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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - K
[x] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended March 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from __________ to __________
Commission file number 0-11363
Chad Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
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California 95-3792700
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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9445 De Soto Avenue, Chatsworth, CA 91311
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (818) 882-0883
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x_ No __
Indicate by check mark if disclosures of delinquent filers pursuant to
Item 405 of Regulation SK (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
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The aggregate market value of the voting shares held by non-affiliates of
the Registrant on June 17, 1996 (based on the average over-the-counter bid and
asked prices of such stock on such date) was $172,175,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of June 17, 1996:
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Common Shares 9,632,185
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Portions of the Registrant's definitive Proxy Statement for its September
10, 1996, Shareholders' meeting ("Proxy Statement") (which Proxy Statement has
not been filed as of the date hereof) are incorporated into Part III as set
forth herein. Portions of the Registrant's Annual Report to Shareholders for
the year ended March 31, 1996 ("Annual Report") are incorporated into Part II
as set forth herein and only such portions of the Annual Report as are
specifically incorporated by reference are thereby made a part of this Annual
Report on Form 10-K.
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PART I
Item 1. Business
Chad Therapeutics, Inc. ("CHAD" or the "Company") was organized in August,
1982, to develop, produce and market respiratory care devices designed to
improve the efficiency of oxygen delivery systems for both home and hospital
treatment of patients who require supplemental oxygen. The Company introduced
its first respiratory care device in the market in June, 1983, and has
introduced additional respiratory care devices in subsequent years.
Pulmonary Disease and Oxygen Therapy
The Company was organized to pursue the development and marketing of
devices which improve the efficiency of systems used to administer oxygen to
patients requiring supplemental oxygen. These are primarily patients suffering
from chronic obstructive pulmonary diseases.
Chronic obstructive pulmonary diseases (COPD) are progressive,
debilitating conditions that affect millions of Americans, severely limiting
their activities and shortening their lives. Such conditions, which include
chronic bronchitis, emphysema and severe asthma, decrease the capacity of the
lungs to oxygenate the blood. To make up for this deficiency, it is common
medical practice to administer supplemental oxygen, usually on a 24 hours per
day basis in an amount sufficient to increase blood oxygenation to near normal
levels.
A report issued in September, 1981, by the National Heart, Lung and Blood
Institute of the National Institutes of Health (NIH) stated that chronic
obstructive pulmonary diseases were the fastest rising cause of death in the
United States, accounting for approximately 2.5% of all deaths and costing more
than $15 billion a year in health care and lost time and wages. The NIH Report
estimated that in 1981 there were approximately 9 million people in the United
States suffering from chronic bronchitis and emphysema.
More recently, the Epidemiology and Statistics Unit of the American Lung
Association reported that in 1989 there were 14.6 million Americans suffering
from COPD. This report also notes that the death rate from COPD has increased
by 28.5 percent in the decade from 1979 to 1989. Some authorities estimate that
as many as 20 million Americans who are now affected by COPD will eventually
require supplemental oxygen.
Although precise data are not available, various individual and institutional
sources and reports estimate that there are more than 1 million home care
patients receiving supplementary
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administration of oxygen. Total dealer revenues for home oxygen therapy were
estimated at $1.5 billion for 1993. Medicare, which accounts for about 60% of
home oxygen dealers' revenues, expected to spend almost $1 billion in 1993 for
home oxygen as compared to $826 million in 1992 according to officials of the
Health Care Financing Administration. Market revenues for home oxygen have
grown consistently at 8-10% per year for the past five years. This is due to
the increasing number of COPD patients as well as the move to home care and out
of hospitals. Overall hospital discharge rates relative to COPD declined 67%
over the period 1983 - 1989.
Chronic obstructive pulmonary diseases are also prevalent in other
countries, particularly in some European nations where the incidence is higher
than in the United States. The potential international market for home oxygen
is expected to grow to 150% of the U.S. market before the end of the decade.
The primary oxygen supply for home patients is provided from cylinders
containing compressed gaseous oxygen (5-10% of users), reservoirs containing
liquid oxygen (20-25%) or by means of concentrators which concentrate oxygen
from the ambient air (65-75%).
Standard oxygen delivery systems are characteristically inefficient,
permitting over 67% of the oxygen supply delivered to the patient to be wasted,
primarily because the oxygen is administered steadily to the patient, even
while he is exhaling. Since the normal breathing cycle consists of an
exhalation period which is approximately twice as long as the inhalation
period, at least two-thirds of the oxygen from this continuous flow system is
wasted. Furthermore, it is generally accepted that the oxygen breathed in
during the first one-third of the inhalation period provides most of the
oxygenation benefit to the patient.
In June, 1989, the home oxygen market changed. A new procedure for
payment by Medicare for home oxygen services became effective. This new
procedure provides a prospective flat fee monthly payment based solely on the
patient's prescribed oxygen requirement and disregards modality, the type of
system in use. Prior to that time, dealers were reimbursed on the basis of
total oxygen delivered by the dealer and reimbursement also varied based on the
modality used and other variables. The prior procedure tended to encourage
waste and inefficiency. Consequently, with the incentive to operate
efficiently, inexpensive concentrators have grown in popularity because of low
cost and less frequent servicing requirements. At the same time interest
heightened in oxygen conserving devices which can extend the life of oxygen
supplies and reduce service calls by dealers.
There is also a separate fixed allowance from Medicare for patients who
need to be mobile and therefore require portable oxygen systems.
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Mobility has increased in importance as the treatment of pulmonary
patients has moved away from hospitals and into home care. Also, leading
authorities now state that maintenance and improvement of the patient's quality
of life should be the major objective in the treatment of COPD. Maintaining
quality of life and compliance with prescribed exercise programs require that
the patient be as mobile as possible and thus increase the demand for portable
oxygen equipment.
CHAD's Products
Recognizing the need for more efficient oxygen delivery systems, the
Company has pursued, since its inception, the development and marketing of
devices which are designed to conserve oxygen. The benefits of such
improvements include substantial cost savings and increased mobility for
ambulatory patients who require portable oxygen supplies. These devices extend
the life of oxygen supplies, make possible more compact and longer lasting
portable systems and thereby improve the quality of life for home oxygen
patients.
