenant shall have the
reasonable opportunity to accompany Landlord at all times during any entry,
and such entry shall be in a manner to minimize the inconvenience on Tenant's
business in the Premises and to reasonably preserve the confidentiality of
Tenant's proprietary information.
Section 20. Late Charges and Interest.
The late payment of any Rent will cause Landlord to incur additional costs,
including administration and collection costs, processing and accounting
expenses, and increased debt service. If Landlord has not received any
installment of Rent within five (5) days after that amount is due, Tenant must
pay five percent (5%) of the delinquent amount, which is agreed to represent a
reasonable estimate of the cost incurred by Landlord. In addition, all
delinquent amounts will bear interest from the date the amount was due until
paid in full at a rate per annum ("Applicable Interest Rate") equal to the
greater of (a) five percent (5%) per annum plus the then federal discount rate
on advances to member banks in effect at the Federal Reserve Bank of San
Francisco on the 25th day of the month preceding the date of this Lease or (b)
ten percent (10%). However, in no event will the Applicable Interest Rate
exceed the maximum interest rate permitted by law that may be charged under
the circumstances. Landlord and Tenant recognize that the damage that Landlord
will suffer in the event of Tenant's failure to pay these amounts is difficult
to ascertain and the late charge and interest are the best estimate of the
damage that Landlord will suffer in the event of late payment.
Section 21. Security
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(a) Security Deposit. Upon the execution of this Lease, Tenant will pay to
Landlord the Security Deposit. The Security Deposit will secure the full and
faithful performance of each provision of this Lease to be performed by
Tenant. Landlord may use and commingle the Security Deposit with other funds
of Landlord. The Security Deposit shall be returned to Tenant at the
expiration of the Lease Term, provided that if Tenant fails to perform any of
Tenant's obligations under this Lease, Landlord may apply all or any portion
of the Security Deposit toward fulfillment of Tenant's unperformed
obligations. If Landlord does apply the Security Deposit, Tenant must
immediately pay Landlord sufficient cash to restore the Security Deposit to
the full original amount. The Security Deposit will not bear interest. If
Landlord disposes of its interest in the Premises, Landlord may deliver or
credit the Security Deposit to Landlord's successor in interest in the
Premises and thereupon be relieved of further responsibility with respect to
the Security Deposit.
(b) Security. Upon execution of this Lease, Tenant shall provide Landlord
with the Security. The Security will secure the full and faithful performance
of each provision of this Lease to be performed by Tenant. If Tenant fails to
perform any of Tenant's obligations under this Lease, Landlord may draw down
that portion of the Security under the terms set forth therein to fulfill
Tenant's unperformed obligations. If Landlord does apply the Security, Tenant
must within thirty (30) days thereafter replenish the Security to the amount
required to be maintained at the time of the drawdown. The maximum amount,
and terms for reduction of the amount of the Security are set forth in that
certain confidential letter agreement executed between Landlord and Tenant of
even date herewith and incorporated herein by reference.
Section 22. Entire Agreement.
This Lease, all Exhibits hereto contained in the Exhibit Document of even date
herewith and the confidential side letter executed between Landlord and Tenant
of even date herewith set forth all the agreements between Landlord and Tenant
concerning the Premises, and there are no other agreements, either oral or
written, other than as set forth in this Lease.
Section 23. Time of Essence.
Time is of the essence in this Lease.
Section 24. Attorney Fees.
In any action that either party brings to enforce rights under this Lease, the
unsuccessful party will pay all costs incurred by the prevailing party,
including reasonable attorney fees (including costs and expert fees), to be
fixed by the court. Those costs and attorney fees will be considered a part of
the judgment in that action.
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Section 25. Severable.
If any provision of this Lease or the application of any provision is held by
a court of competent jurisdiction to be invalid, void, or unenforceable to any
extent, the remaining provisions of this Lease and the application of it will
remain in full force and will not be affected, impaired, or invalidated.
Section 26. Governing Law.
This Lease will be construed and enforced in accordance with the laws of the
state in which the Premises are located.
Section 27. No Option.
Submission of this Lease to Tenant for examination or negotiation does not
constitute an option to lease, offer to lease, or a reservation of, or option
for, the Premises. This document will become effective and binding only upon
the execution and delivery of the document by Landlord and Tenant.
Section 28. Successors and Assigns.
This Lease will be binding on and inure to the benefit of the successors and
assigns of Landlord and, to the extent assignment is approved by Landlord,
Tenant.
Section 29. No Third-Party Beneficiaries.
Nothing in this Lease is intended to create any third-party benefit.
Section 30. Memorandum of Lease and Quitclaim.
Prior to recordation of any trust deed, mortgage lien or ground lease on the
Property except the existing trust deed in favor of R&H, Landlord shall record
a short form memorandum of this Lease, in form attached as Exhibit L, to
which Exhibit A shall be attached. Upon the expiration or earlier termination
of this Lease, Tenant shall provide Landlord with a duly executed and
acknowledged quitclaim of all of Tenant's rights in and to the Premises in
form satisfactory for recording in the county in which the Premises are
located.
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Section 31. No Agency, Partnership, or Joint Venture.
Nothing contained in this Lease will be deemed or construed by the parties, or
by any third party, as creating the relationship of principal and agent,
partnership, or joint venture by the parties. It is understood and agreed that
no provision contained in this Lease or any acts of the parties will be deemed
to create any relationship other than the relationship of landlord and tenant.
Section 32. No Merger.
The voluntary or other surrender of this Lease by Tenant or a mutual
cancellation of the Lease or a termination by Landlord will not work a merger
and will, at the option of Landlord, unless otherwise agreed with Tenant,
terminate all of any existing subtenancies or may, at the option of Landlord,
operate as an assignment to Landlord of any subtenancies.
Section 33. Signs.
Landlord shall prepare a signage program for the Real Property which
reasonably addresses input from Tenant and which shall apply to the Real
Property. Tenant shall prepare a signage program for the Premises for
presentation to Landlord for approval upon execution of this Lease. Tenant's
signage program shall conform to Landlord's signage program. Landlord's
approval of Tenant's signage program shall not be unreasonably withheld,
delayed or conditioned. Subject to Tenant acquiring all governmental permits
and approvals required by all applicable governmental laws, ordinances, and
regulations, Tenant shall have the right, at Tenant's sole cost and expense,
to install company identification signs on, and a monument sign adjacent to,
the exterior of the Shell Improvements. All signs and graphics of every kind
visible from public view, corridors, or the exterior of the Premises will be
in compliance with Landlord's and Tenant's approved signage program and
otherwise subject to Landlord's prior written approval and will be subject to
any applicable governmental laws, ordinances, and regulations. Tenant must
remove all signs and graphics prior to the termination of this Lease.
Installations and removals must be made in a manner so as to avoid injury or
defacement of the Premises. Tenant must repair any injury or defacement,
including, without limitation, if reasonably possible discoloration caused by
installation or removal.
Section 34. No Waiver.
No waiver of any default or breach under this Lease will be implied from any
omission to take action on account of this Lease, regardless of any custom and
practice or course of dealing. No waiver will affect any default other than
the default specified in the waiver, and then the waiver will be operative
only for the time and to the extent stated in the Lease. Waivers of any
covenant will not be construed as a waiver of any subsequent breach of the
same covenant. No waiver by either party of any provision under this Lease
will be effective unless in writing and signed by
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that party.
Section 35. Financial Statements.
Tenant will provide to any lender, purchaser, or Landlord, within ten (10)
days after request, a current, accurate, certified financial statement for
Tenant and Tenant's business prepared under generally accepted accounting
principles consistently applied and any other certified financial information
or tax returns as may be reasonably required by Landlord, purchaser, or any
lender of either. Tenant may satisfy this requirement by providing Landlord
with a copy of Tenant's current Form 10K or Form 10Q as required to be filed
with the Securities and Exchange Commission.
Section 36. Limitation of Liability.
The obligations of Landlord under this Lease are not personal obligations of
the individual members, partners, directors, officers, shareholders, agents,
or employees of Landlord. Tenant shall look solely to the Premises and Real
Property, and to any insurance proceeds from insurance actually carried under
this Lease for satisfaction of any liability or for property damage and may
not look to other assets of Landlord or seek recourse against the assets of
the individual members, partners, directors, officers, shareholders, agents,
or employees of Landlord. Landlord agrees that any future leases of the
Adjacent Real Property shall contain similar provisions limiting Landlord's
liability to tenants of the Adjacent Real Property to that tenant's premises
and the Adjacent Real Property to the exclusion of the Real Property unless
otherwise equitably provided in any AREA. Except as provided in Paragraph 21,
whenever Landlord transfers Landlord's interest, Landlord will be
automatically released from further performance under this Lease and from all
further liabilities and expenses under this Lease (excepting only unperformed
obligations arising prior to such transfer, as to which Landlord shall
continue to be liable for claims made no more than six (6) months following
such transfer and only to the extent of the actual proceeds from sale or
transfer of the Premises) and Landlord shall cause the transferee of
Landlord's interest to agree in writing to assume all liabilities and
obligations of Landlord under this Lease from the date of the transfer. The
foregoing notwithstanding, nothing herein shall limit Landlord's liability for
Landlord's fraudulent misappropriation of insurance proceeds or all or any
portion of the Security or Security Deposit.
