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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 27, 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 0-9428
ADAC LABORATORIES
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 94-1725806
(State or other jurisdiction (I.R.S. Employer
of
incorporation or organization) Identification
No.)
540 ALDER DRIVE 95035
MILPITAS, CALIFORNIA
(Address of principal (Zip Code)
executive offices)
(408) 321-9100
(Registrant's telephone number including area
code)
</TABLE>
Securities registered pursuant to Section 12(b)of the Act:
<TABLE>
<S> <C>
NAME OF EACH
EXCHANGE
TITLE OF EACH CLASS ON WHICH
REGISTERED
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _________ No ____X____
Indicate by check mark if disclosures of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the Registrant's knowledge, in definitive proxy or information
definitive proxy or information statements incorporated by reference in Part III
of the Form 10-K or any amendments to this Form 10-K. / /
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant, based upon the closing price of the Common Stock on February 1,
1999, on the Nasdaq National Market System of $22.44 per share, was
approximately $447,026,036. For the purpose of the foregoing computation, only
the directors and executive officers of the Registrant were deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of February 1, 1999, Registrant had outstanding 20,450,067 shares of
Common Stock, no par value.
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE DESCRIBED IN ANY SUCH FORWARD LOOKING
STATEMENTS. RISKS INHERENT IN THE COMPANY'S BUSINESS AND FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE WITHOUT LIMITATION THE
CONSIDERATIONS SET FORTH UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--BUSINESS CONSIDERATIONS." THE
COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION TO UPDATE ANY FORWARD LOOKING
STATEMENTS.
PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
Subsequent to the Company's announcement on November 5, 1998 of the results
of operations for its fourth fiscal quarter and fiscal year ending September 27,
1998, the Company commenced a review of its accounting principles and their
historic application. On December 29, 1998, the Company announced that its
financial results for fiscal years 1996, 1997 and the first three quarters of
fiscal 1998 would be restated and that its previously announced results for the
fourth fiscal quarter would change.
The Company completed an extensive and critical review of revenue recorded
for each year of fiscal 1996 through 1998. In deciding when revenue would be
recognized, the Company applied a more stringent revenue recognition policy than
it had in the past. The items recognized and restated were primarily certain
sales transactions by the Company's Medical Systems business unit where products
sold had been shipped to a destination other than their final installation
location. The primary impact of the revenue restatement was to move revenue and
associated costs forward to future periods, including fiscal 1999. Costs,
expenses and return reserves associated with the restated revenues were also
adjusted.
The Company adjusted a number of non-ordinary charges taken during the
restated periods. The adjustments included a reduction in the acquired
in-process research and development charge taken in the third quarter of fiscal
1997 to reflect recent SEC interpretations. The Company also reduced the non-
ordinary international restructuring charge taken in the fourth quarter of
fiscal 1998 and moved it forward to fiscal 1999 due to a delay in implementing
certain aspects of the plan. In addition, the Company adopted completed contract
accounting for the LabStat product, which resulted in the Company's reversing
approximately $6 million of revenues (together with associated costs) previously
recognized in fiscal 1996 and 1997, and correspondingly reducing the
non-ordinary charge for the discontinuation of the LabStat product previously
taken in the first quarter of fiscal 1998.
The Company also undertook a review of its asset carrying values, accruals
and expenses, financial instruments and financial statements in each restated
period and made certain adjustments to these items throughout those periods. The
Company also restated the Geometrics acquisition from pooling accounting to
purchase accounting.
GENERAL
ADAC designs, develops, manufactures, sells and services medical imaging
equipment and radiation therapy planning and health care information software
systems used in hospitals and clinics worldwide. The Company conducts its
business primarily through its Medical Systems and Software Business.
In October 1996, the United States Department of Commerce awarded ADAC a
Malcolm Baldrige National Quality Award in the large manufacturing category in
recognition of its performance management system and its achievements in quality
and business performance. ADAC is the first healthcare manufacturer ever to
receive this award.
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ADAC was incorporated in California on October 14, 1970. Its principal
offices are located at 540 Alder Drive, Milpitas, California, 95035. Its
telephone number at that location is (408) 321-9100.
MEDICAL SYSTEMS
The Medical Systems business unit includes the Company's nuclear medicine
product and service business, as well as ADAC Medical Technologies ("AMT"), the
Company's nuclear medicine equipment refurbishing business, and ADAC Radiology
Solutions ("ARS"), the Company's computed tomography ("CT") refurbishing
business. Medical Systems revenues represented 76%, 83% and 85% of the Company's
total revenues in fiscal 1998, 1997 and 1996, respectively. See Note 11 "Segment
Information and Foreign Operations" of Notes to Consolidated Financial
Statements. See also Note 14 "Restatement of Financial Statements" of Notes to
the Consolidated Financial Statements for a description of the Restatement.
NUCLEAR MEDICINE. Nuclear medicine is a diagnostic imaging modality that
images the function or physiology of organs and lesions. In a typical nuclear
medicine procedure, the patient is administered a small amount of a
radiopharmaceutical that localizes in normal and abnormal tissues according to
the make-up of the radiopharmaceutical, the functionality of the tissue, and the
procedure being utilized. The patient is then imaged with a gamma camera and the
images are recorded on a computer. These images may be processed further as
described below. The physician uses the final images and related clinical
information to evaluate the functional and metabolic performance of the portion
of the patient's body under examination. Nuclear medicine is used primarily for
oncology and cardiology procedures, which account for approximately 70% of all
nuclear medicine procedures performed. The Company believes the functional
imaging capability of nuclear medicine may allow for earlier diagnosis of
certain diseases than anatomical imaging modalities such as magnetic resonance
imaging ("MRI"), CT, and ultrasound.
There are three general methods for acquiring single photon nuclear medicine
images: single photon emission computed tomography ("SPECT"), planar imaging and
total or whole body imaging. In SPECT imaging, the camera rotates around the
patient to create three-dimensional images. Planar or static images are acquired
at a single angle relative to a patient and are similar to a "snapshot" image.
In total body imaging, the camera moves along the length of the patient to form
a single image of the whole body. Nuclear images may also be acquired through
positron emission tomography ("PET"), which is described in more detail below.
In its nuclear medicine business, the Company designs, develops,
manufactures and sells a broad line of nuclear medicine cameras and related
computer systems. These systems consist primarily of a gamma camera, a computer
workstation and clinical software that permits the physician to process the
resulting data.
The Company offers two different types of gamma cameras, single head cameras
with one detector head and dual head cameras with two detector heads. Dual head
cameras offer better patient throughput and higher image quality than single
head cameras. Dual head cameras may include fixed angle or variable angle
detectors. The detectors on a fixed angle camera are generally fixed at a 90
degrees orientation for cardiac imaging or at a 180 degrees orientation for
oncology or general purpose imaging. The detectors on a variable angle camera
may be positioned in both of these two orientations as well as other positions
which allow for more versatile clinical applications.
All of the Company's gamma cameras are equipped with the Company's
EPIC-TM-digital detector. This innovative technology improves the reliability
and stability of the nuclear image over that achieved through the use of analog
technology. The EPIC detector also includes auto-tuning and remote diagnostics
capabilities which facilitate improved field service efficiency and customer
satisfaction.
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The Company's dual head camera product line currently includes the
following:
- FORTE-TM---the Company's newest open gantry, variable angle camera. This
camera features the Company's unique FreeDOME-TM- open gantry, which
enables a fuller range of image acquisition without obstruction from
detector arms or gantry feet and improved patient comfort for all imaging
positions, including patients on hospital beds, gurneys and wheelchairs.
This camera is sold with the latest Pegasys computer workstation, the Sun
Ultra-TM-60, which offers a two-fold increase in processing speed and
power over previous generations.
- VERTEX-TM-V60--the Company's latest generation Vertex dual ring, variable
angle camera. This camera is also sold with the Pegasys Sun Ultra 60
computer workstation. The Company's advanced imaging technologies,
including Molecular Coincidence Detection ("MCD-TM-(PET)"), MCD with
attenuation correction ("MCD/AC-TM-(PET)") and Vantage-TM- ExSPECT-TM-are
currently available on this camera.
- CARDIO-TM- EPIC--the Company's dual ring, fixed 90 degree camera. This
camera is based on the Vertex design and was engineered especially for the
cardiology market. Due to the fixed angle of the detectors, this camera is
less expensive than the Vertex V60 but also offers EPIC image quality and
dual head throughput advantages for cardiology imaging.
- SOLUS-TM- EPIC--the Company's dual ring, fixed 180 camera. This camera is
based on the Vertex design and was engineered especially for the oncology
market. Like the Cardio, this camera is less expensive than the Vertex V60
but offers EPIC image quality and dual head throughput advantages for
oncology imaging. MCD(PET) and MCD/AC-PET are both available on the Solus,
thus enhancing the oncology applications of the camera.
The Company's single head product line currently includes the following
cameras:
- SINGLE HEAD GENESYS-TM---the Company's first single detector gamma camera
that was designed for general purpose nuclear medicine studies. The
robotics and patient ergonomics provide efficient patient handling and
transition from total body to SPECT studies in oncology applications. The
compact design allows installation into small rooms.
- ARGUS-TM---the Company's second single detector gamma camera that was
designed to perform general purpose nuclear medicine studies and give
added flexibility for imaging patients when they are seated or in their
hospital bed. The detector orientation affords a larger imaging field for
SPECT procedures, especially for oncology imaging.
The Company also manufactures and sells the Transcam-TM- and Thyrus gamma
cameras, which are niche cameras with a small field of view and are produced by
the Company's Danish subsidiary, ADAC A/S. These cameras offer planar imaging
for specific clinical diagnostic procedures. In addition the Transcam is mobile
and allows imaging to be performed in the hospital ward without moving the
patient.
The Company's gamma cameras are sold with a computer workstation that
enables the user to acquire the data collected by the detectors, to generate a
digital image from that data and to process the data and the resulting image
using a number of clinical software applications. Most of the Company's gamma
cameras are sold with the Sun Ultra or Ultra 60 workstation from Sun
Microsystems.
Traditionally, gamma cameras have been used only to perform SPECT, total
body, or planar studies. In 1995, however, ADAC introduced MCD(PET), which is a
hardware and software upgrade to the Vertex V60 and Solus Epic cameras that
enables these SPECT cameras to perform PET imaging. The Company intends to make
this upgrade available on Forte in the first half of fiscal 1999. PET imaging is
a valuable diagnostic tool because of its high resolution and high accuracy in
oncology, cardiology and neurology. Prior to the introduction of MCD(PET), PET
imaging had been available only on expensive, dedicated PET imaging systems
ranging in price between $1.0 million and $2.0 million. MCD(PET) and MCD/AC-PET
now offer physicians the ability to perform PET imaging with a gamma camera at a
fraction of the cost of a dedicated PET system.
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In 1998, ADAC entered into agreement with UGM Medical Systems to market and
distribute their dedicated PET scanner, C-PET. C-PET gives ADAC a full line of
PET systems to meet different customer needs. The C-PET system enables more
patients to be imaged in a day than the camera-based PET systems and is focused
on customers with a higher PET patient load. ADAC anticipates growth in this
portion of the nuclear medicine market with approval of reimbursement of certain
lung cancer studies for Medicare patients by the Health Care Financing
Administration in January 1998.
In addition to MCD(PET), the Company offers a number of other clinical
hardware and software enhancements to its gamma cameras that enable physicians
to extract clinical information from nuclear medicine procedures to aid in the
diagnosis of disease including the following:
- VANTAGE EXSPECT--Co-developed with Emory University, this product is
offered as an upgrade to the Company's Vantage-TM- product, and corrects
for image distortions created by variations in tissue density, scatter and
resolution. Vantage ExSPECT is particularly useful in cardiac studies, and
the Company believes it offers important advantages over cardiac
ultrasound, the alternate competitive procedure. Vantage ExSPECT permits
evaluations of perfusion.
- MCD/AC-PET--This product is designed to correct for attenuation when
imaging with MCD(PET) and provides substantial improvements in image
quality. Similar to Vantage, MCD/AC-PET corrects for image distortions
created by variations in tissue density. It is important to note that
attenuation is a greater problem in positron imaging because the photons
travel twice as far through the body than in traditional nuclear medicine
procedures. To date, the Company is the only vendor to offer attenuation
correction for coincidence imaging with a gamma camera.
- QUANTITATIVE GATED SPECT ("QGS-TM-")--Developed with Cedars Sinai Medical
Center, this software provides essential information for the detection and
analysis of cardiac disease and enables physicians to study a number of
different snapshots of the heart simultaneously.
- AUTOSPECT PLUS-TM---This product allows physicians to automatically
process through the use of a single button one or more cardiac SPECT,
gated SPECT, Vantage SPECT and MCD/AC-PET data sets. Automated processing
offers the following advantages over manual processing: reproducible and
accurate results, reduced artifacts and processing time and increased
efficiency.
- AUTOQUANT-TM---Jointly developed and under an exclusive license with
Cedars Sinai Medical Center, this product provides comprehensive cardiac
quantitative analysis capability with state of the art algorithms and an
intuitive user interface. This product combines perfusion and functional
information that is essential for the detection and analysis of cardiac
disease and enables physicians to study a number of different quantitative
parameters of the heart simultaneously.
- SHADOW-TM---This product enables remote processing of cardiac studies. The
physician can process and review patient studies using a desktop PC
networked to a Pegasys computer system. Shadow improves workflow by
allowing the physician to obtain direct access from their office or
viewing area to patient data acquired using a gamma camera.
- IMAGE FUSION AND REVIEW--This product is used to align and display
different images such as MCD(PET), SPECT, PET, CT and MRI in three
dimensions as composite images. Image Fusion also permits the operator to
manipulate and align the images. This functionality facilitates image
interpretation by a physician by combining functional and anatomical data
in the same image.
ADAC MEDICAL TECHNOLOGIES (AMT). In its AMT business, the Company
refurbishes and sells previously owned ADAC nuclear medicine systems as well as
nuclear medicine systems manufactured by third parties, including General
Electric Company, Siemens Medical Systems and Elscint Limited.
ADAC RADIOLOGY SOLUTIONS (ARS). In its ARS business, the Company
refurbishes, sells and services previously owned CT systems. The Company entered
this business in fiscal 1998 through the acquisition of Southern CATS, Inc. in
October 1997 and CT Solutions, Inc. in January 1998. See Note 3
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"Acquisitions" of Notes to Consolidated Financial Statements. The ARS business
benefits from synergies with ADAC's existing Radiation Therapy Products ("RTP")
division in the area of CT simulation. CT simulation is a growing trend in
radiation therapy planning. By bundling a refurbished CT with the CT simulation
component of the Pinnacle(3) treatment planning system, ADAC is able to offer a
very cost-effective solution enabling oncology centers to adopt this new
technology sooner.
CUSTOMER SUPPORT AND FIELD SERVICE. The Company maintains a customer
support center in California, and field service forces in North America and
Europe for its Medical Systems business. The Company's network of service
engineers and customer support specialists provide installation, warranty,
repair, training and support services. Together with its distributors, the
Company services over 9,100 installed systems at over 3,200 sites worldwide,
including approximately 600 systems manufactured by vendors other than ADAC. The
Company generates service revenue under service contracts with ADAC and non-ADAC
customers, by providing service on a time and materials basis to such customers
and by offering multi-vendor service under asset management contracts with third
parties.
SOFTWARE BUSINESS
The Company's Software Business includes the Company's RTP business and its
Healthcare Information Systems ("HCIS") business. Revenues from the Software
Business represented 24%, 17% and 15% of the Company's total revenues in fiscal
1998, 1997 and 1996, respectively. See Note 11 "Segment Information and Foreign
Operations" of Notes to Consolidated Financial Statements.
RADIATION THERAPY PRODUCTS. In RTP, the Company designs, develops, markets
and supports turnkey radiation therapy planning systems that assist hospital
radiation oncology departments and cancer treatment centers in planning patient
treatments. The systems combine third-party workstations and printers with the
Company's proprietary application software, Pinnacle(3)-TM-.
RTP's principal product, Pinnacle(3), is a radiation therapy treatment
planning system that includes two-dimensional and three-dimensional planning
capabilities for radiation treatments. This includes implanting radioactive
sources (brachytherapy) and delivery of photon or electron particles at several
angles (stereotactic radiosurgery) for treatments of patients with cancer, as
well as certain benign conditions. Pinnacle(3)s three-dimensional volumetric
image processing and dose computation capabilities enable physicians to plan the
precise application of high energy radiation to a specific targeted area for the
treatment of cancer and other diseases. The Company believes Pinnacle(3)
provides improved image processing and dose calculation methods compared to
currently available products.
HEALTHCARE INFORMATION SYSTEMS. HCIS designs, develops, markets, sells and
supports integrated solutions consisting of computer equipment and software
applications that offer healthcare providers the necessary tools to process and
archive patient and clinical information.
The Company's principal HCIS products are QuadRIS, a radiology information
system product and CorCAAT-TM-, a cardiology information system product. QuadRIS
is based on an advanced client/server architecture, operating on an Oracle-TM-
database server and the Microsoft Windows 95-TM- operating system, and is
designed to work in a distributed computing environment to meet the needs of
rapidly changing integrated healthcare delivery systems. In this environment,
the product must meet the demands of multiple healthcare facilities that act as
a single integrated delivery network. The Company recently released Version 6.0
of QuadRIS, which contains additional functionality including voice recognition
and dictation modules ("Physician Desktop-TM-"), and ENVOI-TM-, an integrated
information and image management solution that combines QuadRIS 6.0 with the
ENVOI intranet image server. ENVOI makes it possible to review reports and
reference images at any time and at any location throughout the healthcare
enterprise through the health care facility's intranet. ENVOI utilizes an
Internet browser and industry communications standard such as DICOM, as well as
other Internet protocols, to provide immediate, secure access to images and
reports for radiologists, referring physicians and technologists.
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The Company also markets CorCAAT, a cardiac catheterization laboratory
information system. CorCAAT performs a number of functions that previously
required equipment and systems from multiple vendors and eliminates the need for
expensive and inflexible interfaces. CorCAAT also simplifies the patient
monitoring, inventory management, case reporting, image management and outcomes
management processes by providing a single point of access to all
catheterization laboratory data. The product is based on networked computing
technology and standard components including Microsoft Windows NT-TM-, Microsoft
SQL Server-TM- and Intel-TM--based computers. CorCAAT is currently installed at
13 sites in the United States.
In the first quarter of fiscal 1998, the Company decided to discontinue
developing and marketing LabStat-TM-, the Company's laboratory information
system, while retaining its laboratory support and maintenance business. As a
result, the Company took an non-ordinary charge of $11.3 million in that
quarter. See Note 9 "Non-ordinary Items" of Notes to Consolidated Financial
Statements.
The Company also supports a line of other more mature products, including
LabCare-TM-, MARS II-TM-, IMAGES/3000-TM-, RadCare(-Registered Trademark-), MRM,
and RadStat(-Registered Trademark-), which are installed in hospitals throughout
the United States and Canada.
OTHER
From time to time, the Company explores other opportunities for expanding
its business. For example, in fiscal 1996, ADAC formed a new business unit, ADAC
Radiology Services to work closely with radiologists, referring physicians,
hospitals and payors to provide technology and management solutions that enhance
the delivery of radiology care. On October 30, 1997, ADAC Radiology Services
exercised an option to acquire the business of Medical Transition Strategies,
Inc., which was in the business of forming and managing radiology networks.
Because, among other things, this business did not contribute meaningfully to
the Company's results in fiscal 1998, and was not expected to do so in future
periods, the Company decided to discontinue this business in the fourth quarter
of fiscal 1998. As a result, the Company took a non-ordinary charge of $1.9
million in that quarter. See Note 9 "Non-ordinary Items" of Notes to
Consolidated Financial Statements.
MARKETING AND SALES
ADAC has a direct sales force in the United States. The Company also
conducts certain direct sales and/or service activities through its subsidiaries
in Brazil, the Netherlands, Germany, France, Italy, Denmark, the United Kingdom
and Canada. Sales and service in other countries are generally handled by
distributors. North America is the largest market for the Company's products and
services followed by Europe, Japan, Asia Pacific and Latin America. ADAC is
represented in all of these geographic areas. See Note 11 "Segment Information
and Foreign Operations" of Notes to Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT
Developing products, systems and services based on advanced technological
concepts is essential to ADAC's ability to compete effectively. The Company
currently maintains a product development and engineering staff responsible for
product design and engineering. In addition, as part of ADAC's research and
development programs, the Company has established the Advanced Clinical Research
Program, which provides annual grants to clinical trial sites at major
institutions to assist the Company in product development concepts and to aid in
verifying engineering and design activities. There can be no assurance that the
Company's product development efforts will result in the development or
commercialization of successful products or product enhancements. Research and
development expenditures, net of software capitalization, totaled $16.8 million,
$16.7 million and $14.0 million in fiscal 1998, 1997, and 1996, respectively.
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COMPETITION
The medical systems and software markets in which the Company competes are
characterized by rapidly evolving technology, intense competition and pricing
pressure. There are a number of companies that currently offer or are in the
process of developing, products that compete with products offered by the
Company. Some of these competitors have substantially greater capital,
manufacturing and other resources than the Company. These competitors could
develop technologies and products that are more effective than those currently
used or produced by the Company or that could render the Company's products
obsolete or noncompetitive. In addition, as the Company enters new markets,
there can be no assurance that the Company will be able to penetrate such
markets successfully.
In the nuclear medicine market, the Company competes with several other
major suppliers. From the end of fiscal 1997 to the end of fiscal 1998, the U.S.
nuclear medicine market grew in excess of 20%. According to data provided by the
National Electronics Manufacturers Association ("NEMA"), ADAC's share of the
U.S. market, based on bookings volume, was approximately 44% for fiscal 1998,
which represents approximately a six percentage point decrease in market share
from the prior year. During this period, according to the same NEMA data, the
Company maintained its price premium of approximately 15% in the dual head
market over its competitors. In December 1998 the Company introduced two new
gamma camera systems, the Forte open gantry and the Vertex V60, which the
Company believes will strengthen the Company's competitive position. However,
there can be no assurance that the Company's market share will not continue to
decrease. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Business Considerations."
The Company believes that the key to success in its markets is to provide
technologically superior products that deliver cost-effective, high quality
clinically diagnostic data and images that meet or exceed customer quality and
service expectations. ADAC's ability to compete successfully depends on its
ability to commercialize new products ahead of its competitors. In addition to
the rapid development of innovative and cost-effective new products, the Company
believes that other competitive factors include patient throughput, system
functionality and reliability, image quality, computer processing speed,
customer service and support, and worldwide distribution network. The Company's
products also must focus on solutions for the managed care environment in order
to improve clinical outcomes at lower clinical process costs.
The Company believes that key competitive factors in its Software Business
include system architecture, key proprietary algorithms, functionality of the
application software, post-sales support services, time to market, integration
expertise with hospital information systems and price/performance.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing process includes mechanical assembly, final
system integration and testing. In 1996, the Medical Systems manufacturing
operations in Milpitas, California were certified to the requirements of the
international quality system requirements of ISO 9001.
The Company purchases certain sub-systems, including Sun-TM- workstations,
disk drives and sodium iodide crystals, from third party suppliers. Although
most materials and purchased components for its products are available from more
than one source of supply, certain essential components such as the sodium
iodide crystals included in its gamma cameras are presently available from only
one supplier. The Company also relies on several significant vendors for
hardware and software components for its HCIS products such as Hewlett-Packard
Company, Oracle Corporation and others. The loss of any of these suppliers,
including any single-source supplier, would require obtaining one or more
replacement suppliers as well as potentially requiring a significant level of
hardware and software development to incorporate the new parts into the
Company's products. Although the Company has obtained insurance to protect
against loss due to business interruption from these and other sources, there
can be no assurance that such coverage would be adequate.
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GOVERNMENT REGULATION
ADAC's nuclear medicine and RTP businesses, as well as certain portions of
its HCIS business, are regulated by the United States Food and Drug
Administration ("FDA"). The FDA regulates the development, testing,
manufacturing, packaging, labeling, distribution and marketing of medical
devices under the Federal, Food, Drug and Cosmetic Act (the "FDC Act") and
regulations promulgated by the FDA. The State of California (through its
Department of Health Services), where the Company maintains its factory, as well
as other states, also regulates the manufacture of medical devices.
In general, these laws require that manufacturers adhere to certain
standards designed to ensure the safety and effectiveness of medical devices.
Under the FDC Act, each medical device manufacturer must comply with
requirements applicable to manufacturing practices, clinical investigations
involving humans, sale and marketing of medical devices, post-market
surveillance, repairs, replacements and refunds, recalls and other matters. The
FDA is authorized to obtain and inspect devices and their labeling and
advertising, and to inspect the facilities in which they are manufactured.
The FDC Act also requires compliance with specific manufacturing and quality
assurance standards, including regulations promulgated by the FDA with respect
to good manufacturing practices ("GMP"). FDA regulations, specifically the
Quality System Regulation ("QSR"), require that each manufacturer establish a
quality assurance program by which the manufacturer monitors the manufacturing
process and maintains records that show compliance with FDA regulations and the
manufacturer's written specifications and procedures relating to the devices.
Compliance is necessary to receive FDA clearance to market new products and is
necessary for a manufacturer to be able to continue to market cleared product
offerings. Recently, the FDA promulgated new design process regulations that
revised and expanded the good manufacturing practices applicable to medical
device manufacturers. Among other things, these new regulations require that
manufacturers establish a formalized design control process. The QSR took effect
on June 1, 1997, and included a twelve-month transition period during which
enforcement action with respect to design control requirements was not to be
taken. That transition period has expired and the regulation is in full force
and effect.
The FDA makes unannounced inspections of medical device manufacturers and
may issue reports of observations where the manufacturer has failed to comply
with applicable regulations and/or procedures. Failure to comply with applicable
regulatory requirements can, among other things, result in warning letters,
civil penalties, injunctions, suspensions or losses of regulatory clearances,
product recalls, seizure or administrative detention of products, operating
restrictions through consent decrees or otherwise, and criminal prosecution,
which could have a material adverse effect upon the Company.
The FDA requires that a new medical device or a new indication for use of or
other significant change in an existing medical device obtain either 510(k)
premarket notification clearance or an approved Pre-Market Approval Application
("PMAA") before orders can be obtained and the product distributed in the United
States. The 510(k) clearance process is applicable when the new product being
submitted is substantially equivalent to an existing commercially available
product. If a product does not meet the eligibility requirements for the 510(k)
process, then it must instead be submitted under the PMAA process. The process
of obtaining 510(k) clearance may take at least three months from the date of
filing of the application and generally requires the submission of supporting
data, which can be extensive and extend the process for a considerable period of
time. Under the PMAA process, the applicant must generally conduct at least one
clinical investigation and submit extensive supporting data and clinical
information in the PMAA, which typically takes from one to two years, but
sometimes longer for the FDA to review. Generally, the Company has not been
required to resort to the PMAA process for approval of its products.
The sale of medical devices outside the United States is subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain clearance in foreign countries may be longer or shorter than
in the United States. In 1995, ADAC implemented a program to enter the
9
<PAGE>
Japanese market and has, through its distributor, received Japanese Ministry of
Health and Welfare (JMHW) approval to market the Vertex Plus Epic, Solus Epic,
Cardio Epic and MCD(PET) with the Company's Pegasys Ultra-TM- computer system.
In addition, ADAC has met the requirements of the European Medical Device
Directive, which became effective in the European Community in June 1998, for
its principal products. Failure of the Company to comply with these requirements
could have a material adverse effect on the Company's results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Business Considerations".
In mid-1997, the FDA conducted an inspection of the Company's newly acquired
subsidiary, Cortet, Inc. ("Cortet"). As a result of that inspection, Cortet
received a Warning Letter from the FDA containing inspectional observations
relating to the adequacies of Cortet's quality assurance system. Cortet
responded to the FDA's observations and Warning Letter and, in October 1997,
received correspondence from the FDA indicating that Cortet's responses appeared
to adequately address the FDA's concerns. In mid-1998, the State of California,
under a contract with the FDA, completed a routine inspection of ADAC's facility
in Milpitas, California. The state investigator issued a FDA Form 483 containing
observations of non-compliance of the recently implemented QSR. The state
investigator also placed a temporary shipment hold on Pinnacle(3) pending the
Company satisfactorily responding to the State's concerns regarding the
Company's quality systems. The Company promptly responded to the FDA and the
State and initiated a number of corrective actions. The State lifted the
Pinnacle(3) shipment hold on August 28, 1998 and, in September 1998, ADAC
received a letter from the FDA indicating that the Company had adequately
responded to the FDA's concerns. Although the Company was deemed to have
adequately responded to the State and FDA following the August 1998 inspection,
the Company is responsible for the full implementation of all corrective
actions. In addition, as all companies are, the Company remains subject to
periodic inspections in the future and there can be no assurance as to the
timing or outcome of any subsequent inspection. The scope of any re-inspection
could be more comprehensive than the inspections of Cortet and the Company's
Milpitas facility, and there can be no assurance that the FDA, upon re-
inspection, will deem the Company's corrective actions to be adequate or that
additional corrective action, in areas not addressed in the Warning Letter or
the Form 483, will not be required. Any failure by the Company to fully
implement the required corrective actions or to comply with any other applicable
regulatory requirements could have a material adverse effect on the Company's
ability to continue to manufacture and distribute its products, and in more
serious cases, could result in seizure, recall, injunction and/or civil fines.
Any of the foregoing, would have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Business Considerations".
Certain additional requirements of other Federal laws and of state, local
and foreign governments exist which may apply to the manufacture and marketing
of the Company's products and to products such as radiopharmaceuticals or
possession and use of radioactive materials that are used in conjunction with
the Company's products.
The Company is subject to various environmental laws and regulations both in
the United States and abroad. The operations of the Company, like those of other
medical device companies, involve the use of substances regulated under
environmental laws.
PATENT, COPYRIGHTS AND ROYALTIES
The Company relies on a combination of trade secret, copyright, patent and
trademark laws and contractual provisions to protect its proprietary rights. The
Company has a policy of undertaking an ongoing review of its products with
patent counsel to determine to what extent its products may be protectable under
the patent or copyright laws. ADAC also has a program in place to develop patent
portfolios to protect its intellectual property. At December 1, 1998, the
Company held 40 United States patents, including several patents that have been
issued covering technology incorporated into MCD(PET), and 59 foreign patents.
The Company has a total of 41 patent applications pending at various stages of
10
<PAGE>
completion. While the Company believes that it benefits from such patents,
competitors may develop competing products by "designing around" patents held by
the Company or may claim that the Company's products infringe their proprietary
rights.
The Company develops application software for its products and also licenses
software components from third parties. Third party software developers include
software companies and clinical development sites that provide turnkey products
or software code. Under its agreements with third parties, the Company generally
obtains a license to use the third party software and to include such software
in its own products for a specified period of time in exchange for the payment
of a royalty to the developer. These agreements may be either exclusive or
non-exclusive.
EMPLOYEES
As of February 1, 1999, the Company had approximately 1,031 full-time
employees worldwide, including 802 employed in Medical Systems and 229 in
Software business units. None of the Company's employees are represented by a
labor union. The Company believes its relations with its employees are good.
Many of the Company's employees are highly skilled and competition in recruiting
and retaining such employees is intense. The Company believes its continued
success is dependent in part upon its ability to continue to attract and retain
highly qualified personnel.
ITEM 2. PROPERTIES
The Company's principal administrative, manufacturing and research
operations occupy approximately 161,000 square feet of leased space in buildings
located in Milpitas, California, under leases expiring through 2006. The
Company's principal healthcare information systems operations occupy
approximately 54,000 square feet of leased space in buildings located in
Houston, Texas, under leases expiring in 2002. Other smaller facilities are
leased in various states and foreign countries. Management believes that the
Company's facilities are adequate at least through fiscal 1999 to meet presently
anticipated manufacturing and other requirements. See Note 5 "Commitments and
Contingencies" of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Commencing in December 1998, a total of eleven class action lawsuits were
filed in federal court by or on behalf of stockholders who purchased Company
stock between January 10, 1996 and December 28, 1998. These actions name as
defendants the Company and certain of its present officers and directors. The
complaints allege various violations of the federal securities laws in
connection with restatement of the Company's financial statements and seek
unspecified but potentially significant damages. The Company intends to contest
these actions vigorously. A stockholder derivative action, purportedly on behalf
of the Company and naming as defendants Company officers and directors was also
filed in state court seeking recovery for the Company based on stock sales by
these defendants during the above time period. The Company is also a defendant
in various legal proceedings incidental to its business.
While it is not possible to determine the ultimate outcome of these actions
at this time, management is of the opinion that any unaccrued liability
resulting from these claims would not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded in the Nasdaq National Market System
under the Nasdaq symbol "ADAC". There were 2,485 shareholders of record of the
Company's Common Stock on February 1, 1999. The table below provides the
quarterly high and low and closing prices in the Nasdaq National Market System,
as reported by Nasdaq, during the last two fiscal years of the Company by fiscal
quarter.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
------------------------------ ------------------------------
PER SHARE PER SHARE
------------------------------ ------------------------------
HIGH LOW CLOSE HIGH LOW CLOSE
-------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
First Quarter........................... $22 1/4 $15 3/4 $17 7/8 $24 1/8 $19 1/8 $24 1/8
Second Quarter.......................... 26 5/8 18 3/8 23 27 1/2 18 1/4 20 1/16
Third Quarter........................... 24 1/16 19 3/8 22 7/8 27 16 23 5/8
Fourth Quarter.......................... 30 5/8 20 7/8 25 25 5/8 17 3/8 19 1/4
</TABLE>
The Company did not pay any dividends in fiscal 1997 or 1998, and presently
intends to retain its earnings for use in its business. Accordingly, the Company
does not anticipate paying dividends to its shareholders in the foreseeable
future.
In August 1998, the Company issued 28,333 shares of Common Stock (the
"Shares") to a consulting company upon the exercise of a warrant to purchase
60,000 shares of Company common stock (the "Warrant"). The Warrant had been
issued to in July 1995. The exercise price of $11.875 per share was paid by the
consulting company's surrender of 31,667 shares issuable under the Warrant. The
Shares were offered and sold pursuant to the exemption from the registration
requirements of the Securities Act of 1933, as amended (the "Act"), provided by
Section 4(2) of the Act.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
ADAC LABORATORIES AND SUBSIDIARIES
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------------
1997 1996
1998 (RESTATED) (RESTATED) 1995(3) 1994(3)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues............................................. $ 300,528 $ 263,887 $ 222,586 $ 184,809 $ 176,280
Cost of revenues(1).................................. 192,697 160,102 142,483 117,320 106,665
Operating expenses(1)(2)............................. 91,385 76,425 67,709 49,264 51,978
Other expense........................................ 4,338 5,271 4,225 1,222 6,452
---------- ---------- ---------- ---------- ----------
Income before income taxes........................... 12,108 22,089 8,169 17,003 11,185
Provision for income taxes........................... 4,722 8,615 3,023 5,930 (6,336)
---------- ---------- ---------- ---------- ----------
Net income(1)(2)..................................... $ 7,386 $ 13,474 $ 5,146 $ 11,073 $ 17,521
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income per share(1)(2)
Basic.............................................. $ .38 $ .73 $ .30 $ .68 $ 1.06
Diluted............................................ $ .36 $ .69 $ .28 $ .65 $ 1.06
Number of shares used in net income per share
calculations
Basic.............................................. 19,500 18,419 17,360 16,332 16,508
Diluted............................................ 20,387 19,534 18,507 17,079 16,508
Dividends declared per share......................... $ .00 $ .00 $ .48 $ .48 $ .48
Total assets......................................... $ 243,809 $ 195,099 $ 177,890 $ 159,097 $ 121,603
</TABLE>
- ------------------------
(1) Cost of revenues, operating expenses, net income and net income per share in
fiscal 1998 include the effects of non-ordinary pre-tax charges of
approximately $13.7 million for discontinued products, $1.3 million for
write off of acquisition costs for non-consummated transactions and $1.9
million for the discontinuing the physician network services business.
Excluding these charges, net income per share (diluted), net income,
operating expenses and cost of revenues for fiscal 1998 would have been
$0.87, $17.7 million, $88.1 million, and $179.0 million, respectively.
(2) Operating expenses, net income and net income per share in fiscal 1997
include the effects of non-ordinary pre-tax charges of approximately $0.5
million for the write off of in-process research and development related to
the acquisition of Cortet, Inc., and $0.7 million of uncompleted acquisition
costs and related expenses. Excluding these charges, net income per share
(diluted), net income and operating expenses for fiscal 1997 would have been
$0.73, $14.2 million and $75.4 million, respectively.
(3) Due to practical considerations, the financial data for fiscal years 1995
and 1994 were not subjected to the same review by management as was carried
out with respect to fiscal years 1996, 1997 and the first three quarters of
1998, and which review resulted in a restatement of the financial statements
for those years. See Note 14 "Restatement of Financial Statements" of Notes
to Consolidated Financial Statements. It is possible that had a similar
review by management been performed with respect to the financial statements
for 1995 and 1994, the previously reported financial results for those years
would be required to be restated in material amounts.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and related Notes thereto contained
elsewhere within this document.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997 AND FISCAL 1996
Prior to fiscal 1998, the results of the Company's RTP division were
included as part of Medical Systems for the purposes of Management's Discussion
and Analysis. However, due to RTP's continued growth, its results are now
presented with the Company's other software business, HCIS. All historical data
and comparisons have been restated to reflect this change.
Revenues for fiscal 1998 were $300.5 million, a 14% increase over fiscal
1997 revenues of $263.9 million. Revenues for fiscal 1997 were $263.9 million, a
19% increase over fiscal 1996 revenues of $222.6 million. Medical Systems
revenues represented 76%, 83% and 85% of the Company's total revenues in fiscal
1998, 1997 and 1996, respectively. The Company's Software business revenues
represented approximately 24%, 17% and 15% of the Company's total revenues in
fiscal 1998, 1997 and 1996, respectively. Gross profit for fiscal 1998 totaled
$107.8 million, an increase of 4% over gross profit of $103.8 million in fiscal
1997, which increased 30% over gross profit of $80.1 million in fiscal 1996.
MEDICAL SYSTEMS
Medical Systems includes revenues from the Company's nuclear medicine
business unit, as well as, AMT and ARS, the Company's nuclear and CT
refurbishing business units. Medical Systems also includes customer service
related to those products. Summary information related to Medical Systems'
product and service revenues and gross profit margins for fiscal 1998 compared
to fiscal 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------
1997 1996
1998 (RESTATED) (RESTATED)
---------- ---------- ----------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Revenues:
Product................................................ $ 162,004 $ 164,274 $ 142,221
Service................................................ 64,927 54,103 46,116
---------- ---------- ----------
Total................................................ $ 226,931 $ 218,377 $ 188,337
Geographical mix:
North America.......................................... 83% 78% 77%
Europe................................................. 11% 13% 15%
Latin America, Japan and Asia.......................... 6% 9% 8%
Gross profit:
Product................................................ $ 60,425 $ 65,238 $ 49,545
Service................................................ 18,429 16,863 14,702
---------- ---------- ----------
Total................................................ $ 78,854 $ 82,101 $ 64,247
Gross margin:
Product................................................ 37% 40% 35%
Service................................................ 28% 31% 32%
---------- ---------- ----------
Total................................................ 35% 38% 34%
</TABLE>
14
<PAGE>
Medical Systems' product revenues decreased 1% from fiscal 1997 to fiscal
1998 and increased 16% from fiscal 1996 to fiscal 1997. The product revenue
decline in fiscal 1998 was due to the timing of delivery for installations
caused by the Company's adoption of a longer product installation process in
1998. This decline was partially offset by strong sales of the Company's nuclear
refurbishing business (AMT) and the formation of the CT refurbishing business
(ARS). Nuclear medicine revenues declined due to weaker European, Asian and
Latin American sales, while the North American market grew in fiscal 1998.
Revenues increased in fiscal 1997 due to the sales of higher priced dual head
products and MCD. In fiscal 1997, Medical Systems' revenues increased in dollar
volume in all of the Company's geographic markets.
Product gross profit margins were 37% for fiscal 1998. Margins decreased
primarily due to non-ordinary charges, consisting of a discontinued product
charge for DSA and an inventory charge for AMT. See Notes 9 "Non-ordinary Items"
and Note 12 "Quarterly Results of Operations" of Notes to Consolidated Financial
Statements. Fiscal 1997 and fiscal 1996 had gross profit margins of 40% and 35%,
respectively. Margins increased in fiscal 1997 due to increased sales of MCD.
Medical Systems service revenues increased 20% from fiscal 1997 to fiscal
1998 and 17% from fiscal 1996 to fiscal 1997. These increases resulted from a
higher number of customers under service contracts and, to a lesser extent, the
Company's launch of the ARS business in fiscal 1998 and growth in the Company's
multi-vendor service business in fiscal 1997. See Note 3 "Acquisitions" of Notes
to Consolidated Financial Statements. Service margins decreased for fiscal 1998,
when compared to fiscal 1997, due to increased staffing, higher retro-fit costs
and the lower margins associated with the ARS business. Service margins
decreased in fiscal 1997, when compared to fiscal 1996 as a result of higher
labor, overtime and travel costs.
SOFTWARE BUSINESS
ADAC's Software Business includes RTP and HCIS. RTP revenues are generated
primarily from the sale and support of the Company's Pinnacle(3)-TM- radiation
therapy planning system. HCIS historically generated revenues from the sale of
radiology, laboratory and cardiology information systems as well as from
providing support for these products. In the first quarter of fiscal 1998, the
Company took an non-ordinary charge of $11.3 million to discontinue the
development and marketing of LabStat, its laboratory information system product,
based on a decision by the Company's Board of Directors made in that quarter. As
a result, the Company was able to increase its focus on the radiology business
resulting in greater profitability for both HCIS and ADAC as a whole. See Note 9
"Non-ordinary Items" of Notes to Consolidated Financial Statements. HCIS'
current revenues are derived from the sale and support of radiology and
cardiology information systems and the support of the Company's legacy
laboratory
15
<PAGE>
information systems. Summary information related to the Software Business
product and support revenues and gross profit margins for fiscal 1998 compared
to fiscal 1997 and fiscal 1996 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------
<S> <C> <C> <C>
1997 1996
1998 (RESTATED) (RESTATED)
--------- ----------- -----------
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Product.................................................. $ 57,042 $ 29,680 $ 17,523
Service.................................................. 16,555 15,546 16,726
--------- ----------- -----------
Total.................................................. $ 73,597 $ 45,226 $ 34,249
Gross profit:
Product.................................................. $ 20,847 $ 14,077 $ 7,407
Service.................................................. 8,130 7,323 8,449
--------- ----------- -----------
Total.................................................. $ 28,977 $ 21,400 $ 15,856
Gross margin:
Product.................................................. 37% 47% 42%
Service.................................................. 49% 47% 51%
--------- ----------- -----------
Total.................................................. 39% 47% 46%
</TABLE>
Software Business product revenues increased 92% from fiscal 1997 to fiscal
1998 and 69% from fiscal 1996 to fiscal 1997. The increase from fiscal 1997 was
due mainly to an increase in sales of Pinnacle(3) and the Company's radiology
information system, QuadRIS-TM-. The growth of Pinnacle(3) and QuadRIS reflects
greater penetration of the commercial sector by both these products, and, in the
case of QuadRIS, continued growth in government sales under the Company's
digital imaging network-picture archiving communications systems (DIN-PACS)
contract with the United States Department of Defense. Product gross margins
decreased from fiscal 1997 to fiscal 1998 due to a $11.3 million charge
associated with the discontinuance of the LabStat product in fiscal 1998 (see
Note 9 "Non-ordinary Items" of Notes to Consolidated Financial Statements).
Excluding the effects of the discontinued product charge associated with the
write-off of the LabStat assets, gross profit margins for the Software Business
products increased to 58% compared to 47% in the prior year. This increase in
margin was a result of increased sales of the Company's higher margin
Pinnacle(3) product.
The Software Business support revenues increased in fiscal 1998 compared
with fiscal 1997, due principally to higher radiology support revenues. Software
service revenues declined in fiscal 1997 from fiscal 1996 due principally to a
lessening of the Company's laboratory support customer base. Gross margins on
support revenues were higher for fiscal 1998 due to an increase in the QuadRIS
installed base, partially offset by fewer support contract renewals from the
Company's legacy client base. Service margins decreased from fiscal 1996 to
fiscal 1997 due to increased third-party hardware maintenance costs associated
with the Company's laboratory product, together with an increase in radiology
and laboratory client support costs. See Note 1 "Summary of Significant
Accounting Policies" to Consolidated Financial Statements for a discussion of
the Company's adoption of SOP 97-2, "Software Revenue Recognition" as amended by
SOP 98-4, and the impact of this adoption on fiscal 1999.
16
<PAGE>
OPERATING AND OTHER EXPENSES
As a percentage of the Company's revenue, operating and other expense, net,
for fiscal 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------
1997 1996
1998 (RESTATED) (RESTATED)
--------- ------------- -------------
<S> <C> <C> <C>
Operating expenses:
Marketing and sales.......................................... 16.7% 15.8% 16.9%
Research and development, net of software capitalization..... 5.6% 6.3% 6.3%
General and administrative................................... 6.3% 6.0% 6.9%
Goodwill amortization........................................ 0.7% 0.4% 0.4%
Acquired in-process research and development................. 0.0% 0.2% 0.0%
Discontinued products........................................ 0.6% 0.0% 0.0%
Acquisition expense write off................................ 0.4% 0.2% 0.0%
--- --- ---
30.3% 28.9% 30.5%
--- --- ---
--- --- ---
Other expense, net............................................. 1.4% 2.0% 1.9%
</TABLE>
Marketing and sales expenses increased as a percentage of revenue from
fiscal 1997 to fiscal 1998 and decreased from fiscal 1996 to fiscal 1997.
Marketing and sales expenses increased in dollar volume from 1997 to 1998 and
1996 to 1997 primarily due to an increase in RTP and HCIS sales representatives.
Research and development expenditures, net of software capitalization,
totaled $16.8 million, $16.7 million and $14.0 million in fiscal 1998, 1997, and
1996, respectively. Research and development expenditures, net of software
capitalization, increased by $0.1 million and $2.7 million in fiscal 1997 to
fiscal 1998 and fiscal 1996 to fiscal 1997 as a result of additional investments
made by the Company to accelerate the development of the Company's laboratory
product and to maintain and enhance the Company's radiology product. Capitalized
software costs were $6.4 million, $4.5 million and $3.4 million in fiscal 1998,
1997 and 1996 respectively.
General and administrative expenses increased as a percentage of sales and
in dollar volume from fiscal 1997 to fiscal 1998 due to higher staffing levels.
General and administrative expenses decreased as a percentage of sales from
fiscal 1996 to fiscal 1997, due to higher sales in relation to general and
administrative expenses.
Goodwill amortization increased from fiscal 1997 to fiscal 1998 as a result
of the amortization of goodwill expenses associated with acquisitions of
Southern Cats, CT Solutions and ONES in fiscal 1998. See Note 3 "Acquisitions"
of Notes to Consolidated Financial Statements.
In fiscal 1998, the Company recognized non-ordinary pre-tax charges of
approximately $14.5 million. These charges consisted of $1.3 million to write
off capitalized expenses relating to specific acquisition activities which are
no longer being pursued by the Company and $1.9 million for discontinuing the
Company's physician network services business. See Note 9 "Non-ordinary Items"
of Notes to Consolidated Financial Statements.
In fiscal 1997, the Company recognized a $0.5 million non-ordinary pre-tax
charge for acquired in-process research and development related to the purchase
of Cortet and $0.7 million of uncompleted acquisition costs and related
expenses. See Note 3 "Acquisitions" of Notes to Consolidated Financial
Statements.
17
<PAGE>
Other expense, net, which primarily consists of interest expense and foreign
currency transaction gains and losses, decreased as a percentage of revenue for
fiscal 1998 compared to fiscal 1997, due primarily to foreign currency gains in
fiscal 1998, partially offset by increased interest expense. Other expense, net,
increased slightly as a percentage of revenue from fiscal 1996 to fiscal 1997
due to increased foreign currency losses and interest expense.