OXYMIZER and OXYMIZER Pendant Oxygen-Conserving Devices. In June, 1983,
the Company began marketing its first product, the OXYMIZER disposable
oxygen-conserving device, a unique, patented, disposable device developed to
provide up to 4 to 1 savings of oxygen when used with any oxygen supply source.
The OXYMIZER device contains a collapsible reservoir which captures
incoming oxygen delivered during expiration and prevents its waste. The oxygen
captured in this reservoir is then inhaled by the patient during the first
instant of his next inspiration. The OXYMIZER device thus both conserves
oxygen and provides the patient with an extra rich supply of oxygen at the
beginning of the inhalation period when it can be most effectively utilized.
Extensive clinical testing and trials over the past ten years have
repeatedly demonstrated that patients using the OXYMIZER device are able to
achieve equivalent blood oxygenation levels while using significantly less
oxygen.
There have been more than 32 clinical evaluations from institutions
worldwide, that have confirmed the efficacy and oxygen savings realized by
patients who use the OXYMIZER devices.
The greater efficiency provided by the OXYMIZER devices over standard
oxygen delivery systems also permits home health care patients to achieve
greater mobility by enabling them to use smaller portable cylinders or by
obtaining two to four times the life from standard sized portable cylinders.
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For home oxygen dealers the disposable OXYMIZER devices afford the cost
advantages of oxygen conservation without capital investment in expensive
equipment.
In hospitals the OXYMIZER devices are reported to be frequently used for
maintenance of certain patients requiring higher flow levels of oxygen without
having to resort to uncomfortable oxygen masks.
The Company is pursuing a marketing strategy which emphasizes the cost
savings, efficiencies and level of patient comfort associated with the use of
the OXYMIZER devices. See "Marketing" and "Competition".
The OXYMIZER Pendant device is similar to the OXYMIZER device, except that
its reservoir is located in a "pendant" which hangs over the patient's chest
rather than under the nose. The OXYMIZER Pendant has a more traditional
appearance than the OXYMIZER. The Company began marketing the OXYMIZER Pendant
in August, 1984, and to date sales have approximated those achieved by the
OXYMIZER device. Total sales of these two devices now account for
approximately 3% of the Company's sales.
OXYMATIC Electronic Oxygen Conservers. The Company began marketing the
OXYMATIC conserver in March, 1986. This product is a small electronic device,
designed for use with portable oxygen systems. The OXYMATIC Model 201 conserver
electronically senses the optimal moment in the breathing cycle for delivery of
oxygen and at that moment, releases a very brief pulse of oxygen to the
patient. The OXYMATIC conserver concentrates the administration of oxygen
during the first one-third of the inhalation phase, when oxygen is most
efficiently utilized. Through its optimal efficiency the OXYMATIC electronic
conserver makes possible oxygen savings ratios of from 4 to 1 up to 12 to 1
depending on the user's breathing rate. In clinical experience the average
saving has been shown to be 7 to 1 - about twice the efficiency of any known
competitive product. There have been at least twelve controlled clinical trials
and studies of patient groups using the OXYMATIC conserver, all of which have
confirmed its efficacy and efficiency.
In May, 1995, the Company introduced the new OXYMATIC Model 301 which
replaces the Model 201. This new model incorporates improved electronics,
providing a longer battery life and other improvements which make it more user
friendly.
In June, 1993, the Company introduced a different version of the OXYMATIC
conserver, the OXYMATIC - 2400. This model incorporates substantial
improvements and additional features, such as an alarm system, which are
designed to allow it to be used 24 hours a day with both primary and portable
oxygen sources. The OXYMATIC - 2400 conserver affords the same oxygen savings
ratios as the original OXYMATIC conserver.
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The OXYMATIC conservers now account for approximately 41% of the
Company's sales, with 9% of these sales relating to sales of the OXYMATIC -
2400. These amounts do not include OXYMATIC devices sold as part of OXYLITE
systems.
OXYLITE Complete Portable Oxygen System. The Company also markets eight
OXYLITE complete portable oxygen systems, each of which is available with
either the OXYMATIC Model 301 conserver or the OXYMATIC - 2400 conserver.
These systems combine the OXYMATIC electronic oxygen conserver with small,
lightweight oxygen cylinders and lightweight pressure regulators in an
attractive carrying pouch.
The OXYMATIC conserver extends the time the contents of the cylinders will
last by an average of seven times. They provide ambulatory patients with
greater mobility and less weight. These systems offer a superior alternative to
commonly used liquid oxygen systems for mobile patients and are more cost
effective for homecare dealers to supply. OXYLITE system and cylinder sales
now account for approximately 48% of the Company's total sales, of which 46%
represents the sales value of OXYMATIC conservers.
OXYFILL Refilling Systems. In March, 1996, the Company began marketing
the OXYFILL oxygen cylinder refilling systems which were designed to reduce the
home oxygen dealers costs of providing ambulatory oxygen to patients using the
Company's OXYLITE portable oxygen systems. These refilling systems allow the
home care dealer to refill cylinders at his base facility or in the patient's
driveway and thereby reduce purchases and inventory of oxygen cylinders, reduce
refill costs and gain more control over their oxygen business. To date, there
have been limited sales of the OXYFILL refilling systems.
OXYCOIL Coiled Oxygen Tubing. In January, 1986, the Company began
marketing the OXYCOIL coiled oxygen tubing, a device which replaces the
standard supply tubing for the OXYMIZER devices, the OXYMATIC conserver or
conventional nasal cannulas. The OXYCOIL tubing is a convenience and safety
device which can be used with any oxygen system to help keep the supply tubing
out of the patients' way, thus minimizing the tripping and tangling problems
associated with standard supply tubing. OXYCOIL tubing sales now account for
approximately 1% of the Company's total sales.
The technology for each of the devices described above belongs to the
inventors thereof. The Company has acquired exclusive licenses to manufacture
and market the OXYMIZER device, the OXYMIZER Pendant device, the OXYMATIC
conservers and the OXYCOIL tubing. See "Licensing and Related Agreements".
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Other Products. The Company also offers a variety of ancillary products
which support the principal oxygen conserving products. These include oxygen
cylinders of various sizes and compositions, regulators, cannulas and
connecting tubing and assorted carrying pouches, which account for less than 9%
of total sales.