Section 37. Notices.
All notices to be given under this Lease will be in writing and mailed,
postage prepaid, by certified or registered mail, return receipt requested, or
delivered by personal or courier delivery, or sent by telecopy (immediately
followed by one of the preceding methods), to Landlord's Address and Tenant's
Address, or to any other place that Landlord or Tenant may designate in a
written notice given to the other party. Notices will be deemed served on the
earlier of receipt or three (3) days after the date of mailing.
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Section 38. Brokerage Commission.
Landlord will pay a brokerage commission to Broker in accordance with a
separate agreement between Landlord and Broker. Tenant warrants to Landlord
that Tenant's sole contact with Landlord or with the Premises in connection
with this transaction has been directly with Landlord and Broker, and that no
other broker or finder can properly claim a right to a commission or a
finder's fee based on contacts between the claimant and Tenant other than Tory
Corporate Real Estate Advisors (d.b.a. The Staubach Company) who are to be
paid by Broker from the commission paid by Landlord to Broker. Tenant and
Landlord, respectively, will each indemnify, defend by counsel acceptable to
the other, protect, and hold each other harmless from any loss, cost, or
expense, including, but not limited to, attorney fees and cost, resulting from
any claim for a fee or commission by any broker or finder in connection with
the Premises and this Lease other than Broker.
Section 39. Authorization.
Tenant will furnish to Landlord, within thirty (30) days after written
request, evidence satisfactory to Landlord that the person who executed this
Lease on behalf of Tenant was duly authorized to do so. Each individual
executing this Lease on behalf of Tenant represents and warrants that she or
he is duly authorized to execute and deliver this Lease on behalf of Tenant
and that the execution is binding upon Tenant. Landlord will furnish to
Tenant, within thirty (30) days after written request, evidence satisfactory
to Tenant that the person who executed this Lease on behalf of Landlord was
duly authorized to do so. Each individual executing this Lease on behalf of
Landlord represents and warrants that she or he is duly authorized to execute
and deliver this Lease on behalf of Landlord and that the execution is binding
upon Landlord.
Section 40. Extension Option.
(a) Landlord grants to Tenant two (2) options to renew the Lease for a period
of five (5) years (each an "Extension Period"). Tenant's privilege to
exercise this option is expressly conditioned upon there being no Tenant Event
of Default at the time the option is exercised, and there being no Tenant
Event of Default between the time the option is exercised and the start of the
Extension Period.
(b) Provided there is no Tenant Event of Default, Tenant shall have the right
to extend the Term upon tendering written notice ("Extension Notice") to
Landlord no later than ten (10) months prior to the expiration of the Term.
All terms and conditions of this Lease shall continue during the Extension
Period, provided that during the Extension Period, the Monthly Rent shall be
adjusted to the Fair Market Rent as of the start of the Extension Period.
(c) As used in this Lease, "Fair Market Rent" shall be deemed to mean the base
amount of rental
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that would typically be paid by a tenant under a net lease (exclusive of all
other sums payable by Tenant under a net lease such as taxes, insurance
premiums, common area maintenance charges, utilities, repair and restoration
costs, and similar charges) for premises of a similar type, design, and
quality as the Shell Improvements, in the same or similar-quality geographic
area in the mid Peninsula, Highway 101 corridor market area in which the
Premises are situated under market leasing conditions existing at that time in
the mid Peninsula, Highway 101 corridor market area and taking into account
the presence, if any, of other escalation provisions and other Tenant payment
provisions in this Lease, and Landlord's obligations, or limitations on same,
in this Lease. In determining the Fair Market Rent for the Premises as of the
commencement of the extension term, the parties or the appraiser(s) shall
consider leases of comparable Shell Improvements for light industrial and
office purposes, which shall be leases of comparable length for space that is
comparable in size, location, and type of building, and is comparable to the
age, quality, layout and condition of the Shell Improvements, with comparable
parking rights and landscaping. Leases of comparable space that are not
arms-length negotiated leases (as with a tenant that owns equity in a
building) or are subleases shall not be considered in determining the Fair
Market Rent. The Fair Market Rent for the Premises shall not include any rent
attributable to Tenant's Tenant Improvements, Tenant's Alterations, or Shell
Upgrades the amortized value of which have been added to Base Rent or any
other improvements theretofore made or paid for by Tenant (whether by
amortization during the initial Lease Term or otherwise), and the rent shall
take into account whether there is any brokerage commission payable by
Landlord upon the lease extension. If necessary to determine a comparable
rental, the parties or the appraiser(s) shall appropriately adjust rentals in
comparable leases to back out leasehold improvements or allowances, rental
abatements or other Landlord concessions, and any other factors that bear on
comparability of such comparable lease to this Lease of the Shell
Improvements, to arrive at a rental as comparable as possible for an "as is"
lease of the Shell Improvements in their then condition (excluding all
improvements paid for by Tenant including Shell Upgrades) for a five (5) year
term without leasehold improvements or other concessions by Landlord.
(d) If Landlord and Tenant cannot agree on the Fair Market Rent within thirty
(60) days after the date of the Extension Notice (but in any case no earlier
than eight (8) months prior to the expiration of the Term), the Monthly Rent
payable during the Extension Period shall be conclusively determined as
follows:
(i) Within thirty (30) days after Tenant's Extension Notice, Landlord
shall give Tenant written notice of the date by which each party must appoint
an appraiser under this Section, which shall be (10) days after the later of
(A) expiration of the sixty (60) day period in Section 40(d) or (B) the date
eight (8) months prior to the expiration of the Term. By the date stated in
Landlord's notice, each party, at its cost and by giving notice to the other
party, shall appoint a real estate appraiser with at least five (5) years'
full-time commercial appraisal experience in the geographic area in which the
Premises are located, to appraise and determine the then Fair Market Rent as
described in Section 40(c).
(ii) If one party does not appoint an appraiser within the time period in
Section 40(d)(i), the appraiser appointed by the other party shall be the sole
appraiser and shall determine the Fair Market Rent. Notwithstanding this
Section, either party shall have the right to appoint a
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replacement appraiser if the appraiser originally selected becomes unable to
perform as required hereunder.
(iii) If neither party appoints an appraiser within the time period set
forth in Section 40(d)(i), the Minimum Monthly Rent during the Extension
Period shall be increased five percent (5%) over the Monthly Rent payable in
the last full month immediately preceding the Rent Determination Date.
(iv) If the two (2) appraisers are so appointed by the parties, they
shall meet promptly and attempt to appraise and determine the Fair Market
Rent. If they are unable to agree within thirty (30) days after the second
appraiser has been appointed, they shall attempt to select a third appraiser
who meets the qualifications stated in Section 40(d)(i) within thirty (30)
days after the last day the two appraisers are given to determine the Fair
Market Rent. If they are unable to agree on a third appraiser, either of the
parties to this Lease, by giving ten (10) days' notice to the other party, can
apply to the presiding judge of the Superior Court for the county in which the
Premises are located for the selection of a third appraiser who meets the
qualifications stated in Section 40(d)(i). Each of the parties shall bear
one-half (1/2) of the cost of appointing the third appraiser and of the third
appraiser's fees, provided, however, that if the parties' respective
determinations of Fair Rental Value differ by more than five percent (5%) of
the lower value, the party whose determination is rejected by the third
appraiser shall pay or reimburse the other party for the third appraiser's
fees and costs. The third appraiser, however selected, shall be a person who
has not previously acted in any capacity for either party.
(v) Within thirty (30) days after appointment of the third appraiser,
each party's appraiser shall submit to the third appraiser a written statement
of such appraisers determination of the Fair Market Rent of the Shell
Improvements, determined as provided in this Lease, together with written
information relating to comparable transactions and adjustments thereto used
in making such determination, and a copy of such submission shall be provided
to the other party. Within fifteen (15) days thereafter , each party shall
have the right to submit a response to the other party's submission. Within
thirty (30) days after the last of such responses are received, the third
appraiser shall select either the Fair Market Rent determined by Landlord's
appraiser or the Fair Market Rent determined by Tenant's appraiser as the
Fair Market Rent. If the third party appraiser considers information not
submitted by either party in making such determination, the third party
appraiser shall advise each of the parties' appraisers and permit them to
comment on such information before making such determination. The third
appraiser may not determine a Fair Market Rent other than a Fair Market Rent
submitted by one of the parties. The Fair Market Rent chosen by the third
appraiser shall be the Fair Market Rent during the Term of the extension.