INCOME TAXES
Fiscal 1998's and fiscal 1997's effective tax rate was 39%, which is
approximately equal to the Company's statutory federal and state tax rates after
utilization of tax credits. In fiscal 1996, the Company's effective tax rate was
37%. This higher tax rate for fiscal 1998 and 1997 resulted primarily from
certain non-tax deductible items relating to the acquisition of Cortet and
Geometrics.
SEGMENT INFORMATION
Segment and foreign operations information is contained in Note 11 "Segment
Information and Foreign Operations" of Notes to Consolidated Financial
Statements. See also Note 13 "Recent Pronouncements" of Notes to Consolidated
Financial Statements, for a discussion of FAS 131, "Disclosures About Segments
of An Enterprise and Related Information" and the possible impact of that
standard on future disclosure by the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes its available cash resources, generated primarily from
operations and credit lines, will provide adequate funds to finance the
Company's operations in fiscal 1999. If necessary, the Company will seek to
increase its credit line to support the Company's future growth.
The Company's financial condition strengthened from fiscal 1997 to fiscal
1998. The Company's ratio of current assets to current liabilities improved to
1.7 to one at September 27, 1998 from 1.6 to one at September 28, 1997. Working
capital increased $20.1 million to $60.9 million in fiscal 1998 from $40.8
million in fiscal 1997.
The primary uses of cash in 1998 were an $12.0 million increase in accounts
receivable and a $29.9 million increase in inventory from fiscal 1997. Inventory
increased due mainly to the introduction of two new gamma camera systems in the
first quarter of fiscal 1999, Forte and the Vertex V60 and longer product
installation schedules. The Company increased production of these cameras to
cover as many product mix demand profiles as possible through the first quarter
of fiscal 1999. Accounts receivable increased due to higher sales and slower
collections.
Cash used for investing activities in fiscal 1998 of $18.2 million included
goodwill from the acquisition of Southern Cats, Inc., CT Solutions, Inc. and
ONES Medical Services, Inc., and capital expenditures for office, manufacturing
and research and development equipment and capitalized software research and
development costs in both the Medical Systems and Software Business units. See
Note 3 "Acquisitions" of Notes to Consolidated Financial Statements.
Financing activities provided $13.3 million in cash in fiscal 1998. This was
primarily attributable to common stock issued to employees under the Company's
employee stock option and stock purchase plans. Bank loans increased slightly,
with $23.4 million of borrowings outstanding under the Company's lines of credit
at September 27, 1998 compared to $22.2 million at September 28, 1997, See Note
4 "Credit and Borrowing Arrangements" of Notes to Consolidated Financial
Statements.
The Company's liquidity is affected by many factors, some based on the
normal ongoing operations of the business and others related to the
uncertainties of the industry and global economies. Although the Company's cash
requirements will fluctuate based on the timing and extent of these factors,
management believes that cash generated from operations, together with the
liquidity provided by existing cash balances
18
<PAGE>
and borrowing capability, will be sufficient to satisfy commitments for capital
expenditures and other cash requirements for the next fiscal year. However, the
Company may need to increase its sources of capital through additional
borrowings or the sale of securities in response to changing business conditions
or to pursue new business opportunities. Should the Company not be able to renew
existing credit facilities, new sources of funding will be required. There can
be no assurance that such additional sources of capital will be available on
terms favorable to the Company, if at all.
BUSINESS CONSIDERATIONS
From time to time, the Company may disclose, through press releases, filings
with the SEC or otherwise, certain matters that constitute forward looking
statements within the meaning of the Federal securities laws. These statements
including the forward looking statements contained in this Form 10-K are subject
to a number of risks and uncertainties, which could cause actual results to
differ materially from those projected, including without limitation those set
forth below. The Company expressly disclaims any obligation to update any
forward looking statements.
LITIGATION
Commencing in December 1998, a total of eleven class action lawsuits were
filed in federal court by or on behalf of stockholders who purchased Company
stock between January 10, 1996 and December 28, 1998. These actions name as
defendants the Company and certain of its present officers and directors. The
complaints allege various violations of the federal securities laws in
connection with restatement of the Company's financial statements and seek
unspecified but potentially significant damages. The Company intends to contest
these actions vigorously. A stockholder derivative action, purportedly on behalf
of the Company and naming as defendants Company officers and directors was also
filed in state court seeking recovery for the Company based on stock sales by
these defendants during the above time period. The Company is also a defendant
in various legal proceedings incidental to its business.
While it is not possible to determine the ultimate outcome of these actions
at this time, management is of the opinion that any unaccrued liability
resulting from these claims would not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flow.
GOVERNMENT REGULATION
The design, clinical activities, manufacturing, labeling, distribution,
sale, marketing, advertising and promotion of the Company's products are subject
to extensive and rigorous governmental regulation in the United States and
foreign countries. In the United States and certain foreign countries, the
process of obtaining and maintaining required regulatory clearances or approvals
is lengthy, expensive and uncertain. There can be no assurance that any
necessary clearance or approval will be granted the Company or that FDA or other
regulatory agency review will not involve delays adversely affecting the
Company. In addition, a failure to comply with applicable regulatory
requirements could result in enforcement actions including Warning Letters, as
well as civil penalties, injunctions, suspensions or losses of regulatory
clearances, product recalls, seizure or administrative detention of products,
operating restrictions through consent decrees or otherwise, and criminal
prosecution, which could have a material adverse effect upon the Company.
Following an inspection in mid-1997, Cortet, Inc., which the Company
acquired in May 1997, received a Warning Letter from the FDA concerning
inspectional observations relating to the adequacies of Cortet's quality
assurance system. Cortet responded to the observations and the Warning Letter
and received correspondence from the FDA's Florida District Office indicating
that Cortet's responses appeared to adequately address the FDA's concerns. In
mid-1998, the State of California, under a contract with the FDA, completed a
routine inspection of ADAC's facility in Milpitas, California. The state
19
<PAGE>
investigator issued a FDA Form 483 containing observations of non-compliance of
the recently implemented QSR. The state investigator also placed a temporary
shipment hold on Pinnacle(3) pending the Company satisfactorily responding to
the State's concerns regarding the Company's quality systems. The Company
promptly responded to the FDA and the State and initiated a number of corrective
actions. The State lifted the Pinnacle(3) shipment hold on August 28, 1998 and,
in September 1998, ADAC received a letter from the FDA indicating that the
Company had adequately responded to the FDA's concerns. Although the Company was
deemed to have adequately responded to the State and FDA following the foregoing
inspections, the Company is responsible for the full implementation of all
corrective actions. In addition, as all companies are, the Company remains
subject to periodic inspections in the future and there can be no assurance as
to the timing or outcome of any subsequent inspection. The scope of any re-
inspection could be more comprehensive than the inspections of Cortet and the
Company's Milpitas facility, and there can be no assurance that the FDA, upon
re-inspection, will deem the Company's corrective actions to be adequate or that
additional corrective action, in areas not addressed in the Warning Letter or
the Form 483, will not be required. Any failure by the Company to fully
implement the required corrective actions or to comply with any other applicable
regulatory requirements could have a material adverse effect on the Company's
ability to continue to manufacture and distribute its products, and in more
serious cases, could result in seizure, recall, injunction and/or civil fines.
Any of the foregoing, would have a material adverse effect on the Company.
The Company is also subject to FTC restrictions on advertising and numerous
federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection and disposal of
hazardous substances. Changes in existing requirements, adoption of new
requirements or failure to comply with applicable requirements could have a
material adverse effect on the Company.
COMPETITION
The markets served by the Company are characterized by rapidly evolving
technology, intense competition and pricing pressure. There are a number of
companies that currently offer, or are in the process of developing, products
that compete with products offered by the Company. Some of the Company's
competitors have substantially greater capital, engineering, manufacturing and
other resources than the Company. These competitors could develop technologies
and products that are more effective than those currently used or marketed by
the Company or that could render the Company's products obsolete or
noncompetitive, which could have a material adverse effect on the Company's
business.
DEPENDENCE ON NEW PRODUCTS AND PRODUCT ENHANCEMENTS
ADAC's success is dependent upon the successful development, introduction
and commercialization of new products and the development of enhancements to
existing products. Because the markets in which the Company competes are highly
competitive, the Company must continue to develop and successfully commercialize
innovative new products and product enhancements such as Forte, MCD(PET,)
MCD/AC-PET and ENVOI in order to pursue its growth strategy. The development of
new products and product enhancements entails considerable time and expense,
including research and development costs, and the time, expense and uncertainty
involved in obtaining any necessary regulatory clearances. Failure of the
Company to develop, market and sell new products and enhancements effectively in
future periods could have a material adverse effect on the Company's results of
operations and financial condition.
FUTURE OPERATING RESULTS
The Company's future operating results may vary substantially from period to
period. The timing and amount of revenues are subject to a number of factors
that make estimation of revenues and operating results prior to the end of the
quarter very uncertain. The timing of revenues can be affected by delays in
product introductions, shipments and installation scheduling, as well as general
economic and industry
20
<PAGE>
conditions. Furthermore, of the orders received by the Company in any fiscal
quarter, a disproportionately large percentage has typically been received and
shipped toward the end of that quarter, which is typical for the industry.
Accordingly, results for a given quarter can be adversely affected if there is a
substantial order shortfall late in that quarter. In addition, although both the
Company's bookings and revenue have increased in recent periods, the Company's
bookings and backlog cannot necessarily be relied upon as an accurate predictor
of future revenues as the timing of such revenues is dependent upon completion
of customer site preparation and construction, installation scheduling, receipt
of applicable regulatory approvals, customer financing and other factors.
Accordingly, there can be no assurance that orders will mature into revenue. The
Company has accounts receivable due from customers in Latin America. Recent
changes in economic conditions in that region, including the devaluation of
Brazilian currency, may adversely affect the Company's ability to collect these
accounts receivable. If the Company were unable to collect a substantial
majority of these accounts receivable, the Company's results of operations for a
quarterly period could be adversely affected.
RISKS RELATED TO ACQUISITIONS
In the past fiscal year, the Company has acquired a number of small
businesses, and anticipates that it may continue to acquire businesses whose
products and services complement the Company's businesses. Acquisitions involve
numerous risks, including, among other things, difficulties in successfully
integrating the businesses (including products and services, as well as sales
and marketing efforts), failure to retain existing customers or attract new
customers to the acquired business operations, failure to retain key technical
and management personnel, coordinating geographically separated organizations,
and diversion of ADAC management attention. These risks, as well as liabilities
of any acquired business (whether known or unknown at the time of acquisition),
could have a material adverse effect on the results of operations and financial
condition of the Company, including adverse short-term effects on its reported
operating results. The Company seeks to mitigate these risks by taking reserves
when appropriate in connection with these acquisitions. In addition, the Company
has in the past and may in the future issue stock as consideration for
acquisitions. Future sales of shares of the Company's stock issued in such
acquisitions could adversely affect or cause fluctuations in the market price of
the Company's Common Stock.
YEAR 2000 COMPLIANCE
The following statements are a "Year 2000 Readiness Disclosure" within the
meaning of the Year 2000 Information and Readiness Disclosure Act. Many
currently installed computer systems and software products are coded to accept
only 2 digit entries in the date code field. Beginning in the Year 2000, these
date code fields will need to accept 4 digit entries to distinguish 21st century
dates from 20th century dates. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. As a
result, in one year, computer systems and/or software used by many companies may
need to be upgraded to comply with such Year 2000 requirements. The Company is
utilizing both internal and external resources to identify, correct or
reprogram, and test its internal systems, for Year 2000 compliance. Although
management is continuing to assess the expense associated with internal Year
2000 compliance, the Company does not believe such compliance will have a
material adverse effect on the Company's results of operations or financial
condition.
The Company has completed an assessment and analysis of its internal
information technology systems, software and manufacturing equipment. The
Company has implemented plans to correct its internal Year 2000 issues, and
expects to have its remediation process substantially completed by early 1999.
While the Company currently expects that the Year 2000 will not pose significant
internal operational problems, delays in the implementation of new information
systems, or a failure to fully identify all Year 2000 dependencies in the
Company's systems, could have a material adverse effect on the Company's results
of operations.
21
<PAGE>
The Company has established a program to assess its products to ensure that
they are Year 2000 compliant. To monitor this program and to inform customers
about the Year 2000 issues with respect to its products, the Company has created
a website at WWW.ADACLABS.COM/ABOUT/YEAR20001.HTML. This website identifies the
status of Year 2000 compatibility of its products, including products that are
Year 2000 compliant, products that need free software updates, products that
require hardware upgrades, and products that cannot be made Year 2000 compliant.
This list is periodically updated as analysis of additional products is
completed.
The Company will sell, or provide under warranty or service contracts,
software license upgrades to update the majority of its installed base to make
the products Year 2000 compliant, and anticipates completing development of such
upgrades in mid-1999. For older equipment which the Company no longer
manufactures, the Company will sell hardware upgrades to its customers which
will address the Year 2000 compliance where possible. The Company is contacting
by mail customers which require computer hardware upgrades, and is also posting
information relating to Year 2000 compliance for its products on the Company's
website as described above.
The Company is gathering information from its suppliers and vendors to
determine the extent to which the Company's capabilities are vulnerable to
failure by those third parties to remedy their own Year 2000 issues. The Company
is currently receiving responses to those inquiries and anticipates that the
analysis of this information will be completed by mid-1999. The Company will
proceed with further analysis or testing of its vendors' systems as needed.
However, there is no guarantee that the systems and products of other companies
on which the Company relies will be timely converted or that they will not have
a material adverse effect on the Company.
The Company is in the process of developing a contingency plan. This plan is
expected to be in place in the first half of mid-1999. The inability of the
Company to develop and implement a contingency plan could result in a material
adverse effect on the Company.
The Company currently estimates that total Year 2000 costs will be
approximately $1.2 million, of which $0.2 million has already been incurred.
These cost estimates do not include any potential costs related to any customer
or other claim. In addition, these cost estimates are based on current
assessments of the ongoing activities described above, and are subject to
changes as the Company continuously monitors these activities. The Company
believes any modifications deemed necessary will be made on a timely basis and
does not believe that the costs of such modifications will have a material
adverse effect on the Company's operating results; however, the Company's
expectations as to the extent and timeliness of any modifications required in
order to achieve Year 2000 compliance and the costs related thereto are
forward-looking statements subject to risks and uncertainties. Actual results
may vary as a result of number of factors, including those described herein.
There can be no assurance that the Company will be able to successfully modify
on a timely basis such products, services and systems to comply with Year 2000
requirements, which failure could have a material adverse effect on the
Company's operating results.
In addition, the Company is currently seeking to ensure that the software
included in its products and other systems is Year 2000 compliant. Failure (or
perceived failure) of such products to be Year 2000 compliant could
significantly adversely affect sales of such products, which could have a
material adverse effect on the Company's results of operations and financial
condition. In addition, the Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues in a
variety of ways. Many potential customers may choose to defer purchasing Year
2000 compliant products until they believe it is absolutely necessary, thus
resulting in potentially stalled market sales within the industries in which the
Company competes. Conversely, Year 2000 issues may cause other companies to
accelerate purchases, thereby causing an increase in short-term demand and a
consequent decrease in long-term demand for the Company's products.
Additionally, Year 2000 issues could cause a significant number of companies,
including current Company customers, to reevaluate their current system needs,
22
<PAGE>
and as a result consider switching to other systems or suppliers. Any of the
foregoing could result in a material adverse effect on the Company's business,
operating results and financial condition.
HEALTH CARE REFORM; REIMBURSEMENT AND PRICING PRESSURE
There is significant concern today about the availability and rising cost of
healthcare in the United States. Cost containment initiatives, market pressures
and proposed changes in applicable laws and regulations may have a dramatic
effect on pricing or potential demand for medical devices, the relative costs
associated with doing business and the amount of reimbursement by both
government and third party payors, which could have a material adverse effect on
the Company's results of operations.
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends in part on its continued ability to obtain
patents, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. There can be no assurance that pending
patent applications will mature into issued patents or that third parties will
not make claims of infringement against the Company's products or technologies
or will not be issued patents that may require payment of license fees by the
Company or prevent the sale of certain products by the Company.
RELIANCE ON SUPPLIERS
Certain components used by the Company to manufacture its products such as
the sodium iodide crystals used in the Company's nuclear medicine systems are
presently available from only one supplier. The Company also relies on several
significant vendors for hardware and software components for its healthcare
information systems products. The loss of any of these suppliers, including any
single-source supplier, would require obtaining one or more replacement
suppliers as well as potentially requiring a significant level of hardware and
software development to incorporate the new parts into the Company's products.
Although the Company has obtained insurance to protect against loss due to
business interruption from these and other sources, there can be no assurance
that such coverage would be adequate. See Note 1 "Summary of Significant
Accounting Policies" of Notes to Consolidated Financial Statements.
PRODUCT LIABILITY
Although the Company maintains product liability insurance coverage in an
amount that it deems sufficient for its business, there can be no assurance that
such coverage will ultimately prove to be adequate or that such coverage will
continue to remain available on acceptable terms, if at all.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock is and is expected to
continue to be subject to significant fluctuations in response to variations in
anticipated or actual operating results, market speculation, announcements of
new products or technology by the Company or its competitors, changes in
earnings estimates by the Company's analysts, trends in the health care industry
in general and other factors, many of which are beyond the control of the
Company. In addition, broad market fluctuations as well as general economic or
political conditions or initiatives, such as health care reform, may adversely
impact the market price of the Common Stock regardless of the Company's
operating results.
23
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------
SEPTEMBER 28, SEPTEMBER 29,
SEPTEMBER 27, 1997 1996
1998 (RESTATED) (RESTATED)
------------- ------------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
REVENUES, NET:
Product........................................................... $ 219,046 $ 194,238 $ 159,744
Service........................................................... 81,482 69,649 62,842
------------- ------------- -------------
300,528 263,887 222,586
------------- ------------- -------------
COST OF REVENUES:
Product........................................................... 124,113 114,639 102,792
Service........................................................... 54,923 45,463 39,691
Discontinued product.............................................. 13,661 -- --
------------- ------------- -------------
192,697 160,102 142,483
------------- ------------- -------------
Gross profit........................................................ 107,831 103,785 80,103
------------- ------------- -------------
OPERATING EXPENSES:
Marketing and sales............................................... 50,119 41,664 37,561
Research and development.......................................... 16,836 16,728 14,044
General and administrative........................................ 19,055 15,836 15,312
Goodwill amortization............................................. 2,165 1,015 792
Acquired in-process research and development...................... -- 531 --
Discontinued products............................................. 1,910 -- --
Acquisition expense write off..................................... 1,300 651 --
------------- ------------- -------------
91,385 76,425 67,709
------------- ------------- -------------
Operating income.................................................... 16,446 27,360 12,394
------------- ------------- -------------
OTHER EXPENSE:
Interest and other, net........................................... 4,338 5,271 4,225
------------- ------------- -------------
Income before provision for income taxes............................ 12,108 22,089 8,169
Provision for income taxes.......................................... 4,722 8,615 3,023
------------- ------------- -------------
Net income.......................................................... $ 7,386 $ 13,474 $ 5,146
------------- ------------- -------------
------------- ------------- -------------
Net income per share
Basic............................................................. $ .38 $ .73 $ .30
Diluted........................................................... $ .36 $ .69 $ .28
Number of shares used in per share calculations
Basic............................................................. 19,500 18,419 17,360
Diluted........................................................... 20,387 19,534 18,507
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
-----------------------------
SEPTEMBER 28,
SEPTEMBER 27, 1997
1998 (RESTATED)
------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 4,869 $ 5,088
Trade receivables, net of allowance for returns
and doubtful accounts of $2,319 in 1998 and
$1,819 in 1997.................................. 55,316 47,112
Tax and other receivables......................... 7,294 1,460
Inventories, net.................................. 78,311 52,672
Prepaid expenses and other current assets......... 4,928 3,570
------------- -------------
Total current assets............................ 150,718 109,902
Service parts, net................................ 18,063 16,469
Fixed assets, net................................. 11,007 9,789
Capitalized software, net......................... 11,770 12,265
Intangibles, net.................................. 25,336 21,703
Deferred income taxes............................. 24,167 21,702
Other assets, net................................. 2,748 3,269
------------- -------------
Total Assets.................................... $243,809 $195,099
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks............................ $ 23,396 $ 22,217
Accounts payable.................................. 22,887 10,543
Deferred revenues................................. 11,591 15,017
Customer deposits and advance billings............ 2,004 2,826
Accrued compensation.............................. 8,903 7,567
Warranty and installation......................... 6,595 3,713
Other accrued liabilities......................... 14,423 7,222
------------- -------------
Total current liabilities....................... 89,799 69,105
Non-current deferred income taxes................. 14,026 13,830
Non-current liabilities and deferred credits...... 3,082 4,073
------------- -------------
Total Liabilities............................... 106,907 87,008
------------- -------------
Commitments and contingencies (Note 5)
Shareholders' equity
Preferred stock, no par value:
Authorized: 5,000 shares;
Issued and outstanding: none in 1998 and 1997
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 20,253 shares as of
September 27, 1998 and 18,812 shares as of
September 28, 1997............................ 149,599 128,109
Accumulated deficit............................... (10,266) (17,652)
Translation adjustment............................ (2,431) (2,366)
------------- -------------
Shareholders' Equity.............................. 136,902 108,091
------------- -------------
Total Liabilities and Shareholders' Equity........ $243,809 $195,099
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------
SEPTEMBER 28, SEPTEMBER 29,
SEPTEMBER 27, 1997 1996
1998 (RESTATED) (RESTATED)
------------- ------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................ $ 7,386 $ 13,474 $ 5,146
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................... 12,395 11,125 10,665
Provision for product returns and doubtful accounts..................... 1,905 2,513 877
Deferred income taxes................................................... 3,093 14,835 2,793
Inventory allowance..................................................... (785) 1,008 1,099
Acquired in-process research and development............................ -- 531 --
Discontinued products................................................... 15,571 -- --
Acquisition expense write off........................................... 1,300 651 --
Changes in operating assets and liabilities:
Accounts receivable................................................... (12,025) (6,160) (9,752)
Tax and other receivables............................................. (5,834) (1,460) --
Inventories........................................................... (30,841) (3,062) (13,034)
Prepaid expenses and other current assets............................. (2,176) 2,364 (1,106)
Service parts......................................................... (3,996) (3,007) (3,712)
Accounts and dividends payable........................................ 11,679 (3,419) 886
Deferred revenues..................................................... (1,303) (654) 1,223
Customer deposits and advance billings................................ (822) 524 (1,899)
Accrued compensation.................................................. 1,336 (1,342) 2,268
Warranty and installation and other accrued liabilities............... 9,027 (6,275) 1,013
Non-current liabilities and deferred credits.......................... (1,179) -- --
------------- ------------- -------------
Net cash provided by (used in) operating activities....................... 4,731 21,646 (3,533)
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures.................................................... (4,930) (6,166) (2,789)
Intangible from acquisitions............................................ (6,010) (10,537) 151
Increase in other assets................................................ (7,226) (5,175) (3,316)
------------- ------------- -------------
Net cash used in investing activities..................................... (18,166) (21,878) (5,954)
------------- ------------- -------------
Cash flows from financing activities:
Borrowings (repayments) under short-term debt arrangements, net......... 188 (5,009) 8,928
Proceeds from issuance and repurchase of common stock, net.............. 13,093 10,733 6,189
Dividends paid.......................................................... -- (2,137) (8,400)
------------- ------------- -------------
Net cash provided by financing activities................................. 13,281 3,587 6,717
------------- ------------- -------------
Effect of exchange rates on cash.......................................... (65) (1,348) (1,700)
------------- ------------- -------------
Net change in cash and cash equivalents................................... (219) 2,007 (4,470)
Cash and cash equivalents, at beginning of the year....................... 5,088 3,081 7,551
------------- ------------- -------------
Cash and cash equivalents, at end of the year............................. $ 4,869 $ 5,088 $ 3,081
------------- ------------- -------------
------------- ------------- -------------
Supplemental cash flow disclosure:
Interest paid........................................................... $ 4,369 $ 3,835 $ 3,325
Income taxes paid....................................................... 5,281 4,185 442
Noncash investing activities:
Issuance of common stock pursuant to the acquisitions of Southern Cats, Geometrics, Photon and Cortet
(see Note 3).
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ACCUMULATED TRANSLATION
SHARES AMOUNT DEFICIT ADJUSTMENT TOTAL
--------- ---------- ------------ ----------- ----------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balances, October 1, 1995 (restated)................. 16,919 $ 101,072 $ (28,449) $ 682 $ 73,305
Employee stock purchases and exercises of employee
stock options...................................... 657 5,263 -- -- 5,263
Shares sold under dividend reinvestment plan......... 69 971 -- -- 971
Shares withheld in payment of stock options
exercised.......................................... (2) (45) -- -- (45)
Income tax benefit resulting from exercises of stock
options............................................ -- 3,682 -- -- 3,682
Pooling of interest with JD Technical................ 138 -- 577 -- 577
Translation adjustment............................... -- -- -- (1,700) (1,700)
Dividends declared ($.48 per share).................. -- -- (8,400) -- (8,400)
Net income........................................... -- -- 5,146 -- 5,146
--------- ---------- ------------ ----------- ----------
Balances, September 29, 1996 (restated).............. 17,781 110,943 (31,126) (1,018) 78,799
Employee stock purchases and exercises of employee
stock options...................................... 623 6,323 -- -- 6,323
Shares sold under dividend reinvestment plan......... 38 776 -- -- 776
Shares withheld in payment of stock options
exercised.......................................... (37) (794) -- -- (794)
Income tax benefit resulting from exercises of stock
options............................................ 2,765 -- -- 2,765
Pooling of interest with Photon...................... 57 -- -- -- --
Acquisition of Cortet and Geometrics................. 350 7,827 -- -- 7,827
Warrants exercised................................... -- 269 269
Translation adjustment............................... -- -- -- (1,348) (1,348)
Net income........................................... -- -- 13,474 -- 13,474
--------- ---------- ------------ ----------- ----------
Balances, September 28, 1997 (restated).............. 18,812 128,109 (17,652) (2,366) 108,091
Employee stock purchases and exercises of employee
stock options...................................... 1,215 13,147 -- -- 13,147
Shares sold under dividend reinvestment plan......... 50 1,013 -- -- 1,013
Shares withheld in payment of stock options
exercised.......................................... (51) (1,067) -- -- (1,067)
Income tax benefit resulting from exercises of stock
options............................................ -- 5,597 -- -- 5,597
Acquisition of Southern Cats......................... 139 2,800 -- -- 2,800
Warrants exercised................................... 88 -- -- --
Translation adjustment............................... -- -- (65) (65)
Net income........................................... -- -- 7,386 -- 7,386
--------- ---------- ------------ ----------- ----------
Balances, September 27, 1998......................... 20,253 $ 149,599 $ (10,266) $ (2,431) $ 136,902
--------- ---------- ------------ ----------- ----------
--------- ---------- ------------ ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the Sunday closest to September 30. Fiscal
1998, 1997 and 1996 all included 52 weeks.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ADAC
Laboratories and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company's European subsidiaries' functional currencies are considered to
be their respective local currencies. Adjustments that arise in translating
their financial statements into U.S. dollars are included as a separate
component of shareholders' equity in the consolidated balance sheets.
REVENUE RECOGNITION
Revenues related to the Company's Medical Systems business unit product
sales are recognized upon shipment to the customer or to the location requested
by the customer, at which time title and risk of ownership pass. In
circumstances where a customer requests the product to be temporally stored or
shipped to a site other than where it is intended to be used, revenue is
recognized where the customer makes a written request based on its circumstances
which prevent immediate on site delivery, title and risk of ownership passes to
the customer, a downpayment is received, and delivery to the end use site is
generally expected within a specified period. Estimated provisions for product
sale returns, installation and warranty are accrued upon revenue recognition.
Revenues related to Medical Systems services are recognized ratably over the
relevant contractual period or as the services are performed. Medical Systems
service revenue billed but unearned is included on the consolidated balance
sheets as deferred revenue.
Revenues related to the Company's Software product lines (RTP and HCIS) are
derived from software licenses, computer hardware sales, related implementation,
training and support services and maintenance contracts. Revenues for software
licenses are recognized either at the shipment date or upon the renewal date. In
either case, payment is due within twelve months after such date. Revenues for
computer hardware sales are recognized at the time of shipment. When software is
sold in conjunction with hardware, revenue is recognized when both software and
hardware have been shipped. The Company's obligations subsequent to shipment
primarily relate to implementation and training; such revenues are recognized as
services are performed Revenues from maintenance contracts are recognized
ratably over the relevant contractual period.
Commencing in fiscal 1999 the Company will comply with the requirements of
Statement of Position ("SOP 97-2"), "Software Revenue Recognition" as amended by
("SOP 98-4"), "Deferral of the Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition". Compliance with SOP 97-2, as amended, will result
in changes to revenue recognition for the Company's HCIS business unit.
Commencing with contracts entered into in fiscal 1999, the Company will
recognize revenue in that business unit for software, hardware, training and
installation under the percentage of completion method, based on the ratio of
labor costs incurred versus total estimated labor costs. This change will result
in revenues being recognized over a longer period of time than under the
Company's previous policy.
28
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
INCOME TAXES
Under the liability method of accounting for income taxes, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rate is recognized as income in the
period that includes the enactment date.
Deferred tax assets are also recognized for deductible temporary differences
and operating loss and tax credit carryforwards and, if appropriate, with a
valuation allowance established against the resulting assets if it is more
likely than not that the related tax benefits will not be realized.
INCOME PER SHARE
Basic net income per share has been computed using the weighted average
number of common shares outstanding. Diluted net income per share includes the
dilutive effect of common stock options and warrants using the treasury stock
method. The calculation of basic and diluted earnings per share (EPS) for fiscal
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 29,
1998 1997 1996
------------- ------------- -------------
($000 EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic EPS:
Net income.......................................................... $ 7,386 $ 13,474 $ 5,146
Weighted average common shares outstanding.......................... 19,500 18,419 17,360
------------- ------------- -------------
Basic EPS........................................................... $ .38 $ .73 $ .30
------------- ------------- -------------
------------- ------------- -------------
Diluted EPS:
Net income.......................................................... $ 7,386 $ 13,474 $ 5,146
Weighted average common shares outstanding.......................... 19,500 18,419 17,360
Options and warrants................................................ 887 1,115 1,147
------------- ------------- -------------
Total Shares........................................................ 20,387 19,534 18,507
------------- ------------- -------------
------------- ------------- -------------
Diluted EPS......................................................... $ .36 $ .69 $ .28
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
CASH EQUIVALENTS
All highly liquid investments purchased with an original maturity of three
months or less are considered cash equivalents.
29
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company sells its products to hospitals and clinics worldwide. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral, except for sales within Latin America. The Company
maintains allowances for potential credit losses. The Company invests any excess
cash on deposits with a major investment bank. The Company has not experienced
any losses on these deposits.
RELIANCE ON CERTAIN SUPPLIERS
Certain components and services used by the Company to manufacture and
develop its products are presently available from only one or a limited number
of suppliers or vendors. The loss of any of these suppliers or vendors would
potentially require a significant level of hardware and/or software development
to incorporate the products or services from new suppliers or vendors into the
Company's products. Although the Company has obtained business interruption
insurance to protect against such losses, there is no assurance that such
coverage would be adequate.
INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
cost on a first-in, first-out basis) or market.
SERVICE PARTS
Service parts used for servicing installed equipment are stated at cost and
are depreciated over a 10-year period using the declining-balance method of
depreciation.
FIXED ASSETS
Major additions and improvements are capitalized at cost, while maintenance
and repairs which do not improve or extend the life of the respective assets are
expensed as incurred. When assets are retired or otherwise disposed of, the
costs and related accumulated depreciation are removed from the financial
statements, and any gain or loss on disposal is included in the consolidated
statements of income. Fixed assets, other than leasehold improvements, are
depreciated on a straight-line basis over their estimated useful lives (3-7
years). Leasehold improvements are amortized on a straight-line basis over the
lesser of their estimated useful lives or the remaining term of the related
leases.
CAPITALIZED SOFTWARE
Costs related to the conceptual formulation and design of software products
to be licensed are expensed as product development, and costs incurred
subsequent to establishing the technological feasibility of software products
are capitalized. Amortization of capitalized software costs, which begins when
products are available for general release to customers, is computed using the
greater of 1) the ratio that current gross revenues bear to the total of current
and anticipated future gross revenues; or 2) a straight-line basis over the
expected product lives, generally estimated to be three to seven years.
Software costs capitalized during fiscal years 1998, 1997, and 1996 amounted
to approximately $6.4 million, $4.5 million, and $3.4 million respectively.
Amortization of capitalized software costs during
30
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the fiscal years 1998, 1997 and 1996 of approximately $2.8 million, $3.2
million, and $2.1 million, respectively, have been charged to cost of product
revenues. See Note 9, "Non-ordinary Items" of Notes to Consolidated Financial
Statements, relating to the write-off of LabStat capitalized software.
INTANGIBLES
Goodwill and other purchased intangibles, including acquired technology, are
capitalized and amortized on a straight-line basis over the estimated useful
life of the related asset (3-20 years). The company evaluates the recoverability
of long-lived assets not held for sale by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such flows are not sufficient to recover the carrying value of
such assets, the assets are adjusted to their fair values. Based on these
evaluations, there were no adjustments to the carrying value of long-lived
assets in 1998 or 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
31
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 BALANCE SHEET DETAIL:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Inventories consist of:
Purchased parts and sub-assemblies.................................... $ 17,452 $ 15,499
Work in process....................................................... 5,713 3,435
Finished goods(1)..................................................... 59,217 38,594
---------- ----------
82,382 57,528
Less reserves......................................................... (4,071) (4,856)
---------- ----------
$ 78,311 $ 52,672
---------- ----------
---------- ----------
Service parts consist of:
Field service parts, at cost.......................................... $ 26,327 $ 23,844
Less accumulated depreciation......................................... (8,264) (7,375)
---------- ----------
$ 18,063 $ 16,469
---------- ----------
---------- ----------
Fixed assets, at cost, consist of:
Production and test equipment......................................... $ 4,351 $ 9,144
Field service equipment............................................... 1,168 2,443
Office and demonstration equipment.................................... 14,401 15,166
Leasehold improvements................................................ 1,261 1,181
---------- ----------
21,181 27,934
---------- ----------
Less accumulated depreciation and amortization........................ (10,174) (18,145)
---------- ----------
$ 11,007 $ 9,789
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) Finished goods of $29.8 million and $25.1 million in fiscal 1998 and fiscal
1997, respectively, are consigned to warehouses pending shipment to
customers.
32
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 BALANCE SHEET DETAIL: (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Intangibles consist of:
Goodwill................................................................ $ 21,849 $ 15,140
Acquired technology..................................................... 8,984 8,984
Other................................................................... 510 510
--------- ---------
31,343 24,634
Less accumulated amortization........................................... (6,007) (2,931)
--------- ---------
$ 25,336 $ 21,703
--------- ---------
--------- ---------
Other accrued liabilities consist of:
Accrued cost of revenue................................................. $ 3,354 $ 367
Accrued royalties....................................................... 956 790
Customer advances....................................................... 2,775 --
Other accrued expenses.................................................. 7,338 6,065
--------- ---------
$ 14,423 $ 7,222
--------- ---------
--------- ---------
Non-current liabilities and deferred credits consist of:
Accrued rent............................................................ $ 1,162 $ 998
Deferred contract revenue............................................... 927 1,662
Deferred gain on sale of fixed assets................................... 47 688
Other non-current liabilities........................................... 946 725
--------- ---------
$ 3,082 $ 4,073
--------- ---------
--------- ---------
</TABLE>
NOTE 3 ACQUISITIONS
In January 1998, the Company acquired CT Solutions, Inc. (CT Solutions) and
O.N.E.S. Medical Services, Inc. (ONES) for cash. CT Solutions was an independent
provider of computed tomography refurbished equipment and service. ONES was a
provider of nuclear medicine service and refurbished equipment. The acquisitions
were accounted for using the purchase method of accounting. CT Solutions and
ONES are not material to the financial position or results of operations of the
Company.
In October 1997, the Company acquired substantially all of the assets of
Southern Cats, Inc. and its affiliates (Southern Cats) in exchange for 139,131
shares of the Company's common stock valued at $2.8 million. Southern Cats was
an independent provider of computed tomography and X-ray equipment refurbishment
and service. The acquisition was accounted for using the purchase method of
accounting. Southern Cats is not material to the financial position or results
of operations of the Company.
In May 1997, the Company acquired Cortet, Inc. (Cortet), of Winter Park,
Florida, in exchange for 159,087 shares of the Company's common stock valued at
approximately $3.9 million including acquisition related costs. Cortet was a
developer of client-server information systems for use in cardiac
catheterization laboratories. The acquisition was accounted for using the
purchase method of accounting and the results of Cortet have been included in
the Company's consolidated financial statements subsequent to May 1997. In
connection with the acquisition, the Company recognized $5.1 million of acquired
technology that is being amortized over seven years and a non-ordinary one-time
pre-tax charge to operations of $0.5 million for
33
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 ACQUISITIONS (CONTINUED)
the purchase of acquired in-process research and development. See Note 14,
"Restatement of Financial Statements."
In February 1997, the Company acquired Photon Diagnostic Technologies, Inc.
(Photon), of Miami, Florida, in exchange for 57,143 shares of the Company's
common stock valued at approximately $1.5 million. Photon refurbished, serviced
and supported Elscint nuclear medicine imaging systems. The acquisition was
accounted for as a pooling of interests.
In November 1996, the Company acquired Geometrics Corporation (Geometrics),
of Madison, Wisconsin, a developer of specialized medical software used in the
planning of radiation therapy treatments for cancer patients, in exchange for
190,561 shares of the Company's common stock valued at approximately $3.9
million. The acquisition was accounted for using the purchase method of
accounting and the results of Geometrics have been included in the Company's
consolidated financial statements subsequent to November 1997. In connection
with acquisition, the Company recognized $3.9 million of acquired technology
that is being amortized over seven years. See Note 14 "Restatement of Financial
Statements" of Notes to Consolidated Financial Statements.
If the acquisitions of Geometrics and Cortet had been consummated at the
beginning of fiscal year 1996, the proforma combined revenue, income before
provision for income taxes, net income and earnings per share (diluted) of the
Company and these acquisitions would have been $225.2 million, $6.4 million,
$4.3 million and $0.23, respectively.
In November 1995, the Company acquired JD Technical Services, Inc., of
Washington, Missouri, a leader in nuclear medicine imaging systems refurbishing,
as well as a nationwide provider of multivendor service and support, in exchange
for 138,301 shares of the Company's common stock valued at $1.7 million. The
transaction was accounted for as a pooling of interests.
NOTE 4 CREDIT AND BORROWING ARRANGEMENTS
As of September 27, 1998, the Company had a $60 million revolving credit
facility with a bank syndicate. The credit facility offers borrowings in either
U.S. dollars or in foreign currencies and expires July 30, 1999. In June of
1998, the Company obtained a $1.5 million temporary increase in the credit
facility to cover operational needs. The Company pays interest and commitment
fees on its borrowings based on its debt level in relation to its cash flow.
Commitment fees range from 0.25% to 0.475% of unused commitment and interest
rates are based on the bank's prime rate or Libor plus rates ranging from 0.875%
to 1.5%. Borrowings are generally repaid within 90 days. At September 27, 1998,
the Company had $36.6 million available for borrowing under this facility. The
Company's delay in delivering financial statements and related information to
its banks in connection with the restatement constituted a default under the
facility. The banks have waived the default and consented to an extension of the
time required to provide the information. The Company expects to deliver all
required information within the time period required by the banks.
Borrowings are collateralized by all of the Company's assets, and the
Company is required to comply with certain financial and other covenants,
including restrictions on its ability to acquire or merge with other companies
and to in-cur additional debt.
34
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 CREDIT AND BORROWING ARRANGEMENTS (CONTINUED)
Additional information with respect to such revolving lines of credit is as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------
1998 1997
--------- ---------
($000)
<S> <C> <C>
Maximum borrowings during the year..................................... $ 61,346 $ 55,650
Average borrowings during the year..................................... $ 40,418 $ 39,645
Weighted average interest rates during the year........................ 6.70% 6.62%
</TABLE>
NOTE 5 COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its office and manufacturing facilities under operating
leases which expire at various dates through 2006. The Company is responsible
for maintenance, taxes and insurance on its principal facilities.
As of September 27, 1998, future annual minimum lease payments for all
non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR BUILDING EQUIPMENT
- ----------------------------------------------------------------------- --------- -----------
($000)
<S> <C> <C>
1999................................................................... $ 4,253 $ 3,484
2000................................................................... 4,414 1,104
2001................................................................... 4,334 872
2002................................................................... 4,166 510
2003................................................................... 3,306 458
Thereafter............................................................. 7,830 10
--------- -----------
Total minimum lease payments........................................... $ 28,303 $ 6,438
--------- -----------
--------- -----------
</TABLE>
Rent expense totaled $6.4 million, $5.9 million, and $4.9 million for fiscal
years 1998, 1997 and 1996, respectively.
CAPITAL LEASES
During fiscal 1998, the Company did not enter into any capital leases. In
fiscal 1997, the Company entered into three capital leases all with terms of
three years. Under these agreements, certain leased fixed assets are pledged as
collateral.
35
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of September 27, 1998, future annual minimum lease payments under these
capital leases were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -------------------------------------------------- CAPITAL LEASES
--------------
($000)
<S> <C>
1999.............................................. $ 248
2000.............................................. 82
Thereafter........................................ --
-----
Total minimum lease payments...................... 330
Amount representing interest...................... (22)
-----
Present value of net minimum lease payments....... 308
Less current portion.............................. (229)
-----
$ 79
-----
-----
</TABLE>
Payments under these capital lease obligations totaled $0.3 million, $0.2
million and $0.2 million in fiscal 1998, 1997 and 1996, respectively. As of
September 27, 1998, the Company had $0.9 million of equipment under capital
leases with accumulated amortization of $0.6 million.
LITIGATION
Commencing in December 1998, a total of eleven class action lawsuits were
filed in federal court by or on behalf of stockholders who purchased Company
stock between January 10, 1996 and December 28, 1998. These actions name as
defendants the Company and certain of its present officers and directors. The
complaints allege various violations of the federal securities laws in
connection with restatement of the Company's financial statements and seek
unspecified but potentially significant damages. The Company intends to contest
these actions vigorously. A stockholder derivative action, purportedly on behalf
of the Company and naming as defendants Company officers and directors was also
filed in state court seeking recovery for the Company based on stock sales by
these defendants during the above time period. The Company is also a defendant
in various legal proceedings incidental to its business.
While it is not possible to determine the ultimate outcome of these actions
at this time, management is of the opinion that any unaccrued liability
resulting from these claims would not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flow.
OTHER
Under third party lease program agreements in effect prior to fiscal 1998,
the Company is contingently liable for losses in the event of default by lessees
up to a specified percentage (ranging from 2% to 100%) of the equipment lease,
depending on the agreement, and up to 100% for the related service contracts. At
September 27, 1998 the total contingent liability was $1.8 million.
In conjunction with its third party financing programs the Company sold
certain receivables with 0% to 10% recourse through March 13, 1998, after that
date all receivables sold are without recourse. Proceeds from receivables sold
totaled $1.7 million and $29.8 million in fiscal 1998 and 1997, respectively. As
of September 27, 1998 the contingent liability was $6.0 million.
36
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 CAPITAL STOCK
PREFERRED STOCK
The Board of Directors is authorized to determine the rights and preferences
of the preferred stock, issuable in series. The Board of Directors may increase
or decrease the number of shares of any series of preferred stock, but not below
the number of shares of such series then outstanding.
COMMON STOCK
In fiscal 1997 and 1995, the Board of Directors approved the issuance of
warrants to purchase up to 24,000 and 60,000 shares of common stock,
respectively, to a consulting firm as partial compensation for services rendered
and to be rendered. The exercise price for these warrants were $22.00 and $11.88
and respectively. The warrants were issued proportionately as services were
performed. As of September 27, 1998, 24,000 of these warrants were still
outstanding. For fiscal 1998, 1997 and 1996 the effect on shares used for
calculation of diluted earnings per share were 46,494, 69,655 and 27,500.
As of September 27, 1998, the Company has reserved a total of 3,365,000
shares of common stock for issuance under employee stock option plans and 71,397
under the employee stock purchase plan discussed in Note 7, together with 24,000
shares to cover the warrants described above.
NOTE 7 STOCK PLANS
STOCK OPTION PLANS
The Company currently has one stock option plan for employees and
consultants under which options may be granted, the 1992 Stock Option Plan, as
amended.
The 1992 Option Plan allows for non-qualified as well as incentive options
to be granted to employees, officers, consultants and others. Incentive stock
options must be granted at exercise prices of not less than fair market value
and expire within 10 years from the date of grant. Under the plan, non-qualified
stock options can have exercise prices of not less than 85% of fair market value
and also expire within 10 years of grant date.
In addition, the Company has a directors' stock option plan under which
options are granted to non-employee directors. Options under this plan are
granted for a period of 5 years from the date of grant at an option exercise
price equal to 100% of fair market value.
37
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 STOCK PLANS (CONTINUED)
A summary of the activity under these plans is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- ----------------- ----------- ----------------- ----------- -----------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................ 3,280 $ 13.38 2,873 $ 11.08 2,578 $ 8.32
Granted....................... 1,182 18.42 1,131 17.33 1,159 15.24
Exercised..................... (1,174) 10.31 (564) 9.23 (553) 7.91
Canceled...................... (218) 17.69 (160) 14.60 (311) 9.31
----------- ------ ----- ------ ----- ------
Outstanding at end of year.... 3,070 $ 16.19 3,280 $ 13.38 2,873 $ 11.08
----------- ------ ----- ------ ----- ------
----------- ------ ----- ------ ----- ------
Options exercisable at end of
year........................ 846 $ 13.32 1,073 $ 10.61 631 $ 9.02
Options available for grant at
end of year................. 294 638 653
</TABLE>
The following table summarizes information about stock options outstanding
at September 27, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
REMAINING ------------------------------
NUMBER CONTRACTUAL LIFE IN WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------------------- ----------- ------------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ 6.38 to $14.25................. 402,263 4.15 $ 8.83 352,263 $ 8.41
15.88 to 15.88................. 558,475 7.58 15.88 217,725 15.88
16.00 to 19.38................. 1,262,882 8.32 16.32 246,061 16.99
19.50 to 24.25................. 846,832 9.38 19.69 30,250 22.16
----------- --- ------ ----------- ------
3,070,452 7.93 $ 16.19 846,299 $ 13.32
----------- --- ------ ----------- ------
----------- --- ------ ----------- ------
</TABLE>
38
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 STOCK PLANS (CONTINUED)
The following table discloses the Company's pro forma net income and net
income per share assuming compensation costs for employee stock options had been
determined using the Black-Scholes option-pricing model with the following
assumptions: (i) no dividends, (ii) expected volatility of 56%, 55% and 55% for
fiscal 1998, 1997 and 1996 respectively, (iii) risk free interest rate of 5.95%,
6.16% and 6.23% for fiscal 1998, 1997 and 1996, respectively, (iv) and expected
lives of 3 years, 2 years and 2 years for fiscal 1998, 1997 and 1996
respectively.
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1998 1997 1996
--------- --------- ---------
($000)
<S> <C> <C> <C>
Net income
As reported................................................... $ 7,386 $ 13,474 $ 5,146
Pro forma..................................................... 4,243 11,078 4,340
--------- --------- ---------
Net income per share
Basic...........................................................
