SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1999
Commission File No. 0-7955
Mentor Corporation
201 Mentor Drive
Santa Barbara, California 93111
Telephone: 805/879-6000
A Minnesota Corporation I.R.S. Employer Identification
No. 41-0950791
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, par value $.10 per share
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Registrant's
knowledge, in a definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K
The aggregate market value of the voting stock of the
Company held by non-affiliates of the Registrant as based upon
the closing National Market System sale price on June 28, 1999
was $408,229,000.
Number of Shares of Common Stock outstanding on June 28, 1999:
24,421,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1999
Annual Meeting of Shareholders are incorporated by reference in
Part III in this Report on Form 10-K.
PART I
ITEM 1. BUSINESS.
This Annual Report on Form 10-K filed on behalf of
Mentor Corporation ("Mentor" or the "Company") contains various
"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, which represent the
Company's expectations or beliefs concerning future events.
Statements containing expressions such as "believes",
anticipates" or "expects" used in this Annual Report and such
other documents incorporated herein by reference are intended to
identify forward-looking statements. These include statements
about the Company's strategies and expectations about new and
existing products, technologies and opportunities, market and
industry segment growth and demand and acceptance of new and
existing products. These also include statements regarding the
regulatory and legal environment in which the Company operates
and its assessment of risks associated therewith. All forward-
looking statements involve risks and uncertainties. Although the
Company believes its expectations are based upon reasonable
assumptions within the bounds of its knowledge of its business
and operations, there can be no assurances that actual results
will not materially differ from expected results. The Company
cautions that these and similar statements included in this
Annual Report are further qualified by important factors that
could cause actual results to differ materially from those in the
forward-looking statements. Such factors include, without
limitation, the following: increased competition, changes in
product demand, changes in market acceptance, new product
development, obtaining FDA approval of new and existing products,
changes in government regulation, supply of raw materials,
changes in reimbursement practices, adverse results of litigation
and other risks identified in this Annual Report or in other
documents filed by the Company with the Securities and Exchange
Commission. Specific attention should be directed to the
sections entitled "Government Regulation" and "Product
Liability". Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date on
which they are made. The Company assumes no obligation to
publicly release any revisions to such forward-looking statements
to reflect changes in events or circumstances after such dates.
General
In May 1999, the Company announced that its Board of
Directors had decided to divest the ophthalmology business, which
accounted for approximately 16% of sales in fiscal 1999. The
Company subsequently announced that it has entered into an
agreement to sell the assets of the intraocular lens business.
The remaining parts of the ophthalmic business are currently
being actively marketed. As a result of this decision, the
Company now accounts for the ophthalmic business as a
"Discontinued Operation" under Generally Accepted Accounting
Principles (GAAP). Accordingly, all sales and expenses and other
financial information of the ophthalmic business are reported, on
a net basis, as a single line on the financials. Numbers in this
Form 10-K have been restated to exclude the results of the
ophthalmic business as appropriate.
The Company develops, manufactures, and markets a broad
range of products for the medical specialties of plastic,
reconstructive and general surgery, and urology. Plastic and
general surgery products include surgically implantable
prostheses for cosmetic and reconstructive surgery, principally
breast implants and tissue expanders, and capital equipment and
disposable products used in soft tissue aspiration. Urologic
products include disposable and surgical products for the
management of urinary incontinence, surgically implantable
prostheses, principally penile implants for the treatment of
chronic male sexual impotence, and brachytherapy seeds for the
treatment of prostate cancer.
Corporate Organization
Two years ago, the Company was operated through wholly
owned subsidiaries which were organized around its existing
primary product groups: plastic surgery (through Mentor H/S,
Inc.), urology (through Mentor Urology, Inc.) and ophthalmology
(through Mentor Ophthalmics, formerly known as Mentor O&O, Inc.).
During fiscal 1998, the Company reorganized along
functional lines, rather than product groups, enabling the
Company to present a unified, single company image to its
customers, as well as to facilitate the sharing of technology and
manufacturing expertise among its various locations. As a result,
in August 1997, the Company formed Mentor Medical Inc. as a
wholly owned subsidiary and transferred to it all the sales and
marketing functions, and related assets, from each of its product
subsidiaries. Mentor H/S, Mentor Urology and Mentor Ophthalmics
retained all of the assets related to the Texas, Minneapolis and
Norwell, Massachusetts manufacturing facilities, respectively.
These assets consisted primarily of leasehold improvements and
manufacturing and research and development equipment. Mentor H/S
was subsequently renamed Mentor Texas, Inc. Mentor Urology was
changed to Mentor Minnesota, Inc.
International Expansion
During the 1990's, the Company expanded its
international presence through the establishment of direct sales
offices in Canada, Europe, and the Pacific Rim. All of the
offices are wholly owned subsidiaries of Mentor Corporation. In
fiscal 1991, the Company established its first four sales
offices: Mentor Medical Systems Canada, Mentor Medical Systems
UK, Ltd., Mentor Deutschland, GmbH, and Mentor Medical Systems,
Pty, Ltd. (Australia). In fiscal 1996, the Company established
Mentor France S.A. and Mentor Benelux B.V. In fiscal 1997, the
Company opened two additional sales office subsidiaries: Mentor
Medical Systems Iberica S.L. and Havas Medical B.V. In late
fiscal 1998, the Company established a sales office in Japan:
Mentor Japan K.K.
In 1993, the Company established Mentor Medical
Systems, B.V. in Leiden, the Netherlands, to further its
expansion into the international marketplace. This is the
Company's manufacturing and research and development facility
outside of the United States.
In fiscal 1999, sales from the direct international
offices accounted for 14% of total sales.
Principal Products and Markets
The Company strives to utilize its product design and
marketing capabilities, and its close working relationships with
health care professionals, to introduce products which provide
improved results for patients compared to existing treatment
methods and which can potentially reduce the overall cost of the
treatment. Following is a description of the Company's principal
product lines and the markets for them.
Plastic and General Surgery Products
The Company produces an extensive line of implants for
cosmetic and reconstructive surgery, including a line of breast
implants and skin and tissue expanders.
Mammary prostheses may be implanted to achieve breast
reconstruction following total or partial removal (mastectomy) or
to enhance breast size and shape in cosmetic surgery. Breast
reconstruction is possible for most patients undergoing a
mastectomy, either at the time of the original surgery or at a
later date.
The Company produces a broad line of mammary
prostheses, including saline-filled implants and silicone gel-
filled implants. Mammary prostheses comprise approximately 90%
of total plastic surgery product sales. Saline-filled breast
implants accounted for approximately 80% of mammary prostheses
sold in fiscal 1999.
By offering a combination of different types of
implants in a variety of different shapes and sizes and surfaces,
the physician is able to select the product most appropriate for
the patient.
The Company offers a patented line of skin and tissue
expanders. Tissue expansion is a technique for growing
additional tissue for reconstruction and skin graft procedures.
Some of the major applications of tissue expansion developed to
date include post-mastectomy reconstruction, and the elimination
of disfigurements such as burns, massive scars and facial
deformities.
In April 1997, the Company began marketing a line of
facial implants. These products are supplied by Implantech, a
private manufacturer of facial implants.
In September 1997, the Company began marketing the
Contour Genesis, following FDA approval in July 1997. The
Contour Genesis is an ultrasound assisted product used for the
liquification and aspiration of soft tissues in general surgery
and plastic and reconstructive surgery applications. While
initial sales of the Contour Genesis have been encouraging, the
Company believes that a greater potential for the product exists
in the area of liposuction. Liposuction, or the removal of body
fat, is one of the most popular cosmetic procedures performed
today. Current liposuction uses a metal cannula to sheer the
fat. This requires the physician to exert a large amount of
force to facilitate the procedure. In ultrasonic assisted
liposuction, a generator sends ultrasonic waves through a probe
that is inserted under the skin. The ultrasonic energy
emulsifies the fat, which can then be easily aspirated away.
The Company is currently conducting human clinical
trials using the Contour Genesis in order to expand the labeling
of the product to include ultrasonic assisted liposuction. The
Company expects to submit an application for approval to the FDA
by the end of the current fiscal year. Like any clinical
research, the outcomes of the trials are not predictable. There
can be no guarantee that data from this study will support an
approvable application. There can be no assurance as to when, if
ever, final approval will be given.
During fiscal 1999, the Company entered into a
marketing alliance and equity investment in Byron Medical, Inc.,
a privately held company that provides a variety of products for
the surgical specialties of liposuction and body contouring.
Under the agreement, the Company will promote and sell Byron's
products.
Disposable Urology Products
The National Institute of Health estimates that, due to
a variety of causes, ten million men, women and children in the
United States suffer from urinary incontinence or retention --
the inability to control the flow of urine. The Company markets
a broad range of incontinence products, including disposable
products that help people manage their incontinence, and surgical
products which aid in curing the problem.
In the disposable products area, the Company produces
several types of catheters, including intermittent self-
catheters, used by women, men and children to manage retentive
incontinence, and male external catheters, including both latex
and silicone models. These products are used in homes, hospitals
and extended care facilities.
During the year, the Company enhanced its position in
this market via the acquisition of Sierra Laboratories, Inc., a
privately held manufacturer of specialized urologic products.
These products include male external catheters and drainage bags.
The Company also markets a variety of other disposable
products used in the management of urinary incontinence. These
include leg bags and urine collection systems, organic odor
eliminators, and moisturizing skin creams and ointments.
Surgical Urology Products
The Company's Surgical Urology products fall into three
general categories of products: impotence treatment, incontinence
treatment, and cancer diagnosis and treatment products.
Impotence Products. The Company's impotence products
include primarily a line of penile implants for the treatment of
male sexual impotence. Penile prostheses, which accounted for
over 90 % of the Company's impotence sales in fiscal 1999, are
implanted in men who cannot achieve a natural erection of
sufficient rigidity for sexual intercourse. In order to respond
to various physician and patient preferences, the Company
manufactures several types of penile prostheses, including two
versions of hydraulic inflatable devices and two versions of a
malleable prosthesis.
For the past several years, alternative treatment
methods for male impotence have become increasingly popular.
These include injection drug therapy and vacuum erection devices.
These modes of treatment have been used extensively as a first
line of treatment due to their lower cost and less invasive
nature. The Company had marketed a vacuum erection device since
fiscal 1991. Due to its small sales base, this product was
discontinued in fiscal 1999.
In April 1998, Pfizer Inc., a major pharmaceutical
company, received FDA approval for the first oral drug treatment
for impotence. Its product, Viagra, received an enormous amount
of media attention, due to its ease of use and purported
efficacy. While the Company believes that the heightened
interest in treating impotence may be beneficial to the Company
in the long run, there was a near term negative impact on penile
implant sales as men who might be interested in an implant tried
Viagra instead. The Company continues to believe that this
interest in treating impotence bodes well for the long-term
prospects of penile implant sales, as Viagra will not work on all
patients. Sales of penile implants in the second half of fiscal
1999 increased 17% over the first half of the year. While the
Company hopes this upward trend will continue, we may continue to
see weakness in sales in the near term.
The Company expects that alternative treatment methods
to permanent implants will remain an integral part of the
marketplace in the future.
Incontinence Products. The Company believes that many
people, if given the choice, would rather cure than manage their
incontinence problem. The Company has focused considerable
attention in developing products for this market. For several
years the Company has been pursuing regulatory approval on a new
product, Urethrin, which is an injectable implant for the
treatment of incontinence. The FDA is currently requiring the
Company to submit additional clinical data before it can make a
decision on the marketing of Urethrin. The Company is in the
process of compiling data for submission to the FDA. There can
be no guarantee that data from this study will support an
approvable application. In addition, there can be no assurance
as to when, if ever, final approval will be given for sales in
the United States. The Company has limited sales of Urethrin in
the international market.
Bladder neck suspensions and the pubovaginal sling are
increasingly popular surgical procedures for women suffering from
stress incontinence. In a suspension procedure, the bladder neck
and proximal urethra are lifted and suspended by a pair of
sutures attached to an anchor in the pubic bone. In April 1997,
the Company began marketing the Cinch bone anchor system, used to
anchor the sutures. In a pubovaginal sling procedure, a piece of
material is placed underneath the urethra and suspended from the
pubic bone, in a hammock-like fashion. This prevents the bladder
neck from descending during coughing or other stressful exertion.
In May 1998, the Company began marketing the Suspend for use in
sling procedures. This product is made from Tutoplast-processed
human fascia lata. The Tutoplast process inactivates pathogens
such as HIV and Hepatitis B and C, while preserving the collagen
matrix of the fascia, providing superior tensile strength
characteristics.
Cancer Products. In June 1997, the Company announced
two strategic alliances to launch its efforts in the treatment of
urologic cancers. The first alliance is with North American
Scientific, Inc. ("NASI") which produces brachytherapy seeds for
the treatment of prostate cancer. The conventional treatment for
prostate cancer has been the radical prostatectomy. This is an
invasive surgical procedure that involves the complete removal of
the prostate. It involves a 2-3 day hospital stay. Due to the
damage done to the urinary sphincter and penile nerves during
surgery, impotence and incontinence are common side effects of
the procedure.
Brachytherapy treatment is a much less invasive
procedure in which radioactive seeds, approximately the size of a
grain of rice, are implanted directly into the prostate. Fifty
to one hundred seeds are used in each procedure. Because the
radiation exposure is limited to a small area, general radiation
side effects are unusual with brachytherapy, and complication
rates are lower than with a radical prostatectomy. The procedure
can often be performed in an outpatient setting, thus reducing
the cost of the overall procedure.
NASI manufactures and ships the IoGold brachytherapy
seed, while the Company does all of the sales and marketing.
Sales of this product began in January 1998.
The second alliance is with Intracel Corporation in
which Mentor will be the exclusive worldwide marketing partner
for two of Intracel's bladder cancer products. PerImmune
Holdings, Inc. originally developed the products. PerImmune
merged with Intracel in 1997. The first product is a bladder
cancer test, the Accu-Dx. The product is a simple urine test
that can be performed in the doctor's office. It is intended to
be used in conjunction with cystoscopy to aid in the management
of bladder cancer patients. The FDA approved this product in
April 1997, and Mentor began sales in February 1998. During the
first quarter of fiscal 1999, the manufacturer voluntarily
recalled this product because of shelf life issues. The Company
expects to re-introduce this product in fiscal 2001. In addition
to the test, Intracel is developing a potential bladder cancer
treatment. This product, BCI-Immune Activator, appears to
demonstrate enhanced anti-tumor activity in the bladder. It has
completed Phase I and II clinical trials, and began Phase III
clinicals during fiscal 1999. Like any clinical research, the
outcomes of the trials are not predictable. There can be no
guarantee that data from this study will support an approvable
application. There can be no assurance as to when, or if, the
FDA will approve this product.
Summary of Sales by Principal Product Lines. The
following table shows the net sales attributable to each of the
Company's principal product lines and the percentage
contributions of such sales to total net sales for the periods
indicated.
Year Ended March 31,
1999 1998 1997
(Dollars in thousands)
Amount % Amount % Amount %
Plastic & General
Surgery Products $122,066 60% $112,449 62% $106,970 64%
Surgical Urology
Products 37,307 18% 28,413 16% 25,500 15%
Disposable Urology
Products 43,410 22% 39,405 22% 34,324 21%
$202,783 100% $180,267 100% $166,794 100%
Marketing
The Company employs specialized domestic sales forces
for its cosmetic surgery, urologic implants and disposable
urology product lines. Each group provides product orientation
and support and related service to physicians, nurses and other
health care professionals. This also allows the Company to
maintain active and continuous communication with leading health
care professionals in order to identify emerging growth markets
and opportunities for improved products and product extensions.
The Company also markets certain products, particularly
its disposable incontinence products, through an extensive
domestic network of independent hospital supply dealers and
health care distributors, and increasingly through retail
pharmacies.
The Company promotes its products through journal
advertising, direct mail programs, and participation in, and
sponsorship of, medical conferences and seminars. The Company
also participates in support organizations that provide
counseling and education for persons suffering from specific
maladies, and provides patient education materials for some of
its products to physicians for use with their patients.
The Company exports most of its products, principally
to Canada and Western Europe. Products are sold to both
independent distributors as well as through the Company's own
foreign direct international sales offices. For the years ended
March 31, 1999, 1998 and 1997, export sales to independent
distributors were $17,600,000, $16,173,000, and $14,996,000,
respectively. In addition, $27,450,000, $25,731,000 and
$19,809,000 in sales respectively, were from the Company's direct
international offices.
The Company's domestic sales and foreign sales are
approximately equal in profitability. Other than sales through
the Company's international sales offices, export sales have been
made in United States dollars and currency fluctuations have not
significantly affected operating earnings. The Company does not
hedge any of its foreign currency transactions.
The Company has eight international sales offices in
Canada, the United Kingdom, Germany, France, Benelux, Australia,
Spain and Japan. The Japan office was established late in fiscal
1998. These offices warehouse product and sell through a direct
sales force in each country. The offices currently sell
primarily cosmetic and reconstructive surgery implants and
disposable urology products. Sales are made in the local
currency of the host country. The Company feels that a local
presence in key countries will help the Company to capitalize on
the growing international market for medical products.
In general, the Company maintains sufficient
inventories of finished goods both domestically and
internationally to support immediate shipment of products upon
receipt of a customer's order. From time to time, however, a
back-order situation may develop due to increased demand for a
product or special circumstances, such as regulatory restrictions
or physical damage to the plant. See "Government Regulation".
During the fiscal year ended March 31, 1999, no
customer accounted for more than 10% of the Company's revenues.
Competition
The Company believes it is one of the leading suppliers
in the United States of penile implants and cosmetic and
reconstructive surgery products and of disposable catheter
products, based upon independent research studies of market
share.
The Company currently competes with only one other
company in the inflatable penile market, American Medical
Systems, Inc. Several implants compete with the Company's
malleable penile implants. The primary competitive factors are
product performance and reliability, ease of implantation and
customer service. The Company believes that, by providing
several types of implants that stress high performance and
reliability, it can successfully respond to various physician and
patient preferences.
The Company competes primarily with one other company
in the domestic breast implant market, McGhan Medical
Corporation, a subsidiary of INAMED, Inc. The primary
competitive factors currently are range of style and sizes,
product performance and quality, proprietary design, customer
service and in certain instances, price.
By careful design and active marketing of catheters and
other disposable incontinence products, the Company has been able
to compete successfully against larger companies. The Company,
C.R. Bard, Inc., Hollister, Inc., Sherwood Medical, Baxter
Travenol, Inc., and Coloplast, Inc. are the dominant competitors
in the market. As with many of the Company's other product
lines, the Company competes primarily on the basis of design and
performance, and by providing product orientation, support and
related service to health care professionals and consumers.
While the Company believes it competes successfully in
its markets, many of its competitors have substantially greater
financial, technological and marketing resources.
Government Regulation
General
As a manufacturer of medical devices, the Company's
manufacturing processes and facilities are subject to continuing
review by the FDA and various state agencies to insure compliance
with current good manufacturing practices and other regulatory
requirements. These agencies inspect the Company and its
facilities from time to time to determine whether the Company is
in compliance with various regulations relating to manufacturing
practices, process validation, testing, quality control and
product labeling. These regulations depend heavily on
administrative interpretation by the various agencies, and can be
influenced by adverse publicity and political pressure. There
can be no assurance that future interpretations made by the FDA
or other regulatory bodies will not adversely affect the Company.
A determination that the Company is in violation of such
regulations could lead to imposition of various penalties,
including the issuance of warning letters, injunctive relief
(whether by adverse court ruling or by consent), product recalls
or product seizures.
Medical Device Amendments of 1976
Under the "Medical Device Amendments of 1976" (the
"Medical Device Act"), the FDA has the authority to adopt
regulations that: (i) set standards for medical devices; (ii)
require proof of safety and effectiveness prior to marketing
devices which the FDA believes require pre-market clearance;
(iii) require test data approval prior to clinical evaluation of
human use; (iv) permit detailed inspections of device
manufacturing facilities; (v) establish "good manufacturing
practices" ("GMP") that must be followed in device manufacture;
(vi) require reporting of product defects to the FDA; and (vii)
prohibit device exports that do not comply with the Medical
Device Act unless they comply with established foreign
regulations, do not conflict with foreign laws, and the FDA and
the health agency of the importing country determine export is
not contrary to public health. All of the Company's products are
"medical devices intended for human use" within the meaning of
the Medical Device Act and are, therefore, subject to FDA
regulation.
The Medical Device Act establishes complex procedures
for compliance based upon FDA regulations that designate devices
as Class I (general controls, such as compliance with labeling
and record-keeping requirements), Class II (performance standards
in addition to general controls) or Class III (pre-market
approval application ("PMAA") before commercial marketing).
Class III devices are the most extensively regulated. Class III
devices require each manufacturer to submit to the FDA a PMAA
that includes information on the safety and effectiveness of the
device. The majority of the Company's plastic surgery and
urology implants, are in Class III, while most of its disposable
incontinence products are in Class I.
In 1991, the Company submitted PMAAs for its silicone
gel-filled mammary prostheses to the FDA, pursuant to FDA
regulations issued at that time. In 1992, the FDA's outside
advisory panel on plastic surgery products indicated that
although there was insufficient data to establish with reasonable
certainty that silicone gel implants were safe and effective,
there was a public health need for these types of implants. The
FDA adopted the recommendations of the panel.
The FDA denied the pending applications for the use of
silicone gel-filled breast implants for augmentation, but
provided for the continued availability of the implants for
reconstruction purposes on the basis of a public health need. In
order to obtain silicone gel-filled implants for use in
reconstruction, women were required to enroll, beginning in 1993,
in a clinical study for future follow-up. Patients were required
to sign an informed consent form and physicians had to certify
that saline implants were not a satisfactory alternative. The
Company continues to ship these products under the terms of this
clinical study.
In 1993, the FDA published proposed guidelines for
PMAA's on the Company's hydraulic inflatable penile prostheses
and saline-filled breast implants. For saline implants, the FDA
published a schedule that permits the data required for the PMAA
to be submitted in phases, beginning with preclinical data due in
1995 and ending with final submission of prospective clinical
data in 1998. The FDA has extended final submissions until 1999.
The Company has submitted all required data to date (primarily
laboratory tests and manufacturing data) and intends to submit
the remaining data for its PMAA's in a timely fashion, which it
expects will be by the end of the calendar year.
For its penile implants, the FDA has requested that the
data for the PMAA be submitted in four modules during calendar
1999. The Company has submitted the first two modules, covering
manufacturing, and chemical and biological testing. The Company
expects to submit the remaining two modules, which include
clinical studies and mechanical testing as required by the FDA.
FDA approval for either of these products, however,
cannot be assured. Should the Company's PMAAs be denied, it
would have a material adverse effect on the Company's operations
and financial position.
To comply with the Medical Device Act, the Company has
incurred, and will continue to incur, substantial costs relating
to laboratory and clinical testing of new products and the
preparation and filing of documents in the formats required by
the FDA. The process of obtaining marketing clearance from the
FDA for new products and existing products can be time-consuming
and expensive, and there is no assurance that such clearances
will be granted. The Company also may encounter delays in
bringing new products to market as a result of being required by
the FDA to conduct and document additional investigations of
product safety and effectiveness, which may adversely affect the
Company's ability to commercialize additional products or
additional applications for existing products.
Additional Regulations
As a manufacturer of medical devices, the Company's
manufacturing processes and facilities are subject to regulations
and review by the FDA and other regulatory agencies. The
Company's domestic facilities must comply with the FDA's Quality
System Regulation requirements (regulations adopted by the FDA in
October 1996 which replaced the requirements previously known as
Good Manufacturing Practices). Also, for products sold
internationally, the Company has obtained a CE mark for its
products by demonstrating compliance with the ISO 9001 and
EN46001 international quality system standards. Medical device
laws and regulations similar to those described above are also in
effect in some of the other countries to which the Company
exports its products. These range from comprehensive device
approval requirements for some or all of the Company's medical
device products to requests for product data or certifications.
Texas Facility Review
In June 1995, Mentor H/S's Texas facility was audited
by the FDA. As a result of that audit, Mentor H/S received an
FD483, "list of observations". These observations dealt
primarily with validation of manufacturing processes and follow-
up on product complaint evaluations. Mentor H/S responded to the
FD483 in August 1995. In February 1996, the FDA issued Mentor
H/S a warning letter, concluding that they had not satisfactorily
addressed the inadequacies noted in the FD483. Specifically, the
FDA disagreed with the method by which the Company had performed
its initial validations of the Texas facility. To address the
warning letter, in 1996 the Company hired an outside expert
consultant to conduct a comprehensive GMP audit, and initiated or
completed all corrections called for in the consultant's report.
For those items which could not be corrected in a timely manner,
primarily the re-validation of the manufacturing process, a time
frame for completion was submitted to the FDA.
In August 1997, the FDA returned to the Texas facility
to perform a comprehensive GMP audit, which included reviewing
the Company's progress in completing the remaining items
contained in the 1996 warning letter. While the Company had
completed most of these items, the re-validation effort had not
been completed within the time frame outlined in the 1996 report.
In December 1997, the Company developed a new timeline for
completion of these items. In May 1998, the Company entered into
a voluntary consent decree with the FDA, under which the Company
agreed, among other things, to complete the re-validations in the
agreed upon timeframe.
The consent decree required the Company to hire outside
expert consultants to assist in strengthening the Company's
compliance program and related processes. In July, 1998 the
consultant conducted a comprehensive GMP audit of the Texas
facility and submitted a detailed written report to Mentor
management and the FDA on its findings. In that report, the
consultant stated that, except for the outstanding re-
validations, there were no significant areas of GMP non-
compliance.
The Company and FDA agreed to time frames under which
the Company was to complete its re-validations of its
manufacturing processes; specifically by November 2, 1998 for
saline-filled devices and by December 31, 1998 for gel-filled
devices. The Company completed its validations of both devices
in those timeframes. The outside expert consultant reviewed the
validations and reported to management and to the FDA that all
validation projects had been completed in accordance with
established milestones and within the timeframes established by
the consent decree.
Additionally, under the terms of the consent decree, an
expert consultant is required to conduct an inspection and to
issue a report annually. The first annual inspection and report
has been completed and filed with the FDA. The consultant
conducted a comprehensive inspection according to the QSR/GMP
medical device regulations. In his report, the consultant
stated, "Mentor is in substantial compliance with the current
Good Manufacturing Practices."
The Company believes that it will meet the remaining
requirements of the consent decree, although there can be no
assurance that it can do so. In addition, although the expert
consultants have expressed their opinion as to the satisfactory
completion of certain consent decree requirements, FDA
inspectors, during some future audit, may disagree with the
conclusions of these experts. Should the Company fail to comply
with the conditions of the consent decree, under its terms the
FDA is allowed to order the Company to stop manufacturing or
distributing the breast implants, order a recall or take other
corrective actions. The Company may also be subject to penalties
of $10,000 per day until compliance is achieved.
If the Company maintains continuous compliance with the
terms of the consent decree for a period of 5 years after the
completion of the re-validations, the Company can petition the
courts to remove the consent decree without opposition from the
government.
Environmental Regulation
In certain states, primarily Texas, the Company is also
subject to regulation by the local Air Pollution Control District
and the United States Environmental Protection Agency as a result
of some of the chemicals used in its manufacturing process.
Health Care Cost Containment
The cost of a significant portion of medical care in
the United States is funded by government and private insurance
programs, such as Medicare and corporate health insurance plans.
Accordingly, third parties, rather than patients, frequently pay
all or a substantial portion of the costs of goods and services
delivered by health care providers. Except for breast and facial
implants used in cosmetic surgery and augmentation, the Company's
medical products are generally eligible for coverage under many
of these third-party reimbursement programs. The Company
believes that eligibility for third-party reimbursement can be an
important factor in the success of medical products, particularly
in situations where there are competing products or treatments
that are also eligible for such reimbursement. Therefore, the
Company attempts when feasible to obtain eligibility of its
products for such reimbursement.
Reimbursement plans, whether through government funded
Medicare or private third party insurers, are developing
increasingly sophisticated methods of controlling health care
costs through prospective reimbursement programs, capitation
programs, group buying, redesign of benefits, requirement of a
second opinion prior to major surgery, careful review of bills,
encouragement of healthier lifestyles and exploration of more
cost-effective methods of delivering health care.
These types of programs can potentially limit the
amount which health care providers may be willing to pay for
medical products. In the past, the Company has encountered
instances in which reimbursement for some of its products,
particularly its hydraulic inflatable penile prostheses, was
denied. In the majority of cases, the Company has successfully
obtained reinstatement of reimbursement for these products.
Denial of reimbursement and/or limitations on the amount third
party payors are willing to pay will, most likely, have a
detrimental effect on sales of the affected products.
Product Development
At March 31, 1999, the Company employed 87 people
engaged in full-time research and development. The Company is
working to develop new or improved products in many of its
principal product lines, including breast implants and general
surgery. In addition, the Company has committed $1 million per
year for three years to help fund the Phase III clinical trials
for the BCI-Immune Activator bladder cancer treatment. Intracel
is conducting the trials. These payments began in January 1998.
The Company is obligated to pay Intracel an additional $3 million
based on the achievement of certain milestones. The first $1
million milestone payment was paid in fiscal 1999. The second
payment of $1 million is not expected until fiscal 2001.
The Company believes its future growth will continue to
depend in part upon the introduction of new products that provide
superior benefits, command premium prices and have significant
growth potential. The Company works closely with health care
professionals to ascertain their needs and concerns and those of
their patients.
During fiscal 1999, 1998 and 1997, the Company spent a
total of $14,820,000, $15,179,000 and $13,861,000 respectively,
for research and development.
Patents and Licenses
It is the Company's policy to actively seek patent
protection for its products when appropriate. The Company's
patents include patents relating to its penile prostheses, tissue
expanders, combination breast implant and tissue expander,
ultrasonic assisted soft tissue aspiration and disposable
catheters.