(e) After the Fair Market Rent is determined, Landlord and Tenant shall
execute an Amendment to this Lease setting forth the Fair Market Rent. The
Amendment shall provide for the addition of unamortized Shell Upgrade Costs to
the determined Fair Market Rent pursuant to Section 3(c) and Section 5(c) of
Exhibit C hereto.
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Section 41. Holding Over.
If Tenant holds over the Premises or any part of the Premises after expiration
of the Term, the holding over will constitute a month-to-month tenancy, at a
rent equal to the Rent in effect immediately prior to the holding over plus
fifty percent (50%) of the Rent. This paragraph will not be construed as
Landlord's permission for Tenant to hold over. Acceptance of Rent by Landlord
following expiration or termination would not constitute a renewal of this
Lease nor limit Landlord's remedies for actual and consequential damages
resulting from Tenant's hold over. The foregoing notwithstanding, Tenant
shall only be liable to Landlord for any consequential damages resulting from
a Tenant hold over if Landlord advises Tenant by written notice that a third
party tenant intends to occupy the Premises upon the expiration of the Term.
Such notice must be provided at least sixty (60) days prior to Tenant's
required departure if Tenant is to vacate upon expiration of the Term and must
be provided at least thirty (30) days prior to Tenant's required departure if
Tenant is to vacate after the expiration of the Term.
Section 42. Tenant Right to Terminate.
Prior to Landlord's commencement of construction of the Shell Improvements,
Tenant shall have the right to terminate this Lease in the event Landlord has
not completed any of the following conditions on or before the date shown: (i)
Receipt by October 1, 1997 of required zoning and planning approvals necessary
to construct the Shell Improvements from the Planning Department of the City
of Redwood City; (ii) Receipt by November 1, 1997 of a binding lender
commitment for permanent financing of the Premises; (iii) Landlord's good
faith commencement of construction by November 15, 1997.
Section 43. Surrender.
Upon the termination of this Lease or Tenant's right to possession of the
Premises, Tenant will surrender the Premises, together with all keys, in good
condition and repair, reasonable wear and tear, and casualty or condemnation,
or repairs that are Landlord's responsibility excepted. Conditions existing
because of Tenant's failure to perform maintenance, repairs, or replacements
as required under this Lease will not be deemed "reasonable wear and tear.
Section 44. Mortgagee Protection.
Tenant acknowledges that Landlord will seek financing to complete the Project
from a lender ("Mortgagee"). Tenant will reasonably cooperate with Landlord
to obtain such financing, including timely provision of the Security, current
financial reports, subordination, attornment and non-disturbance agreements,
estoppel certificates and such other documents and instruments as Mortgagee or
Landlord may reasonably require which do not materially or adversely affect
Tenant's rights or interests under this Lease. Tenant further covenants that:
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(a) Tenant will not unreasonably withhold, delay or condition its consent to
Lease amendments reasonably requested by a prospective Mortgagee of Landlord,
as long as the request do not change the rent to be paid by Tenant and do not
materially or adversely affect the Tenant's rights or interests under this
Lease or in the Premises or Common Area.
(b) If Landlord or any Mortgagee shall have delivered to Tenant prior written
notice of the address of any Mortgagee, Tenant will mail to such Mortgagee a
copy of any notice or other communication from Tenant to Landlord under this
Lease at the time of giving such notice or communication to Landlord and no
termination of this Lease or termination of Tenant's obligations under this
Lease predicated on the giving of any notice shall be effective unless Tenant
gives to such Mortgagee written notice or a copy of its notice to Landlord of
such default or termination, as the case may be and reasonable opportunity to
cure any Landlord default permitting such termination.
(c) In the event of any default by Landlord under the provisions of this
Lease, any Mortgagee will have the same rights granted Landlord for remedying
such default or causing it to be remedied, plus, in each case, an additional
period of thirty (30) days (or in the event of a cure which reasonably
requires in excess of thirty days to cure, for such time as Mortgagee is
diligently prosecuting such cure to completion , including, if necessary,
sufficient time to secure rights to the Premises through appointment of a
receiver) after the expiration of the initial period or after Tenant has
served a notice or a copy of a notice of such default upon the Mortgagee,
whichever is later.
(d) No surrender (except a surrender upon the expiration of the term of this
Lease) by Tenant to Landlord of this Lease, or of the Premises, or any part
thereof, or of any interest therein, and no termination of this Lease by
Landlord or Tenant shall be valid or effective, and neither this Lease nor any
of the terms of this Lease may be amended, modified, changed or canceled
without the prior written consent of any Mortgagee who shall have been
previously identified to Tenant in writing by Landlord as having such rights
with respect to this Lease.
Section 45. Right of First Lease Offer.
Landlord hereby grants to Tenant a right of first offer to lease, on the terms
and conditions herein set forth, on all the rentable area located within any
building located or to be constructed on the Adjacent Real Property (the
"First Offer Area"). If, during the term of this Lease, Landlord reasonably
expects that any portion of the First Offer Area shall become available for
lease (as hereinafter defined), and if there is then no Tenant Event of
Default, Landlord shall offer to lease such area to Tenant at the then
prevailing rental rate and terms and conditions (including, without
limitation, allowances for leasehold improvements, or Landlord may quote an
"as is" rental) then offered by Landlord for new leases of comparable space
within such building for a term ending at the expiration of the Lease Term, as
follows: Landlord shall give Tenant written notice describing the additional
area available for lease and stating the terms and conditions (including
anticipated availability date) upon which the First Offer Area is offered for
lease to Tenant. Within ten (10) days after such notice is given, Landlord
shall be available to negotiate with
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Tenant toward mutually acceptable terms for a lease of the First Offer Area,
and within such time Tenant shall also have the right (provided there is then
no Tenant Event of Default) to accept the offer set forth in Landlord's notice
by written notice to Landlord. If Tenant so exercises its first offer right,
the end of the term of the lease for the First Offer Area shall coincide with
the end of the term of this Lease. The First Offer Area, or any part thereof,
shall be deemed to become available upon expiration or other termination of a
lease to another tenant covering the First Offer Area or any part of it,
taking into account any renewals or extensions of such lease or rights of any
other Tenant of the Adjacent Real Property to such space. Any part of the
First Offer Area which is not leased to another tenant upon execution of this
lease shall not be subject to this right of first refusal upon the initial
lease of such area to another tenant, it being understood that this right of
first refusal shall apply only after such area has been leased to another
tenant and thereafter becomes available as defined above. Landlord and Tenant
shall execute a mutually agreeable "Amendment to Lease" to incorporate the
First Offer Area into the Premises.
Section 46. Joint and Several.
If Tenant consists of more than one person, the obligation of all those
persons will be joint and several.
Section 47. Covenants and Conditions.
Each provision to be performed by Landlord or Tenant under this Lease will be
deemed to be both a covenant and a condition.
In Witness Whereof, the parties have executed this Lease as of the date set
forth above.
"Landlord": CHESTNUT BAY LLC
___________________________________________________________
Mike Newbro, President
Date: September 19, 1997
"Tenant": HEARTPORT, INC.
___________________________________________________________
Steve Johnson Vice President of Manufacturing
Date: September 19, 1997
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FIRST AMENDMENT TO
INDUSTRIAL BUILD TO SUIT LEASE
BETWEEN CHESTNUT BAY LLC AND
HEARTPORT, INC.
THIS FIRST AMENDMENT TO LEASE, dated February 10, 1998, is made by and
between CHESTNUT BAY LLC, a California limited liability company ("Landlord")
and HEARTPORT, INC., a Delaware corporation ("Tenant") with respect to the
following facts:
R E C I T A L S
A. Tenant and Landlord entered into that certain Lease agreement dated
September 19, 1997, and entered into that certain Exhibit Document dated
October 31, 1997 (collectively the "Lease") for premises to be constructed on
real property in the State of California, City of Redwood City, County of San
Mateo, commonly known as 800 Chestnut Street.
B. Tenant and Landlord desire to amend and modify the Lease to include
in the Base Rent the amortized cost for shell upgrades requested by Tenant in
accordance with Section 3(c) of the Lease and Section 5(b) of the Industrial
Build to Suit Lease Work Letter attached as Exhibit C to the Lease.