As reported................................................... $ .38 $ .73 $ .30
Pro forma..................................................... $ .22 $ .60 $ .25
Diluted
As reported................................................... $ .36 $ .69 $ .28
Pro forma..................................................... $ .21 $ .57 $ .23
--------- --------- ---------
</TABLE>
In addition, on November 10, 1997, HCIS adopted a stock option plan, the
HCIS 1997 Stock Option Plan, for its employees under which options to acquire
common stock of HCIS may be granted. Total shares reserved for the plan are
1,484,968. During fiscal 1998, 1,095,045 options were granted under the plan and
no shares were exercised. Total options outstanding at September 27, 1998 are
966,045. The Company recognized $343,000 of compensation expense in fiscal year
1998 related to this plan pursuant to periodic valuations of HCIS conducted by a
third party valuation consultant. The options granted during fiscal 1998 had an
exercise price of $1.43 and vest over three years and expire within 10 years
from the date of grant.
Because the accounting method prescribed by SFAS 123 is not applicable to
options granted prior to October 3, 1995, the compensation cost reflected in the
pro forma amounts shown above may not be representative of the amounts to be
expected in future years.
EMPLOYEE STOCK PURCHASE PLAN
This plan, as amended, permits eligible employees to purchase common stock
through payroll deductions (which cannot exceed 10% of the employee's
compensation and cannot exceed 100 shares per employee per interim offering
period) at the lower of 85% of fair market value at the beginning of the
applicable offering period or at the end of each interim period. During fiscal
years 1998, 1997, and 1996, 99,000, 56,000 and 64,000 shares were issued at an
average price of $16.22, $15.05, and $10.94 per share, respectively.
39
<PAGE>
NOTE 7 STOCK PLANS (CONTINUED)
PREFERRED SHARE PURCHASE RIGHTS PLAN
In April 1996, the Company's Board of Directors adopted a Preferred Share
Purchase Rights Plan (the "Rights Plan"). Under the Rights Plan, a dividend of
one preferred share purchase right (a "Right") for each outstanding share of
common stock, without par value (the "Common Shares"), of the Company was
declared. Each Right entitles the registered holder to purchase from the Company
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
without par value (the "Preferred Stock"), at a price of seventy dollars
($70.00) per one one-hundredth of a Preferred Share. Each one one-hundredth of a
share of Preferred Stock has designations and the powers, preferences and
rights, and the qualifications, limitations and restrictions which make its
value approximately equal to the value of a Common Share. In general, the Rights
are exercisable upon the commencement of, or announcement of an intention to
make, a tender offer or exchange offer, the consummation of which would result
in the beneficial ownership by a person or group of 15% or more of such
outstanding Common Shares. The Rights expire in April 2006 unless the expiration
date is extended or unless the Rights are earlier redeemed by the Company.
The Rights Plan is designed to provide an adequate opportunity for the
Company's Board of Directors to consider and evaluate all strategic alternatives
of the Company in the event an unsolicited attempt is made to acquire the
Company. The Rights are intended to enable all of the Company's shareholders to
realize the full value of their investment and to provide for fair and equal
treatment for all shareholders. The adoption of the Rights Plan will not, nor is
it intended to, prevent all takeover actions. The Rights were not distributed in
response to any proposal to acquire the Company.
NOTE 8 RETIREMENT SAVINGS PLAN
The Company maintains a qualified retirement plan, under the provisions of
Section 401(k) of the Internal Revenue Code, in which eligible employees may
participate. Substantially all participants in this plan are able to defer
compensation up to the annual maximum amount allowable under Internal Revenue
Service regulations. Additionally, the Company may match employee contributions
with discretionary amounts as may be determined by the Board of Directors.
During fiscal 1998, 1997 and 1996 the Company matched employee contributions up
to a maximum of $500 per employee, totaling $0.3 million. $0.3 million and $0.2
million, respectively.
NOTE 9 NON-ORDINARY ITEMS
On September 25, 1998, the Company concluded a comprehensive review of its
operations and decided to discontinue its physician network services business.
As a result, the Company took a non-ordinary charge in the fourth quarter of
fiscal 1998 of $1.9 million. The Company decided to discontinue this business in
the fourth quarter of fiscal 1998 and focus on its core businesses, since, among
other things, this business did not contribute meaningfully to the Company's
results in fiscal 1998, and was not expected to do so in future periods.
In connection with the Company's evaluation of its operations, the Company
identified certain assets, consisting of capitalized consulting and banking
expenses that had been incurred for specific potential acquisitions, and
determined it was appropriate to write off these assets since the acquisitions
would not occur. Accordingly, the Company has included a charge of $1.3 million
in its results of operations for the fourth quarter of fiscal 1998 for these
assets.
On February 10, 1998, the Company decided to discontinue the HCIS business
unit's LabStat product while retaining the laboratory support and maintenance
business. The decision was made after the Company's Board of Directors
determined that continuing development and marketing of LabStat was not in the
best interest of the Company and its shareholders and that all meaningful
discussions with possible
40
<PAGE>
NOTE 9 NON-ORDINARY ITEMS (CONTINUED)
strategic partners had ceased. This decision has allowed the Company to increase
its focus on the radiology business resulting in greater profitability for both
HCIS and ADAC as a whole.
The Company's decision to discontinue LabStat resulted in a non-ordinary
discontinued product charge of $11.3 million. The charge was a consequence of
the Company determining that certain assets utilized in the development and
marketing of LabStat became impaired as a result of the Company's decision. The
discontinued business charge consisted principally of non-cash charges,
including the write off of $4.9 million of capitalized software, $4.7 million of
deferred product costs, $0.6 million of fixed assets that were specifically
utilized in the LabStat product, $1.0 million in legal and other expenses that
were accrued as part of the write-off and $0.1 million in receivables.
In connection with the Company's evaluation of its laboratory information
systems business, the Company also conducted an analysis of the recoverability
of certain assets utilized in the Company's Digital Subtraction Angiography
(DSA) business and determined it was appropriate to write off certain of these
assets. Accordingly, the Company included an impairment charge of $2.4 million
in its results of operations for the first quarter of fiscal 1998 related to
these assets. The decision to write off the DSA assets, consisting primarily of
inventory, was a result of the Company's decision to no longer market the
product due to steadily declining revenues. The combined non-ordinary write off
for LabStat and DSA was $13.7 million.
In conjunction with the acquisition of Cortet in June 1997, the Company
identified certain assets, consisting of capitalized consulting and banking
expenses relating to other specific acquisitions, and determined it was
appropriate to write off these assets since the acquisitions would not occur. As
a result, the Company included a charge for $0.7 million in its results of
operations for the third quarter of fiscal 1997 for these assets.
NOTE 10 INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1998 1997 1996
--------- --------- ---------
($000)
<S> <C> <C> <C>
Current:
Federal........................................................ $ 6,495 $ (854) $ 3,532
Foreign........................................................ 496 411 379
--------- --------- ---------
6,991 (443) 3,911
Deferred:
Federal........................................................ (2,537) 8,165 (1,217)
State.......................................................... 268 893 329
--------- --------- ---------
(2,269) 9,058 (888)
--------- --------- ---------
Total............................................................ $ 4,722 $ 8,615 $ 3,023
--------- --------- ---------
--------- --------- ---------
</TABLE>
41
<PAGE>
NOTE 10 INCOME TAXES (CONTINUED)
The reconciliation of the provision for income taxes, computed at the
marginal federal statutory income tax rate, to the reported amounts is as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1998 1997 1996
--------- --------- ---------
($000)
<S> <C> <C> <C>
Income taxes at marginal Statutory rate of 35%................... $ 4,238 $ 7,731 $ 2,859
State income taxes, net of federal benefit....................... 475 720 214
Non-deductible items............................................. 1,184 949 638
Change in valuation allowance.................................... (834) (704) (844)
Business credits................................................. (833) (597) (239)
Other............................................................ 492 516 395
--------- --------- ---------
Provision for income taxes....................................... $ 4,722 $ 8,615 $ 3,023
--------- --------- ---------
--------- --------- ---------
</TABLE>
As of September 27, 1998, the Company had net operating loss carryforwards
of approximately $56.2 million available to offset future federal taxable income
and approximately $3.7 million available to offset future taxable income in
various foreign jurisdictions. Federal operating loss carryforwards of $30.8
million expire 2006 to 2010, and foreign operating loss carryforwards expire
beginning in fiscal year 2008. The federal operating loss carryforwards expiring
2006 to 2010 are subject to certain restrictions on their utilization. The
Company also has federal credit carryforwards of $9.9 million which will expire
beginning in fiscal year 2010.
Significant components of the Company's deferred tax assets and liabilities
at September 27, 1998 and September 28, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------
1998 1997
----------- -----------
($000)
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards.................................. $ 21,452 $ 21,813
Federal credit carryforwards...................................... 9,877 8,377
Inventory valuation............................................... 1,101 1,691
Employee benefits................................................. 722 555
Accrued customer service costs.................................... -- 938
Deferred income................................................... 2,259 623
Other............................................................. 816 599
----------- -----------
36,227 34,596
Less valuation allowance............................................ (12,060) (12,894)
----------- -----------
Deferred income tax assets.......................................... 24,167 21,702
----------- -----------
Deferred income tax liabilities:
Acquired technology............................................... 2,579 3,047
Fixed assets...................................................... 6,596 5,928
Software development costs........................................ 4,470 4,658
Other............................................................. 381 197
----------- -----------
Deferred income tax liabilities..................................... 14,026 13,830
----------- -----------
Net deferred income tax assets/(liability).......................... $ 10,141 $ 7,872
----------- -----------
----------- -----------
</TABLE>
42
<PAGE>
NOTE 10 INCOME TAXES (CONTINUED)
The valuation allowance identified above relates to net operating loss
carryforwards of certain foreign and domestic subsidiaries. Approximately $10.3
million of the valuation allowance when reduced will be first credited to
unamortized goodwill in accordance with SFAS 109.
NOTE 11 SEGMENT INFORMATION AND FOREIGN OPERATIONS
The Company develops, manufactures, sells and services medical imaging
equipment and radiation therapy planning and health care information software
systems to hospitals and clinics worldwide. Accordingly, the Company's
operations are now derived from two major business units, Medical Systems (MS)
and the Software (SW) business. Prior to fiscal 1998, the results of the
Company's RTP division were considered immaterial and were therefore included as
part of Medical Systems for the purposes of Management's Discussion and
Analysis. However, due to RTP's continued growth, its results are now presented
with the Company's other software business, HCIS. All historical data and
comparisons have been restated to reflect this change. The following table
summarizes the results of operations for the Company's two major business
segments.
<TABLE>
<CAPTION>
FISCAL 1998
--------------------------------------------
MS SW OTHER TOTAL
---------- --------- --------- ----------
($000)
<S> <C> <C> <C> <C>
Revenues $ 226,931 $ 73,597 $ 0 $ 300,528
Operating income (loss)(1).......................................... 14,370 4,048 (1,972) 16,446
Depreciation and amortization....................................... 7,317 5,078 0 12,395
Capital expenditures................................................ 4,082 848 0 4,930
Total assets........................................................ 215,646 27,969 194 243,809
</TABLE>
- ------------------------
(1) Operating income for the Medical Systems, Software and Other business units
includes the effects of non-ordinary pre-tax charges of $3.7 million, $11.3
million and $1.9 million respectively. Excluding these charges operating
income for Medical Systems, Software and Other business units would have
been $18.0 million, $15.4 million, and $(0.1) million, respectively.
<TABLE>
<CAPTION>
FISCAL 1997
--------------------------------------------
MS SW OTHER TOTAL
---------- --------- --------- ----------
($000)
<S> <C> <C> <C> <C>
Revenues............................................................. $ 218,377 $ 45,226 $ 284 $ 263,887
Operating income (loss)(2)........................................... 27,786 70 (496) 27,360
Depreciation and amortization........................................ 5,808 5,317 0 11,125
Capital expenditures................................................. 4,263 1,903 0 6,166
Total assets......................................................... 151,520 42,061 1,518 195,099
</TABLE>
- ------------------------
(2) Operating income for the Software business unit includes the effects of a
non-ordinary pre-tax charge of approximately $0.5 million for the write off
of in-process research and development related to the
43
<PAGE>
NOTE 11 SEGMENT INFORMATION AND FOREIGN OPERATIONS (CONTINUED)
acquisition of Cortet, Inc., and $0.7 million of uncompleted acquisition
costs and related expenses. Excluding this charge, operating income for the
Software business unit was $1.3 million.
<TABLE>
<CAPTION>
FISCAL 1996
----------------------------------------------
MS SW OTHER TOTAL
---------- --------- ----------- ----------
($000)
<S> <C> <C> <C> <C>
Revenues.............................................................. $ 188,337 $ 34,249 $ 0 $ 222,586
Operating income (loss)............................................... 13,681 (1,202) (85) 12,394
Depreciation and amortization......................................... 6,752 3,913 0 10,665
Capital expenditures.................................................. 1,997 792 0 2,789
Total assets.......................................................... 142,843 35,047 0 177,890
</TABLE>
Additionally, the Company has European operations which are those of its
subsidiaries in the Netherlands, France, Germany, Denmark, the United Kingdom
and Italy, and substantially all of their sales are made to unaffiliated
European customers. The following table summarizes the Company's European
subsidiaries' operations:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1998 1997 1996
--------- --------- ---------
($000)
<S> <C> <C> <C>
Revenues..................................................... $ 30,842 $ 32,308 $ 30,475
Net income (loss)............................................ (3,625) 397 419
Total assets................................................. 34,842 28,347 29,335
</TABLE>
The Company also has a subsidiary in Brazil and certain operations in Latin
America and Asia, none of which are material to the financial position or
results of operations of the Company.
NOTE 12 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) SEE NOTE 14 "RESTATEMENT OF
FINANCIAL STATEMENTS" OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
FISCAL 1998
-----------------------------------------------------------------------------------
FOURTH
QUARTER(2)
-----------
FIRST QUARTER SECOND QUARTER THIRD QUARTER
---------------------- ---------------------- ----------------------
AS AS AS
ORIGINALLY ORIGINALLY ORIGINALLY
RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED
--------- ----------- --------- ----------- --------- -----------
($000 EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 67,438 $ 75,523 $ 74,522 $ 77,378 $ 69,756 $ 83,521 $ 88,812
Gross profit.................... 13,941(1) 28,408 31,679 32,944 29,368 36,246 32,843(1)
Net income (loss)............... (5,476 (1) (3,698) 5,379 7,004 3,383 7,500 4,100
Net income per share--
diluted....................... (.29) (.19) .27 .35 .17 .37 .20
</TABLE>
- ------------------------
(1) Gross profit, net income and net income per share in the first quarter
includes the effects of a non-ordinary pre-tax charge of approximately $14.5
million. The charge consists of $13.6 million for the discontinuance of the
Company's LabStat product and $2.9 million for impairment of assets utilized
in the Company's DSA business. $0.3 million and $0.5 million of this charge
were reversed in the fourth quarter because the Company lowered estimates of
liabilities associated with LabStat and because the Company was able to
redeploy certain of impaired DSA assets elsewhere in its business,
respectively.
44
<PAGE>
NOTE 12 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) SEE NOTE 14 "RESTATEMENT OF
FINANCIAL STATEMENTS" OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
(2) Fourth quarter adjustments include the effect of non-ordinary charges
aggregating approximately $8.2 million. These charges include a $4.9 million
carrying value adjustment for inventory at the Company's AMT facility, a
$1.0 million write off of a European distributor receivable, the write off
of $1.3 million of acquisition costs for non-consummated transactions and a
charge of $1.9 million related to the discontinuation of the MTS business,
less $0.9 million in charges taken in the first quarter reversed as the
amount of the charges was reexamined at the end of the fiscal year. With
respect to the $4.9 million inventory charge management after critical
review determined that it was not possible to carry the inventory charge
back to prior periods with any degree of precision. Consequently the total
amount is recorded in the fourth quarter after it was discovered and the
amount was determined.
<TABLE>
<CAPTION>
FISCAL 1997
----------------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
---------------------- ---------------------- ---------------------- ----------------------
AS AS AS AS
ORIGINALLY ORIGINALLY ORIGINALLY ORIGINALLY
RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED
--------- ----------- --------- ----------- --------- ----------- --------- -----------
($000 EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $ 63,079 $ 68,365 $ 61,555 $ 69,976 $ 65,256 $ 71,510 $ 73,997 $ 72,480
Gross profit.......... 21,891 27,527 26,129 28,988 25,918 29,669 29,847 30,124
Net income............ 2,082 5,093 3,546 5,552 2,768(1) 106 5,078 6,027
Net income per
share--diluted...... .11 .27 .18 .29 .14(1) .01 .26 .31
</TABLE>
- ------------------------
(1) Net income and net income per share include the effects of non-ordinary
pre-tax charges of approximately $0.5 million for the write off of acquired
in-process research and development related to the acquisition of Cortet,
Inc., and $0.7 million of uncompleted acquisition costs and related
expenses.
The sum of a year's quarterly earnings per share does not equal the annual
earnings per share as a result of changes in the outstanding number of shares
during the year and the application of the treasury stock method, which
considers changes in the market price of common stock during each period. See
Note 1, "Income Per Share".
NOTE 13 RECENT PRONOUNCEMENTS
In 1997, Financial Accounting Standard 130, "Reporting Comprehensive Income"
("FAS 130"), was issued and is effective for fiscal years commencing after
December 15, 1997. The Company will comply with the requirements of FAS 130 in
fiscal year 1999. This statement expands or modifies disclosures and will have
no impact on the Company's consolidated financial position, results of
operations or cash flows.
In 1997, Financial Accounting Standard 131, "Disclosures About Segments of
an Enterprise and Related Information" ("FAS 131"), was issued and is effective
for fiscal years commencing after December 15, 1997. The Company will comply
with the requirements of FAS 131 in fiscal year 1999. The Company is evaluating
alternative formats for presenting this information. This statement expands or
modifies disclosures and will have no impact on the Company's consolidated
financial position, results of operations or cash flows.
In 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position ("SOP 98-9"), "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions." This SOP amends "SOP
97-2," Software Revenue Recognition. The Company will comply
45
<PAGE>
NOTE 13 RECENT PRONOUNCEMENTS (CONTINUED)
with the requirements of SOP 98-9 in fiscal year 2000. The Company is currently
assessing the implications of this new statement and the impact of its
implementation on the financial statements.
NOTE 14 RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the Company's announcement on November 5, 1998 of the results
of operations for its fourth fiscal quarter and fiscal year ending September 27,
1998, the Company commenced a review of its accounting principles and their
historic application. On December 29, 1998, the Company announced that its
financial results for fiscal years 1996, 1997 and the first three quarters of
fiscal 1998 would be restated and that its previously announced results for the
fourth fiscal quarter would change.
The Company completed an extensive and critical review of revenue recorded
for each year of fiscal 1996 through 1998. In deciding when revenue would be
recognized, the Company applied a more stringent revenue recognition policy than
it had in the past. The items recognized and restated were primarily certain
sales transactions by the Company's Medical Systems business unit where products
sold had been shipped to a destination other than their final installation
location. The primary impact of the revenue restatement was to move revenue and
associated costs forward to future periods, including fiscal 1999. Costs,
expenses and return reserves associated with the restated revenues were also
adjusted.
The Company adjusted a number of non-ordinary charges taken during the
restated periods. The adjustments included a reduction in the acquired
in-process research and development charge taken in the third quarter of fiscal
1997 to reflect recent SEC interpretations. The Company also reduced the non-
ordinary international restructuring charge taken in the fourth quarter of
fiscal 1998 and moved it forward to fiscal 1999 due to a delay in implementing
certain aspects of the plan. In addition, the Company adopted completed contract
accounting for the LabStat product, which resulted in the Company's reversing
approximately $6 million of revenues (together with associated costs) previously
recognized in fiscal 1996 and 1997, and correspondingly reducing the
non-ordinary charge for the discontinuation of the LabStat product previously
taken in the first quarter of fiscal 1998.
The Company also undertook a review of its asset carrying values, accruals
and expenses, financial instruments and financial statements in each restated
period and made certain adjustments to these items throughout those periods. The
Company also restated the Geometrics acquisition from pooling accounting to
purchase accounting.
46
<PAGE>
NOTE 14 RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
A summary of the effects of the restatement follows:
ADAC LABORATORIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------
SEPTEMBER 28, 1997 SEPTEMBER 29, 1996
------------------------ ------------------------
AS AS
ORIGINALLY ORIGINALLY
RESTATED REPORTED RESTATED REPORTED
---------- ------------ ---------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES, NET:
Product................................................... $ 194,238 $ 211,831 $ 159,744 $ 177,613
Service................................................... 69,649 70,500 62,842 63,172
---------- ------------ ---------- ------------
263,887 282,331 222,586 240,785
---------- ------------ ---------- ------------
COST OF REVENUES:
Product................................................... 114,639 121,766 102,792 108,091
Service................................................... 45,463 44,256 39,691 39,542
---------- ------------ ---------- ------------
160,102 166,022 142,483 147,633
---------- ------------ ---------- ------------
Gross profit................................................ 103,785 116,309 80,103 93,152
---------- ------------ ---------- ------------
OPERATING EXPENSES:
Marketing and sales....................................... 41,664 42,445 37,561 36,275
Research and development.................................. 16,728 15,693 14,044 12,516
General and administrative................................ 15,836 16,932 15,312 14,250
Goodwill amortization..................................... 1,015 792 792 792
Acquired in-process research and development.............. 531 5,862 -- --
Acquisition expense write off............................. 651 -- -- --
---------- ------------ ---------- ------------
76,425 81,724 67,709 63,833
---------- ------------ ---------- ------------
Operating income............................................ 27,360 34,585 12,394 29,319
---------- ------------ ---------- ------------
OTHER EXPENSE:
Interest and other, net................................... 5,271 4,940 4,225 3,407
---------- ------------ ---------- ------------
Income before provision for income taxes.................... 22,089 29,645 8,169 25,912
Provision for income taxes.................................. 8,615 12,867 3,023 9,275
---------- ------------ ---------- ------------
Net income.................................................. $ 13,474 $ 16,778 $ 5,146 $ 16,637
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
Net income per share
Basic..................................................... $ .73 $ .91 $ .30 $ .96
Diluted................................................... $ .69 $ .86 $ .28 $ .90
Number of shares used in per share calculations
Basic..................................................... 18,419 18,413 17,360 17,360
Diluted................................................... 19,534 19,528 18,507 18,507
</TABLE>
47
<PAGE>
ADAC LABORATORIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 28, 1997
------------------------
AS
ORIGINALLY
RESTATED REPORTED
---------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 5,088 $ 5,088
Trade receivables, net................................................................. 47,112 98,035
Tax and other receivables.............................................................. 1,460 1,460
Inventories, net....................................................................... 52,672 27,534
Prepaid expenses and other current assets.............................................. 3,570 10,155
---------- ------------
Total current assets................................................................. 109,902 142,272
Service parts, net..................................................................... 16,469 17,278
Fixed assets, net...................................................................... 9,789 11,555
Capitalized software, net.............................................................. 12,265 14,007
Intangibles, net....................................................................... 21,703 10,110
Deferred income taxes.................................................................. 21,702 8,249
Other assets, net...................................................................... 3,269 3,524
---------- ------------
Total Assets......................................................................... $ 195,099 $ 206,995
---------- ------------
---------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks................................................................. $ 22,217 $ 22,217
Accounts payable....................................................................... 10,543 10,543
Deferred revenues...................................................................... 15,017 11,561
Customer deposits and advance billings................................................. 2,826 2,841
Accrued compensation................................................................... 7,567 7,522
Warranty and installation.............................................................. 3,713 4,495
Other accrued liabilities.............................................................. 7,222 6,620
---------- ------------
Total current liabilities............................................................ 69,105 65,799
Non-current deferred income taxes...................................................... 13,830 11,103
Non-current liabilities and deferred credits........................................... 4,073 3,596
---------- ------------
Total Liabilities.................................................................... 87,008 80,498
---------- ------------
Commitments and contingencies
Shareholders' equity
Preferred stock, no par value:
Authorized: 5,000 shares;
Issued and outstanding: none in 1997
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 18,812 shares as of September 28, 1997....................... 128,109 123,269
Retained earnings/(accumulated deficit)................................................ (17,652) 5,593
Translation adjustment................................................................. (2,366) (2,365 )
---------- ------------
Shareholders' Equity................................................................... 108,091 126,497
---------- ------------
Total Liabilities and Shareholders' Equity............................................. $ 195,099 $ 206,995
---------- ------------
---------- ------------
</TABLE>
48
<PAGE>
To the Board of Directors and Shareholders of ADAC Laboratories and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows,
after the restatement described in Note 14, present fairly, in all material
respects, the financial position of ADAC Laboratories and its Subsidiaries (the
"Company") at September 27, 1998 and September 28, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended September 27, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
February 26, 1999
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
Descriptions of the Company's current directors are set forth below.
Mr. Stanley D. Czerwinski, age 63, has served as a director since November
1991 and served as Chairman of the Board of the Company from February 1992 until
March 1996. Mr. Czerwinski previously served as the Company's Chief Executive
Officer, President and Chief Operating Officer at various times since January
1991. He originally joined the Company in May 1986. Mr. Czerwinski is currently
serving as a consultant to the Company. Prior to joining the Company, Mr.
Czerwinski served for seventeen years in various management capacities at TRW,
including Director of Sales and Marketing for the Electronics Components Group,
and General Manager of the Semiconductor Division.
Mr. R. Andrew Eckert, age 37, has served as a director since April 1996. In
August 1997, Mr. Eckert became the Chief Executive Officer of the Company. From
March 1997 until August 1997, Mr. Eckert served as the President and Chief
Operating Officer of the Company. From November 1994 to March 1997, he served as
President and General Manager of ADAC Medical Systems, and from February 1992 to
November 1994, he served as Executive Vice-President and General Manager of the
Company's nuclear medicine business. Mr. Eckert joined the Company in February
1990 and from that date until February 1992 held several other senior management
positions with the Company. Prior to joining the Company, Mr. Eckert worked in
the venture capital and investment banking industries with Summit Partners and
Goldman Sachs, respectively.
Mr. Graham O. King, age 58, has served as a director since June 1995. Mr.
King is currently a Senior Vice President with McKesson HBO & Company, which
delivers software solutions and related services to healthcare organizations.
From 1994 to 1998, Mr. King was the Chairman and Chief Executive Officer of US
Servis, Inc., a healthcare management services company. From 1986 to 1993, Mr.
King was with Shared Medical Systems, a company specializing in hospital
information systems, most recently serving as its President from 1988.
Previously, Mr. King served as President of Daseke and Company from 1983 to 1986
and as President and Chief Executive Officer of Auto-Troll Technology, a
computer-aided design software company, from 1979 to 1982. Mr. King also held
various management level positions with IBM from 1965 to 1979. Mr. King
currently serves as a director of Optika Imaging Systems, Inc., a leading
provider of client/server, integrated imaging systems and development tools, and
Longview Solutions, which develops software for budgeting and financial
reporting.
Mr. David L. Lowe, age 38, has served as a director since August 1992, and
has been serving as Chairman of the Board of Directors since March 1996. In
March 1998, Mr. Lowe joined Friedman & Fleischer, LLC, a private investment firm
specializing in equity investments in buyouts, restructurings, recapitalizations
and friendly minority stakes in public and private companies, as Vice Chairman.
From November 1994 until August 1997, Mr. Lowe served as Chief Executive Officer
of the Company, from March 1994 until November 1994, as Co-Chief Executive
Officer, and from February 1992 until November 1994 as President of the Company.
He joined the Company in April 1988 and from that time until February 1992
served in a variety of senior management positions, including Chief Operating
Officer. Prior to joining the Company, Mr. Lowe held management and consulting
positions with several firms or companies providing services to or engaged in
high-technology industries, including Bain & Company and
50
<PAGE>
Cygnet Systems, Inc. Mr. Lowe serves on the Board of Directors of Vivra
Specialty Partners and the National Children's Cancer Society.
Dr. F. David Rollo, age 59, has served as a director since 1991 and is
currently the Senior Vice-President of Medical Affairs and Executive Medical
Director of Raytel Medical Corporation, a leading cardiology services company.
From April 1995 to May 1996, Dr. Rollo served as Senior Vice President of
Medical Affairs for HCIA, a healthcare information company that develops and
markets clinical and financial decision support systems. From October 1992 to
April 1995, he served as President and Chief Executive Officer of MetriCor,
Inc., a corporation engaged in medical technology, quality assurance and health
information management consulting services. From 1984 until October 1992, Dr.
Rollo served as Senior Vice President-Medical Affairs for Humana Inc. Prior to
that, he served as Vice President for Humana from 1980 until 1984. He has held
various academic and administrative positions with Vanderbilt University Medical
Center since 1977, currently serving as Adjunct Professor of Radiology.
Mr. Edmund H. Shea, Jr., age 69, has served as a director since 1987. He
co-founded, and since 1968 has served as the Executive Vice-President and a
director of, J.F. Shea Co., Inc., a diversified construction, land development
and venture investments company. He was elected a director of Hambrecht & Quist
Group in November 1986 and also serves as a director of Ironstone Group, Inc., a
real and personal property tax appeal company.
To the knowledge of the Company, there are no arrangements or understandings
between these directors and any other person pursuant to which any of these
directors was elected.
During fiscal 1998, each non-employee director received an option to
purchase 3,333 shares of the Company's Common Stock under the Company's
Directors' Stock Option Plan, subject to a specified vesting schedule. In
addition, each non-employee director received an annual retainer of $10,000,
payable in quarterly installments, and $2,500 for each Board meeting attended in
person and $500 for each Board meeting attended by telephone. From October 1997
through January 1998, Mr. Lowe was employed by the Company and received $238,000
in compensation. Beginning in February 1998 Mr. Lowe entered into a consulting
arrangement with the Company pursuant to which the Company paid Mr. Lowe
$258,000.
OFFICERS
Descriptions of the Company's current officers are set forth below.
Mr. Bruce M. Blanco, age 49, has served as Vice President and Corporate
Controller of the Company since April 1998. For three months of fiscal 1997,
when he joined the Company, until April 1998, he served as Corporate Controller.
Prior to that, Mr. Blanco served as Corporate Controller of Triad Systems, Inc.,
and President and General Manager of Triad Financial, Inc., a wholly owned
subsidiary of Triad Systems, Inc.
Mr. Gerhard F. Burbach, age 37, currently serves as President of the Medical
Systems division of the Company. From September 1996, when he joined the
Company, until September 1998, Mr. Burbach served as Senior Vice President and
General Manager of the Radiation Therapy Products division of the Company. Prior
to joining the Company, from 1990 to 1996, Mr. Burbach was a Senior Engagement
Manager for McKinsey & Company, a management consulting firm.
Mr. Earl H. Devanny III, age 47, was elected President of ADAC Healthcare
Information Systems, Inc. ("HCIS"), the Company's healthcare information system
subsidiary, in July 1998. From January 1997, when he joined HCIS, until that
date, he served as Chief Operating Officer of HCIS. From April 1994 until
January 1997, Mr. Devanny served as Vice President and Area General Manager of
Cerner Corporation, a healthcare information systems company. Prior to that,
from 1990 to 1994, Mr. Devanny served as the Business Unit Executive, Health
Section, Mid-Atlantic Area, of IBM Corporation.
51
<PAGE>
Mr. Ian R. Farmer, age 49, currently serves as Senior Vice President of
Business Development for the Company. From 1995 to 1997, he served as Senior
Vice President and General Manager of Nuclear Medicine. From 1993, when he
joined the Company, until 1995, he served as Vice President of Marketing.
Ms. Karen L. Masterson, age 38, has served as the Company's Vice President,
General Counsel and Corporate Secretary since she joined the Company in October
1996. From January 1995 to October 1996, Ms. Masterson served as the Director of
Intercontinental Legal Affairs for Sybase, Inc., a relational database software
company. From January 1993 to December 1994, she was a partner, and prior to
that, an associate, in the law firm of Morrison & Foerster in San Francisco,
California.
Mr. P. Andre Simone, age 41, has served as the Company's Chief Financial
Officer since June 1996 and Treasurer since May 1994, when he joined the
Company. From October 1995 to June 1996, Mr. Simone served as Vice President,
Finance of the Company. Prior to joining the Company, Mr. Simone served as the
Assistant Treasurer for The Ask Group, Inc., a database and manufacturing
accounting software firm, from February 1993 to March 1994. Prior to that time,
he held positions with Emcor Treasury Consultants, Hewlett Packard and Bain &
Company.
The term of office of each of the above-named executive officers is at the
pleasure of the Board of Directors. To the knowledge of the Company, there are
no arrangements or understandings between these officers and any other person
pursuant to which any of these officers was elected as an officer.
52
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth all compensation earned by or paid or awarded
to Mr. Eckert, the Chief Executive Officer of the Company, and to the next four
most highly compensated executive officers of the Company for all services
rendered in all capacities for the periods shown.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION HCIS(2)
------------------------------------------------ STOCK STOCK LONG TERM
FISCAL OPTION OPTION INCENTIVE
NAME AND CURRENT POSITION YEAR SALARY BONUS OTHER(1) AWARDS AWARDS PAYOUTS ALL OTHER
- ------------------------------ ----------- ---------- ---------- ----------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R. Andrew Eckert ............. 1998 $ 450,000 $ 240,000 -- 170,000 107,931 -- --
Chief Executive Officer 1997 325,000 155,000 -- 100,000 -- --
1996 200,000 255,000 -- 90,000 -- --
Gerhard F. Burbach(3) ........ 1998 154,000 138,000 -- 75,000 -- --
President, ADAC Medical
Systems
Earl H. Devany(3) ............ 1998 206,000 216,000 -- 60,000 300,000 -- --
President, ADAC Healthcare
Information Systems, Inc.
Ian R. Farmer(3) ............. 1998 175,000 109,000 -- 55,000 -- --
Senior Vice President
Business Development
P. Andre Simone .............. 1998 220,000 81,000 -- 45,000 -- --
Vice President, Chief 1997 168,000 84,000 -- 20,000 -- --
Financial Officer and 1996 122,000 67,000 -- 20,000 -- --
Treasurer
</TABLE>
- ------------------------
(1) Not included in the compensation table are certain perquisites and other
benefits which do not, in the aggregate, exceed the lesser of either $50,000
or 10% of the total annual salary and bonus reported for each named
executive officer.
(2) Represents options to acquire common stock of the Company's subsidiary, ADAC
Healthcare Information Systems, Inc ("HCIS") under its 1997 Stock Option
Plan.
(3) Messrs. Burbach, Devanny and Farmer became executive officers of the Company
in fiscal 1998.
53
<PAGE>
STOCK OPTIONS GRANTED
The following table sets forth certain information concerning stock option
grants made to certain executive officers during fiscal 1998. No other option
grants were made to the named executive officers during fiscal 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE VALUE
-------------------------------------------------------------- AT ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION
SECURITIES OPTIONS GRANTED PER SHARE FOR OPTION TERM(2)
UNDERLYING TO EMPLOYEE EXERCISE EXPIRATION --------------------------
NAME OPTIONS GRANTED IN 1998 PRICE($) DATE 5% 10%
- -------------------------- --------------- ------------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
R. Andrew Eckert.......... 80,000 6.7 $ 16.00 12-18-08 $ 804,985 $ 2,039,990
90,000 7.5 19.50 06-02-08 1,103,710 2,797,018
107,931(3) 10.4(4) 4.29 11-07-07 291,193 737,941
Gerhard F. Burbach........ 25,000 2.1 16.00 12-18-08 251,558 637.497
50,000 4.2 19.50 06-02-08 613,172 1,553,899
Earl H. Devanny........... 60,000 5.0 19.50 06-02-08 735,807 1,864,679
300,000(3) 28.8(4) 4.29 11-07-07 809,387 2,051,147
Ian R. Farmer............. 15,000 1.2 16.00 12-18-08 150,935 382,498
40,000 3.3 19.50 06-02-08 490,538 1,243,119
P. Andre Simone........... 15,000 1.2 16.00 12-18-08 150,935 382,498
30,000 2.5 19.50 06-02-08 367,903 932,339
</TABLE>
- ------------------------
(1) All option grants, except those described in footnote (3) below, were made
by the Company under the Company's 1992 Stock Option Plan.
(2) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and are not an estimate or projection
of future prices or appreciation of the Company's Common Stock or the actual
future value of these options.
(3) Represents grants by the Company's subsidiary, ADAC Healthcare Information
Systems, Inc. ("HCIS"), under its 1997 Stock Option Plan.
(4) Represents percentage of total options granted under HCIS 1997 Stock Option
Plan.
The foregoing stock options vest in increments of 25%, 25% and 50% over
three years from the date of grant. At the time of grant, options may be
designated as incentive stock options ("ISO's"), a type of option authorized
under the 1981 amendments to the Internal Revenue Code. Options not designated
as an ISO are granted as "non-qualified options." Options generally remain
outstanding for five years or ten years from the date of grant, provided the
recipient remains employed throughout that period. The post-termination exercise
period is generally three months.
54
<PAGE>
AGGREGATED STOCK OPTION EXERCISES AND YEAR-END STOCK OPTION VALUES
The following table sets forth certain information concerning the exercise
of stock options by the Company's executive officers during fiscal 1998, the
"value realized", and the number and value of unexpired stock options at
September 27, 1998 which such executive officers can exercise or in the future
could exercise.
<TABLE>
<CAPTION>
TOTAL VALUE OF
NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY
STOCK OPTIONS HELD AT STOCK OPTIONS HELD AT
SEPTEMBER 27, 1998 SEPTEMBER 27, 1998(2)
SHARES ACQUIRED VALUE -------------------------- ---------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- --------------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Eckert................... 110,935 $ 1,511,600 104,815 290,000 $ 1,092,900 $ 2,300,600
Burbach.................. -- -- 5,000 110,000 45,000 747,500
Devanny.................. -- -- 12,500 97,500 112,500 667,500
Farmer................... 30,500 509,300 46,250 93,750 617,800 705,300
Simone................... -- -- 38,750 70,000 548,100 526,200
</TABLE>
- ------------------------
(1) The "value realized" is calculated by determining the difference between the
fair market value of ADAC Common Stock on the date of exercise of the
options and the exercise price of such options.
(2) The value of unexercised stock options is calculated by determining the
difference between the closing price of ADAC Common Stock on Friday,
September 25, 1998, the last trading day of fiscal 1998, as reported on the
Nasdaq Stock Market, of $25.00, and the exercise price of such options.
CHANGE IN CONTROL AGREEMENTS
The Company has entered into Executive Severance Agreements with Messrs.
Eckert, Burbach, Devanny, Farmer and Simone. These Agreements provide for a
severance payment and acceleration of the exercisability of the executives'
stock options upon a "change in control" of the Company. A "change in control"
is deemed to occur if (a) any "person" or "group" (as defined in or pursuant to
Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), becomes the "beneficial owner" (as defined in Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of securities of
the Company representing 40% or more of the voting power of the common stock
outstanding which votes generally for the election of directors; (b) as a result
of market or corporate transactions or shareholder action, the individuals who
constitute the Board of Directors of the Company at the beginning of any period
of 12 consecutive months (but commencing not earlier than July 1, 1995), plus
any new directors whose election or nomination was approved by a vote of at
least two-thirds of the directors still in office who were directors at the
beginning of such period of 12 consecutive months, cease for any reason during
such period of 12 consecutive months to constitute at least two-thirds of the
members of such Board; or (c) the Company sells, through merger, assignment or
otherwise, in one or more transactions other than in the ordinary course of
business, assets which provided at least 2/3 of the revenues or pre-tax net
income of the Company and its subsidiaries on a consolidated basis during the
most recently-completed fiscal year.
Notwithstanding the foregoing, the following events do not constitute a
change in control: any acquisition of beneficial ownership pursuant to (a) a
reclassification, however effected, of the Company's authorized common stock,
(b) a corporate reorganization involving the Company or any of its subsidiaries
which does not result in a material change in the ultimate ownership by the
shareholders of the Company (through their ownership of the Company or its
successor resulting from the reorganization) of the assets of the Company and
its subsidiaries, but only if such reclassification or reorganization has been
approved by the Company's Board of Directors or (c) a spin-off by the Company of
all or any portion of the ownership of any subsidiary whereby the Company's
shareholders become shareholders of the subsidiary.
55
<PAGE>
If a change in control of the Company occurs, each executive will be
entitled to a severance payment equal to 2.99 times the average annual
compensation received by each such executive, including base salary, bonuses and
other incentive compensation and stock option gains during the sixty-month
period ending immediately preceding the calendar year in which the change in
control occurs. Such severance payment will not be immediately paid if not later
than ten days prior to the change in control, the executive is offered
employment by the Company or its successor corporation on similar terms to those
then applicable to the executive as an officer of the Company and, in such
event, the severance payment would be paid to the executive twelve months
following the change in control, but only if (i) the executive accepts such
comparable employment with the Company and (ii) the executive is not, during
such twelve-month period, terminated for cause. Such a change in control of the
Company will also cause all stock options held by the executive to become
immediately exercisable. In the event that the executive (i) purchases the
shares subject to the accelerated stock options, (ii) sells the shares so
purchased and (iii) is offered comparable employment by the Company or its
successor, the executive must deposit in escrow with the Company an amount equal
to 50% of the difference between his sales proceeds received from the sold
shares and his option exercise price. These escrowed funds will be released to
the executive from the escrow account if the executive has accepted the
comparable employment offer and is not terminated for cause for twelve months
after the change in control. If the executive does not accept such comparable
employment from the Company or its successor or is terminated for cause during
such twelve-month period, then the escrowed funds are released to the Company.
In addition, Mr. Devanny's Executive Severance Agreement provides that if there
is a change in control of ADAC Healthcare Information Systems, Inc. ("HCIS") or
if HCIS is spun off by the Company to its shareholders and, as a result, Mr.
Devanny is no longer employed by the Company or one of its subsidiaries, then,
for twelve months thereafter, the Company will retain Mr. Devanny as a part-time
employee or consultant at a salary of $1,000 per month without fringe benefits,
and all of his Company stock options will continue to vest during such period.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
This report on executive compensation has been furnished by the following
members of the Compensation Committee of the Company's Board of
Directors:Stanley D. Czerwinski, Graham O. King and Edmund H. Shea, Jr. Mr.
Czerwinski served as an officer of the Company in various capacities from
January 1991 to March 1996.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee")
determines the level of compensation for the Company's chief executive officer
and its other executive officers. The Committee determines the base salary and
bonus compensation, and also makes recommendations for the grants of stock
options under the Company's stock option plans.
The goals of the Company's compensation program are to structure
incentive-based compensation that is closely tied to the Company's performance
and long-term objectives, and to attract, retain and reward qualified executives
who contribute to the Company's success.
The primary components of the Company's compensation package are salary,
bonuses and stock options.
SALARY. Base salaries of executive officers are determined based upon their
level of responsibility, qualifications, level of experience, and individual
performance. The Company uses outside consultants to review salary ranges for
each executive officer against independent compensation analyses of salaries
paid to executive officers in similar positions at comparable companies. Base
salary levels are also designed to be competitive with the marketplace.
56
<PAGE>
BONUS COMPENSATION. The Company's bonus plan provides for cash bonuses
based on the accomplishment of individual performance goals, company-wide profit
targets and strategic objectives. The objectives are designed to further the
Company's financial and operating performance, implement its strategic business
plan, develop new products and maintain and increase market share. The goals are
set at the beginning of the fiscal year based on the Company's long-term and
short-term objectives, and accomplishment of these goals is assessed quarterly
and annually. Bonuses range from 0% to 100% of base salary. To be awarded the
maximum bonus, the officer must accomplish most or all of the individual
objectives and the Company must achieve its financial objectives for the fiscal
year.
STOCK OPTIONS. The Committee uses stock option grants to supplement
executive officers' base salary and bonus compensation. The stock option grants
provide long-term incentives for the achievement of the Company's strategic
objectives and financial and operating goals, and align the executives'
interests with those of the Company's shareholders. The Committee also grants
stock options in order to retain and attract high-quality employees in the
competitive job market of the Silicon Valley. The stock incentive program
utilizes a vesting schedule to encourage executive officers to maintain a
long-term perspective. The sizes of stock option grants are based on the
officers' level of responsibility, satisfaction of individual performance
objectives, and the Company's performance.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. Mr. R. Andrew Eckert has been
the Company's Chief Executive Officer since 1997. Mr. Eckert's overall
compensation in Fiscal Year 1998 was based on the Company's performance, Mr.
Eckert's achievement of specified goals, and upon a compensation study of peer
organizations conducted by an independent compensation consulting firm. Mr.
Eckert's base salary for the 1998 Fiscal Year was $450,000. He was also eligible
to receive a bonus of up to $300,000. A maximum of $120,000 of this bonus amount
was payable quarterly based on Company financial results, and a maximum of the
remaining $180,000 was payable at year-end based on his achievement of operating
and strategic goals, including management development and pursuit of growth
opportunities in certain business segments. Based on his level of achievement of
these goals, Mr. Eckert was awarded a $240,000 total bonus. Mr. Eckert also
received stock options for a total of 170,000 shares of Common Stock of the
Company and 107,931 shares of common stock of ADAC Healthcare Information
Systems, Inc. during the 1998 fiscal year, in accordance with the Committee's
philosophy set forth above under "Stock Options."
57
<PAGE>
PERFORMANCE GRAPH
The following graph sets forth the Company's total cumulative shareholder
return as compared to the NASDAQ Composite Index and the Standard and Poor's
Medical Products and Supply Index for the period September 28, 1993 through
September 27, 1998. Total shareholder return assumes $100 invested at the
beginning of the period in the Company's Common Stock, the stocks represented in
the NASDAQ Composite Index and the stocks represented in the Standard and Poor's
Medical Products and Supply Index, in each case on a "total return" basis
assuming reinvestment of dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
<S> <C> <C> <C>
AMONG ADAC LABORATORIES, THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE S & P HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) INDEX
ADAC LABORATORIES
9/30/93 $100
9/30/94 $72
9/30/95 $108
9/30/96 $187
9/30/97 $173
9/30/98 $223
* $100 INVESTED ON 9/30/93 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING SEPTEMBER 30.
<CAPTION>
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
<S> <C>
AMONG ADAC LABORATORIES, THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE S & P HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) INDEX
NASDAQ STOCK MARKET (U.S.)
9/30/93 $100
9/30/94 $103
9/30/95 $138
9/30/96 $165
9/30/97 $227
9/30/98 $231
* $100 INVESTED ON 9/30/93 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING SEPTEMBER 30.
<CAPTION>
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG ADAC LABORATORIES, THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE S & P HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) INDEX
S & P HEALTH CARE
(MEDICAL PRODUCTS & SUPPLIES)
9/30/93 $100
9/30/94 $121
9/30/95 $203
9/30/96 $307
9/30/97 $307
9/30/98 $371
* $100 INVESTED ON 9/30/93 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING SEPTEMBER 30.
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
ADAC Laboratories................................. $100 $72 $108 $187 $173 $223
NASDAQ Composite Index............................ 100 103 138 165 227 231
S&P Medical Products and Supply Index............. 100 121 203 307 307 371
</TABLE>
58
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of February 1, 1999, the number and
percentage of shares of Common Stock beneficially owned by (a) each director and
executive officer listed in the compensation disclosure table and all directors
and executive officers of the Company as a group, and (b) all persons known to
the Company to own beneficially more than five percent (5%) of any class of
voting securities of the Company. All such persons have sole voting and
investment power with respect to all shares shown as beneficially owned by them,
except as otherwise stated in the following footnotes.
<TABLE>
<CAPTION>
BENEFICIAL
NAME AND ADDRESS OF OWNERSHIP PERCENT OF
(a) DIRECTORS AND CERTAIN EXECUTIVE OFFICERS BENEFICIAL OWNER OF COMMON STOCK(1) VOTING SHARES(1)
- ---------------------------------------------- ------------------------ ------------------- -------------------
<S> <C> <C> <C>
Stanley D. Czerwinski......................... 87,491(2) *
R. Andrew Eckert.............................. 125,402(3) *
Graham O. King................................ 43,506(4) *
David L. Lowe................................. 95,433(5) *
F. David Rollo................................ 36,667(6) *
Edmund H. Shea, Jr............................ 516,190(7) 2.5%
Gerhard F. Burbach............................ 21,250(8) *
Earl H. Devanny III........................... 14,500(9) *
Ian R. Farmer................................. 51,200(10) *
P. Andre Simone............................... 42,500(11) *
All directors and executive officers as a
group (12 persons).......................... 1,042,889(12) 5.1%
<CAPTION>
BENEFICIAL
NAME AND ADDRESS OF OWNERSHIP OF COMMON PERCENT OF VOTING
(B) OTHER PRINCIPAL SHAREHOLDERS BENEFICIAL OWNER STOCK(1) SHARES(1)
- ---------------------------------------------- ------------------------ ------------------- -------------------
<S> <C> <C> <C>
Neuberger Berman LLC.......................... 605 Third Avenue
New York, NY 10158 1,733,900(13) 8.65%
FMR Corp...................................... 82 Devonshire St.