All of the patents relating to products, which produce
significant revenues, have at least two years remaining until
expiration. While the Company believes its patents are valuable,
it has been the Company's experience that the knowledge,
experience and creativity of its product development and
marketing staffs, and trade secret information with respect to
manufacturing processes, materials and product design, have also
been important in maintaining proprietary product lines. As a
condition of employment, the Company requires each of its
employees to execute an agreement relating to confidential
information and patent rights.
Product Liability and Warranties
The Company attempts to conduct its product
development, manufacturing, marketing and service and support
activities with careful regard for the consequences to patients.
The Company occasionally receives communications from surgeons or
patients with respect to various products claiming the products
are defective and have resulted in injury to the patient. It is
the Company's policy to replace any products claimed to have
malfunctioned within a reasonable time after sale. In the case
of the Company's inflatable penile prostheses, the Company will
replace a unit after implantation upon request of the surgeon for
any reason.
In fiscal 1999, the Company implemented a limited
warranty program to cover its breast implants. The program
provides a no charge replacement product, under certain
circumstances, for the life of the patient. For five years
following implantation, the Company will provide up to
$1,200 in financial assistance to defray operating room
costs not covered by insurance. The Company provides a
limited warranty on certain of its capital equipment
products, such as the Contour Genesis, against defects in
workmanship and material. Estimated warranty costs are
provided at the time of sale and periodically adjusted to
reflect actual experience.
Raw Material Supply
The Company obtains certain raw materials and
components for a number of its products from single suppliers.
In most cases the Company's sources of supply could be replaced
if necessary without undue disruption, but it is possible that
the process of qualifying new materials and/or vendors for
certain raw materials and components could cause a material
interruption in manufacturing or sales. No material
interruptions occurred during the last fiscal year.
In the mid 90's, certain suppliers of raw materials,
such as Dow Corning, DuPont and others, announced that they would
no longer supply implant or medical grade materials for products
in several markets related to reproduction, contraception,
obstetrics or cosmetic surgery, due to what they perceived as a
product liability risk in excess of the potential economic
benefits of providing these materials. Certain of the Company's
products, principally breast implants and penile implants,
incorporated materials supplied by these companies. Under
guidelines established by the FDA, the Company successfully
replaced these materials with those being offered by other
companies willing to supply device manufacturers. The price the
Company pays for many of these replacement materials is
substantially higher than with its previous vendors. These
sources of supply are relatively new, and there can be no
assurance that they will be able to supply the Company in the
quantities needed, or that regulatory or other delays will not
cause a disruption in sales of affected products. The Company
believes its supply of raw materials is adequate for the current
fiscal year.
Employees
As of March 31, 1999, the Company employed 1,581 people
of whom 1,074 were in manufacturing, 357 in sales and marketing,
87 in research and development and 63 in finance and
administration. Included in this amount are 360 employees
exclusively engaged in the ophthalmology business. None of the
Company's employees are represented by a union. There has never
been a work stoppage due to labor difficulties, and the Company
considers its relations with its employees to be satisfactory.
Discontinued Operations (Ophthalmology Products)
As discussed earlier, the Company is in the process of
divesting the ophthalmology business. The Company has entered
into an agreement to sell the assets of its intraocular lens
business, which represents approximately half of the Company's
ophthalmic assets. The Company is actively marketing the
remaining portions of the business. The Company would expect to
complete the divestiture during fiscal 2000.
Ophthalmic products include intraocular lenses, used
for replacement of a lens following cataract surgery, surgical
equipment, primarily coagulators used to control bleeding during
ophthalmic and other microsurgery, and diagnostic equipment, used
to evaluate disorders of the eye.
Net sales of ophthalmology products were $37,893,000,
$35,029,000 and $36,574,000 in fiscal 1999, 1998 and 1997,
respectively.
The Company's primary focus in ophthalmology has been
on cataract and glaucoma surgery. Cataract surgery, which
involves the removal of a calcified lens in the eye and the
implantation of an intraocular lens ("IOL"), is the most common
surgical procedure performed in both the United States and the
world.
The Company has produced a wide range of products
related to cataract surgery, including diagnostic ultrasound
equipment, disposable products used during the surgery,
phacoemulsification to remove the cataract and IOLs.
In November 1996, the Company introduced its next
generation diagnostic ultrasound device, the Advent A/B. The
Advent aids in the diagnosis of the cataract and other disorders
of the eye, and helps determine the prescription strength of the
IOL to implant.
Disposable ophthalmic products include coagulators to
control bleeding during surgery. This is accomplished by
equipment that generates radio frequency energy and a hand-held
instrument that delivers it to the surgical site. The Company
also markets lint free surgical wipes and sponges, diamond blades
and knives, and titanium instruments such as forceps and needle
holders.
In February 1997, the Company began marketing the
Mentor SIStem phacoemulsifier, a totally redesigned and upgraded
version of the Company's first phacoemulsifier. This product
incorporates many advanced features, including a unique fluidics
system for enhanced hydrodynamic control and a closed aspiration
system for instant vacuum control.
In October 1994, the Company acquired the IOL product
line of Optical Radiation Corporation, a subsidiary of Benson
Eyecare. The Company markets two types of IOLs: a fixed, hard
plastic lens, and proprietary foldable lens, the MemoryLensr.
The MemoryLens has been available internationally since early
1996. Sale in the United States was approved by the FDA in
December 1997. The market for IOL's has been shifting rapidly
from fixed lenses to foldable ones, which can be implanted
through a smaller incision. The MemoryLens is the first and only
lens to be pre-rolled at the factory, thereby facilitating the
surgical procedure.
The Company also markets tonometry products, which
measures the intraocular pressure of the eye, which aids in the
diagnosis of glaucoma.
The Company uses primarily independent sales
representatives in the United States to market its ophthalmic
products. In this market, companies compete primarily on the
basis of product quality and technology, service, reliability and
price. By offering unique, proprietary products and a broad
range of niche products, the Company believes that it will be
able to compete against larger companies. Various competitors
include Allergan, Inc., Alcon Laboratories Inc., a subsidiary of
Nestle S.A., Bausch & Lomb, Inc., Pharmacia, Upjohn, Inc. and
Staar Surgical Company.
ITEM 2. PROPERTIES.
The Company owns manufacturing, warehouse and office
buildings in Minneapolis, Minnesota (161,965 square feet). The
Company leases additional office manufacturing and warehouse
facilities in Santa Barbara, California (78,000 square feet),
Mounds View, Minnesota (20,000), Irving, Texas (139,109 square
feet), Norwell, Massachusetts (57,000 square feet), Cidra, Puerto
Rico (47,000 square feet) and Leiden, the Netherlands (15,000
square feet). Under the terms of the proposed sale of the
intraocular lens product line, the acquirer will assume the
obligations under the Cidra Puerto Rico lease. The Company's
international sales offices lease office and warehouse space
ranging from 1,000 to 5,500 square feet. All leases have terms
ranging from one to fifteen years, renewable on terms the Company
considers favorable.
The Company believes its facilities are generally
suitable and adequate to accommodate its current operations, and
suitable facilities are readily available to accommodate any
future expansion as necessary.
ITEM 3. LEGAL PROCEEDINGS.
Claims related to product liability are a regular and
ongoing aspect of the medical device industry. At any one time,
the Company is subject to claims asserted against it and is
involved in products liability litigation. These actions can be
brought by an individual, or by a group of patients purported to
be a class action. The Company has carried product liability
insurance on all its products, including breast implants,
subsequent to May 1991 and prior to September 1985. This
insurance is subject to certain self-insured retentions and
limits of the policy. From September 1985 through April 1991,
the Company was self insured for the majority of its surgical
implant products, but had product liability insurance on the rest
of its products. From June 1992 on, the Company's insurance has
excluded silicone gel-filled breast implants.
In addition, in the ordinary course of its business the
Company experiences various types of claims that sometimes result
in litigation or other legal proceedings. The Company does not
anticipate that any of these proceedings will have any material
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company as well as the
ages as of June 28, 1999, are listed below, followed by brief
accounts of their business experience and certain other
information.
Name Age Position
Christopher J. Conway 60 Chairman of the Board, Chief
Executive Officer and Director
Anthony R. Gette 43 President, Chief Operating Officer,
Secretary and Director
Malcolm Boddy 57 President, Mentor Manufacturing
Operations Division
Trevor Pritchard 45 President, Mentor Medical Inc.
Gary E. Mistlin 47 Senior Vice President,
Finance/Treasurer and Chief
Financial Officer
Bobby K. Purkait 49 Senior Vice President, Research &
Development
Ramona E. Schwab 38 Senior Vice President, Human
Resources
Mr. Conway is a founder of the Company and has served
as its Chief Executive Officer and Chairman of the Board of
Directors since the Company's inception in 1969.
Mr. Gette joined the Company in December 1980 and has
served in various financial and general management capacities
since that time. He became Vice President, Finance in 1983,
Executive Vice President in 1986 and President and Chief
Operating Officer in 1987. He became Secretary in 1986.
Mr. Boddy joined the Company in July 1997 as Senior
Vice President of Manufacturing Operations. He was promoted to
President, Mentor Manufacturing Operations Division in February
1998. From 1994 to 1997 he was Vice President, Operations of the
Renal Products Division of National Medical Care, a subsidiary of
W.R. Grace & Co.
Mr. Pritchard joined the Company in November 1998 as
President of Mentor Medical, Inc. From 1995 to 1998 he was
Executive Vice President of International Sales and Marketing for
Sherwood-Davis & Geck, a subsidiary of American Home Products
Corporation. From 1994 to 1995 he was Vice President -
International for Davis & Geck.
Mr. Mistlin joined the Company in November 1987, as
Director of Finance/Treasurer, and was promoted to Vice President
of Finance/Treasurer in April 1989 and Senior Vice President in
April 1998.
Mr. Purkait joined the Company in February 1986 and has
served in various research & development capacities. He was
promoted to Vice President of Research & Development in 1988, and
Senior Vice President in April 1998.
Ms. Schwab joined the Company in March 1996. From 1992
to 1996 she was Director, Human Resources of Sorin Biomedical
Inc., a privately held cardiovascular medical device company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
(a) The Common Stock of the Company is traded on the NASDAQ
National Market under the symbol MNTR. There are approximately
14 market makers for the Company's stock. The following table
shows the range of high and low closing sale prices reported on
the NASDAQ National Market. Quotations represent prices between
dealers, and do not reflect retail mark-ups, mark-downs or
commissions.
Year Ended March 31, 1999 High Low
Quarter ended June 30, 1998 29 13/32 23 3/4
Quarter ended September 30, 1998 24 1/8 11 1/16
Quarter ended December 31, 1998 23 7/16 10 1/8
Quarter ended March 31, 1999 21 3/4 14 1/4
Year Ended March 31, 1998 High Low
Quarter ended June 30, 1997 29 5/8 19 1/4
Quarter ended September 30, 1997 33 3/4 29
Quarter ended December 31, 1997 40 1/8 30 1/2
Quarter ended March 31, 1998 36 5/8 24 1/8
(b) As of June 28, 1999 there were 1,500 holders of
record of the Company's Common Stock.
(c) In fiscal 1999 and fiscal 1998, the Company declared
and paid a quarterly dividend of $0.025 per share of Common
Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected
financial data of the Company and should be read in conjunction
with the related Consolidated Financial Statements of the Company
and accompanying Notes to Consolidated Financial Statements.
Year Ended March 31,
(in thousands, except
per share data)
1999 1998 1997 1996 1995
Statement of Income
Data
Net sales $202,783 $180,267 $166,794 $143,344 $116,602
Gross profit 126,609 121,145 116,162 100,558 79,105
Operating income 30,141 36,786 39,649 37,166 26,648
Income before income
taxes - continuing
operations 30,888 38,404 39,832 36,179 23,828
Income taxes -
continuing operations 10,447 13,575 14,497 12,924 8,825
Income from continuing
operations 20,441 24,829 25,335 23,255 15,003
Discontinued operations
net of tax (6,479) (932) 2,535 564 770
Net income $ 13,962 $ 23,897 $ 27,870 $ 23,819 $ 15,773
Basic earnings per
share:
continuing operations $ 0.83 $ 1.00 $ 1.02 $ 0.96 $ 0.69
Diluted earnings per
share:
continuing operations $ 0.80 $ 0.94 $ 0.96 $ 0.89 $ 0.64
Basic earnings per
share $ 0.57 $ 0.96 $ 1.12 $ 0.99 $ 0.73
Diluted earnings per
share $ 0.55 $ 0.91 $ 1.06 $ 0.91 $ 0.67
Dividends per common
share $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.075
Average outstanding
shares:
Basic 24,550 24,894 24,863 24,163 21,640
Diluted 25,394 26,330 26,349 26,412 25,306
Balance Sheet Data:
Working capital $106,751 $113,657 $102,500 $ 85,255 $ 66,920
Total assets 196,011 199,911 164,474 146,072 125,162
Long-term debt, less
current portion 8 58 24,655
Shareholders' equity $158,618 $164,685 $138,349 $116,495 $ 71,114
SALES BY PRINCIPAL PRODUCT LINE
Year Ended March 31,
1999 1998 1997
(Dollars in thousands)
Amount % Amount % Amount %
Plastic % General
Surgery Products $122,066 60% $112,449 62% $106,970 64%
Surgical Urology
Products 37,307 18% 28,413 16% 25,500 15%
Disposable Urology
Products 43,410 22% 39,405 22% 34,324 21%
$202,783 100% $180,267 100% $166,794 100%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
In May 1999, the Company announced that its Board of Directors had
decided to divest the ophthalmology business, which accounted for approximately
16% of sales in fiscal 1999. The Company subsequently announced that it
has entered into an agreement to sell the assets of the intraocular lens
business. The remaining parts of the ophthalmic business are currently
being actively marketed. As a result of this decision, the Company now
accounts for the ophthalmic business as a "Discontinued Operation" under
Generally Accepted Accounting Principles (GAAP). Accordingly, all sales
and expenses and other financial information of the ophthalmic business are
reported, on a net basis, as a single line on the financials. Numbers in this
Form 10-K have been restated to exclude the results of the ophthalmic
business as appropriate.
The following table sets forth various items from the
Consolidated Statements of Income as a percentage of net sales
for the periods indicated:
Year Ended March 31,
1999 1998 1997
Net sales 100.0% 100.0% 100.0%
Costs and expenses
Cost of sales 37.6% 32.8% 30.4%
Selling, general and administrative 40.3% 38.4% 37.6%
Research and development 7.2% 8.4% 8.2%
Operating income from continuing 14.9% 20.4% 23.8
operations
Interest expense (0.1%) 0.0% (0.3%)
Interest income 0.4% 0.7% 0.5%
Other (expense) income 0.0% 0.2% (0.1%)
Income from continuing operations
before income taxes 15.2% 21.3% 23.9%
Income taxes 5.1% 7.5% 8.7%
Income from continuing operations 10.1% 13.8% 15.2%
Income (loss) from discontinued
operations (net of tax) (3.2%) (0.5%) 1.5%
Net income 6.9% 13.3% 16.7%
RESULTS OF OPERATIONS
Sales
Sales for fiscal 1999 increased to $203 million from $180 million
in 1998, an increase of 12%. Disposable urology products
increased 10% from the prior year. Growth continues to be strong
in intermittent self-catheters. Approximately half of the
increase in disposable urology product sales resulted from the
mid year acquisition of Sierra Laboratories, a privately held
manufacturer of specialty urological disposables. Sales of
surgical urology products were up 31%. Adding to urology product
sales were two new products: IoGold brachytherapy seeds for the
treatment of prostate cancer, which was introduced in January
1998, and the Suspend sling for treating female urinary
incontinence, introduced in May 1998. These products accounted
for an additional $14 million of sales for the year. Sales of
penile implants declined 21% from fiscal 1998, due to competition
from a new impotence drug, Viagra, which was introduced by Pfizer
during the Company's first quarter of fiscal 1999. The Viagra
introduction and concurrent advertising campaign generated an
unprecedented amount of interest in impotence causes and
treatments. The Company continues to believe that this interest
in treating impotence bodes well for the long-term prospects of
penile implant sales, as Viagra will not work on all patients.
Sales of penile implants in the second half of fiscal 1999
increased 17% over the first half of the year. While the Company
hopes this upward trend will continue, we may continue to see
weakness in sales in the near term. Plastic & general surgery
product sales increased 9% compared to fiscal 1998. General
surgery products, which include the Company's Contour Genesis
soft tissue aspiration system and a line of related disposable
products, were up $3 million in fiscal 1999. The remaining sales
growth in fiscal 1999 came from higher sales of plastic surgery
products, which had been adversely affected by a fire at the Texas
manufacturing facility during fiscal 1998.
Sales for fiscal 1998 increased from $167 million in 1997 to $180
million, an increase of 8%. Sales of surgical urology products
increased 11%, primarily due to unit growth in penile implant
sales. Included in surgical urology product sales was
approximately $700 thousand in brachytherapy seeds, which was
introduced in January 1998. Disposable urology sales grew 15%,
primarily from increased sales of intermittent self-catheters.
Plastic and General surgery products sales grew 5%. Almost the
entire growth came from the Contour Genesis, which was introduced
during the second quarter of fiscal 1998. Sales of plastic
surgery products were relatively unchanged from the prior year.
These sales were affected by a fire at the Company's Texas
facility, which occurred in August 1997. The fire caused the
shutdown of certain production departments in September and
October 1997. See "Cost of Sales". As a result, the Company was
temporarily unable to meet all of its demand for certain mammary
implants, especially silicone-gel-filled products. Production
was back to normal levels by the end of fiscal 1998, although
significant backorders still existed as of that date.
The Company's export sales to unaffiliated customers accounted
for 9% of net sales in all three fiscal years ended March 31,
1999, 1998 and 1997, respectively. In addition, 14%, 14% and 12%
of sales in each year were from the Company's direct
international sales offices.
Over the three fiscal years ended March 31, 1999, sales increases
have been primarily the result of increased unit sales. General
selling price increases have not been significant in recent
years.
Cost Of Sales
Cost of sales was 37.6% of net sales for fiscal 1999, compared to
32.8% for the prior year. Approximately 1.1% of the change
related to the effect in the sales mix of increased sales of non-
company manufactured products, such as the IoGold brachytherapy
seed and the Suspend sling. Pursuant to the Company's agreements
with its manufacturing partners, the Company generates
approximately a 50% gross margin on these types of products.
The remaining increase in fiscal 1999 was primarily related to
costs incurred in re-validating its manufacturing processes at
its Texas facility. In 1996, the Food and Drug Administration
("FDA") issued the Texas facility a warning letter, citing
several inadequacies in the Company's adherence to FDA Good
Manufacturing Practices. The FDA was specifically concerned with
the method by which the Company had performed its initial
validation of the manufacturing processes in the Texas facility.
The Company agreed to re-validate the facility, as well as
correct the other items in the warning letter. The Company has
committed a variety of resources to the re-validation and GMP
compliance effort, including the hiring of additional staff, use
of outside consultants and extensive testing, both destructive
and otherwise, of work in process and finished goods. In May
1998, the Company entered into a voluntary consent decree with
the FDA, which, among other things, required the Company to
complete the re-validations in the timeframe set forth in the
decree.
The consent decree required the Company to hire outside expert
consultants to assist in strengthening the Company's compliance
program and related processes. In July 1998 the consultant
conducted a comprehensive GMP audit of the Texas facility and
submitted a detailed written report to Mentor management and the
FDA on its findings. In that report, the consultant stated that,
except for the outstanding re-validations, there were no
significant areas of GMP non-compliance.
The Company and FDA agreed to time frames under which the Company
was to complete its re-validations of its manufacturing
processes; specifically by November 2, 1998 for saline-filled
devices and by December 31, 1998 for gel-filled devices. The
Company completed its validations of both devices in those
timeframes. The outside expert consultant reviewed the
validations and reported to management and to the FDA that all
validation projects had been completed in accordance with
established milestones and within the timeframes established by
the consent decree.
Additionally, under the terms of the consent decree, an expert
consultant is required to conduct an inspection and to issue a
report annually. The first annual inspection and report has been
completed and filed with the FDA. The consultant conducted a
comprehensive inspection according to the QSR/GMP medical device
regulations. In his report, the consultant stated, "Mentor is in
substantial compliance with the current Good Manufacturing
Practices."
Should the Company fail to comply with the conditions of the
consent decree under its terms, the FDA is allowed to order the
Company to stop manufacturing or distributing breast implants,
order a recall or take other corrective actions. The Company may
also be subject to penalties of $10,000 per day until the task is
completed.
In fiscal 1999, the Company settled for $6.0 million an insurance
claim related to the fire at its Texas facility in August 1997.
The Company recorded the $2.8 million of this amount that had not
been recorded in the previous year as a reduction to cost of
sales during fiscal 1999.
Cost of sales was 32.8% of net sales for fiscal 1998, compared to
30.4% for the prior year. The increase was primarily related to
the fire at the Company's Texas manufacturing facility. Several
production areas were affected by the fire and many of the
production departments were shut down for the month of September
1997, and, depending on the department, in October and November.
The higher level of cost of sales for the year was caused by
unabsorbed overhead due to a lack of production, combined with
inefficiencies upon production startup.
The Company filed an insurance claim as of March 31, 1998 for
property damage repair, loss of inventory destroyed by the fire
and business interruption. Based on an initial progress payment
of $1 million and representations from the insurance carrier, the
Company recorded $1.6 million in insurance proceeds in fiscal
1998 to cover property damage losses. An additional $1.6 million
in insurance proceeds to offset business interruption losses was
recorded as a reduction to cost of sales in the fourth quarter of
fiscal 1998.
In addition, during fiscal 1998, the Company began to spend a
significant amount of funds related to the re-validation efforts
described above.
Selling, General and Administrative
Selling, general and administrative expenses increased to 40.3%
of net sales in fiscal 1999, compared to 38.4% in the previous
year. The Company added two specialized sales forces during the
year to better promote its line of soft tissue aspiration
products and to support the launch of its brachytherapy seed
products.
Selling, general and administrative expenses increased to 38.4%
of net sales in fiscal 1998, compared to 37.6% the prior year.
The increase relates primarily to the Company's efforts in
launching its new product, the Contour Genesis.
Research and Development
Research and development expenses were 7.2% of net sales in
fiscal 1999, a decrease from 8.4% the prior year. The Company
continues to spend substantial funds on its premarket approval
applications ("PMAAs") for its silicone gel-filled breast
implants, saline-filled breast implants and penile implants. The
Company is committed to a variety of clinical and laboratory
studies in connection with these products. The Company expects
to complete the work on its saline-filled breast implant and
penile implant PMAAs and submit the data to the FDA in fiscal
2000.
The Company has an investment in Intracel, its marketing partner
for a potential bladder cancer treatment. The Intracel agreement
requires the Company to pay $1 million a year for three years to
defray the costs of the clinical trials for the product,
beginning in January 1998. Results for fiscal 1999 included $1.0
million of this amount, compared to $250 thousand in fiscal 1998.
In addition, the Company is obligated to pay an additional $3
million upon the completion of certain milestones by Intracel.
The first $1 million milestone payment was expensed in fiscal
1999. The Company expects the second milestone payment of $1
million to be made in fiscal 2001.
Research and development expenses were 8.4% of sales in fiscal
1998, compared to 8.2% in fiscal 1997. The increase was
primarily related to development of the Contour Genesis, which
was introduced in fiscal 1998.
Interest and Other Income and Expense
Interest expense was $272 thousand in fiscal 1999, an increase
from $27 thousand in fiscal 1998. During the year, the Company
borrowed under its line of credit to help fund a stock repurchase
program. There were no borrowings in fiscal 1998.
Interest income decreased to $926 thousand in 1999 from $1.3
million in fiscal year 1998, resulting from lower cash balances.
Other income and expense primarily includes gains or losses on
disposals of assets, and foreign currency gains or losses related
to the Company's foreign operations.
Interest expense was $27 thousand in fiscal 1998, a decrease from
$559 thousand in fiscal 1997. During fiscal 1997, the Company
paid the remaining portion of its monetary obligations under the
terms of its fiscal 1994 agreement settling breast implant claims
against the Company. This had accounted for $383 thousand of
interest expense in 1997.
Interest income increased to $1.3 million in 1998 from $806
thousand in fiscal 1997, resulting from higher cash balances.
Income Taxes
The effective rate of corporate income taxes was 34% for fiscal
1999, 35% in 1998 and 36% in 1997.
Restructuring Charge and Discontinued Operations
In December 1998, the Company announced a restructuring plan as
part of a strategic initiative to improve the profitability and
competitiveness of the ophthalmic segment of its business by
reducing manufacturing costs and concentrating on those products
and markets capable of sustained, long-term profitable growth.
During the implementation of this plan, the Board of Directors
authorized management to evaluate potential buyers for the
product lines of the ophthalmic business segment. Subsequent to
March 31, 1999, the Company announced the pending sale of the
intraocular lens product line, a substantial portion of the
ophthalmic products business. Consistent with this pending sale,
the net assets and operations of the ophthalmic segment of the
business, comprised of the intraocular lens products and
ophthalmic equipment, have been classified as "discontinued
operations". The sale of both product lines is expected to be
completed in calendar year 1999.
A charge related to the planned restructuring of $7.0 million is
included in the results of discontinued operations in 1999. The
plan included $1.9 million for employee termination benefits
related to a workforce reduction of 150 positions, anticipated
plant closing costs of $800 thousand, a write-down of $3.3
million for production assets, and a write-down of $1.0 million
of intangibles related to products to be discontinued.
Concurrent with the restructuring, the Company recorded a $7.0
million special charge for inventory primarily related to the
discontinuance of certain ophthalmic products. As a result,
total charges of $14.0 million were included in the results of
discontinued operations in fiscal 1999. At March 31, 1999, the
remaining liability for termination and plant closing costs
recorded as part of the restructuring plan was $2.2 million,
which is expected to be paid during calendar 1999.
Net Income
Net income for fiscal 1999 was $14.0 million, compared to $23.9
million the previous year. Higher sales were offset by the
restructuring charge and the re-validation costs at the Texas
facility.
Inflation
The Company does not believe inflation has had a material impact
on the Company's operations over the three-year period ended
March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the three years ended March 31, 1999, liquidity needs have
been satisfied principally by cash flow from operations and
borrowings under the Company's line of credit.
At March 31, 1999, working capital was $106.8 million compared to
$113.7 million the previous year. The Company generated $19.1
million of cash from continuing operations during fiscal 1999,
compared to $31.7 million the previous year. Lower income from
continuing operations, an increase in accounts receivable, and a
decline in taxes payable accounted for the majority of the
change.
During fiscal 1999 the Company spent $10.9 million on capital
expenditures. The funds were used for capacity expansion at the
manufacturing facility in Minneapolis, additional manufacturing
equipment in Texas as a result of the re-validations, and
equipment and data processing hardware and software. The Company
anticipates investing approximately $12 million in facilities and
capital equipment in fiscal 2000.
At the beginning of fiscal 1999, the Company had available to it
$15 million under a secured line of credit. This was increased
to $25 million during the second quarter. Borrowings accrue
interest at the prevailing prime rate or at a premium to LIBOR,
at the Company's discretion. The line of credit includes certain
covenants that, among others, limit the dividends the Company may
pay and require the maintenance of certain levels of tangible net
worth and debt service ratios. An annual commitment fee of .125%
is paid on the unused portion of the credit line. During fiscal
1999, the Company borrowed $6.9 million under the agreement. At
March 31, 1999, the balance outstanding was $4.0 million. This
amount was paid off during the first quarter of fiscal 2000.
The Company's Board of Directors has authorized an ongoing stock
repurchase program. The objectives of the program, among other
items, are to offset the issuance of stock options, provide
liquidity to the market and to reduce the overall number of
shares outstanding. Repurchases are subject to market conditions
and cash availability. In July 1998, the Board increased the
repurchase authorization by 1 million shares, to a total of 1.8
million, and instructed the Company to increase its share
repurchases. As a result, during fiscal 1999, the Company
repurchased 1.1 million shares for consideration of $20.5
million.
The Company's principal source of liquidity at March 31, 1999
consisted of $21.6 million in cash and short term marketable
securities plus $21.0 million available under the existing line
of credit. The Company believes that funds generated from
operations, its cash and marketable securities and funds
available under its line of credit will be adequate to meet its
working capital and capital expenditure requirements through
fiscal 2000.
IMPACT OF YEAR 2000
General Description of the Year 2000 Issue and the Nature and
Effects of the Year 2000 on Information Technology (IT) and Non-
IT Systems
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's computer programs,
hardware or embedded chips that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on recent assessments, the Company determined that it will
be required to modify or replace portions of its distribution,
finance and manufacturing software and certain hardware so that
those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that with modifications or
replacements of certain existing software and hardware, the Year
2000 Issue can be mitigated. However, if such modifications and
replacements are not made, or are not completed in a timely
manner, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the
following key phases: inventory, assessment and remediation. The
Company has categorized its systems into several areas: core
systems (i.e. distribution, finance and manufacturing systems),
ancillary support systems to those core systems, embedded
systems, products, and third party vendors.
Inventory and Assessment
The Company has completed its inventory and assessment of both
its domestic and international core systems, indicating most of
the core systems would be adversely affected. For the ancillary
support systems and embedded systems, the Company has completed
its inventory and assessment. This identified two items that need
to be updated. The Company has completed its inventory and
assessment of its product lines and has determined that most of
the products it has sold and will continue to sell do not require
remediation to be Year 2000 compliant. Accordingly, the Company
does not believe that the Year 2000 presents a material exposure
as it relates to the Company's products.
Status of Progress in Becoming Year 2000 Compliant
For its domestic core system exposures related to its
distribution, finance and manufacturing software, the Company has
completed all required remediation. For other domestic core
systems, such as desktop computers, networks and off-the shelf
application software, the Company is 90% complete on the
remediation phase and expects to complete upgrades and/or
replacement no later than October 31, 1999.
The remediation of the identified ancillary and embedded systems
is expected to be complete no later than October 31, 1999.
