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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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 0-22743
VISTA MEDICAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3184035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5451 AVENIDA ENCINAS, SUITE A
CARLSBAD, CA 92008
(Address of principal executive offices)
(760) 603-9120
(Registrant's phone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS:
(1) YES [X] NO [ ] (2) YES [X] NO [ ]
As of November 13, 1998 there were 13,572,101 shares of $.01 par value common
stock outstanding.
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VISTA MEDICAL TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations. . . . . . . . . . . . 4
Consolidated Statements of Cash Flows . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . 7
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
VISTA MEDICAL TECHNOLOGIES, INC. Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 5,691,054 $ 7,328,502
Short-term investments & securities available for sale. . 5,452,870 16,784,345
Accounts receivable . . . . . . . . . . . . . . . . . . . 1,615,539 521,616
Inventories . . . . . . . . . . . . . . . . . . . . . . . 4,737,680 3,344,967
Other current assets. . . . . . . . . . . . . . . . . . . 201,153 261,864
----------- ------------
Total current assets . . . . . . . . . . . . . . . . . . . . 17,698,296 28,241,294
Property and equipment, net. . . . . . . . . . . . . . . . . 2,373,794 3,327,283
Patents and other assets . . . . . . . . . . . . . . . . . . 240,932 561,873
----------- ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 20,313,022 $ 32,130,450
----------- ------------
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . $ 677,607 $ 1,217,110
Accrued compensation. . . . . . . . . . . . . . . . . . . 382,282 516,743
Accrued liabilities . . . . . . . . . . . . . . . . . . . 1,195,318 665,285
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Total current liabilities. . . . . . . . . . . . . . . . . . 2,255,207 2,399,138
Commitments
Stockholders' equity:. . . . . . . . . . . . . . . . . . . .
Convertible preferred stock, $.01 par value:
Authorized shares - 5,000,000. . . . . . . . . . . . .
Issued and outstanding shares - no shares outstanding
on December 31, 1997 or September 30, 1998 . . . . . . -- --
Common stock, $.01 par value:
Authorized shares - 35,000,000 . . . . . . . . . . . .
Issued and outstanding shares - 13,407,038 on
December 31, 1997 and 13,565,538 on September 30, 1998 135,655 134,071
Additional paid-in capital. . . . . . . . . . . . . . . . 62,823,755 62,531,513
Notes receivable from stockholders. . . . . . . . . . . . (78,375) (78,375)
Deferred compensation . . . . . . . . . . . . . . . . . . (1,161,545) (1,942,074)
Unrealized gains/loss on investments. . . . . . . . . . . 3,449 (416,313)
Accumulated deficit . . . . . . . . . . . . . . . . . . . (43,665,124) (30,497,510)
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Total stockholders' equity . . . . . . . . . . . . . . . . . 18,057,815 29,731,312
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,313,022 $ 32,130,450
----------- ------------
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</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes
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VISTA MEDICAL TECHNOLOGIES, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
1998 1997 1998 1997
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales................................. $ 1,324,639 $ 1,228,666 $ 5,638,880 $ 2,563,328
Costs and expenses:
Cost of sales...................... 1,388,977 1,547,175 4,997,012 3,138,103
Research and development........... 1,173,766 1,793,068 4,361,091 4,860,991
Sales and marketing................ 1,242,488 1,493,546 4,688,272 3,195,445
General and administrative......... 1,062,779 1,327,471 3,922,412 3,671,971
Restructuring expense.............. -- -- 939,919 --
------------- ------------- ------------- -------------
Total cost and expenses................ 4,868,010 6,161,260 18,908,706 14,866,510
------------- ------------- ------------- -------------
Loss from operations................... (3,543,371) (4,932,594) (13,269,826) (12,303,182)
License expense........................ -- (249,993) -- (249,993)
Interest income........................ 181,256 416,615 764,302 560,375
Other losses........................... (24,090) -- (662,090) --
Net loss............................... $ (3,386,205) $ (4,765,972) $ (13,167,614) $ (11,992,800)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Basic and diluted loss per share....... $ (0.25) $ (0.37) $ (0.99) $ (2.63)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares used in computing basic and
diluted loss per share.............. 13,342,758 12,953,565 13,283,583 4,557,660
</TABLE>
See accompanying notes
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VISTA MEDICAL TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $(13,167,614) $(11,992,800)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization. . . . . . . . . . . . . 1,490,747 689,060
Amortization of premium on short term investments. . . 124,320 --
Stock issued for services rendered . . . . . . . . . . -- 20,010
Amortization of deferred compensation. . . . . . . . . 675,914 773,399
Loss on disposal of fixed assets . . . . . . . . . . . 290,410 --
Write down for impairment on available for sale
securities . . . . . . . . . . . . . . . . . . . . . 662,090 --
Common stock issued in exchange for license agreement. -- 249,993
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable . . . . . . . . . . . . . (1,093,923) (588,598)
Inventories . . . . . . . . . . . . . . . . . (1,392,713) (2,619,965)
Other current assets. . . . . . . . . . . . . 301,363 (207,771)
Accounts payable. . . . . . . . . . . . . . . (539,503) 998,827
Accrued compensation. . . . . . . . . . . . . (134,461) 207,081
Accrued liabilities . . . . . . . . . . . . . 665,505 560,637
---------- ----------
Net cash flows used for operating activities . . . . . . . . (12,117,865) (11,910,127)
INVESTING ACTIVITIES
Purchases of short-term investments. . . . . . . . . . . . . (2,140,526) (21,859,097)
Maturities of short-term investments . . . . . . . . . . . . 13,200,196 --
Purchase of property and equipment . . . . . . . . . . . . . (842,861) (2,302,185)
---------- ----------
Net cash flows provided by (used for) investing activities . 10,216,809 (24,161,282)
FINANCING ACTIVITIES
Issuance of common stock . . . . . . . . . . . . . . . . . . 263,608 32,642,338
---------- ----------
Net cash flows provided by (used in) financing activities. . 263,608 32,642,338
Net (decrease) increase in cash and cash equivalents . . . . (1,637,448) (3,429,071)
Cash and cash equivalents at beginning of period . . . . . . 7,328,502 10,119,529
---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . $5,691,054 $6,690,458
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . . $ 769 $ 196
---------- ----------
---------- ----------
</TABLE>
See accompanying notes
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VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The Audited Financial Statements of Vista Medical Technologies, Inc. (the
"Company") and the notes thereto for the year ended December 31, 1997 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission, contain additional information about the Company, its
operations, and its financial statements and accounting practices, and should be
read in conjunction with this quarterly report on Form 10-Q. These unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and with the instructions on Form 10-Q
except that certain information and footnote disclosures normally contained in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted.
The accompanying unaudited consolidated financial statements of the Company
reflect all adjustments of a normal recurring nature which are, in the opinion
of management, necessary for a fair presentation of the financial position,
results of operations and cash flows for all periods presented. The interim
financial information contained herein is not necessarily indicative of results
for any future interim periods or for the full fiscal year ending December 31,
1998.
2. Computation of Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share," (SFAS 128) which replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
restated to conform to SFAS 128 and the requirements of the recently effective
Staff Accounting Bulletin No. 98.
Recent interpretations by the Securities and Exchange Commission have
altered the treatment of preferred stock previously included in computing
certain earnings per share data. The Company previously considered preferred
stock as outstanding in pre-IPO periods from the date of original issuance in
computing earnings per share. To conform with the recent interpretations, the
Company has revised its calculation of earnings per share for all pre-IPO
periods to exclude the impact of preferred shares.
3. New Accounting Standard
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Segment Information."
Both of these standards are effective for fiscal years beginning after December
15, 1997. SFAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income, including foreign
currency translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. The Company believes that comprehensive income or loss
will not be materially different than net income or loss. SFAS No. 131 amends
the requirements for public enterprises to report financial and descriptive
information about its reportable operating segments. Operating segments, as
defined by
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SFAS No. 131, are components of an enterprise for which financial information
is available and evaluated regularly by the Company in deciding how to
allocate resources and in assessing performance. This financial information
is required to be reported on the basis that it is used internally for
evaluating the segment performance. The Company believes it operates in one
business and operating segment and that adoption of SFAS No. 131 will not
have a material impact on the Company's financial statements.
4. Inventories
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
<S> <C> <C>
Parts and materials........ $ 3,041,707 $ 1,977,878
Work in process............ 721,652 662,237
Finished goods............. 974,321 704,852
----------- -----------
$ 4,737,680 $ 3,344,967
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</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIS QUARTERLY REPORT MAY CONTAIN PREDICTIONS, ESTIMATES AND OTHER
FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED BELOW AT "RISKS AND UNCERTAINTIES." WHILE THIS
OUTLOOK REPRESENTS MANAGEMENT'S CURRENT JUDGMENT ON THE FUTURE DIRECTION OF
THE BUSINESS, SUCH RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTED BELOW. THE COMPANY
UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING
AFTER THE DATE HEREOF. THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO
INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q AND THE COMPANY'S
1997 ANNUAL REPORT ON FORM 10-K, FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
Overview
The Company develops, manufactures and markets proprietary visualization
and information systems that enable minimally invasive surgical solutions in
cardiothoracic, head, neck and spine ("HNS") and other selected microsurgical
procedures. The Company also markets endoscopic cameras and related surgical
instruments and accessories and has generated minimal revenues from the sales of
these products since its formation in July 1993. The Company expects to
continue to incur substantial losses for at least the next 12 months. As of
September 30, 1998, the Company's accumulated deficit was approximately $43.7
million.
Results of Operations
Sales. The Company had revenues of $1,325,000 and $5,639,000 for the
three- and nine-months ended September 30, 1998, respectively, compared to
$1,229,000 and $2,563,000 for the same periods in 1997. The increase in revenue
for the three-month period was due to (i) sales of new and existing Series 8000
Advanced Visualization and Information Systems for minimally invasive cardiac
surgery to Medtronic, Inc. ("Medtronic") the Company's strategic partner and
exclusive distributor in cardiac in all of the worlds major markets and (ii)
sales of StereoSite systems to Sofamor Danek, L.P. ("Sofamor Danek"), the
Company's strategic partner and exclusive distributor for the HNS market offset
by (iii) lower sales of the Company's OEM products and discontinuation of
distribution of several non-core instrument and suture product lines announced
at the end of the second quarter. The
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increase in revenue for the nine-month period was due to increased volume
of (i) sales of StereoSite systems and associated distribution fees paid by
Sofamor Danek and (ii) sales of Series 8000's for minimally invasive cardiac
surgery.
Cost of Sales. The Company's cost of sales were $1,389,000 and
$4,997,000 for the three- and nine-months ended September 30, 1998,
respectively, and $1,547,000 and $3,138,000 for the three- and nine-months
ended September 30, 1997, respectively. The decrease for the three-month
period was primarily due to completion of manufacturing scale-up offset by
costs corresponding to the growth in revenues from product sales The
increase for the nine-month period was primarily due to costs corresponding
to the growth in revenues from product sales. Such costs were partially
offset by completion of manufacturing scale-up.
Research and Development Expenses. Research and development expenses
were $1,174,000 and $4,361,000 for the three- and nine-months ended September
30, 1998, respectively, compared to $1,793,000 and $4,861,000 for the
corresponding periods in 1997. The decrease in research and development
expenses for both the three- and nine-month periods was primarily
attributable to decreases in staffing and related supply and occupancy costs
as well as a decrease in contract services related to development efforts.
The Company believes that a significant level of investment for product
development and evaluation is necessary to remain technologically competitive
and anticipates that it will continue its spending in research and
development at or above current levels in the near term.
Sales and Marketing Expenses. Sales and marketing expenses were
$1,242,000 and $4,688,000 for the three- and nine-months ended September 30,
1998, respectively, compared to $1,494,000 and $3,195,000 for the
corresponding periods in 1997. The decrease in sales and marketing expense
for the three-month period reflects the transition of all sales, marketing
and distribution efforts associated with the Company's Series 8000 for
minimally invasisve cardiac surgery in the United States to Medtronic
following an agreement announced at the end of June 1998. The increase in
sales and marketing expense for the nine-month period was attributable to the
Company's expansion of its sales force and increased marketing efforts
associated with commercialization of new products and physician training
costs incurred prior to the announcement of the agreement with Medtronic at
the end of the second quarter. The Company expects that its sales and
marketing expenses will remain near current levels in the near term
as it completes the transition of its sales and marketing efforts in
connection with the Series 8000 in the United States to Medtronic.
General and Administrative Expenses. The Company's general and
administrative expenses were $1,063,000 and $3,922,000 for the three- and
nine-months ended September 30, 1998, respectively, compared to $1,327,000
and $3,672,000 for the corresponding periods in 1997. The decrease in
expenses in the three-month period compared to the prior year was primarily
due to a reduction in deferred compensation, lower professional, legal and
consulting service fees, and a reduction in staffing and related expenses and
costs following a second quarter restructuring. The increase in expenses for
the nine-month period was primarily due to increases in staffing and related
expenses prior to the restructuring at the end of the second quarter of 1998,
and increased costs associated with being a public company. The Company
expects its general and administrative expenses to be relatively flat in the
near term as the impact of the restructuring takes effect and offsets
increased costs associated with being a public company.
Restructuring Expenses. The Company recorded restructuring charges
during the second calendar quarter of 1998 of $940,000 which are included in
the expenses for the nine-months ended September 30, 1998, and had no such
expenses for the corresponding period of 1997. The restructuring expenses
related primarily to termination and severance payments to employees in
connection with transfer of sales and marketing responsibility in the United
States for the Company's Series 8000 System for minimally invasive cardiac
surgery to Medtronic, termination and severance payments to employees in
connection with a general Company restructuring and work force reduction, and
write down of assets related to a strategic decision to discontinue
distribution of a line of cardiac instrument and sutures earlier than
previously planned.
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Interest Income. The Company had net interest income of $181,000 and
$764,000 for the three- and nine-month periods ended September 30, 1998,
respectively, compared to $417,000 and $560,000 for the corresponding periods in
1997. The decrease during the three-month period was due to decreasing average
investment balances and lower average returns on the investments than the year
earlier period while the increase for the nine-month period was due primarily to
increasing average investment balances of the Company's excess cash following
the Company's initial public offering ("IPO").
Other Losses. The Company recorded other losses of $24,000 and $662,000
for the three- and nine-month periods ended September 30, 1998 and had no such
losses for the corresponding periods in 1997. The losses for both the three-
and nine-month periods relate to recognition of a permanent reduction in value
of securities the Company received in connection with an earlier license
agreement with Imagyn Medical Technologies, Inc. (formerly Urohealth Systems,
Inc.).
Liquidity and Capital Resources
The Company completed its IPO in July 1997, raising approximately $32.8
million net of offering costs. Prior to the IPO, the Company satisfied its
liquidity requirements from the private sale of common and preferred stock,
through advances from a related party, and from the proceeds from licensing
certain of the Company's technology.
Net cash used in operating activities for the nine-months ended
September 30, 1998 was $12,118,000 compared to net cash used of $11,910,000
for the corresponding nine-month period in 1997. The increase in net cash
used in operating activities was primarily attributable to the increasing net
losses during the 1998 period and increasing payments on accounts payable
offset by lower inventory purchases and higher non-cash expenses for
depreciation and amortization and asset write-downs during the 1998 period.