Boston, MA 02109 1,657,300(14) 8.27%
</TABLE>
- ------------------------
* Less than one percent (1%).
(1) Based on information furnished by the persons named and 20,450,817 shares of
Common Stock outstanding as of February 1, 1999. All references to options
include options that were exercisable on February 1, 1999 and within sixty
(60) days thereafter.
(2) Includes 64,166 shares issuable upon exercise of options held by Mr.
Czerwinski.
(3) Includes 124,815 shares issuable upon exercise of options held by Mr.
Eckert.
(4) Includes 39,666 shares issuable upon exercise of options held by Mr. King.
Also includes 2,600 shares held by the Leola J. King Pension Fund, of which
Mr. King is a trustee.
(5) Includes 95,033 shares issuable upon exercise of options held by Mr. Lowe.
(6) Includes 21,666 shares issuable upon exercise of options held by Dr. Rollo.
(7) Includes 34,998 shares issuable upon exercise of options held by Mr. Shea.
Also includes 85,580 shares held by J. F. Shea, Co., Inc. and 11,506 shares
held by Mrs. Shea, as to which Mr. Shea disclaims beneficial interest.
(8) Includes 21,250 shares issuable upon exercise of options held by Mr.
Burbach.
(9) Includes 12,500 shares issuable upon exercise of options held by Mr.
Devanny.
59
<PAGE>
(10) Includes 50,000 shares issuable upon exercise of options held by Mr.
Farmer.
(11) Includes 42,500 shares issuable upon exercise of options held by Mr.
Simone.
(12) Includes options to purchase 515,344 shares of Common Stock held by all
directors and executive officers as a group.
(13) Neuberger Berman, LLC has sole voting power over 684,600 shares, shared
voting power over 1,043,300 shares, and shared dispositive power over
1,733,900 shares. Neuberger Berman Genesis Portfolio has shared voting power
and shared dispositive power over 1,043,300 shares. Neuberger Berman
Management, Inc. has shared dispositive power over 1,043,300 shares. The
remaining balance of 6,000 shares is for individual client accounts over
which Neuberger Berman, LLC has shared dispositive power. Neuberger Berman,
LLC and Neuberger Berman Management, Inc. serve as sub-adviser and
investment manager, respectively, of Neuberger Berman Genesis Portfolio.
(14) Edward C. Johnson III, Chairman of FMR Corp., and FMR Corp., through
Fidelity Management & Research Company ("Fidelity"), a wholly-owned
subsidiary of FMR Corp., each has sole dispositive power over the 1,502,600
shares owned by Fidelity funds. Neither Mr. Johnson nor FMR Corp. has sole
voting power over shares owned by the Fidelity funds, which power is held by
the funds' board of trustees. Mr. Johnson and FMR Corp., through Fidelity
Management Trust Company, a wholly-owned subsidiary of FMR Corp., each has
sole dispositive power and sole voting power over 154,700 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with the merger of Community Health Computing Corp. ("CHC"),
the immediate parent of HCIS, with and into HCIS as part of the overall
recapitalization of HCIS, in May 1997 CHC repurchased all outstanding options to
purchase CHC common stock from the holders thereof for a purchase price equal to
the fair market value of the CHC common stock underlying the options, as
determined by an independent appraiser, less the aggregate exercise price for
such options. In these transactions, CHC repurchased 96,000 shares of CHC common
stock from Mr. Lowe for a purchase price of $73,920 and 72,000 shares of CHC
common stock from Mr. Eckert for a purchase price of $55,440.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS. Consolidated Financial Statements, Notes to
Consolidated Financial Statements, and the Report of Independent Accountants are
included under Item 8. Financial Statements and Supplemental Data.
(2) FINANCIAL STATEMENT SCHEDULES. See "Index to Financial Statement
Schedules" attached hereto and made a part hereof.
(3) EXHIBITS. The following exhibits are included or, as indicated by
the footnote, incorporated by reference into this filing:
<TABLE>
<CAPTION>
EXHIBIT # EXHIBIT NAME
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
3.1(1) Amended and Restated Articles of Incorporation.
3.2(1) Bylaws, as amended.
4.1(6) Rights Agreement dated as of April 22, 1996 between the Company and Chemical Mellon Shareholder
Services, LLC.
10.01(2) Leases for two buildings located at 540 Alder Drive, Milpitas, California, between the Company and John
Arrillaga and Richard T. Peery, dated June 25, 1986.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT # EXHIBIT NAME
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.02(3) Amendment to leases for two buildings located at 540 Alder Drive, Milpitas, California, between the
Company and John Arrillaga and Richard T. Peery, dated February 2, 1992.
10.03(4) Amendment to lease for building located at 540 Alder Drive, Milpitas, California, between the Company
and John Arrillaga and Richard T. Peery, dated August 31, 1993.
10.04(4) Lease agreement for building located at 630 Alder Drive, Milpitas, California, between the Company and
John Arrillaga and Richard T. Peery, dated December 6, 1993.
10.05(1) Directors' Stock Option Plan (1987), as amended by Amendments Nos. 1 to 4.
10.06(1) 1992 Stock Option Plan, as amended by Amendments Nos. 1 to 6.
10.07 Amended and Restated Employee Stock Purchase Plan (1994).
10.08(4) Employment/Severance agreement between the Company and Stanley D. Czerwinski, dated November 2, 1994.
10.10 Form of ADAC Executive Severance Agreement.
10.11 Form of ADAC Healthcare Information Systems, Inc. Executive Severance Agreement.
10.12(5) Credit Agreement dated July 31, 1996 among the Company, the Lenders named therein, and ABN AMRO Bank
N.V., as agent for the Lenders
10.16(7) ADAC Healthcare Information Systems, Inc. 1997 Stock Option Plan and related Stock Option Agreement.
10.18(1) Second Amendment to Credit Agreement dated as of May 1, 1997, and First Amendment to Credit Agreement
dated as of December 27, 1996, each by and among the Company, the Lenders named therein and ABN Amro
Bank N.V., as agent for the Lenders.
10.20(8) Amendment No. 7 to 1992 Stock Option Plan.
10.21 Amendments to leases for three buildings located at 540 Alder Drive, Milpitas, California, between the
Company and John Arrillaga and Richard T. Perry dated July 6, 1998.
10.22 Lease agreement for building located at 1860 Barber Lane, Milpitas, California, between the Company and
Golden Pacific Properties, LLC. dated August 19, 1998.
21 Subsidiaries.
23 Consent of Independent Accountants.
27 Financial Data Schedule
</TABLE>
- ------------------------
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the 1998
fiscal year.
(1) Incorporated by reference to Exhibits filed with the Company's Report
on Form 10-Q for the quarter ended June 29, 1997.
(2) Incorporated by reference to Exhibits filed with the Company's Annual
Report on Form 10-K (file no. 0-9428) for the fiscal year ended
September 28, 1986.
(3) Incorporated by reference to Exhibits filed with the Company's Annual
Report on Form 10-K (file no. 0-9428) for the fiscal year ended.
October 1, 1989
(4) Incorporated by reference to Exhibits filed with the Company's Annual
Report on Form 10-K (file no. 0-9428) for the fiscal year ended.
October 2, 1994
(5) Incorporated by reference to Exhibits filed with the Company's
Quarterly Report on Form 10-Q (file no. 0-9428) for the quarter ended
June 30, 1995.
61
<PAGE>
(6) Incorporated by reference to Exhibits filed with the Company's
Current Report on Form 8-K (file no. 0-9428) dated April 22, 1996.
(7) Incorporated by reference to Exhibits filed with the Company's Annual
Report on Form 10-K (file no. 0-9428) for the fiscal year ended
September 28, 1997.
(8) Incorporated by reference to Exhibits filed with the Company's
Quarterly Report on Form 10-Q (file no. 0-9428) for the quarter ended
March 29, 1998.
62
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
Date: February 26, 1999 ADAC LABORATORIES
(Registrant)
BY: /s/ R. ANDREW ECKERT
-----------------------------------------
R. Andrew Eckert
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITIES DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ R. ANDREW ECKERT Chief Executive Officer
- ------------------------------ and Director (Principal February 26, 1999
R. Andrew Eckert Executive Officer)
/s/ P. ANDRE SIMONE Chief Financial Officer
- ------------------------------ (Principal Financial February 26, 1999
P. Andre Simone Officer)
/s/ BRUCE M. BLANCO Corporate Controller
- ------------------------------ (Principal Accounting February 26, 1999
Bruce M. Blanco Officer)
/s/ DAVID L. LOWE
- ------------------------------ Chairman of the Board of February 26, 1999
David L. Lowe Directors
/s/ STANLEY D. CZERWINSKI
- ------------------------------ Director February 26, 1999
Stanley D. Czerwinski
/s/ GRAHAM O. KING
- ------------------------------ Director February 26, 1999
Graham O. King
/s/ F. DAVID ROLLO
- ------------------------------ Director February 26, 1999
F. David Rollo
/s/ EDMUND H. SHEA, JR.
- ------------------------------ Director February 26, 1999
Edmund H. Shea, Jr.
</TABLE>
63
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants
Financial Statement Schedules
Schedule VIII--Consolidated Valuation and Qualifying Accounts
Schedule X--Consolidated Supplementary Income Statement Information
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
consolidated financial statements or the notes thereto.
64
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of ADAC Laboratories is
included on page 49 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedules on pages 66 and 67 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
San Jose, California
February 26, 1999
65
<PAGE>
SCHEDULE VIII
ADAC LABORATORIES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 27, 1998
<TABLE>
<CAPTION>
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- --------------------------------------------------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year Ended September 29, 1996:
Deducted from asset accounts:
Allowance for product returns and doubtful accounts............ $ 695 $ 877 $ 1,267 $ 305
Provision for Inventories...................................... $ 2,748 $ 1,966 $ 867 $ 3,847
------ ----------- ----------- -----------
------ ----------- ----------- -----------
Year Ended September 28, 1997:
Deducted from asset accounts:
Allowance for product returns and doubtful accounts............ $ 305 $ 2,513 $ 999 $ 1,819
Provision for Inventories...................................... $ 3,847 $ 3,370 $ 2,361 $ 4,856
------ ----------- ----------- -----------
------ ----------- ----------- -----------
Year Ended September 27, 1998:
Deducted from asset accounts:
Allowance for product returns and doubtful accounts............ $ 1,819 $ 1,905 $ 1,405 $ 2,319
Provision for Inventories...................................... $ 4,856 $ 5,942 $ 6,727 $ 4,071
------ ----------- ----------- -----------
------ ----------- ----------- -----------
</TABLE>
66
<PAGE>
SCHEDULE X
ADAC LABORATORIES AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(IN THOUSANDS)
FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 27, 1998
<TABLE>
<CAPTION>
CHARGED TO COSTS & EXPENSES
-------------------------------
<S> <C> <C> <C>
ITEM 1998 1997 1996
- --------------------------------------------------------------------------------------- --------- --------- ---------
Depreciation and amortization of intangible assets:
Goodwill............................................................................. $ 1,658 $ 1,014 $ 973
Acquired technology.................................................................. 1,284 695 --
Other................................................................................ 134 119 --
</TABLE>
Amounts charged to costs and expenses do not exceed one percent of net
revenues for all other items for all periods presented.
67
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------- ------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
10.07 Amended and Restated Employee Stock Purchase Plan (1994).
10.10 Form of ADAC Executive Severance Agreement.
10.11 Form of ADAC Healthcare Information Systems, Inc. Executive Severance Agreement.
10.21 Amendments to leases for three buildings located at 540 Alder Drive, Milpitas, California,
between the Company and John Arrillaga and Richard T. Perry dated July 6, 1998.
10.22 Lease agreement for building located at 1860 Barber Lane, Milpitas, California, between the
Company and Golden Pacific Properties, LLC. dated August 19, 1998.
21 Subsidiaries.
23 Consent of Independent Accountants.
27 Financial Data Schedule
</TABLE>
68
<PAGE>
ADAC LABORATORIES
AMENDED AND RESTATED
1994 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1994 Employee Stock Purchase
Plan of ADAC Laboratories.
1. PURPOSE. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. DEFINITIONS.
(a) "BOARD" shall mean the Board of Directors of the Company.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(c) "COMMON STOCK" shall mean the common stock of the Company.
(d) "COMPANY" shall mean ADAC Laboratories and any Designated
Subsidiary of the Company.
(e) "COMPENSATION" shall mean all base straight time gross earnings
and commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "DESIGNATED SUBSIDIARY" shall mean any Subsidiary which has been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "EMPLOYEE" shall mean any individual who is an Employee of the
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "ENROLLMENT DATE" shall mean the first Trading Day of each
Offering Period.
<PAGE>
(i) "EXERCISE DATE" shall mean the last Trading Day of each Purchase
or Offering Period.
(j) "FAIR MARKET VALUE" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day on the date of such determination, as reported in
THE WALL STREET JOURNAL or such other source as the Board deems reliable;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in THE WALL STREET JOURNAL or such
other source as the Board deems reliable; or
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(k) "OFFERING PERIODS" shall mean the periods of approximately
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after March 1 and
September 1 of each year and terminating on the last Trading Day in the periods
ending twenty-four months later; provided however that the first three (3)
Offering Periods shall be consecutive and overlapping periods of approximately
nine (9), six (6) and three (3) months duration, commencing on the first Trading
Day on or after September 1, 1998, December 1, 1998, and March 1, 1999,
respectively. The duration and timing of Offering Periods may be changed
pursuant to Section 4 of this Plan.
(l) "PLAN" shall mean this 1994 Employee Stock Purchase Plan.
(m) "PURCHASE PERIOD" shall mean the approximately six month period
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date; provided, however, that
the nine-month Offering Period commencing on the first Trading Day on or after
September 1 shall contain three (3) three-month Purchase Periods and the
six-month Offering Period commencing December 1, 1998, shall contain two (2)
three-month Purchase Periods.
-2-
<PAGE>
(n) "PURCHASE PRICE" shall mean 85% of the Fair Market Value of a
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever
is lower; provided however, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
(o) "RESERVES" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "SUBSIDIARY" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "TRADING DAY" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
3. ELIGIBILITY.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. OFFERING PERIODS. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after March 1 and September 1 each year, or on such other
dates as the Board shall determine, and continuing thereafter until terminated
in accordance with Section 20 hereof. The Board shall have the power to change
the duration of Offering Periods (including the commencement dates thereof) with
respect to future offerings without shareholder approval if such change is
announced at least ten (10) days prior to the scheduled beginning of the first
Offering Period to be affected thereafter.
5. PARTICIPATION.
-3-
<PAGE>
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office not
less than ten (10) business days prior to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. PAYROLL DEDUCTIONS.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate, but not more than three (3) changes may be made in any Offering
Period. The Board may, in its discretion, change the number of participation
rate changes permitted during any Offering Period. The change in rate shall be
effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any,
-4-
<PAGE>
which arise upon the exercise of the option or the disposition of the Common
Stock. At any time, the Company may, but shall not be obligated to, withhold
from the participant's compensation the amount necessary for the Company to meet
applicable withholding obligations, including any withholding required to make
available to the Company any tax deductions or benefits attributable to sale or
early disposition of Common Stock by the Employee.
7. GRANT OF OPTION. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each three-month Purchase Period
more than 100 shares, or each six-month Purchase Period more than 200 shares, of
the Company's Common Stock (subject to any adjustment pursuant to Section 19),
and provided further that such purchase shall be subject to the limitations set
forth in Sections 3(b) and 12 hereof. The Board may, for future Offering
Periods, increase or decrease, in its absolute discretion, the maximum number of
shares of the Company's Common Stock an Employee may purchase during each
Purchase Period of such Offering Period. Exercise of the option shall occur as
provided in Section 8 hereof, unless the participant has withdrawn pursuant to
Section 10 hereof. The option shall expire on the last day of the Offering
Period.
8. EXERCISE OF OPTION.
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may exceed
(i) the number of shares of Common Stock that were available for sale under the
Plan on the Enrollment Date of the applicable Offering Period, or (ii) the
number of shares available for sale under the Plan on such Exercise Date, the
Board may in its sole discretion (x) provide that the Company shall make a pro
rata allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on
-5-
<PAGE>
such Exercise Date, and continue all Offering Periods then in effect, or (y)
provide that the Company shall make a pro rata allocation of the shares
available for purchase on such Enrollment Date or Exercise Date, as applicable,
in as uniform a manner as shall be practicable and as it shall determine in its
sole discretion to be equitable among all participants exercising options to
purchase Common Stock on such Exercise Date, and terminate any or all Offering
Periods then in effect pursuant to Section 20 hereof. The Company may make pro
rata allocation of the shares available on the Enrollment Date of any applicable
Offering Period pursuant to the preceding sentence, notwithstanding any
authorization of additional shares for issuance under the Plan by the Company's
shareholders subsequent to such Enrollment Date.
9. DELIVERY. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. WITHDRAWAL.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. TERMINATION OF EMPLOYMENT.
Upon a participant's ceasing to be an Employee, for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
-6-
<PAGE>
12. INTEREST. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. STOCK.
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be one hundred eighty-five thousand (185,000) shares.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. ADMINISTRATION. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
-7-
<PAGE>
16. TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. USE OF FUNDS. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. REPORTS. Individual accounts shall be maintained for each participant
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, LIQUIDATION,
MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in
progress shall be shortened by setting a new Exercise Date (the "New Exercise
Date"), and shall terminate immediately prior to the consummation of such
proposed dissolution or liquidation, unless provided otherwise by the Board.
The New Exercise Date shall be before the date of the Company's proposed
dissolution or liquidation. The Board shall notify each participant in
writing, at least ten (10) business days prior to the New Exercise Date, that
the New Exercise Date, that the Exercise Date for the participant's option
has been changed to the
-8-
<PAGE>
New Exercise Date and that the participant's option shall be exercised
automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
(c) MERGER OR ASSET SALE. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. AMENDMENT OR TERMINATION.
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its shareholders. Except as
provided in Section 19 and this Section 20 hereof, no amendment may make any
change in any option theretofore granted which adversely affects the rights of
any participant. To the extent necessary to comply with Section 423 of the Code
(or any successor rule or provision or any other applicable law, regulation or
stock exchange rule), the Company shall obtain shareholder approval in such a
manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
-9-
<PAGE>
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
(1) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(2) shortening any Offering Period so that Offering Period ends
on a new Exercise Date, including an Offering Period underway at the time of the
Board action; and
(3) allocating shares.
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
21. NOTICES. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. AUTOMATIC TRANSFER TO LOW PRICE OFFERING PERIOD. To the extent
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common
-10-
<PAGE>
Stock on the Enrollment Date of such Offering Period, then all participants in
such Offering Period shall be automatically withdrawn from such Offering Period
immediately after the exercise of their option on such Exercise Date and
automatically re-enrolled in the immediately following Offering Period as of the
first day thereof.
-11-
<PAGE>
EXHIBIT A
ADAC LABORATORIES
1994 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _________________________________________________________ hereby elects to
participate in the ADAC Laboratories 1994 Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan") and subscribes to purchase shares of the
Company's Common Stock in accordance with this Subscription Agreement and
the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 1 to 10%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note
that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only): ________
_________________________________________________________________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the
<PAGE>
excess of the fair market value of the shares at the time such shares were
purchased by me over the price which I paid for the shares. I HEREBY AGREE
TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY
DISPOSITION OF MY SHARES AND I WILL MAKE ADEQUATE PROVISION FOR FEDERAL,
STATE OR OTHER TAX WITHHOLDING OBLIGATIONS, IF ANY, WHICH ARISE UPON THE
DISPOSITION OF THE COMMON STOCK. The Company may, but will not be
obligated to, withhold from my compensation the amount necessary to meet
any applicable withholding obligation including any withholding necessary
to make available to the Company any tax deductions or benefits
attributable to sale or early disposition of Common Stock by me. If I
dispose of such shares at any time after the expiration of the 2-year and
1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received income only at the time of such
disposition, and that such income will be taxed as ordinary income only to
the extent of an amount equal to the lesser of (1) the excess of the fair
market value of the shares at the time of such disposition over the
purchase price which I paid for the shares, or (2) 15% of the fair market
value of the shares on the first day of the Offering Period. The remainder
of the gain, if any, recognized on such disposition will be taxed as
capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)_________________________________________________________
(First) (Middle) (Last)
_______________________________ _____________________________________________
Relationship
_____________________________________________
(Address)
-2-
<PAGE>
Employee's Social
Security Number: ____________________________________
Employee's Address: ____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_________________________ ____________________________________________
Signature of Employee
____________________________________________
Spouse's Signature (If beneficiary other than
spouse)
-3-
<PAGE>
EXHIBIT B
ADAC LABORATORIES
1994 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the ADAC Laboratories
1994 Employee Stock Purchase Plan which began on ____________, 19____ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:____________________________
<PAGE>
ADAC LABORATORIES
EXECUTIVE SEVERANCE AGREEMENT
THIS EXECUTIVE SEVERANCE AGREEMENT is made and entered into as of
by and between ADAC LABORATORIES (the "Company") and ("Executive").
WHEREAS, the Board of Directors (the "Board") of the Company has
recommended and authorized the Company entering into a severance agreement in
the form hereof with Executive; and
WHEREAS, the Board has determined that, in the event of a possible,
threatened or pending sale or other change in control of the Company (or its
subsidiaries), it is imperative that the Company and the Board be able to rely
upon Executive to continue in Executive's position, and that the Company be able
to receive and rely upon Executive's advice, if requested, as to the best
interests of the Company and its shareholders without concern that Executive
might be distracted by the personal uncertainties and risks created by any such
possible transactions; and
WHEREAS, in connection with the foregoing, Executive may, in addition
to Executive's regular duties, be called upon to assist in the assessment of any
such possible transactions, advise management and the Board as to whether such
proposals would be in the best interests of the Company and its shareholders,
and to take such other actions as the Board might determine to be appropriate.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Executive and the availability of Executive's advice and counsel
notwithstanding the possibility, threat or occurrence of a sale of the Company
or other Change of Control, and to induce Executive to remain in the employ of
the Company, and for other good and valuable consideration, the Company and
Executive agree as follows:
1. EVENTS CAUSING PAYMENT OF SEVERANCE BENEFIT.
(a) If Executive is employed full-time by the Company (or one of
its subsidiaries) at the time of a "Change in Control" (as defined in Section 4
hereof), Executive shall be entitled to a Severance Payment as set forth in
Section 2 hereof, payable upon the occurrence of the Change in Control;
PROVIDED, HOWEVER, that if, within ten (10) days prior to the Change in Control,
Executive is offered employment by the Company (or one of its subsidiaries) or
its successor corporation on "Similar Terms" (as hereinafter defined) to those
then applicable to him as an executive employee of the Company (or one of its
subsidiaries), the Severance Payment shall be paid to him twelve (12) months
following the Change in Control, but only if the following events occur: (i)
Executive accepts such employment and (ii) Executive is not, during such twelve
(12) month period, terminated as an employee of the Company (or one of its
subsidiaries) or its successor corporation for "Cause" (as hereinafter defined).
(b) "Similar Terms" shall mean (i) duties and responsibilities
similar to those then applicable to Executive as an employee of the Company (or
one of its subsidiaries), (ii) base salary, cash incentive bonuses and other
non-cash perquisites no less than that received by Executive from the Company
(or one of its subsidiaries) during the twelve (12) months prior to the Change
in Control and (iii) a place of employment within ten miles of Executive's
then-existing place of employment.
(c) "Cause" shall mean any of the following: (i) gross and
willful refusal, which continues after thirty (30) days' written warning, to
discharge the normal and material employment duties required of the Executive,
(ii) theft or other misappropriation of Company (or one of its subsidiaries)
<PAGE>
property, trade secrets or other intellectual property rights and use thereof to
the detriment of the Company or its successor corporation or (iii) commission of
a crime such that the Company's reputation with its customers is materially
damaged and cannot be repaired. Becoming fully or partially disabled (whether
mental or physical) shall not be deemed "Cause" herein.
(d) Notwithstanding the foregoing, should Executive be offered
employment upon Similar Terms which is accepted by him, he shall be entitled to
receive the Severance Payment immediately, without having to wait for the
expiration of the twelve-month period hereinabove provided, if at any time his
employer proposes to revise the terms and conditions of his employment in such a
manner that his employment would no longer be on Similar Terms.
(e) The death of Executive following a Change in Control shall
require the immediate payment of the Severance Payment, if not theretofore paid,
to Executive's successors as defined in Section 15 hereof.
(f) Notwithstanding anything to the contrary contained herein,
the Severance Benefit described in Section 2 hereof shall be immediately payable
to Executive and all of Executive's Unvested Options shall immediately and fully
vest and become exercisable should (i) one or more persons or entities propose
any of the transactions or events described in Section 4 hereof AND (ii) such
person(s) or entity(ies) demand, as a condition thereof, that this Severance
Agreement be terminated prior to any Change in Control (as defined in Section 4
hereof).
2. AMOUNT OF SEVERANCE PAYMENT.
The amount of the Severance Payment payable to Executive pursuant to
this Agreement shall be determined in accordance with the following formula:
2.99 times the average annual compensation (including, without limitation, base
salary, bonuses, gains on stock option exercises etc.) includable on Executive's
Form W-2 as a result of services performed for the Company (or its subsidiaries)
during the sixty-month period ending immediately preceding the calendar year in
which the event giving rise to the requirement to pay such Severance Payment to
Executive occurs; provided , however, that if Executive was not employed by the
Company (or its subsidiaries) for all of such sixty-month period, the Severance
Payment payable to Executive pursuant to this Agreement shall be 2.99 times the
average annual compensation includable on Executive's Form W-2 as a result of
services performed for the Company (or its subsidiaries) during his or her
actual period of employment; provided, further, that if Executive's period of
employment with the Company includes a partial year, Executive's compensation
for that partial year shall be annualized (for purposes of the calculations
required by this Section 2). Notwithstanding the foregoing, the Severance
Payment and, if necessary, the value of any option acceleration and any other
benefits pursuant to Section 3 or otherwise shall be reduced by such amount as
is necessary, in the opinion of tax counsel or other appropriate tax advisor
selected in good faith by the Company, so that no portion of the foregoing will
be subject to excise taxes for an "excess parachute payment" under Internal
Revenue Code Section 280(g).
2
<PAGE>
3. STOCK OPTIONS.
(a) Ten (10) days prior to a Change in Control (as defined in
Section 4 hereof), those stock options held by Executive to purchase shares of
common stock of ADAC Laboratories which are then not exercisable ("Unvested
Options") shall immediately vest and become exercisable, notwithstanding the
vesting schedule set forth in Executive's stock option agreement(s). In the
event that (i) Executive exercises the Unvested Options, (ii) Executive sells or
otherwise disposes of the shares so purchased and (iii) Executive is offered
employment by the Company or its successor corporation on Similar Terms (as
defined in Section 1(b) above), he or she shall deposit into an escrow account
with a bank or trust company satisfactory to the Company or its successor an
amount equal to 50% of the difference between (x) the sale proceeds received
from the shares sold or otherwise disposed of which were obtained through the
exercise of previously Unvested Options (without regard to any Federal or state
income taxes which may result from such transaction) and (y) the purchase price
for such shares (such amount is hereinafter referred to as the "Escrowed
Amount"). For purposes of this subparagraph, if such shares are disposed of
without consideration or for a consideration less than the prevailing market
price for such shares at the time of such disposition, the market price of ADAC
Laboratories common stock on the date of such sale (or disposition at less than
fair market value) shall be used to determine the Escrowed Amount.
(b) The Escrowed Amount, including any interest earned
thereon, shall be returned to Executive twelve (12) months following the Change
in Control if, and only if, (i) Executive has accepted the employment which was
offered on Similar Terms and (ii) Executive has not, during such twelve-month
period, been terminated as an employee of the Company (or its subsidiary) or its
successor corporation for Cause (as defined in Section 1(c) above). If
Executive does not accept such employment or accepts such employment and is
terminated during such twelve-month period for Cause, the Escrowed Amount shall
be delivered to the Company or its successor corporation and Executive shall
have no further right thereto. Notwithstanding the foregoing, if at any time
prior to such twelve-month period, Executive's employer proposes to revise the
terms and conditions of his or her employment such that his or her employment
would no longer be on Similar Terms or terminates Executive without Cause, the
Escrowed Amount shall be returned to Executive upon the date of such employer's
proposal or such termination.
4. CHANGE IN CONTROL.
(a) A Change in Control of the Company shall be deemed to have
occurred if (i) any "person" or "group" (as defined in or pursuant to Sections
13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated
under the Exchange Act), directly or indirectly, of securities of the Company
representing 40% or more of the voting power of the common stock outstanding
which votes generally for the election of directors; or (ii) as a result of
market or corporate transactions or stockholder action, the individuals who
constitute the Board of Directors of the Company at the beginning of any period
of 12 consecutive months (but commencing not earlier than March 1, 1998), plus
any new directors whose election or nomination was approved by a vote of at
least two-thirds of the directors still in office who were directors at the
beginning of such period of 12 consecutive months, cease for any reason during
such period of 12 consecutive months to constitute at least two-thirds of the
members of such Board; or (iii) the Company sells, through merger,
3
<PAGE>
assignment or otherwise, in one or more transactions, other than in the ordinary
course of business, assets which provided at least 2/3 of the revenues or
pre-tax net income of the Company and its subsidiaries on a consolidated basis
during the most recently-completed fiscal year; (iv) the Company sells, through
merger, assignment or otherwise, one of its subsidiaries, which is the principal
employer of the Executive; provided, however, for purposes of this subsection
4(a)(iv), no "Change in Control" shall be deemed to have occurred if Executive
is offered comparable employment (similar duties and compensation) by the
Company (or its subsidiaries) at any of its facilities.
(b) Notwithstanding paragraph (a) above, the following events
shall not constitute a Change in Control: any acquisition of beneficial
ownership pursuant to (i) a reclassification, however effected, of the Company's
authorized common stock, or (ii) a corporate reorganization involving the
Company or any of its subsidiaries which does not result in a material change in
the ultimate ownership by the shareholders of the Company (through their
ownership of the Company or its successor resulting from the reorganization) of
the assets of the Company and its subsidiaries, but only if such
reclassification or reorganization has been approved by the Company's Board of
Directors.
5. FRINGE BENEFITS.
(a) The Company shall provide to Executive (and his spouse and
other qualified dependents), for at least 12 months following a Change in
Control (and whether or not Executive is offered or accepts continuing
employment with the Company or its successor) all Fringe Benefits (as defined
below) that were available to Executive (and his spouse or qualified dependents)
immediately prior to the Change in Control. For purposes of this Agreement, the
term "Fringe Benefits" shall include, without limitation, all life, dental,
vacation, health, accident and disability benefit plans, other similar welfare
plans, country club dues, the provision of a company-owned automobile,
company-paid tax advice, professional financial planning assistance or any
equivalent successor policy, plan, program or arrangement that may now exist or
be adopted hereafter by the Company or its subsidiaries. Notwithstanding the
foregoing, with respect to any Fringe Benefits provided through an insurance
policy, the Company's obligation to provide such Fringe Benefits following a
Change in Control if Executive does not continue employment with the Company,
its subsidiaries or successors shall be limited by the terms of such policy;
provided, however, that (i) the Company shall make reasonable efforts to amend
such policy to provide the continued coverage described in this Section 5(a),
and (ii) if such policy is not amended to provide the continued benefits
described in this Section 5(a), the Company shall pay for the cost of comparable
replacement coverage.
(b) If prior to the Change in Control the Executive was required
to contribute towards the payment of a Fringe Benefit as a condition of
receiving such Fringe Benefit, the Executive may be required to continue
contributing towards the payment of such Fringe Benefit under the same terms and
conditions as applied to the Executive immediately prior to the Change in
Control in order to receive such Fringe Benefit.
6. OTHER EMPLOYEE BENEFITS. The benefits provided to Executive
hereunder shall not be affected by or reduced because of any other benefits
(including, but not limited to, salary, bonus, pension, or stock option) to
which Executive may be entitled by reason of his employment with the Company or
any subsidiary thereof or the termination of his employment with the Company,
and no other such benefit by
4
<PAGE>
reason of such employment shall be so affected or reduced because of the
benefits bestowed by this Agreement.
7. WITHHOLDING; NO RIGHT OF SET-OFF. All amounts payable by the
Company hereunder shall be subject to withholding of such amounts related to
taxes as the Company may be legally obligated to so withhold. The right of
Executive to receive benefits under this Agreement, however, shall be absolute
and shall not be subject to any set-off, counterclaim, recoupment, defense, duty
to mitigate or other right the Company or its subsidiaries may have against him
or anyone else, except as specifically provided for herein.
8. SUBSEQUENT EMPLOYMENT. Executive's right to receive benefits
under this Agreement shall not be reduced by reason of Executive's employment
with any other employer after terminating employment with the Company or any of
its subsidiaries. Any compensation for services rendered or consulting fees
earned after the date of termination shall not diminish Executive's right to
receive all amounts due hereunder.
9. SUBSIDIARY AND COMPANY DEFINED. For purposes of this Agreement,
the term "Subsidiary" shall mean (i) any corporation, foreign or domestic, in
which the Company directly or indirectly owns 50% or more of the issued and
outstanding voting stock on an "as converted basis" and (ii) any partnership,
foreign or domestic, in which the Company owns a direct or indirect interest
equal to 50% or more of the outstanding equity interests. The term "Company,"
for purposes of this Agreement, means ADAC Laboratories unless the context of
this Agreement implies the inclusion of one or more Subsidiaries of ADAC
Laboratories.
10. EXECUTIVE'S INDEMNITY. Executive shall be entitled to any
indemnification rights granted by the Company generally to its officers as
reflected in the bylaws or Articles of Incorporation of the Company in effect
immediately prior to any Change in Control of the Company. Any subsequent
changes to the bylaws or Articles of Incorporation reducing any such indemnity
previously granted to officers shall not affect the rights of Executive which
arose prior thereto.
11. COSTS OF ENFORCEMENT; INTEREST. In the event Executive must
collect any part or all of the Severance Payment or Fringe Benefits or otherwise
enforces the terms of this Agreement by or through a lawyer or lawyers, the
Company will pay all costs of such collection or enforcement, including
reasonable legal fees incurred by Executive. In addition, the Company shall pay
to Executive interest on all or any part of the Severance Payment or the Fringe
Benefits that is not paid when due at a rate equal to the prime rate as
announced by Sanwa Bank or its successors from time to time.
12. AMENDMENT. This Agreement may not be amended without the prior
written consent of both Executive and the Company.
13. NO RIGHT TO CONTINUED EMPLOYMENT. Nothing in this Agreement
shall be deemed to give Executive the right to be retained in the service of the
Company or to deny the Company any right it may have to discharge or demote him
at any time; provided, however, that any termination of employment of Executive,
or any removal of Executive as an executive officer of the Company primarily in
5
<PAGE>
contemplation of a Change in Control shall not be effective to deny Executive
the benefits of this Agreement, including without limitation Sections 1 and 2
hereof. No provision of this Agreement shall in any way limit, restrict or
prohibit Executive's right to terminate employment with the Company or leave his
position as senior executive.
14. SEVERABILITY. The invalidity and unenforceability of any
particular provision of this Agreement shall not affect any other provision
hereof, and this Agreement shall be construed in all respects as if such invalid
or unenforceable provision were omitted.
15. SUCCESSORS.
(a) The Company will require any successor, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
(b) This Agreement shall inure to the benefit of, and be
enforceable by, Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive dies prior to the receipt of all benefits payable hereunder with
respect to events occurring prior to death, all such benefits shall be paid
pursuant to the last beneficiary designation executed by the Executive and filed
with the Company. If no beneficiary form has been filed with respect to this
Agreement, all such benefits shall be paid to the Executive's estate.
16. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the Company's state of incorporation.
6
<PAGE>
17. TERM. This Agreement shall terminate and become null and void
if, prior to (but not in contemplation of) a Change in Control, Executive ceases
to be employed as an executive officer with either the Company or a Subsidiary.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, effective as of the ___ day of _______________.
ADAC LABORATORIES EXECUTIVE
By
--------------------------------- ------------------------------
R. Andrew Eckert
Chief Executive Officer
-------------------------------
(Address)
-------------------------------
7
<PAGE>
ADAC LABORATORIES
HCIS EXECUTIVE SEVERANCE AGREEMENT
THIS HCIS EXECUTIVE SEVERANCE AGREEMENT is made and entered into as
of ____, 199_ by and between ADAC LABORATORIES (the "Company") and _______
("Executive").
WHEREAS, the Board of Directors (the "Board") of the Company has
recommended and authorized the Company entering into a severance agreement in
the form hereof with Executive; and
WHEREAS, the Board has determined that, in the event of a possible,
threatened or pending sale or other change in control of the Company (or its
subsidiaries), it is imperative that the Company and the Board be able to rely
upon Executive to continue in Executive's position, and that the Company be able
to receive and rely upon Executive's advice, if requested, as to the best
interests of the Company and its shareholders without concern that Executive
might be distracted by the personal uncertainties and risks created by any such
possible transactions; and
WHEREAS, in connection with the foregoing, Executive may, in addition
to Executive's regular duties, be called upon to assist in the assessment of any
such possible transactions, advise management and the Board as to whether such
proposals would be in the best interests of the Company and its shareholders,
and to take such other actions as the Board might determine to be appropriate.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Executive and the availability of Executive's advice and counsel
notwithstanding the possibility, threat or occurrence of a sale of the Company
or other Change of Control, and to induce Executive to remain in the employ of
the Company, and for other good and valuable consideration, the Company and
Executive agree as follows:
1. EVENTS CAUSING PAYMENT OF SEVERANCE BENEFIT.
(a) If Executive is employed full-time by the Company (or one of
its subsidiaries) at the time of a "Change in Control" (as defined in Section 4
hereof), Executive shall be entitled to a Severance Payment as set forth in
Section 2 hereof, payable upon the occurrence of the Change in Control;
PROVIDED, HOWEVER, that if, within ten (10) days prior to the Change in Control,
Executive is offered employment by the Company (or one of its subsidiaries) or
its successor corporation on "Similar Terms" (as hereinafter defined) to those
then applicable to him as an executive employee of the Company (or one of its
subsidiaries), the Severance Payment shall be paid to him twelve (12) months
following the Change in Control, but only if the following events occur: (i)
Executive accepts such employment and (ii) Executive is not, during such twelve
(12) month period, terminated as an employee of the Company (or one of its
subsidiaries) or its successor corporation for "Cause" (as hereinafter defined).
(b) "Similar Terms" shall mean (i) duties and responsibilities
similar to those then applicable to Executive as an employee of the Company (or
one of its subsidiaries), (ii) base salary, cash incentive bonuses and other
non-cash perquisites no less than that received by Executive from the Company
(or one of its subsidiaries) during the twelve (12) months prior to the Change
in Control and (iii) a place of employment within ten miles of Executive's
then-existing place of employment.
(c) "Cause" shall mean any of the following: (i) gross and
willful refusal, which continues after thirty (30) days' written warning, to
discharge the normal and material employment duties required of the Executive,
(ii) theft or other misappropriation of Company (or one of its subsidiaries)
<PAGE>
property, trade secrets or other intellectual property rights and use thereof to
the detriment of the Company or its successor corporation or (iii) commission of
a crime such that the Company's reputation with its customers is materially
damaged and cannot be repaired. Becoming fully or partially disabled (whether
mental or physical) shall not be deemed "Cause" herein.
(d) Notwithstanding the foregoing, should Executive be offered
employment upon Similar Terms which is accepted by him, he shall be entitled to
receive the Severance Payment immediately, without having to wait for the
expiration of the twelve-month period hereinabove provided, if at any time his
employer proposes to revise the terms and conditions of his employment in such a
manner that his employment would no longer be on Similar Terms.
(e) The death of Executive following a Change in Control shall
require the immediate payment of the Severance Payment, if not theretofore paid,
to Executive's successors as defined in Section 15 hereof.
(f) Notwithstanding anything to the contrary contained herein,
the Severance Benefit described in Section 2 hereof shall be immediately payable
to Executive and all of Executive's Unvested Options shall immediately and fully
vest and become exercisable should (i) one or more persons or entities propose
any of the transactions or events described in Section 4 hereof AND (ii) such
person(s) or entity(ies) demand, as a condition thereof, that this Severance
Agreement be terminated prior to any Change in Control (as defined in Section 4
hereof).
(g) If a Change in Control of ADAC Healthcare Information
Systems, Inc. ("HCIS") shall occur, as such term is defined in the HCIS 1997
Stock Option Plan, or if HCIS is "spun-off" by the Company to its shareholders
and, as a result of either event occurring, Executive is no longer employed by
the Company or any of its other subsidiaries, then for twelve months thereafter,
the Executive shall be retained by the Company as a part-time employee or
consultant at a salary of $1,000 per month (but with no fringe benefits) and all
Company stock options then held by him shall continue in force and remain
subject to his normal vesting provisions during such twelve-month period.
2. AMOUNT OF SEVERANCE PAYMENT.
The amount of the Severance Payment payable to Executive pursuant to
this Agreement shall be determined in accordance with the following formula:
2.99 times the average annual compensation (including, without limitation, base
salary, bonuses, gains on stock option exercises etc.) includable on Executive's
Form W-2 as a result of services performed for the Company (or its subsidiaries)
during the sixty-month period ending immediately preceding the calendar year in
which the event giving rise to the requirement to pay such Severance Payment to
Executive occurs; provided , however, that if Executive was not employed by the
Company (or its subsidiaries) for all of such sixty-month period, the Severance
Payment payable to Executive pursuant to this Agreement shall be 2.99 times the
average annual compensation includable on Executive's Form W-2 as a result of
services performed for the Company (or its subsidiaries) during his or her
actual period of employment; provided, further, that if Executive's period of
employment with the Company includes a partial year, Executive's compensation
for that partial year shall be annualized (for purposes of the calculations
required by this Section 2). Notwithstanding the foregoing,
2
<PAGE>
the Severance Payment and, if necessary, the value of any option acceleration
and any other benefits pursuant to Section 3 or otherwise shall be reduced by
such amount as is necessary, in the opinion of tax counsel or other appropriate
tax advisor selected in good faith by the Company, so that no portion of the
foregoing will be subject to excise taxes for an "excess parachute payment"
under Internal Revenue Code Section 280(g).
3. STOCK OPTIONS.
(a) Ten (10) days prior to a Change in Control (as defined in
Section 4 hereof), those stock options held by Executive to purchase shares of
common stock of ADAC Laboratories which are then not exercisable ("Unvested
Options") shall immediately vest and become exercisable, notwithstanding the
vesting schedule set forth in Executive's stock option agreement(s). In the
event that (i) Executive exercises the Unvested Options, (ii) Executive sells or
otherwise disposes of the shares so purchased and (iii) Executive is offered
employment by the Company or its successor corporation on Similar Terms (as
defined in Section 1(b) above), he or she shall deposit into an escrow account
with a bank or trust company satisfactory to the Company or its successor an
amount equal to 50% of the difference between (x) the sale proceeds received
from the shares sold or otherwise disposed of which were obtained through the
exercise of previously Unvested Options (without regard to any Federal or state
income taxes which may result from such transaction) and (y) the purchase price
for such shares (such amount is hereinafter referred to as the "Escrowed
Amount"). For purposes of this subparagraph, if such shares are disposed of
without consideration or for a consideration less than the prevailing market
price for such shares at the time of such disposition, the market price of ADAC
Laboratories common stock on the date of such sale (or disposition at less than
fair market value) shall be used to determine the Escrowed Amount.
(b) The Escrowed Amount, including any interest earned
thereon, shall be returned to Executive twelve (12) months following the Change
in Control if, and only if, (i) Executive has accepted the employment which was
offered on Similar Terms and (ii) Executive has not, during such twelve-month
period, been terminated as an employee of the Company (or its subsidiary) or its
successor corporation for Cause (as defined in Section 1(c) above). If
Executive does not accept such employment or accepts such employment and is
terminated during such twelve-month period for Cause, the Escrowed Amount shall
be delivered to the Company or its successor corporation and Executive shall
have no further right thereto. Notwithstanding the foregoing, if at any time
prior to such twelve-month period, Executive's employer proposes to revise the
terms and conditions of his or her employment such that his or her employment
would no longer be on Similar Terms or terminates Executive without Cause, the
Escrowed Amount shall be returned to Executive upon the date of such employer's
proposal or such termination.
4. CHANGE IN CONTROL.
(a) A Change in Control of the Company shall be deemed to have
occurred if (i) any "person" or "group" (as defined in or pursuant to Sections
13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated
under the Exchange Act), directly or indirectly, of securities of the Company
representing 40% or more of the voting power of the common stock outstanding
which votes generally for the election of directors; or (ii) as a result of
market or corporate transactions or stockholder action, the individuals who
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constitute the Board of Directors of the Company at the beginning of any period
of 12 consecutive months (but commencing not earlier than March 1, 1998), plus
any new directors whose election or nomination was approved by a vote of at
least two-thirds of the directors still in office who were directors at the
beginning of such period of 12 consecutive months, cease for any reason during
such period of 12 consecutive months to constitute at least two-thirds of the
members of such Board; or (iii) the Company sells, through merger, assignment or
otherwise, in one or more transactions, other than in the ordinary course of
business, assets which provided at least 2/3 of the revenues or pre-tax net
income of the Company and its subsidiaries on a consolidated basis during the
most recently-completed fiscal year; (iv) the Company sells, through merger,
assignment or otherwise, one of its subsidiaries, which is the principal
employer of the Executive; provided, however, for purposes of this subsection
4(a)(iv), no "Change in Control" shall be deemed to have occurred if Executive
is offered comparable employment (similar duties and compensation) by the
Company (or its subsidiaries) at any of its facilities; provided, however, that
the Executive's employment will not cease to be "comparable employment" solely
as a result of a change in duties or responsibilities solely by virtue of
Executive being employed by the Company or another subsidiary of the Company
rather than the subsidiary that is being sold.
(b) Notwithstanding paragraph (a) above, the following events
shall not constitute a Change in Control: any acquisition of beneficial
ownership pursuant to (i) a reclassification, however effected, of the Company's
authorized common stock, or (ii) a corporate reorganization involving the
Company or any of its subsidiaries which does not result in a material change in
the ultimate ownership by the shareholders of the Company (through their
ownership of the Company or its successor resulting from the reorganization) of
the assets of the Company and its subsidiaries, but only if such
reclassification or reorganization has been approved by the Company's Board of
Directors or (iii) a "spin-off" by the Company of all or any portion of its
ownership of any of its subsidiaries to the Company's then existing
shareholders, whereby the Company's shareholders become shareholders in the
subsidiary, regardless of whether such transfer of ownership is by a
distribution of the Company's ownership of the subsidiary's stock, by a direct
issuance by the subsidiary of its shares to such shareholders or by any other
method.
5. FRINGE BENEFITS.
(a) The Company shall provide to Executive (and his spouse and
other qualified dependents), for at least 12 months following a Change in
Control (and whether or not Executive is offered or accepts continuing
employment with the Company or its successor) all Fringe Benefits (as defined
below) that were available to Executive (and his spouse or qualified dependents)
immediately prior to the Change in Control. For purposes of this Agreement, the
term "Fringe Benefits" shall include, without limitation, all life, dental,
vacation, health, accident and disability benefit plans, other similar welfare
plans, country club dues, the provision of a company-owned automobile,
company-paid tax advice, professional financial planning assistance or any
equivalent successor policy, plan, program or arrangement that may now exist or
be adopted hereafter by the Company or its subsidiaries. Notwithstanding the
foregoing, with respect to any Fringe Benefits provided through an insurance
policy, the Company's obligation to provide such Fringe Benefits following a
Change in Control if Executive does not continue employment with the Company,
its subsidiaries or successors shall be limited by the terms of such policy;
provided, however, that (i) the Company shall make reasonable efforts to amend
such policy to provide the continued coverage described in this Section 5(a),
and (ii) if such policy is not amended to provide the continued benefits
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described in this Section 5(a), the Company shall pay for the cost of comparable
replacement coverage.