Products Under Development
It is the Company's objective to continuously improve and add to its
oxygen conserving and related products. In April, 1996, the Company entered
into an exclusive development contract with an outside vendor to develop unique
oxygen therapy products. If the project is successful, the Company intends to
begin marketing the first product late in fiscal 1998. No assurance can be
given that any products developed pursuant to this contract will be
successfully marketed or that the Company will ever derive any revenues or
earnings from the sale of such product.
Research and Development
For the year ended March 31, 1996, the Company expended approximately
$113,000 on research and development and has expended approximately $1,053,000
since its inception in August, 1982. The Company operates in an industry which
is subject to rapid technological change, and its ability to compete
successfully depends upon, among other things, its ability to stay abreast or
ahead of new technological developments. Accordingly, the Company expects to
expend increasing amounts for the development or acquisition of new products or
the improvement of existing products. In the next fiscal year the Company will
expend $400,000 on the project discussed above in addition to other amounts on
smaller projects. The Company conducts research and development in the
electronics area internally and also utilizes the services of outside firms and
consultants for its research and development activities.
Licensing and Related Agreements
The Company has entered into license agreements (the "Inventors License
Agreements") with Brian L. Tiep, M.D., Robert E. Phillips and Ben A. Otsap, the
inventors of the OXYMIZER device (the "Inventors"), with respect to that device
and each of the additional oxygen conserving devices developed by them. At the
present time, the Company has licensed the OXYMIZER device, the OXYMIZER
Pendant device and the OXYMATIC conserver, thereby acquiring exclusive rights
to manufacture and market such products.
Pursuant to the Inventors License Agreements, the Inventors grant to the
Company an exclusive license (with the right to grant sublicenses) to
manufacture, use and sell such device. The Inventors License Agreements
provide that the Company pay royalties
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to the Inventors on the net proceeds of sales of the device covered by the
agreement at the rate of 6% on amounts up to $10 million and 3% on amounts of
$10 million or more. The Inventors License Agreements also provide that the
Company pay minimum advance royalties for each license year in the amount of
$10,000 for each year. The advance payments are to be applied toward royalties
payable for the corresponding license year, and any amounts paid by the Company
under one agreement (except those on the OXYMIZER device), in excess of the
minimum, may be applied by the Company against the minimum payable under any
other such agreement. The Company is obligated to prosecute and defend, at its
own expense, any infringement suits related to manufacture or sale of each
device covered by any such agreement.
Each Inventors License Agreement continues until the expiration of the
last to expire of any patent covering the related device or, if no patent
issues, for 17 years. The Inventors may terminate the Inventors License
Agreements at an earlier date if the Company is in arrears for 60 days on any
royalty payment or if the Company defaults in performing any other term of the
agreement and fails to cure such default within 60 days.
Manufacturing and Sources of Supply
The Company tests and packages its products in its own facility. Some of
its other manufacturing processes are conducted by other firms and the Company
expects to continue using outside firms for certain manufacturing processes for
the foreseeable future. All outside manufacturing is conducted under the
supervision and control of the Company and with tooling provided by the
Company.
Pursuant to an oral agreement, the Company purchases semi- finished units
of the OXYMIZER and OXYMIZER Pendant devices from a supplier in Southern
California. Final assembly and packaging are completed at the Company's
facilities. The Company does not contemplate entering into a formal written
agreement for these units. This arrangement is terminable at will by either
party. The Company believes that other injection molding facilities would be
available in the event of a termination of this arrangement.
Pursuant to a written agreement, the Company purchases the OXYMATIC 2400
conserver from a supplier in Southern California. This arrangement is
terminable with notice by either party. The Company believes that other
electronic assembly facilities would be available in the event of a termination
of the agreement.
Production of the OXYMATIC Model 301 is being handled internally with
only a portion of electronic assembly being subcontracted outside the Company.
The Company is currently
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subcontracting with two electronic assembly facilities and believes that other
facilities would be available in the event of an interruption of supply from
the existing facilities.
Pursuant to oral agreements, the Company purchases components for its
OXYLITE systems (other than the OXYMATIC conserver) from several suppliers.
These arrangements are terminable at will and the Company believes other
suppliers would be available in the event of termination of these arrangements.
The Company is not aware of any shortages of materials necessary for the
manufacture of its products. The Company provides customers the right to
return merchandise for credit but does not provide extended payment terms.
Marketing
The Company's products are designed to reduce the cost of health care
while maintaining or enhancing the therapeutic benefits to the patient, and
improving the user's quality of life. The Company's marketing efforts have
focused primarily on providing home oxygen suppliers with products that they
can utilize to increase their revenues and profits.
Homecare dealers have significantly increased their revenues by using the
Company's OXYLITE complete portable oxygen systems or by locally assembling
small portable systems incorporating the Company's OXYMATIC conserver as a
vehicle to increase their revenues by attracting new and additional patients to
their business. These lightweight, long-lasting portable systems have both
high professional and patient acceptance which allows the supplier promoting
these products to attract new and additional customers. Medical professionals,
who frequently refer patients to specific home oxygen suppliers, find that
these systems assist patients in more easily complying with prescribed exercise
programs and help them to achieve the therapeutic benefits of maintaining a
lifestyle as normal as possible. Patients, most of whom are free to select
their oxygen supplier, are receptive to changing suppliers in order to obtain
equipment that will allow them to travel and maintain their quality of life.
Approximately 80% of all home oxygen patients are covered by Medicare.
Since June 1989, home oxygen suppliers have been reimbursed by Medicare on a
fixed monthly fee basis. The monthly reimbursement amount does not vary, as
in the past, with either the type of oxygen delivery equipment provided or the
amount of oxygen supplied. Since monthly per patient revenues are fixed, home
oxygen suppliers can only increase their per patient profitability by reducing
costs. The Company's oxygen conserving products allow these suppliers to
decrease their costs while providing their patients with improved therapeutic
benefits and quality of life.
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While the home respiratory care dealer remains the primary focus of the
Company's marketing efforts, this focus was augmented recently by a major
effort to increase professional awareness. Promotional programs were initiated
which targeted respiratory care physicians, nurses and therapists. A Medical
Advisory Committee was formed composed of nine physicians who are among the
world's leading respiratory authorities.