Net cash provided by investing activities was $10,217,000 for the
nine-months ended September 30, 1998 compared to $24,161,000 of net cash used
in the same period in 1997. The net cash provided by investing activities in
1998 was primarily attributable to maturities of short-term investments and
the net cash used in 1997 was primarily attributable to the purchase of short
term investments and the purchase of property and equipment related to
increased staffing, expansion of manufacturing capabilities, and marketing
demonstrations.
Net cash provided by financing activities was $264,000 for the
nine-months ended September 30, 1998 compared to net cash provided by
financing activities of $32,642,000 for the same period in 1997. The net
cash provided by financing activities in 1998 was primarily attributable to
proceeds from the purchase of stock by employees through the Company's
employee stock purchase plan and the exercise of stock options while the net
cash provided in the 1997 period was primarily attributable to proceeds from
the Company's IPO.
As of September 30, 1998, the Company's strategic partner, Medtronic,
accounted for approximately 55% of the outstanding receivables and Aesculap AG
and Heartport, Inc. accounted for approximately 24% and 6%, respectively.
In October 1997, the Company completed a $10.0 million Loan and Security
Agreement ("Loan Agreement") to finance the placement with customers of its
Series 8000 product on a pay per procedure basis rather than through an
upfront capital payment. As of September 30, 1998 there were no outstanding
balances under the agreement. On June 29, 1998, the Company announced a new
distribution agreement with Medtronic, whereby Medtronic will distribute the
Series 8000 for the Company in the United States. The terms of that
agreement call for Medtronic to pay Vista for units placed with the companies
then sharing in the gross margins generated by procedure fees. The Company
believes that this agreement effectively replaces the Loan Agreement, which
expires in October 1998, and that the Company will not draw down on the loan.
If the Company were to borrow funds pursuant to the Loan Agreement, it could
borrow up to $10.0 million at one time with an interest rate of prime plus
one and one half percent.
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The Company anticipates that the net proceeds from the IPO completed in
July 1997 and the interest income thereon, together with existing cash, cash
equivalents and short-term investments, and product revenues, will be sufficient
to fund its operations through at least the first quarter of 1999.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's systems to process data
having dates on or after January 1, 2000 (the "Year 2000" issues). Processing
errors due to software failure arising from calculations using the Year 2000
date are a recognized risk. The Company is currently addressing the risk, with
respect to the availability and integrity of its financial systems and the
reliability of its operating systems, and is in the process of communicating
with suppliers, customers, financial institutions and others with whom it
conducts business transactions to assess whether they are Year 2000 compliant.
The Company has an established Year 2000 Compliance Team made up of members
of all of the Company's functional organizations and management and is currently
implementing a full Year 2000 Compliance Program. The Company is nearing
completion of the assessment phase of all of its operations and business
activities and is in the conversion and testing phase of certain of those
operations and business activities at this time. As a result of the assessment
completed to date, the Company believes that adequate remediation exists for
those systems and processes which have been identified as currently non-Year
2000 compliant. Furthermore, the Company currently estimates that the cost of
the Year 2000 initiative to be executed by the Company will not exceed the
$100,000 to $150,000 range, a significant portion of which was scheduled for
upgrade irrespective of the Year 2000 issue, and is therefore not expected to be
material to the Company's results of operations or financial position.
Risks and Uncertainties
THE FOLLOWING ARE AMONG THE FACTORS THAT SHOULD ALSO BE CONSIDERED
CAREFULLY IN EVALUATING VISTA MEDICAL TECHNOLOGIES AND ITS BUSINESS.
DEVELOPMENT STAGE COMPANY; SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL
REQUIREMENTS. Since its formation in July 1993, the Company has been engaged in
the development of visualization and information systems and related surgical
instruments and accessories that enable minimally invasive microsurgery ("MIM")
solutions for applications in cardiothoracic and other selected microsurgical
procedures and in manufacturing and marketing limited quantities of camera
systems to customers as an OEM. As of September 30, 1998, the Company had
incurred cumulative net losses of approximately $43.7 million since its
formation. The Company expects to incur substantial additional operating losses
before it will reach profitability, if at all. 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's future liquidity and capital requirements will depend upon
numerous factors, including the following: the extent to which the Company's
products gain market acceptance; the efforts of the Company's distribution
partners; the progress and scope of product evaluations; the timing and costs
of filing future regulatory submissions; the timing and costs required to
receive both domestic and international governmental approvals; the timing and
costs of 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; and the costs of developing
marketing and distribution capabilities. The Company anticipates that the net
proceeds from the IPO completed in July 1997 and the interest income thereon,
together with existing cash, cash equivalents and short-term investments, and
product revenues, will be sufficient to fund its operations through at least the
first quarter of 1999. The Company will likely require additional financing.
There can be no assurance that such additional financing will be available on
terms acceptable to the Company, if at all. The Company's inability to fund its
capital and operational requirements would have a material adverse effect on the
Company's business, financial condition and results of operations.
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DEPENDENCE UPON AND UNCERTAINTY REGARDING COMMERCIALIZATION OF SERIES 8000
AND STEREOSITE. The Series 8000 for minimally invasive cardiac surgery and
StereoSite systems for head, neck and spine microsurgery are expected to account
for the majority of the Company's revenues over the next several years. There
can be no assurance that demand for the Series 8000 and StereoSite will be
sufficient to achieve profitable operations.
Development of certain additional components of the Series 8000 has not yet
been completed and additional versions of StereoSite have yet to be finally
developed. There can be no assurance that the Company's development efforts for
these products will be successful, or that the Company's other products under
development will be shown to be safe or effective, capable of being manufactured
in commercial quantities at acceptable costs, acquire appropriate regulatory
clearances or be successfully marketed.
Evaluations of the Series 8000 and StereoSite conducted to date have shown
that there is a learning process involved for surgeons and other members of the
surgery team to become proficient with the use of the systems. Based on the
clinical and laboratory procedures performed to date, there can be no assurance
that visualization and information system enhancements incorporated, or to be
incorporated, in the Series 8000 and StereoSite will prove suitable for use by a
substantial number of surgeons. If the Series 8000 and StereoSite prove
unsuitable for a number of surgeons to use, the potential markets and
applications for the Company's products would be significantly limited.
Widespread use of the Series 8000 and StereoSite will require training of a
large number of surgeons, and the time required to institute a training program
and to train such surgeons could adversely affect market acceptance. Failure to
successfully commercialize the Series 8000 and StereoSite would have a material
adverse effect on the Company's business, financial condition and results of
operations.
UNCERTAINTY OF CLINICAL ADOPTION OF MINIMALLY INVASIVE MICROSURGICAL
PROCEDURES. The Company's near-term products are being developed in order to
enable cardiothoracic and HNS surgeons to perform Minimally Invasive
Microsurgical ("MIM") surgical procedures using their existing skills coupled
with training and complementary equipment being developed by other companies.
Accordingly, the Company's success is dependent upon acceptance of these
procedures by the medical community as a reliable, safe and cost effective
alternative to existing treatments. To date, MIM surgical procedures have only
been performed on a very limited basis by a small number of highly skilled
surgeons. The Company is unable to predict how quickly, if at all, MIM surgical
procedures will be adopted by the medical community or, if they are adopted, the
number of procedures that will be performed.
Most patients with cardiovascular disease first consult with a
cardiologist, who then may treat the patient with pharmaceuticals or
non-surgical interventions, such as angioplasty and intravascular stents, or
refer the patient to a cardiac surgeon for open-chest coronary artery bypass
graft ("CABG") surgery. Cardiologists may not recommend MIM procedures until
such time, if at all, as such procedures can successfully be demonstrated to
be as safe and cost-effective as other accepted treatments. In addition,
cardiac surgeons may choose not to recommend MIM procedures until such time,
if at all, as such procedures are proven to be as efficacious as
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 MIM procedures is established in
cardiac and other specialties, surgeons, specialists and other physicians may
choose not to recommend the procedures for any number of other reasons.
Clinical adoption will depend, for example, upon the Company's ability to
facilitate training of surgeons to perform MIM surgery and the willingness of
such surgeons to perform such procedures. Physicians may similarly elect not
to recommend the MIM procedure based on possible unavailability of acceptable
reimbursement from health care payors. Health care payor acceptance may
require evidence of the cost effectiveness of MIM procedures as compared to
other currently available treatments. The Company believes that physician
endorsements will be essential for clinical adoption of MIM procedures, and
there can be no assurance that any such endorsements will be obtained in a
timely manner, if at all. Patient acceptance of the procedure will depend
upon such physician recommendations, as well as other factors, including the
effectiveness of, and the rate and severity of complications associated with,
the procedure as compared to other treatments.
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There can be no assurance that MIM procedures will gain clinical adoption.
Failure of these procedures to achieve significant clinical adoption would have
a material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON MEDTRONIC AND SOFAMOR DANEK. The Company has organized its
sales and marketing efforts through the Company's CardioThoracic Surgery and HNS
Microsurgery divisions. Pursuant to a recently announced sales agreement, the
products of the Company's Cardiothoracic Surgery division will be sold by
Medtronic's sales force in most of the world's significant markets, including
the United States. The products of the Company's HNS Microsurgery division will
be sold worldwide via Sofamor Danek's sales force.
The Company is directly dependent on its agreements with Medtronic and
Sofamor Danek for sales of the majority of its products. The termination of
these relationships could have a material adverse effect on the Company.
Medtronic is the world's leading medical technology company specializing in
implantable and interventional therapies. Medtronic manufactures products in
the United States, Europe and Asia and sells its products to hospitals and
surgeons worldwide. Pursuant to a June 29, 1998 sales agreement between
Medtronic and the Company, the Company appointed Medtronic as its exclusive
distributor for current and future visualization and information systems for
cardiothoracic surgery in the United States, Europe, Japan and several other
significant geographical regions. There can be no assurance that Medtronic will
commit significant resources to market the Company's Series 8000 System or that
its marketing efforts will be effective.
Sofamor Danek is engaged in the worldwide development, manufacturing and
distribution of systems for spinal surgery. Sofamor Danek manufactures products
in the United States and Europe and sells its products to surgeons and hospitals
worldwide. Pursuant to an exclusive distribution agreement between Sofamor Danek
and the Company, the Company appointed Sofamor Danek as its exclusive worldwide
distributor for the Company's current and future visualization and information
systems for neurosurgery, spinal surgery, radiation delivery, otolaryngology and
maxillofacial surgery (the "StereoSite Systems"). There can be no assurance
that Sofamor Danek will commit significant resources to market StereoSite
Systems or that its marketing activities will be effective.
The Company and Sofamor Danek also entered into a cooperative technology
agreement, pursuant to which the parties have agreed to work exclusively
together in performing research and development specifically designed to enhance
StereoSite Systems or integrate StereoSite Systems with Sofamor Danek's image
guidance systems and certain other products, including systems and instruments
for spinal surgery. There can be no assurance that such improvement and
integration of products will be successfully completed.
LACK OF COMMERCIAL MANUFACTURING EXPERIENCE; SCALE-UP RISK. The Company
lacks experience in manufacturing the products under development, including its
Series 8000 systems for minimally invasive cardiac surgery and StereoSite
systems for HNS microsurgery, in the quantities that would be necessary for the
Company to achieve significant commercial sales. The manufacture of the
Company's products primarily involves the assembly of a number of sub-assemblies
and components. Such businesses often encounter difficulties in scaling up
manufacturing of products, which difficulties could include problems involving
quality control and assurance, component and service availability, adequacy of
control policies and procedures, lack of qualified personnel, compliance with
U.S. Food and Drug Administration ("FDA") regulations and the need for further
FDA approval of new manufacturing processes and facilities and other production
constraints. There can be no assurance that reliable, high-volume manufacturing
can be established or maintained at commercially reasonable costs. The Company
will also require additional manufacturing facilities as production volumes
increase; acquisition of new manufacturing facilities will likely involve
relocation. Any of these factors could have a material adverse effect on the
Company's business, financial condition and results of operation.
The Company has considered and will continue to consider as appropriate,
the internal manufacture of sub-assemblies currently provided by third party
subcontractors, as well as the implementation of new production
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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, or that FDA Good
Manufacturing Practices ("GMP") requirements can be met and that such a
transition would not materially adversely affect the Company's business,
financial condition and results of operations.
POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY. The
Company uses or relies on certain components and services used in its systems
that are provided by sole source suppliers. The manufacture of the Company's
products in larger commercial quantities will require a substantial increase in
component supplies and will likely necessitate the replacement of current
suppliers or the addition of new suppliers. The qualification of additional or
replacement vendors for certain components or services is a lengthy process. In
addition, the substitution of replacement vendors may entail re-engineering time
and cost and could delay the supply of the Company's products.
The Company expects to manufacture its products based on forecasted product
orders and intends to purchase 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. As a result, there is a risk of excess or inadequate
inventory if orders do not match forecasts.
Any significant supply interruption, or inventory shortage or overage,
would have a material adverse effect on the Company's ability to manufacture the
Company's products and, therefore, a material adverse effect on its business,
financial condition and results of operations.
NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC AND
INTERNATIONAL REGULATION. The manufacture and sale of medical devices intended
for commercial distribution are subject to extensive governmental regulation in
the United States. Medical devices are regulated in the United States primarily
by the FDA and, to a lesser extent, by certain state agencies. Generally,
medical devices require pre-market clearance or pre-market approval prior to
commercial distribution. In addition, certain material changes or modifications
to, and changes in intended use of, medical devices also are subject to FDA
review and clearance or approval. The FDA regulates the research, testing,
manufacture, safety, effectiveness, labeling, storage, record keeping, promotion
and distribution of medical devices in the United States and the export of
unapproved medical devices from the United States to other countries.
Noncompliance with applicable requirements can result in failure of the
government to grant pre-market clearance or approval for devices, withdrawal or
suspension of approval, total or partial suspension of production, fines,
injunctions, civil penalties, refunds, recall or seizure of products and
criminal prosecution.
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. The Company's
products to date have either been classified as Class I or Class II devices.
Class I devices are subject to general controls (e.g., establishment
registration and product listing, labeling, adulteration and misbranding
provisions and medical device reporting requirements and, unless exempt, to
pre-market notification and adherence to GMP standards). Class II devices
are subject to general controls and special controls (e.g., performance
standards, post-market surveillance, patient registries and FDA guidelines).
Generally, Class III devices are those that must receive pre-market approval
by the FDA to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable or new devices which have not been found to
be substantially equivalent to legally marketed devices). Class III devices
ordinarily require clinical testing to ensure safety and effectiveness and
FDA approval prior to marketing and distribution. The FDA also has the
authority to require clinical testing of Class I and Class II devices. A
pre-market approval ("PMA") application must be filed if a 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 application. A
PMA typically takes several years to be approved by the FDA.
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Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) notification or submission and approval of a PMA application. If a
medical device manufacturer or distributor can establish that a device is
"substantially equivalent" to a legally marketed Class I or Class II device, or
to a Class III device for which the FDA has not called for a PMA, the
manufacturer or distributor may market the device upon receipt of an FDA order
determining such a device substantially equivalent to a predicate device. The
510(k) notification may need to be supported by appropriate performance,
clinical or testing data establishing the claim of substantial equivalence. The
FDA requires a rigorous demonstration of substantial equivalence.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an FDA
substantial equivalence order permitting the marketing of a device is received
by the person who submitted the 510(k) notification. At this time, the FDA
typically responds to the submission of a 510(k) notification within 90 to 200
days. An FDA letter may declare that the device is substantially equivalent to
a legally marketed device and allow the proposed device to be marketed in the
United States. The FDA, however, may determine that the proposed device is not
substantially equivalent or require further information, including clinical
data, to make a determination regarding substantial equivalence. Such
determination or request for additional information will delay market
introduction of the product that is the subject of the 510(k) notification.