(b) If prior to the Change in Control the Executive was required
to contribute towards the payment of a Fringe Benefit as a condition of
receiving such Fringe Benefit, the Executive may be required to continue
contributing towards the payment of such Fringe Benefit under the same terms and
conditions as applied to the Executive immediately prior to the Change in
Control in order to receive such Fringe Benefit.
6. OTHER EMPLOYEE BENEFITS. The benefits provided to Executive
hereunder shall not be affected by or reduced because of any other benefits
(including, but not limited to, salary, bonus, pension, or stock option) to
which Executive may be entitled by reason of his employment with the Company or
any subsidiary thereof or the termination of his employment with the Company,
and no other such benefit by reason of such employment shall be so affected or
reduced because of the benefits bestowed by this Agreement.
7. WITHHOLDING; NO RIGHT OF SET-OFF. All amounts payable by the
Company hereunder shall be subject to withholding of such amounts related to
taxes as the Company may be legally obligated to so withhold. The right of
Executive to receive benefits under this Agreement, however, shall be absolute
and shall not be subject to any set-off, counterclaim, recoupment, defense, duty
to mitigate or other right the Company or its subsidiaries may have against him
or anyone else, except as specifically provided for herein.
8. SUBSEQUENT EMPLOYMENT. Executive's right to receive benefits
under this Agreement shall not be reduced by reason of Executive's employment
with any other employer after terminating employment with the Company or any of
its subsidiaries. Any compensation for services rendered or consulting fees
earned after the date of termination shall not diminish Executive's right to
receive all amounts due hereunder.
9. SUBSIDIARY AND COMPANY DEFINED. For purposes of this Agreement,
the term "Subsidiary" shall mean (i) any corporation, foreign or domestic, in
which the Company directly or indirectly owns 50% or more of the issued and
outstanding voting stock on an "as converted basis" and (ii) any partnership,
foreign or domestic, in which the Company owns a direct or indirect interest
equal to 50% or more of the outstanding equity interests. The term "Company,"
for purposes of this Agreement, means ADAC Laboratories unless the context of
this Agreement implies the inclusion of one or more Subsidiaries of ADAC
Laboratories.
10. EXECUTIVE'S INDEMNITY. Executive shall be entitled to any
indemnification rights granted by the Company generally to its officers as
reflected in the bylaws or Articles of Incorporation of the Company in effect
immediately prior to any Change in Control of the Company. Any subsequent
changes to the bylaws or Articles of Incorporation reducing any such indemnity
previously granted to officers shall not affect the rights of Executive which
arose prior thereto.
11. COSTS OF ENFORCEMENT; INTEREST. In the event Executive must
collect any part or all of the Severance Payment or Fringe Benefits or otherwise
enforces the terms of this Agreement by or
5
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through a lawyer or lawyers, the Company will pay all costs of such collection
or enforcement, including reasonable legal fees incurred by Executive. In
addition, the Company shall pay to Executive interest on all or any part of the
Severance Payment or the Fringe Benefits that is not paid when due at a rate
equal to the prime rate as announced by Sanwa Bank or its successors from time
to time.
12. AMENDMENT. This Agreement may not be amended without the prior
written consent of both Executive and the Company.
13. NO RIGHT TO CONTINUED EMPLOYMENT. Nothing in this Agreement
shall be deemed to give Executive the right to be retained in the service of the
Company or to deny the Company any right it may have to discharge or demote him
at any time; provided, however, that any termination of employment of Executive,
or any removal of Executive as an executive officer of the Company primarily in
contemplation of a Change in Control shall not be effective to deny Executive
the benefits of this Agreement, including without limitation Sections 1 and 2
hereof. No provision of this Agreement shall in any way limit, restrict or
prohibit Executive's right to terminate employment with the Company or leave his
position as senior executive.
14. SEVERABILITY. The invalidity and unenforceability of any
particular provision of this Agreement shall not affect any other provision
hereof, and this Agreement shall be construed in all respects as if such invalid
or unenforceable provision were omitted.
15. SUCCESSORS.
(a) The Company will require any successor, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
(b) This Agreement shall inure to the benefit of, and be
enforceable by, Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive dies prior to the receipt of all benefits payable hereunder with
respect to events occurring prior to death, all such benefits shall be paid
pursuant to the last beneficiary designation executed by the Executive and filed
with the Company. If no beneficiary form has been filed with respect to this
Agreement, all such benefits shall be paid to the Executive's estate.
16. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the Company's state of incorporation.
17. TERM. This Agreement shall terminate and become null and void
if, prior to (but not in contemplation of) a Change in Control, Executive ceases
to be employed as an executive officer with either the Company or a Subsidiary.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, effective as of the day of , 199 .
6
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ADAC LABORATORIES EXECUTIVE
By
--------------------------------- ------------------------------------
R. Andrew Eckert
Chief Executive Officer
-------------------------------------
(Address)
-------------------------------------
7
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Milpitas 15
AMENDMENT NO. 2
TO LEASE
THIS AMENDMENT NO. 2 is made and entered into this 6th day of July, 1998,
by and between JOHN ARRILLAGA, Trustee, or his Successor Trustee UTA dated
7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) (previously known as the "John
Arrillaga Separate Property Trust") as amended, and RICHARD T. PEERY, Trustee,
or his Successor Trustee UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY
TRUST) as amended, collectively as LANDLORD, and ADAC LABORATORIES, a California
corporation, as TENANT.
RECITALS
A. WHEREAS, by Lease Agreement dated September 21, 1992 Landlord
leased to Tenant approximately 8,045 PLUS OR MINUS square feet of that
certain 43,401 PLUS OR MINUS square foot building located at 515 Alder Drive,
Milpitas, California, the details of which are more particularly set forth in
said September 21, 1992 Lease Agreement, and
B. WHEREAS, said Lease was amended by the Commencement Letter dated
November 23, 1992 which changed the Commencement Date of the Lease from November
1, 1992 to November 23, 1992, and changed the Termination Date from October 31,
1995 to November 30, 1995, and,
C. WHEREAS, said Lease was amended by Amendment No. 1 dated August 1,
1993 which amended the Lease by (i) increasing the square footage of the Leased
Premises by 13,720 square feet (for a total of 21,765 square feet) effective
November 15, 1993, (ii) extended the Term for three years and three months and
(iii) amended the Basic Rent schedule, Aggregate Rent and Security Deposit
accordingly, and,
D. WHEREAS, it is now the desire of the parties hereto to amend the Lease
by (i) extending the Term for seven years, changing the Termination Date from
February 28, 1999 to February 28, 2006, (ii) amending the Basic Rent schedule
and Aggregate Rent accordingly, (iii) increasing the Security Deposit required
under the Lease, (iv) amending the Management Fee charged to Tenant, (vii)
amending Lease Paragraphs 15 ("Property Insurance") and 19 ("Assignment and
Subletting"), (viii) replacing Lease Paragraphs 13 ("Liability Insurance"), 39
("Limitation of Liability") and 49 ("Hazardous Materials"), and (ix) adding a
paragraph ("Authority to Execute") to said Lease Agreement as hereinafter set
forth.
AGREEMENT
NOW THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and in consideration of the hereinafter mutual promises, the
parties hereto do agree as follows:
1. TERM OF LEASE: It is agreed between the parties that the Term of said
Lease Agreement shall be extended for an additional seven (7) year period, and
the Lease Termination Date shall be changed from February 28, 1999 to February
28, 2006.
2. BASIC RENTAL FOR EXTENDED TERM OF LEASE: The monthly Basic Rental for
the Extended Term of Lease shall be as follows:
On March 1, 1999, the sum of FORTY THREE THOUSAND FIVE HUNDRED THIRTY AND
NO/100 DOLLARS ($43,530.00) shall be due, and a like sum due on the first day of
each month thereafter through and including February 1, 2000.
On March 1, 2000, the sum of FORTY FIVE THOUSAND SEVEN HUNDRED SIX AND
50/100 DOLLARS ($45,706.50) shall be due, and a like sum due on the first day of
each month thereafter through and including February 1, 2001.
On March 1, 2001, the sum of FORTY SEVEN THOUSAND EIGHT HUNDRED EIGHTY
THREE AND NO/100 DOLLARS ($47,883.00) shall be due, and a like sum due on the
first day of each month thereafter through and including February 1, 2002.
Initial: ______
<PAGE>
On March 1, 2002, the sum of FIFTY THOUSAND FIFTY NINE AND 50/100 DOLLARS
($50,059.50) shall be due, and a like sum due on the first day of each month
thereafter through and including February 1, 2003.
On March 1, 2003, the sum of FIFTY TWO THOUSAND TWO HUNDRED THIRTY SIX AND
NO/100 DOLLARS ($52,236.00) shall be due, and a like sum due on the first day of
each month thereafter through and including February 1, 2004.
On March 1, 2004, the sum of FIFTY FOUR THOUSAND FOUR HUNDRED TWELVE AND
50/100 DOLLARS ($54,412.50) shall be due, and a like sum due on the first day of
each month thereafter, through and including February 1, 2005.
On March 1, 2005, the sum of FIFTY SIX THOUSAND FIVE HUNDRED EIGHTY NINE
AND NO/100 DOLLARS ($56,589.00) shall be due, and a like sum due on the first
day of each month thereafter, through and including February 1, 2006.
The Aggregate Basic Rent for the Lease shall be increased by $4,204,998.00
or from $1,580,415.22 to $5,785,413.22.
3. SECURITY DEPOSIT: Tenant's Security Deposit shall be increased by
$86,657.75, or from $26,520.25 to $113,178.00. Tenant shall pay $43,328.88 of
said $86,657.75 increase upon Tenant's execution of this Amendment No. 2. The
remaining $43,328.87 shall be in the form of a Promissory Note due September 1,
1999.
4. MANAGEMENT FEE: Beginning March 1, 1999, Tenant shall pay to Landlord,
in addition to the Basic Rent and Additional Rent, a FIXED monthly management
fee ("Management Fee") equal to three percent (3%) of the Basic Rent due for
each month throughout the remaining Lease Term. Tenant shall remain liable for
the five percent (5%) management fee previously charged against Additional Rent
through February 28, 1999.
5. PROPERTY INSURANCE: Lease Paragraph 15 ("Property Insurance") is
hereby amended to include the following: "Tenant acknowledges that as part of
the cost of insurance policies for the Premises, Tenant is responsible for the
payment of insurance deductibles on insurance claims as they relate to the
Premises".
6. ASSIGNMENT AND SUBLETTING: Lease Paragraph 19 ("Assignment and
Subletting") shall be amended to include the following language:
"A. Notwithstanding the foregoing, Landlord and Tenant agree that it shall
not be unreasonable for Landlord to refuse to consent to a proposed assignment,
sublease or other transfer ("Proposed Transfer") if the Premises or ant other
portion of the Property would become subject to additional or different
Government Requirements as a direct or indirect consequence of the Proposed
Transfer and/or the Proposed Transferee's use and occupancy of the Premises and
the Property. However, Landlord may, in its sole discretion, consent to such a
Proposed Transfer where Landlord is indemnified by Tenant and (i) Subtenant or
(ii) Assignee, in form and substance satisfactory to Landlord's counsel, by
Tenant and/or the Proposed Transferee from and against any and all costs,
expenses, obligations and liability arising out of the Proposed Transfer and/or
the Proposed Transferee's use and occupancy of the Premises and the Property.
B. Any and all sublease agreement(s) between Tenant and any and all
subtenant(s) (which agreements must be consented to by Landlord, pursuant to the
requirements of this Lease) shall contain the following language:
"If Landlord and Tenant jointly and voluntarily elect, for any
reason whatsoever, to terminate the Master Lease prior to the
scheduled Master Lease termination date, then this Sublease (if then
still in effect) shall terminate concurrently with the termination of
the Master Lease. Subtenant expressly acknowledges and agrees that
(1) the voluntary termination of the Master Lease by Landlord and
Tenant and the resulting termination of this Sublease shall not give
Subtenant any right or power to make any legal or equitable claim
against Landlord, including without limitation any claim for
interference with contract or interference with prospective
Initial: ______
<PAGE>
economic advantage, and (2) Subtenant hereby waives any and all rights
it may have under law or at equity against Landlord to challenge such
an early termination of the Sublease, and unconditionally releases and
relieves Landlord, and its officers, directors, employees and agents,
from any and all claims, demands, and/or causes of action whatsoever
(collectively, "Claims"), whether such matters are known or unknown,
latent or apparent, suspected or unsuspected, foreseeable or
unforeseeable, which Subtenant may have arising out of or in
connection with any such early termination of this Sublease.
Subtenant knowingly and intentionally waives any and all protection
which is or may be given by Section 1542 of the California Civil Code
which provides as follows: "A general release does not extend to
claims which the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if known by him must
have materially affected his settlement with debtor.
The term of this Sublease is therefore subject to early
termination. Subtenant's initials here below evidence (a) Subtenant's
consideration of and agreement to this early termination provision,
(b) Subtenant's acknowledgment that, in determining the net benefits
to be derived by Subtenant under the terms of this Sublease, Subtenant
has anticipated the potential for early termination, and (c)
Subtenant's agreement to the general waiver and release of Claims
above.
Initials: __________ Initials:__________"
Subtenant Tenant
7. LIABILITY INSURANCE: Lease Paragraph 13 ("Liability Insurance") shall
be deleted and replaced in its entirety by the following:
"13. LIABILITY INSURANCE: Tenant, at Tenant's expense, agrees to
keep in force during the Term of this Lease a policy of commercial general
liability insurance with combined single limit coverage of not less than
Two Million Dollars ($2,000,000) per occurrence for bodily injury and
property damage occurring in, on or about the Premises, including parking
and landscaped areas. Such insurance shall be primary and noncontributory
as respects any insurance carried by Landlord. The policy or polices
effecting such insurance shall name Landlord as additional insureds, and
shall insure any liability of Landlord, contingent or otherwise, as
respects acts or omissions of Tenant, its agents, employees or invitees or
otherwise by any conduct or transactions of any of said persons in or about
or concerning the Premises, including any failure of Tenant to observe or
perform any of its obligations hereunder; shall be issued by an insurance
company admitted to transact business in the State of California; and shall
provide that the insurance effected thereby shall not be canceled, except
upon thirty (30) days' prior written notice to Landlord. A certificate of
insurance of said policy shall be delivered to Landlord. If, during the
Term of this Lease, in the considered opinion of Landlord's Lender,
insurance advisor, or counsel, the amount of insurance described in this
Paragraph 13 is not adequate, Tenant agrees to increase said coverage to
such reasonable amount as Landlord's Lender, insurance advisor, or counsel
shall deem adequate."
8. LIMITATION OF LIABILITY: Lease Paragraph 39 ("Limitation of
Liability") shall be deleted and replaced in its entirety by the following:
"39. LIMITATION OF LIABILITY In consideration of the benefits
accruing hereunder, Tenant and all successors and assigns covenant and
agree that, in the event of any actual or alleged failure, breach or
default hereunder by Landlord:
(i) the sole and exclusive remedy shall be against Landlord's interest in
the Premises leased herein;
(ii) no partner of Landlord shall be sued or named as a party in any suit
or action (except as may be necessary to secure jurisdiction of the
partnership);
Initial: ______
<PAGE>
(iii) no service of process shall be made against any partner of Landlord
(except as may be necessary to secure jurisdiction of the partnership);
(iv) no partner of Landlord shall be required to answer or otherwise plead
to any service of process;
(v) no judgment will be taken against any partner of Landlord;
(vi) any judgment taken against any partner of Landlord may be vacated and
set aside at any time without hearing;
(vii) no writ of execution will ever be levied against the assets of any
partner of Landlord;
(viii) these covenants and agreements are enforceable both by Landlord and
also by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements
shall be applicable to any covenant or agreement either expressly contained
in this Lease or imposed by statute or at common law."
9. HAZARDOUS MATERIALS: Lease Paragraph 49 ("Hazardous Materials")
shall be deleted in its entirety and replaced with the following:
"49. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with
respect to the existence or use of "Hazardous Materials" (as defined
herein) on, in, under or about the Premises and real property located
beneath said Premises and the common areas of the Complex (hereinafter
collectively referred to as the "Property"):
A. As used herein, the term "Hazardous Materials" shall mean
any material, waste, chemical, mixture or byproduct which is or
hereafter is defined, listed or designated under Environmental Laws
(defined below) as a pollutant, or as a contaminant, or as a toxic or
hazardous substance, waste or material, or any other unwholesome,
hazardous, toxic, biohazardous, or radioactive material, waste,
chemical, mixture or byproduct, or which is listed, regulated or
restricted by any Environmental Law (including, without limitation,
petroleum hydrocarbons or any distillates or derivatives or fractions
thereof, polychlorinated biphenyls, or asbestos). As used herein, the
term "Environmental Laws" shall mean any applicable Federal, State of
California or local government law (including common law), statute,
regulation, rule, ordinance, permit, license, order, requirement,
agreement, or approval, or any determination, judgment, directive, or
order of any executive or judicial authority at any level of Federal,
State of California or local government (whether now existing or
subsequently adopted or promulgated) relating to pollution or the
protection of the environment, ecology, natural resources, or public
health and safety.
B. Tenant shall obtain Landlord's written consent, which may be
withheld in Landlord's discretion, prior to the occurrence of any Tenant's
Hazardous Materials Activities (defined below); provided, however, that
Landlord's consent shall not be required for normal use in compliance with
applicable Environmental Laws of customary household and office supplies
(Tenant shall first provide Landlord with a list of said materials use),
such as mild cleaners, lubricants and copier toner. As used herein, the
term "Tenant's Hazardous Materials Activities" shall mean any and all use,
handling, generation, storage, disposal, treatment, transportation,
discharge, or emission of any Hazardous Materials on, in, beneath, to,
from, at or about the Property, in connection with Tenant's use of the
Property, or by Tenant or by any of Tenant's agents, employees,
contractors, vendors, invitees, visitors or its future subtenants or
assignees. Tenant agrees that any and all Tenant's Hazardous Materials
Activities shall be conducted in strict, full compliance with applicable
Environmental Laws at Tenant's expense, and shall not result in any
contamination of the Property or the environment. Tenant agrees to provide
Landlord with prompt written notice of any spill or release of Hazardous
Materials at the Property during the term of the Lease of which Tenant
becomes aware, and further agrees to provide Landlord with prompt written
notice of any violation of Environmental Laws in connection with Tenant's
Hazardous Materials Activities of which Tenant becomes aware. If Tenant's
Hazardous Materials Activities involve Hazardous Materials other than
normal use of customary household and office supplies, Tenant also agrees
at Tenant's expense: (i) to install such Hazardous Materials
Initial: ______
<PAGE>
monitoring, storage and containment devices as Landlord reasonably deems
necessary (Landlord shall have no obligation to evaluate the need for any
such installation or to require any such installation); (ii) provide
Landlord with a written inventory of such HazardousMaterials, including an
update of same each year upon the anniversary date of the Commencement Date
of the Lease ("Anniversary Date"); and (iii) on each Anniversary Date, to
retain a qualified environmental consultant, acceptable to Landlord, to
evaluate whether Tenant is in compliance with all applicable Environmental
Laws with respect to Tenant's Hazardous Materials Activities. Tenant, at
its expense, shall submit to Landlord a report from such environmental
consultant which discusses the environmental consultant's findings within
two (2) months of each Anniversary Date. Tenant, at its expense, shall
promptly undertake and complete any and all steps necessary, and in full
compliance with applicable Environmental Laws, to fully correct any and all
problems or deficiencies identified by the environmental consultant, and
promptly provide Landlord with documentation of all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at its
expense, shall (i) properly remove from the Property all Hazardous
Materials which come to be located at the Property in connection with
Tenant's Hazardous Materials Activities, and (ii) fully comply with and
complete all facility closure requirements of applicable Environmental Laws
regarding Tenant's Hazardous Materials Activities, including but not
limited to (x) properly restoring and repairing the Property to the extent
damaged by such closure activities, and (y) obtaining from the local Fire
Department or other appropriate governmental authority with jurisdiction a
written concurrence that closure has been completed in compliance with
applicable Environmental Laws. Tenant shall promptly provide Landlord with
copies of any claims, notices, work plans, data and reports prepared,
received or submitted in connection with any such closure activities.
D. If Landlord, in its sole discretion, believes that the Property
has become contaminated as a result of Tenant's Hazardous Materials
Activities, Landlord in addition to any other rights it may have under this
Lease or under Environmental Laws or other laws, may enter upon the
Property and conduct inspection, sampling and analysis, including but not
limited to obtaining and analyzing samples of soil and groundwater, for the
purpose of determining the nature and extent of such contamination. Tenant
shall promptly reimburse Landlord for the costs of such an investigation,
including but not limited to reasonable attorneys' fees Landlord incurs
with respect to such investigation, that discloses Hazardous Materials
contamination for which Tenant is liable under this Lease. Notwithstanding
the above, Landlord may, at its option and in its sole and absolute
discretion, choose to perform remediation and obtain reimbursement for
cleanup costs as set forth herein from Tenant. Any cleanup costs incurred
by Landlord as the result of Tenant's Hazardous Materials Activities shall
be reimbursed by Tenant within thirty (30) days of presentation of written
documentation of the expense to Tenant by Landlord. Such reimbursable
costs shall include, but not be limited to, any reasonable consultant and
attorney fees incurred by Landlord. Tenant shall take all actions
necessary to preserve any claims it has against third parties, including,
but not limited to, its insurers, for claims related to its operation,
management of Hazardous Materials or contamination of the Property. Except
as may be required of Tenant by applicable Environmental Laws, Tenant shall
not perform any sampling, testing, or drilling to identify the presence of
any Hazardous Materials at the Property, without Landlord's prior written
consent which may be withheld in Landlord's discretion. Tenant shall
promptly provide Landlord with copies of any claims, notices, work plans,
data and reports prepared, received or submitted in connection with any
sampling, testing or drilling performed pursuant to the preceding
sentence.
E. Tenant shall indemnify, defend (with legal counsel acceptable to
Landlord, whose consent shall not unreasonably be withheld) and hold
harmless Landlord, its employees, assigns, successors,
successors-in-interest, agents and representatives from and against any and
all claims (including but not limited to third party claims from a private
party or a government authority), liabilities, obligations, losses, causes
of action, demands, governmental proceedings or directives, fines,
penalties, expenses, costs (including but not limited to reasonable
attorneys', consultants' and other experts' fees and costs), and damages,
which arise from or relate to: (i) Tenant's Hazardous Materials
Activities; (ii) releases or discharges of Hazardous Materials at the
Property, which occur
Initial: ______
<PAGE>
during the Term of this Lease, (iii) any Hazardous Materials contamination
caused by Tenant prior to the Commencement Date of the Lease; or (iv) the
breach of any obligation of Tenant under this Paragraph 49 (collectively,
"Tenant's Environmental Indemnification"). Tenant's Environmental
Indemnification shall include but is not limited to the obligation to
promptly and fully reimburse Landlord for losses in or reductions to rental
income, and diminution in fair market value of the Property. Tenant's
Environmental Indemnification shall further include but is not limited to
the obligation to diligently and properly implement to completion, at
Tenant's expense, any and all environmental investigation, removal,
remediation, monitoring, reporting, closure activities, or other
environmental response action (collectively, "Response Actions"). Tenant
shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with
any Response Actions.
It is agreed that the Tenant's responsibilities related to Hazardous
Materials will survive the expiration or termination of this Lease and that
Landlord may obtain specific performance of Tenant's responsibilities under
this Paragraph 49."
10. AUTHORITY TO EXECUTE. The parties executing this Agreement hereby
warrant and represent that they are properly authorized to execute this
Agreement and bind the parties on behalf of whom they execute this Agreement
and to all of the terms, covenants and conditions of this Agreement as they
relate to the respective parties hereto.
EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions of
said September 21, 1992 Lease Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 2
to Lease as of the day and year last written below.
LANDLORD: TENANT:
JOHN ARRILLAGA SURVIVOR'S TRUST ADAC LABORATORIES
a California corporation
By By
--------------------------------- ----------------------------------
John Arrillaga, Trustee
Date: ------------------------------------
----------------------- Print or Type Name
RICHARD T. PEERY SEPARATE Title:
PROPERTY TRUST -----------------------------
By Date:
-------------------------------- -----------------------------
Richard T. Peery, Trustee
Date:
------------------------
Initial: ______
<PAGE>
Milpitas 11
AMENDMENT NO. 1
TO LEASE
THIS AMENDMENT NO. 1 is made and entered into this 6th day of July, 1998,
by and between JOHN ARRILLAGA, Trustee, or his Successor Trustee UTA dated
7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) (previously known as the "John
Arrillaga Separate Property Trust") as amended, and RICHARD T. PEERY, Trustee,
or his Successor Trustee UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY
TRUST) as amended, collectively as LANDLORD, and ADAC LABORATORIES, a California
corporation, as TENANT.
RECITALS
A. WHEREAS, by Lease Agreement dated December 6, 1993 Landlord leased
to Tenant approximately 13,786 PLUS OR MINUS square feet of that certain
52,812 PLUS OR MINUS square foot building located at 630 Alder Drive,
Milpitas, California, the details of which are more particularly set forth in
said December 6, 1993 Lease Agreement, and
B. WHEREAS, it is now the desire of the parties hereto to amend the Lease
by (i) extending the Term for seven years, changing the Termination Date from
February 28, 1999 to February 28, 2006, (ii) amending the Basic Rent schedule
and Aggregate Rent accordingly, (iii) increasing the Security Deposit required
under the Lease, (iv) amending the Management Fee charged to Tenant, (vii)
amending Lease Paragraphs 15 ("Property Insurance") and 19 ("Assignment and
Subletting"), (viii) replacing Lease Paragraphs 13 ("Liability Insurance"), 39
("Limitation of Liability") and 49 ("Hazardous Materials"), (ix) deleting Lease
Paragraph 48 ("Option to Lease Additional Space") and (x) adding a paragraph
("Authority to Execute") to said Lease Agreement as hereinafter set forth.
AGREEMENT
NOW THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and in consideration of the hereinafter mutual promises, the
parties hereto do agree as follows:
1. TERM OF LEASE: It is agreed between the parties that the Term of said
Lease Agreement shall be extended for an additional seven (7) year period, and
the Lease Termination Date shall be changed from February 28, 1999 to February
28, 2006.
2. BASIC RENTAL FOR EXTENDED TERM OF LEASE: The monthly Basic Rental for
the Extended Term of Lease shall be as follows:
On March 1, 1999, the sum of TWENTY SEVEN THOUSAND FIVE HUNDRED SEVENTY TWO
AND NO/100 DOLLARS ($27,572.00) shall be due, and a like sum due on the first
day of each month thereafter through and including February 1, 2000.
On March 1, 2000, the sum of TWENTY EIGHT THOUSAND NINE HUNDRED FIFTY AND
60/100 DOLLARS ($28,950.60) shall be due, and a like sum due on the first day of
each month thereafter through and including February 1, 2001.
On March 1, 2001, the sum of THIRTY THOUSAND THREE HUNDRED TWENTY NINE AND
20/100 DOLLARS ($30,329.20) shall be due, and a like sum due on the first day of
each month thereafter through and including February 1, 2002.
On March 1, 2002, the sum of THIRTY ONE THOUSAND SEVEN HUNDRED SEVEN AND
80/100 DOLLARS ($31,707.80) shall be due, and a like sum due on the first day of
each month thereafter through and including February 1, 2003.
On March 1, 2003, the sum of THIRTY THREE THOUSAND EIGHTY SIX AND 40/100
DOLLARS ($33,086.40) shall be due, and a like sum due on the first day of each
month thereafter through and including February 1, 2004.
On March 1, 2004, the sum of THIRTY FOUR THOUSAND FOUR HUNDRED SIXTY
Initial: _________
<PAGE>
FIVE AND NO/100 DOLLARS ($34,465.00) shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2005.
On March 1, 2005, the sum of THIRTY FIVE THOUSAND EIGHT HUNDRED FORTY THREE
AND 60/100 DOLLARS ($35,843.60) shall be due, and a like sum due on the first
day of each month thereafter, through and including February 1, 2006.
The Aggregate Basic Rent for the Lease shall be increased by $2,663,455.20
or from $894,133.28 to $3,557,588.48.
3. SECURITY DEPOSIT: Tenant's Security Deposit shall be increased by
$38,600.80, or from $33,086.40 to $71,687.20. Tenant shall pay $19,300.40 of
said $38,600.80 increase upon Tenant's execution of this Amendment No. 1. The
remaining $19,300.40 shall be in the form of a Promissory Note due September 1,
1999.
4. MANAGEMENT FEE: Beginning March 1, 1999, Tenant shall pay to Landlord,
in addition to the Basic Rent and Additional Rent, a FIXED monthly management
fee ("Management Fee") equal to two percent (2%) of the Basic Rent due for each
month throughout the remaining Lease Term. Tenant shall remain liable for the
five percent (5%) management fee previously charged against Additional Rent
through February 28, 1999.
5. PROPERTY INSURANCE: Lease Paragraph 15 ("Property Insurance") is
hereby amended to include the following: "Tenant acknowledges that as part of
the cost of insurance policies for the Premises, Tenant is responsible for the
payment of insurance deductibles on insurance claims as they relate to the
Premises".
6. ASSIGNMENT AND SUBLETTING: Lease Paragraph 19 ("Assignment and
Subletting") shall be amended to include the following language:
"A. Notwithstanding the foregoing, Landlord and Tenant agree that it shall
not be unreasonable for Landlord to refuse to consent to a proposed assignment,
sublease or other transfer ("Proposed Transfer") if the Premises or ant other
portion of the Property would become subject to additional or different
Government Requirements as a direct or indirect consequence of the Proposed
Transfer and/or the Proposed Transferee's use and occupancy of the Premises and
the Property. However, Landlord may, in its sole discretion, consent to such a
Proposed Transfer where Landlord is indemnified by Tenant and (i) Subtenant or
(ii) Assignee, in form and substance satisfactory to Landlord's counsel, by
Tenant and/or the Proposed Transferee from and against any and all costs,
expenses, obligations and liability arising out of the Proposed Transfer and/or
the Proposed Transferee's use and occupancy of the Premises and the Property.
B. Any and all sublease agreement(s) between Tenant and any and all
subtenant(s) (which agreements must be consented to by Landlord, pursuant to the
requirements of this Lease) shall contain the following language:
"If Landlord and Tenant jointly and voluntarily elect, for any reason
whatsoever, to terminate the Master Lease prior to the scheduled Master
Lease termination date, then this Sublease (if then still in effect) shall
terminate concurrently with the termination of the Master Lease. Subtenant
expressly acknowledges and agrees that (1) the voluntary termination of the
Master Lease by Landlord and Tenant and the resulting termination of this
Sublease shall not give Subtenant any right or power to make any legal or
equitable claim against Landlord, including without limitation any claim
for interference with contract or interference with prospective economic
advantage, and (2) Subtenant hereby waives any and all rights it may have
under law or at equity against Landlord to challenge such an early
termination of the Sublease, and unconditionally releases and relieves
Landlord, and its officers, directors, employees and agents, from any and
all claims, demands, and/or causes of action whatsoever (collectively,
"Claims"), whether such matters are known or unknown, latent or apparent,
suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may
have arising out of or in connection with any such early termination of
this Sublease. Subtenant knowingly and intentionally waives any and all
protection which is or may be given by Section 1542 of the California Civil
Code
Initial: _________
<PAGE>
which provides as follows: "A general release does not extend to claims
which the creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have materially
affected his settlement with debtor.
The term of this Sublease is therefore subject to early termination.
Subtenant's initials here below evidence (a) Subtenant's consideration of
and agreement to this early termination provision, (b) Subtenant's
acknowledgment that, in determining the net benefits to be derived by
Subtenant under the terms of this Sublease, Subtenant has anticipated the
potential for early termination, and (c) Subtenant's agreement to the
general waiver and release of Claims above.
Initials: __________ Initials:__________"
Subtenant Tenant
7. LIABILITY INSURANCE: Lease Paragraph 13 ("Liability Insurance") shall
be deleted and replaced in its entirety by the following:
"13. LIABILITY INSURANCE: Tenant, at Tenant's expense, agrees to
keep in force during the Term of this Lease a policy of commercial general
liability insurance with combined single limit coverage of not less than
Two Million Dollars ($2,000,000) per occurrence for bodily injury and
property damage occurring in, on or about the Premises, including parking
and landscaped areas. Such insurance shall be primary and noncontributory
as respects any insurance carried by Landlord. The policy or polices
effecting such insurance shall name Landlord as additional insureds, and
shall insure any liability of Landlord, contingent or otherwise, as
respects acts or omissions of Tenant, its agents, employees or invitees or
otherwise by any conduct or transactions of any of said persons in or about
or concerning the Premises, including any failure of Tenant to observe or
perform any of its obligations hereunder; shall be issued by an insurance
company admitted to transact business in the State of California; and shall
provide that the insurance effected thereby shall not be canceled, except
upon thirty (30) days' prior written notice to Landlord. A certificate of
insurance of said policy shall be delivered to Landlord. If, during the
Term of this Lease, in the considered opinion of Landlord's Lender,
insurance advisor, or counsel, the amount of insurance described in this
Paragraph 13 is not adequate, Tenant agrees to increase said coverage to
such reasonable amount as Landlord's Lender, insurance advisor, or counsel
shall deem adequate."
8. LIMITATION OF LIABILITY: Lease Paragraph 39 ("Limitation of
Liability") shall be deleted and replaced in its entirety by the following:
"39. LIMITATION OF LIABILITY In consideration of the benefits
accruing hereunder, Tenant and all successors and assigns covenant and
agree that, in the event of any actual or alleged failure, breach or
default hereunder by Landlord:
(i) the sole and exclusive remedy shall be against Landlord's interest in
the Premises leased herein;
(ii) no partner of Landlord shall be sued or named as a party in any suit
or action (except as may be necessary to secure jurisdiction of the
partnership);
(iii) no service of process shall be made against any partner of Landlord
(except as may be necessary to secure jurisdiction of the partnership);
(iv) no partner of Landlord shall be required to answer or otherwise plead
to any service of process;
(v) no judgment will be taken against any partner of Landlord;
(vi) any judgment taken against any partner of Landlord may be vacated and
set aside at any time without hearing;
(vii) no writ of execution will ever be levied against the assets of any
partner of Landlord;
(viii) these covenants and agreements are enforceable both by Landlord and
also by any partner of Landlord.
Initial: _________
<PAGE>
partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall be
applicable to any covenant or agreement either expressly contained in this Lease
or imposed by statute or at common law."
9. HAZARDOUS MATERIALS: Lease Paragraph 49 ("Hazardous Materials") shall
be deleted in its entirety and replaced with the following:
"49. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows
with respect to the existence or use of "Hazardous Materials" (as
defined herein) on, in, under or about the Premises and real property
located beneath said Premises and the common areas of the Complex
(hereinafter collectively referred to as the "Property"):
A. As used herein, the term "Hazardous Materials" shall mean
any material, waste, chemical, mixture or byproduct which is or
hereafter is defined, listed or designated under Environmental Laws
(defined below) as a pollutant, or as a contaminant, or as a toxic or
hazardous substance, waste or material, or any other unwholesome,
hazardous, toxic, biohazardous, or radioactive material, waste,
chemical, mixture or byproduct, or which is listed, regulated or
restricted by any Environmental Law (including, without limitation,
petroleum hydrocarbons or any distillates or derivatives or fractions
thereof, polychlorinated biphenyls, or asbestos). As used herein, the
term "Environmental Laws" shall mean any applicable Federal, State of
California or local government law (including common law), statute,
regulation, rule, ordinance, permit, license, order, requirement,
agreement, or approval, or any determination, judgment, directive, or
order of any executive or judicial authority at any level of Federal,
State of California or local government (whether now existing or
subsequently adopted or promulgated) relating to pollution or the
protection of the environment, ecology, natural resources, or public
health and safety.
B. Tenant shall obtain Landlord's written consent, which may be withheld
in Landlord's discretion, prior to the occurrence of any Tenant's Hazardous
Materials Activities (defined below); provided, however, that Landlord's consent
shall not be required for normal use in compliance with applicable Environmental
Laws of customary household and office supplies (Tenant shall first provide
Landlord with a list of said materials use), such as mild cleaners, lubricants
and copier toner. As used herein, the term "Tenant's Hazardous Materials
Activities" shall mean any and all use, handling, generation, storage, disposal,
treatment, transportation, discharge, or emission of any Hazardous Materials on,
in, beneath, to, from, at or about the Property, in connection with Tenant's use
of the Property, or by Tenant or by any of Tenant's agents, employees,
contractors, vendors, invitees, visitors or its future subtenants or assignees.
Tenant agrees that any and all Tenant's Hazardous Materials Activities shall be
conducted in strict, full compliance with applicable Environmental Laws at
Tenant's expense, and shall not result in any contamination of the Property or
the environment. Tenant agrees to provide Landlord with prompt written notice
of any spill or release of Hazardous Materials at the Property during the term
of the Lease of which Tenant becomes aware, and further agrees to provide
Landlord with prompt written notice of any violation of Environmental Laws in
connection with Tenant's Hazardous Materials Activities of which Tenant becomes
aware. If Tenant's Hazardous Materials Activities involve Hazardous Materials
other than normal use of customary household and office supplies, Tenant also
agrees at Tenant's expense: (i) to install such Hazardous Materials monitoring,
storage and containment devices as Landlord reasonably deems necessary (Landlord
shall have no obligation to evaluate the need for any such installation or to
require any such installation); (ii) provide Landlord with a written inventory
of such HazardousMaterials, including an update of same each year upon the
anniversary date of the Commencement Date of the Lease ("Anniversary Date"); and
(iii) on each Anniversary Date, to retain a qualified environmental consultant,
acceptable to Landlord, to evaluate whether Tenant is in compliance with all
applicable Environmental Laws with respect to Tenant's Hazardous Materials
Activities. Tenant, at its expense, shall submit to Landlord a report from such
environmental consultant which discusses the environmental consultant's findings
within two (2) months of each Anniversary Date.
Initial: _________
<PAGE>
Tenant, at its expense, shall promptly undertake and complete any and all
steps necessary, and in full compliance with applicable Environmental Laws,
to fully correct any and all problems or deficiencies identified by the
environmental consultant, and promptly provide Landlord with documentation
of all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at its
expense, shall (i) properly remove from the Property all Hazardous
Materials which come to be located at the Property in connection with
Tenant's Hazardous Materials Activities, and (ii) fully comply with and
complete all facility closure requirements of applicable Environmental Laws
regarding Tenant's Hazardous Materials Activities, including but not
limited to (x) properly restoring and repairing the Property to the extent
damaged by such closure activities, and (y) obtaining from the local Fire
Department or other appropriate governmental authority with jurisdiction a
written concurrence that closure has been completed in compliance with
applicable Environmental Laws. Tenant shall promptly provide Landlord with
copies of any claims, notices, work plans, data and reports prepared,
received or submitted in connection with any such closure activities.
D. If Landlord, in its sole discretion, believes that the Property
has become contaminated as a result of Tenant's Hazardous Materials
Activities, Landlord in addition to any other rights it may have under this
Lease or under Environmental Laws or other laws, may enter upon the
Property and conduct inspection, sampling and analysis, including but not
limited to obtaining and analyzing samples of soil and groundwater, for the
purpose of determining the nature and extent of such contamination. Tenant
shall promptly reimburse Landlord for the costs of such an investigation,
including but not limited to reasonable attorneys' fees Landlord incurs
with respect to such investigation, that discloses Hazardous Materials
contamination for which Tenant is liable under this Lease. Notwithstanding
the above, Landlord may, at its option and in its sole and absolute
discretion, choose to perform remediation and obtain reimbursement for
cleanup costs as set forth herein from Tenant. Any cleanup costs incurred
by Landlord as the result of Tenant's Hazardous Materials Activities shall
be reimbursed by Tenant within thirty (30) days of presentation of written
documentation of the expense to Tenant by Landlord. Such reimbursable
costs shall include, but not be limited to, any reasonable consultant and
attorney fees incurred by Landlord. Tenant shall take all actions
necessary to preserve any claims it has against third parties, including,
but not limited to, its insurers, for claims related to its operation,
management of Hazardous Materials or contamination of the Property. Except
as may be required of Tenant by applicable Environmental Laws, Tenant shall
not perform any sampling, testing, or drilling to identify the presence of
any Hazardous Materials at the Property, without Landlord's prior written
consent which may be withheld in Landlord's discretion. Tenant shall
promptly provide Landlord with copies of any claims, notices, work plans,
data and reports prepared, received or submitted in connection with any
sampling, testin or drilling performed pursuant to the preceding sentence.
E. Tenant shall indemnify, defend (with legal counsel acceptable to
Landlord, whose consent shall not unreasonably be withheld) and hold
harmless Landlord, its employees, assigns, successors,
successors-in-interest, agents and representatives from and against any and
all claims (including but not limited to third party claims from a private
party or a government authority), liabilities, obligations, losses, causes
of action, demands, governmental proceedings or directives, fines,
penalties, expenses, costs (including but not limited to reasonable
attorneys', consultants' and other experts' fees and costs), and damages,
which arise from or relate to: (i) Tenant's Hazardous Materials
Activities; (ii) releases or discharges of Hazardous Materials at the
Property, which occur during the Term of this Lease, (iii) any Hazardous
Materials contamination caused by Tenant prior to the Commencement Date of
the Lease; or (iv) the breach of any obligation of Tenant under this
Paragraph 49 (collectively, "Tenant's Environmental Indemnification").
Tenant's Environmental Indemnification shall include but is not limited to
the obligation to promptly and fully reimburse Landlord for losses in or
reductions to rental income, and diminution in fair market value of the
Property. Tenant's Environmental Indemnification shall further include but
is not limited to the obligation to diligently and properly implement to
completion, at Tenant's expense, any and all environmental investigation,
removal, remediation, monitoring, reporting, closure activities, or other
environmental response action (collectively, "Response Actions").
Initial: _________
<PAGE>
Tenant shall promptly provide Landlord with copies of any claims, notices,
work plans, data and reports prepared, received or submitted in connection
with any Response Actions.
It is agreed that the Tenant's responsibilities related to Hazardous
Materials will survive the expiration or termination of this Lease and that
Landlord may obtain specific performance of Tenant's responsibilities under
this Paragraph 49."
10. OPTION TO LEASE ADDITIONAL SPACE: Tenant's Option to Lease an
additional 9,483 square feet under Lease Paragraph 48 ("Option to Lease
Additional Space") expired on April 1, 1994; therefore it is agreed between the
parties that said Lease Paragraph 48 is hereby deleted in its entirety and of no
further force or effect.
11. AUTHORITY TO EXECUTE. The parties executing this Agreement hereby
warrant and represent that they are properly authorized to execute this
Agreement and bind the parties on behalf of whom they execute this Agreement and
to all of the terms, covenants and conditions of this Agreement as they relate
to the respective parties hereto.
EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions of
said December 6, 1993 Lease Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 1
to Lease as of the day and year last written below.
LANDLORD: TENANT:
JOHN ARRILLAGA SURVIVOR'S TRUST ADAC LABORATORIES
a California corporation
By By
-------------------------------- --------------------------------
John Arrillaga, Trustee
-----------------------------------
Date: Print or Type Name
------------------------------
RICHARD T. PEERY SEPARATE Title:
PROPERTY TRUST ----------------------------
By Date:
-------------------------------- ------------------------------
Richard T. Peery, Trustee
Date:
-----------------------------
Initial: _________
<PAGE>
ADDENDUM NO. 1
This ADDENDUM NO. 1 (this "Addendum") is made in connection with and is a
part of that certain Lease, dated as of August 19, 1998, by and between GOLDEN
PACIFIC, LLC, a Delaware limited liability company, as Landlord, and ADAC
LABORATORIES, as Tenant, (the "Lease").
1. DEFINITIONS AND CONFLICT. All capitalized terms referred to in this
Addendum shall have the same meaning as provided in the Lease, except as
expressly provided to the contrary in this Addendum. In case of any conflict
between any term or provision of the Lease and any exhibits attached thereto and
this Addendum, this Addendum shall control.
2. ACCEPTANCE OF PREMISES. Landlord represents and warrants that as of
the Effective Date (a) the roof, all structural portions of the Premises,
plumbing, electrical, sprinklers and heating and air conditioning system for the
Premises are in good working order and repair. If there is a breach of the
foregoing representation and warranty within sixty (60) days after the
Commencement Date and Tenant provides written notice to Landlord within said
sixty (60) day period specifying the nature of the breach, then Landlord, at its
expense, shall promptly rectify such breach in a manner reasonably determined by
Landlord. The failure of Tenant to provide written notice of such breach of the
warranties set forth above within the specified time periods shall be
conclusively deemed that no such breach occurred. Tenant's acceptance of the
Premises shall not be deemed a waiver of Tenant's right to have latent defects
in the roof structure, foundation, footings, floor slab and exterior and load
bearing walls repaired at Landlord's expense; provided that Tenant shall give
notice to Landlord promptly after Tenant has knowledge of such defect or such
defect becomes reasonably apparent. Landlord agrees to assign to Tenant during
the Lease Term any warranty from any vendor with respect to the Premises which
is applicable to the Premises and will reduce Tenant's maintenance obligations
under this Lease, subject to Landlord's right to retain an interest in such
warranty if Tenant does not enforce such warranty. Such assignment is made
without representation or warranty as to the assignability, existence or
validity of any such warranty.
3. COMPLIANCE WITH REGULATIONS. Landlord represents and warrants to its
knowledge that as of the Effective Date: (a) the Private Restrictions do not
prohibit the permitted uses set forth in Section N of the Summary of Basic Lease
Terms, and (b) Landlord is not in receipt of notice of a violation of any Law
pertaining to the Premises (provided that Landlord has informed Tenant that due
to the age of the Building there may be work required to comply with existing
Laws in connection with the construction of the Tenant Improvements).
4. PARKING. The parties hereby acknowledge and agree that Tenant's
parking rights described in Section H of the Summary and Section 4.5 of this
Lease are included in the Base Monthly Rent, and under no circumstances,
including, without limitation, Landlord's institution of a validation or
assessment program, shall Tenant be required to pay Landlord or Landlord's
Agents any additional amount for said parking rights.
5. TRADE FIXTURES. All Tenant's Trade Fixtures and personal property
installed in the Premises at Tenant's expense ("Tenant's Property") shall at all
times remain Tenant's property and Tenant shall be entitled to all depreciation,
amortization and other tax benefits with respect thereto. At any time Tenant
may remove Tenant's Property from the Premises, provided Tenant repairs all
damage caused by such removal. Landlord shall have no lien or other interest
whatsoever in any item of Tenant's Property, or any portion thereof or interest
therein located in the Premises or elsewhere, and Landlord hereby waives all
such liens and interests. Within twenty (20) days following Tenant's request,
Landlord shall execute documents in a form reasonably acceptable to Landlord and
Tenant to evidence Landlord's waiver of any right, title, lien or interest in
Tenant's Property located in the Premises.
6. REPAIRS AND MAINTENANCE. Notwithstanding anything to the contrary in
this Lease, Landlord shall perform and construct, and Tenant shall have no
responsibility to perform or construct, any repair, maintenance, restoration,
replacement, renewal or improvement (i) necessitated by the gross negligence or
willful misconduct of Landlord or Landlord's Agents, or
1
<PAGE>
(ii) to the structural portions of the Project (which for purposes hereof shall
mean the roof structure, foundation, floor slab, footings, exterior and load
bearing walls of any building).
7. COMMON AREAS. Notwithstanding anything to the contrary in Section 6.3
of the Lease, Tenant shall at all times during the Term of this Lease have
reasonable access to and from the Premises and the parking lot outlined on
EXHIBIT A attached to this Lease.