Nature and Level of Importance of Third Parties and their
Exposure to the Year 2000
Other than payroll and its banking relationships, the Company has
no other significant direct interfaces with third party vendors.
The Company is in the process of working with key third party
vendors to ensure that the Company's systems that interface
directly with third party vendors are Year 2000 compliant by
December 31, 1999. The Company understands that key vendors are
in the process of making their systems Year 2000 compliant. Each
vendor queried by the Company believed that its system would be
Year 2000 compliant by the end of 1999.
The Company is beginning to query its significant suppliers and
subcontractors that do not share information systems with the
Company (external agents). To date, the Company is not aware of
any external agent with a Year 2000 issue that would materially
impact the Company's results of operations, liquidity, or capital
resources. The Company has no means of ensuring that external
agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-
compliance by external agents is not determinable at this time.
Costs
The total cost to the Company of the Year 2000 project is
estimated at $3.1 million and is being funded through operating
cash flows. To date, the Company has incurred costs of
approximately $2.1 million. This amount includes upgrading its
desktop systems and office software to the latest release, which
the Company would do in the normal course of business. The
majority of these costs relate to new hardware and software and
are being capitalized.
Risks
Management of the company believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. The
Company has not yet completed all necessary phases of the Year
2000 program. In the event that the Company does not complete
any additional phases, the Company would be constrained in taking
customer orders, and might be unable to manufacture and ship
certain products, or invoice customers. In addition, disruptions
in the economy generally resulting from Year 2000 issues could
also materially adversely affect the Company.
Contingency Plans
The Company currently has no contingency plans in place in the
event it does not complete all phases of the Year 2000 program.
The Company plans to evaluate the status of completion in June
1999 and determine whether such a plan is necessary.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Except for the historical information contained herein, the
matters discussed in this Management's Discussion are forward-
looking statements, the accuracy of which is necessarily subject
to risks and uncertainties. Actual results may differ
significantly from the discussion of such matters in the forward-
looking statements.
Due to the nature of the Company's products and business, the
Company has been and will be involved in various legal actions
arising in the course of business, some of which involve product
liability and intellectual property claims. With respect to
product liability issues, the litigation and regulatory risks
will continue to exist even with respect to those products that
have received or in the future may receive regulatory approval
for commercial sale. It is possible that adverse results arising
from product liability or intellectual property actions, as well
as adverse results arising from regulatory or administrative
proceedings could negatively affect the Company's future results
of operations.
The Company has been and may be in the future the subject of
negative publicity, which can arise from various sources, ranging
from the news media to legislative and regulatory investigations.
There can be no assurance that such negative publicity will not
result in a material adverse effect on the Company's future
financial position, its results of operations or the market price
of its stock. In addition, significant negative publicity could
result in an increase in product liability claims.
The Company's products, development activities and manufacturing
processes are subject to extensive and rigorous regulation by the
FDA and by comparable agencies in foreign countries. In the
United States, the FDA regulates the introduction, manufacturing,
labeling and record-keeping procedures for medical devices. The
process of obtaining marketing clearance from the FDA for new
products and existing products can be time-consuming and
expensive, and there is no assurance that such clearances will be
granted or that FDA review will not involve delays that would
adversely affect the Company's ability to commercialize
additional products or additional applications for existing
products. In addition, certain of the Company's products that
are in the research and development stage may be subject to a
lengthy and expensive pre-market approval ("PMA") process with
the FDA. Product approvals by the FDA can also be withdrawn due
to failure to comply with regulatory standards or the occurrence
of unforeseen problems following initial approval. The FDA could
also limit or prevent the manufacture or distribution of the
Company's products and has the power to require the recall of
such products. FDA regulations depend heavily on administrative
interpretation, and there can be no assurance that future
interpretations made by the FDA or other regulatory bodies will
not adversely affect the Company. The FDA, various state
agencies and foreign regulatory agencies inspect the Company and
its facilities from time to time to determine whether the Company
is in compliance with various regulations relating to
manufacturing practices, validation, testing, quality control and
product labeling. A determination that the Company is in
violation of such regulations could lead to imposition of
penalties, product recalls, consent decrees or product seizures.
Each of the Company's major business segments operates its
manufacturing, warehousing and research and development
activities in a single facility. While the Company has some
limited protection in the form of basic insurance coverage, the
Company's operating results and financial condition would be
materially adversely affected in the event of a fire or similar
catastrophe.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The following discussion about the Company's market
risk disclosures involves forward-looking statements. Actual
results could differ materially from those projected in the
forward-looking statements. The Company is exposed to market
risk related to changes in interest rates and foreign exchange
rates. The Company does not use derivative financial
instruments.
The Company maintains a portfolio of highly liquid cash
equivalents, with maturities of three months or less as of the
date of purchase. The Company also has current marketable
securities consisting primarily of municipal bonds that are of
limited credit risk and have contractual maturities of less than
two years. Given the short-term nature of these investments, the
Company is not subject to significant interest rate risk.
A portion of the Company's operations consists of sales
activities in foreign markets. The Company manufactures its
products primarily in the United States and sells them outside
the U.S. through a combination of international distributors and
eight wholly owned sales offices. Sales to third party
distributors and to the wholly owned sales offices are in U.S.
dollars. The sales offices invoice their customers in their
local currency.
As a result, the Company's financial results could be
significantly affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in those
foreign markets. The principal exposure on sales to third party
distributors stems from the potential for weak economic
conditions in the foreign market, thus weakening the foreign
currency, decreasing the customer's buying power and potentially
decreasing the Company's sales. The Company's exposure on sales
to its subsidiaries consists of 1) the exposure related to the
weakening of local currency when payment of the trade payable is
made, thus translating into more local currency needed to pay off
the U.S. denominated payable than when it was recorded, lowering
the subsidiaries' earnings and 2) upon translation of the
subsidiaries monthly financial statements, that a weakening local
currency would cause lower market sales to be recorded in U.S.
dollars that what have occurred had the currency been stable as
compared to the U.S. dollar. However, in the latter instance,
operating expenses would also be translated at lower amounts and
accordingly, the effect on net income would be mitigated. The
Company does not currently hedge any of these exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted pursuant to Item
14 of this Annual Report on Form 10-K and incorporated herein by
reference.
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.
Information concerning the directors of the Company is
contained in portions of the Proxy Statement for Annual Meeting
of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended
March 31, 1999 and incorporated herein by reference. For
information concerning executive officers, see Item 4A of this
Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in this item is incorporated
herein by reference to portions of the Proxy Statement for Annual
Meeting of Shareholders to be filed with the Securities and
Exchange Commission within 120 days of the close of the fiscal
year ended March 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required in this item is incorporated
herein by reference to portions of the Proxy Statement for Annual
Meeting of Shareholders to be filed with the Securities and
Exchange Commission within 120 days of the close of the fiscal
year ended March 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in this item is incorporated
herein by reference to portions of the Proxy Statement for Annual
Meeting of Shareholders to be filed with the Securities and
Exchange Commission within 120 days of the close of the fiscal
year ended March 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a)(1) Consolidated Financial Statements
Report of Independent Auditors
Consolidated Statements of Financial Position
as of March 31, 1999 and 1998
Consolidated Statements of Income for the
Years Ended March 31, 1999, 1998, and 1997
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended March 31, 1999, 1998, and
1997
Consolidated Statements of Cash Flows for the
Years Ended March 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)(2) Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and
Reserves
All other schedules are omitted because they are
not required, inapplicable, or the information is
otherwise shown in the consolidated financial
statements or notes thereto.
(a)(3) List of exhibits:
3(a)
Composite Restated Articles of Incorporation of the
Company. (1)
3(b) Composite Restated Bylaws of the Company. (2)
10(a) Mentor Corporation Restated 1987 Non-
Statutory Stock Option Plan and Agreement -
Registration Statement No. 33-25865. (8)(11)
10(b) Mentor Corporation 1991 Stock Option
Plan - Registration Statement No. 33-48815.
(9)(11)
10(c) Stock Option Agreement, dated September
21, 1988, between Mentor Corporation and Anthony
R. Gette. (2)(11)
10(d) Lease Agreement, dated November 9, 1989,
between Mentor Corporation and Skyway Business
Center Joint Venture. (3)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
10(e) First Amendment to Lease Agreement,
dated December 1, 1993, between Mentor Corporation
and Skyway Business Center Joint Venture. (6)
10(f) Credit Agreement, dated May 22, 1995,
between Mentor Corporation and Sanwa Bank
California. (7)
10(g) $15,000,000 Revolving Note, dated May
22, 1995, between Mentor Corporation and Sanwa
Bank California. (7)
10(h) Security Agreement, dated May 22, 1995,
between Mentor Corporation and Sanwa Bank
California. (7)
10(i) Guarantor Security Agreement, dated May
22, 1995, between Mentor Corporation and its
subsidiaries and Sanwa Bank California. (7)
10(j) Guaranty Agreement, dated May 22, 1995,
between Mentor Corporation and Sanwa Bank
California. (7)
10(k) Contribution Agreement, dated May 22,
1995, between Mentor Corporation and Sanwa Bank
California. (7)
10(l) Inter-Company Note, dated May 22, 1995,
between Mentor Corporation and Sanwa Bank
California. (7)
10(m) Lease Agreement, dated July 23, 1990,
between Mentor Corporation and SB Corporate
Center, Ltd., covering 201 Mentor Drive. (4)
10(n) Lease Agreement, dated August 19, 1998,
between Mentor Corporation and SB Corporate
Center, LLC, covering 301 Mentor Drive.
10(o) Employment Agreement, dated October 30,
1997, between Mentor Corporation and Malcolm
Boddy. (10) (11)
10(p) Employment Agreement, dated December 1,
1998, between Mentor Corporation and Trevor M.
Pritchard. (11)
21 Subsidiaries of the Company
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
(1) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1988, File No. 0-
7955.
(2) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1989, File No. 0-
7955.
(3) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1990, File No. 0-
7955.
(4) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1991, File No. 0-
7955.
(5) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1993, File No. 0-
7955.
(6) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1994, File No. 0-
7955.
(7) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1995, File No. 0-
7955.
(8) Incorporated by reference to the post effective amendment
No. 1 to Registration Statement on Form S-8, Registration
No. 33-25865.
(9) Incorporated by reference to Registration Statement on Form
S-8, Registration No. 33-48815.
(10) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended March 31, 1998, File No. 0-
7955.
(11) Management contract or compensatory plan or arrangement.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Mentor Corporation
We have audited the accompanying consolidated statements of
financial position of Mentor Corporation as of March 31, 1999 and
1998, and the related consolidated statements of income, changes
in shareholders' equity, and cash flows for each of the three
years in the period ended March 31, 1999. Our audits also
included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Mentor Corporation at March 31, 1999 and
1998, and the consolidated statements of income and cash flows
for each of the three years in the period ended March 31, 1999,
in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
May 11, 1999
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(dollars in thousands) March 31,
Assets 1999 1998
Current assets:
Cash and equivalents $ 19,533 $ 16,626
Marketable securities 2,088 11,603
Accounts receivable, net of
allowance for doubtful accounts
of $2,072 in 1999 and $1,606 in
1998 37,431 31,668
Inventories 30,552 27,557
Deferred income taxes 7,919 6,619
Net assets of discontinued
operations 36,818 43,446
Prepaid expenses and other 7,640 6,996
Total current assets 141,981 144,515
Property and equipment, net 34,995 31,775
Intangibles, net 2,342 2,938
Goodwill, net 7,966 5,591
Long-term marketable securities and
Investments 8,356 14,806
Other assets 371 286
$ 196,011 $ 199,911
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued
liabilities $ 26,848 $ 24,982
Income taxes payable 3,770 5,192
Dividends payable 612 634
Short-term bank borrowings 4,000 50
Total current liabilities 35,230 30,858
Long-term deferred income taxes 2,163 4,368
Shareholders' equity:
Common Stock, $.10 par value:
Authorized - 50,000,000 shares;
Issued and outstanding --
24,548,537 shares in 1999; 2,455 2,502
25,020,690 shares in 1998
Capital in excess of par value 21,502 35,189
Cumulative translation adjustment (1,141) (1,404)
Unrealized gain on investments 880 5,000
Retained earnings 134,922 123,398
158,618 164,685
$ 196,011 $ 199,911
See notes to consolidated financial statements.
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended March 31,
(in thousands, except per share data) 1999 1998 1997
Net sales $202,783 $180,267 $166,794
Costs and expenses:
Cost of sales 76,174 59,122 50,632
Selling, general and administrative 81,648 69,180 62,651
Research and development 14,820 15,179 13,861
172,642 143,481 127,144
Operating income from continuing
operations 30,141 36,786 39,650
Interest expense (272) (27) (559)
Interest income 926 1,338 806
Other (expense) income 93 307 (65)
Income from continuing operations 30,888 38,404 39,832
before income taxes
Income taxes 10,447 13,575 14,497
Income from continuing operations 20,441 24,829 25,335
Income (loss) from discontinued
operations, net of tax (6,479) (932) 2,535
Net income $ 13,962 $ 23,897 $ 27,870
Basic earnings (loss) per share:
Continuing operations $ 0.83 $ 1.00 $ 1.02
Discontinued operations $ (0.26) $ (0.04) $ 0.10
Basic earnings per share $ 0.57 $ 0.96 $ 1.12
Diluted earnings (loss) per share:
Continuing operations $ 0.80 $ 0.94 $ 0.96
Discontinued operations $ (0.25) $ (0.03) $ 0.10
Diluted earnings per share $ 0.55 $ 0.91 $ 1.06
See notes to consolidated financial statements.
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
Capital Accumu-
Common in lated
Common Stock Excess Other
Shares $.10 of Par Compre-
(in thousands) Outstand- Par Value hensive Retained
ing Value Income Earnings Total
Balance April 1,
1996 24,861 $2,486 $37,840 $ (445) $ 76,614 $116,495
Comprehensive
income:
Net income 27,870 27,870
Foreign currency
translation
adjustment (248) (248)
Comprehensive
income 27,622
Exercise of stock
options 241 24 1,610 1,634
Income tax
benefit arising
from the
exercise of
stock options 2,034 2,034
Repurchase of
common shares (295) (29) (6,919) (6,948)
Dividends
declared ($.10
per share) (2,488) (2,488)
Balance March 31,
1997 24,807 2,481 34,565 (693) 101,996 138,349
Comprehensive
income:
Net income 23,897 23,897
Foreign currency
translation
adjustment (711) (711)
Unrealized gain
investments 5,000 5,000
Comprehensive
income 28,186
Exercise of stock
options 383 38 2,985 3,023
Income tax
benefit arising
from the
exercise of
stock options 1,703 1,703
Repurchase of
common shares (169) (17) (4,064) (4,081)
Dividends
declared ($.10
per share) (2,495) (2,495)
Balance March 31,
1998 25,021 2,502 35,189 3,596 123,398 164,685
Comprehensive
income:
Net income 13,962 13,962
Foreign currency
translation
adjustment 263 263
Unrealized (loss)
on investments (4,120) (4,120)
Comprehensive
income 10,105
Exercise of stock
options 660 66 4,614 4,680
Income tax
benefit arising
from the
exercise of
stock options 2,038 2,038
Repurchase of
common shares (1,132) (113) (20,339) (20,452)
Dividends
declared ($.10
per share) (2,438) (2,438)
Balance March 31,
1999 24,549 $ 2,455 $21,502 $ (261) $134,922 $ 158,618
See notes to consolidated financial statements.
MENTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
(in thousands) 1999 1998 1997
Cash From Operating Activities:
Income from continuing operations $ 20,441 $ 24,829 $ 25,335
Adjustments to derive cash flows from
continuing operating activities
Depreciation 7,537 6,187 5,209
Amortization 1,072 1,124 861
Deferred income taxes (1,165) 216 3,213
Loss on sale of assets 107 261 43
Litigation settlement obligation (4,950)
Changes in operating assets and
liabilities:
Accounts receivable (5,764) (1,066) (3,223)
Inventories and other current
assets (3,642) (4,861) (3,016)
Accounts payable and accrued
liabilities 1,918 2,088 1,083
Income taxes payable (1,422) 2,952 1,237
Net cash provided by continuing
operating activities 19,082 31,730 25,792
Net cash provided by (used in)
discontinued operating activities 1,720 (4,832) 1,452
Net cash provided by operating
activities 20,802 26,898 27,244
Cash From Investing Activities:
Purchases of property and equipment (10,850) (11,081) (7,600)
Purchases of intangibles and goodwill (2,866) (612) (2,504)
Purchases of marketable securities (9,073) (10,349)
Sales of marketable securities 9,519 9,213 9,400
Investment in manufacturing partners (7,006)
Other net 67 143 (56)
Net cash used by continuing investing
activities (4,130) (18,416) (11,109)
Net cash used by discontinued
investing activities (1,521) (6,025) (756)
Net cash used by investing activities (5,651) (24,441) (11,865)
Cash From Financing Activities:
Repurchase of common stock (20,452) (4,081) (6,948)
Proceeds from exercise of stock 6,718 4,726 3,668
options
Dividends paid (2,460) (2,489) (2,488)
Borrowings under line of credit
agreement 6,900
Repayments under line of credit
agreement (2,900)
Reduction in long-term debt (50) (8) (415)
Net cash used for financing
activities (12,244) (1,852) (6,183)
Increase in cash and equivalents 2,907 605 9,196
Cash and equivalents at beginning of
year 16,626 16,021 6,825
Cash and equivalents at end of year $ 19,533 $ 16,626 $ 16,021
See notes to consolidated financial statements.
MENTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
Note A Summary Of Significant Accounting Policies
Business Activity
Mentor Corporation was incorporated in April 1969. The Company
develops, manufactures and markets a broad range of products for
medical specialties of plastic and general surgery and urology.
The Company's products are sold to hospitals, physicians and
through various health care dealers, wholesalers, and retail
outlets. The net assets and results of operation of the
ophthalmic segment of the business are considered discontinued
operations and not included in the continuing operations.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries in which a controlling
interest is maintained. For those subsidiaries where the Company
owns less than 100%, the outside shareholders' interests are
treated as minority interests. All intercompany accounts and
transactions have been eliminated. Certain amounts in previously
issued financial statements have been reclassified to conform to
the 1999 presentation. Financial information presented in the
Notes to Consolidated Financial Statements excludes discontinued
operations, except where noted.
Cash and Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Marketable Securities and Long-term investments
The Company considers its marketable securities available-for-
sale as defined in Statement Financial Accounting Standards No.
115. Realized gains and losses and declines in value considered
to be other than temporary are included in income. The cost of
securities sold is based on the specific identification method.
For short term marketable securities there were no material
realized or unrealized gains or losses nor any material
differences between estimated fair values, based on quoted market
prices, and the costs of securities in the investment portfolio
as of March 31, 1999. The Company's current marketable
securities consist primarily of municipal bonds that are of
limited credit risk and have contractual maturities of less than
two years.
The Company's long-term marketable securities and investments
include a $6 million equity interest, at cost, as quoted market
prices are not available, in Intracel Corporation, the Company's
business partner for a new bladder cancer test and potential
bladder cancer treatment. Also included is an equity interest
($1.0 million cost) in North American Scientific Inc., the
Company's manufacturing partner under an exclusive agreement for
the distribution of brachytherapy seeds for the treatment of
prostate cancer. The Company's investment is recorded at its
fair market value, based upon quoted stock market prices, of
$2,350,000 and $8,800,000 at March 31, 1999 and 1998,
respectively. The unrealized gain of $880,000 and $5,00,000, net
of taxes of $470,000 and $2,800,000, at March 31, 1999 and 1998,
respectively, is reported as a separate component of
shareholders' equity.
Concentrations and Credit Risk
The Company obtains certain raw materials and components for a
number of its products from single suppliers. In most cases the
Company's sources of supply could be replaced if necessary
without undue disruption, but it is possible that the process of
qualifying new materials and/or vendors for certain raw materials
and components could cause a material interruption in
manufacturing or sales. No material interruptions occurred
during the last fiscal year.
The Company grants credit terms in the normal course of business
to its customers, primarily hospitals, doctors and distributors.
As part of its ongoing control procedures, the Company monitors
the credit worthiness of its customers. Bad debts have been
minimal. The Company does not normally require collateral or
other security to support credit sales. No customer accounted
for more than 10% of the Company's revenues or accounts
receivable balance for all periods presented.
Revenue Recognition
Sales and related cost of sales are recognized primarily upon the
shipment of products. The Company allows credit for products
returned within its policy terms. Such returns are estimated and
an allowance provided at the time of sale. The Company provides
a warranty on certain of its implants and capital equipment
products against defects in workmanship and material. Estimated
warranty costs are provided at the time of sale and periodically
adjusted to reflect actual experience.
Inventories
Inventories are stated at the lower of cost or market, cost
determined by the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is based
on the useful lives of the properties and computed using the
straight-line method. Buildings are depreciated over 30 years,
furniture and equipment over 3 to 10 years and leasehold
improvements over the shorter of their estimated remaining lives
or lease term. Significant improvements and betterments are
capitalized while maintenance and repairs are charged to
operations as incurred.
Intangible Assets and Goodwill
Intangible assets consist of values assigned to patents,
licenses, and trademarks. These are stated at cost less
accumulated amortization and are amortized over their economic
life ranging from 3 to 20 years using the straight-line method.
Accumulated amortization of intangibles was $3,745,000 at March
31, 1999 and $3,409,000 at March 31, 1998. The excess purchase
cost over fair value of net tangible assets acquired, goodwill,
is amortized on a straight-line basis over 15-40 years.
Accumulated amortization of goodwill was $2,008,000 at March 31,
1999 and $1,611,000 at March 31, 1998. The Company assesses on
an ongoing basis the recoverability of goodwill and intangibles
based on estimates of future undiscounted cash flows for the
applicable business compared to net book value. If the future
undiscounted cash flow estimates were less than net book value,
net book value would then be reduced to fair value based on an
estimate of discounted cash flow.
Income Taxes
The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred income taxes are provided on the temporary
differences between income for financial statement and tax
purposes.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") encourages but does
not require companies to record compensation expense for stock
options at fair value. The Company has chosen to continue to
account for stock options using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock issued to Employees," ("APB Opinion 25")
and related interpretations. Accordingly, the Company has
provided pro forma disclosures of the earnings per share as
determined under the provision of SFAS 123.
Foreign Sales
Export sales to independent distributors, principally to Canada
and Western Europe, were $17,600,000, $16,173,000 and $14,996,000
in 1999, 1998 and 1997, respectively. In addition, $27,450,000,
$25,731,000 and $19,809,000 in sales respectively, were from the
Company's direct international sales offices primarily in Canada
and Western Europe.
Foreign Currency Translation
The financial statements of the Company's non-U.S. subsidiaries
are translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency
Translation." Net assets of certain non-U.S. subsidiaries whose
"functional" currencies are other than the U.S. Dollar are
translated at current rates of exchange. Income and expense
items are translated at the average exchange rate for the year.
The resulting translation adjustments are recorded directly into
a separate component of shareholders' equity. Transaction
exchange gains and losses were immaterial in 1999, 1998 and 1997.
Net assets and the results of operations of the Company's foreign
entities were not significant on a consolidated basis.
New Accounting Requirements Adopted
During fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards
under which companies report information about operating segments
in financial statements.
During fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 requires unrealized gains or losses on
the Company's available-for-sale securities and foreign currency
translation adjustments to be included in other comprehensive
income. Prior year financial statements have been reclassified
to conform to the requirements of SFAS 130. Comprehensive income
for the years ended March 31, 1999, 1998 and 1997 is presented in
the Consolidated Statements of Changes in Shareholders' Equity.
Estimates and Assumptions
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 March 31, 1999, and the reported amounts of
revenues and expenses during the year then ended. Actual results
could differ from those estimates.
Reclassifications
Certain reclassifications of previously reported amounts have
been made to conform to current year's presentation.
Specifically the amounts related to the Ophthalmic product lines
previously reported as continuing operation have been
reclassified as discontinued operations, except where noted.
Note B Inventories
Inventories at March 31 consisted of:
(in thousands) 1999 1998
Raw materials $ 7,640 $ 9,231
Work in process 6,563 4,999
Finished goods 16,349 13,327
$ 30,552 $ 27,557
Note C Property and Equipment
Property and equipment at March 31 consisted of:
(in thousands) 1999 1998
Land $ 286 $ 231
Buildings 9,489 4,662
Leasehold improvements 12,508 11,086
Furniture, fixtures and equipment 42,213 34,620
Construction in progress 3,053 7,005
67,549 57,604
Less accumulated depreciation and (32,554) (25,829)
amortization
$ 34,995 $ 31,775
Note D Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at March 31 consisted
of:
(in thousands) 1999 1998
Trade accounts payables $ 5,726 $ 4,883
Accrued compensation 7,049 7,085
Sales returns 5,126 5,503
Self insured retention 3,700 3,580
Accrued royalties 1,076 1,163
Other 4,171 2,768
$ 26,848 $ 24,982
Note E Short-Term Bank Borrowings
At March 31, 1999, the Company had a secured line of credit for
borrowings up to $25 million. Borrowings accrue interest at the
prevailing prime rate or at a mark-up over LIBOR at the Company's
discretion. The Credit Agreement includes certain covenants,
which, among others, limit the dividends the Company may pay and
require maintenance of certain levels of tangible net worth and
debt service ratios. A commitment fee of .125% is paid on the
unused portion of the credit line. During fiscal 1999, the
Company borrowed $6.9 million under the line of credit. At March
31, 1999, $4.0 million was outstanding, at 6.9% interest.
Note F Stock Options
The Company has granted options to key employees and non-employee
directors under a qualified 1991 Plan and a non-qualified 1987
Plan. Options granted under both plans are exercisable in four
equal cumulative installments beginning one year from the date of
grant, and expire in ten years. Options are granted at the fair
market value on the date of grant. Activity in the stock option
plans during fiscal 1999, 1998 and 1997 was as follows:
At March 31,
1999,
Options
Outstanding
Weighted
Average
Number of Price per
Shares Share
Balance April 1, 1996 2,549,230 $ 7.62
Granted 402,800 23.18
Exercised (244,350) 7.06
Canceled or terminated (41,400) 11.86
Balance March 31, 1997 2,666,280 $ 9.91
Granted 592,550 22.79
Exercised (383,441) 7.50
Canceled or terminated (56,496) 17.91
Balance March 31, 1998 2,818,893 $ 12.76
Granted 361,300 21.31
Exercised (633,682) 7.02
Canceled or terminated (166,725) 21.52
Balance March 31, 1999 2,379,786 $ 15.04
At March 31, 1999 and 1998, there were 2,018,375 shares and
2,302,950 shares available for grant under the 1991 Plan. There
are no additional shares available for grant under the 1987 Plan.
During fiscal 1989, the Company granted an officer a non-
qualified stock option to purchase 100,000 shares of Common
Stock, at $5.375 per share. During fiscal 1996, the officer
exercised 73,334 shares of this option. The remaining 26,666
shares were exercised in fiscal 1999.
Stock option grants are set at the closing price of the Company's
Common Stock on the date of grant and the related number of
shares granted are fixed at that point in time. Therefore under
the principles of APB Opinion 25, the Company does not recognize
compensation expense associated with the grant of stock options.
SFAS 123 requires the use of an option valuation model to provide
supplemental information regarding options granted after fiscal
1995. Pro forma information regarding net income and earnings
per share shown below was determined as if the Company had
accounted for its employee stock options under the Fair Value
method of that statement.
The weighted average fair values of stock option granted were
estimated at the date of grant using the Black-Scholes option
valuation model and the following actuarial assumptions:
1999 1998 1997
Weighted average fair
value of stock
options granted $ 11.99 $ 13.18 $ 12.59
Risk-free interest rate 5.6% 6.6% 6.7%
Expected life (in years) 7.2 6.8 6.5
Expected volatility .528 .531 .482
Expected dividend yield 0.5% 0.4% 0.4%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's
employee stock options have characteristics significantly
different from those of traded options such as vesting
restrictions and extremely limited transferability. In addition,
the assumptions used in option valuation models (see above) are
highly subjective, particularly the expected stock price
volatility of the underlying stock. Because changes in these
subjective input assumptions can materially effect the fair value
estimate, in management's opinion, the existing models do not
provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosure, the estimated fair value of
the options is amortized over the option's vesting period. The
pro forma effect on net income for the years ended March 31,
1999, 1998 and 1997 is not representative of the pro forma effect
on net income in future years because it does not take into
consideration pro forma compensation expense related to grants
prior to 1996. Pro forma information in future years will
reflect the amortization of a larger number of stock options
granted in several succeeding years. The Company's pro forma
information is as follows (in thousands, except per share
information):
Year Ended March 31,
1999 1998 1997
Net income: as reported $13,962 $23,897 $27,870
Net income: Pro forma $11,266 $21,599 $26,700
Basic earnings per share:
as reported $ .57 $ .96 $ 1.12
Basic earnings per share:
Pro forma $ .46 $ .87 $ 1.07
Diluted earnings per share:
as reported $ .55 $ .91 $ 1.06
Diluted earnings per share:
Pro forma $ .44 $ .83 $ 1.03
Information regarding stock options outstanding as of March 31,
1999 is as follows:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Remaining Average Number Average
Number of Contract- Exercise of Exercise
Price Range Shares ual Life Price Shares Price
Under $7.00 866,986 3.3 years $ 6.57 866,986 $ 6.57
$7.00 to $22.00 1,085,300 7.6 years $ 17.83 396,575 $ 14.45
Over $22.00 427,500 7.6 years $ 25.14 160,600 $ 24.05
At March 31, 1999, 1998 and 1997 stock options to purchase
1,424,000, 1,698,000 and 1,673,000 shares, respectively, were
exercisable at weighted-average prices of $10.73, $7.96, and
$6.81, respectively.