C. Landlord intends to borrow funds from Mercantile-Safe Deposit and
Trust Company ("Trustee"), in its capacity as trustee of the AFL-CIO Building
Investment Trust ("Trust"), a trust existing under the laws of Maryland, and
not in its corporate capacity pursuant to certain agreements (collectively,
the "Loan Agreements") of even date herewith between Landlord and Trustee
through which Landlord intends to borrow funds from the Trust to refinance the
acquisition of the Real Property and the Adjacent Real Property, to finance
the acquisition of a portion of the Adjacent Real Property, and to finance the
construction of the Project and improvements on the Real Property and the
Adjacent Real Property. The Tenant and Landlord desire to amend and modify
the Lease to accommodate the requirements of the Trust, including expanding
Tenant's protection in the event of casualty, as permitted under Section 44 of
the Lease. Pursuant to Landlord's borrowing of funds from the Trust, Landlord
shall enter into certain agreements with the Trust including a Deed of Trust,
Security Agreement and Fixture Filing with Assignment of Rents of even date
herewith to be recorded against the Property and Adjacent Real Property to
secure funds to be used in part to construct the Shell Improvements (defined
in the Loan Agreements as the "Phase I Loan Indenture") and a Deed of Trust,
Security Agreement and Fixture Filing with Assignment of Rents of even date
herewith to be recorded against the Property and Adjacent Real Property to
secure funds to be used in part to construct Building II and Building III on
the Adjacent Real Property (defined in the Loan Agreements as the "Phase II
Loan Indenture"). The Phase I Loan Indenture and the Phase II Loan Indenture
are collectively defined in the Loan Agreements and are hereinafter
collectively referred to as the "Indentures". The date when the lien of the
Phase I Loan Indenture is reconveyed with respect to the Adjacent Real
Property and the lien of the Phase II Loan Indenture is reconveyed with
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respect to the Real Property is defined in the Loan Agreements as the "Cross
Collateralization Release Date" which Loan Agreements definition shall be
controlling with respect to the parties.
NOW, THEREFORE, for good and valuable consideration the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
1. BASIC LEASE INFORMATION.
(a) INITIAL BASE RENTAL AND ADJUSTMENT TO BASE RENT DURING LEASE
TERM. The Initial Base Rent Per Month set forth in the Basic Lease
Information to the Lease is hereby amended to read in its entirety as follows:
Initial Base Rent Per Month ("Base Rent"): During the initial year of
the Lease Term the Base Rent shall be $1.64 per rentable square foot per
month. On the first Adjustment Date, and on each subsequent Adjustment
Date during the initial term only, the Base Rent shall be adjusted to the
sum of the following amounts: (a) $1.56 per rentable square foot as such
amount shall be adjusted pursuant to Section 3(b); plus (b) $.08 per
rentable square foot, which represents the amortized value of Tenant
requested Shell Upgrade Costs under Section 3(c). Except as provided in
the foregoing sentence no additional adjustment shall be made to the Base
Rent under: Section 3(b); or Section 3(c) except as set forth in Section
40(e) of the Lease with respect to an extension term.
(b) TENANT'S ADDRESS FOR NOTICE. The following language is hereby
added to Tenant's Address for Notice as set forth in the Basic Lease
Information:
Prior to Tenant's occupancy of the Premises for the conduct of Tenant's
business Tenant's address for notice shall be: Heartport, Inc., 200
Chesapeake, Redwood City, California 94063 Attn: Steve Johnson
(c) SECURITY. The Security provision set forth in the Basic Lease
Information to the Lease is hereby amended to read in its entirety as follows:
Security ("Security"): Additional collateral in the form of an
irrevocable letter of credit issued by a bank reasonably acceptable to
Landlord and Landlord's lender and naming Trustee as beneficiary. The
amount of the Security and an agreement for reductions in such amount
upon Tenant's achievement of certain financial milestones, is set forth
in that certain Letter of Credit Agreement ("Letter of Credit Agreement")
executed between Trust, Landlord and Tenant of even date with the First
Amendment to Lease and incorporated into the Lease by this reference.
(d) PERMITTED USE. The following language is hereby added to
Permitted Use as set forth in the Basic Lease Information:
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Tenant acknowledges and agrees that under no circumstances shall the
Premises or Common Areas be used for any use which is prohibited under
Section 8.4 of the Purchase and Sale Agreement attached to the Lease as
Exhibit I-1.
2. Section 2 TERM.
(a) Section 2(b)(i) RENTAL COMMENCEMENT DATE. The hand
interlineations of the language of subsection 2(b)(i) are hereby removed such
that 2(b)(i) is revised to read in its entirety as follows:
(i) One Hundred Twenty (120) days following the Commencement Date, plus
any time following the Commencement Date that Tenant's work on the Tenant
Improvements was interrupted or delayed by a Landlord Delay as defined in
Exhibit C (the "Outside Rental Commencement Date");
(b) Section 2(d) DELAYS. Subsection 2(d) of the Lease is hereby
deleted in its entirety and replaced with the following:
(d) Delays. If Shell Substantial Completion has not occurred within
fifteen (15) days following the Estimated Shell Substantial Completion
Date, as it may be extended by any Unavoidable Delays (defined in Exhibit
C) and Tenant Delays, this Lease will not terminate but Tenant shall
receive a Rent credit of one day free rent for each day of delay
commencing on the sixteenth (16th) day following the Estimated Shell
Substantial Completion Date until the earlier to occur of: thirty (45)
days following the Estimated Shell Substantial Completion Date; or the
Shell Substantial Completion Date. If Shell Substantial Completion has
not occurred for forty-five (45) days after the Estimated Shell
Substantial Completion Date, as it may be extended by any Unavoidable
Delays and Tenant Delays, this Lease will not terminate but Tenant shall
receive a Rent credit of two days free rent for each day of delay
following the forty-fifth (45th) day of delay until Shell Substantial
Completion. The Rent credits provided in this Section 2(d) and Tenant's
rights under Section 2(f) shall serve as Tenant's sole and exclusive
remedy for any delay of Shell Substantial Completion. Any free rent
credits will commence on the date Rent would otherwise commence under
Section 3(a) of the Lease.
3. Section 2(f)(i) OUTSIDE SHELL COMPLETION DATE. Subsection 2(f)(i)
of the Lease is hereby deleted in its entirety and replaced with the following:
(i) In the event of a Landlord election to terminate this Lease
pursuant to this subsection 2(f), and provided this Lease has not been
assigned (other than as permitted under Section 15(b) of the Lease) and
Tenant is not in default hereunder beyond any applicable cure periods,
Tenant shall have the right (the "Outside Shell Completion Date Tenant
Purchase Option"), for a period of thirty (30) days following Landlord's
termination notice, to elect to purchase the Adjacent Real Property with
all improvements constructed thereon and appurtenances thereto and the
Real Property with all completed Tenant Improvements,
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Common Area Improvements and Shell Improvements together with all
materials, equipment and other assets purchased with proceeds of the
loans secured by the Indentures whether or not incorporated into the
improvements on the Real Property or Adjacent Real Property and any
insurance proceeds or condemnation award due Landlord with respect to any
such property (collectively the "Option Property") at a purchase price
equal to the greater of: ninety percent (90%) of the Option Property's
then Fair Market Purchase Price (defined herein); or the outstanding
amounts due under the loans secured by the Indentures at the closing of
the purchase under the option, including any amounts due as a result of
Tenant's exercise of this option (the "Indentures Price"). Tenant shall
exercise such right by delivering to Landlord during said thirty day
period Tenant's proposed purchase contract which shall include reasonable
and customary terms for the acquisition of similarly situated real
property and improvements (which at a minimum shall provide for close of
escrow no later than forty-five days following the date of execution of
the agreement and shall relieve Landlord of all liability with respect to
the Option Property following close of escrow) (the "Purchase Agreement")
and shall state Tenant's proposed Fair Market Purchase Price
(collectively, "Tenant's Purchase Notice"). As used in this Section,
"Fair Market Purchase Price" shall be deemed to mean the arm's length
purchase price between parties of equal bargaining position for real
property and improvements of a similar type, design, and quality as the
Option Property, in the same or similar-quality geographic area in the
mid Peninsula, Highway 101 corridor market area in which the Premises are
situated under market conditions existing at that time in the mid
Peninsula, Highway 101 corridor market area. In determining the Fair
Market Purchase Price the parties or their appraiser(s) shall consider
cost replacement analysis, income analysis as well as sales of comparable
real property and improvements analysis for light industrial and office
purposes comparable in size, location, and type of building, age,
quality, layout and condition of the Option Property, with comparable
parking rights and landscaping. Sales of comparable property that are
not arms-length negotiated transactions (as with a tenant that owns
equity in a building) shall not be considered in determining the Fair
Market Purchase Price. The Fair Market Purchase Price shall not include
any amount attributable to Tenant's Tenant Improvements, Tenant's
Alterations (defined herein), or other improvements made or paid for by
Tenant (whether by amortization during the initial Lease Term or
otherwise), and the Fair Market Purchase Price shall take into account
whether there is any brokerage commission payable by Landlord upon sale.