All clinical investigations involving the use of an unapproved or uncleared
device on humans to determine the safety or effectiveness of the device must be
conducted in accordance with the FDA's investigational device exemption ("IDE")
regulations. If the device presents a "significant risk," the manufacturer or
distributor of the device is required to file an IDE application with the FDA
prior to commencing human clinical trials. The IDE application must be
supported by data, typically the result of animal and bench testing. If the IDE
application is approved by the FDA, human clinical trials may begin at a
specific number of investigational sites with a maximum number of patients, as
approved by the FDA. If the device presents a "non-significant risk," approval
by an Institutional Review Board prior to commencing human clinical trials is
required, as well as compliance with labeling, record keeping, monitoring and
other requirements. However, the FDA can disagree with a non-significant risk
device finding.
Any products manufactured or distributed by the Company are subject to
continuing regulation by the FDA, which includes record keeping requirements,
reporting of adverse experience with the use of the device, GMP requirements and
post-market surveillance, and may include post-market registry and other actions
deemed necessary by the FDA. A new 510(k), PMA or PMA supplement is also
required when a medical device manufacturer makes a change or modification to a
legally marketed device that could significantly affect the safety or
effectiveness of the device, or where there is a major change or modification
in the intended use of the device or a new indication for use of the device.
When any change or modification is made to a device or its intended use, the
manufacturer is expected to make the initial determination as to whether the
change or modification is of a kind that would necessitate the filing of a new
510(k), PMA or PMA supplement.
Sales of medical device products outside the United States are subject
to foreign regulatory requirements that vary from country to country. The
time required to obtain approvals required by foreign countries may be longer
or shorter than that required for FDA clearance, and requirements for
licensing may differ from FDA requirements. Failure to comply with
regulatory requirements could have a material adverse effect on the Company's
business, financial condition and results of operations. The current
regulatory environment in Europe for medical devices differs significantly
from that in the United States. After June 1998, all medical devices sold in
the European Union must bear the CE mark. Devices are now classified by
manufacturers according to the risks they represent with a classification
system giving Class III as the highest risk devices and Class I as the
lowest. Once the device has been classified, the manufacturer can follow one
of a series of conformity assessment routes, typically through a registered
quality system, and demonstrate compliance to a European Notified Body.
After that, the CE mark may be applied to the device. Maintenance of the
system is ensured through annual on-site audits
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by the Notified Body and a post-market surveillance system requiring the
manufacturer to submit serious complaints to the appropriate governmental
authority.
Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RAPID TECHNOLOGICAL CHANGE; SIGNIFICANT COMPETITION. The medical device
market is characterized by intensive development efforts and rapidly advancing
technology. The future success of the Company will depend, in large part, upon
its ability to anticipate and keep pace with advancing technology and competing
innovations. There can be no assurance, however, that the Company will be
successful in identifying, developing and marketing new products or enhancing
its existing products.
The Company believes that a number of large companies, with significantly
greater financial, manufacturing, marketing, distribution and technical
resources and experience than that of the Company, already develop, manufacture
and market visualization products for minimally invasive surgery and would have
a natural interest in developing and marketing advanced technology for minimally
invasive microsurgical applications in general, which could also be applied to
cardiac or HNS surgery. The Company estimates there are approximately ten
potential major competitors in the minimally invasive visualization market with
such companies as Stryker, Karl Storz, Olympus and Dyonics considered leaders,
and while they have not yet introduced products which compete directly with the
Company's technology, there can be no assurance that they will not do so in the
future.
Technological advances with other therapies such as drugs, interventional
procedures or future innovations in surgical techniques could make such other
therapies more effective or lower in cost than MIM surgical procedures and could
render MIM surgery obsolete.
There can be no assurance that physicians will use MIM surgical procedures
to replace or supplement established treatments, or that MIM cardiac surgery or
HNS microsurgery will be competitive with current or future technologies. 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.
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 products. The Company's future success may depend, in part, on its
relationships with such partners, including, for example, the Company's
relationships with Medtronic and Sofamor Danek. The Company will have limited
or no control over the resources that any partner may devote to the Company's
products, or over its partners' development and marketing efforts. There can be
no assurance that any of the Company's present or future collaborative partners
will perform their obligations as expected or will devote sufficient resources
to the development or marketing of the Company's potential products. Any
parallel development by a partner of alternate technologies, preclusion from
entering into competitive arrangements, failure to obtain timely regulatory
approvals, premature termination of a collaborative agreement or failure by a
partner to devote sufficient resources to the development and commercialization
of the Company's products would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company believes
that its strategic partners currently have the right to terminate their
respective agreements only in the event of a material breach by the Company.
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
relationship will be successful.
FLUCTUATIONS IN OPERATING RESULTS. Results of operations of the Company
may vary significantly from quarter to quarter depending upon numerous factors,
including the following: timing and results of product evaluations; delays
associated with the FDA and other regulatory approval processes; demand for and
utilization of the Company's products; changes in the financial stability of
international economies; changes in pricing policies by the Company or its
competitors; changes in third-party payment guidelines; the number, timing and
significance of product enhancements and new product announcements by the
Company and its competitors;
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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.
UNCERTAINTY RELATING TO THIRD-PARTY PAYMENTS. The Company expects that
the majority of its sales and the prices of those sales will be directly or
indirectly affected by the profitability to, or cost-effectiveness for,
hospitals of the procedures in which the Company's products are involved.
While the cost of using one of the Company's products may not be specifically
reimbursable, its cost will form part of the global cost of the procedure to
the institution. Such attention to the relationship between procedure cost
and potential reimbursement is an increasing element in purchasing decisions
by hospitals, particularly in the United States and, increasingly, in other
important foreign markets. In the U.S. profitability levels are directly
related to the level of payments for surgical procedures, either by Medicare
or private insurance companies, and it is a continuing trend in U.S. health
care for such payments to be under continual scrutiny and downward pressure.
The Company expects that the majority of its products typically will be used
by hospitals and surgical centers, which bill various third-party payors,
such as governmental programs and private insurance plans, for the health
care services provided to their patients. If such hospitals and surgical
centers are unable to be reimbursed for procedures using the Company's
equipment, this could have a material adverse effect on the sales of the
Company's products. Third-party payors carefully review and increasingly
challenge the prices charged for medical products and services or negotiate a
flat rate fee in advance. Payment rates from private companies also vary
depending on the procedure performed, the third-party payor, the insurance
plan and other factors. Medicare compensates hospitals at a prospectively
determined fixed amount for the costs associated with an in-patient
hospitalization based on the patient's discharge diagnosis and compensates
physicians at 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 or
systems used in that procedure. Medicare and other third-party payors are
increasingly scrutinizing whether to cover new products and the level of
payment for new procedures. The flat fee reimbursement trend is causing
hospitals to control costs strictly in the context of a managed care system
in which health care providers contract to provide comprehensive health care
for a fixed cost per person. The Company is unable to predict what changes
will be made in the reimbursement methods utilized by third-party health care
payors. The Company could be adversely affected by changes in payment
policies of government or private health care payors, particularly to the
extent any such changes affect payment for the procedure in which the
Company's products are intended to be used.
If the Company obtains the necessary foreign regulatory registrations or
approvals, market acceptance of the Company's products in international
markets would be dependent, in part, upon the acceptance by the prevailing
health care financing system in each country. Health care financing systems
in international markets vary significantly by country and include both
government sponsored health care programs and private insurance. These
financing systems face the same cost containment pressures as the U.S. and
there can be no assurance that they will endorse use of the Company's
technology.
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 funding will be available or adequate, 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 utilized in procedures which are
more expensive than competing conventional surgical procedures. The
unavailability or inadequacy of third-party payor coverage or reimbursement
would have a material adverse effect on the Company's business, financial
condition and results of operations.
RISK RELATING TO INTERNATIONAL OPERATIONS. In the event the Company is
successful in developing its products, manufacturing them in commercial
quantities and receiving necessary FDA and foreign
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regulatory registrations or approvals, the Company plans to market its
products in international markets, either on its own or with its strategic
partners. The Company has limited experience in marketing its products
overseas. Changes in overseas economic conditions, currency exchange rates,
foreign tax laws or tariffs or other trade regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations. The anticipated international nature of the Company's business
is also expected to subject it and its representatives, agents and
distributors to laws and regulations of the foreign jurisdictions in which
they operate or in which the Company's products under development are sold.
The regulation of medical devices in a number of such jurisdictions,
particularly in the European Union, continues to develop and there can be no
assurance that new laws or regulations will not have an adverse effect on the
Company's business, financial condition and results of operations. In
addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States.
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE. 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's current product liability insurance
coverage limit is $10.0 million per occurrence and in the aggregate. There can
be no assurance that such coverage limits are adequate to protect the Company
from any liabilities it might incur in connection with the development,
manufacture and sale of its products. In addition, the Company may require
increased product liability coverage if any products are used in clinical
evaluations or successfully commercialized. Product liability insurance is
expensive and in the future may not be available to the Company on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company in excess of its insurance coverage or a product
recall could have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY;
RISKS OF FUTURE LITIGATION. Vista Medical relies on a combination of technical
leadership, patent, trade secret, copyright and trademark protection and
nondisclosure agreements to protect its proprietary rights. As of September 30,
1998, the Company had exclusive ownership rights to seven issued United States
patents, 10 pending United States patent applications and 16 pending foreign
applications covering various aspects of its devices and systems. Furthermore,
as of the same date, the Company had exclusive rights in the medical field to
four issued United States patents, one pending United States patent application,
three issued foreign patents and nine pending foreign applications covering
various aspects of its devices and systems. The Company intends to file
additional patent applications in the future. The failure of such patents to
issue could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's future success will depend, in part, on its ability to
continue to develop patentable products, enforce its patents and obtain patent
protection for its products both in the United States and in other countries.
The patent positions of medical device companies, including the Company,
however, are generally uncertain and involve complex legal and factual
questions. There can be no assurance that patents will issue from any patent
applications owned by or licensed to the Company or that, if patents do issue,
the claims allowed will be sufficiently broad to protect the Company's
technology. In addition, there can be no assurance that any issued patents
owned by or licensed to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation, which
would result in substantial expense to the Company, may be necessary to
enforce any patents issued or licensed to the Company and/or to determine the
scope and validity of proprietary rights of third parties or whether the
Company's products, processes or procedures infringe any such third-party
proprietary rights. The Company may also have to participate in interference
proceedings declared by the United States Patent and Trademark Office, which
could result in substantial expense to the Company, to determine the priority
of inventions covered by the Company's issued United States patents or pending
patent
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applications. Furthermore, the Company may have to participate at
substantial cost in International Trade Commission proceedings to enjoin
importation of products which would compete unfairly with products of the
Company. Any adverse outcome of any patent litigation (including
interference proceedings) could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from or
to third parties or require the Company to cease using the technology in
dispute.
Patent applications in the United States are maintained in secrecy until
a patent issues, and patent applications in foreign countries are maintained
in secrecy for a period of time after filing. After such period of time, and
usually before the grant of the patent, patent applications in foreign
countries are published. While publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications, such publication may enable the Company's
competitors to ascertain what areas of research or development the Company is
engaged in prior to the Company's receipt of patent protection in the United
States or foreign countries relating to such research or development.
In general, the development of visualization and information systems and
related surgical instruments and accessories is intensely competitive.
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. There can also be no
assurance that third parties will not assert infringement claims against the
Company in the future or that any such assertions will not result in costly
litigation or require the Company to obtain a license to intellectual
property rights of such parties. There can be no assurance that any such
licenses would be available on terms acceptable to the Company, if at all.
Furthermore, parties making such claims may be able to obtain injunctive or
other equitable relief that could effectively block the Company's ability to
make, use, sell or otherwise practice its intellectual property (whether or
not patented or described in pending patent applications), or to further
develop or commercialize its products in the United States and abroad and
could result in the award of substantial damages. Defense of any lawsuit or
failure to obtain any such license could have a material adverse effect on
the Company.
The Company relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire the same or substantially
equivalent technologies or otherwise gain access to the Company's proprietary
technology or disclose such technology or that the Company can ultimately
protect its rights to such unpatented proprietary technology. No assurance
can be given that third parties will not obtain patent rights to such
unpatented trade secrets, which patent rights could be used to assert
infringement claims against the Company. The Company also relies on
confidentiality agreements with its collaborators, employees, advisors,
vendors and consultants to protect its proprietary technology. There can be
no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors. In addition, the Company's agreements with its employees and
consultants require disclosure to the Company of ideas, developments,
discoveries or inventions conceived during employment or consulting, as the
case may be, and assignment to the Company of proprietary rights to such
matters related to the business and technology of the Company. The extent to
which efforts by others will result in patents and the effect on the Company
of the issuance of such patents is unknown. Failure to obtain or maintain
patent and trade secret protection, for any reason, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company has in-licensed certain aspects of its technology. In
September 1995, Mr. H. McKinley and McKinley Optics, Inc. (collectively,
"McKinley") granted to the Company a perpetual, exclusive, worldwide license in
the medical field to make, have made, modify, use, lease, market, sell and
otherwise distribute certain endoscopes and other medical products incorporating
a stereo objective lens and/or a relay lens configuration. Under the terms of
this license agreement, Vista Medical is obligated to pay McKinley an annual
maintenance royalty, additional royalties upon the sale of certain numbers of
systems incorporating the McKinley technology and royalties on net sales of
products incorporating the McKinley technology. The exclusive license granted
under this agreement becomes a non-exclusive license (or, under certain
circumstances, the license terminates) in the event Vista Medical
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<PAGE>
fails to pay any royalties following receipt of notice of such failure to
pay. In addition, Vista Medical has the right to terminate the agreement
with limited notice.
In June 1996, Fuji Film Co. and Fuji Photo Optical Co., Ltd.
(collectively, "Fuji") granted to the Company a non-exclusive license to
certain optical zoom technology for use in endoscopes. Vista Medical is
obligated to pay royalties on net sales of products in the United States
which incorporate Fuji's technology. Fuji may terminate the agreement if
Vista Medical does not cure any violation of the agreement within a limited
period of time. Failure of the Company to retain rights to these
technologies could have a material, adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL AND ADVISORS. 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. The Company has not entered into any employment contracts
or arrangements with any of its employees. Competition for such personnel is
intense, 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.
The Company has established three Clinical Advisory Boards made up of
leading surgeons, one focused on minimally invasive cardiac surgery, another
focused on HNS microsurgery and a third General Board focused on several
specialties. The Company also has formed a Research Advisory Board to conduct
specific research in the development of techniques applicable to the use of
video assistance in minimally invasive cardiac surgery. Members of the Clinical
Advisory Boards consult with the Company exclusively in the field of
visualization, but are free to consult with other non-competing instrumentation
companies and are employed elsewhere on a full-time basis. As a result, they
only spend a limited amount of time on the Company's affairs. Although the
Company has entered into consulting agreements, with terms ranging from 12
months to two years, including confidentiality provisions with each of the
members of the Clinical Advisory Boards, there can be no assurance that the
consulting and confidentiality agreements between the Company and each of the
members of the Clinical Advisory Boards will not be terminated or breached. In
addition, there can be no assurance that any of such agreements will be renewed
upon termination.