Note G Income Taxes
Income tax expense from continuing operations consists of
the following:
Year Ended March 31,
(in thousands) 1999 1998 1997
Current:
Federal $ 9,736 $ 10,307 $ 9,098
Foreign 1,052 1,949 1,002
State 834 1,103 1,184
11,622 13,359 11,284
Deferred:
Federal (1,150) 206 2,817
State (25) 10 396
(1,175) 216 3,213
$ 10,447 $ 13,575 $ 14,497
The reconciliation of the federal statutory rate to the Company's
effective rate for continuing operations is as follows:
Year Ended March 31,
1999 1998 1997
Federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State tax, net of federal tax
benefit 2.7 2.3 2.3
Non-taxable interest and dividends (.4) (0.7) (0.3)
Research and development credit (2.0) (2.0) (1.1)
Foreign Sales Corporation (1.2) (1.1) (1.2)
Foreign operations (1.0) 1.0 1.2
Non-deductible goodwill .2 0.2 0.2
Other .5 0.6 0.3
33.8% 35.3% 36.4%
Significant components of the Company's deferred tax liabilities
and assets at March 31 are as follows:
Year Ended March
31,
(in thousands) 1999 1998
Deferred tax liabilities:
Tax over book depreciation $ 1,693 $ 1,568
Unrealized gain on investment 470 2,800
2,163 4,368
Deferred tax assets:
Book liabilities not deductible for
tax 5,774 4,607
Inventory 862 907
Profit in inventory of foreign
subsidiaries 1,283 1,105
7,919 6,619
$ 5,756 $ 2,251
Note H Supplemental Information
Supplemental schedule of cash flow information:
Year Ended March 31,
(in thousands) 1999 1998 1997
Interest paid $ 226 $ 54 $ 1,549
Income taxes paid $ 6,727 $ 9,190 $ 10,013
Note I Earnings per Share
A reconciliation of weighted average shares outstanding, used to
calculate Basic earnings per share, to weighted average shares
outstanding assuming dilution, used to calculate Diluted earnings
per share, follows:
1999 1998 1997
Average outstanding shares: basic 24,550 24,894 24,863
Shares issueable through options 844 1,436 1,486
Average outstanding shares: diluted 25,394 26,330 26,349
Shares issueable through options are determined using the
treasury stock method.
Options to purchase 1,114,100, 23,500, and 21,500 shares with
exercise prices greater than the average market prices of common
stock were outstanding during the years ended March 31, 1999,
1998, and 1997, respectively. These options were excluded from
the respective computations of diluted earnings per share because
their effect would be anti-dilutive.
Note J Commitments
The Company leases certain facilities under operating leases with
unexpired terms ranging from one to twelve years. Most leases
contain renewal options. Rental expense for these leases was
$3.4 million, $2.8 million and $2.7 million for fiscal 1999, 1998
and 1997, respectively.
Future minimum lease payments under lease arrangements at March
31, 1999 are as follows:
(in thousands)
2000 3,763
2001 3,216
2002 2,919
2003 2,809
2004 2,871
Thereafter 35,142
Total $50,720
During fiscal 1998, the Company entered into an alliance with
Intracel Corporation, in which the Company will be the exclusive
distributor of a bladder cancer test manufactured by Intracel.
In addition, the Company has the right to distribute a potential
bladder cancer treatment product currently under development by
Intracel. The agreement with Intracel requires the Company to
pay $1 million per year, beginning in January 1998, for three
years, to defray the costs of the clinical trials for the cancer
treatment product. The Company must also pay an additional $3
million upon the completion of certain milestones related to the
clinical trials. During fiscal year 1999, $1 million was paid
towards the cost of the clinical trials and an additional $1
million was paid on the achievement of the first milestone. The
total $2 million paid was charged to research and development
expense in 1999. Total remaining commitments to Intracel at
March 31, 1999 total $3.75 million.
Note K Related Party Transactions
In 1991, the Company entered into an exclusive license agreement
with Rochester Medical Corporation (Rochester) to market and
distribute certain external catheter products developed by
Rochester. The Company purchased $1,900,000, $2,400,000 and
$1,958,000 of product from Rochester in 1999, 1998 and 1997,
respectively. Several officers/founders of Rochester, a public
company, are siblings of the Chairman of Mentor Corporation. The
Chairman derived no financial or other benefit from transactions
between the Company and Rochester.
Note L Litigation
Claims related to product liability are a regular and ongoing
aspect of the medical device industry. At any one time, the
Company is subject to claims against it and is involved in
litigation. These actions can be brought by an individual, or by
a group of patients purported to be a class action. The Company
has carried product liability insurance on all its products,
including breast implants, subsequent to May 1991 and prior to
September 1985. From June 1992 on, such insurance has excluded
silicone gel-filled breast implants. This insurance is subject
to certain self-insured retention and other limits of the policy.
From September 1985 through April 1991, the Company was self
insured for the majority of its surgical implant products, but
had product liability insurance on the rest of its products,
subject to certain limits, exclusions and deductibles that the
Company believes to be appropriate. The Company has recorded a
self-insured retention liability, ($3,700,000 and $3,580,000 at
March 31, 1999 and 1998, respectively) in an amount it believes
to be reasonably sufficient to cover the cost of anticipated
product liability claims.
In addition, in the ordinary course of its business, the Company
experiences various types of claims that sometimes result in
litigation or other legal proceedings. The Company does not
anticipate that any of these proceedings will have any material
adverse effect on the Company.
Note M Restructuring Charge and Discontinued Operations
In December 1998, Mentor announced a restructuring plan as part
of a strategic initiative to improve the profitability and
competitiveness of its ophthalmic business by reducing
manufacturing costs and concentrating on those products and
markets capable of sustained, long-term profitable growth.
The restructuring plan resulted in a third quarter charge to the
operating results of the ophthalmic business segment of $14
million. The $14 million charge consisted of approximately $1.9
million for employee termination benefits related to the
workforce reduction of 150 positions, $800,000 for plant closing
costs, $3.3 million for the impairment write down of production
assets to their estimated fair value, approximately $1 million
for the write down of intangible assets related to discontinued
products, and $7 million for the write down of inventory to its
estimated net realizable value.
During the implementation of this plan, the Board of Directors
authorized management to evaluate potential buyers for the
product lines of the ophthalmic business segment. In March 1999,
the Company adopted a plan to dispose of its ophthalmic business
segment. Consistent with the plan to dispose of its ophthalmic
business segment, the net assets and operations of the ophthalmic
segment of the business, comprised of the intraocular lens
products and ophthalmic equipment product lines have been
classified as discontinued operations. Subsequent to March 31,
1999, the Company announced the pending sale of the intraocular
lens product line, a substantial portion of the ophthalmic
products business. The sale of both product lines is expected to
be completed in calendar year 1999.
Summaries of the results of operations for discontinued
operations for the years ended March 31, 1999, 1998 and 1997 are
as follows:
Year Ended March 31,
1999 (1) 1998 1997
Revenues $ 37,893 $ 35,029 $ 36,574
Income (loss) before
income taxes (10,436) (2,075) 2,613
Income tax expense
(benefit) (3,957) (1,143) 78
Net income (loss) from
discontinued operations ($6,479) ($932) $ 2,535
(1) Includes charges totaling $14 million related to the
restructuring plan discussed above.
The assets and liabilities of discontinued operations have been
classified in the balance sheet as net assets of discontinued
operations and consist of the following:
March 31,
(in thousands) 1999 1998
Accounts receivable, net $ 7,981 $ 8,541
Inventory 17,687 17,075
Property, plant and equipment,
net 3,985 7,648
Intangibles and goodwill, net 9,017 11,644
Other 4,525 4,181
Total assets 43,195 49,089
Current liabilities 6,377 5,643
Net assets of discontinued
operations $ 36,818 $ 43,446
Included in current liabilities of the discontinued segment at
March 31, 1999, is the remaining $2.2 million liability for
termination and plant closing costs recorded as part of the
restructuring plan. These amounts are expected to be paid during
calendar 1999.
Note N Business Segment Information
In 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise
and related information," which revises reporting and disclosure
requirements for operating segments. The following information
with respect to the Company's continuing operations is provided
in accordance with the requirements of this Statement.
The Company's operations are principally managed on a functional
basis and reported on a product or geographic basis. As a result
there are four reportable segments: Plastic and General Surgery,
Surgical Urology, Disposable Urology products and International.
The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting
policies except that certain expenses such as interest and
certain corporate expenses are not allocated to the segments.
Due to the reorganization in early 1998, information related to
segments for fiscal 1997 was impracticable to provide.
The Plastic and General Surgery products segment consists
primarily of breast implants, tissue expanders and the Company's
Contour Genesis Ultrasonic equipment product line along with
equipment and disposables for traditional liposuction. The
Surgical urology segment includes impotence implants, surgical
incontinence products and radioactive seeds for the treatment of
prostate cancer. The Disposable urology segment includes
catheters and other products for the management of urinary
incontinence. The International segment includes the operations
of the Company's wholly owned international sales offices, which
cover most of the Company's implantable product lines, and a
small European manufacturing and distribution facility. Segment
revenues include domestic sales, sales to independent foreign
distributors and sales to the Company's direct international
sales and offices.
Selected financial information for the Company's reportable
segments for the years ended March 31, 1999 and 1998 follows:
Year Ended March 31,
(in thousands) 1999 1998
Revenues
Plastic & General Surgery $107,247 $ 98,794
Surgical Urology 36,084 27,131
Disposable Urology 41,446 37,201
International 36,683 32,837
Total reportable segments 221,460 195,963
Elimination of inter-segment
revenues (18,677) (15,696)
Total consolidated revenues $202,783 $180,267
Year Ended March 31,
1999 1998
Operating profit
Plastic & General Surgery $ 21,326 $ 25,513
Surgical Urology 4,410 2,164
Disposable Urology 7,001 9,276
International 4,707 4,822
Total reportable segments $ 37,444 $ 41,775
March 31,
1999 1998
Identifiable assets
Plastic & General Surgery $ 48,818 $ 53,799
Surgical Urology 23,175 21,055
Disposable Urology 28,354 23,000
International 20,957 17,371
Total reportable segments $121,304 $115,225
Year Ended March 31,
1999 1998
Depreciation and amortization
Plastic & General Surgery $ 3,418 $ 2,950
Surgical Urology 1,652 1,347
Disposable Urology 1,562 1,142
International 502 313
Total reportable segments 7,134 5,752
Corporate and other 1,475 1,559
$ 8,609 $ 7,311
Year Ended March 31,
1999 1998
Capital expenditures
Plastic & General Surgery $ 3,499 $ 2,716
Surgical Urology 2,173 2,011
Disposable Urology 4,819 4,003
International 356 91
Total reportable segments 10,847 8,821
Corporate and other 2,869 2,872
$ 13,716 $11,693
The following tables reconcile segment information to the amounts
shown on the consolidated financial statements.
Year Ended March 31,
(in thousands) 1999 1998
Operating profit from
continuing operations
Reportable segments $ 37,444 $ 41,775
Corporate operating loss (7,303) (4,989)
Interest expense (272) (27)
Interest income 926 1,338
Other income 93 307
Income from continuing
operations before taxes $ 30,888 $ 38,404
March 31,
1999 1998
Identifiable Assets
Reportable segments $121,304 $115,225
Corporate and other 37,889 41,240
Net assets of discontinued
operations 36,818 43,446
Consolidated assets $196,011 $199,911
Selected financial information for the Company's operations by
geographic area is as follows:
Year Ended March 31,
(in thousands) 1999 1998
Geographic area revenue
United States $157,733 $138,363
Foreign 45,050 41,904
Consolidated total $202,783 $180,267
March 31,
1999 1998
Geographic area long-lived
assets
United States $ 43,748 $ 38,669
Foreign 1,555 1,635
Consolidated total $ 45,303 $ 40,304
Note O Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results of
operations. Previously reported results have been restated to
reflect the ophthalmic business as a discontinued operation. See
Note M.
(in thousands, except per
share data) Quarter
Year Ended March 31, 1999 First Second Third Fourth
Net sales $48,084 $ 47,713 $ 51,655 $ 55,331
Gross profit 32,893 30,717 30,644 32,355
Income from continuing
operations 7,313 4,880 3,454 4,794
Income from discontinued
operations 526 692 (8,652) 955
Net income $ 7,839 $ 5,572 $ (5,198) $ 5,749
Basic earnings (loss) per
share:
Continuing operations $ .29 $ .20 $ .14 $ .20
Discontinued operations $ .02 $ .03 $ (.35) $ .04
Basic earnings (loss) per
share $ .31 $ .23 $ (.21) $ .24
Diluted earnings (loss) per
share:
Continuing operations $ .28 $ .19 $ .14 $ .19
Discontinued operations $ .02 $ .03 $ (.35) $ .04
Diluted earnings (loss) per
share $ .30 $ .22 $ (.21) $ .23
Year Ended March 31, 1998 First Second Third Fourth
Net sales $ 46,561 $ 40,790 $ 45,459 $ 47,457
Gross profit 32,841 25,086 30,813 32,405
Net income from continuing
operations 7,973 3,862 6,017 6,976
Net income from discontinued
operations (170) (715) (181) 135
Net income $ 7,803 $ 3,147 $ 5,836 $ 7,111
Basic earnings (loss) per
share:
Continuing operations $ .32 $ .16 $ .24 $ .28
Discontinued operations (.01) (.03) (.01) .01
Basic earnings per share $ .31 $ .13 $ .23 $ .29
Diluted earnings (loss) per
share:
Continuing operations $ .31 $ .15 $ .23 $ .27
Discontinued operations (.01) (.03) (.01) -
Diluted earnings per share $ .30 $ .12 $ .22 $ .27
MENTOR CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
COL. A COL. B COL. C COL. D COL. E
Additions
Balance
at Charged Balance
Beginn- to CostsCharged at End
ing of and to Other Deduc- of
Description Period ExpensesAccounts tions Period
Year Ended March 31, 1999
Deducted from asset
accounts:
Allowance for
doubtful accounts $ 1,606 $ 960 $ $ 494 $ 2,072
Liability Reserves:
Self insured retention $ 3,580 $ 2,866 $ $ 2,746 $ 3,700
Accrued sales returns
and allowances 5,503 377 5,126
$ 9,083 $ 2,866 $ $ 3,123 $ 8,826
Year Ended March 31, 1998
Deducted from asset
accounts:
Allowance for
doubtful accounts $ 1,497 $ 933 $ $ 824 $ 1,606
Liability Reserves:
Self insured retention $ 3,400 $ 2,385 $ $ 2,205 $ 3,580
Accrued sales returns
and allowances 5,398 105 5,503
$ 8,798 $ 2,490 $ $ 2,205 $ 9,083
Year Ended March 31, 1997
Deducted from asset
accounts:
Allowance for
doubtful accounts $ 1,490 $ 1,028 $ $ 1,021 $ 1,497
Liability Reserves:
Self insured retention $ 2,800 $ 2,624 $ $ 2,024 $ 3,400
Accrued sales returns
and allowances 6,405 1,007 5,398
$ 9,205 $ 2,624 $ $ 3,031 $ 8,798
EXHIBIT 21
LIST OF
SUBSIDIARIES OF MENTOR CORPORATION
1. Mentor Texas Inc. (Formerly Mentor H/S, Inc).
2. Mentor Minnesota Inc. (Formerly Mentor Urology, Inc.)
3. Mentor Ophthalmics, Inc. (Formerly Mentor O&O, Inc.)
4. Mentor Caribe, Inc.
5. Mentor ORC, Inc. (Dissolved 4/1/96)
6. Mentor Polymer Technologies Company
7. Teknar Corporation (Dissolved 4/1/96)
8. Mentor International Sales Corporation
9. Mentor International Holdings Alpha, Inc.
10. Mentor International Holdings Beta, Inc.
11. Mentor International Holdings Camda, Inc.
12. Mentor International Holdings Delta, inc.
13. Mentor Medical Systems,(Aust) Pty. Ltd.
14. Mentor Medical Systems, Ltd.(UK)
15. Mentor Medical Systems, B.V.
16. Mentor Deutschland GmbH
17. Mentor Medical Systems, France, S.A.
18. Mentor Medical Systems,(Canada), Inc.
19. MDI Company LTD
20. Mentor Medical Systems, Iberica, S.L.
21. Havas Medical,B.V.
22. Mentor Medical Inc.
23. Mentor Benelux B.V.
24. Mentor Japan K.K.
25. Mentor Medical Systems, C.V.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the (1)
Registration Statement Number 33-25865 on Form S-8 dated December
22, 1988, (2) Registration Statement Number 33-48815 on Form S-8
dated June 24, 1992 of our report dated May 11, 1999 with respect
to the consolidated financial statements and schedule of Mentor
Corporation included in the Annual Report on Form 10-K for the
year ended March 31, 1999.
ERNST & YOUNG LLP
Los Angeles, California
June 28, 1999
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Mentor Corporation has duly
caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MENTOR CORPORATION
/s/CHRISTOPHER J. CONWAY
Christopher J. Conway, Chairman
DATE: June 28, 1999
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:
/s/CHRISTOPHER J. CONWAY Chairman, Chief June 28, 1998
Christopher J. Conway Executive Officer
and Director (Principal
Executive Officer)
/s/ANTHONY R. GETTE President and Secretary June 28, 1998
Anthony R. Gette and Director
/s/GARY E. MISTLIN Senior Vice President June 28, 1998
Gary E. Mistlin Chief Financial Officer
and Treasurer
(Principal Financial and
Accounting Officer)
/s/WALTER W. FASTER Director June 28, 1998
Walter W. Faster
/s/EUGENE G. GLOVER Director June 28, 1998
Eugene G. Glover
/s/MICHAEL NAKONECHNY Director June 28, 1998
Michael Nakonechny
/s/DR. RICHARD W. YOUNG Director June 28, 1998
Dr. Richard W. Young
Exhibit 10(n)
NET, NET, NET
BUILDING LEASE
Santa Barbara Corporate Center
Mentor Corporation
TABLE OF CONTENTS
1. LEASE OF PREMISES
2. TERM
2.1 Commencement of Term
2.2 Delay in Commencement
3. RENT
3.1 Base Rent
3.2 Additional Rent
3.3 Offset Rights
3.4 Definitions
3.5 Rent Adjustment for Consumer Price Index
3.6 Calculation and Payment
3.7 End of Term
4. SECURITY DEPOSIT
5. USE
5.1 Use
5.2 Compliance With Law
5.3 Insurance Cancellation
5.4 Hazardous Substances
5.5 Solid Waste Management Program
5.6 Environmental Laws
A. Compliance with Environmental Laws
B. Hazardous Materials Handling
C. Notices
D. Indemnification of Lessor
6. MAINTENANCE. REPAIRS AND ALTERATIONS
6.1 Lessor's Obligations
6.2 Lessee's Obligations
6.3 Alterations and Additions
6.4 Surrender
6.5 Lessor's Rights
7. INSURANCE
7.1 Lessee's Liability Insurance
7.2 Lessee's Worker's Compensation Insurance
7.3 Lessee's Fire and Extended Coverage Insurance
7.4 Policy Requirements
7.5 Lessor's Rights
7.6 Lessor's Insurance
7.7 Indemnification
7.8 Exemption of Lessor from Liability
8. DAMAGE OR DESTRUCTION
8.1 Partial Damage
8.2 Damage Near End of Term
8.3 Abatement of Rent, Lessee's Remedies
8.4 Insurance Proceeds Upon Termination
8.5 Restoration
9. PERSONAL PROPERTY TAXES
10. UTILITIES
11. ASSIGNMENT AND SUBLETTING
11.1 Restrictions on Assignment
11.2 Consents to Transfer of Lease
11.3 Organizational Changes
11.4 Continuing Liability of Lessee
11.5 Options in Favor of Lessor
11.6 Assumption by Assignee
11.7 Lessor's Participation in Rental Overages.
11.8 Reimbursement of Costs and Fees
12. DEFAULTS: REMEDIES
12.1 Default by Lessee
12.2 Remedies for Default of Lessee
12.3 Default by Lessor.
12.4 Late Charges.
13. CONDEMNATION OR RESTRICTION ON USE
13.1 Eminent Domain
13.2 Abatement of Rent
13.3 Temporary Taking.
13.4 Voluntary Sale as Taking
14. BROKERS
15. LESSOR'S LIABILITY
16. PARKING
17. GENERAL PROVISIONS
17.1 Estoppel Certificate
17.2 Severability
17.3 Time of Essence
17.4 Captions
17.5 Notices
17.6 Waivers
17.7 Holding Over
17.8 Cumulative Remedies
17.9 Inurement
17.10 Choice of Law
17.11 Subordination
17.12 Attorneys' Fees
17.13 Lessor's Access
17.14 Corporate Authority
17.15 Surrender or Cancellation
17.16 Entire Agreement
17.17 Signs
17.18 Interest on Past Due Obligations
17.19 Gender; Number
17.20 Recording of Lease
17.21 Waiver of Subrogation
17.22 Confidentiality of Lease
17.23 Quiet Enjoyment.
17.24 Window Coverage
17.25 Materials Storage Restrictions
17.26 No Agency
17.27 Force Majeure
17.28 Building Name
17.29 Assignment by Lessor
17.30 Facsimile Signatures
Net, Net, Net
BUILDING LEASE
THIS LEASE dated August 19, 1998, for reference purposes
only is made between SANTA BARBARA CORPORATE CENTER, LLC, a
California limited liability company, as Lessor, and MENTOR
CORPORATION, a Minnesota corporation, as Lessee.
BASIC LEASE PROVISIONS
10 Premises: New free-standing building as depicted on
Exhibit A.
Project Name: Santa Barbara Corporate Center
Premises Address: 301 Mentor Drive
Santa Barbara, CA 93111
Use of Premises: Office, research and development
and warehouse
20 Leased Area: As depicted on Exhibit A
Rentable Square Feet: See Addendum. Unless otherwise
expressly stated herein, all per square
foot rent described herein is based on
rentable square feet. In no event will
the total rentable square feet of the
Premises upon which Lessee is obligated
to pay rent exceed 60,000 square feet
or, if the Additional Space is built,
68,000 square feet.
Useable Square Feet: See Addendum. Unless otherwise
expressly described herein, all tenant
improvement allowance amounts described
herein are based on useable square feet.
30 Lessee's Percentages:
Building: 100%.
Common Area: 100%.
40 Base Rent: See Addendum. The base rent ("Base Rent") shall
initially be $1.45 per square foot per
month for office and research and
development ("Office/R&D") space
(estimated initially to be approximately
38,543 sq.ft.), $.65 per square foot per
month for warehouse space (estimated
initially to be 9,660 sq.ft.), and $.45
per square foot per month for shell area
(estimated initially to be 11,797 square
feet). The shell area will be gradually
converted to executive offices. Upon
such conversion, the Base Rent for such
space shall be increased as provided in
Sections 3.1 and 3.5.
Unless otherwise expressly stated
herein, all per square foot rental
amounts are stated on a per month basis.
Rental Deposit: See Addendum.
50 Initial Monthly Rental See Addendum.
Installments:
60 Term: Fifteen (15) years.
70 Commencement
Date: Substantial completion of
the Phase I Tenant Improvements as
provided in Section 2.1. To be
specified in Addendum. Target
Commencement date is January 31, 1999.
Term Commencement
Date: First day of the month
succeeding substantial completion of
Tenant Improvements. To be specified in
Addendum.
Termination Date: Fifteen (15) years after Term Commencement Date.
80 Security Deposit: See Section 4.
90 Broker(s): None.
100 Parking Spaces Provided: Not less than two hundred ten (210) spaces.
Thirty (30) spaces shall be reserved for
Lessee, the balance shall be in common
with other tenants.
1. LEASE OF PREMISES
11. Generally. Concurrently with the execution of this Lease,
Lessor and Lessee have entered into a Development and
Construction Agreement (the "Development Agreement"). Pursuant
to the Development Agreement, Lessor proposes to construct the
Building, which will be a two-story building for office, research
and development and warehouse use. The Building shall consist of
a building shell area of approximately 76,136 rentable square
feet comprised of two floors of approximately 38,068 rentable
square feet each. The building shell includes approximately
16,136 square feet of space (the "Cutout Space") for which Lessor
has not received entitlements or building permits. Approximately
8,000 of the Cutout Space is referred to herein as the Additional
Space, as defined in Section 1.2. The balance of the Cutout
Space is referred to herein as the Future Building Space, as
defined in Section 1.3. Accordingly, although the building size
will be approximately 76,136 square feet, the rentable square
feet of the Building will only be approximately initially 60,000
rentable square feet (68,000 including the Additional Space) in
light of the exclusion of the Cutout Space.
12. Additional Space.
1.2.1 During and following the completion of the Building, Lessor
will make commercially reasonable efforts to obtain sufficient
square footage allocations from the County of Santa Barbara under
the Goleta Growth Management Ordinance (the "GGMO") to construct
an additional 8,000 rentable square feet of second floor area
within the Cutout Space of the Building (the "Additional Space")
in accordance with Lessor's approved development plan with the
County of Santa Barbara (97-DP-024).
1.2.2 If Lessor receives GGMO allocations for the Additional
Space, Lessor shall have the right to enter the Premises to
construct and build out the Additional Space, and Lessee shall
lease the entire Additional Space. Upon substantial completion
of the Landlord's Work in the Additional Space, the parties shall
measure the entire Premises (including the Additional Space)
using the American National Standard ANSI Z65.1-1996 as published
by the Building Owners and Managers Association International
(the "BOMA Standard"). Lessee's obligation to pay rent on the
Additional Space shall commence upon substantial completion of
the Landlord's Work for the Additional Space, and the Additional
Space shall be incorporated into the Premises for all purposes
hereunder. If Lessor does not obtain GGMO allocations within
seven years from the date hereof, Lessor shall have no further
obligation to pursue the GGMO allocations. If Lessor does not
obtain the GGMO allocations, Lessor shall have no obligation to
construct the Additional Space.
13. Future Building Area.
1.3.1 Lessee acknowledges that (a) the Building has not received
entitlements or building permits for approximately 8,136 square
feet of rentable space in the Cutout Space on the second floor of
the Building (the "Future Building Area"), and (b) Lessor shall
have no obligation whatsoever to seek any entitlements or to
construct any improvements within the Future Building Area unless
and until Lessor, in its sole discretion, determines to do so.
1.3.2 If Lessor elects, in its sole discretion, to seek all
entitlements (including a GGMO allocation) for the Future
Building Area, Lessor nevertheless shall not seek building
permits to construct any improvements within the Future Building
Area without Lessee's prior written approval until the sooner of
(a) the expiration of this Lease, or (b) such time as Lessee
reasonably determines that the warehouse and racking space
currently extending vertically from the ground floor of the
Building into the Future Building Area is no longer needed for
Lessee's business operations.
1.3.3 If (a) Lessor determines, in Lessor's sole discretion, to
seek entitlements for the Future Building Area, and (b) Lessee
has made the determination described in clause (b) of Section
1.3.2, then Lessor shall notify Lessee in writing, not less than
30 days prior to submittal of a development application to the
County of Santa Barbara, that Lessor intends to seek entitlements
for the Future Building Area. Prior to Lessor's obtaining the
entitlements for the Future Building Area, Lessor shall offer
Lessee a right of first offer for such space based on the then
current terms and conditions of this Lease and the Development
Agreement. Lessee shall have 90 days from such offer within
which to accept such offer. If Lessee does not accept such offer,
then Lessor may lease the Future Building Space to a third party
lessee at terms and conditions acceptable to Lessor, in Lessor's
sole discretion, provided that Lessor has notified Lessee of the
name, address and business of such third party lessee and Lessee
approves the third party lessee, such approval not to be
unreasonably withheld provided that the third party lessee does
not materially compete with Lessee's business.
14. Lease of Rentable Space. Lessee agrees to lease all
rentable space in the Building which the parties estimate will
initially be approximately 60,000 rentable square feet (the
"Premises"). After construction of the Additional Space, the
Building rentable area shall be approximately 68,000 square feet.
The Premises do not include the Cutout Area. The Building will
be one of several free-standing buildings owned by Lessor and
operated as the Santa Barbara Corporate Center (the "Project").
Upon completion of the demising walls in the Building, the
parties shall measure the Premises using the BOMA Standard to
determine the precise square footage within the Premises. Within
ten (10) days following the completion of such measurements,
Lessor and Lessee shall complete and initial the Addendum
attached hereto stating the total number of square feet in the
Premises, the initial Monthly Rental Installments, and the
Initial Annual Rent. Notwithstanding the foregoing, in no event
shall the total rentable square feet of the Premises upon which
Lessee is obligated to pay rent exceed 60,000 square feet, or if
the Additional Space is built, 68,000 square feet.
15. Lease of Premises. Lessor hereby leases to Lessee and
Lessee leases from Lessor for the term, at the rental, and upon
all of the conditions set forth in this Lease, the Premises
identified in Item 1 of the Basic Lease Provisions, together with
the non-exclusive use, in common, with Lessor and other tenants
of the Project and their respective invitees, of common areas in
or about the Project and the parking areas adjoining the Project.
The approximate anticipated configuration of the Project and the
location of the Building, and associated common and parking areas
is indicated on Exhibit "B". The size, location and function of
the buildings and related structures depicted here are
approximate. The configuration of the development, the design,
size, function and location of all other improvements, and the
identity and location of other tenants to the extent depicted are
subject to change without notice for any reason deemed sufficient
by Lessor. Lessor reserves the right to alter the configuration
of the Project to construct additional improvements thereon, to
withdraw areas therefrom from time to time and alter the
configuration of the associated common and parking areas,
provided that (i) the number of parking spaces intended for
Lessee's use shall not thereby be materially diminished and (ii)
areas material to Lessee's enjoyment of the Premises shall not be
withdrawn from the Property without the prior written consent of
Lessee, which shall not be unreasonably withheld. Lessee shall
be allocated the number of parking spaces set forth in item 10 of
the Basic Lease Provisions and Lessee acknowledges that Lessor
shall have no responsibility to supervise or police the usage of
the parking lot by the tenants of the Project. Nothing in this
Lease shall cause Lessor in any way to be construed as an
employer, employee, fiduciary, a partner, a joint venturer or
otherwise associated in any way with Lessee in the operation of
the Premises, or to subject Lessor to any obligation, loss,
charge or expense in connection with or arising from Lessee's
operation or use of the Premises.