It is the intention of the parties that the provisions of this Option
shall be construed so that Tenant does not pay twice for the Tenant
Improvements or Tenant Alterations paid for by Tenant. If the parties
cannot agree on the Fair Market Purchase Price of the Option Property
within thirty (30) days of Tenant's purchase notice, each party, at its
cost and by giving notice to the other party, shall, within ten (10) days
thereafter, appoint a real estate appraiser with at least five (5) years'
full-time commercial appraisal experience in the geographic area in which
the Option Property is located, to appraise and determine the then Fair
Market Purchase Price and the Fair Market Purchase Price shall be
conclusively determined as follows:
4. Section 2(g) OUTSIDE SHELL COMPLETION DATE. The first sentence of
Subsection 2(g)
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of the Lease is hereby deleted and replaced with the following:
(g) After the Fair Market Purchase Price is determined, Landlord and
Tenant shall execute a Purchase Agreement with a purchase price of the
greater of: ninety percent (90%) of the Option Property's then Fair
Market Purchase Price as determined by the parties as set forth above; or
the Indentures Price. If the parties cannot agree on reasonable and
customary terms for the remaining provisions of the Purchase Agreement
within one hundred thirty (130) days of Tenant's Purchase Notice despite
diligent good faith efforts at negotiating such contract and the
determination of a Fair Market Purchase Price, each party, at its cost
and by giving notice to the other party, shall, within ten (10) days
thereafter, appoint a licensed real estate broker with at least five (5)
years' full-time commercial lease brokerage experience in the geographic
area in which the Option Property is located, who shall jointly determine
the reasonable and customary terms for remaining provisions of the
Purchase Agreement. If Landlord's appointed broker and Tenant's
appointed broker are unable to agree on the reasonable and customary
terms for remaining provisions of the Purchase Agreement within one
hundred sixty (160) days of Tenant's Purchase Notice, they shall select a
third licensed real estate broker with equivalent experience and the
three brokers shall establish the "reasonable and customary terms for
remaining provisions of the Purchase Agreement" using the same process
required of the appraisers to establish the "Fair Market Purchase Price"
under Sections 2(f)(iii) and (iv) of the Lease.
5. Section 2(h) TENANT'S CONTINUING OPTION RIGHTS. A new Section
2(h) TENANT'S PRE- CROSS COLLATERALIZATION RELEASE DATE OPTION and a new
Section 2(i) TENANT'S POST CROSS COLLATERALIZATION RELEASE DATE OPTION are
hereby added to the Lease to read in their entirety as follows:
2(h) Tenant's Pre- Cross Collateralization Release Date Option. In the
event that Landlord terminates the Lease pursuant to Section 12 or 13
herein prior to the date that the Cross Collateralization Release Date
and the contemplated reconveyances of the Indentures associated therewith
have occurred, and provided this Lease has not been assigned (other than
as permitted under Section 15(b) of the Lease) and Tenant is not in
default hereunder beyond any applicable cure periods, Tenant shall have
the right, for a period of thirty (30) days following Landlord's
termination notice, to elect to purchase the Option Property at a price
equal to the greater of: ninety percent (90%) of the Option Property Fair
Market Purchase Price determined for the date immediately preceding the
date of damage or destruction less Estimated Reconstruction Costs; or the
Indentures Price (the "Pre- Cross Collateralization Release Date
Option"). For purposes of this provision, "Estimated Reconstruction
Costs" shall be the amount reasonably estimated by Landlord's Contractor
and Tenant's Contractor to restore the completed Shell Improvements,
Tenant Improvements, Common Area Improvements, and any improvements
completed on the Adjacent Real Property, to their condition immediately
prior to the damage or destruction. If Landlord's Contractor and
Tenant's Contractor are unable to agree on the Estimated Reconstruction
Costs within thirty (30) days of Tenant's exercise of its Pre-Cross
Collateral
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Release Date Option Right, they shall select a third licensed contractor
with equivalent experience to Tenant's Contractor and the three
contractors shall establish the Estimated Reconstruction Costs using the
same process required of the appraisers to establish the Fair Market
Purchase Price under Sections 2(f)(iii) and (iv) of the Lease. The
purchase of the Option Property pursuant to this Pre-Cross
Collateralization Release Date Option shall be concluded in accordance
with Section 2(g) above; provided, however, that Tenant shall receive a
credit toward the purchase price for any outstanding monetary obligations
due Tenant from Landlord under the Lease (reduced by any monetary
obligations due Landlord from Tenant under the Lease), but only to the
extent the purchase price exceeds the Indentures Price (it being
understood between the parties that the minimum price for the Option
Property in all circumstances under this Pre-Cross Collateral Release
Date option right shall be the outstanding amounts due the Trust under
the Indentures including any amounts due as a result of Tenant's exercise
of this option).
2(i) Tenant's Post Cross Collateralization Release Date Option. In the
event that Landlord terminates the Lease pursuant to Section 12 or 13
herein at any time following the date that the Cross Collateralization
Release Date and the contemplated reconveyances of the Indentures
associated therewith have occurred, and provided this Lease has not been
assigned (other than as permitted under Section 15(b) of the Lease) and
Tenant is not in default hereunder beyond any applicable cure periods,
Tenant shall have the right (the "Post Cross Collateralization Release
Date Option"), for a period of thirty (30) days following Landlord's
termination notice, to elect to purchase the Real Property with all
remaining Tenant Improvements, Common Area Improvements and Shell
Improvements together and with all materials, equipment and other assets
purchased with proceeds of the $16,000,000 loan secured by the Phase I
Indenture whether or not incorporated into the improvements on the Real
Property or Adjacent Real Property and any insurance proceeds or
condemnation award due Landlord with respect to any such property ("Phase
I Option Property") at the greater of: ninety percent (90%) of the Phase
I Option Property Fair Market Purchase Price determined for the date
immediately preceding the date of damage or destruction less Estimated
Reconstruction Costs; or the outstanding amounts due under the
$16,000,000 loan secured by the Phase I Indenture at the closing of the
purchase under this option including any amounts due as a result of
Tenant's exercise of the option (the "Phase I Indenture Price").
Reconstruction Costs and the Fair Market Purchase Price for the Phase I
Option Property shall be determined as set forth in Section 2(h) above
but only with respect to the Phase I Option Property. The purchase of
the Phase I Option Property pursuant to this Post Cross Collateralization
Release Date Option shall be concluded in accordance with Section 2(g)
above; provided, however, that Tenant shall receive a credit toward the
purchase price for any outstanding monetary obligations due Tenant from
Landlord under the Lease (reduced by any monetary obligations due
Landlord from Tenant under the Lease), but only to the extent the
purchase price exceeds the Phase I Indenture Price (it being understood
between the parties that the minimum price for the Phase I Option
Property in all circumstances under this Post Cross Collateral Release
Date option right shall be the outstanding amounts due the Trust under
the Phase I Indenture including any amounts due under the Phase I
Indenture as
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a result of Tenant's exercise of the Pre- Cross Collateralization Release
Date Option).
6. Section 3(c) SHELL UPGRADE COSTS. Section 3(c) to the Lease is
hereby deleted in its entirety and replaced with the following language:
(c) Shell Upgrade Costs. Landlord shall provide Tenant with ten dollars
($10.00) ("Shell Upgrade Allowance") per rentable square foot toward
Shell Upgrade Costs which shall be amortized and included in Base Rent by
amendment to this Lease pursuant to Section 5(b) of Exhibit C hereto.
Any portion of the Shell Upgrade Allowance which is not used by Tenant to
pay for actual Shell Upgrade Costs may be used by Tenant to pay the cost
for Tenant Improvements installed in the Premises. Following the Rental
Commencement Date, Landlord shall pay Tenant, within thirty (30) days
from Tenant's request, an amount equal to any unused Shell Upgrade
Allowance (not used to pay for Shell Upgrade Costs) to reimburse Tenant
for amounts expended for Tenant Improvements as reflected in paid
invoices and lien waivers presented to Tenant for completed Tenant
Improvement work installed in the Premises.
7. Section 7(b) SHELL IMPROVEMENTS, TENANT IMPROVEMENTS, COMMON AREA
IMPROVEMENTS, ALTERATIONS AND ADDITIONAL RISK. The first sentence of
subsection 7(c)(v) is hereby revised to read as follows:
Landlord shall maintain fire and extended coverage (including "all risk",
expediting expense coverage and law and ordinance coverage), and at
Landlord's or Tenant's option earthquake insurance, throughout the Term
in an amount equal to the full replacement cost of the Shell
Improvements, Tenant Improvements, Common Area Improvements and
Alterations (new without deduction for depreciation), rental interruption
or equivalent loss of use insurance against loss of Rent in an amount
equal to the amount of Rent for a period of twelve (12) months (or at
Landlord's or Tenant's option up to twenty-four (24) months) commencing
on the date of loss, together with other insurance as may be required by
Landlord's lender, in its reasonable discretion, or by any governmental
agency.
8. Section 7(c)(v) WAIVER OF SUBROGATION. The first sentence of
subsection 7(c)(v) is hereby revised to read as follows:
Tenant waives any right of recovery from the Landlord, Landlord's
officers and employees, and Landlord waives any right of recovery from
Tenant, Tenant's officers or employees, for any loss or damage (including
consequential loss) resulting from any of the perils insured against
under insurance either: (i) required to be carried by the party required
to waive its right of recovery under this provision; or (ii) actually
carried by either party under this Lease.