NEED TO FINANCE AND MANAGE AN EXPANDING AND CHANGING BUSINESS. In order
to compete effectively against current and future competitors, prepare
additional products for potential commercialization and develop future
products, the Company believes that it must be prepared to expand its
operations, particularly in the areas of development and manufacturing. If
the Company were to experience significant growth in the future, such growth
would likely result in additional demands for financing and new and increased
responsibilities for management personnel and place significant strain upon
the Company's management, operating and financial systems and resources. To
accommodate such growth and compete effectively, the Company must continue to
implement and improve information systems, procedures and controls, and to
expand, train, motivate and manage its work force. All of the foregoing
demands will require the addition of new management personnel. The Company's
future success will depend to a significant extent on the ability of its
current and future management personnel to operate effectively, both
independently and as a group. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's future operations. The Company anticipates that the net proceeds
from the IPO completed in July 1997 and the interest income thereon, together
with existing cash, cash equivalents and short-term investments, and product
revenues, will be sufficient to fund and expand operations through at least
the first quarter of 1999. The Company will likely require additional financing
and will evaluate various strategies and sources of funds at that time. There
can be no assurance
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<PAGE>
that such additional financing will be available on terms acceptable to the
Company, if at all, and any failure to finance, implement and improve the
Company's operational, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on the
Company's business, financial condition and results of operations.
YEAR 2000 ISSUES. The Company recognizes the need to ensure its
operations will not be adversely impacted by the inability of the Company's
systems to process data having dates on or after January 1, 2000 (the "Year
2000" issues). Processing errors due to software failure arising from
calculations using the Year 2000 date are a recognized risk. The Company is
currently addressing the risk, with respect to the availability and integrity of
its financial systems and the reliability of its operating systems, and is in
the process of communicating with suppliers, customers, financial institutions
and others with whom it conducts business transactions to assess whether they
are Year 2000 compliant.
The Company has an established Year 2000 Compliance Team made up of members
of all of the Company's functional organizations and management and is currently
implementing a full Year 2000 Compliance Program. The Company is nearing
completion of the assessment phase of all of its operations and business
activities and is in the conversion and testing phase of certain of those
operations and business activities at this time. For example, the Company has
determined that its manufacturing, order entry and financial software will be
upgraded to a Year 2000 compliant version, currently available from the software
vendor, by the end of the first quarter of 1999 as part of a planned upgrade of
the system at minimal cost to the Company.
As a result of the assessment completed to date, the Company believes that
adequate remediation exists for those systems and processes which have been
identified as currently non-Year 2000 compliant. Furthermore, the Company
currently estimates that the cost of the Year 2000 initiative to be executed by
the Company will not exceed the $100,000 to $150,000 range, a significant
portion of which was scheduled for upgrade irrespective of the Year 2000 issue,
and is therefore not expected to be material to the Company's results of
operations or financial position.
While the Company believes its planning efforts are adequate to address its
Year 2000 concerns, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material effect on the Company. In
addition, the potential impact of the Year 2000 issues on significant suppliers,
customers, financial institutions and others with whom the Company does business
cannot be reasonably estimated at this time.
POTENTIAL VOLATILITY OF STOCK PRICE. The market prices and trading
volumes for securities of emerging companies, like the Company, have
historically been highly volatile and have experienced significant
fluctuations unrelated to the operating performance of such companies. The
market price of the shares of Common Stock is likely to be highly volatile
and may be significantly affected by factors such as actual or anticipated
fluctuations in the Company's operating results, changes in financial
estimates by securities analysts, announcements of technological innovations,
new products or new contracts by the Company or its competitors, regulatory
announcements, 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,
general market conditions and other factors. In addition, the stock market
has from time to time experienced significant price and volume fluctuations
that have particularly affected the market prices for shares of early stage
companies. These broad market fluctuations may adversely affect the market
price of the Common Stock. 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.
HAZARDOUS MATERIALS. The Company's research and development may involve
the controlled use of hazardous materials and chemicals. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an
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accident, the Company could be held liable for any resultant damages, and any
such liability could exceed the resources of the Company. The Company may
incur substantial cost to comply with environmental regulations. The Company
believes it is currently in compliance with all Federal, State and local
environmental laws.
NO DIVIDENDS. The Company currently intends to retain any future earnings
for use in its business and does not anticipate paying any cash dividends in the
foreseeable future.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF SECOND
RESTATED CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW. The Company's
Board of Directors has the authority to issue up to 5,000,000 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 are 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.
In addition, the Company's Second Restated Certificate of Incorporation
provides for a classified Board of Directors such that approximately one-third
of the members of the Company's Board of Directors are elected at each annual
meeting of stockholders. Such classification of the Company's Board of
Directors may have the effect of delaying, deferring or discouraging changes in
control of the Company. Making more difficult or discouraging a change in
control of the Company may adversely affect the market price of the Common
Stock.
Item 3. Not Applicable
PART II. OTHER INFORMATION
Item 1. Not Applicable
Item 2(d). Changes in Securities and Use of Proceeds
From the effective date of the Company's initial registration
statement on Form S-1 on July 2, 1997 (Registration No. 333-28519) to
September 30, 1998, the approximate amounts of the net offering proceeds used
were $7.6 million for research and development, $7.4 million for sales and
marketing activities, $7.4 million to fund product introductions, $5.1
million for temporary investments in money markets, commercial paper and
government backed securities, $2.3 million for the acquisition of capital
equipment, and $3.0 million for working capital and general corporate
purposes. All of such payments were direct or indirect payments to others.
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
10.1 Vista Medical Technologies, Inc., Industrial Real Estate Lease
between the Company and Ocean Point Tech Centre dated July 7, 1998.
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
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B) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three months
ended June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VISTA MEDICAL TECHNOLOGIES, INC.
Date: November 13, 1998 /s/ John R. Lyon
John R. Lyon
President, Chief Executive Officer and Director
Date: November 13, 1998 /s/ Robert J. De Vaere
Robert J. De Vaere
Vice President of Finance & Administration & Chief
Financial Officer (Principal financial and
accounting officer)
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<PAGE>
[LOGO] EXHIBIT 10.1
SOUTHERN CALIFORNIA CHAPTER OF THE
SOCIETY OF INDUSTRIAL AND OFFICE REALTORS,-Registered Trademark- INC.
INDUSTRIAL REAL ESTATE LEASE
(MULTI -TENANT FACILITY)
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of
the Lease referred to in this Article One explain and define the Basic Terms
and are to be read in conjunction with the Basic Terms.
<TABLE>
<S> <C>
Section 1.01. DATE OF LEASE: JULY 7, 1998
-------------------------------------------------
Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): OCEAN POINT TECH CENTRE
------------------------------
- --------------------------------------------------------------------------------
ADDRESS OF LANDLORD: 5411 AVENIDA ENCINAS, STE #110
------------------------------------------------------------
CARLSBAD, CA 92008
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Section 1.03. TENANT (INCLUDE LEGAL ENTITY): VISTA MEDICAL TECHNOLOGIES INC.,
--------------------------------
ADDRESS OF TENANT: 5451 AVENIDA ENDINAS, STES A,B,C,J & K
--------------------------------------------------------------
CARLSBAD, CA. 92008
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Section 1.04. PROPERTY: The Property is part of Landlord's multi-tenant real
property development known as OCEAN POINT TECH CENTRE
---------------------------------------------------
and described or depicted in Exhibit "A" (the "Project"). The Project
includes the land, the buildings and all other improvements located on the
land, and the common areas described in Paragraph 4.05(a). The Property is
(include street address, approximate square footage and description)
APPROXIMATELY 6500 RENTABLE SQUARE
- --------------------------------------------------------------------------------
FEET LOCATED AT:
- --------------------------------------------------------------------------------
5451 AVENIDA ENCINAS, STES A,B,C,J & K
- --------------------------------------------------------------------------------
CARLSBAD, CA 92008
- --------------------------------------------------------------------------------
Section 1.05. LEASE TERM: 2 years 0 months BEGINNING ON DECEMBER 01, 1998
--- --- -----------------
or such other date as is specified in this Lease, and ENDING ON NOVEMBER 30, 2000
------------------
Section 1.06. PERMITTED USES: (See Article Five) GENERAL OFFICE FOR MEDICAL
---------------------------
RESEARCH COMPANY.
- --------------------------------------------------------------------------------
Section 1.07. TENANT'S GUARANTOR: (If none, so state) NONE
------------------------
Section 1.08. BROKERS: (See Article Fourteen) (If none, so state)
LANDLORD'S BROKER: NONE
--------------------------------------------------------------
TENANT'S BROKER: NONE
----------------------------------------------------------------
Section 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article Fourteen)
$ N/A
- --------------------------------------------------------------------------------
Section 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) $ 9,425.00
---------------
Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Section 4.05) NONE ASSIGNED
-------------
Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT:
(a) BASE RENT: EIGHT THOUSAND FOUR HUNDRED FIFTY AND XX/100 Dollars ($ 8450.00 )
------------------------------------------------ ----------------
per month for the first 24 months, as provided in Section 3.01, and shall be increased on the
---------------
first day of the 25 month(s) after the Commencement Date, either (i) as provided in
-------------------
Section 3.02, or (ii) SEE RENTAL SCHEDULE
- -------------------------------------------------------------------------------
. (If (ii) is completed, then (i) and Section 3.02 are inapplicable.)
- -------------
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes above the "Base Real Property Taxes" (See
Section 4.02); (ii) Utilities (See Section 4.03); (iii) Increased Insurance Premiums above "Base Premiums" (See
Section 4.04); (iv) Tenant's Initial Pro Rata Share of Common Area Expenses 7,95 % (See Section
----------------
4.05); (v) Impounds for Tenant's Share of Insurance Premiums and Property Taxes (See Section 4.08); (vi)
Maintenance, Repairs and Alterations (See Article Six).
Section 1.13. COSTS AND CHARGES PAYABLE BY LANDLORD: (a) Base Real Property Taxes (See Section 4.02);
(b) Base Insurance Premiums (See Section 4.04(c)); (c) Maintenance and Repair (See Article Six).
Section 1.14. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See Section 9.05) ONE
----------------
HUNDRED percent (100%) of the Profit (the "Landlord's Share").
- ---------------------- ------
Section 1.15. RIDERS: The following Rider's are attached to and made a
part of this Lease: (If none, so state)
- --------------------------------------------------------------------------------
SECTION 15, 16, 17, 18, & 19
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
ARTICLE TWO: LEASE TERM
Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and
shall begin and end on the dates specified in Section 1.05 above, unless the
beginning or end of the Lease Term is changed under any provision of this
Lease. The "Commencement Date" shall be the date specified in Section 1.05
above for the beginning of the Lease Term, unless advanced or delayed under
any provision of this Lease.
Section 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to
Tenant if Landlord does not deliver possession of the Property to Tenant on
the Commencement Date. Landlord's non-delivery of the Property to Tenant on
that date shall not affect this Lease or the obligations of Tenant under this
Lease except that the Commencement Date shall be delayed until Landlord
delivers possession of the Property to Tenant and the Lease Term shall be
extended for a period equal to the delay in delivery of possession of the
Property to Tenant, plus the number of days necessary to end the Lease Term
on the last day of a month. If Landlord does not deliver possession of the
Property to Tenant within sixty (60) days after the Commencement Date, Tenant
may elect to cancel this Lease by giving written notice to Landlord within
ten (10) days after the sixty (60) -day period ends. If Tenant gives such
notice, the Lease shall be cancelled and neither Landlord nor Tenant shall
have any further obligations to the other. If Tenant does not give such
notice, Tenant's right to cancel the Lease shall expire and the Lease Term
shall commence upon the delivery of possession of the Property to Tenant. If
delivery of possession of the Property to Tenant is delayed, Landlord and
Tenant shall, upon such delivery, execute an amendment to this Lease setting
forth the actual Commencement Date and expiration date of the Lease. Failure
to execute such amendment shall not affect the actual Commencement Date and
expiration date of the Lease.
Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior
to the Commencement Date, Tenant's occupancy of the Property shall be subject
to all of the provisions of this Lease. Early occupancy of the Property
shall not advance the expiration date of this Lease. Tenant shall pay Base
Rent and all other charges specified in this Lease for the early occupancy
period.
Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse
Landlord for and indemnify Landlord against all damages which Landlord incurs
from Tenant's delay in vacating the Property. If Tenant does not vacate the
Property upon the expiration or earlier termination of the Lease and Landlord
thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall
be a "month-to-month" tenancy, subject to all of the terms of this Lease
applicable to a month-to-month tenancy, except that the Base Rent then in
effect shall be increased by twenty-five percent (25%).
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon commencement of this
Lease, Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand.
The Base Rent shall be payable at Landlord's address or at such other place as
Landlord may designate in writing.
Section 3.02 Deleted.
Section 3.03 SECURITY DEPOSIT; INCREASES.
(a) Upon the commencement of this Lease, Tenant shall deposit with
Landlord a cash Security Deposit in the amount set forth in Section 1.10 above.
Landlord may apply all or part of the Security Deposit to any unpaid rent or
other charges due from Tenant or to cure any other defaults of Tenant. If
Landlord uses any part of the Security Deposit Tenant shall restore the Security
Deposit to its full amount within ten (10) days after Landlord's written
request. Tenant's failure to do so shall be a material default under this
Lease. No interest shall be paid on the Security Deposit. Landlord shall not
be required to keep the Security Deposit separate from its other accounts and no
trust relationship is created with respect to the Security Deposit.
(b) Each time the Base Rent is increased, Tenant shall deposit additional
funds with Landlord sufficient to increase the Security Deposit to an amount
which bears the same relationship to the adjusted Base Rent as the initial
Security Deposit bore to the initial Base Rent.
Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, Landlord shall
refund or credit to Tenant (or Tenant's successor) the unused portion of the
Security Deposit, any advance rent or other advance payments made by Tenant to
Landlord, and any amounts paid for real property taxes and other reserves which
apply to any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
2
<PAGE>
Section 4.02. PROPERTY TAXES.
(a) REAL PROPERTY TAXES. Landlord shall pay the "Base Real Property
Taxes" on the Property during the Lease Term. Base Real Property Taxes are
real property taxes applicable to the Property as shown on the tax bill for
the most recent tax fiscal year ending prior to the Commencement Date.
However, if the structures on the Property are not completed by the tax lien
date of such tax fiscal year, the Base Real Property Taxes are the taxes
shown on the first tax bill showing the full assessed value of the Property
after completion of the structures. Tenant shall pay Landlord the amount, if
any, by which the real property taxes during the Lease Term exceed the Base
Real Property Taxes. Subject to Paragraph 4.02(c), Tenant shall make such
payments within fifteen (15) days after receipt of Landlord's statement
showing the amount and computation of such increase. Landlord shall
reimburse Tenant for any real property taxes paid by Tenant covering any
period of time prior to or after the Lease Term.