16. Triple Net Lease. The parties intend this Lease to be a
net, net, net Lease with the Lessee paying its proportionate
share, as specified herein, of real property taxes, insurance and
certain operating costs for the Premises, the common areas of the
Project and the land on which it is situated. Except as
expressly provided herein, Lessee shall have no right to reduce
or offset the rent payable hereunder for any reason.
2. TERM
21. Commencement of Term. The term of the Lease shall be as
shown in Item 6 of the Basic Lease Provisions, commencing on the
Term Commencement Date, which Lessor and Lessee expect to be the
Target Commencement Date as shown in Item 7 of the Basic Lease
Provisions but which may be such other date as herein provided,
and ending fifteen (15) years thereafter unless sooner terminated
pursuant to any provision hereof.
2.1.1 The Commencement Date of this Lease shall be upon
substantial completion of the Phase I Tenant Improvements as
defined and described in the Development Agreement, and the
obligation of Lessee to pay rent shall begin on such date. Not
more than ten (10) days following substantial completion of the
Tenant Improvements, Lessor and Lessee shall complete and initial
the Addendum attached hereto specifying the Term Commencement
Date.
2.1.2 If delivery of possession occurs prior to the Target
Commencement Date, the term of this Lease shall commence on such
date of delivery of possession, but the Termination Date shall
not be advanced.
22. Delay in Commencement.
2.2.1 If for any reason Lessor cannot deliver possession of the
Premises to Lessee on or before the Target Commencement Date,
Lessor shall not be subject to any liability therefor, nor shall
such failure affect the validity of this Lease or the obligations
of Lessee hereunder. Subject to the provisions of the Development
Agreement, Lessee shall not be obligated to pay rent until the
Tenant Improvements are substantially complete.
2.2.2 If Lessor shall not have completed such construction within
twelve (12) months from the date of execution of this Lease (the
"Outside Completion Date), Lessee shall have the right to
terminate this Lease by giving not less than thirty (30) days'
prior written notice of default to Lessor, and this Lease shall
terminate as of the date set forth in said notice of termination
if Lessor is unable to cure said default within thirty (30) days
after receipt of said notice. Lessor shall use commercially
reasonable efforts to complete the Building as quickly as
possible. The Outside Completion Date shall be extended in the
event of a Tenant Delay (as defined in the Development Agreement)
or as a result of conditions beyond the control of Lessor as
provided in the Development Agreement.
3. RENT
31. Base Rent.
3.1.1 Lessee shall pay to Lessor as rent for the Premises Base
Rent in the amounts specified below and in Item 4 of the Basic
Lease Provisions in equal monthly installments in the amount
specified in Item 5 of the Basic Lease provisions in advance on
the first day of each month.
Office/R&D Base Rent - $1.45 per sq.ft.
Warehouse Base Rent - $.65 per sq.ft.
Shell Base Rent - $.45 per sq.ft.
The Office/R&D Base Rent, the Warehouse Base Rent and
the Shell Base Rent are collectively referred to as the "Base
Rent."
3.1.2 The Base Rent payable during the first two (2) years of the
term is based upon the following approximate allocation of space
within the Premises:
Office/R&D: 38,543 sq.ft.
Warehouse: 9,660 sq.ft.
Shell: 11,797 sq.ft.
Notwithstanding the foregoing, as more
specifically provided in the Development Agreement, Lessee shall
have the right in connection with and as a part of the
construction of the Tenant Improvements for Phase I to (i) use a
portion of the Tenant Improvement Allowance (as defined in the
Development Agreement) to wallpaper, paint, finish and/or carpet
all or a portion of the Shell space that will be converted to
Office/R&D space in the subsequent Phases for the purpose of
assuring that colors and finishes of such finished materials are
not discontinued prior to the time that the shell space is fully
and finally converted to office/R&D space as provided hereunder
or in the Development Agreement and/or (ii) use a portion of the
Tenant Improvement Allowance to build approximately 4,491 square
feet of mezzanine space in the warehouse area. In the event that
Lessee does use a portion of the Tenant Improvement Allowance for
(i) and/or (ii) above, the Base Rent then payable for such space
shall be increased by $.01167 per square foot per month for every
$1.00 of Tenant Improvement Allowance used for such work (the
"Amortization Rent") and the sum shall become the new Base Rent
for such space and be adjusted thereafter pursuant to Section 3.5
hereof.
For example, if Lessee used $20 per sq.ft. of the
Tenant Improvement Allowance to carpet and paint the portion of
the Shell space that will be converted to Office/R&D space as
provided in clause (i) above, the Base Rent for such shell space
for the initial two (2) years of the term shall be $.45 per
sq.ft. (the Shell Base Rent) plus $.2334 per sq.ft. (the
"Amortization Rent"). If, as provided below, the portion of the
Shell space to be converted to Office/R&D space is not
substantially complete prior to the commencement of the third
year of the term, the Base Rent for the Initial Converted Space
(defined below) shall be $1.10 per sq.ft., adjusted for increases
theretofore made in the Base Rent pursuant to Section 3.5 hereof
from the Term Commencement Date, to which will be added the
Amortization Rent as described above. Similarly, if a portion of
the Tenant Improvement Allowance is used for construction of the
mezzanine in the warehouse area, the Warehouse Base Rent for such
Warehouse space shall be increased as described herein.
In the case of the mezzanine, the only Base Rent
payable by Lessee shall be the Amortization Rent attributable to
the amount of the Tenant Improvement Allowance used for the
mezzanine. In other words, if Lessee uses $20 of the Tenant
Improvement Allowance to build the mezzanine, the Base Rent for
the mezzanine shall be $.2334 per sq.ft. per month. Except for
the payment of the Amortization Rent thereon, the mezzanine area
shall not be included for purposes of calculating useable or
rentable square feet in the Building.
3.1.3 Lessee agrees that during the initial two (2) years of the
term, 4,725 sq.ft. of the shell space in the Building will be
converted to Office/R&D space (the "Initial Converted Space") so
that the approximate allocation of space within the Premises
shall be as follows:
Office/R&D: 43,268 sq.ft.
Warehouse: 9,660 sq.ft.
Shell: 7,072 sq.ft.
The conversion of the Shell space to Office/R&D
shall be completed as described in the Development Agreement. In
the event that Tenant Improvements for the Initial Converted
Space have been substantially completed prior to the commencement
of the third year of the term, commencing upon substantial
completion of the Tenant Improvements, the Base Rent for the
Initial Converted Space shall be increased to the Office/R&D Base
Rent then payable, and shall be subject to annual adjustments
thereafter as provided herein. In the event that the Tenant
Improvements for the Initial Converted Space have not been
substantially completed by such date, the Base Rent for the
converted space shall be $1.10 per sq.ft. (adjusted for increases
theretofore made in the Base Rent pursuant to this Section 3.1
and Section 3.5 hereof from the Term Commencement Date) until the
first to occur of (i) the first day of the fifth lease year or
(ii) such time as the Tenant Improvements have been substantially
completed, at which time the Base Rent for the Initial Converted
Space shall be adjusted to be equal to the Office/R&D Base Rent
then payable.
3.1.4 Lessee agrees that prior to the end of the fourth year of
the lease term, the remaining 7,072 sq.ft. of Shell space shall
be converted to Office/R&D space (the "Additional Converted
Space") so that the approximate allocation of space will be as
follows:
Office/R&D: 50,340 sq.ft.
Warehouse: 9,660 sq.ft.
The conversion of the shell space to Office/R&D
space shall be completed as described in the Development
Agreement. Whether or not the Tenant Improvements for the
Additional Converted Space have been substantially completed
prior to the commencement of the fifth year of the term, the Base
Rent for the Additional Converted Space shall be increased to the
Office/R&D Base Rent then payable and shall be subject to annual
adjustments thereafter as provided herein.
3.1.5 Notwithstanding anything herein to the contrary, in the
event that Lessee elects to build out the Initial Converted Space
and/or the Additional Converted Space through the utilization of
the full Tenant Improvement Allowance for such areas prior to the
planned conversion of such spaces to Office/R&D as described
above, upon the Substantial Completion of the Tenant Improvements
for the Initial Converted Space and/or Additional Converted
Space, the Base Rent therefor shall be increased to the
Office/R&D Base Rent then payable, and shall be subject to any
adjustments thereafter as provided herein.
3.1.6 In the event that Lessor constructs the Additional Space, as
described in Section 1 hereof, the Additional Space shall be
constructed as Shell Space and the Base Rent payable for the
Additional Space shall be the Base Rent then payable for Shell
Space hereunder; provided, however, that the Additional Space
shall be converted to Office/R&D space at the same time and on
the same terms as the Additional Converted Space and the Base
Rent for the Additional Space shall be increased to the
Office/R&D Base Rent then payable. If the Additional Space is
substantially completed at any time after the commencement of the
5th year of the term, the Base Rent for the Additional Space
shall be the Office/R&D Base Rent then payable, regardless of the
time that the Additional Space is actually converted to
Office/R&D space or the date when the Tenant Improvement
Allowance for the Additional Space is actually used.
The parties intend that the Additional Space will be
constructed at the earliest possible date, provided that Lessor
is successful in obtaining sufficient square footage allocations
under the GGMO. If and when the Additional Space is constructed
and added to the Premises, the Premises shall consist of
approximately 67,991 rentable square feet. The approximate
allocation of the space within the Premises with the addition of
the Additional Space shall be as follows:
Phase I
Office/R&D 37,854 sq.ft.
Warehouse 9,488 sq. ft.
Shell 20,658 sq.ft.
Phase II
Office/R&D 43,268 sq.ft.
Warehouse 9,488 sq.ft.
Shell 15,244 sq.ft.
Phase III
Office/R&D 58,512 sq.ft.
Warehouse 9,488 sq.ft.
Following the construction of the Additional Space the
Premises shall be re-measured as provided in Section 1.4;
provided, however, that the rentable square feet upon which
Lessee is obligated to pay rent shall not exceed 68,000 square
feet. If the Additional Space is constructed, the conversions of
space to the allocations described above shall occur at the same
intervals as is described in Section 3.1. For example, if the
Additional Space is built during the first two years of the term
of the Lease, the conversion of space from Shell Space to
Office/R&D shall be such that it will cause the allocation of
space between the Premises for Phase II to be as set forth in
this Section 3.1.6.
32. Additional Rent.
3.2.1 Lessee shall reimburse Lessor, as additional rent, in the
manner and at the times provided, for Lessee's proportionate
share of all Building Operating Expenses and Common Area
Operating Expenses (as hereinafter defined) incurred by Lessor
(the "Additional Rent"). Lessee's proportionate share of such
Building Operating Expenses and Common Area Operating Expenses
shall be based upon Lessee's Building Percentage in the case of
Building Operating Expenses and upon Lessee's Common Area
Percentage in the case of Common Area Operating Expenses, all as
defined herein.
3.2.2 Amounts included as Additional Rent for repair, maintenance
or other building services obtained from an affiliate of Lessor
shall not exceed the amounts that would be paid if such services
had been obtained at competitive rates from independent third-
party contractors providing the same services to similar
buildings in the area in which the Project is located.
3.2.3 The level of repair, maintenance and upkeep of the Building,
Common Areas and landscaping shall conform to, but shall not
exceed, the standard customarily utilized for professional office
and research/development buildings in the Santa Barbara area,
with the University Business Center constituting an example of
such standards.
3.2.4 Salaries and payroll expenses shall be limited to (a) those
persons who are employed on a substantially full-time basis on
site and (b) Lessee's pro rata share of the salary and payroll
expense of common employees who are engaged by Lessor to provide
services both to the Project and to other properties owned and/or
managed by Lessor, based on the percentage that the square
footage of the space occupied by Lessee bears to the total square
footage of all space receiving the services of such common
employees.
3.2.5 Except as set forth below, no amounts shall be included in
Additional Rent for (a) amortization or depreciation of capital
assets that constitute real property or that do not constitute
removable trade fixtures or (b) the costs of correcting defects
in workmanship or materials covered by contractor's warranties or
that are caused by the failure of Lessor or its contractor to
construct the Building and Common Area in a good and workmanlike
manner in accordance with the plans and specifications and
applicable building codes.
33. Offset Rights. All Base Rent and Additional Rent due under
this Lease shall be payable without deduction, abatement or
offset except as may be otherwise expressly provided in this
Lease.
34. Definitions. For purpose of this Article 3:
3.4.1 Lessee's Building Percentage is a percentage (not in excess
of 100%) calculated by dividing the Leased Area of the Premises,
as shown in Item 2 of the Basic Lease Provisions, by the rentable
area of the Building, and is stipulated to be as shown in Item 3
of the Basic Lease Provisions.
3.4.2. Building Operating Expenses shall mean the sum of all
expenses incurred by Lessor in connection with the operation,
repair and maintenance of the Building, including but not limited
to the following: (a) the costs of supplying heating and air
conditioning to the Common Areas; (b) all Real Property Taxes (as
hereinafter defined) imposed upon or with respect to the Building
and related improvements (exclusive of the land underlying all
such improvements); (c) fifty percent (50%) of the premium for
earthquake insurance and the entire premium for all fire and
extended coverage, loss of rents, vandalism, malicious mischief
and other insurance covering the Building (including a pro rata
share of the premium for Lessor's excess liability insurance
coverage) maintained by Lessor under the provisions of this
Lease, to the extent the costs thereof are permitted by Section
7.6, below, and any losses suffered which fall below the
deductible limits of such insurance; (d) direct costs incurred
for security and fire protection and the costs of materials and
supplies; (e) salaries and payroll expenses for any persons who
are employed on a substantially full-time basis on-site in the
management, operation, repair and maintenance of the Building;
(f) subject to the provisions of Section 3.2, above, the costs of
(1) repair and maintenance of the Building and (2) repainting,
wallcovering or recarpeting Common Areas of the Building; (g) an
allowance for overhead and administrative expense (including the
costs of any off-site management supplied or procured by Lessor),
of thirteen percent (13%) of all expenses hereunder excluding the
premium for earthquake insurance payable by Lessee; and (h) the
amortization of the costs of capital investments for improvements
which are designed to reduce operating costs, improve operations
or comply with governmental conservation or safety programs,
together with interest at ten percent (10%) per annum on the
unamortized amount, amortized over such reasonable period as
Lessor shall determine, but such amortized costs shall be
included only to the extent of any demonstrable reductions or
savings in occupancy costs or operating expenses that are
achieved by Lessee as the result of such improvements or
programs.
3.4.3 Building Operating Expenses attributable to the utilities
and services furnished pursuant to Article 10 shall be
apportioned among the tenants of the Building receiving such
services (excluding those tenants furnishing or paying for their
own utilities and janitorial services) based on the respective
leased areas occupied by such tenants. Lessor has provided to
Lessee actual Building Operating Expenses for 5425 Hollister
Avenue, the current offices of Lessee, but without warranty or
representation to Lessee that Building Operating Expenses for the
Premises will be limited to such amounts.
3.4.4 Lessee's Common Area Percentage is a percentage figure cal
culated by the project architect by dividing the Premises by the
average leasable area in all improvements, including the Building
and other buildings, shown on Exhibit "B" during such year and is
initially stipulated to be as shown in Item 3 of the Basic Lease
Provisions. Should the Building and/or landscape area become a
separate legal lot, or should additional improvements or common
area be added to or deleted from Exhibit "B", Lessor may, at its
option, calculate Lessee's Common Area Percentage by comparing
the common area attributable to the Premises with the common area
on such legal lot or otherwise within Exhibit "B" as so revised.
3.4.5 Common Area Operating Expenses shall mean the sum of all
expenses incurred by Lessor in connection with the operation and
maintenance of driveways, landscaping, walkways, plazas, parking
facilities, and perimeter property, including, but not limited
to: (a) all real property taxes (as hereinafter defined) imposed
upon or with respect to the land described in Exhibit "B"; (b)
all public liability insurance maintained by Lessor under the
provisions of this Lease, to the extent the costs thereof are
permitted by Section 7.6, below, and any losses suffered which
fall below the deductible limits of such insurance; (c) direct
costs incurred for security and fire protection and the costs of
materials and supplies; (d) salaries and payroll expenses for any
persons who are employed on a substantially full-time or contract
basis on-site in the management, operation, repair and
maintenance of the common areas, gardening, landscaping,
repaving, repainting and trash removal; (e) depreciation of
equipment used in such maintenance; (f) the amortization of the
costs of capital investments for improvements which are designed
to reduce operating costs, improve operations or comply with
governmental conservation or safety programs, together with
interest at ten percent (10%) on the unamortized amount,
amortized over such reasonable period as Lessor shall determine,
but such amortized costs shall be included only to the extent of
any demonstrable reductions or savings in occupancy costs or
operating expenses that are achieved by Lessee as the result of
such improvements or programs; (g) any governmental surcharge,
fee or assessment imposed with respect to the parking facilities
within the Project, to the extent paid by Lessor and not passed
on to the users of said parking facilities; and (h) an amount
equal to thirteen percent (13%) of all such expenses to cover
Lessor's administrative and overhead expenses.
3.4.6 Subject to the exception set forth in subparagraph A, below,
Real Property Taxes shall mean all real and personal property
taxes and assessments incurred during any calendar year,
including, but not limited to: special and extraordinary
assessments, water and sewer rates and charges, occupancy taxes
or similar taxes imposed on or with respect to the real or
personal property whether or not imposed on or measured by the
rent payable by Lessee, and other governmental levies and
charges, general and special, ordinary and extraordinary,
unforeseen as well as foreseen, of any kind and nature whatsoever
relating to the real or personal property, including increases
due to a change in ownership, and any gross rental, license or
business tax measured by or levied on rent payable or space
occupied. If, by law, any property taxes are payable, or may at
the option of the taxpayer be paid, in installments (whether or
not interest shall accrue on the unpaid balance of such property
taxes), Lessor may, at Lessor's option, pay the same and, in such
event, any accrued interest on the unpaid balance of such
property taxes shall be deemed to be Real Property Taxes as
defined herein. Real Property Taxes shall also include all
expenses reasonably incurred by Lessor in seeking a reduction by
the taxing authorities of Real Property Taxes applicable to the
Project. If at any time during the term of this Lease under the
laws of the United States or the State of California or any
political subdivision of either, a tax or excise on rents, space
or other aspects of real property, is levied or assessed against
Lessor, the same shall be deemed to be Real Property Taxes. If
any such property taxes upon the income of Lessor shall be
imposed on a graduated scale, based upon Lessor's aggregate
rental income, Real Property Taxes shall include only such
portion of such property taxes as would be payable if the rent
payable with respect to the Building and Common Areas were the
only rental income of Lessor subject thereto.
1. Real Property Taxes shall not include (1) any capital levy,
franchise, estate, inheritance, succession, gift or transfer tax
of Lessor or (2) any income, profits or excess profits tax,
assessment, charge or levy upon the income of Lessor.
2. Lessee at its cost shall have the right, at any time, to
seek a reduction in the assessed valuation of the premises or to
contest any Real Property Taxes that are paid by Lessee, provided
that Lessee first obtains Lessor's written consent to the seeking
of such reduction, which consent shall not be unreasonably
withheld. If Lessee seeks a reduction or contests the Real
Property Taxes, the failure on Lessee's part to pay the Real
Property Taxes shall not constitute a default as long as Lessee
complies with the provisions of this Section.
3. Lessor shall not be required to join in any proceeding or
contest brought by Lessee unless the provisions of any law
require that the proceeding or contest be brought by or in the
name of Lessor or any owner of the Premises. In that case Lessor
shall join in the proceeding or contest or permit it to be
brought in Lessor's name as long as Lessor is not required to
bear any cost. Lessee, on final determination of the proceeding
or contest, shall immediately pay or discharge any decision or
judgment rendered, together with all costs, charges, interest,
and penalties incidental to the decision or judgment.
4. If Lessee does not pay the Real Property Taxes when due and
Lessee seeks a reduction or contests them as provided in this
Section, before the commencement of the proceeding or contest,
Lessee shall furnish to Lessor a surety bond issued by an
insurance company qualified to do business in California. The
amount of the bond shall equal one hundred twenty-five percent
(125%) of the total amount of Real Property Taxes in dispute,
including any penalties for late payment thereof. The bond shall
hold Lessor and the Premises harmless from any damage arising out
of the proceeding or contest and shall insure the payment of any
judgment that may be rendered.
5. Should Real Property Taxes applicable to the property be
reduced, Real Property Taxes assessed to Lessee pursuant to this
Lease shall reflect such reduction.
35. Rent Adjustment for Consumer Price Index. The Base Rent
shall be adjusted effective as of the first day of the thirteenth
(13th) full calendar month of the lease term, and on the
corresponding day of each year thereafter during the lease term
(the "Amendment Date") in accordance with the procedures set
forth in Section 3.6.2, below.
36. Calculation and Payment.
3.6.1 Base Rent and Additional Rent shall be payable to Lessor in
lawful money of the United States at Lessor's address herein or
to such other persons or at such other places as Lessor
designates in writing. Base Rent and Additional Rent payable for
any period for less than one month shall be prorated based upon a
thirty (30) day month.
3.6.2 The Base Rent shall be adjusted on each Amendment Date by an
amount equal to the percentage of increase in the Consumer Price
Index for Urban Wage Earners and Clerical Workers, All Items,
L.A.-Anaheim-Riverside Area (1982-84= 100 Base) (the "Index")
during the preceding year. Such amount shall be determined by
comparing the Index figure for the second month immediately
preceding the Amendment Date to the Index figure for the
corresponding month of the prior year, but in no event shall the
annual rental increase be less than three percent (3%) or more
than seven percent (7%) in any year.
1. If the applicable Index figure is not available on the
Amendment Date, the parties shall make an interim increase in the
annual rent on the basis of the most recently available Index
figure. A final amendment shall thereafter be made, retroactive
to the Amendment Date, once the applicable Index figure becomes
available, and Lessee shall pay any additional rent owing for
prior periods by reason of such final amendment not later than
the first day of the next following month.
2. If on any Amendment Date the Consumer Price Index is no
longer published in the same format as set forth above, the
parties shall substitute any official index published by the
Bureau of Labor Statistics or any successor or similar
Governmental agency as may then be in existence and shall be most
nearly equivalent thereto. If the parties shall be unable to
agree upon a successor index, the parties shall refer the choice
to nonbinding arbitration by an experienced commercial real
estate broker or attorney mutually agreeable to the parties. No
discovery shall be allowed.
3.6.3 Prior to the commencement of the lease term and in each
December thereafter, Lessor shall give Lessee a written estimate
of Lessee's share of Building and Common Area Operating Expenses
for the ensuing year or portion thereof. Lessee shall pay such
estimated amount to Lessor in equal monthly installments, in
advance. Within ninety (90) days after the end of each calendar
year, Lessor shall furnish to Lessee a statement showing in
reasonable detail the actual Building and Common Area Operating
Expenses incurred by Lessor during such period, and the parties
shall within thirty (30) days make any payment or allowance
necessary to adjust Lessee's estimated payment to Lessee's actual
proportionate share as shown by such annual statement. Any amount
due Lessee shall be credited against installments next coming due
under this Section.
3.6.4 Lessor shall keep at its principal place of business books
and records in sufficient detail to permit the verification of
all costs and expenses charged to Lessee as Building and Common
Area Operating Expenses during the term of this lease. All such
books and records shall be available for inspection and copying
by Lessee or its duly authorized representative at Lessor's
principal place of business at reasonable times during regular
business hours upon reasonable prior notice to Lessor.
37. End of Term. Upon the expiration or earlier termination of
this Lease, Lessee shall pay Lessor, as Additional Rent, the
aggregate rental increase which would have been payable by Lessee
pursuant to this Article 3, except for such expiration or
termination, for the portion of the year in which termination or
expiration occurs through the termination date. The amount of
such payment shall be calculated by Lessor based upon Sections
3.2, 3.3, and 3.5 (using the expiration or termination date as
the amendment date for Section 3.5) and the best information then
available to Lessor, and shall give effect to all prior
amendments and payments on account by Lessee pursuant to this
Article 3.
4. SECURITY DEPOSIT
Lessee has deposited with Lessor the sum of One Hundred
Twenty-seven Thousand Dollars ($127,000) as security for the
faithful performance by Lessee of all covenants and conditions of
this Lease. Lessor shall deposit Lessee's security deposit into a
money market or similar high yield account and shall cause the
interest accruing thereon to be remitted to Lessee no less
frequently than annually. If Lessee shall breach or default in
the performance of any covenants or conditions of this Lease,
including the payment of Base Rent or Additional Rent, Lessor may
use, apply or retain the whole or any part of such security
deposit for the payment of any rent in default or for any other
sum which Lessor may spend or be required to spend by reason of
Lessee's default. If Lessor so uses or applies all or any portion
of said deposit, Lessee shall, within ten (10) days after written
demand therefor, deposit cash with Lessor in an amount sufficient
to restore said deposit to the full amount hereinabove stated and
Lessee's failure to do so shall be a material breach of this
Lease. Should Lessee comply with all covenants and conditions of
this Lease, the security deposit or any balance thereof shall be
returned to Lessee (or at the option of Lessor, to the last
assignee of Lessee's interest in this Lease) at the expiration of
the term. Should Lessor sell its interest in the Premises, Lessor
shall transfer to the purchaser thereof the then unexpended or
unappropriated deposit and thereupon Lessor shall be discharged
from any further liability for such funds. Notwithstanding the
foregoing, Lessee agrees that Lessor shall have the right to use
said deposit to pay the impact fees demanded by the Goleta Water
District ("GWD") in order to obtain GWD's plan check approval and
"Can and Serve" letter; upon Lessor's receipt of debt financing
from Lessor's lender, Lessor shall restore the security deposit
to the sum of $127,000.
5. USE
51. Use. The Premises shall be used and occupied for lawful
warehouse, office and research and development purposes permitted
under applicable ordinances and other Governmental requirements,
the covenants, conditions and restrictions affecting the Project,
as the same may be amended from time to time, and the Rules and
Regulations as Lessor may from time to time reasonably adopt for
the safety, care and cleanliness of the Building and the Project
or the preservation of good order. The Rules and Regulations
presently in effect are attached hereto as Exhibit "C". Lessor
shall endeavor to enforce such Rules and Regulations in a uniform
and consistent manner as to all tenants and occupants of the
Building, but Lessor shall not be responsible to Lessee for the
nonperformance of any of such Rules and Regulations, or
noncompliance with said covenants, conditions and restrictions,
by any other tenant of the Building for reasons beyond the,
reasonable ability of Lessor to control.
52. Compliance With Law. Lessee shall at Lessee's expense,
comply promptly with all applicable statutes, ordinances, rules,
regulations, orders and requirements in effect regulating the use
by Lessee of the Premises. Lessee shall not use or permit the use
of the Premises in any manner that will tend to create waste or a
nuisance or which shall tend to disturb other tenants of the
Building.
53. Insurance Cancellation. If Lessee's use of the Premises
causes an increase in the rates of fire or other insurance
maintained on the Project, Lessee shall pay as additional rent
the amount of such increase. Lessee shall be in default under
this Lease should Lessee cause the cancellation of fire or other
insurance upon the Building or Property or should Lessee fail to
pay any increased insurance rate attributable to Lessee's use of
the Premises. In determining whether increased premiums are a
result of Lessee's use or occupancy of the Premises, Property or
Building, a schedule issued by Lessor's insurer computing the
insurance rate on the Premises, Property or Building, or the
leasehold improvements showing the various components of such
rate, shall be conclusive evidence of the several items and
charges which make up such rate. Lessee shall promptly comply
with all reasonable requirements of the insurance authority or of
any insurer now or hereafter in effect relating to the Premises.
54. Hazardous Substances. Any corrosive, flammable, hazardous,
or other special wastes or materials shall be handled or disposed
of as directed by applicable State, Federal, County and City
regulations. Lessee shall handle, store or dispose of such
materials in a careful and prudent manner. At the termination of
the lease, or any option period thereof, Lessee shall fully clean
the premises in such a manner that no residue of such materials
or wastes shall remain on the premises in concentrations which
exceed those permitted under applicable rules and regulations
then in effect. Lessee shall notify the appropriate governmental
authority of the presence and amount of any such material or
wastes, and shall comply with all conditions imposed by such
authority. Lessee shall contact the appropriate governmental
authority prior to occupancy to determine the existence of any
records for the Building and/or Premises. Specifically thirty
(30) days prior to occupancy, Lessee shall submit to Lessor and
the appropriate governmental authority for approval any Hazardous
Materials Management Plan (HMMP) and a Hazardous Materials Floor
Plan (HMF) required by such governmental authority. These plans
shall be attached in full to this lease.
5.4.1 The HMMP shall include the following:
1. The Company name, address, and contact person.
2. General facility description with map showing location of
all buildings and structures.
3. Facility hazardous material storage map showing the location
of each proposed hazardous material storage area and access to
such facilities. The map shall be updated annually by the
occupant and submitted by January 1 each year.
4. A floor plan showing the location of each hazardous material
storage area, storage area access, and the location of emergency
equipment.
5.4.2. The HMFP shall include the following:
1. Hazardous Materials Handling Report describing the safe
handling of hazardous materials to prevent accidents.
2. Separation of Hazardous Material Report outlining the
methods to be utilized to insure separation and protection of
hazardous materials from such factors that could cause fire,
explosion, spills, etc.
3. Inspection and Record Keeping Plan indicating the procedures
for inspecting each storage facility. An authorized record of
inspection shall be maintained by the Lessee.
4. Employee Training Program to insure that employees know how
to safely handle hazardous materials.
5. Hazardous Materials Contingency Plan that clearly describes
appropriate response procedures and measures in case of an
accident.
6. A floor plan identifying the location and quantity of each
hazardous material, including the chemical name and quantity
limit for each class.