The Company markets its products directly to home oxygen suppliers
throughout the U.S. The Company currently has a Marketing Director, a Director
of Professional and Government Relations, a Promotion Manager, a marketing
assistant, a National Sales Manager and six in-house customer service
representatives who are in regular and frequent telephone sales contact with
customers and potential customers. In the past, the Company extensively tested
the use of manufacturer representatives. It has subsequently found that
dealers, professionals, and users can be provided better service via direct
contact with the in-house customer service representatives. The Company also
utilizes extensive direct mail, trade show attendance, and trade advertising to
promote the benefits of the products to home care dealers. Additionally, the
Company actively seeks to increase professional awareness of its products
through professional advertising and participation in professional meetings.
Home oxygen therapy markets outside the United States are, in most cases,
at a much earlier stage of development. In many countries, these patients are
cared for in domiciliary settings. As the trend develops to move patients into
home care, opportunities for the Company's products should increase. Sales of
the OXYMATIC conserver in Europe, Canada and Japan have become an important
part of the Company's business. Based on industry market research projections,
the Company expects the market potential to increase to 150% of the U.S.
potential within the current decade.
The Company has entered into exclusive distributorship agreements in
Germany, Canada, Japan, and Australia. The Company's distributor in Germany
covers the entire European Community. The Company also has non-exclusive
distributors in many other countries.
Sales outside of the United States will subject the Company to certain
risks, including those involving political and economic factors, interruption
of shipments of products, currency fluctuations and devaluations and
governmental restrictions and regulations.
Customers, Backlog and Orders
The Company presently has an active list of approximately 4,100 dealer and
hospital customers. Based upon information developed from various lists the
Company believes that there are
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approximately 5,000 to 6,000 oxygen dealers and 3,000 general hospitals in the
United States which are potential customers or customer sources for the
Company. Accordingly, the Company believes it is unlikely that it will be
dependent upon a limited number of domestic customers.
Financial Information Relating to Foreign and
Domestic Operations and Export Sales
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1996 1995 1994
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Sales (thousands):
United States $17,832 12,651 8,073
Europe 961 718 747
Other 1,566 1,149 650
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Total $20,359 14,518 9,470
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Gross profit:
United States $10,630 6,717 4,334
Europe 436 340 351
Other 773 545 324
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Total $11,879 7,602 5,009
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All identifiable assets are located in the United States.
The Company does not presently have, and does not intend in the future to
have, any backlog of orders for any of its products. The Company presently has
and intends to maintain a large enough inventory to ship all of its products
immediately upon receipt of orders. The Company believes that such an
inventory is necessary to meet the requirements of its customers.
Competition
The Company is not aware of any firm which markets an oxygen conserving
device directly competitive with the OXYMIZER devices. The Company is aware of
several demand valve, electronically controlled devices currently being
marketed. Of these devices, those that are the principal competitors of the
OXYMATIC conserver are targeted primarily to a specific segment of the market
- - liquid oxygen usage. The Company does not know the levels of sales achieved
by the companies marketing these systems.
Two companies, Nellcor/Puritan Bennett and Sunrise/De Vilbiss, market
smaller (5.5 lbs.) portable liquid oxygen systems incorporating simple oxygen
conserving devices which double the useful life of these systems. Although
these units allow longer ambulation and/or reduce the weight of portable liquid
oxygen, they are heavier than the smallest OXYLITE system and provide less
ambulatory time due to the greater efficiency of the OXYMATIC conserver, which
provides at least double the oxygen savings of
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other conservers. Also both units are more expensive than OXYLITE systems and
still require the supplier to make frequent and costly oxygen deliveries. The
Company does not know the levels of sales achieved by the companies marketing
these systems.
There are several other types of portable oxygen systems which compete
with the Company's OXYLITE systems but do not utilize oxygen conserving
devices. Aluminum and steel oxygen cylinders with continuous flow are utilized
by some oxygen suppliers as portable systems. Although they do provide users
with some portability, their size and bulk limits their use by patients who
need or want to be truly ambulatory. The most commonly used of these cylinders
is approximately three feet high, weighs over 20 lbs., and provides an average
patient with less than 5 hours of oxygen. The OXYMATIC conserver, which
provides an average oxygen savings of 7 to 1, allows the use of smaller,
lighter cylinders and thus provide greater mobility.
Until the availability of OXYLITE systems and the previously cited
changes in Medicare oxygen reimbursement, liquid oxygen was the modality of
choice for truly mobile users. Portable liquid oxygen systems which weigh 8 to
10 lbs., provide an average patient with 6 to 8 hours of oxygen, compared to
the smallest OXYLITE system which weighs 4.5 lbs. and provides an average
patient with 10.5 hours of oxygen. These systems are more costly than OXYLITE
systems and require frequent and expensive (usually weekly) deliveries of bulk
liquid oxygen to the patient's home. Although many oxygen suppliers continue
to use and re-use existing inventories of liquid oxygen equipment to service
ambulatory patients, purchases of new liquid oxygen equipment by home care
dealers is decreasing.
Patents and Trademarks
The Company regards the products that it develops or licenses and its
manufacturing processes as proprietary and relies on a combination of patents,
trademarks, trade secret laws and confidentiality agreements to protect its
rights in its products. A U.S. patent has been issued covering the original
OXYMIZER device, the OXYMIZER Pendant device and the OXYMATIC conserver. A
number of foreign patent applications pertaining to the Company's activities
have also been issued.
The Company pursues a policy of obtaining patents for appropriate
inventions related to products marketed or manufactured by the Company. The
Company considers the patentability of products developed for it to be
significant to the success of the Company. To the extent that the products to
be marketed by the Company do not receive patent protection, competitors may be
able to manufacture and market substantially similar products. Such
competition could have an adverse impact upon the Company's business.
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There can be no assurance that patents, domestic or foreign, will be
obtained with respect to the Company's products, or that, if issued, they will
provide substantial protection or be of commercial benefit to the Company. In
addition, the patent laws of foreign countries may differ from those of the
United States as to the patentability of the Company's products and processes
and, accordingly, the degree of protection afforded by foreign patents may be
more or less than in the United States.
In the United States, although a patent has a statutory presumption of
validity, the issuance of a patent is not conclusive as to such validity or as
to the enforceable scope of its claims therein. The validity and
enforceability of a patent can be attacked by litigation after its issuance by
the U.S. Patent and Trademark Office. If the outcome of such litigation is
adverse to the owner of the patent in that the patent is held to be invalid,
other parties may then use the invention covered by the patent. Accordingly,
there can be no assurance that patents with respect to the Company's products,
if issued, will afford protection against competitors with similar products,
nor can there be any assurance that the patents will not be infringed upon or
designed around by others.