(b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i)
any fee, license fee, license tax, business license fee, commercial rental
tax, levy, charge, assessment, penalty or tax imposed by any taxing authority
against the Property; (ii) any tax on the Landlord's right to receive, or the
receipt of, rent or income from the Property, or against Landlord's business
of leasing the Property; (iii) any tax or charge for fire protection,
streets, sidewalks, road maintenance, refuse or other services provided to
the Property by any governmental agency; (iv) any tax imposed upon this
transaction or based upon a re-assessment of the Property due to a change of
ownership, as defined by applicable law, or other transfer of all or part of
Landlord's interest in the Property; and (v) any charge or fee replacing any
tax previously included within the definition of real property tax. "Real
property tax" does not, however, include Landlord's federal or state income,
franchise, inheritance or estate taxes.
(c) JOINT ASSESSMENT. If the Property is not separately assessed,
Landlord shall reasonably determine Tenant's share of the real property tax
payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or
other reasonably available information. Tenant shall pay such share to
Landlord within fifteen (15) days after receipt of Landlord's written
statement.
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade
fixtures, furnishings, equipment or any other personal property
belonging to Tenant. Tenant shall try to have personal property
taxed separately from the Property.
(ii) If any of Tenant's personal property is taxed with the
Property, Tenant shall pay Landlord the taxes for the personal
property within fifteen (15) days after Tenant receives a written
statement from Landlord for such personal property taxes.
Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied
to the Property. However, if any services or utilities are jointly metered
with other property, Landlord shall make a reasonable determination of
Tenant's proportionate share of the cost of such utilities and services and
Tenant shall pay such share to Landlord within fifteen (15) days after
receipt of Landlord's written statement.
Section 4.04 INSURANCE POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain
a policy of commercial general liability insurance (sometimes known as broad
form comprehensive general liability insurance) insuring Tenant against
liability for bodily injury, property damage (including loss of use of
property) and personal injury arising out of the operation, use or occupancy
of the Property. Tenant shall name Landlord as an additional insured under
such policy. The initial amount of such insurance shall be One Million
Dollars ($1,000,000) per occurrence and shall be subject to periodic increase
based upon inflation, increased liability awards, recommendation of
Landlord's professional insurance advisers and other relevant factors. The
liability insurance obtained by Tenant under this Paragraph 4.04(a) shall (i)
be primary and non-contributing; (ii) contain cross-liability endorsements;
and (iii) insure Landlord against Tenant's performance under Section 5.05, if
the matters giving rise to the indemnity under Section 5.05 result from the
negligence of Tenant. The amount and coverage of such insurance shall not
limit Tenant's liability nor relieve Tenant of any other obligation under
this Lease. Landlord may also obtain comprehensive public liability
insurance in an amount and with coverage determined by Landlord insuring
Landlord against liability arising out of ownership, operation, use or
occupancy of the Property. The policy obtained by Landlord shall not be
contributory and shall not provide primary insurance.
(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term,
Landlord shall maintain policies of insurance covering loss of or damage to
the Property in the full amount of its replacement value. Such policy shall
contain an Inflation Guard Endorsement and shall provide protection against
all perils included within the classification of fire, extended coverage,
vandalism, malicious mischief, special extended perils (all risk), sprinkler
leakage and any other perils which Landlord deems reasonably necessary.
Landlord shall have the right to obtain flood and earthquake insurance if
required by any lender holding a security interest in the Property. Landlord
shall not obtain insurance for Tenant's fixtures or equipment or building
improvements installed by Tenant on the Property. During the Lease Term,
Landlord shall also maintain a rental income insurance policy, with loss
payable to Landlord, in an amount equal to one year's Base Rent, plus
estimated real property taxes and insurance premiums. Tenant shall be liable
for the payment of any deductible amount under Landlord's or Tenant's
insurance policies maintained pursuant to this Section 4.04, in an
3
<PAGE>
amount not to exceed Ten Thousand Dollars ($10,000). Tenant shall not do or
permit anything to be done which invalidates any such insurance policies.
(c) PAYMENT OF PREMIUMS.
(i) Landlord shall pay the "Base Premiums" for the
insurance policies maintained by Landlord under Paragraph
4.04(b). If the Property has been previously fully occupied, the
"Base Premiums" are the insurance premiums paid during or
applicable to the last twelve (12) months of such prior
occupancy. If the Property has not been previously fully
occupied or has been occupied for less than twelve (12) months,
the Base Premiums are the lowest annual premiums reasonably
obtainable for the required insurance for the Property as of the
Commencement Date.
(ii) Tenant shall pay Landlord the amount, if any, by which
the insurance premiums for all policies maintained by Landlord
under Paragraph 4.04(b) have increased over the Base Premiums,
whether such increases result from the nature of Tenant's
occupancy, any act or omission of Tenant, the requirement of any
lender referred to in Article Eleven (Protection of Lenders), the
increased value of the Property or general rate increases.
However, if Landlord substantially increases the amount of
insurance carried or the percentage of insured value after the
period during which the Base Premiums were calculated, Tenant
shall only pay Landlord the amount of increased premiums which
would have been charged by the insurance carrier if the amount of
insurance or percentage of insured value had not been
substantially increased by Landlord. This adjustment in the
amount due from Tenant shall be made only once during the Lease
Term. Thereafter, Tenant shall be obligated to pay the full
amount of any additional increases in the insurance premiums,
including increases resulting from any further increases in the
amount of insurance or percentage of insured value. Subject to
Section 4.05, Tenant shall pay Landlord the increases over the
Base Premiums within fifteen (15) days after receipt by Tenant of
a copy of the premium statement or other evidence of the amount
due. If the insurance policies maintained by Landlord cover
improvements or real property other than the Property, Landlord
shall also deliver to Tenant a statement of the amount of the
premiums applicable to the Property showing, in reasonable
detail, how such amount was computed. If the Lease Term expires
before the expiration of the insurance period, Tenant's liability
shall be pro rated on an annual basis.
(d) GENERAL INSURANCE PROVISIONS.
(i) Any insurance which Tenant is required to maintain
under this Lease shall include a provision which requires the
insurance carrier to give Landlord not less than thirty (30)
days' written notice prior to any cancellation or modification of
such coverage.
(ii) If Tenant fails to deliver any policy, certificate or
renewal to Landlord required under this Lease within the
prescribed time period or if any such policy is cancelled or
modified during the Lease Term without Landlord's consent,
Landlord may obtain such insurance, in which case Tenant shall
reimburse Landlord for the cost of such insurance within fifteen
(15) days after receipt of a statement that indicates the cost of
such insurance.
(iii) Tenant shall maintain all insurance required under
this Lease with companies holding a "General Policy Rating" of A-
12 or better, as set forth in the most current issue of 'Best Key
Rating Guide". Landlord and Tenant acknowledge the insurance
markets are rapidly changing and that insurance in the form and
amounts described in this Section 4.04 may not be available in
the future. Tenant acknowledges that the described in this
Section 4.04 is for the primary benefit of Landlord. If at any
time during the Lease Term, Tenant is unable to maintain the
insurance required under the Lease, Tenant shall nevertheless
maintain insurance coverage which is customary and commercially
reasonable in the insurance industry for Tenant's type of
business, as that coverage may change from time to time, Landlord
makes no representation as to the adequacy of such insurance to
protect Landlord's or Tenant's interests. Therefore, Tenant
shall obtain any such additional property or liability insurance
which Tenant deems necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance
policies maintained, Landlord and Tenant each hereby waive any
and all rights of recovery against the other, or against the
officers, employees, agents or representatives of the other, for
loss of or damage to its property or the property of others under
its control, if such loss or damage is covered by any insurance
policy in force (whether or not described in this Lease) at the
time of such loss or damage. Upon obtaining the required
policies of insurance, Landlord and Tenant shall give notice to
the insurance carriers of this mutual waiver of subrogation.
Section 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS.
(a) COMMON AREAS. As used in this Lease, "Common Areas" shall mean all
areas within the Project which are available for the common use of tenants of
the Project and which are not leased or held for the exclusive use of Tenant or
other tenants, including, but not limited to, parking areas, driveways,
sidewalks, loading areas, access roads, corridors, landscaping and planted
areas. Landlord, from time to time, may change the size, location, nature and
use of any of the Common Areas, convert Common Areas into leaseable areas,
construct additional parking facilities (including parking structures) in the
Common Areas, and increase or decrease Common Area land and/or facilities.
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Tenant acknowledges that such activities may result in inconvenience to
Tenant. Such activities and changes are permitted if they do not materially
affect Tenant's use of the Property.
(b) USE OF COMMON AREAS. Tenant shall have the nonexclusive right (in
common with other tenants and all others to whom Landlord has granted or may
grant such rights) to use the Common Areas for the purposes intended, subject to
such reasonable rules and regulations as Landlord may establish from time to
time. Tenant shall abide by such rules and regulations and shall use its best
effort to cause others who use the Common Areas with Tenant's express or implied
permission to abide by Landlord's rules and regulations. At any time, Landlord
may close any Common Areas to perform any acts in the Common Areas as, in
Landlord's judgment, are desirable to improve the Project. Tenant shall not
interfere with the rights of Landlord, other tenants or any other person
entitled to use the Common Areas.
(c) SPECIFIC PROVISION RE: VEHICLE PARKING. Tenant shall be entitled to
use the number of vehicle parking spaces in the Project allocated to Tenant in
Section 1.11 of the Lease without paying any additional rent. Tenant's parking
shall not be reserved and shall be limited to vehicles no larger than standard
size automobiles or pickup utility vehicles. Tenant shall not cause large
trucks or other large vehicles to be parked within the Project or on the
adjacent public streets. Temporary parking of large delivery vehicles in the
Project may be permitted by the rules and regulations established by Landlord.
Vehicles shall be parked only in striped parking spaces and not in driveways,
loading areas or other locations not specifically designated for parking.
Handicapped spaces shall only be used by those legally permitted to use them.
(d) MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common Areas
in good order, condition and repair and shall operate the Project, in Landlord's
sole discretion, as a first-class industrial/commercial real property
development. Tenant shall pay Tenant's pro rata share (as determined below) of
all costs incurred by Landlord for the operation and maintenance of the Common
Areas. Common Area costs include, but are not limited to, costs and expenses
for the following: gardening and landscaping; utilities, water and sewage
charges; maintenance of signs (other than tenants' signs); premiums for
liability, property damage, fire and other types of casualty insurance on the
Common Areas and worker's compensation insurance; all property taxes and
assessments levied on or attributable to the Common Areas and all Common Area
improvements; all personal property taxes levied on or attributable to personal
property used in connection with the Common Areas; straight-line depreciation on
personal property owned by Landlord which is consumed in the operation or
maintenance of the Common Areas; rental or lease payments paid by Landlord for
rented or leased personal property used in the operation or maintenance of the
Common Areas; fees for required licenses and permits; repairing, resurfacing,
repaving, maintaining, painting, lighting, cleaning, refuse removal, security
and similar items; reserves for roof replacement and exterior painting and other
appropriate reserves; and a reasonable allowance to Landlord for Landlord's
supervision of the Common Areas (not to exceed five percent (5%) of the gross
rents of the Project for the calendar year). Landlord may cause any or all of
such services to be provided by third parties and the cost of such services
shall be included in Common Area costs. Common Area costs shall not include
depreciation of real property which forms part of the Common Areas.
(e) TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual pro rata
share of all Common Area costs (prorated for any fractional month) upon written
notice from Landlord that such costs are due and payable, and in any event prior
to delinquency. Tenant's pro rata share shall be calculated by dividing the
square foot area of the Property, as set forth in Section 1.04 of the Lease, by
the aggregate square foot area of the Project which is leased or held for lease
by tenants, as of the date on which the computation is made. Tenant's initial
pro rata share is set out in Paragraph 1.13(b). Any changes in the Common Area
costs and/or the aggregate area of the Project leased or held for lease during
the Lease Term shall be effective on the first day of the month after such
change occurs. Landlord may, at Landlord's election, estimate in advance and
charge to Tenant as Common Area costs, all real property taxes for which Tenant
is liable under Section 4.02 of the Lease, all insurance premiums for which
Tenant is liable under Section 4.04 of the Lease, all maintenance and repair
costs for which Tenant is liable under Section 6.04 of the Lease, and all other
Common Area costs payable by Tenant hereunder. At Landlord's election, such
statements of estimated Common Area costs shall be delivered monthly, quarterly
or at any other periodic intervals to be designated by Landlord. Landlord may
adjust such estimates at any time based upon Landlord's experience and
reasonable anticipation of costs. Such adjustments shall be effective as of the
next rent payment date after notice to Tenant. Within sixty (60) days after the
end of each calendar year of the Lease Term, Landlord shall deliver to Tenant a
statement prepared in accordance with generally accepted accounting principles
setting forth, in reasonable detail, the Common Area costs paid or incurred by
Landlord during the preceding calendar year and Tenant's pro rata share. Upon
receipt of such statement, there shall be an adjustment between Landlord and
Tenant, with payment to or credit given by Landlord (as the case may be) so that
Landlord shall receive the entire amount of Tenant's share of such costs and
expenses for such period.
Section 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but
are not limited to, processing and accounting charges and late charges which may
be imposed on Landlord by any ground lease, mortgage or trust deed encumbering
the Property. Therefore, if Landlord does not receive any rent payment within
ten (10) days after it becomes due, Tenant shall pay Landlord a late charge
equal to ten percent (10%) of the overdue amount. The parties agree that such
late charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of such late payment. There will be a $50.00 charge assessed
for Non Sufficient Funds.
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Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant
to Landlord which is not paid when due shall bear interest at the rate of Ten
percent (10%) per annum from the due date of such amount. However, interest
shall not be payable on late charges to be paid by Tenant under this Lease. The
payment of interest on such amounts shall not excuse or cure any default by
Tenant under this Lease. If the interest rate specified in this Lease is higher
than the rate permitted by law, the interest rate is hereby decreased to the
maximum legal interest rate permitted by law.
Section 4.08 Deleted.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth In Section 1.06 above.
Section 5.02. MANNER OF USE. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes with
the rights of tenants of the Project, or which constitutes a nuisance or waste.
Tenant shall obtain and pay for all permits, including a Certificate of
Occupancy, required for Tenant's occupancy of the Property and shall promptly
take all actions necessary to comply with all applicable statutes, ordinances,
rules, regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act.
Section 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state or
local laws or regulations, including without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, amonnia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently found to have adverse effects on the environment or the health and
safety of persons. Tenants shall not cause or permit any Hazardous Material to
be generated, produced, brought upon, used, stored, treated or disposed of in or
about the Property by Tenant, its agents, employees, contractors, sublessees or
invitees without the prior written consent of Landlord. Landlord shall be
entitled to take into account such other factors or facts as Landlord may
reasonably determine to be relevant in determining whether to grant or withhold
consent to Tenant's proposed activity with respect to Hazardous Material. In no
event, however, shall Landlord be required to consent to the installation or use
of any storage tanks on the Property.
Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on the
Property without Landlord's prior written consent. Tenant shall not conduct or
permit any auctions or sheriff's sales at the Property.
Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and hold
Landlord harmless from any and all costs, claims or liability arising from: (a)
Tenant's use of the Property; (b) the conduct of Tenant's business or anything
else done or permitted by Tenant to be done in or about the Property, including
any contamination of the Property or any other property resulting from the
presence or use of Hazardous Material caused or permitted by Tenant; (c) any
breach or default in the performance of Tenant's obligations under this Lease;
(d) any misrepresentation or breach of warranty by Tenant under this Lease; or
(e) other acts or omissions of Tenant. Tenant shall defend Landlord against any
such cost, claim or liability at Tenant's expense with counsel reasonably
acceptable to Landlord or, at Landlord's election, Tenant shall reimburse
Landlord for any legal fees or costs incurred by Landlord in connection with any
such claim. As a material part of the consideration to Landlord, Tenant assumes
all risk of damage to property or injury to persons in or about the Property
arising from any cause, and Tenant hereby waives all claims in respect thereof
against Landlord, except for any claim arising out of Landlord's gross
negligence or willful misconduct. As used in this Section, the term "Tenant"
shall include Tenant's employees, agents, contractors and invitees, if
applicable.
Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties; to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems necessary. Landlord shall
give Tenant prior notice of such entry, except in the case of an emergency.
Landlord may place customary "For Sale" or "For Lease" signs on the Property.
Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies with
all other terms of this Lease, Tenant may occupy and enjoy the Property for the
full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. EXISTING CONDITIONS. Tenant accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation as to the condition of the Property or the suitability
of the Property for Tenant's intended use. Tenant represents and warrants that
Tenant has made its own inspection of and inquiry regarding the condition of the
Property and is not relying on any representations of Landlord or any Broker
with respect thereto. If Landlord or Landlord's Broker has provided a
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Property Information Sheet or other Disclosure Statement regarding the
Property, a copy is attached as an exhibit to the Lease.
Section 6.02. *EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not
be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Property, whether such damage or injury is caused by or results from: (a) fire,
steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction
or other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures or any other cause; (c) conditions arising in
or about the Property or upon other portions of the Project, or from other
sources or places; or (d) any act or omission of any other tenant of the
Project. Landlord shall not be liable for any such damage or injury even though
the cause of or the means of repairing such damage or injury are not accessible
to Tenant. The provisions of this Section 6.02 shall not, however, exempt
Landlord from liability for Landlord's gross negligence or willful misconduct.
*Reference Improvement Page.
Section 6.03. LANDLORD'S OBLIGATIONS. Subject to the provisions of
Article Seven (Damage or Destruction) and Article Eight (Condemnation), and
except for damage caused by any act or omission of Tenant, or Tenant's
employees, agents, contractors or invitees, Landlord shall keep the foundation,
roof and structural portions of exterior walls of the improvements on the
Property in good order, condition and repair. However, Landlord shall not be
obligated to maintain or repair windows, doors, plate glass or the surfaces of
walls. Landlord shall not be obligated to make any repairs under this Section
6.03 until a reasonable time after receipt of a written notice from Tenant of
the need for such repairs. Tenant waives the benefit of any present or future
law which might give Tenant the right to repair the Property at Landlord's
expense or to terminate the Lease because of the condition of the Property.
Section 6.04. TENANT'S OBLIGATIONS.
(a) Except as provided in Article Seven (Damage or Destruction) and
Article Eight (Condemnation), Tenant shall keep all portions of the Property
(including structural, nonstructural, interior, systems and equipment) in
good order, condition and repair (including interior repainting and
refinishing, as needed). If any portion of the Property or any system or
equipment in the Property which Tenant is obligated to repair cannot be fully
repaired or restored, Tenant shall promptly replace such portion of the
Property or system or equipment in the Property, regardless of whether the
benefit of such replacement extends beyond the Lease Term; but if the benefit
or useful life of such replacement extends beyond the Lease Term (as such
term may be extended by exercise of any options), the useful life of such
replacement shall be prorated over the remaining portion of the Lease Term
(as extended), and Tenant shall be liable only for that portion of the cost
which is applicable to the Lease Term (as extended). Landlord shall
undertake the responsibility for preventive maintenance of the heating and
air conditioning system at Tenant's expense. In addition, Tenant shall, at
Tenant's expense, repair any damage to the roof, foundation or structural
portions of walls caused by Tenant's acts or omissions. It is the intention
of Landlord and Tenant that, at all times during the Lease Term, Tenant shall
maintain the Property in an attractive, first-class and fully operative
condition.
(b) Tenant shall fulfill all of Tenant's obligations under this Section
6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace
the Property as required by this Section 6.04, Landlord may, upon ten (10) days'
prior notice to Tenant (except that no notice shall be required in the case of
an emergency), enter the Property and perform such maintenance or repair
(including replacement, as needed) on behalf of Tenant. In such case, Tenant
shall reimburse Landlord for all costs incurred in performing such maintenance
or repair immediately upon demand.
Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or improvements to
the Property without Landlord's prior written consent, except for non-structural
alterations which do not exceed Ten Thousand Dollars ($10,000) in cost
cumulatively over the Lease Term and which are not visible from the outside of
any building of which the Property is part. Landlord may require Tenant to
provide demolition and/or lien and completion bonds in form and amount
satisfactory to Landlord. Tenant shall promptly remove any alterations,
additions, or improvements constructed in violation of this Paragraph 6.05(a)
upon Landlord's written request. All alterations, additions, and improvements
shall be done in a good and workmanlike manner, in conformity with all
applicable laws and regulations, and by a contractor approved by Landlord. Upon
completion of any such work, Tenant shall provide Landlord with "as built"
plans, copies of all construction contracts, and proof of payment for all labor
and materials.
(b) Tenant shall pay when due all claims for labor and material furnished
to the Property. Tenant shall give Landlord at least twenty (20) days' prior
written notice of the commencement of any work on the Property, regardless of
whether Landlord's consent to such work is required. Landlord may elect to
record and post notices of non-responsibility on the Property.
Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). In addition, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent) prior to the expiration of the Lease and to
restore the Property to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the expiration or earlier termination of the Lease, except
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that Tenant may remove any of Tenant's machinery or equipment which can be
removed without material damage to the Property. Tenant shall repair, at
Tenant's expense, any damage to the Property caused by the removal of any
such machinery or equipment. In no event, however, shall Tenant remove any of
the following materials or equipment (which shall be deemed Landlord's
property) without Landlord's prior written consent: any power wiring or power
panels; lighting or lighting fixtures; wall coverings; drapes, blinds or
other window coverings; carpets or other floor coverings; heaters, air
conditioners or any other heating or air conditioning equipment; fencing or
security gates; or other similar building operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e., less than fifty percent (50%) of the Property is untenantable as
a result of such damage or less than fifty percent (50%) of Tenant's operations
are materially impaired) and if the proceeds received by Landlord from the
insurance policies described in Paragraph 4.04(b) are sufficient to pay for the
necessary repairs, this Lease shall remain in effect and Landlord shall repair
the damage in 180 days. Landlord may elect (but is not required) to repair any
damage to Tenant's fixtures, equipment, or improvements.
(b) If the insurance proceeds received by Landlord are not sufficient to
pay the entire cost of repair, or if the cause of the damage is not covered by
the insurance policies which Landlord maintains under Paragraph 4.04(b) Landlord
may elect either to (i) repair the damage as soon as reasonably possible, in
which case this Lease shall remain in full force and effect, or (ii) terminate
this Lease as of the date the damage occurred. Landlord shall notify Tenant
within thirty (30) days after receipt of notice of the occurrence of the damage
whether Landlord elects to repair the damage or terminate the Lease. If
Landlord elects to repair the damage, Tenant shall pay Landlord the "deductible
amount" (if any) under Landlord's insurance policies and, if the damage was due
to an act or omission of Tenant, or Tenant's employees, agents, contractors or
invitees, the difference between the actual cost of repair and any insurance
proceeds received by Landlord. If Landlord elects to terminate this Lease,
Tenant may elect to continue this Lease in full force and effect, in which case
Tenant shall repair any damage to the Property and any building in which the
Property is located. Tenant shall pay the cost of such repairs, except that
upon satisfactory completion of such repairs, Landlord shall deliver to Tenant
any insurance proceeds received by Landlord for the damage repaired by Tenant.
Tenant shall give Landlord written notice of such election within ten (10) days
after receiving Landlord's termination notice.
(c) If the damage to the Property occurs during the last six (6) months of
the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within thirty (30) days after
Tenant's notice to Landlord of the occurrence of the damage.
Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless of whether Landlord receives any insurance proceeds, this Lease shall
terminate as of the date the destruction occurred. Notwithstanding the
preceding sentence, if the Property can be rebuilt within six (6) months after
the date of destruction, Landlord may elect to rebuild the Property at
Landlord's own expense, in which case this Lease shall remain in full force and
effect. Landlord shall notify Tenant of such election within thirty (30) days
after Tenant's notice of the occurrence of total or substantial destruction. If
Landlord so elects, Landlord shall rebuild the Property at Landlord's sole
expense, except that if the destruction was caused by an act or omission of
Tenant, Tenant shall pay Landlord the difference between the actual cost of
rebuilding and any insurance proceeds received by Landlord.
Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Property is impaired. However, the reduction
shall not exceed the sum of one year's payment of Base Rent, insurance premiums
and real property taxes. Except for such possible reduction in Base Rent,
insurance premiums and real property taxes, Tenant shall not be entitled to any
compensation, reduction, or reimbursement from Landlord as a result of any
damage, destruction, repair, or restoration of or to the Property.
Section 7.04. WAIVER. Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial or total destruction of the leased property. Tenant
agrees that the provisions of Section 7.02 above shall govern the rights and
obligations of Landlord and Tenant in the event of any substantial or total
destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of eminent
domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on
the date the condemning authority takes title or possession, whichever occurs
first. If more than twenty percent (20%) of the floor area of the building in
which the Property is located, or which is located on the Property, is taken,
either Landlord or Tenant may terminate this Lease as of the date the
condemning authority takes title or possession, by delivering written notice
to the other within ten (10) days after receipt of written notice of such
taking (or in the absence of such notice,
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within ten (10) days after the condemning authority takes title or
possession). If neither Landlord nor Tenant terminates this Lease, this
Lease shall remain in effect as to the portion of the Property not taken,
except that the Base Rent and Additional Rent shall be reduced in proportion
to the reduction in the floor area of the Property. Any Condemnation award
or payment shall be distributed in the following order: (a) first, to any
ground lessor, mortgagee or beneficiary under a deed of trust encumbering the
Property, the amount of its interest in the Property; (b) second, to Tenant,
only the amount of any award specifically designated for loss of or damage to
Tenant's trade fixtures or removable personal property; and (c) third, to
Landlord, the remainder of such award, whether as compensation for reduction
in the value of the leasehold, the taking of the fee, or otherwise. If this
Lease is not terminated, Landlord shall repair any damage to the Property
caused by the Condemnation, except that Landlord shall not be obligated to
repair any damage for which Tenant has been reimbursed by the condemning
authority. If the severance damages received by Landlord are not sufficient
to pay for such repair, Landlord shall have the right to either terminate
this Lease or make such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a non-curable breach of this Lease.
If Tenant is a partnership, any cumulative transfer of more than twenty percent
(20%) of the partnership interests shall require Landlord's consent. If Tenant
is a corporation, any change in the ownership of a controlling interest of the
voting stock of the corporation shall require Landlord's consent.
Section 9.02. TENANT AFFILIATE. Tenant may assign this Lease or sublease
the Property, without Landlord's consent, to any corporation which controls, is
controlled by or is under common control with Tenant, or to any corporation
resulting from the merger of or consolidation with Tenant ("Tenant's
Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all
of Tenant's obligations under this Lease.
Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this Article
Nine, whether with or without Landlord's consent, shall release Tenant or change
Tenant's primary liability to pay the rent and to perform all other obligations
of Tenant under this Lease. Landlord's acceptance of rent from any other person
is not a waiver of any provision of this Article Nine. Consent to one transfer
is not a consent to any subsequent transfer. If Tenant's transferee defaults
under this Lease, Landlord may proceed directly against Tenant without pursuing
remedies against the transferee. Landlord may consent to subsequent assignments
or modifications of this Lease by Tenant's transferee, without notifying Tenant
or obtaining its consent. Such action shall not relieve Tenant's liability
under this Lease.
Section 9.04. OFFER TO TERMINATE. If Tenant desires to assign the Lease
or sublease the Property, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice of
the offer, the Lease shall terminate as of the date specified and all the terms
and provisions of the Lease governing termination shall apply. If Landlord does
not so elect, the Lease shall continue in effect until otherwise terminated and
the provisions of Section 9.05 with respect to any proposed transfer shall
continue to apply.
Section 9.05. LANDLORD'S CONSENT.
(a) Tenant's request for consent to any transfer described in Section 9.01
shall set forth in writing the details of the proposed transfer, including the
name, business and financial condition of the prospective transferee, financial
details of the proposed transfer (e.g., the term of and the rent and security
deposit payable under any proposed assignment or sublease), and any other
information Landlord deems relevant. Landlord shall have the right to withhold
consent, if reasonable, or to grant consent, based on the following factors: (i)
the business of the proposed assignee or subtenant and the proposed use of the
Property; (ii) the net worth and financial reputation of the proposed assignee
or subtenant; (iii) Tenant's compliance with all of its obligations under the
Lease; and (iv) such other factors as Landlord may reasonably deem relevant. If
Landlord objects to a proposed assignment solely because of the net worth and/or
financial reputation of the proposed assignee, Tenant may nonetheless sublease
(but not assign), all or a portion of the Property to the proposed transferee,
but only on the other terms of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under
the Lease the Landlord's Share (stated in Section 1.14) of the
Profit (defined below) on such transaction as and when received
by Tenant, unless Landlord gives written notice to Tenant and the
assignee or subtenant that Landlord's Share shall be paid by the
assignee or subtenant to Landlord directly. The "Profit" means
(A) all amounts paid to Tenant for such assignment or sublease,
including "key" money, monthly rent in excess of the monthly rent
payable under the Lease, and all fees and other consideration
paid for the assignment or sublease, including fees under any
collateral agreements, less (B) costs and expenses directly
incurred by Tenant in connection with the execution and
performance of such assignment or sublease for real estate
broker's commissions and costs of renovation or construction of
tenant improvements required under such assignment or sublease.
Tenant is entitled to recover such costs and expenses before
Tenant is obligated to pay the Landlord's Share to Landlord. The
Profit in the case of a sublease of less than all the Property IS
the rent allocable to the subleased space as a percentage on a
square footage basis.
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(ii). Tenant shall provide Landlord a written statement
certifying all amounts to be paid from any assignment or sublease
of the Property within thirty (30) days after the transaction
documentation is signed, and Landlord may inspect Tenant's books
and records to verify the accuracy of such statement. On written
request, Tenant shall promptly furnish to Landlord copies of all
the transaction documentation, all of which shall be certified by
Tenant to be complete, true and correct. Landlord's receipt of
Landlord's Share shall not be a consent to any further assignment
or subletting. The breach of Tenant's obligation under this
Paragraph 9.05(b) shall be a material default of the Lease.
Section 9.06. NO MERGER. No merger shall result from Tenant's sublease of
the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under thy Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants
and conditions.
Section 10.02. DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge; within five (5)
business days after receipt of notice.