8. HAZARDOUS MATERIALS.
(a) LIMITATION. Under no circumstance shall Tenant be liable for any
liabilities, losses, claims, damages, lost profits, consequential damages,
interest, penalties, fines, monetary sanctions, attorneys' fees, experts' fees,
court costs, remediation costs, investigation costs, and other expenses of every
type and nature, directly or indirectly arising out of or in connection with (i)
any pre-existing condition at the Project that may be in violation of the
Hazardous Materials Laws, or (ii) any use of Hazardous Materials by any other
tenant in the Project or any third party other than Tenant or Tenant's Agents,
or (iii) any migration of any Hazardous Materials from neighboring property in,
to, under or about the Building or Project.
(b) LANDLORD'S REPRESENTATION. Landlord represents and warrants to
the best of its actual knowledge, without independent investigation or the
imputation of knowledge from any other party, that as of the Effective Date,
Landlord (i) is not in receipt of notice of a violation nor is Landlord aware of
any violation of any applicable Hazardous Materials Laws as of the date hereof
with respect to the Premises or Building, (ii) no Hazardous Material is present
on the Premises, Building or Project in violation of any applicable Hazardous
Materials Laws, (iii) no underground storage tanks or asbestos-containing
building materials are present in the Premises or Building in violation of any
Hazardous Materials Laws, and (iv) no action, proceeding or claim is pending or
threatened regarding the Premises, Building or Project concerning the presence
of any Hazardous Materials. Landlord covenants and agrees that it shall not
deposit or dispose of any Hazardous Materials in the Building or Project in
violation of the applicable Hazardous Materials Laws. Under no circumstances
shall Landlord be liable to Tenant for any Hazardous Use by any tenant in the
Project or any third party or as a result of any migration of any Hazardous
Materials from adjacent property in, to, under or about the Building or Project.
The foregoing representation and warranty is made by Landlord, but shall not be
applicable to any lender under any mortgage or deed of trust now or hereafter
encumbering the Building or Project or any such lender that acquires the
Building or Project through foreclosure, trustee sale or deed in lieu thereof or
by person acquiring the Building or Project from such lender.
9. COMMON OPERATING EXPENSES.
(a) EXCLUSIONS. Notwithstanding anything contained in the Lease,
Common Operating Expenses shall not include and in no event shall Tenant have
any obligation to perform or to pay directly, or to reimburse Landlord for, all
or any portion of the following costs and expenses:
(1) Costs occasioned by the violation of any Law by Landlord or
Landlord's Agents or by the gross negligence or willful misconduct of Landlord
or Landlord's Agents;
(2) Costs occasioned by fire, acts of God, or other casualties
or by the exercise of the power of eminent domain;
(3) Costs to correct any construction defect in the structural
portions of the Building or Project, which for purposes hereof shall mean the
foundation, footings, floor slab, exterior and load bearing walls and roof
structure (as opposed to the roof covering or membrane), or the costs to comply
with any Private Restrictions or Laws relating to the Building or Project for
work or improvements required under the Private Restrictions or Laws prior to
the Effective Date;
(4) Depreciation, amortization (except as permitted above) or
other
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expense reserves;
(5) Interest, charges and fees incurred on debt, payments on
mortgages and rent under ground leases;
(6) The amount of the deductible under any insurance policy;
provided, however, that if Tenant or any Tenant's Agents causes the damage, loss
or claim, then Tenant shall be solely responsible for payment of the applicable
deductible to Landlord; provided further, however, that in no event shall Tenant
be required to pay any deductibles for earthquake or flood insurance maintained
in connection with the Project, Building or Premises;
(7) Costs incurred in connection with the presence of any
Hazardous Material, except to the extent caused by the storage, use or disposal
of the Hazardous Material in question by Tenant or Tenant's Agents;
(8) Costs to the extent for which Landlord has a right of
reimbursement from another tenant at the Project, another source or a vendor
under any warranty, except for warranty claims that Landlord determines in its
commercially reasonable discretion not to pursue or does not collect;
(9) Costs for which Tenant reimburses Landlord directly or which
Tenant pays directly to a third person;
(10) Costs relating to improvements and equipment that should be
capitalized under generally accepted accounting principles, except for Tenant's
Share of the amortized cost (with interest) of such improvement or equipment to
the extent provided in this Lease; and
(11) Costs relating to the repair, maintenance and replacement of
the structural elements of the Premises, Building, Common Areas or Project.
(b) ALLOCATIONS. Since the Project consists of three (3) separate
buildings including the Building, certain Common Operating Costs may pertain to
a particular building and other Common Operating Costs to the Project as a
whole. Common Operating Costs applicable to any particular building within the
Project shall be allocated and charged to the building in question whose tenants
shall be responsible for payment of their respective proportionate shares in the
pertinent building and other Common Operating Costs applicable to the Project
shall be allocated and charged to each building in the Project based on the
ratio that each building's gross leasable area bears to the total gross leasable
area of all buildings in the Project, with the tenants in each building in the
Project being responsible for paying their respective proportionate shares of
such costs. Landlord shall in good faith attempt to allocate such Common
Operating Costs to the buildings (including the Building) or Project, as the
case may be.
10. TENANT DEFAULT. Any reference in the Lease to the term "default" used
in the context of whether or not Tenant is in default, shall be deemed to refer
to an Event of Tenant's Default as defined in Article 13 of the Lease, so that
Tenant is given the required notice and opportunity to cure as set forth
therein.
11. LANDLORD'S DEFAULT. If Landlord fails to perform any of its
obligations under the Lease within a reasonable time but in no event later than
thirty (30) days after Landlord's receipt of written notice from Tenant (or such
longer period of time if such default cannot reasonably be cured within said
thirty (30) day period, provided, Landlord commences such cure within said
thirty (30) day period and thereafter diligently prosecutes such cure to
completion), Tenant may cure any default of Landlord, at Landlord's cost, and
Landlord shall pay to Tenant the cost of such cure, plus interest at the Agreed
Interest Rate, within fifteen (15) days after receipt of written demand.
12. LANDLORD'S ENTRY OF PREMISES. Any entry by Landlord and Landlord's
Agents under section 15.1 of the Lease shall not impair Tenant's operations more
than reasonably
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necessary. During any such entry, Landlord and Landlord's Agents shall comply
with Tenant's reasonable security measures, shall not impair Tenant's operations
more than reasonable necessary, and shall, at Tenant's election, be accompanied
by a representative Tenant if one is available at the time.
13. SUBORDINATION, RECOGNITION AND ATTORNMENT. At no cost or expense to
Landlord, Landlord shall request that the holder of a Security Instrument
provide its written agreement providing for the recognition of Tenant's rights,
interests and options under the Lease in the event of a foreclosure or
termination of the holder's Security Instrument (the "NDA"). Tenant shall
execute reasonable documents subordinating its interest in the Lease in
accordance with Section 15.4 provided any such Lender agrees to recognize all of
Tenant's rights, interests and options under this Lease in writing. Tenant
shall also attorn to a purchaser of the Premises at any foreclosure or private
sale or to any grantee or transferee, in the event such party agrees to
recognize Tenant's rights, interests and options under this Lease in writing.
Landlord's sole obligation under this section is to request such NDA. Tenant is
responsible for paying all costs and expenses for such NDA, including, without
limitation, the lender attorneys' fees and disbursements. Obtaining the NDA is
not a condition precedent to the Lease. The failure of such lender to issue its
NDA shall not relieve Tenant of any of its obligations under the Lease.
14. RULES AND REGULATIONS. Tenant shall not be required to comply with
any rule or regulation if the rule or regulation unreasonably interferes with
Tenant's use of or access to the Premises or Tenant's parking rights or if such
rule or regulation materially increases Tenant's obligations or materially
decreases Tenant's rights under the Lease.
15. UTILITIES. Landlord represents and warrants to its best knowledge
without independent investigation that the Premises are separately metered for
electricity and gas; however, the electricity for the Premises also provides
electricity for the exterior lighting of the Building.
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LEASE
BY AND BETWEEN
GOLDEN PACIFIC PROPERTIES, LLC,
a Delaware limited liability company,
as Landlord
and
ADAC LABORATORIES
a California corporation,
as Tenant
AFFECTING PREMISES COMMONLY KNOWN AS
1860 Barber Lane, Milpitas, California
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
ARTICLE 1 - DEFINITIONS 1
ARTICLE 2 - DEMISE, CONSTRUCTION, AND ACCEPTANCE 2
ARTICLE 3 - RENT 3
ARTICLE 4 - USE OF PREMISES 3
ARTICLE 5 - TRADE FIXTURES AND ALTERATIONS 5
ARTICLE 6 - REPAIR AND MAINTENANCE 6
ARTICLE 7 - WASTE DISPOSAL AND UTILITIES 7
ARTICLE 8 - COMMON OPERATING EXPENSES 8
ARTICLE 9 - INSURANCE 10
ARTICLE 10 - LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY 11
ARTICLE 11 - DAMAGE TO PREMISES 12
ARTICLE 12 - CONDEMNATION 13
ARTICLE 13 - DEFAULT AND REMEDIES 14
ARTICLE 14 - ASSIGNMENT AND SUBLETTING 15
ARTICLE 15 - GENERAL PROVISIONS 18
EXHIBITS
Exhibit A - Site plan of the Project and Outline of the Premises
Exhibit B - Work Letter for Tenant Improvements
ADDENDUM NO. 1
</TABLE>
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SUMMARY OF BASIC LEASE TERMS
<TABLE>
<CAPTION>
SECTION TERMS
(LEASE REFERENCE)
<S> <C>
A. LEASE REFERENCE DATE: August 19, 1998
(Introduction)
B. LANDLORD: GOLDEN PACIFIC PROPERTIES, LLC,
(Introduction) a Delaware limited liability company
C. TENANT: ADAC LABORATORIES
(Introduction) a California corporation
D. PREMISES: All of the space in the Building which contains approximately
(Section 1.21) 27,293 square feet of gross leasable area, as outlined in
EXHIBIT A attached hereto.
E. PROJECT: The Building, a commercial building located at 1820 McCarthy Boulevard, Milpitas,
(Section 1.22) CA containing approximately 41,263 square feet of space, another commercial building
located at 1840 McCarthy Boulevard, Milpitas, CA containing approximately 39,428
square feet of space, together with the Common Areas and the land on which such
improvements are located, as outlined in EXHIBIT A attached hereto.
F. BUILDING: The building in which the Premises are located, having an
(Section 1.7) address of 1860 Barber Lane, Milpitas, CA 95035, and containing 27,293 square feet of gross
leasable area.
G. TENANT'S SHARE: 100% of the Building, and
(Section 1.29) 25.28% of the Project (i.e., 27,293/107,984)
H. TENANT'S ALLOCATED PARKING STALLS: 109 parking stalls based on a ration of 4
(Section 4.5) parking stalls per 1,000 square feet in the Premises.
I. SCHEDULED COMMENCEMENT DATE: September 15, 1998
(Section 1.26)
J. LEASE TERM: Sixty (60) calendar months (plus the partial month following the Commencement Date if
(Section 1.18) such date is not the first day of a month), commencing on September 15, 1998 (the
"Commencement Date" and expiring September 30, 2003. If the Commencement Date is other
than the first day of a calendar month, the first month shall include the remainder of the
calendar month in which the Commencement Date occurs plus the first full calendar month
thereafter, and Base Monthly Rent for such first month shall include the full monthly rent
for the first full calendar month plus monthly rent for the partial month in which the
Commencement Date occurs prorated on a daily basis at the monthly rent provided for the
first calendar month.
K. BASE MONTHLY RENT:
(Section 3.1) MONTHS MONTHLY BASE RENT
1-12 $44,214.66
13-24 $45,541.10
25-36 $46,907.33
37-48 $48,314.55
49-60 $49,763.99
L. PREPAID RENT: $44,214.66 plus $6,548.44 for Tenant's Share of Common
(Section 3.3) Operating Expenses.
M. SECURITY DEPOSIT: $49,763.99
(Section 3.5)
N. PERMITTED USE: general administrative offices, sales, research and
(Section 4.1) development, light manufacturing (of non-Hazardous
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Materials hereinafter defined), warehouse and such other uses as are approved in writing by
Landlord, which approval shall not be unreasonably withheld.
O. PERMITTED TENANT'S ALTERATIONS LIMIT: $10,000.00
(Section 5.2)
P. TENANT'S LIABILITY INSURANCE MINIMUM: $3,000,000.00
(Section 9.1)
Q. LANDLORD'S ADDRESS:
(Section 1.3) c/o Gibson Speno Properties
5201 Great America Parkway
Suite 243
Santa Clara, CA 95054
` Attn.: Ruth Cornthwaite
With a copy to:
Divco West Group, LLC
150 Almaden Boulevard, Suite 700
San Jose, CA 95113
Attn.: Rosanna Davidson
R. TENANT'S ADDRESS:
(Section 1.3) ADAC Laboratories
540 Alder Drive
Milpitas, CA 95035
Attn.: Karen Masterson, General Counsel
S. RETAINED REAL ESTATE BROKERS:
(Section 15.13) Craig L. Fordyce and Michael L. Rosendin of Colliers Parrish International, Inc., representing the Landlord and
Tony Lautmann of the Staubach Company representing the Tenant.
T. LEASE: This Lease includes the summary of the Basic Lease
(Section 1.17) Terms, the Lease, and the following exhibits and addenda (if any):
EXHIBIT A - Project Site Plan and Outline of the Premises
EXHIBIT B - Work Letter for Tenant Improvements
EXHIBIT C - Hazardous Materials Questionnaire
ADDENDUM NO. 1
The foregoing Summary is hereby incorporated into and made a part of this Lease. Each reference in this Lease to any term of the
Summary shall mean the respective information set forth above and shall be construed to incorporate all of the terms provided under
the particular paragraph pertaining to such information. In the event of any conflict between the Summary and the Lease, the
Summary shall control.
</TABLE>
LANDLORD: TENANT:
GOLDEN PACIFIC PROPERTIES, LLC, ADAC LABORATORIES
a Delaware limited liability company a California corporation
By: Divco West Group, LLC, By: ______________________________
a Delaware limited liability company Name: _____________________________
Its Authorized Agent
Title: ____________________________
By: __________________________
Name: Scott Smithers
Its: President Dated: August __, 1998
Dated: August __, 1998
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LEASE
This Lease is dated as of the lease reference date specified in SECTION
A of the Summary and is made by and between the party identified as Landlord in
SECTION B of the Summary and the party identified as Tenant in SECTION C of the
Summary.
ARTICLE 1
DEFINITIONS
1.1 GENERAL: Any initially capitalized term that is given a special
meaning by this Article 1, the Summary, or by any other provision of this Lease
(including the exhibits attached hereto) shall have such meaning when used in
this Lease or any addendum or amendment hereto unless otherwise clearly
indicated by the context.
1.2 ADDITIONAL RENT: The term "Additional Rent" is defined in
PARA 3.2.
1.3 ADDRESS FOR NOTICES: The term "Address for Notices" shall mean
the addresses set forth in SECTIONS Q AND R of the Summary.
1.4 AGENTS: The term "Agents" shall mean the following: (i) with
respect to Landlord or Tenant, the agents, employees, contractors, and invitees
of such party; and (ii) in addition with respect to Tenant, Tenant's subtenants
and their respective agents, employees, contractors, and invitees.
1.5 AGREED INTEREST RATE: The term "Agreed Interest Rate" shall
mean that interest rate determined as of the time it is to be applied that is
equal to the lesser of (i) 5% in excess of the discount rate established by the
Federal Reserve Bank of San Francisco as it may be adjusted from time to time,
or (ii) the maximum interest rate permitted by Law.
1.6 BASE MONTHLY RENT: The term "Base Monthly Rent" shall mean the
fixed monthly rent payable by Tenant pursuant to PARA 3.1 which is specified in
SECTION K of the Summary.
1.7 BUILDING: The term "Building" shall mean the building in which
the Premises are located which Building is identified in SECTION F of the
Summary, the gross leasable area of which is referred to herein as the "Building
Gross Leasable Area."
1.8 COMMENCEMENT DATE: The term "Commencement Date" is the date the
Lease Term commences, which term is defined in SECTION J of the Summary.
1.9 COMMON AREA: The term "Common Area" shall mean all areas and
facilities within the Project that are not designated by Landlord for the
exclusive use of Tenant or any other lessee or other occupant of the Project,
including the parking areas, access and perimeter roads, pedestrian sidewalks,
landscaped areas, trash enclosures, recreation areas and the like.
1.10 COMMON OPERATING EXPENSES: The term "Common Operating Expenses"
is defined in PARA 8.2.
1.11 EFFECTIVE DATE: The term "Effective Date" shall mean the date
the last signatory to this Lease whose execution is required to make it binding
on the parties hereto shall have executed this Lease.
1.12 EVENT OF TENANT'S DEFAULT: The term "Event of Tenant's Default"
is defined in PARA 13.1.
1.13 HAZARDOUS MATERIALS: The terms "Hazardous Materials" and
"Hazardous Materials Laws" are defined in PARA 7.2E.
1.14 INSURED AND UNINSURED PERIL: The terms "Insured Peril" and
"Uninsured Peril" are defined in PARA 11.2E.
1.15 LAW: The term "Law" shall mean any judicial decision,
statute, constitution, ordinance, resolution, regulation, rule,
administrative order, or other requirement of any municipal, county, state,
federal or other government agency or authority having jurisdiction over the
parties to this Lease or the Premises, or both, in effect either at the
Effective Date or any time during the Lease Term, including, without
limitation, any Hazardous Material Law (as defined in PARA 7.2E) and the
Americans with Disabilities Act, 42 U.S.C. Sections 12101 ET. SEQ. and any
rules, regulations, restrictions, guidelines, requirements or publications
promulgated or published pursuant thereto.
1.16 LEASE: The term "Lease" shall mean the Summary and all elements
of this Lease identified in SECTION T of the Summary, all of which are attached
hereto and incorporated herein by this reference.
1.17 LEASE TERM: The term "Lease Term" shall mean the term of this
Lease which shall commence on the Commencement Date and continue for the period
specified in SECTION J of the Summary.
1.18 LENDER: The term "Lender" shall mean any beneficiary,
mortgagee, secured party, lessor, or other holder of any Security Instrument.
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1.19 PERMITTED USE: The term "Permitted Use" shall mean the use
specified in SECTION N of the Summary.
1.20 PREMISES: The term "Premises" shall mean that building area
described in SECTION D of the Summary that is within the Building.
1.21 PROJECT: The term "Project" shall mean that real property and
the improvements thereon which are specified in SECTION E of the Summary, the
aggregate gross leasable area of which is referred to herein as the "Project
Gross Leasable Area."
1.22 PRIVATE RESTRICTIONS: The term "Private Restrictions" shall
mean all recorded covenants, conditions and restrictions, private agreements,
reciprocal easement agreements, and any other recorded instruments affecting the
use of the Premises which (i) exist as of the Effective Date, or (ii) are
recorded after the Effective Date and are approved by Tenant.
1.23 REAL PROPERTY TAXES: The term "Real Property Taxes" is defined
in PARA 8.3.
1.24 SCHEDULED COMMENCEMENT DATE: The term "Scheduled Commencement
Date" shall mean the date specified in SECTION I of the Summary.
1.25 SECURITY INSTRUMENT: The term "Security Instrument" shall mean
any underlying lease, mortgage or deed of trust which now or hereafter affects
the Project, and any renewal, modification, consolidation, replacement or
extension thereof.
1.26 SUMMARY: The term "Summary" shall mean the Summary of Basic
Lease Terms executed by Landlord and Tenant that is part of this Lease.
1.27 TENANT'S ALTERATIONS: The term "Tenant's Alterations" shall
mean all improvements, additions, alterations, and fixtures installed in the
Premises by Tenant at its expense which are not Trade Fixtures.
1.28 TENANT'S SHARE: The term "Tenant's Share" shall mean the
percentage obtained by dividing Tenant's Gross Leasable Area by the Building
Gross Leasable Area for Tenant's Share of the Building and by the Project Gross
Leasable Area for Tenant's Share of the Project, which as of the Effective Date
is the percentage identified in SECTION G of the Summary.
1.29 TRADE FIXTURES: The term "Trade Fixtures" shall mean (i)
Tenant's inventory, furniture, signs, and business equipment, and (ii) anything
affixed to the Premises by Tenant at its expense for purposes of trade,
manufacture, ornament or domestic use (except replacement of similar work or
material originally installed by Landlord) which can be removed without material
injury to the Premises.
ARTICLE 2
DEMISE, CONSTRUCTION, AND ACCEPTANCE
2.1 DEMISE OF PREMISES: Landlord hereby leases to Tenant, and
Tenant leases from Landlord, for the Lease Term upon the terms and conditions of
this Lease, the Premises together with (i) the non-exclusive right to use the
number of Tenant's Allocated Parking Stalls within the Common Area (subject to
the limitations set forth in PARA 4.5), and (ii) the non-exclusive right to use
the Common Area for ingress to and egress from the Premises. Landlord reserves
the use of the exterior walls, the roof and the area beneath and above the
Premises, together with the right to install, maintain, use, and replace ducts,
wires, conduits and pipes leading through the Premises in a manner and in
locations which will not materially interfere with Tenant's use of the Premises.
2.2 COMMENCEMENT DATE: The term of this Lease shall commence on the
Commencement Date; however, Tenant may enter upon the Premises prior to the
Effective Date for the purpose of constructing the Tenant Improvements in
accordance with Exhibit B attached hereto.
2.3 CONSTRUCTION OF IMPROVEMENTS: Prior to the Commencement Date,
Tenant may construct certain improvements that shall constitute or become part
of the Premises if required by, and then in accordance with, the terms of
EXHIBIT B.
2.4 DELIVERY AND ACCEPTANCE OF POSSESSION: If Landlord is unable to
deliver possession of the Premises to Tenant by the Effective Date for any
reason whatsoever, this Lease shall not be void or voidable for a period of 30
days thereafter, and Landlord shall not be liable to Tenant for any loss or
damage resulting therefrom. In such event, the Commencement Date shall be
delayed one day for each day after the Effective Date that Landlord is unable to
deliver possession of the Premises to Tenant. Tenant agrees to accept
possession of the Premises in its then existing condition, "as-is", including
all patent defects; however, the Premises shall be in broom clean condition with
all debris, furniture and personal property removed.
2.5 PRE-TERM POSSESSION. Prior to the Commencement Date, Tenant may
thereupon enter the Premises to construct the Tenant Improvements at its own
risk. During the course of any pre-term possession, all terms and conditions of
this Lease shall apply, except for the payment of Base Monthly Rent and Tenant's
Share of Operating Expenses. During such pre-term possession, Tenant shall pay
for its utilities.
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ARTICLE 3
RENT
3.1 BASE MONTHLY RENT: Commencing on the Commencement Date and
continuing throughout the Lease Term, Tenant shall pay to Landlord the Base
Monthly Rent set forth in SECTION K of the Summary.
3.2 ADDITIONAL RENT: Commencing on the Commencement Date and
continuing throughout the Lease Term, Tenant shall pay the following as
additional rent (the "Additional Rent"): (i) any late charges or interest due
Landlord pursuant to PARA 3.4; (ii) Tenant's Share of Common Operating
Expenses as provided in PARA 8.1; (iii) Landlord's share of any Subrent
received by Tenant upon certain assignments and sublettings as required by
PARA14.1; (iv) any legal fees and costs due Landlord pursuant to PARA15.9;
and (v) any other charges due Landlord pursuant to this Lease.
3.3 PAYMENT OF RENT: Concurrently with the execution of this Lease
by both parties, Tenant shall pay to Landlord the amount set forth in SECTION L
of the Summary as prepayment of rent for credit against the first installment(s)
of Base Monthly Rent. All rent required to be paid in monthly installments
shall be paid in advance on the first day of each calendar month during the
Lease Term. If SECTION K of the Summary provides that the Base Monthly Rent is
to be increased during the Lease Term and if the date of such increase does not
fall on the first day of a calendar month, such increase shall become effective
on the first day of the next calendar month. All rent shall be paid in lawful
money of the United States, without any abatement, deduction or offset
whatsoever (except as specifically provided in PARA 11.4 and PARA 12.3), and
without any prior demand therefor. Rent shall be paid to Landlord at its
address set forth in SECTION Q of the Summary, or at such other place as
Landlord may designate from time to time. Tenant's obligation to pay Base
Monthly Rent and Tenant's Share of Common Operating Expenses shall be prorated
at the commencement and expiration of the Lease Term.
3.4 LATE CHARGE, INTEREST AND QUARTERLY PAYMENTS:
(a) LATE CHARGE. Tenant acknowledges that the late payment
by Tenant of any installment of rent, or any other sum of money required to be
paid by Tenant under this Lease, will cause Landlord to incur certain costs and
expenses not contemplated under this Lease, the exact amount of such costs being
extremely difficult and impractical to fix. Such costs and expenses will
include, without limitation, attorneys' fees, administrative and collection
costs, and processing and accounting expenses and other costs and expenses
necessary and incidental thereto. If any Base Monthly Rent or Additional Rent
is not received by Landlord from Tenant within five (5) days after receipt of
written notice, then Tenant shall immediately pay to Landlord a late charge
equal to 5% of such delinquent rent as liquidated damages for Tenant's failure
to make timely payment; provided, however, that if Landlord has provided two
notices of a late payment or default during any calendar year, Landlord shall
not be obligated to provide any notice during the remainder of the calendar year
in order for Tenant to be obligated to pay such late charge. In no event shall
this provision for a late charge be deemed to grant to Tenant a grace period or
extension of time within which to pay any rent or prevent Landlord from
exercising any right or remedy available to Landlord upon Tenant's failure to
pay any rent due under this Lease in a timely fashion, including any right to
terminate this Lease pursuant to PARA 13.2B.
(b) INTEREST. If any rent remains delinquent for a period
in excess of five (5) days then, in addition to such late charge, Tenant shall
pay to Landlord interest on any rent that is not paid when due at the Agreed
Interest Rate following the date such amount became due until paid.
(c) QUARTERLY PAYMENTS. If Tenant during any six (6) month
period shall be more than five (5) days delinquent in the payment of any rent or
other amount payable by Tenant hereunder on three (3) or more occasions, then,
notwithstanding anything herein to the contrary, Landlord may, by written notice
to Tenant, elect to require Tenant to pay all Base Monthly Rent and Additional
Rent quarterly in advance. Such right shall be in addition to and not in lieu
of any other right or remedy available to Landlord hereunder or at law on
account of Tenant's default hereunder
3.5 SECURITY DEPOSIT: On the Effective Date, Tenant shall deposit
with Landlord the amount set forth in SECTION M of the Summary as security for
the performance by Tenant of its obligations under this Lease, and not as
prepayment of rent (the "Security Deposit"). Landlord may from time to time
apply such portion of the Security Deposit as is reasonably necessary for the
following purposes: (i) to remedy any default by Tenant in the payment of rent;
(ii) to repair damage to the Premises caused by Tenant and clean the Premises
upon termination of the Lease; and (iii) to remedy any other default of Tenant
to the extent permitted by Law. In the event the Security Deposit or any
portion thereof is so used, Tenant agrees to pay to Landlord promptly upon
demand an amount in cash sufficient to restore the Security Deposit to the full
original amount. Landlord shall not be deemed a trustee of the Security
Deposit, may use the Security Deposit in business, and shall not be required to
segregate it from its general accounts. Tenant shall not be entitled to any
interest on the Security Deposit. If Landlord transfers the Premises during the
Lease Term, Landlord shall pay the Security Deposit to any transferee of
Landlord's interest in conformity with the provisions of California Civil Code
Section 1950.7 and/or any successor statute, in which event the transferring
Landlord will be released from all liability for the return of the Security
Deposit.
ARTICLE 4
USE OF PREMISES
4.1 LIMITATION ON USE: Tenant shall use the Premises solely for the
Permitted Use specified in SECTION N of the Summary, without the prior written
consent of Landlord which will not be unreasonably withheld. Tenant shall not
do anything in or about the Premises which will (i) cause structural injury to
the Building, or (ii) cause
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damage to any part of the Building except to the extent reasonably necessary for
the installation of Tenant's Trade Fixtures and Tenant's Alterations, and then
only in a manner which has been first approved by Landlord in writing. Tenant
shall not operate any equipment within the Premises which will (i) materially
damage the Building or the Common Area, (ii) overload existing electrical
systems or other mechanical equipment servicing the Building, (iii) impair the
efficient operation of the sprinkler system or the heating, ventilating or air
conditioning ("HVAC") equipment within or servicing the Building, or (iv)
damage, overload or corrode the sanitary sewer system. Tenant shall not attach,
hang or suspend anything from the ceiling, roof, walls or columns of the
Building or set any load on the floor in excess of the load limits for which
such items are designed nor operate hard wheel forklifts within the Premises.
Any dust, fumes, or waste products generated by Tenant's use of the Premises
shall be contained and disposed so that they do not (i) create an unreasonable
fire or health hazard, (ii) damage the Premises, or (iii) result in the
violation of any Law. Except as approved by Landlord, Tenant shall not change
the exterior of the Building or install any equipment or antennas on or make any
penetrations of the exterior or roof of the Building. Tenant shall not commit
any waste in or about the Premises, and Tenant shall keep the Premises in a
neat, clean, attractive and orderly condition, free of any nuisances. If
Landlord designates a standard window covering for use throughout the Building,
Tenant shall use this standard window covering to cover all windows in the
Premises. Tenant shall not conduct on any portion of the Premises or the
Project any sale of any kind, including any public or private auction, fire
sale, going-out-of-business sale, distress sale or other liquidation sale.
4.2 COMPLIANCE WITH REGULATIONS: Tenant shall not use the Premises
in any manner which violates any Laws or Private Restrictions which affect the
Premises. Tenant shall abide by and promptly observe and comply with all Laws
and Private Restrictions. Tenant shall not use the Premises in any manner which
will cause a cancellation of any insurance policy covering Tenant's Alternations
or any improvements installed by Landlord at its expense or which poses an
unreasonable risk of damage or injury to the Premises. Tenant shall not sell,
or permit to be kept, used, or sold in or about the Premises any article which
may be prohibited by the standard form of fire insurance policy. Tenant shall
comply with all reasonable requirements of any insurance company, insurance
underwriter, or Board of Fire Underwriters which are necessary to maintain the
insurance coverage carried by either Landlord or Tenant pursuant to this Lease;
provided, however, that if any such requirement involves the construction of any
capital improvement to the Premises, then Tenant shall not be required to comply
with or pay the cost of complying with such requirement, unless such compliance
is necessitated by Tenant's particular use of the Premises or any alteration or
improvement made to the Premises made by or on behalf of Tenant.
4.3 OUTSIDE AREAS: No materials, supplies, tanks or containers,
equipment, finished products or semi-finished products, raw materials,
inoperable vehicles or articles of any nature shall be stored upon or permitted
to remain outside of the Premises except in fully fenced and screened areas
outside the Building which have been designed for such purpose and have been
approved in writing by Landlord for such use by Tenant.
4.4 SIGNS: Tenant shall not place on any portion of the Premises
any sign, placard, lettering in or on windows, banner, displays or other
advertising or communicative material which is visible from the exterior of the
Building without the prior written approval of Landlord in its sole and absolute
discretion. Tenant may have its name placed on the existing monument sign
located on the grass burn on Barber Lane, subject to the prior approval by
Landlord in its sole and absolute discretion concerning the design and quality
of the sign. All such approved signs shall strictly conform to all Laws,
Private Restrictions, and Landlord's sign criteria then in effect, and shall be
installed at the expense of Tenant. Tenant shall maintain such signs in good
condition and repair. At the expiration or earlier termination of this Lease,
Tenant shall remove all of its signs and repair and damage caused as a result.
4.5 PARKING: Tenant is allocated and shall have the non-exclusive
right, free of charge, to use not more than the number of Tenant's Allocated
Parking Stalls contained within the Project described in SECTION H of the
Summary for its use and the use of Tenant's Agents, the location of which may be
designated from time to time by Landlord. Tenant shall not at any time use more
parking spaces than the number so allocated to Tenant or park its vehicles or
the vehicles of others in any portion of the Project not designated by Landlord
as a non-exclusive parking area. Tenant shall not have the exclusive right to
use any specific parking space. If Landlord grants to any other tenant the
exclusive right to use any particular parking space(s), Tenant shall not use
such spaces. Landlord reserves the right, after having given Tenant reasonable
notice, to have any vehicles owned by Tenant or Tenant's Agents utilizing
parking spaces in excess of the parking spaces allowed for Tenant's use to be
towed away at Tenant's cost. All trucks and delivery vehicles shall be (i)
parked at the rear of the Building, (ii) loaded and unloaded in a manner which
does not interfere with the businesses of other occupants of the Project, and
(iii) permitted to remain on the Project only so long as is reasonably necessary
to complete loading and unloading. In the event Landlord elects or is required
by any Law to limit or control parking in the Project, whether by validation of
parking tickets or any other method of assessment, Tenant agrees to participate
in such validation or assessment program under such reasonable rules and
regulations as are from time to time established by Landlord.
4.6 RULES AND REGULATIONS: Landlord may from time to time
promulgate reasonable and nondiscriminatory rules and regulations applicable to
all occupants of the Project for the care and orderly management of the Project
and the safety of its tenants and invitees. Such rules and regulations shall be
binding upon Tenant upon delivery of a copy thereof to Tenant, and Tenant agrees
to abide by such rules and regulations. If there is a conflict between the
rules and regulations and any of the provisions of this Lease, the provisions of
this Lease shall prevail. Landlord shall not be responsible for the violation
by any other tenant of the Project of any such rules and regulations.
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ARTICLE 5
TRADE FIXTURES AND ALTERATIONS
5.1 TRADE FIXTURES: Throughout the Lease Term, Tenant may provide
and install, and shall maintain in good condition, any Trade Fixtures required
in the conduct of its business in the Premises. All Trade Fixtures shall remain
Tenant's property.
5.2 TENANT'S ALTERATIONS: Construction by Tenant of Tenant's
Alterations shall be governed by the following:
A. Tenant shall not construct any Tenant's Alterations or
otherwise alter the Premises without Landlord's prior written approval. Tenant
shall be entitled, without Landlord's prior approval, to make Tenant's
Alterations (i) which do not affect the structural or exterior parts or water
tight character of the Building, and (ii) the reasonably estimated cost of
which, including the cost of demolition of any part of the Premises removed or
materially altered in connection with such Tenant's Alterations, together do not
exceed the Permitted Tenant Alterations Limit specified in SECTION O of the
Summary per work of improvement. In the event Landlord's approval for any
Tenant's Alterations is required, Tenant shall not construct any Tenant
Alteration until Landlord has approved in writing the plans and specifications
therefor, and such Tenant's Alterations shall be constructed substantially in
compliance with such approved plans and specifications by a licensed contractor
first approved by Landlord. All Tenant's Alterations constructed by Tenant
shall be constructed by a licensed contractor in accordance with all Laws using
new materials of good quality.
B. Tenant shall not commence construction of any Tenant's
Alterations until (i) all required governmental approvals and permits have been
obtained, (ii) all requirements regarding insurance imposed by this Lease have
been satisfied, (iii) Tenant has given Landlord at least five days' prior
written notice of its intention to commence such construction, and (iv) if
reasonably requested by Landlord, Tenant has obtained contingent liability and
broad form builders' risk insurance in an amount reasonably satisfactory to
Landlord if there are any perils relating to the proposed construction not
covered by insurance carried pursuant to Article 9.
C. All Tenant's Alterations shall remain the property of
Tenant; provided, however, that if Landlord requires Tenant to remove any
Tenant's Alterations, Tenant shall so remove such Tenant's Alterations prior to
the expiration or sooner termination of the Lease Term. Notwithstanding the
foregoing, Tenant shall not be obligated to remove any Tenant's Alterations with
respect to which the following is true: (i) Tenant was required, or elected, to
obtain the approval of Landlord to the installation of Tenant's Alteration in
question; (ii) at the time Tenant requested Landlord's approval, Tenant
requested of Landlord in writing that Landlord inform Tenant of whether or not
Landlord would require Tenant to remove such Tenant's Alteration at the
expiration of the Lease Term; and (iii) at the time Landlord granted its
approval, it did not inform Tenant that it would require Tenant to remove such
Tenant's Alteration at the expiration of the Lease Term.
5.3 ALTERATIONS REQUIRED BY LAW: Tenant shall make any
alteration, addition or change of any sort to the Premises that is required
by any Law because of (i) Tenant's particular use or change of use of the
Premises; (ii) Tenant's application for any permit or governmental approval;
or (iii) Tenant's construction or installation of any Tenant's Alterations or
Trade Fixtures. Any other alteration, addition, or change required by Law
which is not the responsibility of Tenant pursuant to the foregoing shall be
made by Landlord (subject to Landlord's right to reimbursement from Tenant
specified in PARA 5.4).
5.4 AMORTIZATION OF CERTAIN CAPITAL IMPROVEMENTS: Tenant shall pay
Additional Rent in the event Landlord reasonably elects or is required to make
any of the following kinds of capital improvements to the Project and the cost
thereof is not reimbursable as a Common Operating Expense: (i) capital
improvements required to be constructed in order to comply with any Law
(excluding any Hazardous Materials Law) not in effect or applicable to the
Project as of the Effective Date; (ii) modification of existing or construction
of additional capital improvements or building service equipment for the purpose
of reducing the consumption of utility services or Common Operating Expenses of
the Project; and (iii) replacement of capital improvements or building service
equipment existing as of the Effective Date when required because of normal wear
and tear. The amount of Additional Rent Tenant is to pay with respect to each
such capital improvement shall be determined as follows:
A. All costs paid by Landlord to construct such
improvements (including financing costs) shall be amortized over the useful life
of such improvement (as reasonably determined by Landlord in accordance with
generally accepted accounting principles) with interest on the unamortized
balance at the then prevailing market rate Landlord would pay if it borrowed
funds to construct such improvements from an institutional lender, and Landlord
shall inform Tenant of the monthly amortization payment required to so amortize
such costs, and shall also provide Tenant with the information upon which such
determination is made.
B. As Additional Rent, Tenant shall pay at the same time
the Base Monthly Rent is due an amount equal to Tenant's Share of that portion
of such monthly amortization payment fairly allocable to the Building (as
reasonably determined by Landlord) for each month after such improvements are
completed until the first to occur of (i) the expiration of the Lease Term (as
it may be extended), or (ii) the end of the term over which such costs were
amortized.
5.5 MECHANIC'S LIENS: Tenant shall keep the Project free from any
liens and shall pay when due all bills arising out of any work performed,
materials furnished, or obligations incurred by Tenant or Tenant's Agents
relating to the Project. If any claim of lien is recorded (except those caused
by Landlord or Landlord's Agents),
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Tenant shall bond against or discharge the same within 10 days after Tenant has
received notice that the same has been recorded against the Project. Should any
lien be filed against the Project or any action be commenced affecting title to
the Project, the party receiving notice of such lien or action shall immediately
give the other party written notice thereof.
5.6 TAXES ON TENANT'S PROPERTY: Tenant shall pay before delinquency
any and all taxes, assessments, license fees and public charges levied, assessed
or imposed against Tenant or Tenant's estate in this Lease or the property of
Tenant situated within the Premises which become due during the Lease Term. If
any tax or other charge is assessed by any governmental agency because of the
execution of this Lease, such tax shall be paid by Tenant. On demand by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of these
payments.
ARTICLE 6
REPAIR AND MAINTENANCE
6.1 TENANT'S OBLIGATION TO MAINTAIN: Except as otherwise
provided in PARA 6.2, PARA 11.1, and PARA 12.3, Tenant shall be responsible
for the following during the Lease Term:
A. Tenant shall clean and maintain in good order,
condition, and repair and replace when necessary the Premises and every part
thereof, through regular inspections and servicing, including, but not limited
to: (i) all plumbing and sewage facilities (including all sinks, toilets,
faucets and drains), and all ducts, pipes, vents or other parts of the HVAC or
plumbing system; (ii) all fixtures, interior walls, floors, carpets and
ceilings; (iii) all windows, doors, entrances, plate glass, showcases and
skylights (including cleaning both interior and exterior surfaces); (iv) all
electrical facilities and all equipment (including all lighting fixtures, lamps,
bulbs, tubes, fans, vents, exhaust equipment and systems); and (v) any automatic
fire extinguisher equipment in the Premises.
B. With respect to utility facilities serving the Premises
(including electrical wiring and conduits, gas lines, water pipes, and plumbing
and sewage fixtures and pipes), Tenant shall be responsible for the maintenance
and repair of any such facilities which serve only the Premises, including all
such facilities that are within the walls or floor, or on the roof of the
Premises, and any part of such facility that is not within the Premises, but
only up to the point where such facilities join a main or other junction (e.g.,
sewer main or electrical transformer) from which such utility services are
distributed to other parts of the Project as well as to the Premises. Tenant
shall replace any damaged or broken glass in the Premises (including all
interior and exterior doors and windows) with glass of the same kind, size and
quality. Tenant shall repair any damage to the Premises (including exterior
doors and windows) caused by vandalism or any unauthorized entry.
C. Tenant shall (i) maintain, repair and replace when
necessary all HVAC equipment which services only the Premises, and shall keep
the same in good condition through regular inspection and servicing, and (ii)
maintain continuously throughout the Lease Term a service contract for the
maintenance of all such HVAC equipment with a licensed HVAC repair and
maintenance contractor approved by Landlord, which contract provides for the
periodic inspection and servicing of the HVAC equipment at least once every 60
days during the Lease Term. Notwithstanding the foregoing, Landlord may elect
at any time to assume responsibility for the maintenance, repair and replacement
of such HVAC equipment which serves only the Premises. Tenant shall maintain
continuously throughout the Lease Term a service contract for the washing of all
windows (both interior and exterior surfaces) in the Premises with a contractor
approved by Landlord, which contract provides for the periodic washing of all
such windows at least once every 60 days during the Lease Term. Tenant shall
furnish Landlord with copies of all such service contracts, which shall provide
that they may not be canceled or changed without at least 30 days' prior written
notice to Landlord.
D. All repairs and replacements required of Tenant shall be
promptly made with new materials of like kind and quality. If the work affects
the structural parts of the Building or if the estimated cost of any item of
repair or replacement is in excess of the Permitted Tenant's Alterations Limit,
then Tenant shall first obtain Landlord's written approval of the scope of the
work, plans therefor, materials to be used, and the contractor.
E. Notwithstanding anything to the contrary in section 6.1
and its subsections, Landlord agrees to perform any repair or maintenance
required of Tenant under sections 6.1 A, B, C or D above that constitutes a
capital improvement under generally accepted accounting principles as determined
by Landlord in its reasonable discretion, if the cost of such work is estimated
to be more than $10,000.00 during any Lease Year and such work is not due to any
negligence or willful misconduct of Tenant or any of Tenant's Agents for which
the waiver of subrogation provisions of section 9.4 are not applicable or due to
any alterations by Tenant; provided, however that Tenant shall pay to Landlord
the amortized portion of the cost for any such repair or replacement in
accordance with Sections 5.4A and B of this Lease. Tenant shall not be
responsible for any repairs or maintenance due to the active negligence or
willful misconduct of Landlord or its Agents.
6.2 LANDLORD'S OBLIGATION TO MAINTAIN: Landlord shall repair,
maintain and operate the Common Area and repair and maintain the roof, exterior
and structural parts of the building(s) located on the Project so that the same
are kept in good order and repair. If there is central HVAC or other building
service equipment and/or utility facilities serving portions of the Common Area
and/or both the Premises and other parts of the Building, Landlord shall
maintain and operate (and replace when necessary) such equipment. Landlord
shall not be responsible for repairs required by an accident, fire or other
peril or for damage caused to any part of the Project by any act or omission of
Tenant or Tenant's Agents except as otherwise required by Article 11. Landlord
may engage contractors of its choice to perform the obligations required of it
by this Article, and the necessity of any expenditure to perform such
obligations shall be at the sole discretion of Landlord.
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6.3 CONTROL OF COMMON AREA: Landlord shall at all times have
exclusive control of the Common Area. Landlord shall have the right, without
the same constituting an actual or constructive eviction and without entitling
Tenant to any abatement of rent, to: (i) close any part of the Common Area to
whatever extent required in the opinion of Landlord's counsel to prevent a
dedication thereof or the accrual of any prescriptive rights therein; (ii)
temporarily close the Common Area to perform maintenance or for any other reason
deemed sufficient by Landlord; (iii) change the shape, size, location and extent
of the Common Area; (iv) eliminate from or add to the Project any land or
improvement, including multi-deck parking structures; (v) make changes to the
Common Area including, without limitation, changes in the location of driveways,
entrances, passageways, doors and doorways, elevators, stairs, restrooms, exits,
parking spaces, parking areas, sidewalks or the direction of the flow of traffic
and the site of the Common Area; (vi) remove unauthorized persons from the
Project; and/or (vii) change the name or address of the Building or Project.
Tenant shall keep the Common Area clear of all obstructions created or permitted
by Tenant. If in the opinion of Landlord unauthorized persons are using any of
the Common Area by reason of the presence of Tenant in the Building, Tenant,
upon demand of Landlord, shall restrain such unauthorized use by appropriate
proceedings. In exercising any such rights regarding the Common Area, (i)
Landlord shall make a reasonable effort to minimize any disruption to Tenant's
business, and (ii) Landlord shall not exercise its rights to control the Common
Area in a manner that would materially interfere with Tenant's use of the
Premises without first obtaining Tenant's consent. Landlord shall have no
obligation to provide guard services or other security measures for the benefit
of the Project. Tenant assumes all responsibility for the protection of Tenant
and Tenant's Agents from acts of third parties; provided, however, that nothing
contained herein shall prevent Landlord, at its sole option, from providing
security measures for the Project.
ARTICLE 7
WASTE DISPOSAL AND UTILITIES
7.1 WASTE DISPOSAL: Tenant shall store its waste either inside the
Premises or within outside trash enclosures that are fully fenced and screened
in compliance with all Private Restrictions, and designed for such purpose. All
entrances to such outside trash enclosures shall be kept closed, and waste shall
be stored in such manner as not to be visible from the exterior of such outside
enclosures. Tenant shall cause all of its waste to be regularly removed from
the Premises at Tenant's sole cost. Tenant shall keep all fire corridors and
mechanical equipment rooms in the Premises free and clear of all obstructions at
all times.
7.2 HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with
respect to the existence or use of Hazardous Materials on the Project:
A. Any handling, transportation, storage, treatment,
disposal or use of Hazardous Materials by Tenant and Tenant's Agents after the
Effective Date in or about the Project shall strictly comply with all applicable
Hazardous Materials Laws. Tenant shall indemnify, defend upon demand with
counsel reasonably acceptable to Landlord, and hold harmless Landlord from and
against any liabilities, losses, claims, damages, lost profits, consequential
damages, interest, penalties, fines, monetary sanctions, attorneys' fees,
experts' fees, court costs, remediation costs, investigation costs, and other
expenses which result from or arise in any manner whatsoever out of the use,
storage, treatment, transportation, release, or disposal of Hazardous Materials
on or about the Project by Tenant or Tenant's Agents after the Effective Date.
B. If the use, storage, treatment, transportation, release
or disposal of any Hazardous Material by Tenant or any of Tenant's Agents after
the Effective Date results in contamination or deterioration of water or soil
resulting in a level of contamination greater than the levels established as
acceptable by any governmental agency having jurisdiction over such
contamination, then Tenant shall promptly take any and all action necessary to
investigate and remediate such contamination if required by Law or as a
condition to the issuance or continuing effectiveness of any governmental
approval which relates to the use of the Project or any part thereof. Tenant
shall further be solely responsible for, and shall defend, indemnify and hold
Landlord and its agents harmless from and against, all claims, costs and
liabilities, including attorneys' fees and costs, arising out of or in
connection with any investigation and remediation required hereunder to return
the Project to its condition existing prior to the appearance of such Hazardous
Materials.