The Company has obtained U.S. registration for the trademarks "OXYMIZER",
"OXYMATIC", "CHAD" and "OXYCOIL" and has filed an application for the trademark
"OXYFILL". A series of foreign applications to register the trademark
"OXYMIZER" in a number of countries of commercial interest to the Company have
been filed.
Governmental Regulation
The commercialization of the OXYMIZER and OXYMATIC devices is subject to
the Federal Food, Drug and Cosmetic Act (the "Food and Drug Act") and to
regulations issued thereunder. The Company anticipates that commercialization
of other devices which it intends to market will also be subject to the Food
and Drug Act. The Food and Drug Act is administered by the FDA, which has
authority to regulate the marketing, manufacturing, labeling, packaging and
distribution of products subject to the Food and Drug Act. In addition, there
are requirements under other federal laws and under state, local and foreign
statutes which may apply to the manufacture and marketing of the Company's
products. The Medical Device Amendments of 1976 to the Food and Drug Act (the
"Amendments") and the Safe Medical Device Act of 1990 significantly extended
the authority of the FDA to regulate the commercialization of medical devices.
The Amendments established three classifications of medical devices: Class I,
Class II and Class III. With respect to all three classes, the general
provisions of the Food and Drug Act prohibit adulteration and misbranding. A
medical device may be adulterated if the device is or could be adversely
affected by its methods of manufacture, storage or
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packaging. A medical device may be misbranded if its labeling is false or
misleading or if its labeling does not contain specific information required by
law applicable to such type of device. In addition, failure to register a
medical device covered under the Food and Drug Act with the FDA will render it
misbranded under the Food and Drug Act.
All manufacturers of medical devices must register with the FDA and, with
their initial registration, list all medical devices produced by them. This
listing must be updated annually. In addition, prior to commercial distribution
of additional devices, the manufacturer must file with the FDA and receive
approval prior to the commencement of such commercial distribution, a notice
setting forth certain information about the device, including the
classification into which the manufacturer believes it falls.
Class I devices are subject only to the general controls concerning
adulteration, misbranding, good manufacturing practices, record keeping and
reporting requirements. Class II devices must, in addition, comply with
performance standards as promulgated by the FDA.
The Company has registered with the Bureau of Medical Devices of the FDA
as a Medical Device Establishment and with the Department of Health Services of
the State of California as a Medical Device Manufacturer. In addition, the
Company has developed procedures to comply with FDA standards concerning good
manufacturing practices, record keeping and reporting.
The Company has filed notification submissions pursuant to Section 510(k)
of the Food and Drug Act of its intent to market the OXYMIZER, the OXYMIZER
Pendant, the OXYMIZER Flow Restrictor, the OXYMATIC conserver and the OXYCOIL;
it has been granted permission by the FDA to market the OXYMIZER and the
OXYMIZER Pendant as Class I devices. Permission has been granted to market the
OXYMATIC and the OXYCOIL as Class II devices.
Employees
As of June 17, 1996, CHAD had 70 full-time and no part-time employees.
Forty-four of the Company's employees are engaged in manufacturing and the
remainder are engaged in marketing, sales, administration and management. None
of the Company's employees are represented by unions; the Company believes its
employee relations are satisfactory. The Company will employ additional
personnel in all phases of its activities as required by the growth in its
activities. The number of additional personnel will be dependent on sales
levels of individual products.
15
<PAGE> 16
Item 2. Properties.
The Company's principal offices and manufacturing facilities are situated
in premises located in Chatsworth, California and consist of 16,714 square
feet, at a monthly rental fee of $16,246 pursuant to a lease expiring in
January, 1997. The Company has entered into a lease for new facilities which
commences in July, 1996. The new facilities, also located in Chatsworth,
California, consist of 55,500 square feet at a monthly rental rate of $24,500
and management feels this larger facility should adequately handle the
Company's needs for the foreseeable future. The Company does not own any real
property and does not anticipate acquiring any in the foreseeable future.
Item 3. Legal Proceedings.
The Company may become involved in legal proceedings in the ordinary
course of business. The Company maintains product liability insurance in an
amount deemed customary in the industry for protection of the Company against
potential product liability claims. There are no pending legal proceedings
which, in the opinion of management, would have a material adverse effect on
the Company's financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Stockholder
Matters.
The information required herein is hereby incorporated by reference
to the information contained under the caption "Corporate Data" in the
Company's Annual Report.
Item 6. Selected Financial Data.
The information required herein is hereby incorporated by reference
to the information contained under the caption "Selected Financial Data" in the
Company's Annual Report.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The information required herein is hereby incorporated by reference
to the information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report.
16
<PAGE> 17
Item 8. Financial Statements and Supplementary Data.
The information required herein is hereby incorporated by reference
to the Financial Statements and the Notes thereto contained in the Company's
Annual Report.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required herein is hereby incorporated by reference
to the information appearing under the captions "Election of Directors" and
"Executive Officers" in the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission.
Item 11. Executive Compensation.
The information required herein is hereby incorporated by reference
to the information appearing under the caption "Compensation of Directors and
Executive Officers" in the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required herein is hereby incorporated by reference
to the information appearing under the caption "Voting Securities and Principal
Holders Thereof" in the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions.
None.
17
<PAGE> 18
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.
(a) (1) Financial Statements.
Included in Part II of this Report:
Independent Auditors' Report
Balance Sheets -- March 31, 1996 and 1995
Statements of Operations -- Years ended
March 31, 1996, 1995 and 1994.
Statements of Shareholders' Equity --
Years ended March 31, 1996, 1995 and 1994.
Statements of Cash Flows --
Years ended March 31, 1996, 1995 and 1994.
Notes to Financial Statements.
(a) (2) Financial Statement Schedules.
None.
(3) Exhibits.
<TABLE>
<S> <C>
3.1 Articles of Incorporation of the Registrant,
as amended*****
3.2 Bylaws of the Registrant, as amended*
10.3 OXYMIZER License Agreement, as amended, with
Robert E. Phillips, Brian L. Tiep, M.D. and
Ben A. Otsap*
10.5 Pulser System License Agreement, as amended,
with Robert E. Phillips, Brian L. Tiep, M.D.
and Ben A. Otsap. (The Pulser System is now
called the OXYMATIC.)*
10.7 OXYMIZER Pendant License Agreement, as
amended, with Robert E. Phillips, Brian L.