9. Section 9(d) DAMAGE AND REMOVAL. The following language is hereby
added to the end of Section 9(d) of the Lease:
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Tenant shall not remove as Tenant's equipment any equipment, whether
installed by Tenant as part of the Tenant Improvements or otherwise,
which includes any integral portion of the Building mechanical,
electrical or plumbing systems excluding Tenant's trade fixtures.
10. Section 11(h) REMEDIATION DUE TO TENANT'S ACTIVITIES. A new
subsection 11(h)(iii) is hereby added to the Lease to read in its entirety as
follows:
Tenant's obligations under this Section 11(h) shall survive the
expiration or earlier termination of the Term of this Lease.
11. Section 11(l) LANDLORD REPRESENTATION WITH RESPECT TO R&H
AGREEMENTS. A new subsection 11(l) is added to the Lease to read in its
entirety as follows:
11(l) R&H Agreements.
Landlord represents and warrants to Tenant as of the date hereof that the
following constitute all of the agreements between Landlord and R&H
pertaining to the Real Property or the Adjacent Real Property under which
Landlord has any continuing obligation to R&H: The Access Agreement, the
Purchase and Sale Agreement, and all Exhibits thereto, Addendum, First
Amendment, Second Amendment, Third Amendment, the Deed of Trust described
in Exhibit B, and the Note secured by such Deed of Trust and letter
agreement relating to reinstallation of monitoring wells and monitoring
points following grading and/or construction. Landlord represents and
warrants to Tenant that, as of the date hereof, Landlord is not under any
continuing obligation to R&H under any other agreement, written or oral,
pertaining to the Real Property or the Adjacent Real Property.
12. Section 12(a) CASUALTY.
(a) The first sentence of subsection 12(a)(ii)(bb) is hereby revised
to read in its entirety as follows:
(bb) If Landlord elects to terminate this Lease pursuant to this
subsection 12(a)(ii) of the Lease, the Rent shall be abated from the date
Tenant vacates the Premises, and Landlord shall provide Tenant with any
insurance proceeds actually received by Landlord allocable to the damaged
Tenant Improvements, provided however, that if Tenant is not otherwise in
default under the terms of this Lease Tenant shall have the additional
right upon written notice to Landlord given with thirty (30) days
following Landlord's notice of termination, to elect to repair the
Premises at Tenant's expense, provided that if the date of such damage or
destruction is after the expiration of the fifth Lease Year, Tenant's
right to make such election shall be conditioned upon Tenant's
simultaneous election to renew the Lease Term for a minimum of ten (10)
years from the date of the damage and destruction under the same terms
and conditions as an extension of the Term under Section 40 of this Lease.
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(b) The following language is hereby added to the end of subsection
12(a)(iv) Total Destruction:
Any property insurance proceeds actually received by Landlord or the
Trust (or any other Landlord lender with senior lien rights to this
Lease) under insurance policies carried by Landlord pursuant to Section
7(b) of the Lease allocable to damaged Tenant Improvements and which
Landlord is required to reimburse to Tenant pursuant to Sections
12(a)(iv) TOTAL DESTRUCTION, and (ii) any condemnation award actually
received by Landlord or the Trust to which Tenant is entitled under
Section 13(c) AWARD or Section 13(d) TEMPORARY CONDEMNATION of the Lease,
shall be collectively referred to herein as the "TI Proceeds". As a
pre-condition of the effectiveness of any termination notice given by
Landlord under this subsection 12(a)(iv), Landlord shall pay to Tenant an
amount equal to the TI Proceeds, such payment to be made no later than
the later of ninety (90) days after the date of destruction or ten (10)
business days after the TI Proceeds are paid by the insurer or to the
party entitled thereto (the "TI Proceeds Payment Date"). If Landlord is
unable to pay the TI Proceeds to Tenant on or before the TI Proceeds
Payment Date, Tenant shall thereupon have the right, upon written notice
to Landlord given with thirty (30) days after the TI Proceeds Payment
Date, to elect to cause Landlord to repair the Premises, provided that if
the date of such damage or destruction is after the expiration of the
fifth Lease Year, Tenant's right to make such election shall be
conditioned upon Tenant's simultaneous election to renew the Lease Term
for a minimum of ten (10) years from the date of the damage and
destruction under the same terms and conditions as an extension of the
Term under Section 40 of this Lease.
13. Section 15(a) ASSIGNMENT AND SUBLETTING The first two sentences of
Section 15(a) to the Lease are hereby deleted in their entirety and replaced
with the following language:
(a) Tenant will not assign the Lease or sublet, whether voluntarily or
involuntarily or by operation of law, the Premises or any part of the
Premises without Landlord's prior written approval, which will not be
unreasonably withheld, delayed or conditioned. If Tenant desires to
assign this Lease or sublet any or all of the Premises, Tenant must, as
soon as reasonably possible, and in any event no less than twenty (20)
days prior to the anticipated effective date transfer, give Landlord
written notice of the anticipated effective date of the assignment or
sublease. Landlord will have a period of fifteen (15) business days
following receipt of notice from Tenant requesting Landlord's approval
(and providing to Landlord copies) of all related documents and
agreements associated with the assignment or sublease received by
Landlord or reasonably requested by Landlord, including, without
limitation, the financial statements of any proposed assignee or
subtenant, to notify Tenant in writing that Landlord elects (a) to permit
Tenant to assign this Lease or sublet space; or (b) to disapprove the
proposed assignment or subletting. If Tenant's notice requesting approval
of such documents contains a prominent statement in solid capital letters
stating, in substance, "WARNING: FAILURE TO RESPOND TO THIS NOTICE WITHIN
FIFTEEN (15) BUSINESS DAYS OF RECEIPT SHALL RESULT IN DEEMED APPROVAL OF
ASSIGNMENT OR SUBLETTING", a courtesy copy of such notice is delivered to
GE Capital Investment
9
<PAGE>
Advisors, Inc., 600 West Peachtree Street, N.W., Atlanta, Georgia 30308
("GECIA") (such notice to be provided for notice purposes only and not
for purposes of consent) and Tenant has written evidence of receipt of
such notice by the acting President or agent for service of process of
Landlord, and a Senior Vice President of GECIA, and Landlord fails to
notify Tenant in writing of a disapproval within fifteen (15) business
days of such receipted notice, Landlord will be deemed to have elected
option (a); if such notice contained no such statement Landlord will be
deemed to have elected option (b).
14. Section 18 SUBORDINATION. The last sentence of Section 18
regarding the delivery of the R&H SAND to Tenant is hereby deleted in its
entirety.
15. Section 21(a) SECURITY DEPOSIT. The following language is
hereby added to the end of Section 21(a).
Landlord shall make the Security Deposit available to the Trust if and
when required to cure a Tenant Event of Default. Landlord shall transfer
the Security Deposit to the Trust at such time that the Trust succeeds to
the rights of Landlord under the Lease upon exercise by the Trust of its
rights under the Indentures.
16. Section 21(b) SECURITY. The first sentence of Section 21(b)
Security, is hereby deleted and replaced with the following sentence:
Tenant shall provide Landlord with the Security concurrent with the
execution of the R&H Estoppel in favor of Tenant in the form attached
hereto as Exhibit A.
17. Section 22 ENTIRE AGREEMENT. Section 22 of the Lease is hereby
deleted in its entirety and replaced with the following language:
Section 22. Entire Agreement. This Lease, all Exhibits hereto contained
in the Exhibit Document, this First Amendment to Lease, as well as the
Letter of Credit Agreement and the Subordination Attornment and
Non-Disturbance Agreement as executed between Trust, Landlord and Tenant
of even date herewith, set forth all the agreements between Landlord and
Tenant concerning the Premises, and there are no other agreements (or
side letters), either oral or written, other than as set forth in this
Section 22 to this Lease.
18. Section 42 TENANT RIGHT TO TERMINATE. Section 42 of the Lease
is hereby deleted in its entirety and replaced with the following language:
Section 42. Tenant Right to Terminate. Tenant shall have the right to
terminate this Lease in the event the construction loan (or adequate
alternate financing or equity) (together the "Loan"), for construction of
the Shell Improvements is not funded or available on or before February
14, 1998. Landlord covenants: (i) to advise Tenant of any notice from
Landlord's lender which may prevent the loan from funding; (ii) to
continue the progress of construction
10
<PAGE>
without delay due to any delay in construction financing; and (iii) in
the event Tenant elects to terminate the Lease pursuant to this paragraph
42, to pay to Tenant actual architectural fees for the Tenant
Improvements, invoiced to Tenant by Tenant's Architect for services
provided after December 15, 1997 through the date of Tenant's notice, not
to exceed One Hundred Thousand Dollars ($100,000).
19. ADDITIONAL PROVISIONS. The following new provisions are hereby
added to the end of the Lease.