5.4.3 Lessee shall reduce the hazardous waste stream from the
Building to the maximum extent feasible. Thirty (30) days prior
to occupancy, Lessee shall submit to Lessor and the appropriate
governmental authority for approval a plan outlining measures for
the reduction of the hazardous waste stream from the Building.
The plan shall contain the monitoring component. Components of
the plan shall be implemented as indicated in the plan.
5.4.4 Lessee shall pay inspection fees, based on the hourly
inspection rate, for an environmental audit to be conducted by
the appropriate governmental authority or Lessor at the
termination of the lease and prior to reoccupation of the
Building and/or premises if hazardous materials were in use on
the leased Building and/or premises. The appropriate governmental
authority shall perform or Lessee shall arrange for such an audit
in a timely manner to prevent economic hardship to Lessor and
shall certify that the premises are available for reoccupation,
or shall specify cleanup measures that will render the premises
safe for reoccupation. Lessee shall be responsible for any
cleanup that may be required as a result of the audit.
5.4.5 Should Lessee fail to comply with any duty set forth in this
Section 5.4, Lessor may, in addition to all other remedies now or
hereafter provided by this Lease or by law, perform such duty or
make good such default, and any amounts which Lessor shall
advance pursuant thereto shall be repaid by Lessee to Lessor on
demand. Lessee shall indemnify, defend, and hold Lessor harmless
from all costs, attorney fees, expenses, claims and liability for
damage to property and injury to persons as a result of or
arising out of Lessee's use, generation, storage, release or
disposal of any hazardous or toxic substance, material, or waste
on the Project site.
55. Solid Waste Management Program. Thirty (30) days prior to
occupancy Lessee shall submit to Lessor and to the appropriate
governmental authority for approval a Solid Waste Management
Program. The program shall identify the amount of waste
generation projected from the Building. The program shall include
one or more of the following measures, but is not limited to
those measures: (i) provision of bins for storage of recyclable
materials within the Building, (ii) participation in the curbside
recycling program which serves the Goleta area, (iii) development
of a Source Reduction Plan ("SRP") describing the recommended
program and the estimated reduction of the solid waste disposed
of in the Building, and (iv) implementation of a program to
purchase materials that have recycled content for the operations
of Lessee (e.g. office supplies). To insure compliance, Lessee
shall develop an integrated solid waste management program,
including recommended source reduction, recycling, composting
programs, and/or a combination of such programs subject to review
and approval by the appropriate governmental authority.
56. Environmental Laws.
1. Compliance with Environmental Laws. Lessee, in its conduct
of business on or in any activity, work, thing done, permitted or
suffered by Lessee, its agents, contractors, employees or
invitees on the Premises, shall at all times and in all respects
comply with all federal, state and county laws, ordinances and
regulations (the "Hazardous Materials Laws") relating to
industrial hygiene, environmental protection or the use,
analysis, generation, manufacture, storage, disposal or
transportation of any oil, flammable explosives, asbestos,
radioactive materials or waste, or other hazardous, toxic,
contaminated or polluting materials, substances, or wastes,
including, without limitation, any "hazardous substances,"
"hazardous wastes," "hazardous materials," or "toxic substances"
under any such laws, ordinances or regulations (collectively, the
"Hazardous Materials"). Such laws, ordinances or regulations
shall include, but not be limited to, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980,
as amended, 42 U.S.C. Section 9601, et seq; the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq; the
Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section
6901 et seq; the Clean Water Act, 33 U.S.C. Section 466, et seq;
the Safe Drinking Water Act, 14 U.S.C. Section 1401, et seq; the
Superfund Amendment and Reauthorization Act of 1986; Public Law
99-499, 100 Stat. 1613; the Toxic Substances Control Act, 15
U.S.C. Section 2601, et seq, as amended; those substances defined
as "hazardous waste", "extremely hazardous waste", "restricted
hazardous waste" or "hazardous substance" in the Hazardous Waste
Control Act, Section 25100 et seq of the California Health &
Safety Code; and those materials and substances similarly
described in the Federal Insecticide, Fungicide and Rodenticide
Act, 7 U.S.C. Section 136, et seq., as amended; the Atomic Energy
Act of 1954, 42 U.S.C. Section 2011, et seq., as amended; the
Porter Cologne Water Quality Control Act, Section 1300 et seq. of
the California Health & Safety Code; and any regulations adopted
and publications promulgated pursuant to said Laws.
2. Hazardous Materials Handling. The Lessee shall, at its own
expense, procure, maintain in effect and comply with all
conditions of any and all permits, licenses and other
governmental and regulatory approvals required for Lessee's use
of the Premises, including, without limitation, discharge of
(appropriately treated) materials or wastes into or through any
sanitary sewer serving the Premises. Except as discharged into
the sanitary sewer in strict accordance and conformity with all
applicable Hazardous Materials Laws, Lessee shall cause any and
all Hazardous Materials removed from the Premises to be removed
and transported solely by duly licensed haulers to duly licensed
facilities for final disposal of such materials and wastes.
Lessee shall in all respects handle, treat, deal with and manage
any and all Hazardous Materials in, on, under or about the
Premises in total conformity with all applicable Hazardous
Materials Laws and prudent industry practices regarding
management of such Hazardous Materials. Upon expiration or
earlier termination of the term of the Lease, Lessee shall cause
all Hazardous Materials to be removed from the Premises and
transported for use, storage or disposal in accordance and
compliance with all applicable Hazardous Materials Laws. Lessee
shall not take any remedial action in response to the presence of
any Hazardous Materials in or about the Premises or the Building,
nor enter into any settlement agreement, consent, decree or other
compromise in respect to any claims relating to any Hazardous
Materials in any way connected with the Premises or the Building,
without first notifying Lessor of Lessee's intention to do so and
affording Lessor ample opportunity to appear, intervene or
otherwise appropriately assert and protect Lessor's interest with
respect thereto.
3. Notices. Lessee shall immediately notify Lessor in writing
of any of the following activities relating to Lessee's
operations on the Premises: (i) any enforcement, clean-up,
removal or other governmental or regulatory action instituted,
completed or threatened pursuant to any Hazardous Materials Laws;
(ii) any claim made or threatened by any person against Lessee,
the Premises or the Building relating to damage, contribution,
cost recovery compensation, loss or injury resulting from or
claimed to result from any Hazardous Materials in, on or removed
from the Premises or the Building; and (iii) any reports made to
any environmental agency arising out of or in connection with any
Hazardous Materials in or removed from the Premises or the
Building, including any complaints, notices, warnings or asserted
violations in connection therewith. Lessee shall also supply to
Lessor as promptly as possible, and in any event within five (5)
business days after Lessee first receives or sends the same, with
copies of all claims, reports, complaints, notices, warnings or
asserted violations relating in any way to the Premises, the
Building or Lessee's use thereof. Lessee shall promptly deliver
to Lessor copies of hazardous waste manifests reflecting the
legal and proper disposal of all Hazardous Materials removed from
the Premises.
4. Indemnification of Lessor. Lessee shall indemnify, defend,
protect, and hold Lessor, and each of Lessor's partners,
employees, agents, attorneys, successors and assigns, free and
harmless from and against any and all claims, liabilities,
penalties, forfeitures, losses or expenses (including reasonable
attorneys' fees) for death of or injury to any person or damage
to any property whatsoever arising from or caused in whole or in
part, directly or indirectly, by (A) the presence in, on, under
or about the Premises or the Building, or discharge in or from
the Premises or the Building of any Hazardous Materials or
Lessee's use, analysis, storage, transportation, disposal,
release, threatened release, discharge or generation of Hazardous
Materials to, in, on, under, about or from the Premises or the
Building, but only to the extent such Hazardous Materials are
present as a result of actions of Lessee, its officers,
employees, invitees, assignees, contractors, or agents, or (B)
Lessee's failure to comply with any Hazardous Materials Law.
Lessee's obligations hereunder shall include, without limitation,
and whether foreseeable or unforeseeable, all costs of any
required or necessary repair, clean-up or detoxification or
decontamination of the Premises or the Building, and the
preparation and implementation of any closure, remedial action or
other required plans in connection therewith, and shall survive
the expiration or earlier termination of the term of the Lease.
For purposes of the release and indemnity provisions hereof, any
acts or omissions of Lessee, or by officers, invitees, employees,
agents, assignees, contractors or subcontractors of Lessee or
others acting for or on behalf of Lessee (to the extent any such
individual is acting within the scope of his relationship with
Lessee), whether or not such acts or omissions are negligent,
intentional, willful or unlawful, shall be strictly attributable
to Lessee.
6. MAINTENANCE. REPAIRS AND ALTERATIONS
61. Lessor's Obligations. Lessor shall cause to be maintained,
in good order, condition and repair (a) the roof and exterior
walls, (b) common windows and doors of the Building (excluding
the interior surface thereof), (c) heating, venting and air
conditioning systems, (d) all encased plumbing and wiring,
whether within or outside the Leased Premises (but excluding
plumbing blockages attributable to any misuse of plumbing by
tenant or its agents or employees), (e) any public and common
areas in the Building, (f) all parking areas, driveways,
sidewalks, private roads or streets and landscaping and (g) all
other areas located within the Project other than areas occupied
by other buildings (such non-building areas being herein referred
to as "Common Areas").
62. Lessee's Obligations. Lessee shall during the term of this
Lease keep in good order, condition and repair, the interior of
the Premises (except as set forth above) and every part thereof,
including, but not limited to, all interior windows and doors in
and to the Premises and all exposed plumbing and electrical
fixtures. Lessor shall incur no expense nor have any obligation
of any kind whatsoever in connection with the maintenance of the
interior of the Premises and, except as expressly provided in
Section 12.3, below, Lessee waives the benefits of any statute
now or hereafter in effect which would otherwise afford Lessee
the right to make repairs at Lessor's expense or to terminate
this Lease because of any failure to keep the interior of the
Premises in good order, condition and repair. Notwithstanding the
foregoing, Lessor shall be liable for maintenance or repairs
which are caused by Lessor's active negligence (whether act or
omission) or willful misconduct, or due to defects in workmanship
or material covered by Contractor's warranty or that are caused
by the failure of Lessor or its contractors to construct the
Premises to the agreed specifications.
63. Alterations and Additions.
6.3.1 Lessee shall not, without Lessor's prior written consent,
which shall not be unreasonably withheld, make any alterations,
improvements, additions or utility installations in, on or about
the Premises unless such work is nonstructural and can be
completed at a cost that does not exceed one-half (1/2) the
monthly Base Rent in effect at the time of the proposed
alteration or addition. As used in this Section 6.3, the term
"utility installations" shall include bus ducting, power panels,
fluorescent fixtures, space heaters, conduits and wiring. All
utility installations made by Lessee shall conform to all
applicable codes and governmental regulations. As a condition to
giving any required consent, Lessor may require that Lessee agree
to remove any such alterations, improvements, additions or
utility installations at the expiration or sooner termination of
the term, and to restore the Premises to their prior condition.
Lessee shall keep the Premises free of all lien claims and shall
defend, indemnify and hold harmless Lessor against all claims
arising from mechanics' and materialmen's liens, including all
costs, attorneys' fees, expenses and liabilities incurred in or
about any such claim or any action or proceeding brought thereon.
6.3.2 All alterations, improvements and additions to the Premises
for which the approval of Lessor is required under Section 6.3.1,
or which involve changes to the plumbing, electrical or HVAC
systems, shall be performed by Lessor's contractor for the
Project or other licensed contractor approved by Lessor, which
shall not be unreasonably withheld. Lessee shall pay, when due,
all claims for labor or materials furnished to or for Lessee at
or for use in the Premises, which claims are or may be secured by
any mechanics' or materialmen's lien against the Premises or any
interest therein, and Lessor shall have the right to post notices
of nonresponsibility in or on the Premises as provided by law.
6.3.3 Lessee shall provide Lessor with notice of any changes or
alterations made to the Premises, whether or not such changes or
alterations require the prior approval of Lessor, shall furnish
Lessor with a copy of the plans, sketches or drawings, if any,
made for the purpose of designing or constructing such changes or
additions, and shall provide Lessor with "as-built" drawings for
any such alterations requiring the prior approval of Lessor.
64. Surrender. On the last day of the term hereof, or on any
sooner termination, Lessee shall surrender to lessor the Premises
and, subject to the provisions of Section 6.3.1 hereof, all
additions, and improvements thereto, in the same condition as
when received or made, ordinary wear and tear excepted; provided,
however, that Lessee's machinery, equipment and trade fixtures
(including utility installations) which may be removed without
irreparable or material damage to the Premises, shall remain the
property of Lessee and be removed by Lessee. Lessee shall repair
any damage to the Premises occasioned by the removal of Lessee's
furnishings, machinery, equipment and trade fixtures, which
repair shall include the patching and filling of holes and repair
of structural damage.
65. Lessor's Rights. If Lessee fails to perform Lessee's
obligations under this Article 6, Lessor may, at its option (but
shall not be required to), and with a 5-day written notice to
Lessee, perform such obligations on behalf of Lessee, and the
cost thereof, together with interest thereon at the rate
specified in Section 17.18 hereof, shall immediately become due
and payable as additional rent to Lessor.
7. INSURANCE
Lessee, at its sole cost and expense, shall, commencing on
the date Lessee is given access to the premises for any purpose,
and during the entire term hereof, procure, pay for and keep in
full force and effect:
71. Lessee's Liability Insurance. Comprehensive general
liability insurance with respect to the Premises and the
operations of or on behalf of Lessee in, on or about the
Premises, but not limited to: personal injury, blanket
contractual, owner's protective, broad form property damage
liability coverage, host liquor liability and owned and non-owned
automobile liability in an amount not less than $1,000,000 per
occurrence, $2,000,000 general aggregate, per policy year. In
addition, Lessee shall maintain for the Lease Term, such policies
of product liability insurance as are readily available for
Lessee's product lines at competitive, cost-effective rates and
shall self-insure for those product lines for which such
insurance is not available or not available at commercially
reasonable rates. Each policy of insurance maintained by Lessee
shall contain (i) severability of interest, (ii) cross liability,
and (iii) an endorsement stating in substance that "Such
insurance as is afforded by this policy for the benefit of Lessor
shall be primary as respects any liability or claims arising out
of the occupancy of the Premises by Lessee, or out of Lessee's
operations, and any insurance carried by Lessor shall be excess
and non-contributory."
72. Lessee's Worker's Compensation Insurance. Worker's
Compensation coverage as required by law, together with Employer
Liability coverage.
73. Lessee's Fire and Extended Coverage Insurance. Insurance
against fire, vandalism, malicious mischief and such other
additional perils as now are or hereafter may be included in a
standard "All Risks" coverage, insuring all improvements and
betterments made to the Premises, Lessee's trade fixtures,
furnishings, equipment, stock, loss of income or extra expense,
and other items of personal property in an amount not less than
100% of replacement value. Such insurance shall contain (i) no
coinsurance or contribution clauses, (ii) a Replacement Cost
Endorsement, and (iii) deductible amounts acceptable to Lessor.
74. Policy Requirements.
7.4.1 All policies of insurance required to be carried by Lessee
pursuant to these requirements shall be written by responsible
insurance companies authorized to do business in the State of
California. Any such insurance required by Lessee hereunder may
be furnished by Lessee under any blanket policy carried by it or
under a separate policy therefor. A true and exact copy of each
paid up policy evidencing such insurance or a certificate of the
insurer, certifying that such policy has been issued, providing
the coverage required and containing the provisions specified
herein, shall be delivered to Lessor prior to the date Lessee is
given the right to possession of the Premises, and upon renewals,
not less than thirty (30) days prior to the expiration of such
coverage. Lessor may, at any time, and from time to time, inspect
and/or copy any and all insurance policies required hereunder. In
no event shall the then limits of any policy be considered as
limiting the liability of Lessee under this Lease.
7.4.2 Each policy evidencing insurance required to be carried by
Lessee pursuant to these requirements shall contain, in form and
substance satisfactory to Lessor: (i) a provision in all general
liability policies including Lessor and any other parties in
interest designated by Lessor as an additional insured; (ii) a
waiver by Lessee's insurers of any right to subrogation against
Lessor, its agents, employees and representatives which arises or
might arise by reason of any payment under such policy or by
reason of any act or omission of Lessor, its agents, employees or
representatives; and (iii) a provision that the insurer will not
cancel or materially change the coverage provided by such policy
without first giving Lessor thirty (30) days prior written
notice, if the same is reasonably available.
7.4.3 The amounts of insurance and extent of coverage set forth in
this Article 7 can be subject to periodic review and amendment,
based either on the mutual agreement of Lessor and Lessee or, if
Lessor and Lessee are unable to agree, on the determination of an
insurance broker mutually agreeable to the parties.
75. Lessor's Rights. If Lessee fails to procure, maintain
and/or pay for at the times and for the durations specified in
this Lease, the insurance required hereunder, or fails to carry
insurance required by any governmental requirement, Lessor may
(but without obligation to do so), and with twenty-four (24)
hours advance notice to Lessee, perform such obligations on
behalf or Lessee, and the cost thereof, together with interest
thereon at the rate specified in Section 12.2.1 hereof, shall
immediately become due and payable as additional rent to Lessor.
76. Lessor's Insurance. Lessor shall be entitled to maintain
during the term of this Lease such insurance against physical
damage to the Building in an amount not less than one-hundred
percent (100%) of replacement value of the Premises, and a policy
of comprehensive excess liability insurance with a combined
single limit in such amount as Lessor reasonably considers
appropriate and Fire and Extended Coverage Insurance. Lessor may,
but shall not be obliged to, take out and carry any other form or
forms of Insurance as it or the mortgagees of Lessor may
reasonably determine advisable, except that Lessor and Lessee
agree that (a) Lessor shall not be obligated to obtain earthquake
insurance for the Premises and (b) Lessee shall not be required
to reimburse Lessor for premiums for other insurance which
exceeds in nature, scope or amount of coverage insurance that is
consistent with normal commercial practices. Notwithstanding any
contributions by Lessee to the cost of insurance premiums, with
respect to the Building or any alterations of the Premises, as
may be provided herein, Lessee acknowledges that it has no right
to receive any proceeds from any such insurance policies carried
by Lessor.
77. Indemnification. To the fullest extent permitted by law,
Lessee shall defend, indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's use of the
Premises of the conduct of its business or from any activity,
work, or thing done, permitted of suffered by Lessee, its agents,
contractors, employees or invitees in or about the Premises or
elsewhere, and shall further indemnify and hold harmless Lessor
from and against any and all claims arising from any breach or
default in the performance of any obligation on Lessee's part to
be performed hereunder, or arising from any act, neglect, fault
or omission of Lessee, or of its agents, employees, or invitees,
and from and against all costs, attorney's fees, expenses and
liabilities incurred in or about such claim or any action or
proceeding brought thereon. In case any action or proceeding be
brought against Lessor by reason of any such claim, Lessee, upon
notice from Lessor, shall defend the same at Lessee's expense by
counsel approved in writing by Lessor. Lessee, as a material part
of the consideration to Lessor hereunder, hereby assumes all risk
of damage to property or injury to persons in, upon or about the
Premises from any cause whatsoever except that which is caused by
the failure of Lessor to observe any of the terms and conditions
of this Lease or, except as expressly waived by Lessee in this
Lease, a duty imposed on Lessor by law, and Lessee hereby waives
all its claims in respect thereof against Lessor, but nothing
herein shall be construed to release Lessor from liability for
damages caused by its fault or neglect and Lessee shall not be
obligated to defend, indemnify and hold harmless Lessor from and
against any claims attributable to Lessor's negligence or willful
misconduct.
78. Exemption of Lessor from Liability. Lessor shall not be
liable for injury to Lessee's business or any loss of income
therefrom or for damage to the property of Lessee, Lessee's
employees, invitees, customers, or any other person in or about
the Premises, nor shall Lessor by liable for injury to the person
of Lessee, Lessee's employees, agents or contractors, whether
such damage or injury is caused by or results from fire,
explosion, falling plaster, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of
pipes, sprinklers, wires, appliances, plumbing, air conditioning
or lighting fixtures, or from any other cause, whether such
damage or injury results from conditions arising upon the
Premises or upon other portions of the Building, or from other
sources or places, and regardless or whether the cause of such
damage or injury or the means of repairing the same in
inaccessible. Lessor shall not be liable for incorporeal
hereditament including interference or obstruction of light, air
or view. Lessor shall not be liable for any damages arising from
any act or neglect of any other tenant of the Building or the
other portions of the Project or for nonperformance by such
tenant of the Rules and Regulations affecting the Building which
is beyond the reasonable ability of Lessor to control.
Notwithstanding the foregoing Lessor shall be liable for damage
or injury caused by Lessor's active negligence (whether act or
omission) or willful misconduct.
8. DAMAGE OR DESTRUCTION
81. Partial Damage. If the Premises, or so much of the Building
as to cause the Premises to be uninhabitable, are damaged by any
casualty required to be insured against by Lessor, and the damage
(exclusive of any property or improvements installed by Lessee in
the Premises) can be repaired within nine (9) months from the
receipt by Lessor of proceeds from insurance policies applicable
to said casualty, utilizing only such proceeds, without the
payment of overtime, Lessor shall at Lessor's expense repair such
damage (exclusive of any property of Lessee or improvements
installed by Lessee in the Premises) as soon as practicable and
this Lease shall continue in full force and effect.
Notwithstanding the foregoing, Lessor shall not be required to
undertake such repair if (a) the remaining term of the Lease is
less than three (3) years or (b) Lessor, for the remainder of the
Lease Term, either (i) provides Lessee with comparable
alternative space at a cost that does not exceed the cost
previously paid by Lessee under the Lease or (ii) makes provision
sufficient to assure the reimbursement to Lessee of the
additional rent which Lessee will incur above its cost under the
Lease for comparable alternative space. Lessor shall not be
required to undertake repairs resulting from any casualty for
which Lessor is not obligated to maintain insurance, as provided
in the Lease, or which cannot be repaired within nine (9) months
from the receipt of the insurance proceeds. In such event, either
party shall be entitled to terminate this Lease by giving written
notice of termination to the other party.
82. Damage Near End of Term. If the Premises, or so much of the
Building as to cause the Premises to be uninhabitable, are
damaged during the last nine (9) months of the term of this Lease
or any renewal thereof, Lessor may, at Lessor's option, terminate
this Lease as of the date of occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within
thirty (30) days after the date of occurrence of such damage;
provided, however, that if the term of this Lease has been
extended for any reason whatsoever, Lessor's right to terminate
this Lease shall only apply during the last nine (9) months of
the then current term of this Lease.
83. Abatement of Rent, Lessee's Remedies.
8.3.1 If Lessor is obligated or elects to repair the Premises as
provided above, the Base Rent payable for the period during which
such repair continues shall be abated, in proportion to the
degree to which Lessee's use of the Premises is impaired. Except
for such abatement, if any, Lessee shall have no claim against
Lessor for any damage suffered by reason of any such damage,
destruction, repair or restoration.
8.3.2 If Lessor is obligated or elects to repair the Premises
provided above, but does not commence such repair within ninety
(90) days after such obligation shall accrue, subject to an
extension or up to another sixty (60) days for delays beyond the
reasonable control of Lessor, Lessee may, at Lessee's option,
terminate this Lease by giving Lessor written notice of Lessee's
election to do so at any time prior to the commencement of such
repair or restoration, in which event this Lease shall terminate
as of the date of such destruction.
84. Insurance Proceeds Upon Termination. If this Lease is
terminated pursuant to any right given Lessee or Lessor to do so
under this Article 8, all insurance proceeds payable under
Section 7.6 with respect to the damage giving rise to such right
of termination shall be paid to Lessor and any encumbrance of the
Premises, as their interest may appear.
85. Restoration. Lessor's obligation to restore shall not
include the restoration or replacement of Lessee's furnishings,
machinery, equipment, trade fixtures or other personal property
or any improvements or alterations made by Lessee to the
Premises.
9. PERSONAL PROPERTY TAXES
Lessee shall pay prior to delinquency all Real Property
Taxes and other taxes assessed against, levied upon or
attributable to its furnishings, machinery, equipment, trade
fixtures or other personal property contained in the Premises or
elsewhere, and, if required, all improvements to the Premises in
excess of Lessor's "building standard" improvements, provided,
however, that nothing contained herein shall, require Lessor to
insure the accuracy of any segregation of the same for purposes
of Section 3.4.2 hereof. When practicable, Lessee shall cause
said furnishings, machinery, equipment, trade fixtures and all
other personal property to be assessed and billed separately from
the real property of Lessor.
10. UTILITIES
Lessee shall pay for all water, gas, heat, light, power,
janitorial services and other utilities and services supplied to
the Premises, together with any taxes thereon. If any such
services are not separately metered or charged to Lessee, Lessee
shall pay a pro rata proportion, as part of operating expenses,
based on leasable area, of all charges jointly metered or charged
with other premises. Lessor shall not be liable in damages or
otherwise unless due to Lessor's active negligence (whether act
or omission) for any failure or interruption of any utility
services being furnished to the building and no such failure or
interruption shall entitle Lessee to terminate this lease. In no
event shall Lessor be liable for any such failure or interruption
caused by the exercise of governmental authority, strikes, riots,
acts of God, war, adverse weather conditions, fire, flood, or
casualties or acts of third parties beyond Lessor's control. The
operation and control of utilities, air conditioning and any
other energy system is subject to compliance with any government
authority governing the regulation and use of energy systems
within the commercial office or industrial building structure.
Lessee shall not subject any of the mechanical, electrical,
plumbing, sewer or other utility or service systems or equipment
to exercise or use which causes damage to said systems or
equipment. Any such damages to equipment caused by Lessee
overloading such equipment shall be rectified by Lessee, or may,
at Lessor's option, be rectified by Lessor, at Lessee's sole cost
and expense.
11. ASSIGNMENT AND SUBLETTING
111. Restrictions on Assignment. Lessee shall not voluntarily or
by operation of law sublet, assign, transfer, mortgage or
otherwise encumber, or grant concessions, licenses or franchises
with respect to all or any part of Lessee's interest in this
Lease or the Premises without the prior written consent of
Lessor, which shall not be unreasonably withheld. Notwithstanding
the foregoing, Lessee, without Lessor's consent, may assign or
sublet its interest in this Lease or the Premises to an affiliate
or subsidiary of Lessee, subject to the provisions of Section
11.3 hereof.
112. Consents to Transfer of Lease. If Lessee desires at
any time to assign this Lease or to sublet the Premises or any
portion thereof in a transaction that is not exempt under Section
11.1, above, it shall first notify Lessor of its desire to do so
and shall submit in writing to Lessor (i) the name of the
proposed sublessee or assignee; (ii) the nature of the proposed
sublessee or assignee; (iii) the nature of the proposed
sublessee's or assignee's business to be carried on in the
Premises; (iv) the terms and provisions of the proposed sublease
or assignment; (v) such reasonable financial information as
Lessor may request concerning the proposed sublessee or assignee,
including, but not limited to a balance sheet as of a date within
ninety (90) days of the request for Lessor's consent, statements
of income or profit and loss for the two-year period preceding
the request for Lessor's consent and a written statement in
reasonable details as to the business experience of the proposed
sublessee or assignee during the five (5) years preceding the
request for Lessor's consent; and (vi) the name and address of
sublessee's or assignee's present or previous landlord. Lessor
may, as a condition to granting such consent, require that the
obligations of any assignee which is a subsidiary or affiliate of
another corporation be guaranteed by the parent or controlling
corporation. Any sublease, license, concession, franchise or
other permission to use the Premises shall be expressly subject
and subordinate to all applicable terms and conditions of this
Lease. Any purported or attempted assignment, transfer, mortgage,
encumbrance, subletting, license, concession, franchise or other
permission to use the Premises contrary to the provisions of this
Section shall be void and, at the option of Lessor, shall
terminate this Lease.
113. Organizational Changes. If Lessee is a corporation, any
transfer of its stock, or any dissolution, merger or
consolidation, which results in a change in the control of Lessee
from the person or persons owning a majority of its voting stock
immediately prior thereto, or the sale of other transfer of all
or substantially all of the assets of Lessee, shall constitute an
assignment of Lessee's interest in this Lease within the meaning
of this Article 11 and the provisions requiring consent contained
herein. Lessor may require as a condition to giving such consent
that the new controlling person(s) execute a guaranty of this
Lease. If Lessee is a corporation which, under then current
guidelines published by the California Commissioner of
Corporation, is not deemed to be a public corporation, the
transfer, assignment or hypothecation of any interest in such
corporation in the aggregate in excess of 25% (other than a
transfer occurring by operation of law upon the death of the
holder of such interest) shall be deemed an assignment within the
provisions of this Article.
114. Continuing Liability of Lessee. No subletting, assignment,
license, concession, franchise or other permission to use the
Premises shall relieve Lessee of its obligations to pay the rent
or to perform all of the other obligations to be performed by
Lessee hereunder. The acceptance of rent by Lessor from any other
person shall not be deemed to be a waiver by Lessor of any
provisions of this Lease.
115. Options in Favor of Lessor. At any time within ten (10)
days after Lessor's receipt of the information specified in
Section 11.2 above, Lessor may by written notice to Lessee elect
(a) to sublease the Premises or the portion thereof so proposed
to be subleased by Lessee, or to take an assignment of Lessee's
leasehold estate hereunder, upon the same terms as those offered
to the proposed sublessee or assignee, as the case may be; or (b)
to terminate this Lease as to the portion (including all) of the
Premises so proposed to be subleased or assigned, with a
proportionate abatement in the rent payable hereunder; or (c)
disapprove such assignment or subletting. If Lessor does not act
within the ten (10) days, such failure to act is deemed a
disapproval of such request for assignment or subletting.
Notwithstanding the foregoing, the provisions of this Section
11.5 shall not apply to any assignment of the Lease to an entity
surviving any corporate reorganization of Lessee, provided that
said entity has a net worth, as demonstrated by the provisions of
such reasonable financial information as is set forth in Section
11.2(v) hereof, of not less than twenty (20) times the annual
rent in effect on the date of assignment.