Tiep, M.D. and Ben A. Otsap*
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C>
10.20 OXYCOIL tubing License Agreement with
Mary Smart (licensed under the name
Respi-Coil).***
10.22 Lease on real property at 9445 DeSoto Avenue,
Chatsworth, California****
10.23 Summary plan description for Chad Therapeutics,
Inc. Employee Savings and Retirement Plan****
10.24 1994 Stock Option Plan
13.1 Annual Report to Shareholders for the year
ended March 31, 1996.
28.1 Letter from the FDA authorizing the Company
to market the OXYMIZER oxygen conserving
device as a Class 1 device.*
28.2 Letter from the FDA authorizing the Company
to market the OXYMIZER Pendant oxygen
conserving device as a Class 1 device.**
28.5 Letter from the FDA authorizing the Company
to market the OXYMATIC electronic oxygen
conserver as a Class 2 device.***
28.6 Letter from the FDA authorizing the Company
to market the OXYCOIL coiled oxygen tubing
as a Class 2 device.***
</TABLE>
(b) Reports on Form 8-K - None filed.
(c) Index to Exhibits.
(d) Financial Statement Schedules - None
- ---------------
* Previously filed as an Exhibit to the Registrants'
Registration Statement on Form S-18, File No. 2-83926.
** Previously filed as an Exhibit to the Registrants' Annual
Report on Form 10-K for the year ended March 31, 1984.
*** Previously filed as an Exhibit to the Registrants' Annual
Report on Form 10-K for the year ended March 31, 1986.
**** Previously filed as an Exhibit to the Registrants' Annual
Report on Form 10-K for the year ended March 31, 1993.
***** Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the year ended March 31, 1994.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on the 25th day of June, 1996.
CHAD THERAPEUTICS, INC.
By /S/Charles R. Adams
---------------------------------------
Charles R. Adams, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C> <C>
/S/Charles R. Adams Chief Executive June 25, 1996
- ----------------------- Officer and Director
Charles R. Adams (Principal Executive
Officer)
/S/Francis R. Fleming President, Chief June 25, 1996
- ----------------------- Operating Officer and
Francis R. Fleming Director
/S/Earl L. Yager Senior Vice President, June 25, 1996
- ----------------------- Chief Financial
Earl L. Yager Officer and Secretary
and Director (Principal
Financial and Accounting
Officer)
/S/David L. Cutter Director June 25, 1996
- -----------------------
David L. Cutter
/S/John C. Boyd Director June 25, 1996
- -----------------------
John C. Boyd
/S/Norman Cooper Director June 25, 1996
- -----------------------
Norman Cooper
/S/Philip Wolfstein Director June 25, 1996
- -----------------------
Philip Wolfstein
</TABLE>
20
<PAGE> 21
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Index Sequentially
Exhibit No. Document Numbered Page
- ----------- ------------- -------------
<S> <C>
13.1 Annual Report to Shareholders for
the year ended March 31, 1996
10.25 Lease on real property at 21622
Plummer Street, Chatsworth, California
</TABLE>
21
<PAGE> 1
Exhibit 10.25
STANDARD INDUSTRIAL LEASE AGREEMENT
between
TCEP II PROPERTIES JOINT VENTURE, a Texas joint venture
as Landlord
and
CHAD THERAPEUTICS, INC., a California corporation
as Tenant
Premises Location: 21622 Plummer Street
Chatsworth, California 91311
<PAGE> 2
STANDARD INDUSTRIAL LEASE AGREEMENT
THIS STANDARD INDUSTRIAL LEASE AGREEMENT (this "Lease"), dated this
12th day of April, 1996, is made and entered into by and between TCEP II
PROPERTIES JOINT VENTURE, a Texas joint venture, hereinafter referred to as
"Landlord", and CHAD THERAPEUTICS, INC., a California corporation, hereinafter
referred to as "Tenant".
BASIC LEASE PROVISIONS
1. Area of Premises: Approximately 54,361 rentable square feet.
(Paragraph 1.1)
2. Building Address: 21622 Plummer Street
Chatsworth, California 91311
(Paragraph 1.1)
3. Commencement Date: The earlier of (a) Tenant's commencement of
business operations from the Premises, or (b) July 1, 1996.
4. Term: Eighty-four (84) months. (Paragraph 1.2)
5. The amount of the First Month's Rent is as follows: (Paragraph 2. 1)
<TABLE>
<S> <C> <C>
(a) Base Rent (See Paragraph 2.2 for adjustments thereto) $24,500.00
(b) Taxes $2,989.86
(c) Insurance $1,630.83
(d) Operating Expenses $3,261.66
First Month's Rent Total $32,382.35
</TABLE>
6. Security Deposit: $24,500.00. (Paragraph 2.3)
7. Tenant's Proportionate Share: The Premises comprise forty-one and
60/the percent (41.60%) of the Building (such percentage shall be
Tenant's Proportionate Share). (Paragraph 2.4)
8. Use of Premises: Light manufacturing, assembly, warehousing
and distribution of medical care products,
all subject to compliance with all laws,
codes, rules and regulations (Paragraph 3.1)
9. Parking: 150 automobiles, 75 of which may be on a reserved basis in
accordance with the terms of Paragraph 3.3. (Paragraph 3.3)
10. Liability insurance amount: $3,000,000.00.
(Paragraph 12.3.1)
11. Tenant's Address
For Notices: 9445 De Soto Avenue
Chatsworth, California 91311
(Paragraph 22.21)
12. Landlord's Address For
Payments and Notices: 5801 S. Eastern Avenue, Suite 100
Los Angeles, California 90040
(Paragraph 22.21)
-1-
<PAGE> 3
13. Brokers: The Seeley Company (Robert Valencia) and
Trammell Crow So. Cal, Inc.
(Paragraph 22.24)
14. Exhibits:
"A" Site Plan of Project
"B" Work Letter and Construction Agreement
"C" Additional Provisions
The paragraphs of the Lease identified above in parentheses are those
provisions where references to particular items from the Basic Lease Provisions
appear, and such items are incorporated into the Lease as part thereof. In the
event of any conflict between any Basic Lease Provision and the Lease, the
former shall control.