Section 48. REPRESENTATIONS REGARDING FINANCING FROM TRUST. Landlord
makes the following representations and warranties regarding the terms of
the Loan Agreements:
(a) The Loan Agreements provide for advances of principal in an
aggregate maximum amount of $31,000,000 of which $16,000,000 is allocated
to the Real Property ("Phase I Project") and $15,000,000 is allocated to
the Adjacent Real Property ("Phase II Project") (each, a "Loan" and
together, the "Loans"). There is no provision in the Loan Agreements for
advances to or for the benefit of Landlord, or any designee or member of
Landlord, in excess of these amounts other than, at Trustee's option,
advancing sums to complete the Phase I Project and/or the Phase II
Project or otherwise in connection with a default by Landlord under the
terms of the Loan Agreements. Landlord may incur additional liability
under the Loan Agreements as a result of its obligations (i) to reimburse
Trustee expenses and (ii) to indemnify and defend Trustee under certain
circumstances connected with a default by Landlord.
(b) The Loan Agreements impose a prepayment penalty ("Prepayment
Penalty") equal to $160,000 in the case of the Phase I Project loan and
$150,000 in the case of the Phase II Project loan, for any payment of the
principal sum prior to maturity, by acceleration or otherwise. In the
case of the Phase I Project Loan, the prepayment penalty drops to zero
eight years after the date on which the Loan converts to permanent
status. The Phase II Project Loan contains a similar provision whose
effective date varies depending on the term selected for the permanent
phase of the Phase II Project Loan. The Loan Agreements do not contain
any provision that affords Landlord better treatment than Tenant with
respect to the Prepayment Penalty or any other right or obligation
respecting the Loans.
The Loan Agreements permit prepayment of the Loans in connection with
Tenant's exercise of its option to purchase the Real Property (and, prior
to the Cross Collateralization Release Date, the Adjacent Real Property)
pursuant to Sections 2(h) and (i) of the Lease (as amended herein) and
Tenant's exercise of the option to purchase the Real Property and the
Adjacent Real Property pursuant to Section 2(f) of the Lease (as amended
herein). The Loan Agreements exempt from the application of the
Prepayment Penalty (i) any prepayment resulting from Trustee's election
to apply condemnation awards or casualty proceeds to reduce the
outstanding principal balance of the Loans, provided that Landlord is not
in default under the associated Loan Agreement, and (ii) any prepayment
of all or any portion
11
<PAGE>
of the principal balance of the Loans remaining outstanding after any
such application pursuant to Tenant's exercise of its option to purchase
the Real Property (and, prior to the Cross Collateralization Release
Date, the Adjacent Real Property) pursuant to Sections 2(h) and (i) of
the Lease (as amended herein). Tenant's exercise of the option to
purchase the Real Property and the Adjacent Real Property pursuant to
Section 2(f) of the Lease (as amended herein) would be subject to the
Prepayment Penalty, and the amount outstanding under the Loan Agreements
would include any applicable Prepayment Penalty in the event that Trustee
elected to apply any condemnation award or casualty proceeds to reduce
the outstanding principal balance of the loans while Landlord was in
default under the associated Loan Agreement.
(c) The project budgets approved in the Loan Agreements allocate the
entire loan proceeds to hard and soft costs associated with the Phase I
Project and the Phase II Project, with a reserve for contingencies in the
amount of $444,000 for the Phase I Project Loan and $400,000 for the
Phase II Project Loan. These hard and soft costs include certain costs
already incurred by Landlord which will be reimbursed to Landlord,
including Landlord's obligation to reimburse David Ferrari for the
assignment of the Rohm and Haas Purchase Agreement. Disbursements will
be made under the Loan Agreements only for approved budget items, and any
cost savings will be allocated to the associated contingency reserve.
Following Completion of the associated Project and satisfaction of
certain conditions, Landlord may make a final draw of the unadvanced
portion of the maximum amount of the Loan. In the case of the Phase I
Project Loan, this draw will be applied to reduce Landlord's indebtedness
with respect to the Phase II Project Loan.
(d) The Loan Agreements specifically authorize Tenant's prepayment of
the Loans in connection with Tenant's exercise of its purchase options
pursuant to the Lease, and there is no provision of the Loan Agreements
that would (i) materially interfere with or delay Tenant's exercise of
the options, or the prepayment of the Loans in connection therewith (ii)
impose any obligation or liability upon Tenant or otherwise require
Tenant to make any payment on account of the Phase II Loan after the
Cross Collateralization Release Date, or (iii) make Tenant liable to
Trustee for any other amount in connection with the exercise of any of
the foregoing options of Tenant, other than the Prepayment Penalty (to
the extent described in these representations) and any Trustee's fees or
expenses for which Borrower is liable, including Trustee's fees and
expenses incidental to Tenant's exercise of the option, including but not
limited to attorney's fees incurred by Trustee in connection with the
proposed repayment of the Loan.
(e) Landlord agrees that within two (2) business days after the
initial funding under the Loan Agreements, Landlord will provide Tenant
with a true and complete copy of the Loan Agreements provided Tenant
covenants to and agrees with Trustee, in writing, not to disclose to any
third parties or to the public the terms of the Loan or the Loan
Agreement without Trustee's and Landlord's prior written consent.
Landlord shall be liable to Tenant for all damages incurred by Tenant
resulting from the material inaccuracy or incompleteness
12
<PAGE>
of any of the foregoing representations.
(f) Landlord represents that the definition of the Cross
Collateralization Release Date in the Loan Documents occurs at Landlord's
request to Trustee following the satisfaction of certain conditions
including: (i) Tenant has completed construction of the Tenant
Improvements to be installed in sixty-five percent (65%) of the net
Building Rentable Area in accordance with the Final Tenant Improvement
Working Drawings and has occupied the Premises for substantial business
operations and has commenced payment in full of rent for the entire
rentable square footage of the Premises; and (ii) Landlord has completed
construction of Building II and Building III and seventy-five percent
(75%) of the combined net Rentable Area is fully occupied on a full rent
paying basis by third party tenants under leases approved by Trustee.
The definition of the Cross Collateralization Date in the Loan Documents
is controlling and the Trustee will not be bound by the provisions of
this paragraph.
Section 49. ADJACENT REAL PROPERTY LEASING INFORMATION.
(a) LEASING INFORMATION. Landlord agrees to advise Tenant in writing
of the date, lease term, square footage, proposed Building and general
tenant credit worthiness of any initial offer received from a prospective
tenant by Landlord for the initial lease of shell space in Building II or
III as well as Landlord's then asking rent for Buildings II and III and
whether the offered rent is above or below Landlord's then asking rent.
Landlord's notice shall be timely provided to Tenant and in any case no
later than five (5) business days prior to Landlord's first written
counter offer to the prospective tenant which is the subject of the
notice. Landlord's failure to provide such information to Tenant shall
not be a default under this Lease nor shall such obligation limit
Landlord's right in any way to conclude any lease, sale, exchange,
license or any other agreement with respect to Building II or III.
Landlord's obligation to pay the liquidated damages under Section 49(b)
(but not Landlord's obligation to provide leasing information pursuant to
this Section 49(a)) shall expire upon the sale, exchange or transfer of:
solely the Adjacent Real Property; collectively the Real Property and
Adjacent Real Property; or upon the sale, exchange or transfer of all of
the membership interests in Landlord. Landlord's obligation for the
liquidated damages with respect to Section 49(b) shall continue in the
event that Landlord shall sell the Real Property for so long as Landlord
retains title to the Adjacent Real Property.
(b) LIQUIDATED DAMAGES. LANDLORD SHALL BE OBLIGATED TO PAY TENANT AS
LIQUIDATED DAMAGES THE SUM OF FIFTY THOUSAND DOLLARS ($50,000) PER
BUILDING ON THE FIRST OCCASION FOR EACH OF BUILDING II AND BUILDING III
(FOR A MAXIMUM $50,000 PER BUILDING) THAT LANDLORD SHALL EXECUTE AN
INITIAL LEASE OF SHELL SPACE FOR ALL OR ANY TENANTABLE PORTION OF EITHER
BUILDING WITHOUT TIMELY PROVIDING THE INFORMATION REGARDING THE INITIAL
OFFER FROM THE PROSPECTIVE TENANT TO TENANT AS REQUIRED UNDER THIS
SECTION 49. SUCH AMOUNT
13
<PAGE>
SHALL BE ACCEPTED BY TENANT AS LIQUIDATED DAMAGES AND NOT AS A PENALTY
AND AS TENANT'S SOLE AND EXCLUSIVE REMEDY. IT IS AGREED THAT SAID AMOUNT
CONSTITUTES A REASONABLE ESTIMATE OF THE DAMAGES TO TENANT FROM
LANDLORD'S FAILURE. LANDLORD AND TENANT AGREE THAT IT WOULD BE
IMPRACTICAL OR IMPOSSIBLE TO PRESENTLY PREDICT WHAT MONETARY DAMAGES
TENANT WOULD SUFFER UPON LANDLORD'S FAILURE TO PROVIDE THE NOTICE
REQUIRED BY THIS SECTION 49. LANDLORD DESIRES TO LIMIT THE MONETARY
DAMAGES FOR WHICH IT MIGHT BE LIABLE HEREUNDER AND TENANT AND LANDLORD
DESIRE TO AVOID THE COSTS AND DELAYS THEY WOULD INCUR IF A LAWSUIT WERE
COMMENCED TO RECOVER DAMAGES OR OTHERWISE ENFORCE TENANT'S RIGHTS. THE
PARTIES ACKNOWLEDGE THIS PROVISION BY PLACING THEIR INITIALS BELOW:
LANDLORD: _________________ TENANT: ________________
20. WORK LETTER. Exhibit C to the Lease is hereby modified as
follows:
(a) Section 1. DEFINED TERMS; LANDLORD DELAY. The first phrase of
the definition of Landlord Delay which reads, "(a) any actual delay in the
Shell Substantial Completion or Final Substantial Completion ,, that is caused
by:" is hereby replaced with the phrase, "(a) any actual delay in the Rental
Commencement Date beyond the Outside Rental Commencement Date (computed
without regard to Landlord Delays) that is caused by:".