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after written notice from
Landlord; provided that if more than thirty (30) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30) -day period and thereafter diligently pursues
its completion. However, Landlord shall not be required to give such notice if
Tenant's failure to perform constitutes a non-curable breach of this Lease, The
notice required by this Paragraph is intended to satisfy any and all notice
requirements imposed by law on Landlord and is not in addition to any such
requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession is not restored to
Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets
located at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
thirty (30) days. If a court of competent jurisdiction determines that any of
the acts described in this subparagraph (d) is not a default under this Lease,
and a trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the excess, if any, of the rent
(or any other consideration) paid in connection with such assignment or sublease
over the rent payable by Tenant under this Lease.
(e) If any guaranor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any portion of
Tenant's obligations tinder the Lease. Unless otherwise expressly provided, no
guaranty of the Lease is revocable.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Property to Landlord. In such event, Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including (i) the worth at the time of the award of the unpaid
Base Rent, Additional Rent and other charges which Landlord had earned at the
time of the termination; (ii) the worth at the time of the award of the amount
by which the unpaid Base Rent, Additional Rent and other charges which Landlord
would have earned after termination until the time of the award exceeds the
amount of such rental loss that Tenant proves Landlord could have reasonably
avoided; (iii) the worth at the time of the award of the amount by which the
unpaid Base Rent, Additional Rent and-other charges which Tenant would have paid
for the balance of the Lease term after the time of award exceeds the amount of
such rental loss that Tenant proves Landlord could have reasonably avoided; and
(iv) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under the
Lease or which in the ordinary course of things would be likely to result
therefrom, including, but not limited to, any costs or expenses Landlord incurs
in maintaining or preserving the Property after such default, the cost of
recovering possession of the Property, expenses of reletting, including
necessary renovation or alteration of the Property, Landlord's reasonable
attorneys' fees incurred in connection therewith, and any real estate commission
paid or payable. As used in subparts (i) and (ii) above, the "worth at the
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time of the award" is computed by allowing interest on unpaid amounts at the
rate of fifteen percent (15%) per annum, or such lesser amount as may then be
the maximum lawful rate. As used in subpart (iii) above, the "worth at the
time of the award" is computed by discounting such amount at the discount
rate of the Federil Reserve Bank of San Francisco at the time of the award,
plus one percent (1%). If Tenant has abandoned the Property, Landlord shall
have the option of (i) retaking, possession of the Property and recovering
from Tenant the amount specified in this Paragraph 10.03(a), or (ii)
proceeding under Paragraph 10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease shall
continue in effect whether or not Tenant has abandoned the Property. In such
event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it becomes
due;
(c) Pursue any other remedy now or hereafter available to Landlord under
the laws or judicial decisions of the state in which the Property is located.
Section 10.04. REPAYMENT OF "FREE" RENT. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent or other
rent concession, such postponed rent or "free" rent is called the "Abated
Rent". Tenant shall be credited with having paid all of the Abated Rent on
the expiration of the Lease Term only if Tenant has fully, faithfully, and
punctually performed all of Tenant's obligations hereunder, including the
payment of all rent (other than the Abated Rent) and all other monetary
obligations and the surrender of the Property in the physical condition
required by this Lease. Tenant acknowledges that its right to receive credit
for the Abated Rent is absolutely conditioned upon Tenant's full, faithful
and punctual performance of its obligations under this Lease. If Tenant
defaults and does not cure within any applicable grace period, the Abated
Rent shall immediately become due and payable in full and this Lease shall be
enforced as if there were no such rent abatement or other rent concession.
In such case Abated Rent shall be calculated based on the full initial rent
payable under this Lease.
Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default
shall include all costs and fees, including reasonable attorneys' fees that
Landlord incurs in connection with the filing, commencement, pursuing and/or
defending of any action in any bankruptcy court or other court with respect to
the Lease; the obtaining of relief from any stay in bankruptcy restraining any
action to evict Tenant; or the pursuing of any action with respect to Landlord's
right to possession of the Property. All such damages suffered (apart from Base
Rent and other rent payable hereunder) shall constitute pecuniary damages which
must be reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
Section 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. SUBORDINATION. Landlord shall have the right to subordinate
this Lease to any ground lease, deed of trust or mortgage encumbering the
Property, any advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever made
or recorded. Tenant shall cooperate with Landlord and any lender which is
acquiring a security interest in the Property or the Lease. Tenant shall
execute such further documents and assurances as such lender may require,
provided that Tenant's obligations under this Lease shall not be increased in
any material way (the performance of ministerial acts shall not be deemed
material), and Tenant shall not be deprived of its rights under this Lease.
Tenant's right to quiet possession of the Property during the Lease Term shall
not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
its ground lease, deed of trust or mortgage and gives written notice thereof to
Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or
mortgage whether this Lease is dated prior or subsequent to the date of said
ground lease, deed of trust or mortgage or the date of recording thereof.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. If Tenant fails to do so within ten
(10) days after written request, Tenant hereby makes, constitutes and
irrevocably appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge and
deliver to Landlord a written statement certifying: (i) that none of the terms
or provisions of this Lease have been changed (or if they have been changed,
stating how they have been changed); (ii) that this Lease has not been cancelled
or terminated; (iii) the last date of payment of the Base Rent and other charges
and the time period covered by such payment; (iv) that Landlord is not in
default under this Lease (or, if Landlord is claimed to be in default, stating
why); and (v) such other representations or information with respect to Tenant
or the Lease as Landlord may reasonably request or which any
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prospective purchaser or encumbrancer of the Property may require. Tenant
shall deliver such statement to Landlord within ten (10) days after
Landlord's request. Landlord may give any such statement by Tenant to any
prospective purchaser or encumbrancer of the Property. Such purchaser or
encumbrancer may rely conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within such ten
(10)-day period, Landlord, and any prospective purchaser or encumbrancer, may
conclusively presume and rely upon the following facts: (i) that the terms and
provisions of this Lease have not been changed except as otherwise represented
by Landlord; (ii) that this Lease has not been cancelled or terminated except as
otherwise represented by Landlord; (iii) that not more than one month's Base
Rent or other charges have been paid in advance; and (iv) that Landlord is not
in default under the Lease. In such event, Tenant shall be estopped from
denying the truth of such facts.
Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verify the net worth of Tenant or
any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall
deliver to any lender designated by Landlord any financial statements required
by such lender to facilitate the financing or refinancing of the Property.
Tenant represents and warrants to Landlord that each such financial statement is
a true and accurate statement as of the date of such statement. All financial
statements shall be confidential and shall be used only for the purposes set
forth in this Lease.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in breach
or default under this Lease, such party (the "Defaulting Party") shall reimburse
the other party (the "Nondefaulting Party") upon demand for any costs or
expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the
provisions of this Lease is commenced, the court in such action shall award to
the party in whose favor a judgment is entered, a reasonable sum as attorneys'
fees and costs. The losing party in such action shall pay such attorneys' fees
and costs. Tenant shall also indemnify Landlord against and hold Landlord
harmless from all costs, expenses, demands and liability Landlord may incur if
Landlord becomes or is made a party to any claim or action (a) instituted by
Tenant against any third party, or by any third party against Tenant, or by or
against any person holding any interest under or using the Property by license
of or agreement with Tenant; (b) for foreclosure of any lien for labor or
material furnished to or for Tenant or such other person; (c) otherwise arising
out of or resulting from any act or transaction of Tenant or such other person;
or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy
proceeding, or other proceeding under Title 11 of the United States Code, as
amended. Tenant shall defend Landlord against any such claim or action at
Tenant's expense with counsel reasonably acceptable to Landlord or, at
Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs
Landlord incurs in any such claim or action.
Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable
attorneys' fees incurred in connection with Tenant's request for Landlord's
consent under Article Nine (Assignment and Subletting), or in connection with
any other act which Tenant proposes to do and which requires Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition
to the continuance of this Lease, that there will be no discrimination against,
or segregation of, any person or group of persons on the basis of race, color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or Project or the leasehold
estate under a ground lease of the Property or Project at the time in question.
Each Landlord is obligated to perform the obligations of Landlord under this
Lease only during the time such Landlord owns such interest or title. Any
Landlord who transfers its title or interest is relieved of all liability with
respect to the obligations of Landlord under this Lease to be performed on or
after the date of transfer. However, each Landlord shall deliver to its
transferee all funds that Tenant previously paid if such funds have not yet been
applied under the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to perform
any of its obligations under this Lease to Landlord and to any ground lessor,
mortgagee or beneficiary under any deed of trust encumbering the Property whose
name and address have been furnished to Tenant in writing. Landlord shall not
be in default under this Lease unless Landlord (or such ground lessor, mortgagee
or beneficiary) fails to cure such non-performance within thirty (30) days after
receipt of Tenant's notice. However, if such non-performance reasonably
requires more than thirty (30) days to cure, Landlord shall not be in default if
such cure is commenced within such thirty (30) -day period and thereafter
diligently pursued to completion.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property and the Project,
and neither
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the Landlord nor its partners, shareholders, officers or other principals
shall have any personal liability under this Lease.
Section 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provisions or
this Lease, which shall remain in full force and effect.
Section 13.04. INTERPRETATION. The captions of the Articles or Sections of
this Lease are to assist the parties in reading this Lease and are not a part of
the terms or provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or other using the Property with Tenant's expressed or
implied permission.
Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the only Agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. NOTICES. All notices required or permitted under this Lease
shall be in writing and shall be personally delivered or sent by certified mail,
return receipt requested, postage prepaid. Notices to Tenant shall be delivered
to the address specified in Section 1.03 above, except that upon Tenant's taking
possession of the Property, the Property shall be Tenant's address for notice
purposes. Notices to Landlord shall be delivered to the address specified in
Section 1.02 above. All notices shall be effective upon delivery. Either party
may change its notice address upon written notice to the other party.
Section 13.07. WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08. NO RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. However, either Landlord or Tenant may
require that a "Short Form" memorandum of this Lease executed by both parties be
recorded. The party requiring such recording shall pay all transfer taxes and
recording fees.
Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that he
or it is a general partner of the partnership, that he or it has full authority
to sign for the partnership and that this Lease binds the partnership and all
general partners of the partnership. Tenant shall give written notice to
Landlord of any general partner's withdrawal or addition. Within thirty (30)
days after this Lease is signed, Tenant shall deliver to Landlord a copy of
Tenant's recorded statement of partnership or certificate of limited
partnership.
Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this Lease
as Tenant shall be jointly and severally liable for all obligations of Tenant.
Section 13.12. FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 13.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. SURVIVAL. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: Deleted.
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Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialled all Riders
which are attached to or incorporated by reference In this Lease.
"LANDLORD"
Signed on 9-17-98 , 19 OCEAN POINT TECH CENTRE
-------------- ----- ----------------------------------------
at San Diego
------------------------------ ----------------------------------------
BY: /s/ W. H. Adair
------------------------------------
William H. Adair
ITS: Executive Vice President
------------------------------------
BY:
-----------------------------------
ITS:
------------------------------------
"TENANT"
Signed on AUGUST 13, 1998 VISTA MEDICAL TECHNOLOGIES, INC.,
----------------- ----------------------------------------
at ------------------------------- ----------------------------------------
BY: /s/ Robert DeVaere
------------------------------------
Robert DeVaere
ITS: CHIEF FINANCIAL OFFICER/SECRETARY
------------------------------------
BY:
------------------------------------
ITS: -----------------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH
A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER
PERSON WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING
THE POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND
STORAGE TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE
DIRECTION OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND
OFFICE REALTORS,-Registered Trademark- INC. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF
INDUSTRIAL AND OFFICE REALTORS,-Registered Trademark- INC., ITS LEGAL
COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR EMPLOYEES OR AGENTS,
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF THIS LEASE
OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD RETAIN LEGAL COUNSEL TO
ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE ADVICE OF SUCH LEGAL
COUNSEL.
14
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SECTION 15: This Rental Schedule is attached to and made part of that certain
- ----------
real estate Lease (the "Lease") dated: JULY 07, l998 By and between OCEAN POINT
------------- -----------
TECH CENTRE as Landlord, and VISTA MEDICAL TECHNOLOGIES INC., as Tenant,
- ----------- -------------------------------
covering property commonly known as 5451 AVENIDA ENCINAS, SUITES A, B, C, J & K,
--------------------------------------------
CARLSBAD, CA. 92008 The terms used in this Section shall have the same
- -------------------
definitions as set forth in the Lease.
RENTAL SCHEDULE
- ---------------
BASE
DATE RENT NNN TOTAL RENT
- ---- -------- ------- ----------
12/01/98 - 11/30/00 $8450.00 $975.00 $9425.00
NNN CHARGES
- -----------
The NNN charges are capped at $975.00 per month during entire Two (2) Year Lease
Term.
TAXES AND INSURANCE
- -------------------
Taxes and Insurance are not applicable. Covered in NNN.
<PAGE>
STANDARD LEASE ATTACHMENT
FOR
REPAIRS AND/REPLACEMENT
This Lease Attachment refers to that certain Lease dated JULY 7, 1998
--------------------
- ------------------ by and between OCEAN POINT TECH CENTRE
------------------------------------------
as Landlord and VISTA MEDICAL TECHNOLOGIES INC.,
------------------------------------------------------------
as Tenant for the premises known as 5451 AVENIDA ENCINAS, STE A,B,C,J & K
------------------------------------------
CARLSBAD, CA 92008
------------------------------------------
The following paragraphs are hereby incorporated into the aforementioned lease
and made a part thereof:
PARAGRAPH # 16. OUTSIDE STORAGE. Lessee hereby grants permission to Lessor
to tow away and store, at Lessee's expense, all automobiles or motor vehicles
belonging to Lessee or its employees or customers, which remain in the common
parking area for more than 40 consecutive hours. No automobiles or motor
vehicles shall be parked and left unattended in any part of the common area or
service yard not striped or designated for parking. Lessee shall not store in
the parking, service or common area any materials, supplies, equipment or
machinery outside the premises, whether in the open or in tanks, bin or other
container devices, and shall not otherwise obstruct parking, service or common
areas.
PARAGRAPH 17. REPAIRS AND/OR REPLACEMENT. Lessee shall, at its sole cost,
keep and maintain the Leased Premises and appurtenances and every part
thereof (excepting wall and roofs which Landlord agrees to repair unless
damage is caused by Lessee or Lessee's agents' or invitees), including but
not limited to windows and skylights, doors and store front, floors,
carpeting, ceilings, interior walls and interior surfaces of exterior walls
of the Leased premises, in good and sanitary order, condition, repair or
replacement. Lessee shall, at its sole cost, keep and maintain all
utilities, fixtures, hot water heater s and mechanical equipment used by
Lessee in good order, condition and repair and shall repair or replace any
asphalt paving damaged by Lessee's agents or invitees.
PARAGRAPH 18. GLASS. Lessor shall replace, at the expense of the Lessee,
any and all plate and other glass damaged or broken from any cause whatsoever in
and about the leased premises, or Lessee may, at its option, replace such glass
at its expense provided Lessee receives approval from Lessor to perform this
repair.
<PAGE>
Section 19 This Emissions; Storage, Use & Disposal of Waste is attached to and
- ----------
made part of that certain real estate Lease (the "Lease") dated JULY 7, 1998,
---------------
between the OCEAN POINT TECH CENTRE, as
----------------------------
Landlord and VISTA MEDICAL TECHNOLOGIES INC., as Tenant, Covering the
--------------------------------------
Property commonly known as: 5451 AVENIDA ENCINAS, STES A,B,C, J & K
--------------------------------------------------
The terms used in this Section shall have the same definitions as set forth in
the Lease.