-2-
<PAGE> 4
1. PREMISES AND TERM.
1.1 LEASE OF PREMISES. Landlord leases to Tenant, and Tenant
hires from Landlord, certain premises (the "Premises") consisting of the
rentable area shown in Item 1 of the Basic Lease Provisions within a building
(the "Building") described in Item 2 of the Basic Lease Provisions. The
location of the Building and Premises are shown on the site plan attached
hereto as "Exhibit A" and incorporated herein. The "Project" shall refer to
the land shown on the site plan (the "Land") together with such additions and
deletions to the Land as Landlord may from time to time designate, plus all
buildings and improvements located thereon.
1.2 TERM. The term of this Lease shall commence on the
"Commencement Date" specified in or established pursuant to Item 3 of the Basic
Lease Provisions, and except as otherwise provided herein, shall continue in
full force and effect through the number of months provided in Item 4 of the
Basic Lease Provisions (the "Term"), provided, however, that if the
Commencement Date is a date other than the first day of a calendar month, the
Term shall consist of the remainder of the calendar month including and
following the Commencement Date, plus said number of full calendar months.
1.3 CONDITION OF PREMISES.
Tenant acknowledges that it has inspected and accepts the Premises in
their present condition as suitable for the purpose for which the Premises are
leased. Notwithstanding the preceding sentence, Landlord shall make the
following repairs, alterations or improvements prior to delivery of possession
of the Premises to Tenant: (a) repair and/or replace the existing mezzanine
floor within the Premises as reasonably necessary to be functional and comply
with law; and (b) provide an electrical meter and switch of 480 volts, 3 phase,
4 wire, with at least 600 amps service to the Premises ("Initial Electrical
Service") (collectively, "Landlord's Work"). The taking of possession by
Tenant shall be conclusive to establish that the Premises are in good and
satisfactory condition when possession is taken, except that Landlord hereby
agrees to use all commercially reasonable efforts to replace the Initial
Electrical Service with an electrical meter and switch of 480 volts, 3 phase, 4
wire, with at least 1000 amps service to the Premises ("Modified Electrical
Service") on or before the later of (i) Tenant's commencement of business
operations from the Premises, or (ii) July 1, 1996 (the "Modified Electrical
Service Outside Date"). If Landlord is unable to provide the Modified
Electrical Service to the Premises on or before the Modified Electrical Service
Outside Date, and such failure is not due in whole or in part to any act or
omission of Tenant or Tenant's Parties, then for each day of delay in
Landlord's delivery of the Modified Electrical Service beyond the Modified
Electrical Service Outside Date, Tenant shall accrue one (1) day of Rent
credit. Landlord shall coordinate with Tenant's contractor and/or architect in
connection with the installation of the Modified Electrical Service. Tenant
further acknowledges that no representations or promises were made by Landlord
or any agent of Landlord to repair, alter, remodel or improve the Premises,
except as expressly set forth in this Lease. Notwithstanding the foregoing,
Landlord represents and warrants that the exterior roof covering the Premises
is in good condition and repair (except to the extent any defects in the roof
exist as a result of any act or omission of Tenant or Tenant's Parties [defined
below], in which event Tenant shall be solely responsible for the repair
thereof); provided, however, if Tenant does hot deliver written notice to
Landlord of any defects with respect to the condition of the roof before the
end of the twenty-fourth (24th) month of the Term, Tenant shall be deemed to
have inspected and accepted the condition of the roof in its present condition
as suitable for the purpose for which the Premises are leased and the
correction of any subsequently discovered defects shall be the obligation of
Tenant (except as
-3-
<PAGE> 5
expressly provided to the contrary in Paragraph 5.1 below). If a breach of the
foregoing warranty exists and Tenant timely (i.e., within 24 months) delivers
written notice to Landlord of the same setting forth in reasonable detail a
description of such breach, Landlord shall, as Tenant's sole and exclusive
remedy, rectify the same at Landlord's sole expense.
The Commencement Date shall be the date provided in Item 3 of the
Basic Lease Provisions. If this Lease is executed before the Premises become
vacant or otherwise available or if any present tenant or occupant of the
Premises holds over, and Landlord cannot acquire possession of the Premises in
time to deliver them by the Commencement Date, or if any required repairs,
alterations or improvements are not substantially completed by Landlord prior
to the Commencement Date, this Lease shall not be void or voidable, and
Landlord shall not be deemed to be in default hereunder, nor shall Landlord be
liable for any loss or damage directly or indirectly arising out of or
resulting from such holdover. Tenant agrees to accept possession of the
Premises at such time as Landlord is able to tender the same, which date shall
thenceforth be deemed the Commencement Date. After the Commencement Date,
Tenant shall, upon demand, execute and deliver to Landlord a letter of
acceptance of delivery of the Premises specifying the Commencement Date.
Notwithstanding the foregoing, (a) if Landlord is unable to deliver possession
of the Premises to Tenant with Landlord's Work substantially completed on or
before April 15, 1996 (the "Initial Target Delivery Date"), and such failure is
not due in whole or in part to any Force Majeure Event (as defined below) or
any act or omission of Tenant or Tenant's Parties, then the Commencement Date
shall be delayed by one (1) day for each day of delay beyond the Initial Target
Delivery Date that Landlord has failed to deliver possession of the Premises to
Tenant with Landlord's Work, substantially completed, and (b) if Landlord is
unable to deliver possession of the Premises to Tenant with Landlord's Work
substantially completed on or before May 15, 1996 (the "Initial Outside Date"),
and such failure is not due in whole or in part to any Force Majeure Event or
any act or omission of Tenant or Tenant's Parties, then Tenant shall have the
right to terminate this Lease by delivering thirty (30) days advance written
notice to Landlord within ten (10) days following the Initial Outside Date;
provided, however, if Landlord delivers possession of the Premises to Tenant
with Landlord's Work substantially completed on or before the expiration of the
thirty (30) day period following Tenant's delivery of termination notice,
Tenant's termination notice shall be null and void and this Lease shall remain
in full force and effect. If Tenant fails to timely deliver any such
termination notice within said ten (10) days following the Initial Outside
Date, Tenant shall have no further right of termination with respect to the
Initial Outside Date and this Lease shall continue in full force and effect.