(b) Section 4(d)(ii) LANDLORD DELAY CALCULATIONS. The last sentence
of Section 4(d)(ii) is hereby deleted and replaced with the following language:
Notwithstanding anything to the contrary in the Lease or this Work
Letter, if Final Substantial Completion has not occurred within
Seventy-five (75) days following the Estimated Shell Completion Date, as
it may be extended by any Unavoidable Delays and Tenant Delays, the Rent
credit to which Tenant is entitled under Section 2(d) of the Lease shall
be computed by adding to the number of days of delay in Shell Substantial
Completion (if any) used in the Section 2(d) calculation a number of days
equal to any incremental additional delay in Final Substantial Completion
(so that delays in Shell Substantial Completion and in Final Substantial
Completion are aggregated, but not double counted).
(c) Section 6. TENANT'S IMPROVEMENTS. A new Section 6(j) is hereby
added to the Work Letter as follows:
(j) TENANT IMPROVEMENT COMPLETION SCHEDULE. Provided Landlord has
achieved Substantial Shell Completion on or before the Estimated Shell
Completion Date, then, subject to Landlord Delays and Unavoidable Delays,
on or before January 30, 1999, Tenant shall: (i) complete construction of
the Tenant Improvements to be installed in sixty-five percent (65%)
14
<PAGE>
of the net Building Rentable Area in accordance with the Final Tenant
Improvement Working Drawings; and (ii) occupy the Premises for
substantial business operations.
21. CONDITIONAL PROVISIONS.
(a) Trust Loan Not Consummated or Funded. The following provisions of
this First Amendment to Lease, and only the listed provisions, shall be of no
force and effect if the loan from the Trust to Landlord is not consummated and
the first draw is not funded on or before February 14, 1998: Sections 1(c),
13 (with respect to notice to GECIA only), 14, 17 and 19 (with respect to
Section 48 only). In addition, if the loan from the Trust to Landlord is not
consummated Tenant shall not be obligated to post the Security until the date
that a replacement loan or adequate alternate financing or equity for the
construction of the Shell Improvements is funded. Sections 3, 4 and 5 shall
survive (should the loan from the Trust to Landlord not be consummated and the
first draw not funded on or before February 14, 1998), only in the event and
to the extent that any new loan documentation preempts Tenant's rights to TI
Proceeds in the manner of the loans secured by the Indentures; and, in
addition with respect to Section 4 where the Real Property and the Adjacent
Real Property are cross collateralized. The provisions of Section 42 of the
Lease as modified by Section 19 of this First Amendment to Lease shall prevail
over any provision the Lease.
(b) Indentures Reconveyed. The following provisions of this First
Amendment to Lease, and only the listed provisions shall be of no further
force and effect upon Landlord's repayment of all amounts due and the
reconveyance of: (i) the Indentures prior to the Cross Collateralization
Release Date; or (ii) the Phase I Indenture following the Cross
Collateralization Release Date: Sections 1(c)(provided in no event shall
Tenant be obligated to increase the Security amount or further defer reduction
of the Security amount but that the parties shall otherwise not be bound by
the terms of the Letter of Credit Agreement), 13 (with respect to notice to
GECIA only), 14, 17 (except with respect to any side letter referenced in the
Lease which predates this First Amendment to Lease which shall be of no
further force and effect between the parties), and 19 (with respect to Section
48 only). Sections 3, 4 and 5 shall survive (should the Indentures be
reconveyed), only in the event and to the extent that any new loan
documentation preempts Tenant's rights to TI Proceeds in the manner of the
loans secured by the Indentures; and, in addition with respect to Section 4
where the Real Property and the Adjacent Real Property are cross
collateralized.
22. NO FURTHER MODIFICATIONS. Except as specifically modified
herein, the Lease and all Exhibits thereto remain unmodified and in full force
and effect.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Lease as of the date and year first set forth above.
Landlord: CHESTNUT BAY LLC, a
California limited liability company
___________________________
Mike Newbro, President
___________________________
John Nicholson, Member
15
<PAGE>
Tenant: HEARTPORT, INC., a Delaware
corporation
_________________________________
Steve Johnson, Vice President of
Manufacturing
By: ____________________________
Its: ____________________________
16
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-4030 and Form S-3 No. 333-31161) pertaining to the Heartport,
Inc. 1996 Stock Option Plan and Employee Stock Purchase Plan and the convertible
subordinated notes, of our report dated January 26, 1998, with respect to the
consolidated financial statements and schedule of Heartport, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 1997.
San Jose, California
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 35,805
<SECURITIES> 76,780
<RECEIVABLES> 6,848
<ALLOWANCES> 923
<INVENTORY> 4,878
<CURRENT-ASSETS> 124,848
<PP&E> 17,882
<DEPRECIATION> 4,474
<TOTAL-ASSETS> 142,810
<CURRENT-LIABILITIES> 10,925
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> 41,992
<TOTAL-LIABILITY-AND-EQUITY> 142,810
<SALES> 23,421
<TOTAL-REVENUES> 23,421
<CGS> 15,395
<TOTAL-COSTS> 15,395
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 282
<INTEREST-EXPENSE> 4,910
<INCOME-PRETAX> (51,331)
<INCOME-TAX> 0
<INCOME-CONTINUING> (51,331)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,331)
<EPS-PRIMARY> (2.29)
<EPS-DILUTED> (2.29)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-K AND FORMS 10-Q
FOR THE YEAR AND YEAR-TO-DATE, RESPECTIVELY, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> DEC-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 33,445 43,454 14,257
<SECURITIES> 56,407 70,280 88,778
<RECEIVABLES> 583 0 0
<ALLOWANCES> 33 0 0
<INVENTORY> 2,107 0 0
<CURRENT-ASSETS> 94,226 114,950 105,241
<PP&E> 7,979 3,769 5,971
<DEPRECIATION> 1,584 822 1,096
<TOTAL-ASSETS> 101,852 118,076 110,321
<CURRENT-LIABILITIES> 6,665 2,886 4,870
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 24 24 24
<OTHER-SE> 90,446 110,440 100,813
<TOTAL-LIABILITY-AND-EQUITY> 101,852 118,076 110,321
<SALES> 624 0 0
<TOTAL-REVENUES> 624 0 0
<CGS> 561 0 0
<TOTAL-COSTS> 561 0 0
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 33 0 0
<INTEREST-EXPENSE> 592 224 344
<INCOME-PRETAX> (34,054) (9,699) (23,135)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (34,054) (9,699) (23,135)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (34,054) (9,699) (23,135)
<EPS-PRIMARY> (1.79) (0.58) (1.27)
<EPS-DILUTED> (1.79) (0.58) (1.27)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE
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STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 22,370 59,353 62,983
<SECURITIES> 51,584 79,061 63,343
<RECEIVABLES> 2,983 4,355 6,298
<ALLOWANCES> 380 669 848
<INVENTORY> 2,911 4,212 3,465
<CURRENT-ASSETS> 80,882 149,160 137,333
<PP&E> 9,460 12,535 16,680
<DEPRECIATION> 2,130 2,757 3,448
<TOTAL-ASSETS> 89,434 163,284 154,977
<CURRENT-LIABILITIES> 6,226 7,484 12,285
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 24 25 25
<OTHER-SE> 78,708 65,509 52,720
<TOTAL-LIABILITY-AND-EQUITY> 89,434 163,284 154,977
<SALES> 3,216 7,868 15,019
<TOTAL-REVENUES> 3,216 7,868 15,019
<CGS> 2,721 6,342 11,191
<TOTAL-COSTS> 2,721 6,342 11,191
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 117 186 282
<INTEREST-EXPENSE> 81 1,203 3,000
<INCOME-PRETAX> (11,948) (26,550) (39,479)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (11,948) (26,550) (39,479)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (11,948) (26,550) (39,479)
<EPS-PRIMARY> (0.54) (1.20) (1.77)
<EPS-DILUTED> (0.54) (1.20) (1.77)
</TABLE>