C. Landlord and Tenant shall each give written notice to
the other as soon as reasonably practicable of (i) any communication received
from any governmental authority concerning Hazardous Materials which relates to
the Project, and (ii) any contamination of the Project by Hazardous Materials
which constitutes a violation of any Hazardous Materials Law. Tenant may use
(a) small quantities of household chemicals such as adhesives, lubricants, and
cleaning fluids in order to conduct its business at the Premises and (b) such
other Hazardous Materials as are necessary and used in the management and
operation of the business of the original party signing this Lease as tenant as
of the Commencement Date as disclosed in the Hazardous Material Questionnaire
attached hereto as EXHIBIT C, which materials in either case were or are used in
the manner for which they were designed and in such amounts as may be necessary
for the operation of such business at the Property. If Tenant assigns this
Lease or sublets any space, then any such assignee's or sublessee's use of
Hazardous Materials in the normal and customary operation of its business shall
be subject to the prior written approval of Landlord. At any time during the
Lease Term, Tenant shall, within fifteen (15) days after written request
therefor received from Landlord, disclose in writing all Hazardous Materials
that are being used by Tenant on the Project, the nature of such use, and the
manner of storage and disposal.
D. Landlord may cause testing wells to be installed on the
Project, and may cause the ground water to be tested to detect the presence of
Hazardous Material by the use of such tests as are then
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customarily used for such purposes. If Tenant so requests, Landlord shall
supply Tenant with copies of such test results. The cost of such tests and
of the installation, maintenance, repair and replacement of such wells shall
be paid by Tenant if such tests disclose the existence of facts which give
rise to liability of Tenant pursuant to its indemnity given in PARA 7.2A
and/or PARA 7.2B.
E. As used herein, the term "Hazardous Material," means any
hazardous or toxic substance, material or waste which is or becomes regulated by
any local governmental authority, the State of California or the United States
Government. The term "Hazardous Material," includes, without limitation,
petroleum products, asbestos, PCB's, and any material or substance which is (i)
listed under Article 9 or defined as hazardous or extremely hazardous pursuant
to Article 11 of Title 22 of the California Administrative Code, Division 4,
Chapter 20, (ii) defined as a "hazardous waste" pursuant to Section 1004 of the
Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq. (42
U.S.C. 6903), or (iii) defined as a "hazardous substance" pursuant to Section
101 of the Comprehensive Environmental Response; Compensation and Liability Act,
42 U.S.C. 9601 et seq. (42 U.S.C. 9601). As used herein, the term "Hazardous
Material Law" shall mean any statute, law, ordinance, or regulation of any
governmental body or agency (including the U.S. Environmental Protection Agency,
the California Regional Water Quality Control Board, and the California
Department of Health Services) which regulates the use, storage, release or
disposal of any Hazardous Material.
F. The obligations of Landlord and Tenant under this
PARA 7.2 shall survive the expiration or earlier termination of the Lease
Term. The rights and obligations of Landlord and Tenant with respect to
issues relating to Hazardous Materials are exclusively established by this
PARA 7.2. In the event of any inconsistency between any other part of this
Lease and this PARA 7.2, the terms of this PARA 7.2 shall control.
7.3 UTILITIES: Tenant shall promptly pay, as the same become due,
all charges for water, gas, electricity, telephone, sewer service, waste pick-up
and any other utilities, materials or services furnished directly to or used by
Tenant on or about the Premises during the Lease Term, including, without
limitation, (i) meter, use and/or connection fees, hook-up fees, or standby fee
(excluding any connection fees or hook-up fees which relate to making the
existing electrical, gas, and water service available to the Premises as of the
Commencement Date), and (ii) penalties for discontinued or interrupted service.
If any utility service is not separately metered to the Premises, then Tenant
shall pay its pro rata share of the cost of such utility service with all others
served by the service not separately metered. However, if Landlord determines
that Tenant is using a disproportionate amount of any utility service not
separately metered, then Landlord at its election may (i) periodically charge
Tenant, as Additional Rent, a sum equal to Landlord's reasonable estimate of the
cost of Tenant's excess use of such utility service, or (ii) install a separate
meter (at Tenant's expense) to measure the utility service supplied to the
Premises.
7.4 COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Landlord and Tenant
shall comply with all rules, regulations and requirements promulgated by
national, state or local governmental agencies or utility suppliers concerning
the use of utility services, including any rationing, limitation or other
control. Tenant shall not be entitled to terminate this Lease nor to any
abatement in rent by reason of such compliance.
ARTICLE 8
COMMON OPERATING EXPENSES
8.1 TENANT'S OBLIGATION TO REIMBURSE: As Additional Rent, Tenant
shall pay Tenant's Share (specified in SECTION G of the Summary) of all Common
Operating Expenses with respect to the maintenance, repair, replacement and use
of the Building, Common Areas and Project. Tenant shall pay such share of the
actual Common Operating Expenses incurred or paid by Landlord but not
theretofore billed to Tenant within 30 days after receipt of a written bill
therefor from Landlord, on such periodic basis as Landlord shall designate, but
in no event more frequently than once a month. Alternatively, Landlord may from
time to time require that Tenant pay Tenant's Share of Common Operating Expenses
in advance in estimated monthly installments, in accordance with the following:
(I) Landlord shall deliver to Tenant Landlord's reasonable estimate of the
Common Operating expenses it anticipates will be paid or incurred for the
Landlord's fiscal year in question; (ii) during such Landlord's fiscal year
Tenant shall pay such share of the estimated Common Operating Expenses in
advance in monthly installments as required by Landlord due with the
installments of Base Monthly Rent; and (iii) within 90 days after the end of
each Landlord's fiscal year, Landlord shall furnish to Tenant a statement in
reasonable detail of the actual Common Operating Expenses paid or incurred by
Landlord during the just ended Landlord's fiscal year and thereupon there shall
be an adjustment between Landlord and Tenant, with payment to Landlord or credit
by Landlord against the next installment of Base Monthly Rent, as the case may
require, within 10 days after delivery by Landlord to Tenant of said statement,
so that Landlord shall receive the entire amount of Tenant's Share of all Common
Operating Expenses for such Landlord's fiscal year and no more. Tenant shall
have the right at its expense, exercisable upon reasonable prior written notice
to Landlord, to inspect at Landlord's office during normal business hours
Landlord's books and records as they relate to Common Operating Expenses. Such
inspection must be within 90 days of Tenant's receipt of Landlord's annual
sttement for the same, and shall be limited to verification of the charges
contained in such statement. Tenant may not withhold payment of such bill
pending completion of such inspection.
8.2 COMMON OPERATING EXPENSES DEFINED: The term "Common Operating
Expenses" shall mean the following:
A. All costs and expenses paid or incurred by Landlord in
doing the following (including payments to independent contractors providing
services related to the performance of the following): (i) maintaining,
cleaning, repairing and resurfacing the roof (including repair of leaks) and the
exterior surfaces (including painting) of the Building and all other structures
and improvements at the Project; (ii) maintenance of the
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liability, fire and property damage, earthquake and other insurance covering the
Project carried by Landlord pursuant to PARA 9.2 (including the prepayment of
premiums for coverage of up to one year); (iii) maintaining, repairing,
operating and replacing when necessary HVAC equipment, utility facilities and
other building service equipment; (iv) providing utilities to the Common Area
(including lighting, trash removal and water for landscaping irrigation); (v)
complying with all applicable Laws and Private Restrictions to the extent that
such requirements are not applicable to or required at the Building, Common
Areas or Project as of the Effective Date (but noncompliance with any Law in
effect as of the Effective Date which is permitted or not required to be
rectified or corrected under applicable Law because such improvements were in
compliance with applicable Law as of the date they were constructed shall not be
considered a violation of Law applicable to the Building, Common Areas or
Project under this section and therefore shall be included in the Common
Operating Expenses); (vi) operating, maintaining, repairing, cleaning, painting,
restriping and resurfacing the Common Area; (vii) replacement or installation of
lighting fixtures, directional or other signs and signals, irrigation systems,
trees, shrubs, ground cover and other plant materials, and all landscaping in
the Common Area; (viii) providing security (provided, however, that Landlord
shall not be obligated to provide security and if it does, Landlord may
discontinue such service at any time and in any event Landlord shall not be
responsible for any act or omission of any security personnel); and (ix) capital
improvements as provided in PARA 5.4 hereof;
B. The following costs: (i) Real Property Taxes as
defined in PARA 8.3; (ii) the amount of any "deductible" paid by Landlord
with respect to damage caused by any Insured Peril not to exceed $25,000.00;
(iii) the cost to repair damage caused by an Uninsured Peril up to a maximum
amount in any 12 month period equal to $25,000.00; and (iv) that portion of
all compensation (including benefits and premiums for workers' compensation
and other insurance) paid to or on behalf of employees of Landlord but only
to the extent they are involved in the performance of the work described by
PARA 8.2A that is fairly allocable to the Project;
C. Fees for management services rendered by either Landlord
or a third party manager engaged by Landlord (which may be a party affiliated
with Landlord), except that the total amount charged for management services and
included in Tenant's Share of Common Operating Expenses shall not exceed the
monthly rate of three percent (3%) of the Base Monthly Rent.
D. All additional costs and expenses incurred by Landlord
with respect to the operation, protection, maintenance, repair and replacement
of the Project which would be considered a current expense (and not a capital
expenditure) pursuant to generally accepted accounting principles; provided,
however, that Common Operating Expenses shall not include any of the following:
(i) payments on any loans or ground leases affecting the Project; (ii)
depreciation of the Building and all other structures and improvements at the
Project or any major systems of building service equipment within the Project;
(iii) leasing commissions; (iv) the cost of tenant improvements installed for
the exclusive use of other tenants of the Project; and (v) any cost incurred in
complying with Hazardous Materials Laws, which subject is governed exclusively
by PARA 7.2.
(E) BUILDING ALLOCATION. Since the Project consists of
multiple buildings including the Building, certain Common Operating Expenses may
pertain to a particular building(s) and other Common Operating Expenses to the
Project as a whole. Common Operating Expenses applicable to any particular
building within the Project shall be allocated and charged to the building in
question whose tenants shall be responsible for payment of their respective
proportionate shares in the pertinent building and other Common Operating
Expenses applicable to the Project shall be allocated and charged to each
building in the Project based on the ratio that each building's gross leasable
area bears to the total gross leasable area of all buildings in the Project,
with the tenants in each building in the Project being responsible for paying
their respective proportionate shares of such costs. Landlord shall in good
faith attempt to allocate such Common Operating Expenses to the buildings
(including the Building) or Project, as the case may be, and such allocation
shall be binding on Tenant.
8.3 REAL PROPERTY TAXES DEFINED: The term "Real Property Taxes"
shall mean all taxes, assessments, levies, and other charges of any kind or
nature whatsoever, general and special, foreseen and unforeseen (including all
installments of principal and interest required to pay any existing or future
general or special assessments for public improvements, services or benefits,
and any increases resulting from reassessments resulting from a change in
ownership, new construction, or any other cause), now or hereafter imposed by
any governmental or quasi-governmental authority or special district having the
direct or indirect power to tax or levy assessments, which are levied or
assessed against, or with respect to the value, occupancy or use of all or any
portion of the Project (as now constructed or as may at any time hereafter be
constructed, altered, or otherwise changed) or Landlord's interest therein, the
fixtures, equipment and other property of Landlord, real or personal, that are
an integral part of and located on the Project, the gross receipts, income, or
rentals from the Project, or the use of parking areas, public utilities, or
energy within the Project, or Landlord's business of leasing the Project. If
at any time during the Lease Term the method of taxation or assessment of the
Project prevailing as of the Effective Date shall be altered so that in lieu of
or in addition to any Real Property Tax described above there shall be levied,
assessed or imposed (whether by reason of a change in the method of taxation or
assessment, creation of a new tax or charge, or any other cause) an alternate or
additional tax or charge (i) on the value, use or occupancy of the Project or
Landlord's interest therein, or (ii) on or measured by the gross receipts,
income or rentals from the Project, on Landlord's business of leasing the
Project, or computed in any manner with respect to the operation of the Project,
then any such tax or charge, however designated, shall be included within the
meaning of the term "Real Property Taxes" for purposes of this Lease. If any
Real Property Tax is based upon property or rents unrelated to the Project, then
only that part of such Real Property Tax that is fairly allocable to the Project
shall be included within the meaning of the term "Real Property Taxes".
Notwithstanding the foregoing, the term "Real Property Taxes" shall not include
estate, inheritance, transfer, gift or franchise taxes of Landlord or the
federal or state net income tax imposed on Landlord's income from all sources.
With respect to any special assessments which may be levied as part of the
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Real Property Taxes and which may be payable in installments over a period of
time, only the amount of the installments due each year shall be included in the
Real Property Taxes charged to Tenant, whether or not Landlord elects to pay in
installments, provided that Landlord has the option of paying said assessment in
installments over a period of time.
ARTICLE 9
INSURANCE
9.1 TENANT'S INSURANCE: Tenant shall maintain insurance complying
with all of the following:
A. Tenant shall procure, pay for and keep in full force and
effect the following:
(1) Commercial general liability insurance, including
property damage, against liability for personal injury, bodily injury, death and
damage to property occurring in or about, or resulting from an occurrence in or
about, the Premises with combined single limit coverage of not less than the
amount of Tenant's Liability Insurance Minimum specified in SECTION P of the
Summary, which insurance shall contain a "contractual liability" endorsement
insuring Tenant's performance of Tenant's obligation to indemnify Landlord
contained in PARA 10.3;
(2) Fire and property damage insurance in so-called
"all risk" form insuring Tenant's Trade Fixtures and Tenant's Alterations for
the full actual replacement cost thereof;
(3) Business interruption insurance with limits of
liability representing at least approximately six months of income, business
auto liability covering owned, non-owned and hired vehicles with a limit of not
less than $1,000,000 per accident, insurance protecting against liability under
workers' compensation laws with limits at least as required by statute,
insurance for all plate glass in the Premises, and such other insurance that is
reasonably required by Landlord and customarily carried by tenants of similar
property in similar businesses.
B. Where applicable and required by Landlord, each policy
of insurance required to be carried by Tenant pursuant to this PARA 9.1: (i)
shall name Landlord and such other parties in interest as Landlord reasonably
designates as additional insured; (ii) shall be primary insurance which provides
that the insurer shall be liable for the full amount of the loss up to and
including the total amount of liability set forth in the declarations without
the right of contribution from any other insurance coverage of Landlord; (iii)
shall be in a form satisfactory to Landlord; (iv) shall be carried with
companies reasonably acceptable to Landlord; (v) shall provide that such policy
shall not be subject to cancellation or reduction in coverage except after at
least 30 days prior written notice to Landlord so long as such provision of 30
days notice is reasonably obtainable, but in any event not less than 10 days
prior written notice; (vi) shall not have a "deductible" in excess of such
amount as is reasonably approved by Landlord and which is then customary in the
marketplace; (vii) shall contain a cross liability endorsement; and (viii) shall
contain a "severability" clause. If Tenant has in full force and effect a
blanket policy of liability insurance with the same coverage for the Premises as
described above, as well as other coverage of other premises and properties of
Tenant, or in which Tenant has some interest, such blanket insurance shall
satisfy the requirements of this PARA 9.1.
C. A copy of each paid-up policy evidencing the insurance
required to be carried by Tenant pursuant to this PARA 9.1 (appropriately
authenticated by the insurer) or a certificate of the insurer, certifying that
such policy has been issued, providing the coverage required by this PARA 9.1,
and containing the provisions specified herein, shall be delivered to Landlord
prior to the time Tenant or any of its Agents enters the Premises and upon
renewal of such policies, but not less than 5 days prior to the expiration of
the term of such coverage. Landlord may, at any time, and from time to time,
inspect and/or copy any and all insurance policies required to be procured by
Tenant pursuant to this PARA 9.1 if a claim is filed or threatened against
Landlord. If the original five year Lease Term is extended by the parties and
any Lender or any insurance advisor reasonably determines at any time that the
amount of coverage required for any policy of insurance Tenant is to obtain
pursuant to this PARA 9.1 is not adequate, then Tenant shall increase such
coverage for such insurance to such amount as such Lender or insurance advisor
reasonably deems adequate, not to exceed the level of coverage for such
insurance commonly carried by comparable businesses similarly situated.
9.2 LANDLORD'S INSURANCE: Landlord shall have the following
obligations and options regarding insurance:
A. Landlord shall maintain a policy or policies of fire and
property damage insurance in so-called "all risk" form insuring Landlord (and
such others as Landlord may designate) against loss of rents for a period of not
less than 12 months and from physical damage to the Project with coverage of not
less than the full replacement cost thereof. Landlord may so insure the Project
separately, or may insure the Project with other property owned by Landlord
which Landlord elects to insure together under the same policy or policies.
Landlord shall have the right, but not the obligation, in its sole and absolute
discretion, to obtain insurance for such additional perils at Landlord deems
appropriate, including, without limitation, coverage for damage by earthquake
and/or flood. All such coverage shall contain "deductibles" which Landlord
deems appropriate, which in the case of earthquake and flood insurance, may be
up to 10% of the replacement value of the property insured or such higher amount
as is then commercially reasonable. Landlord shall not be required to cause
such insurance to cover any Trade Fixtures or Tenant's Alterations of Tenant.
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B. Landlord may maintain a policy or policies of commercial
general liability insurance insuring Landlord (and such others as are designated
by Landlord) against liability for personal injury, bodily injury, death and
damage to property occurring or resulting from an occurrence in, on or about the
Project, with combined single limit coverage in such amount as Landlord from
time to time determines is reasonably necessary for its protection.
C. TENANT'S OBLIGATION TO REIMBURSE: If Landlord's
insurance rates for the Building are increased at any time during the Lease Term
as a result of the nature of Tenant's particular use of the Premises, Tenant
shall reimburse Landlord for the full amount of such increase immediately upon
receipt of a bill from Landlord therefor.
9.4 RELEASE AND WAIVER OF SUBROGATION: Notwithstanding anything
to the contrary in this Lease, the parties hereto release each other, and
their respective agents and employees, successors, assigns and subtenants,
from any liability for injury to any person or damage to property that is
caused by or results from any risk insured against under any valid and
collectible insurance policy carried by either of the parties which contains
a waiver of subrogation by the insurer and is in force at the time of such
injury or damage or any insurance policy which is required to be maintained
by the parties under this Lease without regard to the negligence or willful
misconduct of the party or entity so released, subject to the following
limitations: (i) the foregoing provision shall not apply to the commercial
general liability insurance described by subparagraphs PARA 9.1A and PARA
9.2B; (ii) such release shall apply to liability resulting from any risk
insured against or covered by self-insurance maintained or provided by Tenant
to satisfy the requirements of PARA 9.1A.2 to the extent permitted by this
Lease; and (iii) Landlord or Tenant, as the case may be, shall not be
released from any such liability to the extent any damages resulting from
such injury or damage are not covered by the recovery obtained by Landlord or
Tenant for such insurance, as applicable (or for such insurance required to
be carried by each party under this Lease), but only to the extent of the
applicable deductible and to the extent such damage or claim is caused by
Landlord or Landlord's Agents or Tenant or any of Tenant's Agents,
respectively. Each party shall use reasonable efforts to cause each
insurance policy obtained by it to provide that the insurer waives all right
of recovery by way of subrogation against the other party and its Agents in
connection with any injury or damage covered by such policy. However, if any
insurance policy cannot be obtained with such a waiver of subrogation, or if
such waiver of subrogation is only available at additional cost and the party
for whose benefit the waiver is to be obtained does not pay such additional
cost, then the party obtaining such insurance shall notify the other party of
that fact and thereupon shall be relieved of the obligation to obtain such
waiver of subrogation rights from the insurer with respect to the particular
insurance involved.
ARTICLE 10
LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY
10.1 LIMITATION ON LANDLORD'S LIABILITY: Landlord shall not be
liable to Tenant, nor shall Tenant be entitled to terminate this Lease or to any
abatement of rent (except as expressly provided otherwise herein), for any
injury to Tenant or Tenant's Agents, damage to the property of Tenant or
Tenant's Agents, or loss to Tenant's business resulting from any cause,
including without limitation any: (i) failure, interruption or installation of
any HVAC or other utility system or service; (ii) failure to furnish or delay in
furnishing any utilities or services when such failure or delay is caused by
fire or other peril, the elements, labor disturbances of any character, or any
other accidents or other conditions beyond the reasonable control of Landlord;
(iii) limitation, curtailment, rationing or restriction on the use of water or
electricity, gas or any other form of energy or any services or utility serving
the Project; (iv) vandalism or forcible entry by unauthorized persons or the
criminal act of any person; or (v) penetration of water into or onto any portion
of the Premises or the Building through roof leaks or otherwise.
Notwithstanding the foregoing but subject to PARA 9.4, Landlord shall be liable
for any such injury, damage or loss which is proximately caused by Landlord's
willful misconduct or active negligence, but such limitation of liability shall
not relieve Landlord from its obligations under this Lease.
10.2 LIMITATION ON TENANT'S RECOURSE: If Landlord is a corporation,
limited liability company, trust, partnership, joint venture, unincorporated
association or other form of business entity: (i) the obligations of Landlord
shall not constitute personal obligations of the officers, directors, trustees,
partners, members, managers, joint venturers, members, owners, stockholders, or
other principals or representatives of such business entity; and (ii) Tenant
shall not have recourse to the assets of such officers, directors, trustees,
partners, members, managers, joint venturers, members, owners, stockholders,
principals or representatives except to the extent of their interest in the
Project (including any net sale proceeds from the sale of the Project or
Building). Tenant shall have recourse only to the interest of Landlord in the
Project and shall not have recourse to any other assets of Landlord.
10.3 INDEMNIFICATION OF LANDLORD: Tenant shall hold harmless,
indemnify and defend Landlord, and its employees, agents and contractors, with
competent counsel reasonably satisfactory to Landlord (and Landlord agrees to
accept counsel that any insurer requires be used), from all liability,
penalties, losses, damages, costs, expenses, causes of action, claims and/or
judgments arising by reason of any death, bodily injury, personal injury or
property damage resulting from (i) any cause or causes whatsoever (other than to
the extent caused by the willful misconduct or negligence of Landlord or breach
of Landlord's obligations under this Lease) occurring in or about or resulting
from an occurrence in or about the Premises during the Lease Term, (ii) the
negligence or willful misconduct of Tenant or its agents, employees and
contractors, wherever the same may occur, or (iii) an Event of Tenant's Default.
The provisions of this PARA 10.3 shall survive the expiration or sooner
termination of this Lease.
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ARTICLE 11
DAMAGE TO PREMISES
11.1 LANDLORD'S DUTY TO RESTORE: If the Premises are damaged by any
peril after the Effective Date, Landlord shall restore the Premises unless the
Lease is terminated by Landlord pursuant to PARA 11.2 or by Tenant pursuant to
PARA11.3. All insurance proceeds available from the fire and property damage
insurance carried by Landlord pursuant to PARA 9.2 shall be paid to and become
the property of Landlord. If this Lease is terminated pursuant to either
PARA 11.2 or PARA 11.3, then all insurance proceeds available from insurance
carried by Tenant shall be paid to and become the property of Tenant. If this
Lease is not so terminated, then upon receipt of the insurance proceeds (if the
loss is covered by insurance) and the issuance of all necessary governmental
permits, Landlord shall commence and diligently prosecute to completion the
restoration of the Premises, to the extent then allowed by Law, to substantially
the same condition in which the Premises were immediately prior to such damage.
Landlord's obligation to restore shall be limited to the Premises and interior
improvements constructed by Landlord as they existed as of the Commencement
Date, excluding any Tenant's Alterations, Trade Fixtures and/or personal
property constructed or installed by Tenant in the Premises. Tenant shall
forthwith replace or fully repair all Tenant's Alterations and Trade Fixtures
installed by Tenant and existing at the time of such damage or destruction, and
all insurance proceeds received by Tenant from the insurance carried by it
pursuant to PARA 9.1A(2) shall be used for such purpose.
Tenant shall forthwith replace or fully repair all Tenant's
Alterations and Trade Fixtures installed by Tenant and existing at the time of
such damage or destruction, and all insurance proceeds received by Tenant from
the insurance carried by it pursuant to PARA 9.1A(2) shall be used for such
purpose. Tenant's obligations to repair or replace Tenant's Alterations and
Tenant's Trade Fixtures pursuant to this Section shall be limited to the extent
of the insurance proceeds actually received by Tenant and subject to Tenant's
right to terminate the Lease as set forth in Section 11.3 below. Tenant shall
be entitled to retain all insurance proceeds and settlements it receives in
connection with the damage or destruction of Tenant's Trade Fixtures and any
other property insurance maintained by Tenant.
11.2 LANDLORD'S RIGHT TO TERMINATE: Landlord shall have the right to
terminate this Lease in the event any of the following occurs, which right may
be exercised only by delivery to Tenant of a written notice of election to
terminate within 30 days after the date of such damage:
A. Either the Project (other than the Building) or the
Building is damaged by an Insured Peril to such an extent that the estimated
cost to restore the Project (other than the Building) exceeds 33% of the then
actual replacement cost thereof, or the estimated cost to restore the Building
exceeds 50% of the actual replacement cost thereof;
B. Either the Project or the Building is damaged by an
Uninsured Peril to such an extent that the estimated cost to restore exceeds 2%
of the then actual replacement cost thereof; provided, however, that Landlord
may not terminate this Lease pursuant to this PARA 11.2B if one or more tenants
of the Building agree in writing to pay the amount by which the cost to restore
the damage exceeds such amount and subsequently deposit such amount with
Landlord within 30 days after Landlord has notified Tenant of its election to
terminate this Lease;
C. The Premises are damaged by any peril within 12 months
of the last day of the Lease Term to such an extent that the estimated cost to
restore equals or exceeds an amount equal to six times the Base Monthly Rent
then due; provided, however, that Landlord may not terminate this Lease pursuant
to this PARA 11.2C if Tenant, at the time of such damage, has a then valid
express written option to extend the Lease Term and Tenant exercises such option
to extend the Lease Term within 15 days following the date of such damage; or
D. Either the Project or the Building is damaged by any
peril and, because of the Laws then in force, (i) cannot be restored at
reasonable cost to substantially the same condition in which it was prior to
such damage, or (ii) cannot be used for the same use being made thereof before
such damage if restored as required by this Article.
E. As used herein, the following terms shall have the
following meanings: (i) the term "Insured Peril" shall mean a peril actually
insured against for which the insurance proceeds actually received by Landlord
are sufficient (except for any "deductible" amount specified by such insurance)
to restore the Project under then existing building codes to the condition
existing immediately prior to the damage; and (ii) the term "Uninsured Peril"
shall mean any peril which is not an Insured Peril. Notwithstanding the
foregoing, if the "deductible" for earthquake or flood insurance exceeds 5% of
the replacement cost of the improvements insured, such peril shall be deemed an
"Uninsured Peril".
11.3 TENANT'S RIGHT TO TERMINATE: If the Premises are damaged by any
peril and Landlord does not elect to terminate this Lease or is not entitled to
terminate this Lease pursuant to PARA 11.2, then as soon as reasonably
practicable, Landlord shall furnish Tenant with the written opinion of
Landlord's architect or construction consultant as to when the restoration work
required of Landlord may be completed. Tenant shall have the right to terminate
this Lease in the event any of the following occurs, which right may be
exercised only by delivery to Landlord of a written notice of election to
terminate within 10 days after Tenant receives notice from Landlord that the
estimated time needed to complete such restoration is more than the applicable
period set for in paragraphs A or B below.
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A. The Premises are damaged by any peril and, in the
reasonable opinion of Landlord's architect or construction consultant, the
restoration of the Premises cannot be substantially completed within 180 days
after the date of such damage; or
B. The Premises are damaged by any peril within 12 months
of the last day of the Lease Term and, in the reasonable opinion of Landlord's
architect or construction consultant, the restoration of the Premises cannot be
substantially completed within 120 days after the date of such damage.
In addition, if Landlord provides notice that the restoration
can be completed within said 180 or 120 days, as provided in paragraphs B or C
above, and Landlord fails to substantially complete the restoration work within
the applicable time period, as the same may be extended for any delay caused by
Tenant or any of Tenant's Agents or a Force Majeure Delay (as such term is
defined in Exhibit B attached), then Tenant may terminate this Lease by
providing written notice of such election to terminate within 10 days after the
earlier of (i) the end of said 180 or 120 day time period, as the case may be,
as such time period may be extended for any delay caused by Tenant or any of
Tenant's Agents, or (ii) after receipt of written notice from Landlord of the
delay. Landlord agrees to provide written notice of any delay caused by Tenant
or its Agents or by any Force Majeure Delay within a reasonable period of time
not to exceed thirty (30) days after Landlord knows of an event constituting and
causing such a delay.
11.4 ABATEMENT OF RENT: In the event of damage to the Premises which
does not result in the termination of this Lease, the Base Monthly Rent and the
Additional Rent shall be temporarily abated during the period of restoration in
proportion to the degree to which Tenant's use of the Premises is impaired by
such damage. Tenant shall not be entitled to any compensation or damages from
Landlord for loss of Tenant's business or property or for any inconvenience or
annoyance caused by such damage or restoration. Tenant hereby waives the
provisions of California Civil Code Sections 1932(2) and 1933(4) and the
provisions of any similar law hereinafter enacted.
ARTICLE 12
CONDEMNATION
12.1 LANDLORD'S TERMINATION RIGHT: Landlord shall have the right to
terminate this Lease if, as a result of a taking by means of the exercise of the
power of eminent domain (including a voluntary sale or transfer by Landlord to a
condemnor under threat of condemnation), (i) more than one-third of the Building
Leasable Area is so taken, or (ii) more than 50% of the Common Area is so taken.
Any such right to terminate by Landlord must be exercised within a reasonable
period of time, to be effective as of the date possession is taken by the
condemnor.
12.2 TENANT'S TERMINATION RIGHT: Tenant shall have the right to
terminate this Lease if, as a result of any taking by means of the exercise of
the power of eminent domain (including any voluntary sale or transfer by
Landlord to any condemnor under threat of condemnation), (i) 10% or more of the
Premises is so taken and that part of the Premises that remains cannot be
restored within a reasonable period of time and thereby made reasonably suitable
for the continued operation of the Tenant's business, or (ii) there is a taking
affecting the Common Area and, as a result of such taking, Landlord cannot
provide parking spaces within reasonable walking distance of the Premises equal
in number to at least 90% of the number of spaces allocated to Tenant by
PARA 2.1, whether by rearrangement of the remaining parking areas in the Common
Area (including construction of multi-deck parking structures or restriping for
compact cars where permitted by Law) or by alternative parking facilities on
other land. Tenant must exercise such right within a reasonable period of time,
to be effective on the date that possession of that portion of the Premises or
Common Area that is condemned is taken by the condemnor.
12.3 RESTORATION AND ABATEMENT OF RENT: If any part of the Premises
or the Common Area is taken by condemnation and this Lease is not terminated,
then Landlord shall restore the remaining portion of the Premises and Common
Area and interior improvements constructed by Landlord as they existed as of the
Commencement Date, excluding any Tenant's Alterations, Trade Fixtures and/or
personal property constructed or installed by Tenant. Thereafter, as of the
date possession is taken the Base Monthly Rent shall be reduced in the same
proportion that the floor area of that part of the Premises so taken (less any
addition thereto by reason of any reconstruction) bears to the original floor
area of the Premises.
12.4 TEMPORARY TAKING: If any portion of the Premises is temporarily
taken for one year or less, this Lease shall remain in effect. If any portion
of the Premises is temporarily taken by condemnation for a period which exceeds
one year or which extends beyond the natural expiration of the Lease Term, and
such taking materially and adversely affects Tenant's ability to use the
Premises for the Permitted Use, then Tenant shall have the right to terminate
this Lease, effective on the date possession is taken by the condemnor.
12.5 DIVISION OF CONDEMNATION AWARD: Any award made as a result of
any condemnation of the Premises or the Common Area shall belong to and be paid
to Landlord, and Tenant hereby assigns to Landlord all of its right, title and
interest in any such award; provided, however, that Tenant shall be entitled to
make a direct claim against the condemning authority for the following: (i) for
the taking of personal property or Trade Fixtures belonging to Tenant, (ii) for
the interruption of Tenant's business or its moving costs, (iii) for loss of
Tenant's goodwill; or (iv) for any temporary taking where this Lease is not
terminated as a result of such taking. The rights of Landlord and Tenant
regarding any condemnation shall be determined as provided in this Article, and
each party hereby waives the provisions of California Code of Civil Procedure
Section 1265.130 and the provisions of any similar law hereinafter enacted
allowing either party to petition the Superior Court to terminate this Lease in
the event of a partial taking of the Premises.
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ARTICLE 13
DEFAULT AND REMEDIES
13.1 EVENTS OF TENANT'S DEFAULT: Tenant shall be in default of its
obligations under this Lease if any of the following events occurs (an "Event of
Tenant's Default"):
A. Tenant shall have failed to pay Base Monthly Rent or
Additional Rent when due, and such failure is not cured within 3 days after
delivery of written notice from Landlord specifying such failure to pay; or
B. Tenant shall have failed to perform any term, covenant,
or condition of this Lease except those requiring the payment of Base Monthly
Rent or Additional Rent, and Tenant shall have failed to cure such breach within
30 days after written notice from Landlord specifying the nature of such breach
where such breach could reasonably be cured within said 30 day period, or if
such breach could not be reasonably cured within said 30 day period, Tenant
shall have failed to commence such cure within said 30 day period and thereafter
continue with due diligence to prosecute such cure to completion; or
C. Tenant shall have sublet the Premises or assigned its
interest in the Lease in violation of the provisions contained in Article 14; or
D. Tenant shall have abandoned the Premises; or
E. The occurrence of the following: (i) the making by
Tenant of any general arrangements or assignments for the benefit of creditors;
(ii) Tenant becomes a "debtor" as defined in 11 USC Section 101 or any successor
statute thereto (unless, in the case of a petition filed against Tenant, the
same is dismissed within 60 days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Tenant's assets located at
the Premises or of Tenant's interest in this Lease, where possession is not
restored to Tenant within 30 days; or (iv) the attachment, execution or other
judicial seizure of substantially all of Tenant's assets located at the Premises
or of Tenant's interest in this Lease, where such seizure is not discharged
within 30 days; provided, however, in the event that any provision of this
Section 13.1E is contrary to any applicable Law, such provision shall be of no
force or effect; or
F. Tenant shall have failed to deliver documents required
of it pursuant to PARA 15.4 or PARA 15.6 within the time periods specified
therein; or
13.2 LANDLORD'S REMEDIES: If an Event of Tenant's Default occurs,
Landlord shall have the following remedies, in addition to all other rights and
remedies provided by any Law or otherwise provided in this Lease, to which
Landlord may resort cumulatively or in the alternative:
A. Landlord may keep this Lease in effect and enforce by an
action at law or in equity all of its rights and remedies under this Lease,
including (i) the right to recover the rent and other sums as they become due by
appropriate legal action, (ii) the right to make payments required of Tenant or
perform Tenant's obligations and be reimbursed by Tenant for the cost thereof
with interest at the Agreed Interest Rate from the date the sum is paid by
Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of
injunctive relief and specific performance to compel Tenant to perform its
obligations under this Lease. Notwithstanding anything contained in this Lease,
in the event of a breach of an obligation by Tenant which results in a condition
which poses an imminent danger to safety of persons or damage to property, or a
threat to insurance coverage, then if Tenant does not cure such breach within 3
days after delivery to it of written notice from Landlord identifying the
breach, Landlord may cure the breach of Tenant and be reimbursed by Tenant for
the cost thereof with interest at the Agreed Interest Rate from the date the sum
is paid by Landlord until Landlord is reimbursed by Tenant.
B. In accordance with applicable law, Landlord may enter
the Premises and re-lease them to third parties for Tenant's account for any
period, whether shorter or longer than the remaining Lease Term. Tenant shall
be liable immediately to Landlord for all costs Landlord incurs in releasing the
Premises, including brokers' commissions, expenses of altering and preparing the
Premises required by the releasing. Tenant shall pay to Landlord the rent and
other sums due under this Lease on the date the rent is due, less the rent and
other sums Landlord received from any releasing. No act by Landlord allowed by
this subparagraph shall terminate this Lease unless Landlord notifies Tenant in
writing that Landlord elects to terminate this Lease. Notwithstanding any
releasing without termination, Landlord may later elect to terminate this Lease
because of the default by Tenant.
C. In accordance with applicable law, Landlord may
terminate this Lease by giving Tenant written notice of termination, in which
event this Lease shall terminate on the date set forth for termination in such
notice. Any termination under this PARA 13.2C shall not relieve Tenant from its
obligation to pay sums then due Landlord or from any claim against Tenant for
damages or rent previously accrued or then accruing. In no event shall any one
or more of the following actions by Landlord, in the absence of a written
election by Landlord to terminate this Lease, constitute a termination of this
Lease: (i) appointment of a receiver or keeper in order to protect Landlord's
interest hereunder; (ii) consent to any subletting of the Premises or assignment
of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise;
or (iii) any other action by Landlord or Landlord's Agents intended to mitigate
the adverse effects of any breach of this Lease by Tenant, including without
limitation any action taken to maintain and preserve the Premises or any action
taken to relet the Premises or any portions thereof to the extent such actions
do not affect a termination of Tenant's right to possession of the Premises.
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D. In the event Tenant breaches this Lease and abandons the
Premises, this Lease shall not terminate unless Landlord gives Tenant written
notice of its election to so terminate this Lease. No act by or on behalf of
Landlord intended to mitigate the adverse effect of such breach, including those
described by PARA 13.C, shall constitute a termination of Tenant's right to
possession unless Landlord gives Tenant written notice of termination. Should
Landlord not terminate this Lease by giving Tenant written notice, Landlord may
enforce all its rights and remedies under this Lease, including the right to
recover the rent as it becomes due under the Lease as provided in California
Civil Code Section 1951.4.
E. In the event Landlord terminates this Lease, Landlord
shall be entitled, at Landlord's election, to damages in an amount as set forth
in California Civil Code Section 1951.2 as in effect on the Effective Date. For
purposes of computing damages pursuant to California Civil Code Section 1951.2,
(i) an interest rate equal to the Agreed Interest Rate shall be used where
permitted, and (ii) the term "rent" includes Base Monthly Rent and Additional
Rent. Such damages shall include:
(1) The worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that Tenant proves could be reasonably
avoided, computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent (1%); and
(2) Any other amount necessary to compensate
Landlord for all detriment proximately caused by Tenant's failure to perform
Tenant's obligations under this Lease, or which in the ordinary course of things
would be likely to result therefrom, including the following: (i) expenses for
cleaning, repairing or restoring the Premises; (ii) expenses for altering,
remodeling or otherwise improving the Premises for the purpose of reletting,
including installation of leasehold improvements (whether such installation be
funded by a reduction of rent, direct payment or allowance to a new tenant, or
otherwise); (iii) broker's fees, advertising costs and other expenses of
reletting the Premises; (iv) costs of carrying the Premises, such as taxes,
insurance premiums, utilities and security precautions; (v) expenses in retaking
possession of the Premises; and (vi) attorneys' fees and court costs incurred by
Landlord in retaking possession of the Premises and in releasing the Premises or
otherwise incurred as a result of Tenant's default.
F. Nothing in this PARA 13.2 shall limit Landlord's
right to indemnification from Tenant as provided in PARA 7.2 and PARA 10.3.
Any notice given by Landlord in order to satisfy the requirements of PARA
13.1A or PARA 13.1B above shall also satisfy the notice requirements of
California Code of Civil Procedure Section 1161 regarding unlawful detainer
proceedings.
13.3 WAIVER: One party's consent to or approval of any act by the
other party requiring the first party's consent or approval shall not be deemed
to waive or render unnecessary the first party's consent to or approval of any
subsequent similar act by the other party. The receipt by Landlord of any rent
or payment with or without knowledge of the breach of any other provision hereof
shall not be deemed a waiver of any such breach unless such waiver is in writing
and signed by Landlord. No delay or omission in the exercise of any right or
remedy accruing to either party upon any breach by the other party under this
Lease shall impair such right or remedy or be construed as a waiver of any such
breach theretofore or thereafter occurring. The waiver by either party of any
breach of any provision of this Lease shall not be deemed to be a waiver of any
subsequent breach of the same or of any other provisions herein contained.
13.4 LIMITATION ON EXERCISE OF RIGHTS: At any time that an Event of
Tenant's Default has occurred and remains uncured, (i) it shall not be
unreasonable for Landlord to deny or withhold any consent or approval requested
of it by Tenant which Landlord would otherwise be obligated to give, and (ii)
Tenant may not exercise any option to extend.
13.5 WAIVER BY TENANT OF CERTAIN REMEDIES: Tenant waives the
provisions of Sections 1932(1), 1941 and 1942 of the California Civil Code and
any similar or successor law regarding Tenant's right to terminate this Lease or
to make repairs and deduct the expenses of such repairs from the rent due under
this Lease. Tenant hereby waives any right of redemption or relief from
forfeiture under the laws of the State of California, or under any other present
or future law, including the provisions of Sections 473, 1174 and 1179 of the
California Code of Civil Procedure and Civil Code Section 3275.
ARTICLE 14
ASSIGNMENT AND SUBLETTING
14.1 TRANSFER BY TENANT: The following provisions shall apply to any
assignment, subletting or other transfer by Tenant or any subtenant or assignee
or other successor in interest of the original Tenant (collectively referred to
in this PARA 14.1 as "Tenant"):
A. Tenant shall not do any of the following (collectively
referred to herein as a "Transfer"), whether voluntarily, involuntarily or by
operation of law, without the prior written consent of Landlord, which consent
shall not be unreasonably withheld: (i) sublet all or any part of the Premises
or allow it to be sublet, occupied or used by any person or entity other than
Tenant; (ii) assign its interest in this Lease; (iii) mortgage or encumber the
Lease (or otherwise use the Lease as a security device) in any manner; or (iv)
materially amend or modify an assignment, sublease or other transfer that has
been previously approved by Landlord. Tenant shall reimburse Landlord for all
reasonable costs and attorneys' fees incurred by Landlord in connection with the
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evaluation, processing, and/or documentation of any requested Transfer, whether
or not Landlord's consent is granted, not to exceed $1,500.00 for each request.
Landlord's reasonable costs shall include the cost of any review or
investigation performed by Landlord or consultant acting on Landlord's behalf of
(i) Hazardous Materials (as defined in Section 7.2E of this Lease) used, stored,
released, or disposed of by the potential Subtenant or Assignee, and/or (ii)
violations of Hazardous Materials Law (as defined in Section 7.2E of this lease)
by the Tenant or the proposed Subtenant or Assignee, provided such costs in
addition to the cost set forth in the preceding sentence do not exceed in the
aggregate $1,500.00 for each request for consent to a Transfer. Any Transfer so
approved by Landlord shall not be effective until Tenant has delivered to
Landlord an executed counterpart of the document evidencing the Transfer which
(i) is in a form reasonably approved by Landlord, (ii) contains the same terms
and conditions as stated in Tenant's notice given to Landlord pursuant to
PARA 14.1B, and (iii) in the case of an assignment of the Lease, contains the
agreement of the proposed transferee to assume all obligations of Tenant under
this Lease arising after the effective date of such Transfer and to remain
jointly and severally liable therefor with Tenant. Any attempted Transfer
without Landlord's consent shall constitute an Event of Tenant's Default and
shall be voidable at Landlord's option. Landlord's consent to any one Transfer
shall not constitute a waiver of the provisions of this PARA 14.1 as to any
subsequent Transfer or a consent to any subsequent Transfer. No Transfer, even
with the consent of Landlord, shall relieve Tenant of its personal and primary
obligation to pay the rent and to perform all of the other obligations to be
performed by Tenant hereunder. The acceptance of rent by Landlord from any
person shall not be deemed to be a waiver by Landlord of any provision of this
Lease nor to be a consent to any Transfer.
B. At least 20 days before a proposed Transfer is to become
effective, Tenant shall give Landlord written notice of the proposed terms of
such Transfer and request Landlord's approval, which notice shall include the
following: (i) the name and legal composition of the proposed transferee; (ii) a
current financial statement of the transferee, financial statements of the
transferee covering the preceding three years if the same exist, and (if
available) an audited financial statement of the transferee for a period ending
not more than one year prior to the proposed effective date of the Transfer, all
of which statements are prepared in accordance with generally accepted
accounting principles; (iii) the nature of the proposed transferee's business to
be carried on in the Premises; (iv) all consideration to be given on account of
the Transfer; (v) a current financial statement of Tenant; and (vi) an
accurately filled out response to Landlord's standard hazardous materials
questionnaire. Tenant shall provide to Landlord such other information as may
be reasonably requested by Landlord within seven days after Tenant's receipt of
such notice from Landlord. Landlord shall respond in writing to Tenant's
request for Landlord's consent to a Transfer within the later of (i) 20 days of
receipt of such request together with the required accompanying documentation,
or (ii) 10 days after Landlord's receipt of all information which Landlord
reasonably requests within seven days after it receives Tenant's first notice
regarding the Transfer in question. If Landlord fails to respond in writing
within said period, then Tenant shall provide a second written notice to Tenant
requesting such consent and if Landlord fails to respond within 5 days after
receipt of such second notice, then Landlord will be deemed to have consented to
such Transfer. Tenant shall immediately notify Landlord of any modification to
the proposed terms of such Transfer, which shall also be subject Landlord's
consent in accordance with the same process for obtaining Landlord's initial
consent to such Transfer.
C. In the event that Tenant seeks to make any Transfer,
Landlord shall have the right to terminate this Lease or, in the case of a
sublease of less than all of the Premises, terminate this Lease as to that part
of the Premises proposed to be sublet so that Landlord is thereafter free to
lease the Premises (or, in the case of a partial sublease, the portion proposed
to be so sublet) to whomever it pleases on whatever terms are acceptable to
Landlord, including, without limitation to the transferee under the proposed
Transfer. Tenant shall have the right to rescind its request for consent to the
Transfer (and thereby rescind Landlord's election to terminate) upon written
notice to Landlord within ten (10) days after receipt of Landlord's notice to
terminate. In the event Landlord elects to so terminate this Lease, then the
Lease shall so terminate in its entirety (or as to the space to be so sublet)
fifteen (15) days after Landlord has notified Tenant in writing of such
election. Upon such termination, Tenant shall be released from any further
obligation under this Lease if it is terminated in its entirety, or shall be
released from any further obligation under the Lease with respect to the space
proposed to be sublet in the case of a proposed partial sublease. In the case
of a partial termination of the Lease, the Base Monthly Rent and Tenant's Share
shall be reduced to an amount which bears the same relationship to the original
amount thereof as the area of that part of the Premises which remains subject to
the Lease bears to the original area of the Premises. Landlord and Tenant shall
execute a cancellation and release with respect to the Lease to effect such
termination.
D. If Landlord consents to a Transfer proposed by Tenant,
Tenant may enter into such Transfer, and if Tenant does so, the following shall
apply:
(1) Tenant shall not be released of its liability
for the performance of all of its obligations under the Lease.
(2) If Tenant assigns its interest in this Lease,
then Tenant shall pay to Landlord 80% of all Subrent (as defined in
PARA 14.1D(5)) received by Tenant over and above (i) the assignee's agreement to
assume the obligations of Tenant under this Lease, and (ii) the amortized amount
of all Permitted Transfer Costs related to such assignment. In the case of
assignment, the amount of Subrent owed to Landlord shall be paid to Landlord on
the same basis, whether periodic or in lump sum, that such Subrent is paid to
Tenant by the assignee. All Permitted Transfer Costs shall be amortized on a
straight line basis over the term of such sublease (including any extension
options) for purposes of calculating the amount due Landlord hereunder.
(3) If Tenant sublets any part of the Premises, then
with respect to the space so subleased, Tenant shall pay to Landlord 80% of the
positive difference, if any, between (i) all Subrent paid by the subtenant to
Tenant, less (ii) the sum of all Base Monthly Rent and Additional Rent allocable
to the space sublet and
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all Permitted Transfer Costs related to such sublease. Such amount shall be
paid to Landlord on the same basis, whether periodic or in lump sum, that such
Subrent is paid to Tenant by its subtenant. All Permitted Transfer Costs shall
be amortized on a straight line basis over the term of such sublease (including
any extension options) for purposes of calculating the amount due Landlord
hereunder.