EMISSIONS; STORAGE, USE AND DISPOSAL OF WASTE
1. EMISSIONS. Tenant shall not:
a. Permit any vehicle on the premises to emit exhaust which is in
violation of any governmental law, rule, regulation or requirement;
b. Discharge, emit or permit to be discharged or emitted, any liquid,
solid or gaseous matter, or any combination thereof, into the
atmosphere, the ground or any body of water. which matter, as
reasonably determined by Lessor or any governmental entity, does, or
may, pollute or contaminate the same, or is, or may become,
radioactive or does, or may, adversely affect the (1) health or safety
of persons, wherever located, whether on the premises or anywhere
else, (2) condition, use or enjoyment of the promises or any other
real or personal property, whether on the premises or anywhere else,
or (3) premises or any of the improvements thereto or thereon
including buildings, foundations, pipes, utility lines, landscaping or
parking areas;
c. Produce, or permit to be produced, any intense glare, light or heat
except within an enclosed or screened area and then only in such
manner that the glare, light or heat shall not be discernible from
outside the premises;
d. Create, or permit to be created, any sound pressure level which will
interfere with the quiet enjoyment of any real property outside the
premises, of which will create a nuisance or violate any governmental
law, rule, regulation or requirement;
e. Create, or permit to be created, any ground vibration that is
discernible outside the premises;
f. Transmit, receive or permit to be transmitted or received, any
electromagnetic, microwave or other radiation which is harmful or
hazardous to any person or property in, on or about the premises, or
anywhere else.
2. STORAGE AND USE.
a. STORAGE. Subject to the uses permitted and prohibited to Tenant under
this lease, Tenant shall store in appropriate leak proof containers
all solid, liquid or gaseous matter, or any combination thereof, which
matter, if discharged or emitted into the atmosphere, the ground or
any body of water, does or may (1) pollute or contaminate the same, or
(2) adversely affect the (i) health or safety of persons, whether on
the premises or anywhere else, (ii) condition, use or enjoyment of the
premises or any real or personal property, whether on the promises or
anywhere else, or (iii) promises or any of the improvements thereto or
thereon.
b. USE. In addition, without Landlord's prior written consent, Tenant
shall not use, store or permit to remain on the premises any solid,
liquid or gaseous matter which is, or may become, radioactive. If
Landlord does give its consent, Tenant shall store the materials in
such a manner that no radioactivity will be detectable outside a
designated storage area and Tenant shall use the materials in such a
manner that (1) no real or personal property outside the designated
storage area shall become contaminated thereby or (2) there are and
shall be no adverse effects on the (i) health or safety of persons,
whether on the premises or anywhere else, (ii) condition, use or
enjoyment of the premises or any real or personal property thereon or
therein, or (iii) premises or any of the improvements thereto or
thereon.
3. DISPOSAL OF WASTE.
a. REFUSE DISPOSAL. Tenant shall not keep any trash, garbage, waste or
other refuse on the premises except in sanitary containers and shall
regularly and frequently remove same from the premises. Tenant shall
keep all incinerators, containers or other equipment used for the
storage or disposal of such materials in a clean and sanitary
condition.
b. SEWAGE DISPOSAL. Tenant shall properly dispose of all sanitary sewage
and shall not use the sewage disposal system (1) for the disposal of
anything except sanitary sewage or (2) excess of the lesser of the
amount (a) reasonably contemplated by the uses permitted under this
Lease or (b) permitted by any governmental entity. Tenant shall keep
the sewage disposal system free of all obstructions and in good
operating condition.
c. DISPOSAL OF OTHER WASTE. Tenant shall properly dispose of all other
waste or other matter delivered to, stored upon, located upon or
within, used on, or removed from, the premises in such a manner that
is does not, and will not, adversely affect the (1) health or safety
of persons, wherever located, whether on the premises or elsewhere,
(2) condition, use or enjoyment of the premises or any other real or
personal property, wherever located, whether on the premises or
anywhere else, or (3) premises or any of the improvements thereto or
thereon including buildings, foundations, pipes, utility lines,
landscaping or parking areas.
4. COMPLIANCE WITH LAW. Notwithstanding any other provision in this Lease to
the contrary, Tenant shall comply with all laws, statutes, ordinances,
regulations, rules and other governmental requirements in complying with
its obligations under this lease, and in particular, relating to the
storage, use and disposal of hazardous or toxic matter.
5. INDEMNIFICATION. Tenant shall defend, indemnify and hold Landlord harmless
from any loss, claim, liability or expense, including attorneys' fees and
costs, arising out of or in connection with its failure to observe or
comply with the provisions of this Lease.
LANDLORD: OCEAN POINT TECH CENTRE
----------------------------------------
By: /s/ W. H. Adair
------------------------------------
W. H. Adair, Executive Vice President
TENANT: VISTA MEDICAL TECHNOLOGIES INC.,
-------------------------------------
By: /s/ Robert DeVaere
-------------------------------------
Robert DeVaere
By:
-------------------------------------
<PAGE>
TENANT: VISTA MEDICAL TECHNOLOGIES INC.
UNIT ADDRESS:
5451 AVENIDA ENCINAS, STES A,B,C,J & K
CARLSBAD, CA 92008
QUALITY AND/OR SIZE
HEIGHT, LENGTH ETC.
ITEM:
X STANDARD IMPROVEMENT ONLY
- -------
- ------- STANDARD IMPROVEMENTS PLUS THOSE SHOWN BELOW.
PARTITIONS:
CEILINGS:
FLOOR COVERINGS:
PLUMBING:
LIGHTS:
SWITCHES:
WALL ELEC. OUTLETS:
PHONE OUTLETS:
A/C OR VENT FAN:
A/C HOOK UP:
WATER HEATER:
PAINTING:
OTHER:
LESSEE SHALL HAVE NINETY (90) DAYS FROM COMMENCEMENT DATE TO NOTIFY LANDLORD IF
PLUMBING, MECHANICAL AND ELECTRICAL SYSTEMS ARE NOT IN GOOD WORKING ORDER. IF
NOTIFIED LANDLORD WILL MAKE REPAIRS AT LANDLORD'S SOLE COST.
UNLESS OTHERWISE STATED, THE IMPROVEMENTS LISTED ABOVE WILL BE FINAL. ANY
ADDITIONS WILL BE PAID FOR BY THE TENANT.
<PAGE>
RULES AND REGULATIONS
EXHIBIT "D"
(Supplemental To Lease Provisions)
1. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside
or inside of the Building without the written consent of Landlord first
hand and obtained and Landlord shall have the right to remove any such
sign, placard, picture, advertisement, name or notice without notice to and
at the expense of the Tenant.
All approved signs or lettering on doors shall be printed, painted, affixed
or inscribed at the expense of Tenant by a person approved of by Landlord.
Tenant shall not place anything or allow anything to be placed near the
glass or any window, door, partition or wall which may appear unsightly
from outside the Premises as determined by Landlord; provided, however,
Landlord may require a Building Standard window covering at all exterior
windows. Tenant shall not without prior written consent of Landlord cause
or otherwise sun screen any window.
2. The sidewalks, exits, entrances, shall not be obstructed by any of the
Tenants, or used by them for any purpose other than for ingress and egress
from their respective Premises.
3. Tenant shall not alter any lock or install any new or additional locks or
any bolts on any doors or windows of the Premises.
4. The toilet rooms, urinal, wash bowls and other apparatus shall not be used
for any purpose other than that for which there were constructed and no
foreign substance of any kind whatsoever shall be thrown therein and the
expense of any breakage, stoppage, or damage resulting from the violation
of this rule shall be borne by the Tenant who, or whose employees or
invitee(s) shall have caused it.
5. Tenant shall not in any way deface the Premises or any part thereof.
6. Tenant shall not use, keep or permit to be used or kept any foul or noxious
gas or substance in the Premises, or permit or suffer the Premises to be
occupied or used in a manner offensive or objectionable to the Landlord or
other occupants of the Building by reason of noise, odors, and/or
vibrations or interfere in any way with other Lessees or those having
business therein, nor shall any animals or birds be brought in or kept in,
on, or about the Premises or Building.
7. Lessee shall not use or keep in the Premises or the Building any kerosene
gasoline or inflammable or combustible fluid or material. or use any method
of heating or air conditioning other than that supplied by Landlord.
8. Landlord reserves the right to exclude or expel from the premises any
person who, in the judgement of Landlord is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in
violation of any of these Rules and Regulations.
9. No vending machine or machines of any description shall be installed,
maintained or operated upon the Premises without the written consent of the
Landlord.
10. Landlord shall have the right, exercisable without notice and without
liability to Landlord to change the name and street address of the Building
of which the Premises are a part.
11. Tenant shall not disturb, solicit, canvas any occupant of the Building and
shall cooperate to prevent same.
12. Without the written consent of Landlord, Tenant shall not use the name of
the Building in connection with or in promoting or advertising the business
of Tenant except as Tenant's address.
13. All garbage and refuse shall be placed by Tenants in containers.
Page 1 of 2
<PAGE>
RULES AND REGULATIONS
EXHIBIT "D"
(continued)
14. No aerial or antenna shall be erected on the roof or exterior walls of the
Lease Premises, or on the grounds without in each instance, the written
consent of Landlord first being obtained. Any aerial or antenna so
installed without such written consent shall be subject to removal by
Landlord at any time without notice.
15. No loud speakers, television, phonographs, radios or other devises shall be
used in a manner so as to be heard or seen outside of the Leased Premises
with the prior written consent of Landlord.
16. The outside areas immediately adjoining the Leased Premises shall be kept
clean and free from dirt and rubbish by Tenant, to the satisfaction of the
Landlord, and Tenant shall not place or permit any obstruction or materials
in such areas. No exterior storage shall be allowed including, without
limitation, the storage of motor vehicles, trucks, boars, trailers,
pallets, drums, or equipment of any kind or nature, without the permission
in writing from Landlord.
17. Tenant shall use at Tenant's cost such pest extermination contractor as
Landlord may direct and at such intervals as Landlord may require.
18. Tenant shall not burn any trash or garbage of any kind in or about the
Leased Premises or the Project.
19. No residential use, including without limiting the generality of the
foregoing, residing, sleeping or cooking are permitted on the Premises or
anywhere on the Project.
20. No animals of any type, including, without limiting the generality of the
foregoing, pets, guard dogs, exotic animals, reptiles or birds, are
permitted on the Premises or anywhere on the Project.
21. Landlord reserves the right, by written notice to Tenant, to rescind, alter
or waive any rule or regulation at any time prescribed for the Building
when, in Landlord's judgment, it is necessary, desirable or proper for the
best interest of the Building and its Tenants.
22. The trash dumpsters in the common areas are designed for office and light
waste only. If a Tenant is a heavier generator of trash, it is the
responsibility of the Tenant to contract directly with a trash disposal
company for a dumpster and trash pick-ups. Under no circumstances are
contractors allowed to place construction debris in any dumpster in the
park.
Page 2 of 2
<PAGE>
OCEAN POINT TECH CENTRE
-----------------------
SIGN CRITERIA
-------------
This criteria establishes the policy governing all tenant sign identification
within Ocean Point Tech Centre. The purpose is to maintain the high quality of
the Tech Centre. Conformance will be strictly enforced and any sign that does
not conform shall be brought into conformity at the expense of the tenant. All
tenants shall be required to have a window sign.
GENERAL REQUIREMENTS,
---------------------
1. Drawings have been attached hereto showing placement type and style of
permitted signs.
2. Landlord shall approve all copy and/or logo design prior to the
installation of the sign.
3. Landlord shall approve the placement and method of all signs to the
building prior to installation.
GENERAL SPECIFICATIONS
----------------------
1. SIGN TYPE G: Front Door Suite Identification for Buildings 5421, 5431,
5441, 5451 - shall be white vinyl letters applied to glass side panels.
Suite designation has been provided and company name shall be "3" caps and
lower case as shown on attached drawing. These letters are provided and
installed by Q.R.S. Signs at the expense of the tenant.
2. SIGN TYPE II; Major Tenant Building Identification. The size shall be
limited to an area not more than 2' high x and 10' long and shall be placed
on the concrete beam in front of Tenant's space. In the event there is no
beam in front, the sign may be placed on the third concrete panel from the
ground adjacent to tent's door. These signs shall be non-lit cut out
letters. The material used should be durable, weather and fade resistant.
Suggested materials are acrylic, foam sandwich with plex skin, etc. Colors
are encouraged, but all signs must be approved by landlord. Q. R. S. Signs
at 3272 "F" Street, San Diego is the sign contractor for Ocean Point Tech
Centre.
3. Upon removal of any sign, any damage or disfiguration of the building will
be repaired at tenant's expense. It is a tenant's responsibility to
maintain their sign in a new condition at all times.
No other signs, placards, banners, pennants, insignias, trademarks, security
stickers or other descriptive materials shall be placed or affixed or maintained
upon any glass parts, wall surfaces, landscaped area, streets, or parking areas.
<PAGE>
- -------------------------------------------------------------------------------
SIGN TYPE: G
- -------------------------------------------------------------------------------
[PICTURE]
<PAGE>
- -------------------------------------------------------------------------------
SIGN TYPE: H
- -------------------------------------------------------------------------------
[PICTURE]
<PAGE>
250392.01 -- VIS/GEN INDUSTRIAL REAL ESTATE LEASE (MULTI-TENANT FACILITY)
<PAGE>
EXHIBIT 11.1
VISTA MEDICAL TECHNOLOGIES, INC. Statement Regarding Computation
of Per Share Data
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net loss........................................ $ 3,386,205 $ 4,765,972 $13,167,614 $11,992,800
Weighted average common shares outstanding...... 13,342,758 12,953,565 13,283,583 4,557,660
Assumed conversion of convertible preferred..... -- -- -- --
----------- ----------- ----------- -----------
Shares used in basic per share computations .... 13,342,758 12,953,565 13,283,583 4,557,660
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share - basic...................... $ (0.25) $ (0.37) $ (0.99) (2.63)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net effect of dilutive common share equivalents
based on the treasury stock method........... -- -- -- --
----------- ----------- ----------- -----------
Shares used in diluted per share computations... 13,342,758 12,953,565 13,283,583 4,557,660
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share - diluted.................... $ (0.25) $ (0.37) $ (0.99) $ (2.63)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997 AND AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,691,054
<SECURITIES> 5,457,870
<RECEIVABLES> 1,615,539
<ALLOWANCES> 0
<INVENTORY> 4,737,680
<CURRENT-ASSETS> 17,698,296
<PP&E> 5,728,099
<DEPRECIATION> 3,354,304
<TOTAL-ASSETS> 20,313,022
<CURRENT-LIABILITIES> 2,255,207
<BONDS> 0
0
0
<COMMON> 135,655
<OTHER-SE> 17,922,160
<TOTAL-LIABILITY-AND-EQUITY> 20,313,022
<SALES> 5,174,280
<TOTAL-REVENUES> 6,403,182
<CGS> 4,997,012
<TOTAL-COSTS> 4,997,012
<OTHER-EXPENSES> 14,575,633
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (13,167,614)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,167,614)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,167,614)
<EPS-PRIMARY> (0.99)
<EPS-DILUTED> (0.99)
</TABLE>