116. Assumption by Assignee. Each assignee or transferee, other
than Lessor, shall assume all obligations of Lessee under this
Lease and shall be and remain liable jointly and severally with
Lessee for the payment of the Base Rent and Additional Rent, and
for the due performance of all the terms, covenants, conditions
and agreements to be performed by Lessee hereunder; provided,
however, that a transferee other than an assignee shall be liable
to Lessor for rent only in the amount set forth in the assignment
or transfer. No assignment shall be binding on Lessor unless such
assignee or Lessee shall deliver to Lessor a counterpart of such
assignment and an instrument in recordable form which contains a
covenant of assumption by such assignee satisfactory in substance
and form to Lessor, consistent with the requirements of this
Section 11.6, but the failure or refusal of such assignee to
execute such instrument of assumption shall not release or
discharge such assignee from its liability as set forth above.
117. Lessor's Participation in Rental Overages. Consent by
Lessor to any subletting or assignment shall be conditioned upon
payment by Lessee to Lessor of one-half (1/2) of any Rental
Overages (as hereafter defined) received, directly or indirectly,
by Lessee on account of such assignment or subletting. Lessor's
share of any such Rental Overages shall be paid to Lessor within
ten (10) days after the receipt by Lessee of the consideration
upon which such Rental Overages are based. Failure to pay Lessor
its share of any Rental Overages, or any portion or installment
thereof, shall be deemed to default under this lease, entitling
Lessor to exercise all remedies available to it under law
including, but not limited to, those specified in Article 12 of
this lease. "Rental Overages" shall mean (a) in the case of a
subletting, any net rental income (after deducting all broker
fees and all other costs and expenses paid or incurred by Lessee
in securing the sublease) paid or given, directly or indirectly,
by the sublessee to Lessee pursuant to the sublease for the use
of the Premises, or any portion thereof, over and above the rent
and any additional rent, however denominated, in this Lease,
payable by Lessee to Lessor for the use of the Premises (or
portion thereof), prorating as appropriate the amount payable by
Lessee to Lessor under this Lease if less than all of the
Premises is sublet, and (b) in the case of an assignment or a
sublease, any net payment (after deducting (i) all, brokers fees
and (ii) all other costs and expenses, but not to exceed the sum
of $10,000.00, paid or incurred by Lessee in securing the
sublease) paid or given, directly or indirectly, by the sublessee
or assignee to Lessee solely in exchange for entering into the
sublease or assignment, but shall not include (a) reimbursement
for any security deposit, (b) reimbursement of any improvements,
fixtures or furnishings installed in the Premises by Lessee, (c)
any amounts paid for the business or assets of Lessee, other than
the leasehold estate, or (d) any payment for personal property of
Lessee, including payments made for goodwill, going concern value
or similar intangible personal property. As used herein,
consideration shall include consideration in any form, including
but not limited to, money, property, discounts, services, credits
or any other item or thing of value. Irrespective of the form of
such consideration, Lessor shall be entitled to be paid in cash
in an amount equivalent to the aggregate of the cash portion of
the Rental Overages and the value of any non-cash portion of the
Rental Overages. If any Rental Overages are to be paid or given
in installments, Lessee shall pay each such installment at the
time the same is received by Lessee.
118. Reimbursement of Costs and Fees. Lessee shall reimburse
Lessor for Lessor's reasonable costs and attorneys' fees, in an
amount not to exceed Two Thousand Dollars ($2,000.00), incurred
in conjunction with the processing and documentation of any
assignment, subletting, transfer, change of ownership or
hypothecation of this Lease or Lessee's interest in the Premises.
12. DEFAULTS: REMEDIES
121. Default by Lessee. The occurrence of any one or more of the
following events shall constitute a default of this Lease by
Lessee:
12.1.1 The vacating or abandonment of the Premises by Lessee
combined with the failure to pay rent;
12.1.2 The failure of Lessee to make any payment of rent or any
other payment required to be made by Lessee hereunder, as and
when due, where such failure shall continue for a period of ten
(10) days after written notice thereof from Lessor to Lessee;
provided, however, that any such notice shall be in lieu of, and
not in addition to, any notice required under California Code of
Civil Procedure Section 1161;
12.1.3 The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease (or the
covenants, conditions and restrictions governing the Project) to
be observed or performed by Lessee, other than described in
Section 12.1.2 hereof, where such failure shall continue for a
period of thirty (30) days after written notice thereof from
Lessor to Lessee, or for such lesser period as may be reasonable,
taking in to account the matter complained of and the potential
risk of damage or loss caused thereby (hereinafter the "cure
period"); provided, however, than any such notice shall be in
lieu of, and not in addition to, any notice required under
California Code of Civil Procedure Section 1161; provided
further, that if the nature of Lessee's default is such that more
than the default period is reasonably required for its cure, then
Lessee shall not be deemed to be in default if Lessee commences
such cure within the cure period and thereafter diligently
prosecutes such cure to completion; or
12.1.4 The making by Lessee of any general assignment or general
arrangement for the benefit of creditors; the filing by or
against Lessee of a petition to have Lessee adjudged a bankrupt
or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition for
reorganization or arrangement tinder any law relating to
bankruptcy (unless, in the case of a petition for against Lessee,
the same is dismissed within sixty (60) days); the appointment of
a trustee or receiver to take possession of substantially all of
the Lessee's assets located at the Premises, or of Lessee's
interest in this Lease, where possession is not restored to
Lessee within thirty (30) days; or the attachment, execution or
other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease,
where such seizure is not discharged within thirty (30) days.
122.0 Remedies for Default of Lessee. In the event of any such
default, Lessor may at any time thereafter, upon notice and
demand and without limiting Lessor in the exercise of any other
right or remedy which Lessor may have by reason of such default
or breach:
12.2.1 Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and
Lessee shall immediately surrender possession of the Premises to
Lessor. In such event Lessor shall be entitled to recover from
Lessee:
1. The worth at the time of award of the unpaid rent which has
been earned at the time of termination;
2. The worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss that
Lessee proves could have been reasonably avoided;
3. The worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that Lessee proves could
be reasonably avoided; and
4. Any other amount necessary to compensate Lessor for all the
detriment proximately caused by Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom, including, but not
limited to; the cost of recovering possession of the Premises,
expenses of releasing including necessary renovation and
alteration of the Premises, reasonable attorneys' fees and any
other reasonable cost. The "worth of the time of award" of the
amounts referred to in subparagraphs (A) and (B) above shall be
computed by allowing interest at five (5) percentage points above
the discount rate of the Federal Reserve Bank of San Francisco at
the time of the award. The worth at the time of award of the
amount referred to in subparagraph (C) above shall be computed by
discounting such amount at one (1) percentage point above such
discount rate.
12.2.2 Suspend or discontinue the services specified in Article 10
above, or any thereof, during the continuance of any such default
and any such suspension or discontinuance shall not be deemed or
construed to be an eviction or ejection of Lessee.
12.2.3 Require Lessee to make payment of all rental obligations in
cash or by certified cashiers check
12.2.4 Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the State of California,
including, but no limited to, the remedy provided in California
Civil Code Section 1951.4 to continue this Lease in effect.
123. Default by Lessor.
12.3.1 Lessor shall not be in material default of any of the obliga
tions of Lessor under this Lease unless Lessor fails to perform
such obligations within thirty (30) days after written notice
thereof from Lessee to Lessor, or such lesser period as may be
reasonable, taking into account the matter complained of and the
potential risk of damage or loss caused thereby (hereinafter, the
"cure period") . If the nature of Lessor's default is such that
it cannot be promptly cured, Lessor shall not be in material
default if Lessor promptly commences such cure within such cure
period and thereafter diligently prosecutes the same to
completion. In the event of any such material default by Lessor,
Lessee may pursue any remedy now or hereafter available to Lessee
under the laws or judicial decisions of the State of California,
except that Lessee shall not have the right to terminate this
Lease except as expressly provided herein. Lessee waives except
as herein provided, any Lessor obligations for tenantability of
the Building or Premises.
12.3.2 Lessee shall have the right to deduct from the rent the
expenses of any commercially reasonable repairs to the Premises
done by Lessee on Lessor's behalf, or commercially reasonable
expenditures made by Lessee to cure material defaults by Lessor,
only under the following circumstances:
1. Lessor shall have committed a material default in the
performance of its obligations under this Lease; and
2. Lessee provides Lessor not less than three (3) working days'
prior written notice of Lessee's intention to make any
expenditure that Lessee proposes to make for the purpose of
curing such default, unless the expenditure is for an emergency
health and safety matter and it is not possible to give prior
notice; and
3. Lessee must have been denied reimbursement by its insurance
carrier; and
4. Lessor fails to reimburse Lessee within ten (10) days after
Lessee makes written demand on Lessor for reimbursement of such
expenditure, confirming the satisfaction of Items A-C above.
124. Late Charges. Lessee acknowledges that the late payment by
Lessee to Lessor of rent and other sums due hereunder will cause
Lessor to incur costs not contemplated by this Lease, the exact
amount of which will be extremely difficult to ascertain. Such
costs include, but are not limited to, processing and accounting
charges and late charges which may be imposed on Lessor by the
terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee
within ten (10) days after the same is due, Lessee shall pay to
Lessor a late charge equal to five percent (5%) of such overdue
amount, except that no late charge shall be assessed for the
first delinquency in any calendar year that exceeds ten (10) days
until the delinquency exceeds fifteen (15) days. Lessee
acknowledges that such late charged represents a fair and
reasonable estimate of the cost Lessor will incur by reason of a
late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's default with
respect to such overdue amounts, nor prevent Lessor from
exercising any of the other rights and remedies granted
hereunder.
13. CONDEMNATION OR RESTRICTION ON USE
131. Eminent Domain. If the whole of the Premises or so much
thereof as to render the balance unusable by Lessee shall be
taken under power of eminent domain, this Lease shall
automatically terminate as of the date of such condemnation, or
as of the date possession is taken by the condemning authority,
whichever is earlier. The balance of the Premises shall be
deemed to be unusable if the taking constitutes an interference
with Lessee's business such that Lessee's ability to conduct its
business operations on the Premises in the same manner as they
were conducted prior to the taking is substantially impaired. In
any taking or condemnation, Lessee shall be entitled to receive
the value, if any, of its leasehold interest; and any award made
to Lessee for its relocation expenses, the taking of personal
property and fixtures belonging to Lessee, the interruption of or
damage to Lessee's business and/or for Lessee's unamortized cost
of leasehold improvements. The unamortized portion of the
Lessee's expenditures for improving the Premises shall be
determined by multiplying such expenditures by a fraction, the
numerator of which shall be the number of years of the term of
this Lease which shall not have expired at the time of such
appropriation or taking, and the denominator of which shall be
the number of years of the term of this Lease which shall not
have expired at the time of improving the Premises. Lessee's
right to receive compensation or damages for its fixtures and
personal property shall not be affected in any manner thereby.
132. Abatement of Rent. In the event of a partial taking which
does not result in a termination of this Lease, Base Rent shall
be abated in proportion to that part of the Premises so made
unusable by Lessee.
133. Temporary Taking. No temporary taking of the Premises
and/or of Lessee's rights therein or under this Lease shall
terminate this Lease or give Lessee any right to any abatement of
Base Rent hereunder; and any award made to Lessee by reason of
any such temporary taking shall belong entirely to Lessee and
Lessor shall not be entitled to share therein. A temporary taking
shall be defined as a taking which does not extend beyond a
period of one (1) year in length.
134. Voluntary Sale as Taking. A voluntary sale by Lessor to
any public body or agency having the power or eminent domain,
either under threat of condemnation or while condemnation
proceedings are pending, shall be deemed to be a taking under the
power of eminent domain for the purpose of this Article 13.
14. BROKERS
141. Lessor acknowledges its obligation to pay a single
commission to the broker(s) specified in Item 9 of the Basic
Lease Provisions, if any.
142. Lessor represents and warrants that it has not engaged any
other brokers or finders, in connection with the origin,
negotiation, execution or performance of this Lease and agrees to
indemnify, defend and hold harmless Lessee from any claims for
compensation asserted by any person claiming an entitlement
thereto on account of services rendered for or at the request of
Lessor.
143. Lessee represents and warrants that it has not engaged any
other brokers or finders, in connection with the origin,
negotiation, execution or performance of this Lease and agrees to
indemnify, defend and hold harmless Lessor from any claims for
compensation asserted by any person claiming an entitlement
thereto on account of services rendered for or at the request of
Lessee.
15. LESSOR'S LIABILITY
The term "Lessor" as used herein shall mean only the owner
or owners at the time in question of the fee title or a Lessee's
interest in a ground lease of the Building. In the event of any
transfer of such title or interest, Lessor herein named (and in
case of any subsequent transfers, the then grantor) shall be
relieved from and after the date of such transfers, of all
liability for Lessor's obligations thereafter to be performed;
provided, however, that any funds in the hands of Lessor or the
then grantor at the time of such transfer in which Lessee has an
interest shall be delivered to the grantee, and provided that the
grantee assumes in writing Lessor's obligations pursuant to this
Lease. The obligations contained in this Lease to be performed by
Lessor shall, subject as aforesaid, be binding on Lessor's
successors and assigns only during their respective periods of
ownership.
Lessee agrees that, in the event of any default or breach by
Lessor with respect to any of the terms of the Lease to be
observed and performed by Lessor, (1) Lessee shall look solely to
the then-current Lessor's interest in the Building for the
satisfaction of Lessee's remedies for the collection of a
judgment (or other judicial process) requiring the payment of
money by Lessor; (2) no other property or assets of Lessor, its
partners, shareholders, officers, directors, employees,
investment advisors, or any successor in interest of any of them
(collectively, the "Lessor Parties") shall be subject to levy,
execution or other enforcement procedure for the satisfaction of
Lessee's remedies; (3) no personal liability shall at any time be
asserted or enforceable against the Lessor Parties; and (4) no
judgment will be taken against Lessor Parties except as to their
interest in the Building. The provisions of this section shall
apply only to Lessor and the parties herein described, and shall
not be for the benefit of any insurer nor any other third party.
16. PARKING
During the term of this Lease, Lessee shall have the right
in common with other tenants of the Building (if any) and any
adjacent buildings, to use the parking area available to tenants
of the Building. Lessee's use of such parking facilities or that
of its invitees shall be limited to two hundred ten (210) spaces,
and shall be subject to such rules and regulations as may be
established from time to time by Lessor for the effective use of
such parking facilities. Such rules and regulations may include,
but shall not be limited to: designation of specific areas for
use by invitees of Lessee and Lessor; hours during which parking
shall be available for use; parking attendants; a parking
validation or other control system to prevent parking abuse; and
such other matters affecting the parking operation to the end
that said facilities shall be utilized to maximum efficiency and
in the best interest of Lessor, Lessee and their respective
invitees. Lessor may temporarily close any part of the Common
Area for such periods of time as may be necessary to prevent the
public from obtaining prescriptive rights or to make repair or
alterations. Lessee's right to use any area for parking purposes
shall be subject to restrictions or other limitations resulting
from any laws, statutes, ordinances and governmental rules,
regulations or requirements now in force or which may hereafter
he in force, and no such event shall in any way affect this
Lease, abate rent, relieve Lessee of any liabilities or
obligations under this Lease or give rise to any claim whatsoever
against Lessor; specifically Lessee's right to use any area for
parking purposes shall be subject to any preferential parking
program for participants in any ridesharing program established
by the Lessor. If Lessor reasonably determines that Lessee is
regularly using in excess of the number of parking spaces
specified in Item 10 of the Basic Lease Provisions, Lessor may,
in addition to any other remedy, impose a reasonable charge for
such excess usage, payable by Lessee upon demand.
Notwithstanding the above, Lessee shall be entitled to a total of
thirty (30) parking spaces to be separately identified (at
Lessee's sole cost and expense) as being reserved for Lessee's
exclusive use in a location acceptable to Lessor).
17. GENERAL PROVISIONS
171. Estoppel Certificate.
17.1.1 Either party shall at any time and from time to time upon
not less than ten (10) days prior written notice from the other
party execute, acknowledge and deliver to Lessor a statement in
writing (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) and the date to which the rent and
other charges are paid in advance, if any, and (ii) acknowledging
that there are not, to such party's knowledge, uncured defaults
on the part of the other party, or specifying such defaults if
any are claimed. Any such statement may be conclusively relied
upon by any prospective purchaser or encumbrancer of the
Premises.
17.1.2 Lessee's failure to deliver such statement within such time
shall be conclusive upon Lessee that (i) this Lease is in full
force and effect without modification except as may be
represented by Lessor, (ii) there are no uncured defaults in
Lessor's performance and (iii) not more than one month's Base
Rent or Additional Rent has been paid in advance.
17.1.3 If Lessor desires to finance or refinance the Premises, or
any part thereof, lessee shall deliver to any lender designated
by Lessor such public financial statements of Lessee as may be
reasonably required by such lender.
172. Severability. The invalidity of any provision of this Lease
as determined by a court of competent jurisdiction, shall in no
way affect the validity of any other provision hereof.
173. Time of Essence. Time is of the essence in the performance
of all terms and conditions of this Lease in which time is an
element.
174. Captions. Article and Section captions have been inserted
solely as a matter of convenience and such captions in no way
define or limit the scope or intent of any provision of this
Lease.
175. Notices. All notices and demands of any kind which any
party may be required or desires to serve upon the other parties
under the terms of this Agreement shall be in writing, and shall
be served upon the other parties at the addresses set forth
beside their names. These addresses may be changed by a written
notice given in accordance with this Section 17.5.
Notices may be sent only by the following means: personal
delivery; United States mail, registered or certified, return
receipt requested; telephonic facsimile process; or United States
Postal Service Express Mail, private courier, or private mail
service.
Notices shall be effective only as follow: (i) if
personally delivered, upon actual delivery during normal working
hours of the party to whom notice is given, (ii) if delivered by
United States mail, certified or registered mail (return receipt
requested), then upon actual delivery as is shown by return
receipt, (iii) if delivered by telephonic facsimile process then
upon actual receipt by the party to whom notice is given, with a
confirmation copy sent by United States mail (iv) if delivered by
United States Postal Service Express Mail, by private courier, or
by private mail service, then upon actual receipt during normal
business hours of the party to whom notice is given. No notice
shall be effective except as delivered in a manner prescribed in
this Section 17.5.
176. Waivers. No waiver of any provisions hereof shall be deemed
a waiver of any other provision hereof. Consent to or approval of
any act by one of the parties hereto shall not be deemed to
render unnecessary the obtaining of such party's consent to or
approval of any subsequent act. The acceptance of rent hereunder
by Lessor shall not be a waiver of any preceding breach by Lessee
of any provision hereof, other than the failure of Lessee to pay
the particular rent so accepted, regardless of Lessor's knowledge
of such preceding breach at the time of acceptance of such rent.
177. Holding Over. If Lessee holds over after the expiration or
earlier termination of the term hereof without the express
written consent of Lessor, Lessee shall become a tenant at
sufferance only at a rate one hundred twenty-five percent (125%)
of the Base Rent for the space in effect upon the date of such
expiration or earlier termination (subject to amendment as
provided in Article 3 hereof and prorated on a daily basis), and
otherwise upon the terms, covenants and conditions herein
specified, so far as applicable. Acceptance by Lessor of Base
Rent after such expiration or earlier termination shall not
constitute a consent to a holdover hereunder or result in a
renewal. The foregoing provisions of this Section are in addition
to and do not affect Lessor's right of re-entry or any other
rights of lessor hereunder or as otherwise provided by law.
178. Cumulative Remedies. No remedy or election hereunder shall
be deemed exclusive but shall, wherever possible, be cumulative
with all other remedies at law or in equity.
179. Inurement. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions
of Article 15 hereof, the terms and conditions contained in this
Lease shall bind the parties, their personal representatives,
successors and assigns.
1710. Choice of Law. This lease shall be governed by the laws of
the State of California.
1711. Subordination. This Lease shall, at Lessor's option, be
either superior or subordinate to mortgages or deeds of trust on
the Premises, whether now existing or hereinafter created. Lessee
shall, upon written demand by Lessor, execute such instruments as
may be required from time to time to subordinate the rights and
interest of Lessee under this Lease to the lien of any mortgage
or deed of trust on the Building. Notwithstanding any such
subordination, so long as Lessee is not in default hereunder,
this Lease shall not be terminated or Lessee's quiet enjoyment of
the Premises disturbed in the event such mortgage or deed of
trust is foreclosed. In the event of such foreclosure, Lessee
shall thereupon become a Lessee of, and attorn to, the successor-
in-interest to Lessor on the same terms and conditions as are
contained in this Lease.
1712. Attorneys' Fees. If either party hereto brings an action
to enforce the terms hereof or declare the rights of the parties
hereunder, the prevailing party in any such action, on trial or
appeal, shall be entitled to recover from the other party the
reasonable costs and attorneys' fees incurred in connection with
such action. For purposes of this provision, in any action or
proceeding instituted by a party based upon any default or
alleged default by the other party hereunder, a party shall be
deemed the prevailing party if (i) judgment is entered in favor
of such party or (ii) prior to trial or judgment the other party
shall pay all or any portion of the rent and charges claimed by
such party, eliminate the condition(s) , cease the act(s) or
otherwise cure the omission(s) claimed by such party to
constitute a default by the other party hereunder. Any expenses
incurred in collecting sums due, whether action is brought or
not, and any attorneys' fees incurred in collecting payment will
be charged to the losing party.
1713. Lessor's Access. Lessor and Lessor's agents shall have the
right to enter the Premises at reasonable times for the purpose
of inspecting the same, showing the same to prospective
purchasers, lessees, or lenders, and making such alterations,
repairs, improvements or additions to the Premises or to the
Building as Lessor may deem necessary or desirable. Lessor may at
any time place on or about the Building any ordinary "For Sale"
signs and Lessor may at any time during the last one hundred
eighty (180) days of the term hereof place on or about the
Building any ordinary "For Sale", "For Lease" or similar signs,
all without rebate of rent or liability to Lessee.
1714. Corporate Authority. If Lessee is a corporation, Lessee
shall, at Lessor's request, require that each individual
executing this Lease on behalf of said corporation represent and
warrant that he is duly authorized to execute and deliver this
Lease on behalf of said corporation in accordance with a duly
adopted resolution of the Board of Directors of said corporation
or in accordance with the By-Laws of said corporation, and that
this Lease is binding upon said corporation in accordance with
its terms. Lessee shall also, at Lessor's request, within thirty
(30) days after execution of this Lease, deliver to Lessor a
certified copy of a resolution of the Board of Directors of said
corporation authorizing or ratifying the execution of this Lease.
1715. Surrender or Cancellation. The voluntary or other surrender
of this Lease by Lessee, or a mutual cancellation thereof, shall
not work a merger, and shall terminate all or any existing
subleases, unless Lessor elects to treat such surrender or
cancellation as an assignment to Lessor of any or all of such
subleases.
1716. Entire Agreement.
17.16.1 This Lease, the Exhibits hereto which by this reference are
incorporated herein as though set forth in full herein, and the
Development Agreement covers in full each and every agreement of
every kind or nature whatsoever between the parties hereto
concerning the Premises and the Building, and all preliminary
negotiations and agreements of whatsoever kind or nature are
merged herein. Lessor has made no representations or promises
whatsoever with respect to the Premises or the Building, or the
design configuration of the Project, except those contained
herein, and no other person, firm or corporation has at any time
had any authority from Lessor to make any representations or
promises on behalf of Lessor. If any such representations or
promises have been made by others, Lessee hereby waives all right
to rely thereon. Lessee has made no representations or promises
whatsoever concerning its use or enjoyment of the Premises or the
Building except those contained herein, and no other person, firm
or corporation has at any time had any authority to make any
representations or promises on behalf of Lessee. If any such
representations or promises have been made by others, Lessor
hereby waives all right to rely thereon. No verbal agreement or
implied covenant shall be held to vary the provisions hereof, any
statute, law or custom to the contrary notwithstanding.
17.16.2 Except as otherwise provided herein, nothing expressed or
implied herein is intended or shall be construed to confer upon
or grant any person any rights or remedies under or by reason of
any term or condition contained in this Lease.
1717. Signs. No sign, placard, picture, advertisement, name or
notice shall be inscribed, displayed, printed or affixed to or
near any part of the outside or inside of the Building without
the written consent of Lessor first had and obtained and without
full compliance with all governmental requirements. Lessor shall
have the right to remove any non-complying sign, placard,
picture, advertisement, name or notice without notice to and at
the expense of Lessee. All approved signs shall be installed at
Lessee's sole cost and expense. Lessee further agrees to maintain
any such approved signs, as may be approved by Lessor, in good
condition and repair at all times. Lessee shall not place any
sign on a vehicle or movable or non-movable object in or on
street adjacent to the Project. Lessor further agrees that:
17.17.1 Signs approved by Lessor for future tenants of the project
shall not be superior in size, placement or quality to those
signs approved by Lessor for Lessee.
17.17.2 Lessee shall have exclusive signage rights on the facade of
the Building, except that Lessor may install a smaller additional
sign of a lesser nature on the lower portion of the facade of the
Building provided that (a) such smaller additional sign satisfies
all applicable codes and ordinances and (b) does not jeopardize
the right of Lessee to have its name prominently displayed on the
facade of the Building.
17.17.3 The name "Mentor Corporation" shall be displayed alone in
the upper-most position on all monument signs for the Building in
lettering no smaller than that employed to identify any other
tenants of the Building. Lessee shall pay its pro rata share of
the cost of any monument sign based upon its share of the total
sign area.
1718. Interest on Past Due Obligations. Any amount due from
Lessee to Lessor hereunder which is not paid when due shall bear
interest at five (5) percentage points above the discount rate of
the Federal Reserve Bank of San Francisco at the time of the
award or the maximum allowable under the law, whichever is
greater, from the date due until paid, but the payment of such
interest shall not excuse or cure any default by Lessee. Interest
will accrue from and after the date on which a late charge
payment first becomes payable or, if there is no late charge
payment, from and after ten (10) working days from and after the
date on which the payment first becomes due.
1719. Gender; Number. Whenever the context of this Lease
requires, the masculine gender includes the feminine or neuter,
and the singular number includes the plural.
1720. Recording of Lease. Lessee shall not record this Lease
without the express written consent of Lessor. If such permission
is granted, at the expiration or sooner termination of this
Lease, Lessee shall execute, acknowledge and deliver to Lessor,
within ten (10) days after written demand from Lessor, any quit
claim deed or other document reasonably required by any reputable
title company to remove the cloud of this Lease from the title of
the real property subject to the Lease.
1721. Waiver of Subrogation. Lessee and Lessor each hereby
release and waive any and all rights of recovery against the
other, or against the officers, employees, and agents and
representatives of the other, for loss of or any damage to such
waiving party or its property or the property of others under its
control to the extent that such loss or damage is insured against
under any valid and collectible insurance policy in force at the
time of such loss or damages. Lessee shall, upon obtaining the
policies of insurance required hereunder, give notice to the
insurance carrier or carriers that the foregoing mutual waiver of
subrogation is contained in this Lease.
1722. Confidentiality of Lease. Lessee acknowledges and agrees
that the terms of this Lease are confidential and constitute
proprietary information of Lessor. Disclosure of the terms hereof
could adversely affect the ability of Lessor to negotiate other
leases with respect to the Building and impair Lessor's relation
ship with other tenants of the Building. Lessee agrees that it,
its partners, officers, directors, employees and attorneys, shall
not disclose the terms and conditions of this Lease to any other
person known by Lessee to be a tenant or prospective tenant of
the Building or Premises without the prior written consent of
Lessor. It is understood and agreed that damages would be an
inadequate remedy for the breach of this provision by Lessee, and
Lessor shall have the right to specific performance of this
provision and to injunctive relief to prevent its breach or
continued breach.
Lessor agrees to keep the terms and provisions of
this Lease confidential except as may be required in connection
with the development, construction, improvement, financing,
refinancing, sale or exchange of the Building and the Project.
1723. Quiet Enjoyment. Provided Lessee has performed all of the
terms, covenants, agreements and conditions of this Lease,
including the payment of rent and all other sums due hereunder,
Lessee shall peaceably and quietly hold and enjoy the Premises
for the term hereof, but subject to the provisions and conditions
of this Lease against Lessor and all persons claiming by, through
or under Lessor. Lessee's right to use the Premises and the
Common Area as herein provided shall be subject to restrictions
or other limitations or prohibitions resulting from any laws,
statutes, ordinances and governmental rules, regulations or
requirements now in force or which may hereafter be in force and
no such event shall in any way affect this Lease, abate rent,
relieve Lessee of any liabilities or obligations under this Lease
or give rise to any claim whatsoever against Lessor.
1724. Window Coverage. Lessor shall select a standard miniblind
type and color for all windows to be covered by Lessee. No window
covering, including but not limited to coatings or draperies,
shall be used by Lessee without Lessor's written approval.
1725. Materials Storage Restrictions. Lessee agrees to conduct
its business so as not to violate or exceed the design standards
of the fire protection system or any insurance policies
maintained by Lessor pursuant to Article 7.
1726. No Agency. Neither party is the agent or partner of the
other, and the legal relationship between the parties hereto
shall be governed solely by the terms of this lease when duly
executed by both parties with respect to the transactions
contemplated hereby.
1727. Force Majeure. Notwithstanding any of the items set forth
above, Lessor shall bear no liability, of whatever kind, to
Lessee if, despite Lessor's exercise of due diligence, Lessor's
carrying out of its obligations as defined herein is prevented or
delayed by legal action nor by the exercise of governmental
authority, whether Federal, State, County, or other or by force
majeure, strikes, riots, acts of God, war, adverse weather
conditions, fire, unavoidable casualties, or acts of third
parties beyond Lessor's control.
1728. Building Name. Lessor agrees that the Project within which
the Premises are located will be named the "Santa Barbara
Corporate Center" and will not be "Hollister Corporate Center" or
any other name containing the word "Hollister."