(4) Tenant's obligations under this PARA 14.1D
shall survive any Transfer, and Tenant's failure to perform its obligations
hereunder shall be an Event of Tenant's Default (subject to the applicable
notice and cure periods). At the time Tenant makes any payment to Landlord
required by this PARA 14.1D, Tenant shall deliver an itemized statement of
the method by which the amount to which Landlord is entitled was calculated,
certified by Tenant as true and correct. Landlord shall have the right at
reasonable intervals to inspect Tenant's books and records relating to the
payments due hereunder. Upon request therefor, Tenant shall deliver to
Landlord copies of all bills, invoices or other documents upon which its
calculations are based. Landlord may condition its approval of any Transfer
upon obtaining a certification from both Tenant and the proposed transferee
of all Subrent and other amounts that are to be paid to Tenant in connection
with such Transfer.
(5) As used in this PARA 41.1D, the term "Subrent"
shall mean any consideration of any kind received by Tenant as a result of the
Transfer, if such sums are related to Tenant's interest in this Lease or in the
Premises, including payments from or on behalf of the transferee (in excess of
the book value thereof) for Tenant's leasehold improvements, but shall not
include any payments or other consideration received by Tenant in connection
with Tenant's assets, Tenant's Trade Fixtures, or any inventory, accounts,
goodwill, equipment, furniture, furnishings or general intangibles of Tenant,
whatsoever. As used in this PARA 14.1D, the term "Permitted Transfer Costs"
shall mean (i) all reasonable leasing commissions paid to third parties not
affiliated with Tenant in order to obtain the Transfer in question, (ii) the
actual cost of standard improvements made to the Premises for such Transfer, and
(iii) all reasonable attorneys' fees incurred by Tenant with respect to the
Transfer in question.
E. Except as provided in section 14.1F, if Tenant is a
corporation, the following shall be deemed a voluntary assignment of Tenant's
interest in this Lease: (i) any dissolution, merger, consolidation, or other
reorganization of or affecting Tenant, whether or not Tenant is the surviving
corporation; and (ii) if the capital stock of Tenant is not publicly traded, the
sale or transfer to one person or entity (or to any group of related persons or
entities) stock possessing more than 50% of the total combined voting power of
all classes of Tenant's capital stock issued, outstanding and entitled to vote
for the election of directors. If Tenant is a partnership, limited liability
company or other entity any withdrawal or substitution (whether voluntary,
involuntary or by operation of law, and whether occurring at one time or over a
period of time) of any partner, member or other party owning 25% or more
(cumulatively) of any interest in the capital or profits of the partnership,
limited liability company or other entity or the dissolution of the partnership,
limited liability company or other entity, shall be deemed a voluntary
assignment of Tenant's interest in this Lease.
F. Notwithstanding anything contained in PARA 14.1, so long
as Tenant otherwise complies with the provisions of PARA 14.1 Tenant may enter
into any of the following transfers (a "Permitted Transfer") without Landlord's
prior written consent, and Landlord shall not be entitled to terminate the Lease
pursuant to PARA 14.1C or to receive any part of any Subrent resulting therefrom
that would otherwise be due it pursuant to PARA 14.1D:
(1) Tenant may sublease all or part of the Premises
or assign its interest in this Lease to any corporation which controls, is
controlled by, or is under common control with the original Tenant to this
Lease;
(2) Tenant may assign its interest in the Lease to a
corporation which results from a merger, consolidation or other reorganization
in which Tenant is not the surviving corporation, so long as the surviving
corporation has a net worth at the time of such assignment that is equal to or
greater than the net worth of Tenant immediately prior to such transaction; and
(3) Tenant may assign this Lease to a corporation
which purchases or otherwise acquires all or substantially all of the assets of
Tenant at the Premises, so long as such acquiring corporation has a net worth at
the time of such assignment that is equal to or greater than the net worth of
Tenant immediately prior to such transaction.
Notwithstanding the foregoing, the term "corporation" as used in Section
14.1.F of the Lease shall be deemed to include any subsidiary, affiliate,
franchisee, division or other entity and the reference to sale of Tenant's
assets refers to those assets located within the Premises. For the purpose of
this Lease, any sale or transfer of Tenant's capital stock, including without
limitation, a transfer in connection with the merger, consolidation or
non-bankruptcy reorganization of Tenant and any sale through any national market
system or public exchange, or any re-incorporation by Tenant in another state,
shall not be deemed an assignment, subletting, or any other transfer of the
Lease or the Premises.
14.2 TRANSFER BY LANDLORD: Landlord and its successors in interest
shall have the right to transfer their interest in this Lease and the Project at
any time and to any person or entity. In the event of any such transfer, the
Landlord originally named herein (and, in the case of any subsequent transfer,
the transferor) from the date of such transfer, shall be automatically relieved,
without any further act by any person or entity, of all liability for the
performance of the obligations of the Landlord hereunder which may accrue after
the date of such transfer, provided such assignee or successor assumes such
obligations. After the date of any such transfer, the term "Landlord" as used
herein shall mean the transferee of such interest in the Premises.
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ARTICLE 15
GENERAL PROVISIONS
15.1 LANDLORD'S RIGHT TO ENTER: Landlord and its agents may enter
the Premises at any reasonable time after giving at least 24 hours' prior notice
to Tenant (and immediately in the case of emergency) for the purpose of: (i)
inspecting the same; (ii) posting notices of non-responsibility; (iii) supplying
any service to be provided by Landlord to Tenant; (iv) showing the Premises to
prospective purchasers, mortgagees or tenants; (v) making necessary alterations,
additions or repairs; (vi) performing Tenant's obligations when Tenant has
failed to do so after written notice from Landlord; (vii) placing upon the
Premises ordinary "for lease" signs or "for sale" signs; and (viii) responding
to an emergency. Landlord shall have the right to use any and all means
Landlord may deem necessary and proper to enter the Premises in an emergency.
Any entry into the Premises obtained by Landlord in accordance with this
PARA 15.1 shall not be a forcible or unlawful entry into, or a detainer of, the
Premises, or an eviction, actual or constructive, of Tenant from the Premises.
15.2 SURRENDER OF THE PREMISES: Upon the expiration or sooner
termination of this Lease, Tenant shall vacate and surrender the Premises to
Landlord in the same condition as existed at the Commencement Date, except for
(i) reasonable wear and tear, (ii) damage caused by any peril or condemnation,
and (iii) contamination by Hazardous Materials for which Tenant is not
responsible pursuant to PARA 7.2A or PARA 7.2B. In this regard, reasonable wear
and tear shall be construed to mean wear and tear caused to the Premises by the
natural aging process which occurs in spite of prudent application of the best
standards for maintenance, repair and janitorial practices, and does not include
items of neglected or deferred maintenance. In any event, Tenant shall cause
the following to be done prior to the expiration or the sooner termination of
this Lease in order to return the Premises to the same condition when the Lease
commenced subject to reasonable wear and tear: (i) all interior walls shall be
painted or cleaned so that they appear in good condition; (ii) all tiled floors
shall be cleaned and waxed; (iii) all carpets shall be cleaned and shampooed;
(iv) all broken, marred, stained or nonconforming acoustical ceiling tiles shall
be replaced; (v) all windows shall be washed; (vi) the HVAC system shall be
serviced by a reputable and licensed service firm and left in good operating
condition and repair as so certified by such firm; and (vii) the plumbing and
electrical systems and lighting shall be placed in good order and repair
(including replacement of any burned out, discolored or broken light bulbs,
ballasts, or lenses).
If Landlord so requests, Tenant shall, prior to the expiration
or sooner termination of this Lease, (i) remove any Tenant Improvements that
Landlord notified Tenant at the time Landlord approved of the Final Plans (as
defined in Exhibit B attached hereto would have to be removed at the expiration
or earlier termination of this Lease, unless Landlord subsequently notifies
Tenant at least thirty (30) days prior to the expiration of the Lease that all
or any portion of the Tenant Improvements must remain, and repair all damage
caused by such removal, (ii) remove any Tenant's Alterations which Tenant is
required to remove pursuant to PARA 5.2 and repair all damage caused by such
removal, and (iii) return the Premises or any part thereof to its original
configuration existing as of the time the Premises were delivered to Tenant. If
the Premises are not so surrendered at the termination of this Lease, Tenant
shall be liable to Landlord for all costs incurred by Landlord in returning the
Premises to the required condition, plus interest on all costs incurred at the
Agreed Interest Rate. Tenant shall indemnify Landlord against loss or liability
resulting from delay by Tenant in so surrendering the Premises, including,
without limitation, any claims made by any succeeding tenant or losses to
Landlord due to lost opportunities to lease to succeeding tenants.
15.3 HOLDING OVER: This Lease shall terminate without further notice
at the expiration of the Lease Term. Any holding over by Tenant after
expiration of the Lease Term shall not constitute a renewal or extension of the
Lease or give Tenant any rights in or to the Premises except as expressly
provided in this Lease. Any holding over after such expiration with the written
consent of Landlord shall be construed to be a tenancy from month to month on
the same terms and conditions herein specified insofar as applicable except that
Base Monthly Rent shall be increased to an amount equal to 150% of the greater
of (a) the Base Monthly Rent payable during the last full calendar month of the
Lease Term, or (b) the then prevailing fair market rent.
15.4 SUBORDINATION: The following provisions shall govern the
relationship of this Lease to any Security Instrument:
A. The Lease is subject and subordinate to all Security
Instruments existing as of the Effective Date. However, if any Lender so
requires, this Lease shall become prior and superior to any such Security
Instrument.
B. At Landlord's election, this Lease shall become subject
and subordinate to any Security Instrument created after the Effective Date.
Notwithstanding such subordination, Tenant's right to quiet possession of the
Premises shall not be disturbed so long as Tenant is not in default and performs
all of its obligations under this Lease, unless this Lease is otherwise
terminated pursuant to its terms.
C. Tenant shall upon request execute any document or
instrument required by any Lender to make this Lease either prior or subordinate
to a Security Instrument, which may include such other matters as the Lender
customarily and reasonably requires in connection with such agreements,
including provisions that the Lender not be liable for (i) the return of any
security deposit unless the Lender receives it from Landlord, and (ii) any
defaults on the part of Landlord occurring prior to the time the Lender obtains
possession of the Project in connection with the enforcement of its Security
Instrument. Tenant's failure to execute any such document or instrument within
10 days after written demand therefor shall constitute an Event of Tenant's
Default.
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15.5 MORTGAGEE PROTECTION AND ATTORNMENT: In the event of any
default on the part of the Landlord, Tenant will use reasonable efforts to give
notice by registered mail to any Lender whose name has been provided to Tenant
and shall offer such Lender a reasonable opportunity to cure the default,
including time to obtain possession of the Premises by power of sale or judicial
foreclosure or other appropriate legal proceedings, if such should prove
necessary to effect a cure, but in no event longer than 60 days. Tenant shall
attorn to any purchaser of the Premises at any foreclosure sale or private sale
conducted pursuant to any Security Instrument encumbering the Premises, or to
any grantee or transferee designated in any deed given in lieu of foreclosure.
15.6 ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS: At all times
during the Lease Term, each party agrees, following any request by the other
party, promptly to execute and deliver to the requesting party within 15 days
following delivery of such request an estoppel certificate: (i) certifying that
this Lease is unmodified and in full force and effect or, if modified, stating
the nature of such modification and certifying that this Lease, as so modified,
is in full force and effect, (ii) stating the date to which the rent and other
charges are paid in advance, if any, (iii) acknowledging that there are not, to
the certifying party's knowledge, any uncured defaults on the part of any party
hereunder or, if there are uncured defaults, specifying the nature of such
defaults, and (iv) certifying such other information about the Lease as may be
reasonably required by the requesting party. A failure to deliver an estoppel
certificate within 15 days after delivery of a request therefor shall be a
conclusive admission that, as of the date of the request for such statement: (i)
this Lease is unmodified except as may be represented by the requesting party in
said request and is in full force and effect, (ii) there are no uncured defaults
in the requesting party's performance, and (iii) no rent has been paid more than
30 days in advance. At any time during the Lease Term Tenant shall, upon 15
days' prior written notice from Landlord, provide Tenant's most recent financial
statement and financial statements covering the 24 month period prior to the
date of such most recent financial statement to any existing Lender or to any
potential Lender or buyer of the Premises. Such statements shall be prepared in
accordance with generally accepted accounting principles and, if such is the
normal practice of Tenant, shall be audited by an independent certified public
accountant.
15.7 CONSENT: Whenever Landlord's approval or consent is required by
this Lease, such approval or consent may be exercised in Landlord's sole and
absolute discretion, unless a different standard has been expressly provided in
this Lease for the particular matter requiring Landlord's consent or approval.
15.8 NOTICES: Any notice required or desired to be given regarding
this Lease shall be in writing and may be given by personal delivery, by
facsimile (with a copy sent by mail), by courier service, or by mail. A notice
shall be deemed to have been given (i) on the third business day after mailing
if such notice was deposited in the United States mail, certified or registered,
postage prepaid, addressed to the party to be served at its Address for Notices
specified in SECTION Q or SECTION R of the Summary (as applicable), (ii) when
delivered if given by personal delivery, and (iii) in all other cases when
actually received at the party's Address for Notices. Either party may change
its address by giving notice of the same in accordance with this PARA 15.8,
provided, however, that any address to which notices may be sent must be a
California address.
15.9 ATTORNEYS' FEES: In the event either Landlord or Tenant shall
bring any action or legal proceeding for an alleged breach of any provision of
this Lease, to recover rent, to terminate this Lease or otherwise to enforce,
protect or establish any term or covenant of this Lease, the prevailing party
shall be entitled to recover as a part of such action or proceeding, or in a
separate action brought for that purpose, reasonable attorneys' fees, court
costs, and experts' fees as may be fixed by the court.
15.10 CORPORATE AUTHORITY: If Tenant is a corporation (or
partnership), each individual executing this Lease on behalf of Tenant
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of such corporation in accordance with the by-laws of such
corporation (or partnership in accordance with the partnership agreement of such
partnership) and that this Lease is binding upon such corporation (or
partnership) in accordance with its terms. Each of the persons executing this
Lease on behalf of a corporation or limited liability company does hereby
covenant and warrant that the party for whom it is executing this Lease is a
duly authorized and existing corporation, that it is qualified to do business in
California, and that the corporation has full right and authority to enter into
this Lease.
15.11 MISCELLANEOUS: Should any provision of this Lease prove to be
invalid or illegal, such invalidity or illegality shall in no way affect, impair
or invalidate any other provision hereof, and such remaining provisions shall
remain in full force and effect. Time is of the essence with respect to the
performance of every provision of this Lease in which time of performance is a
factor. The captions used in this Lease are for convenience only and shall not
be considered in the construction or interpretation of any provision hereof.
Any executed copy of this Lease shall be deemed an original for all purposes.
This Lease shall, subject to the provisions regarding assignment, apply to and
bind the respective heirs, successors, executors, administrators and assigns of
Landlord and Tenant. "Party" shall mean Landlord or Tenant, as the context
implies. If Tenant consists of more than one person or entity, then all members
of Tenant shall be jointly and severally liable hereunder. This Lease shall be
construed and enforced in accordance with the laws of the State of California.
The language in all parts of this Lease shall in all cases be construed as a
whole according to its fair meaning, and not strictly for or against either
Landlord or Tenant. When the context of this Lease requires, the neuter gender
includes the masculine, the feminine, a partnership or corporation or joint
venture, and the singular includes the plural. The terms "shall", "will" and
"agree" are mandatory. The term "may" is permissive. When a party is required
to do something by this Lease, it shall do so at its sole cost and expense
without right of reimbursement from the other party unless a provision of this
Lease expressly requires reimbursement. Landlord and Tenant agree that (i) the
gross leasable area of the Premises includes any atriums, depressed loading
docks, covered entrances or egresses, and covered loading areas, (ii) each has
had an opportunity to determine to its satisfaction the actual area of the
Project and the Premises, (iii) all
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measurements of area contained in this Lease are conclusively agreed to be
correct and binding upon the parties, even if a subsequent measurement of any
one of these areas determines that it is more or less than the amount of area
reflected in this Lease, and (iv) any such subsequent determination that the
area is more or less than shown in this Lease shall not result in a change in
any of the computations of rent, improvement allowances, or other matters
described in this Lease where area is a factor. Where a party hereto is
obligated not to perform any act, such party is also obligated to restrain any
others within its control from performing said act, including the Agents of such
party. Landlord shall not become or be deemed a partner or a joint venturer
with Tenant by reason of the provisions of this Lease.
15.12 TERMINATION BY EXERCISE OF RIGHT: If this Lease is terminated
pursuant to its terms by the proper exercise of a right to terminate
specifically granted to Landlord or Tenant by this Lease, then this Lease shall
terminate 30 days after the date the right to terminate is properly exercised
(unless another date is specified in that part of the Lease creating the right,
in which event the date so specified for termination shall prevail), the rent
and all other charges due hereunder shall be prorated as of the date of
termination, and neither Landlord nor Tenant shall have any further rights or
obligations under this Lease except for those that have accrued prior to the
date of termination or those obligations which this Lease specifically provides
are to survive termination. This PARA 15.12 does not apply to a termination of
this Lease by Landlord as a result of an Event of Tenant's Default.
15.13 BROKERAGE COMMISSIONS: Each party hereto (i) represents and
warrants to the other that it has not had any dealings with any real estate
brokers, leasing agents or salesmen, or incurred any obligations for the payment
of real estate brokerage commissions or finder's fees which would be earned or
due and payable by reason of the execution of this Lease, other than to the
Retained Real Estate Brokers described in SECTION S of the Summary, and (ii)
agrees to indemnify, defend, and hold harmless the other party from any claim
for any such commission or fees which result from the actions of the
indemnifying party. Landlord shall be responsible for the payment of any
commission owed to the Retained Real Estate Brokers pursuant to a separate
written commission agreement between Landlord and the Retained Real Estate
Brokers for the payment of a commission as a result of the execution of this
Lease.
15.14 FORCE MAJEURE: Any prevention, delay or stoppage due to
strikes, lock-outs, inclement weather, labor disputes, inability to obtain
labor, materials, fuels or reasonable substitutes therefor, governmental
restrictions, regulations, controls, action or inaction, civil commotion, fire
or other acts of God, and other causes beyond the reasonable control of a party
hereto (except financial inability) shall excuse the performance by that party,
for a period equal to the period of any said prevention, delay or stoppage, of
any obligation hereunder; provided, however that the foregoing shall not be
deemed to extend the time by which Tenant shall be entitled to terminate this
Lease or to an abatement of rent. A party claiming such a force majeure delay
under this section shall notify the other party within a reasonable period of
time after an event constituting such a force majeure delay occurs and of such
party's good faith estimate of the length of such delay.
15.15 ENTIRE AGREEMENT: This Lease constitutes the entire agreement
between the parties, and there are no binding agreements or representations
between the parties except as expressed herein. Tenant acknowledges that
neither Landlord nor Landlord's Agents has made any legally binding
representation or warranty as to any matter except those expressly set forth
herein, including any warranty as to (i) whether the Premises may be used for
Tenant's intended use under existing Law, (ii) the suitability of the Premises
or the Project for the conduct of Tenant's business, or (iii) the condition of
any improvements. There are no oral agreements between Landlord and Tenant
affecting this Lease, and this Lease supersedes and cancels any and all previous
negotiations, arrangements, brochures, agreements and understandings, if any,
between Landlord and Tenant or displayed by Landlord to Tenant with respect to
the subject matter of this Lease. This instrument shall not be legally binding
until it is executed by both Landlord and Tenant. No subsequent change or
addition to this Lease shall be binding unless in writing and signed by Landlord
and Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease with
the intent to be legally bound thereby, to be effective as of the Effective
Date.
LANDLORD: TENANT:
GOLDEN PACIFIC PROPERTIES, LLC, ADAC LABORATORIES
a Delaware limited liability company a California corporation
By: Divco West Group, LLC, By: ____________________________
a Delaware limited liability Name: ____________________________
company Title: ____________________________
Its Authorized Agent
Dated: August __, 1998
By: ________________________
Name: Scott Smithers
Its: President
Dated: August __, 1998
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EXHIBIT B
WORK LETTER
This Exhibit B forms a part of that certain Lease (the "Lease") by and
between Golden Pacific Properties, as Landlord, and ADAC Laboratories, as
Tenant, to which this Exhibit is attached. If there is any conflict between
this Exhibit B and the Lease, this Exhibit B shall govern. All capitalized
terms referred to in this Exhibit B shall have the same meaning provided in the
Lease, except where expressly provided to the contrary in this Exhibit B.
ARTICLE 1 DEFINITIONS
1. ADDITIONAL DEFINITIONS. Each of the following terms shall have the
following meaning:
ARCHITECT: WHL Architects and Planners, Inc. in Sunnyvale, California
or any other architectural firm selected by Tenant and approved by Landlord in
its reasonable discretion to prepare the "Final Plans" (as hereinafter defined).
CONTRACTOR: L & S Hallmark Construction in Sunnyvale, California or
any other general contractor selected by Tenant and approved by Landlord in its
reasonable discretion to construct the Tenant Improvements.
CONSTRUCTION CONTRACT: The construction contract to be entered into
by Tenant and its Contractor in form, scope and substance satisfactory to Tenant
and approved by Landlord in its reasonable discretion.
DESIGN PROBLEM: A Design Problem shall mean when the Working Drawings
(or any revision to any) for the Tenant Improvements that have been submitted to
Landlord for its approval are reasonably determined by Landlord's architect (i)
to have a material adverse effect on the structure of the Building or to the
Building's electrical, plumbing, life safety, mechanical, heating,
air-conditioning and ventilation systems; (ii) not be in compliance with any
applicable federal, state and local laws, ordinances, rules, regulations and
building codes (collectively, the "Applicable Laws"); (iii) to have an adverse
effect on the exterior appearance of the Building; or (iv) not to be consistent
with the Space Plan (each, a "Design Problem").
GOVERNMENTAL APPROVALS: All building permits and other approvals from
the governmental authorities to construct the Tenant Improvements.
LANDLORD'S ALLOWANCE: An amount equal to $163,758.00. Any unused
portion of Landlord's Allowance for the Tenant Improvements shall remain the
property of Landlord, and Tenant shall have no interest in said funds.
LANDLORD DELAY: A Landlord Delay shall mean a delay incurred by
Tenant in Substantially Completing the Tenant Improvements due to a delay by
Landlord or its architect in providing written notice of approval or disapproval
of the Working Drawings within the time periods and as provided in section 2.1
of this Exhibit. Tenant shall notify Lessor within five (5) days after Tenant
knows of an event constituting such a Landlord Delay and of the length of the
delay as reasonably determined by the Architect.
SUBSTANTIAL COMPLETION, SUBSTANTIALLY COMPLETE, AND SUBSTANTIALLY
COMPLETED (OR SIMILAR PHRASE): The foregoing shall mean when the following have
occurred or would have occurred but for any delay cause by Tenant:
(a) the Tenant has delivered to Landlord a certificate from the
Architect, in a form reasonably approved by Landlord, that the Tenant
Improvements have been Substantially Completed substantially in accordance with
the Final Plans; and
(b) Tenant has obtained from the appropriate governmental
authority a certificate of occupancy (or all building permits with all
inspections approved or the equivalent) and all other approvals and permits for
the Premises permitting occupancy and use of the Premises for its permitted use
under the Lease.
TENANT IMPROVEMENTS: The improvements to be constructed in accordance
with the Final Plans, including, without limitation, Tenant's identification
sign on the monument located on the grass burn on Barber Lane. Said work shall
include architectural, mechanical and electrical work and life safety systems,
and shall be in accordance with the criteria, procedures and schedules referred
to in this Exhibit. The Tenant Improvements shall comply in all respects with
all applicable laws, statutes, ordinances, building codes and regulations
(collectively, "Applicable Laws").
CONSTRUCTION COSTS: All costs, expenses, fees, taxes and charges to
construct the Tenant Improvements, including, without limitation, the following:
(1) architects, engineers and consultants in the preparation of
the Preliminary Plans and the Final Plans, including mechanical, electrical,
plumbing and structural drawings and of all other aspects of
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such plans for the Tenant Improvements, and for processing governmental
applications and applications for payment, observing construction of the work,
and other customary engineering, architectural, interior design and space
planning services;
(2) surveys, reports, environmental and other tests and
investigations of the site and any improvements thereon;
(3) labor, materials, equipment and fixtures supplied by the
Contractor, its subcontractors and/or materialmen, including, without
limitation, charges for a job superintendent and project representative;
(4) the furnishing and installation of all heating, ventilation
and air conditioning duct work, terminal boxes, distributing defusers and
accessories required for completing the heating, ventilation and
air-conditioning system in the Premises, including costs of meter and key
control for after-hour usage, if required by Landlord;
(5) all electrical circuits, wiring, lighting fixtures, and tube
outlets furnished and installed throughout the Premises, including costs of
meter;
(6) all window and floor coverings in the Premises, including,
without limitation, all treatment and preparatory work required for the
installation of floor coverings over the concrete or other structural floor;
(7) all fire and life safety control systems , such as fire
walls, wiring and accessories installed within the Building;
(8) all plumbing, fixtures, pipes and accessories installed
within the Building;
(9) fees charged by the city and/or county where the Building is
located (including, without limitation, fees for building permits and approvals
and plan checks) required for the work in the Building;
(10) all taxes, fees, charges and levies by governmental and
quasi-governmental agencies for authorization, approvals, licenses and permits;
and all sales, use and excise taxes for the materials supplied and services
rendered in connection with the installation and construction of the Tenant
Improvements; and
(11) all costs and expenses incurred to comply with all
Applicable Laws of any governmental authority for any work at the Project in
order to construct the Tenant Improvements.
The term Construction Costs under this Exhibit shall not include
(i) any fees, costs, expenses, compensation or other consideration payable to
Tenant, or any of its officers, directors, employees or affiliates, or (ii) the
cost any of Tenant's furniture, artifacts, trade fixtures, telephone and
computer systems and related facilities, or equipment. Any fees or costs
referred to in clauses (i) or (ii) above shall be paid by Tenant without resort
to Landlord's Allowance.
ARTICLE 2 CONSTRUCTION OF TENANT IMPROVEMENTS
2.1 PREPARATION OF PLANS.
(a) SPACE PLAN. Tenant has caused to be prepared a space plan for
the Tenant Improvements a copy of which is attached hereto as Exhibit B-1, which
space plan has been approved by the parties (the "Space Plan").
(b) FINAL PLANS. Tenant shall cause the Architect to prepare final
working drawings, which shall be consistent with the Space Plan, compatible with
the design, construction and equipment of the Building, comply with all
Applicable Laws, capable of logical measurement and construction, and contain
all such information as may be required for obtaining all permits and other
governmental approvals for the construction of the Tenant Improvements (the
"Working Drawings"). Within thirty (30) days after approval of the Effective
Date, Tenant shall submit two copies of the Working Drawings to Landlord for its
review and approval in its reasonable discretion. Within ten (10) days after
receipt of the Working Drawings, Landlord shall notify Tenant in writing that
(i) Landlord approves of such Working Drawings, or (ii) Landlord disapproves of
such Working Drawings, the basis for disapproval and the changes requested by
Landlord. Tenant shall cause the Working Drawings to be revised and shall
submit the revised Working Drawings to Landlord for its review and approval as
provided in this section. If Landlord disapproves of the Working Drawings in
any respect, the parties shall confer and negotiate in good faith to reach
written agreement on the Working Drawings within five (5) business days
thereafter for the first (1st) disapproval and three (3) business days
thereafter. Upon such agreement, Tenant shall cause the Working Drawings to be
revised and shall submit the revised Working Drawings to Landlord for its review
and approval as provided in this section. Landlord shall approve or reasonably
disapprove of such revised Working Drawings
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within three (3) business days after delivery of such Working Drawings to
Landlord. If Landlord disapproves the revised Working Drawings, the parties
shall again meet and confer in accordance with this paragraph until the parties
agree on the Working Drawings. If Landlord disapproves of the second set of
Working Drawings within said three (3) business day time period and such
disapproval or failure to agree is not based on a Design Problem, then each day
after the end of said three (3) business day time period shall constitute a
Landlord Delay and if Tenant is unable to conduct its business in all of the
Premises as a result, Tenant shall be entitled to a partial abatement in rent
for each day of such Landlord Delay. Such abatement in rent shall be limited to
the square footage of the Premises in which Tenant is constructing the Tenant
Improvements and is unable to construct the Tenant Improvements pending approval
of such Working Drawings. The Working Drawings approved in writing by the
parties shall be referred to as the "Final Plans."
(c) GENERAL. It is the responsibility of Tenant to assure that the
Final Plans and the Tenant Improvements constructed thereunder conform to all of
the Applicable Laws. Tenant shall submit to Landlord one (1) reproducible and
four (4) prints of the Final Plans.
2.2 SELECTION AND APPROVAL OF CONTRACTOR. The Contractor shall be
familiar with all Applicable Laws. In addition, any subcontractor performing
any work on the life safety or alarm systems or work affecting the roof shall be
subject to Landlord's prior written approval in its reasonable discretion and
Landlord may require the Tenant use Landlord's contractor or a specific
subcontractor for any such work. Landlord shall provide written notice of
approval or disapproval within five (5) business days after Tenant's request for
such approval. Tenant may request that Landlord approve three (3) or more
Contractors prior to competitive bidding, in which case Tenant may select any
one of the Contractors approved by Landlord. The construction contract shall be
subject to the prior written approval of Landlord in its reasonable discretion
and shall require, among other things, that the Contractor (a) obtain and
deliver to Landlord evidence of insurance required by Landlord, and (b) execute,
obtain and deliver to Tenant lien waivers in the form required under Applicable
Law from the Contractor and all of its subcontractors and suppliers, and (c)
monthly progress payments, with a ten percent (10%) retention. The failure of
Landlord to provide its written notice of approval or disapproval (which shall
include the basis for such disapproval) of such contract within five (5) days
after Landlord's receipt of such request shall be deemed an approval by Landlord
of such contract.
2.3 INFORMATION PROVIDED BY LANDLORD. Acceptance or approval of any plan,
drawing or specification, including, without limitation, the Preliminary Plans
and the Final Plans, by Landlord shall not constitute the assumption of any
responsibility by Landlord for the accuracy or sufficiency of such plans and
material, and Tenant shall be solely responsible therefor. Tenant agrees and
understands that the review of all plans pursuant to the Lease or this Exhibit
by Landlord is to protect the interests of Landlord in the Building, and
Landlord shall not be the guarantor of, nor responsible for, the correctness,
completeness or accuracy of any such plans or compliance of such plans with
Applicable Laws. Landlord shall promptly furnish to Tenant upon request all
information regarding the Premises and Building within Landlord's possession and
which is reasonably requested by Tenant Architect or Contractor, including,
without limitation, any "as built" drawings, plumbing, mechanical, electrical,
and any other engineering reports that are necessary to prepare the plans to
construct the Tenant Improvements. Any information that may have been
furnished to Tenant by Landlord or others about the mechanical, electrical,
structural, plumbing or geological (including soil and sub-soil) characteristics
of the Building or Project (hereinafter referred to as the "Site
Characteristics") are for Tenant's convenience only, and Landlord does not
represent or warrant that the Site Characteristics are accurate, complete or
correct or that the Site Characteristics are as indicated. Any information that
has been furnished by Landlord to Tenant has been delivered on the expressed
condition and understanding that Tenant will independently verify whether such
information is accurate, complete or correct and not rely on such information
provided by Landlord.
2.4 NO RESPONSIBILITY OF LANDLORD. Landlord's approval of any plans,
including, without limitation, the Preliminary Plans or the Final Plans, shall
not: (i) constitute an opinion or agreement by Landlord that such plans and
Tenant Improvements are in compliance with all Applicable Laws, (ii) impose any
present or future liability on Landlord; (iii) constitute a waiver of Landlord's
rights hereunder or under the Lease or this Exhibit; (iv) impose on Landlord any
responsibility for a design and/or construction defect or fault in the Tenant
Improvements, or (v) constitute a representation or warranty regarding the
accuracy, completeness or correctness thereof.
2.5 ACTUAL REVIEW COSTS. Tenant shall pay to Landlord its actual costs
incurred for Landlord's architect to review the Working Drawings and Final Plans
to the extent Landlord determines it reasonably necessary to engage an outside
architectural firm to assist in the review of such drawings and plans. All such
reimbursements shall be made within ten (10) days after receipt of written
invoice for same.
2.6 CHANGES. After approval of the Preliminary Plans or Final Plans by
Landlord and Tenant, any changes in the Preliminary Plans or Final Plans shall
require the prior written consent of Landlord and the parties shall follow the
same process as was required under sections 3.2 for approval of plans. Any
change requested by Tenant that is approved in writing by Landlord shall be
prepared by the Architect and shall be subject to the review and approval of
Landlord's architect in its reasonable discretion. The cost of such changes,
including the cost to revise such plans, obtain any additional permits and
construct any additional improvements required as a result thereof, and the cost
for materials and labor, and all other additional costs incurred by Tenant from
resulting delays in completing the Tenant Improvements, shall be included as
part of the Construction Costs for the Tenant
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Improvements. Notwithstanding the foregoing, Tenant may order minor field
changes which do not affect the Building structure, Building systems or the
exterior appearance of the Premises or Building without Landlord's prior
approval; provided, however, that Tenant shall promptly notify Landlord of any
such change.
2.7 CONSTRUCTION BUDGET FOR TENANT IMPROVEMENTS. After approval of the
Final Plans by Landlord and Tenant as provided above, Tenant shall prepare a
detailed estimate of the Construction Costs for the Tenant Improvements (the
"Construction Budget"). Tenant shall not make any changes in the Construction
Budget that (a) will result in a change in the Tenant Improvements that is not
comparable in structure, design or quality of the Tenant Improvements approved
by Landlord in the Final Plans, or (b) result in any change in the exterior of
the Premises or a change visible from the exterior of the Premises. Landlord
shall provide its approval or disapproval for any change in the Construction
Budget within five (5) business days after receipt of such request by Tenant.
The failure of Landlord to provide such approval or disapproval shall be deemed
an approval. Landlord's approval of the Construction Budget, and any changes
thereto, shall not under any circumstances constitute an agreement by Landlord
to pay any costs or expenses in excess of Landlord's Allowance.
2.8 BUILDING PERMITS AND APPROVALS. Not later than after approval by
Landlord and Tenant of the Final Plans as provided above, Tenant or its
Contractor shall submit the Final Plans to the appropriate governmental body for
plan checking and all building permits and other governmental and
quasi-governmental approvals.
2.9 CONDUCT OF WORK. Tenant shall confine the construction activity to
within the Premises as much as possible and shall work in an orderly manner
removing trash and debris from the project on a regular basis. All such work
shall be undertaken in compliance with all Applicable Laws and the Lease. If
Tenant fails to comply with these requirements, Landlord shall have the right,
but not the obligation, to cause remedial action (at Tenant's cost) as deemed
necessary by Landlord to protect the public. Tenant shall complete construction
of the Tenant Improvements free and clear of all liens, security interests and
encumbrances of any kind.
(a) PRE-CONSTRUCTION SUBMITTALS TO LANDLORD. A minimum of five (5)
days prior to the commencement of construction, Tenant shall submit the
following items to Landlord:
(1) A certificate setting forth the proposed commencement date
of construction and the estimated completion dates of construction work,
fixturing work and projected opening date;
(2) Certificates of all insurance required under the Lease and
this Exhibit;
(3) Copies of all building permits, and all other permits and
approvals required by governmental agencies to construct the Tenant
Improvements; and
(4) Copies of all the construction contract with Tenant's
Contractor.
(b) DELAYS. Tenant shall with reasonable diligence prosecute
construction of the Tenant Improvements to complete all work by the Commencement
Date. Any delay in completing such work, including any delay as a result of
governmental delays, acts of God and other events beyond the control of Tenant,
shall not extend or delay the time for the commencement of payment Rent or any
other sum under the Lease; provided, however, that Tenant may be entitled to a
partial abatement in rent for a Landlord Delay to the extent provided in section
2.1(b) hereof.
(c) CORRECTION OF WORK. Landlord may reject any portion of the
Tenant Improvements which is defective or not in conformity with the Final
Plans. Landlord shall not be responsible for correcting the portions of the
Tenant Improvements which were defective or not in compliance with the Final
Plans; all such work shall be the responsibility of Tenant at its sole cost and
expense.
2.10 NOTICE OF COMPLETION; COPY OF RECORD SET OF PLANS. Within ten (10)
days after final completion of construction of the Tenant Improvements, Tenant
shall cause a notice of completion (or the equivalent notice required under
local law to provide notice to all contractors, subcontractors and materialmen
that the work is completed and the time for filing any mechanic's lien is
running) to be recorded in the Official Records of the County where the Building
is located, and shall furnish a copy thereof to Landlord upon such recordation.
If Tenant fails to do so, Landlord may execute and file the same on behalf of
Tenant as Tenant's agent for such purpose, at Tenant's sole cost and expense.
At the conclusion of construction: (i) Tenant shall cause the Architect or
Contractor (A) to update the Final Plans as necessary to reflect all changes
made to the Final Plans during the course of construction, (B) to certify to the
best of their knowledge that the "record-set" of as-built drawings are true and
correct, which certification shall survive the expiration or termination of this
Lease, and (C) to deliver to Landlord two (2) sets of copies of such record set
of drawings within ninety (90) days following issuance of a certificate of
occupancy for the Premises; and (ii) Tenant shall deliver to Landlord a copy of
all signed building permits and certificates of occupancy, and all warranties,
guaranties, and operating manuals and information relating to the improvements,
equipment and systems in the Premises.
2.11 TENANT'S PARTIES AND INSURANCE. The Contractor and all
subcontractors, laborers, materialmen, and suppliers used by Tenant collectively
shall be referred to as "Tenant's Parties".
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(a) INDEMNITY. Tenant's indemnity of Landlord as set forth in the
Lease shall also apply with respect to any and all costs, losses, damages,
injuries and liabilities related in any way to any act or omission of Tenant or
Tenant's Parties, or any one directly or indirectly employed by any of them, or
in connection with Tenant's non-payment of any amount arising out of the Tenant
Improvements and/or Tenant's disapproval of all or any portion of any request
for payment.
(b) REQUIREMENTS OF TENANT'S PARTIES. Each of Tenant's Parties shall
guarantee to Tenant and Landlord that the portion of the Tenant Improvements for
which it is responsible shall be free from any defects in workmanship and
materials for a period of not less than one (1) year from the date of completion
thereof. Each of Tenant's Parties shall be responsible for the replacement or
repair, without additional charge, of all work done or furnished in accordance
with its contract that shall become defective within one (1) year after the
later to occur of (i) completion of the work performed by such contractor or
subcontractors, and (ii) the date when the Tenant Improvements have been
Substantially Completed. All such warranties or guarantees as to material or
workmanship of or with respect to the Tenant Improvements shall be contained in
the construction contract or subcontract and shall be written such that such
guarantees or warranties shall inure to the benefit of both Landlord and Tenant,
as their respective interests may appear, and can be directly enforced by
either. Tenant covenants to give to Landlord any assignment or other assurances
which may be necessary to effect such right of direct enforcement.
(c) INSURANCE REQUIREMENTS. In addition to the insurance
requirements set forth in the Lease, Tenant shall comply with the following
requirements:
(1) GENERAL COVERAGES. Ensure that the Contractor carries
worker's compensation insurance covering all of their respective employees, and
shall also carry not less than $1,000,000 of commercial liability insurance,
including property damage, in form and with companies as are required to be
carried by Tenant as set forth in the Lease.
(2) SPECIAL COVERAGE. Tenant shall carry or cause the
Contractor to carry "Builder's All Risk" insurance in an amount approved by
Landlord covering the construction of the Tenant Improvements. Such insurance
shall be in amounts and shall include such extended coverage endorsements as may
be reasonably required by Landlord including, but not limited to, the
requirement that all of Tenant's Parties shall carry excess liability and
Products and Completed Operation Coverage insurance, each in amounts not less
than $1,000,000 per incident, $1,000,000 in aggregate, and in form and with
companies as are required to be carried by Tenant as set forth in the Lease.
(3) GENERAL TERMS. Certificates for all insurance carried
pursuant to the foregoing sections shall be delivered to Landlord before the
commencement of construction of the Tenant Improvements and before the
Contractor's equipment is moved onto the site. All such policies of insurance
must contain a provision that the company writing said policy will give Landlord
thirty (30) days' prior written notice of any cancellation or lapse of the
effective date or any reduction in the amounts of such insurance. Tenant's
Parties shall maintain all of the foregoing insurance coverage in force until
the Tenant Improvements are fully completed and accepted by Landlord, except for
any Products and Completed Operation Coverage insurance required by Landlord,
which is to be maintained for three (3) years following completion of the work
and acceptance by Landlord and Tenant. All policies carried under this section
except for Workers' Compensation shall insure Landlord and Tenant, as their
interests may appear, as well as Contractor and Tenant's Parties. All
insurance, except Workers' Compensation, maintained by Tenant's Parties shall
preclude or waive subrogation claims by the insurer against anyone insured
thereunder. Such insurance shall provide that it is primary insurance as
respects Landlord and Tenant and that any other insurance maintained by Landlord
or Tenant is excess and noncontributing with the insurance required hereunder.
The requirements for the foregoing insurance shall not derogate from the
provisions for indemnification of Landlord by Tenant under the Lease or this
Exhibit.
2.12 LABOR MATTERS. Tenant shall use reasonable efforts to perform or
cause Tenant's contractor to perform all work in the making and/or installation
of any repairs, alterations or improvements in a manner so as to avoid any labor
dispute which causes or is likely to cause stoppage or impairment of work or
delivery service or any other services in the Project. In the event there shall
be any such stoppage or impairment as the result of any such labor dispute or
potential labor dispute, Tenant shall promptly undertake such actions as may be
reasonably necessary to eliminate such dispute or potential dispute.
2.13 TEMPORARY FACILITIES DURING CONSTRUCTION. Tenant shall obtain in its
name and pay for all temporary utility facilities, and the removal of debris, as
necessary and required in connection with the construction of the Premises.
Storage of Tenant's contractors' construction material, tools, equipment and
debris shall be confined to the Premises and any other areas designated for such
purposes by Landlord. Landlord shall not be responsible for any loss or damage
to Tenant's and/or Tenant's contractors' equipment. In no event shall any
materials or debris be stored in the malls or service or exit corridors of the
Project.
5
<PAGE>
2.14 MISCELLANEOUS. The Tenant Improvements shall be subject to the
reasonable inspection and approval of Landlord and its supervisory personnel.
All contractors engaged by Tenant shall be bondable, licensed contractors,
possessing good labor relations, capable of performing quality workmanship.
ARTICLE 3 PAYMENT OF CONSTRUCTIONS COSTS
3.1 PAYMENT OF COSTS. Tenant shall pay for the Tenant Improvements,
except for the Landlord's Allowance which Landlord shall advance as hereinafter
provided. Landlord shall only be responsible for payment of up to the amount of
Landlord's Allowance for the Tenant Improvements. If the Tenant Improvement
Costs for the Tenant Improvements is greater than the amount of the Landlord's
Allowance, Tenant shall be solely responsible for such additional costs.
3.2 PAYMENT BY LANDLORD. Landlord shall make one payment of the
Landlord's Allowance within thirty (30) days after receipt by Landlord of (i)
copies of all applicable building permits reflecting final sign-off by the local
governmental authority, (ii) a copy of the as-built Final Plans for the Tenant
Improvements, and (iii) unconditional lien waivers from the general contractor
and all subcontractors and suppliers (iv) receipt and approval by Landlord of
the Architect's certificate referred to in the definition of Substantial
Completion in this Exhibit, which approval shall not be unreasonably withheld.
ARTICLE 4 GENERAL PROVISIONS
4.1 TENANT'S REPRESENTATIVE. Tenant hereby authorizes Paul A. Reda,
Director of Facilities for Tenant, located at 540 Alder Drive, Milpitas,
California 95035, as Tenant's representative to act on its behalf and represents
its interests with respect to all matters which pertain to the construction of
Tenant Improvements, and to make decisions binding upon Tenant with respect to
such matters.
4.2 LANDLORD'S REPRESENTATIVE. Landlord hereby authorizes Ruth L.
Cornthwiate, Portfolio Manager, of Gibson Speno Management Co., located at 5994
W. Las Positas Boulevard, Suite 203, Pleasanton, California, as Landlord's
representative to act on its behalf and represents its interests with respect to
all matters which pertain to the construction of Tenant Improvements, and to
make decisions binding upon Landlord with respect to such matters.
4.3 REMOVAL OF TENANT IMPROVEMENTS. At the time when Landlord approves of
the Final Plans, Landlord shall advise Tenant if all or any portion of the
Tenant Improvements will have to be removed by Tenant at its expense at or prior
to the expiration or earlier termination of the Lease as part of Tenant's
surrender obligations under section 15.2 of the Lease. As provided in section
15.2 of the Lease, if Landlord advises Tenant at the time Landlord approves of
the Final Plans that all or any portion of the Tenant Improvements must be
removed at the expiration or earlier termination of the Lease, Landlord shall
also have the right, but not the obligation, to notify Tenant at least thirty
(30) days prior to the expiration of the Lease that all or part of such Tenant
Improvements must remain at the Premises.
6
<PAGE>
EXHIBIT B-1
SPACE PLAN
7
<PAGE>
EXHIBIT 21
ADAC LABORATORIES AND SUBSIDIARIES
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION
OF
NAME INCORPORATION
- ----- -------------
<S> <C>
ADAC do Brasil Brazil
ADAC Laboratories Australia PTY Limited Australia
ADAC (Barbados) Foreign Sales Corporation, Inc. Barbados
ADAC Laboratories Europe, B.V. The Netherlands
ADAC Laboratories, SARL France
ADAC Laboratories, GmbH Germany
ADAC Laboratories, A/S Denmark
ADAC Laboratories, Canada Limited Canada
ADAC Laboratories, S.R.L. Italy
ADAC Laboratories, Ltd. United Kingdom
ADAC Laboratories Pacific, Inc. California, U.S.
ADAC Foreign Sales Corporation, Inc. Virgin Islands, U.S.
ADAC Research and Manufacturing, Inc. California, U.S.
ADAC Medical Technologies, Inc. Delaware, U.S.
ADAC HealthCare Information Systems, Inc. Texas, U.S.
ADAC Radiology Services, Inc. Delaware, U.S.
ADAC Healthcare Partners, Inc. Delaware, U.S.
Cortet, Inc. Florida, U.S.
CT Solutions, Inc. California, U.S.
O.N.E.S. Medical Services, Inc. New Hampshire, U.S.
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of ADAC Laboratories on Form S-8 (File Nos. 333-53849, 333-53871 and 333-34629)
of our report dated February 26, 1998, on our audits of the consolidated
financial statements and financial statement schedules of ADAC Laboratories as
of September 27, 1998 and September 28, 1997, and for each of the three fiscal
years ended September 27, 1998, which is included under Item 8. Financial
Statements and Supplemental Data of this Form 10-K.
San Jose, California
February 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 4,869
<SECURITIES> 0
<RECEIVABLES> 57,635
<ALLOWANCES> 2,319
<INVENTORY> 78,311
<CURRENT-ASSETS> 150,718
<PP&E> 21,181
<DEPRECIATION> 10,174
<TOTAL-ASSETS> 243,809
<CURRENT-LIABILITIES> 89,799
<BONDS> 0
0
0
<COMMON> 149,599
<OTHER-SE> (12,697)
<TOTAL-LIABILITY-AND-EQUITY> 243,809
<SALES> 219,046
<TOTAL-REVENUES> 300,528
<CGS> 124,113
<TOTAL-COSTS> 192,697
<OTHER-EXPENSES> 91,385
<LOSS-PROVISION> 1,905
<INTEREST-EXPENSE> 4,463
<INCOME-PRETAX> 12,108
<INCOME-TAX> 4,722
<INCOME-CONTINUING> 7,386
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,386
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.36
</TABLE>