1729. Assignment by Lessor. Lessor shall be entitled to assign
this Lease (or an interest therein) to any person who acquires
title to (or an undivided interest in) the fee ownership of the
Property provided that such assignee assumes and agrees in
writing to be bound by the obligations of the Lessor named in
this Lease from and after the effective date of such assignment.
Lessor and its assignee shall give written notice of any such
assignment, together with a copy of the assignment and assumption
agreement, to Lessee promptly after the assignment has occurred.
1730. Facsimile Signatures. The parties (a) have each agreed to
permit the use, from time to time and where appropriate, of
telecopied signatures to expedite the transaction contemplated by
this Lease; (b) each intend to be bound by his, her, or its
respective telecopied signature; (c) are each aware that the
others will rely on the telecopied signature; and (d) each
acknowledge such reliance and waive any defenses to the
enforcement of the documents effecting the transaction
contemplated by this Lease based on a telecopied signature.
EXHIBITS
A - Building
B - Project
C - Rules and Regulations
Submission of this instrument for examination or signature by the
Lessee does not constitute a reservation of or option for space
and it is not effective as a lease or otherwise until execution
by both the Lessee and the Lessor.
IN WITNESS WHEREOF, the parties hereto have executed this
Lease, consisting of the foregoing Basic Lease Provisions,
Articles 1 through 17 which follow, and any attached Exhibits or
Addendums, as of the date first above written.
LESSOR:
Date: August 19, 1998 SANTA BARBARA CORPORATE CENTER, LLC,
a California limited liability company
By: /s/JEFFREY C. BERMANT
Jeffrey C. Bermant, Manager
Address:
5383 Hollister Avenue, Suite 150
Santa Barbara, California 93111
LESSEE:
Date: August 19, 1998 MENTOR CORPORATION, a Minnesota
corporation
By: /s/GARY E. MISTLIN
Senior Vice President
Chief Financial Officer & Treasurer
Address:
5425 Hollister Avenue
Santa Barbara, California 93111
Exhibit 10(p)
EMPLOYMENT AGREEMENT
This Employment Agreement, dated December 1, 1998, is
between MENTOR Corporation ("COMPANY"), with its executive
offices at 5425 Hollister Avenue, Santa Barbara, California 93111
and TREVOR M. PRITCHARD ("EMPLOYEE") of 17014 Kimwood Court,
Chesterfield, Missouri, 63005.
RECITALS
COMPANY is in the business of manufacturing and selling
medical devices and related products. EMPLOYEE has experience in
this business and possesses valuable skills and experience, which
will be used in advancing COMPANY's interests. EMPLOYEE is
willing to be engaged by COMPANY and COMPANY is willing to engage
EMPLOYEE in an executive capacity responsible for the global
sales, marketing and distribution operations of COMPANY, upon the
terms and conditions set forth in this Agreement.
AGREEMENT
EMPLOYEE and COMPANY, intending to be legally bound, agree as
follows:
1. SERVICES
1.1 General Services.
1.1.1 Company shall employ EMPLOYEE as President,
Mentor Medical, Inc. ("MMI"), a wholly-owned subsidiary
of COMPANY. EMPLOYEE shall perform the duties
customarily performed by one holding such position in a
similar business as that engaged in by COMPANY. To the
extent that they do not reduce the scope of the
responsibilities described above, EMPLOYEE's duties may
change from time to time on reasonable notice, based on
the needs of COMPANY and EMPLOYEE's skills as
determined by COMPANY. These duties shall hereinafter
be referred to as "Services." EMPLOYEE shall report
directly to the President and Chief Operating Officer
of Mentor Corporation.
1.1.2 As President of MMI, EMPLOYEE shall also be an
officer of COMPANY and shall serve in such capacity
without further compensation. In the event that
EMPLOYEE shall from time to time serve COMPANY or MMI
as a director or shall serve in any other office during
the term of this Agreement, EMPLOYEE shall serve in
such capacities without further compensation. If
EMPLOYEE is, for any reason, removed as an officer or
director of either COMPANY or MMI by the Board of
Directors of COMPANY or MMI, such removal shall be
without prejudice to EMPLOYEE's contractual rights
under this Agreement.
1.1.3. EMPLOYEE shall devote his entire working time,
attention, and energies to the business of COMPANY, and
shall not, during the term of this Agreement, be
engaged in any other business activity whether or not
such business activity is pursued for gain, profit or
other pecuniary advantage, without the prior written
consent of the Board of Directors of COMPANY. This
shall not be construed as preventing EMPLOYEE from
investing his assets in a form or manner that does not
require any services on the part of EMPLOYEE in the
operation or affairs of the entities in which such
investments are made, or from engaging in such civic,
charitable, religious, or political activities that do
not interfere with the performance of EMPLOYEE's duties
hereunder.
1.2 Location. EMPLOYEE shall be based in and shall render
services for COMPANY primarily in Santa Barbara, California,
but EMPLOYEE shall undertake such travel as is necessary or
advisable for the effective performance of the duties of the
position.
1.3 Best Abilities. EMPLOYEE shall serve COMPANY
faithfully and to the best of EMPLOYEE's ability. EMPLOYEE
shall use EMPLOYEE's best abilities to perform the Services.
Employee shall act at all times according to what EMPLOYEE
reasonably believes is in the best interests of COMPANY.
1.4 Corporate Authority. Employee, as an executive
officer, shall comply with all laws and regulations
applicable to EMPLOYEE as a result of this Agreement
including, but not limited to, the Securities Act of 1933
and Securities Act of 1934. Prior to the execution of this
Agreement, EMPLOYEE has received and reviewed COMPANY's
Policies and Procedures and COMPANY's Employee Handbook.
EMPLOYEE shall comply with COMPANY's Policies and
Procedures, and practices now in effect or as later amended
or adopted by COMPANY, as required of similarly-situated
executives of COMPANY.
2. TERM
This Agreement shall commence upon the execution of this
Agreement and shall continue until terminated as provided in
Section 4 of this Agreement.
3. COMPENSATION AND BENEFITS
3.1 Compensation. EMPLOYEE's total compensation consists
of base salary, bonus potential, stock options, and medical
and other benefits generally provided to employees of
COMPANY. Any compensation paid to EMPLOYEE shall be
pursuant to COMPANY's policies and practices for exempt
employees and shall be subject to all applicable laws and
requirements regarding the withholding of federal, state
and/or local taxes. Compensation provided in this Agreement
is full payment for Services and EMPLOYEE shall receive no
additional compensation for extraordinary services unless
otherwise authorized. EMPLOYEE's entire compensation
package will be reviewed annually by the Compensation
Committee of the Board of Directors, a practice which is
consistent with COMPANY's Executive Compensation Program.
3.1.1 Base Compensation. COMPANY agrees to pay
EMPLOYEE an annualized base salary of Two Hundred Forty
Thousand Dollars ($240,000.00), less applicable
withholdings, payable in equal installments no less
frequently than semi-monthly.
3.1.2 Cash Incentive Bonus. EMPLOYEE shall be
eligible for a cash incentive bonus, subject to
applicable withholdings and subject to approval by
COMPANY's Compensation Committee and Board of
Directors. Any cash incentive bonus shall accrue and
become payable to EMPLOYEE only if EMPLOYEE is employed
with COMPANY on the last day of the fiscal year for
which the cash incentive bonus is calculated. For the
fiscal year ending March 31, 1999, EMPLOYEE will
receive a pro-rated share (approximately 33-1/3 %) of a
cash incentive bonus of fifty percent (50%) of base
salary calculated on a fiscal year basis, or Forty
Thousand Dollars ($40,000).
3.1.3 Stock Options. EMPLOYEE shall be granted an
option for Forty-Five Thousand (45,000) shares of
COMPANY's common stock subject to a four (4) year
vesting schedule one (1) year after grant at the rate
of twenty-five percent (25%) per year. Options are
exercisable for a period of ten (10) years after
vesting and shall be exercised in accordance with the
Mentor Corporation 1991 Stock Option Plan ("Plan"), as
amended from time to time. EMPLOYEE shall execute the
Option Agreement and otherwise comply with the terms of
the Plan with regard to the options being granted by
this Agreement. This provision is subject to
applicable state and federal securities laws. Based
upon satisfactory performance, under the Plan, COMPANY
expects that EMPLOYEE will qualify for additional
grants of options to acquire common stock of COMPANY in
the April-May 1999 time frame, subject to determination
by the Board of Directors, of an amount which is
consistent with COMPANY's Executive Compensation
Program. Subsequent grants, if any, shall also be
subject to performance considerations as well as the
determination of the Board of Directors.
3.2 Relocation Expenses. COMPANY shall reimburse EMPLOYEE
for relocation expenses, whether or not deductible pursuant
to federal, state and local tax laws. Relocation expenses
shall be limited to reasonable expenses for real estate
commissions incurred upon the sale of EMPLOYEE's primary
residence, house-hunting trips, physical moving expenses
(once upon movement into temporary housing, if necessary,
and once upon movement into permanent housing), closing
costs and fees not to exceed two (2.0) mortgage points,
temporary living expenses of up to Thirty-Five Hundred
Dollars ($3,500.00) per month in the Santa Barbara area,
including commuting trips until Employee and his family
complete a physical relocation to a permanent residence in
the Santa Barbara, California area, and other reasonable out-
of-pocket expenses (other than home decorating expenses,
differences in mortgage rates, costs of comparable housing,
etc.). COMPANY will reimburse EMPLOYEE for federal and
state income taxes EMPLOYEE would not otherwise have
incurred attributable to the receipt of Relocation Expenses
as provided in this Section (generally referred to as
reimbursement on a "gross-up" basis). All reimbursements of
relocation expenses as provided hereunder shall be subject
to EMPLOYEE providing appropriate documentation of such
expenses.
3.3 Business Expenses. COMPANY shall reimburse EMPLOYEE
for business expenses reasonably incurred in performing
Services according to COMPANY's Expense Reimbursement
Policy.
3.4 Additional Benefits. COMPANY shall provide EMPLOYEE
those additional benefits normally granted by COMPANY to its
employees subject to eligibility requirements applicable to
each benefit. COMPANY has no obligation to provide any
other benefits unless provided for in this Agreement.
Currently COMPANY provides major medical and dental benefits
and eligibility to participate in COMPANY's 401(k) plan.
3.5 Vacation. Employee shall accrue vacation equal to
fifteen (15) days per year during the first five (5) years
of service, at the rate of 1.25 days per month. Thereafter,
vacation will accrue at twenty (20) days per year, at the
rate of approximately 1.67 days per month. The time or
times for such vacation shall be selected by Employee and
approved by the Chairman of the Board of Directors of
COMPANY.
3.6 Automobile Expense. COMPANY will permit EMPLOYEE to
select a business automobile (four-door sedan) for lease by
COMPANY for which COMPANY will make lease payments of up to
Seven Hundred Fifty Dollars ($750.00) per month. COMPANY
shall pay applicable taxes on the automobile and shall
obtain motor vehicle insurance in an amount it deems
reasonable in its sole discretion. EMPLOYEE may obtain
additional liability insurance at his own expense if he so
chooses.
4. TERMINATION
4.1 Circumstances Of Termination. This Agreement and the
employment relationship between COMPANY and EMPLOYEE may be
terminated as follows:
4.1.1 Death. This Agreement shall terminate upon
EMPLOYEE's death, effective as of the date of
EMPLOYEE's death.
4.1.2 Disability. COMPANY may, at its option, either
suspend compensation payments or terminate this
Agreement due to EMPLOYEE's Disability if EMPLOYEE is
incapable, even with reasonable accommodation by
COMPANY, of performing the Services because of
accident, injury, or physical or mental illness for
forty-five (45) consecutive days, or is unable or shall
have failed to perform the Services for a total period
of sixty (60) days within a twelve (12) month period,
regardless of whether such days are consecutive. If
COMPANY suspends compensation payments because of
EMPLOYEE's Disability, COMPANY shall resume
compensation payments when EMPLOYEE resumes performance
of the Services. If COMPANY elects to terminate this
Agreement due to EMPLOYEE's Disability, it must first
give EMPLOYEE three (3) days advance written notice.
4.1.3 Discontinuance Of Business. If COMPANY
discontinues operating its business, this Agreement
shall terminate as of the last day of the month on
which COMPANY ceases its entire operations with the
same effect as if that last date were originally
established as termination date of this Agreement.
4.1.4 For Cause. COMPANY may terminate this Agreement
without advance notice for Cause. For the purpose of
this Agreement, "Cause" shall mean any failure to
comply in any material respect with this Agreement or
any Agreement incorporated herein; personal or
professional misconduct by EMPLOYEE (including, but not
limited to, criminal activity or gross or willful
neglect of duty); breach of EMPLOYEE's fiduciary duty
to MMI and/or COMPANY; conduct which threatens public
health or safety, or threatens to do immediate or
substantial harm to MMI's and/or COMPANY's business or
reputation; or any other misconduct, deficiency,
failure of performance, breach or default, reasonably
capable of being remedied or corrected by EMPLOYEE. To
the extent that a breach pursuant to this Section 4.1.4
is curable by EMPLOYEE without harm to MMI and/or
COMPANY and/or either of their reputations, COMPANY
shall, instead of immediately terminating EMPLOYEE
pursuant to this Agreement, provide EMPLOYEE with
notice of such breach, specifying the actions required
to cure such breach, and EMPLOYEE shall have ten (10)
days to cure such breach by performing the actions so
specified. If EMPLOYEE fails to cure such breach
within the ten (10) day period, COMPANY may terminate
this Agreement without further notice. COMPANY's
exercise of its right to terminate under this section
shall be without prejudice to any other remedy to which
COMPANY may be entitled at law, in equity, or under
this Agreement.
4.1.5. For Convenience Of Party. This Agreement and
employment relationship is terminable by either party,
for convenience, with or without cause, at any time
upon thirty (30) days' advance written notice to the
other party. If COMPANY terminates this Agreement for
convenience prior to December 1, 1999, COMPANY shall
pay EMPLOYEE the base compensation to which he would
have been entitled if he had remained employed until
December 1, 1999, less applicable withholdings.
4.2 EMPLOYEE's Rights Upon Termination
4.2.1 Death or Disability. Upon termination of this
Agreement because of death or Disability of EMPLOYEE
pursuant to Sections 4.1.1 or 4.1.2 above, COMPANY
shall have no further obligation to EMPLOYEE under the
Agreement except to distribute to EMPLOYEE's estate or
designated beneficiary any unpaid compensation and
reimbursable expenses, less applicable withholdings,
owed to EMPLOYEE prior to the date of EMPLOYEE's death
or termination due to Disability.
4.2.2 Discontinuance Of Business. Upon termination of
this Agreement because of discontinuation of COMPANY's
business pursuant to Section 4.1.3, COMPANY shall have
no further obligation to EMPLOYEE under the Agreement
except to distribute to EMPLOYEE any unpaid
compensation and reimbursable expenses, less applicable
withholdings, owed to EMPLOYEE prior to the date of
termination of this Agreement.
4.2.3 Termination With Cause. Upon termination of
EMPLOYEE's employment for Cause pursuant to Section
4.1.4, COMPANY shall have no further obligation to
EMPLOYEE under this Agreement except to distribute to
EMPLOYEE:
i. Any compensation and reimbursable expenses
owed to EMPLOYEE by COMPANY through the
termination date, less applicable withholdings;
and
ii. Severance compensation as provided for in
COMPANY's Severance Policy, if any, less
applicable withholdings.
4.2.4 Termination Without Cause. Upon termination of
EMPLOYEE's employment by COMPANY without cause pursuant
to Section 4.1.5, COMPANY shall have no further
obligation to EMPLOYEE under this Agreement except to
distribute to EMPLOYEE:
i. Any compensation and reimbursable expenses
owed by COMPANY to EMPLOYEE through the
termination date, less applicable withholdings;
ii. A pro-rated share of the cash incentive bonus
that would be due to EMPLOYEE if EMPLOYEE had
remained employed with COMPANY through the last
day of the fiscal year for which the cash
incentive bonus is calculated, less applicable
withholdings; and
iii. Severance compensation totaling twelve (12)
months base pay, determined at EMPLOYEE's then-
current rate of base pay. In consideration for
this severance compensation, EMPLOYEE, on behalf
of himself, his agents, heirs, executors,
administrators, and assigns, expressly releases
and forever discharges COMPANY and its successors
and assigns, and all of its respective agents,
directors, officers, partners, employees,
representatives, insurers, attorneys, parent
companies, subsidiaries, affiliates, and joint
venturers, and each of them, from any and all
claims based upon acts or events that occurred on
or before the date on which EMPLOYEE accepts the
severance compensation, including any claim
arising under any state or federal statute or
common law, including, but not limited to, Title
VII of the Civil Rights Act of 1964, 42 U.S.C. ''
2000e, et seq., the Americans with Disabilities
Act, 42 U.S.C. '' 12101, et seq., the Age
Discrimination in Employment Act, 29 U.S.C. ''
623, et seq., the Worker Adjustment and
Retraining Notification Act, 29 U.S.C. '' 2101, et
seq., and the California Fair Employment and
Housing Act, Cal. Gov't Code '' 12940, et seq.
EMPLOYEE acknowledges that he is familiar with
section 1542 of the California Civil Code, which
reads 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 THE DEBTOR.
EMPLOYEE expressly acknowledges and agrees that he
is releasing all known and unknown claims, and
that he is waiving all rights he has or may have
under Civil Code Section 1542 or under any other
statute or common law principle of similar effect.
EMPLOYEE acknowledges that the benefits he is
receiving in exchange for this Release are more
than the benefits to which he otherwise would have
been entitled, and that such benefits constitute
valid and adequate consideration for this Release.
EMPLOYEE further acknowledges that he has read
this Release, understands all of its terms, and
has consulted with counsel of his choosing before
signing this Agreement.
Severance compensation pursuant to this paragraph
shall be in lieu of any other severance benefit to
which EMPLOYEE would otherwise be entitled under
COMPANY's policies in effect on the date of
execution of this Agreement. Severance
compensation shall be paid upon termination of
EMPLOYEE's employment and in one lump sum payment
at the date of termination, less applicable
withholdings.
4.3 Resignation From Board. Upon termination of this
Agreement, EMPLOYEE shall immediately submit his written
resignation from any Board positions to which he has been
appointed or elected.
5. REPRESENTATIONS AND WARRANTIES
5.1 Representations of EMPLOYEE. EMPLOYEE represents and
warrants that EMPLOYEE has all right, power, authority and
capacity, and is free to enter into this Agreement; that by
doing so, EMPLOYEE will not violate or interfere with the
rights of any other person or entity; and that EMPLOYEE is
not subject to any contract, understanding or obligation
that will or might prevent, interfere with or impair the
performance of this Agreement by EMPLOYEE. EMPLOYEE shall
indemnify and hold COMPANY harmless with respect to any
losses, liabilities, demands, claims, fees, expenses,
damages and costs (including attorneys' fees and court
costs) resulting from or arising out of any claim or action
based upon EMPLOYEE's entering into this Agreement.
5.2 Representations of COMPANY. COMPANY represents and
warrants that it has all right, power and authority, without
the consent of any other person, to execute and deliver, and
perform its obligations under, this Agreement. All
corporate and other actions required to be taken by COMPANY
to authorize the execution, delivery and performance of this
Agreement and the consummation of all transactions
contemplated hereby have been duly and properly taken. This
Agreement is the lawful, valid and legally binding
obligation of COMPANY enforceable in accordance with its
terms.
5.3 Materiality of Representations. The representations,
warranties and covenants set forth in this Agreement shall
be deemed to be material and to have been relied upon by the
parties hereto.
6. COVENANTS
6.1 Nondisclosure and Invention Assignment. EMPLOYEE
acknowledges that, as a result of performing the Services,
EMPLOYEE shall have access to confidential and sensitive
information concerning COMPANY's business including, but not
limited to, their business operations, sales and marketing
data, and manufacturing processes. EMPLOYEE also
acknowledges that in the course of performing the Services,
EMPLOYEE may develop new product ideas or inventions as a
result of COMPANY's information. Accordingly, to preserve
COMPANY's confidential information and to assure it the full
benefit of that information, EMPLOYEE shall, as a condition
of employment with COMPANY, execute COMPANY's standard form
of Employee Confidentiality Agreement attached hereto as
Exhibit A, and execute updated versions of the Employee
Confidentiality Agreement as it may be modified from time to
time by COMPANY and as may be required of similarly-situated
executives of COMPANY. The Employee Confidentiality
Agreement is incorporated herein by this reference.
EMPLOYEE's obligations under the Employee Confidentiality
Agreement continue beyond the termination of this Agreement.
6.2 Covenant Not to Compete. In addition to the provisions
of the Employee Confidentiality Agreement, EMPLOYEE shall
abide by the following covenant not to compete if COMPANY,
at its option upon the termination of this Agreement
(regardless of the reason for the termination), exercises
this Covenant Not to Compete. COMPANY shall notify EMPLOYEE
within ten (10) days of termination of this Agreement of its
intention to exercise this option and make an additional
payment to EMPLOYEE of six (6) months' base pay determined
at EMPLOYEE's last rate of pay with COMPANY. EMPLOYEE
agrees that for a period of one (1) year following the
termination of this Agreement, he shall not directly or
indirectly for EMPLOYEE, or as a member of a partnership, or
as an officer, director, stockholder, employee, or
representative of any other entity or individual, engage,
directly or indirectly, in any business activity which is
the same or similar to work engaged in by EMPLOYEE on behalf
of COMPANY within the same geographic territory as
EMPLOYEE's work for COMPANY and which is directly
competitive with the business conducted or to EMPLOYEE's
knowledge, contemplated by COMPANY at the time of
termination of this Agreement, as defined in the Employee
Confidentiality Agreement incorporated into this Agreement
by reference. EMPLOYEE may accept employment with an entity
competing with COMPANY only if the business of that entity
is diversified and EMPLOYEE is employed solely with respect
to a separately-managed and separately-operated part of that
entity's business that does not compete with COMPANY. Prior
to accepting such employment, EMPLOYEE and the prospective
employer entity shall provide COMPANY with written
assurances reasonably satisfactory to COMPANY that EMPLOYEE
will not render services directly or indirectly to any part
of that entity's business that competes with the business of
COMPANY.
6.3 Covenant to Deliver Records. All memoranda, notes,
records and other documents made or compiled by EMPLOYEE, or
made available to EMPLOYEE during the term of this Agreement
concerning the business of COMPANY, shall be and remain
COMPANY's property and shall be delivered to COMPANY upon
the termination of this Agreement or at any other time on
request.
6.4 Covenant Not To Recruit. EMPLOYEE shall not, during
the term of this Agreement and for a period of one (1) year
following termination of this Agreement, directly or
indirectly, either on EMPLOYEE's own behalf, or on behalf of
any other individual or entity, solicit, interfere with,
induce (or attempt to induce) or endeavor to entice away any
employee associated with COMPANY to become affiliated with
him or any other individual or entity.
7. CERTAIN RIGHTS OF COMPANY
7.1 Announcement. COMPANY shall have the right to make
public announcements concerning the execution of this
Agreement and certain terms thereof.
7.2 Use of Name, Likeness and Biography. COMPANY shall
have the right (but not the obligation) to use, publish and
broadcast, and to authorize others to do so, the name,
approved likeness and approved biographical material of
EMPLOYEE to advertise, publicize and promote the business of
COMPANY and its affiliates, but not for the purposes of
direct endorsement without EMPLOYEE's consent. An "approved
likeness" and "approved biographical material" shall be,
respectively, any photograph or other depiction of EMPLOYEE,
or any biographical information or life story concerning the
professional career of EMPLOYEE.
7.3 Right to Insure. COMPANY shall have the right to
secure in its own name, or otherwise, and at its own
expense, life, health, accident or other insurance covering
EMPLOYEE, and EMPLOYEE shall have no right, title or
interest in and to such insurance. EMPLOYEE shall assist
COMPANY in procuring such insurance by submitting to
examinations and by signing such applications and other
instruments as may be required by the insurance carriers to
which application is made for any such insurance.
8. ASSIGNMENT
Neither party may assign or otherwise dispose of its rights
or obligations under this Agreement without the prior written
consent of the other party except as provided in this Section.
COMPANY may assign and transfer this Agreement, or its interest
in this Agreement, to any affiliate of COMPANY or to any entity
that is a party to a merger, reorganization, or consolidation
with COMPANY, or to a subsidiary of COMPANY, or to any entity
that acquires substantially all of the assets of COMPANY or of
any division with respect to which EMPLOYEE is providing services
(providing such assignee assumes COMPANY's obligations under this
Agreement). EMPLOYEE shall, if requested by COMPANY, perform
EMPLOYEE's duties and Services, as specified in this Agreement,
for the benefit of any subsidiary or other affiliate of COMPANY.
Upon assignment, acquisition, merger, consolidation or
reorganization, the term ACOMPANY@ as used herein shall be deemed
to refer to such assignee or successor entity. EMPLOYEE shall
not have the right to assign EMPLOYEE's interest in this
Agreement, any rights under this Agreement, or any duties imposed
under this Agreement, nor shall EMPLOYEE or his spouse, heirs,
beneficiaries, executors or administrators have the right to
pledge, hypothecate or otherwise encumber EMPLOYEE's right to
receive compensation hereunder without the express written
consent of COMPANY.
9. RESOLUTION OF DISPUTES
In the event of any dispute arising out of or in connection
with this Agreement or in any way relating to the employment of
EMPLOYEE which leads to the filing of a lawsuit, the parties
agree that venue and jurisdiction shall be in Santa Barbara
County, California. The prevailing party in any such litigation
shall be entitled to an award of costs and reasonable attorneys'
fees to be paid by the losing party.
10. GENERAL PROVISIONS
10.1 Notices. Notice under this Agreement shall be
sufficient only if personally delivered by a major
commercial paid delivery courier service or mailed by
certified or registered mail (return receipt requested and
postage pre-paid) to the other party at its address set
forth in the signature block below or to such other address
as may be designated by either party in writing. If not
received sooner, notices by mail shall be deemed received
five (5) days after deposit in the United States mail.
10.2 Agreement Controls. Unless otherwise provided for in
this Agreement, the COMPANY's policies, procedures and
practices shall govern the relationship between EMPLOYEE and
COMPANY. If, however, any of COMPANY's policies, procedures
and/or practices conflict with this Agreement (together with
any amendments hereto), this Agreement (and any amendments
hereto) shall control.
10.3 Amendment and Waiver. Any provision of this Agreement
may be amended or modified and the observance of any
provision may be waived (either retroactively or
prospectively) only by written consent of the parties.
Either party's failure to enforce any provision of this
Agreement shall not be construed as a waiver of that party's
right to enforce such provision.
10.4 Governing Law. This Agreement and the performance
hereunder shall be interpreted under the substantive laws of
the State of California.
10.5 Force Majeure. Either party shall be temporarily
excused from performing under this Agreement if any force
majeure or other occurrence beyond the reasonable control of
either party makes such performance impossible, except a
Disability as defined in this Agreement, provided that the
party subject to the force majeure provides notice of such
force majeure at the first reasonable opportunity. Under
such circumstances, performance under this Agreement which
related to the delay shall be suspended for the duration of
the delay provided the delayed party shall resume
performance of its obligations with due diligence once the
delaying event subsides. In case of any such suspension,
the parties shall use their best efforts to overcome the
cause and effect of such suspension.
10.6 Remedies. EMPLOYEE acknowledges that because of the
nature of COMPANY's business, and the fact that the services
to be performed by EMPLOYEE pursuant to this Agreement are
of a special, unique, unusual, extraordinary, and
intellectual character which give them a peculiar value, a
breach of this Agreement shall cause substantial injury to
COMPANY for which money damages cannot reasonably be
ascertained and for which money damages would be inadequate.
EMPLOYEE therefore agrees that COMPANY shall have the right
to obtain injunctive relief, including the right to have the
provisions of this Agreement specifically enforced by any
court having equity jurisdiction, in addition to any other
remedies that COMPANY may have.
10.7 Severability. If any term, provision, covenant,
paragraph, or condition of this Agreement is held to be
invalid, illegal, or unenforceable by any court of competent
jurisdiction, that provision shall be limited or eliminated
to the minimum extent necessary so this Agreement shall
otherwise remain enforceable in full force and effect.
10.8 Construction. Headings and captions are only for
convenience and shall not affect the construction or
interpretation of this Agreement. Whenever the context
requires, words, used in the singular shall be construed to
include the plural and vice versa, and pronouns of any
gender shall be deemed to include the masculine, feminine,
or neuter gender.
10.9 Counterpart Copies. This Agreement may be signed in
counterpart copies, each of which shall represent an
original document, and all of which shall constitute a
single document.
10.10 No Adverse Construction. The rule that a contract is
to be construed against the party drafting the contract is
hereby waived, and shall have no applicability in construing
this Agreement or the terms hereof.
10.11 Entire Agreement. With respect to its subject matter,
namely, the employment by COMPANY of EMPLOYEE, this
Agreement (including the documents expressly incorporated
therein, such as the Employee Confidentiality Agreement),
contains the entire understanding between the parties, and
supersedes any prior agreements, understandings, and
communications between the parties, whether oral, written,
implied or otherwise, including, but not limited to, the
offer of employment letter dated November 19, 1998.
10.12 Assistance of Counsel. EMPLOYEE expressly
acknowledges that he was represented by counsel of his own
choosing in connection with the negotiation and drafting of
the terms of this Agreement.
The parties execute this Agreement as of the date stated above:
TREVOR M. PRITCHARD MENTOR CORPORATION
/s/TREVOR M. PRITCHARD /s/ANTHONY R. GETTE
Trevor M. Pritchard Anthony R. Gette
President and Chief Operating
Officer
NOTICE ADDRESS: NOTICE ADDRESS:
17014 Kimwood Court 5425 Hollister Avenue
Chesterfield, Missouri 63005 Santa Barbara, California
93111
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