The Initial Target Delivery Date and the Initial Outside Date shall be extended
for each day of delay resulting from any Force Majeure Event or any act or
omission of Tenant or Tenant's Parties. Notwithstanding the occurrence of any
Force Majeure Event, if Landlord fails to deliver possession of the Premises to
Tenant with Landlord's Work substantially completed on or before June 15, 1996
("Ultimate Outside Date"), and such failure is not due in whole or in part to
any act or omissions of Tenant or Tenant's Parties (each such day of delay to
result in one (1) day of delay of the Ultimate Outside Date), then Tenant shall
have the right to terminate this Lease upon ten (10) days advance written
notice to Landlord within five (5) days following the Ultimate Outside Date;
provided, however, if Landlord delivers the Premises with Landlord's Work
substantially completed on or before the expiration of the ten (10) day period
following Tenant's delivery of the termination notice, Tenant's termination
notice shall be null and void and this Lease shall remain in full force and
effect. If Tenant fails to timely deliver any such termination notice within
said ten (10) days following the Ultimate Outside Date, Tenant shall have no
further right of termination under this Paragraph 1.3. The term "Force Majeure
Event" shall mean
-4-
<PAGE> 6
fire, earthquake, or other acts of God, strikes, boycotts, war, riot,
insurrection, embargoes, shortages of equipment, labor or materials, delays in
issuance of governmental permits or approvals, weather delays or any other
cause beyond the reasonable control of Landlord.
1.4 EARLY ENTRY INTO PREMISES. Tenant may enter into the Premises
upon receipt of Landlord's consent, solely for the purpose of installing the
Tenant Improvements (as defined in Exhibit "B") and furniture, special flooring
or carpeting, trade fixtures, telephones, computers, photocopy equipment, and
other business equipment. Such early entry will not advance the Commencement
Date so long as Tenant does not commence business operations from any part of
the Premises. All of the provisions of this Lease shall apply to Tenant during
any early entry, including the indemnity in Paragraph 12.1, but excluding the
obligation to pay Rent unless and until Tenant has commenced business
operations in the Premises, whereupon Rent shall commence. Landlord may revoke
its permission for Tenant's early entry if Tenant's activities or workers
unreasonably interfere with the completion of Landlord's Work. If Tenant is
granted early entry, Landlord shall not be responsible for any loss, including
theft, damage or destruction to any work or material installed or stored by
Tenant at the Premises or for any injury to Tenant or its agents, employees,
contractors, subcontractors, subtenants, assigns or invitees (collectively,
"Tenant's Parties"). Landlord shall have the right to post appropriate notices
of non-responsibility and to require Tenant to provide Landlord with evidence
that Tenant has fulfilled its obligation to provide insurance pursuant to
paragraphs 7(c) and 12.3 of this Lease.
2. RENT AND SECURITY DEPOSIT.
2.1 RENT. Rent (as defined below) shall accrue hereunder from the
Commencement Date. The amounts per month provided in Item 5(a) of the Basic
Lease Provisions, as adjusted pursuant to Paragraph 2.2 ("Base Rent"), plus the
"Additional Rent" (as defined in Paragraph 2.5 below) shall collectively
constitute the "Rent". The first full calendar month's Base Rent shall be due
and payable upon execution of this Lease in the total amount shown in Item 5(a)
of the Basic Lease Provisions. A like monthly installment, subject to the
adjustments described herein, shall be due and payable without demand on or
before the first day of each calendar month succeeding the Commencement Date
during the Term, except that Rent for any fractional calendar month at the
commencement or end of the Term shall be prorated on a daily basis.
2.2 ADJUSTMENT OF BASE RENT. Base Rent shall be increased on the
first day of the thirteenth (13th), twenty-fifth (25th), thirty- seventh
(37th), forty-ninth (49th), sixty-first (61st) and seventy-third (73rd) months
as follows:
<TABLE>
<CAPTION>
Month of Term Base Rent
<S> <C>
13-24 $25,480.00 per month
25-36 $26,499.20 per month
37-48 $27,559.17 per month
49-60 $28,661.53 per month
61-72 $29,808.00 per month
73-84 $31,000.32 per month
</TABLE>
2.3 SECURITY DEPOSIT. Tenant shall deposit with Landlord upon
execution of this Lease the sum provided in Item 6 of the Basic Lease
Provisions ("Security Deposit"), which sum shall be held by Landlord in its
general fund, without obligation for interest, as security for the performance
of Tenant's covenants and obligations under this Lease, it being expressly
understood and agreed that the Security Deposit is not an advance rental
deposit or a measure of Landlord's damages in case of Tenant's default. Upon
the occurrence of any event of default by Tenant,
-5-
<PAGE> 7
Landlord may, without prejudice to any other remedy provided herein or provided
by law, use the Security Deposit to the extent necessary to make good any
arrears of Rent or other payments due Landlord hereunder, all of which shall be
deemed to be Rent, and any other damage, injury, expense or liability caused by
such event of default; and Tenant shall pay to Landlord on demand the amount so
applied in order to restore the Security Deposit to its original amount. Any
remaining balance of the Security Deposit shall be returned by Landlord to
Tenant within fourteen (14) days after termination of this Lease, provided all
of Tenant's obligations under this Lease have been fulfilled.
2.4 TENANT'S PROPORTIONATE SHARE. "Tenant's Proportionate Share",
as used in this Lease, shall mean that portion of the cost of the applicable
item that is obtained by multiplying such cost of the applicable item by a
fraction, the numerator of which is the rentable square footage of the Premises
and the denominator of which is the rentable square footage of the Building,
which fraction is set forth as a percentage figure in Item 7 of the Basic Lease
Provisions.
2.5 ADDITIONAL RENT.
2.5.1 DEFINITION. In addition to the Base Rent set forth in
Paragraph 2.1, Tenant agrees to pay Tenant's Proportionate Share of (a) "Taxes"
as defined in and payable by Landlord pursuant to Paragraph 4.1 below, (b)
Landlord's costs of providing insurance on the Project pursuant to Paragraph
12.2 below, and (c) "Operating Expenses" as defined in and incurred pursuant to
Paragraph 5.1 below (collectively, "Additional Rent"). Notwithstanding the
foregoing, Tenant's Proportionate Share of "Controllable Operating Expenses"
(defined below) shall not increase by more than eight percent (8% per year
("Controllable Operating Expense Cap"), provided such Controllable Operating
Expense Cap shall be cumulative and compounded annually. "Controllable
Operating Expenses" shall mean all Operating Expenses other than (i) Taxes,
(ii) insurance expenses, (iii) utility expenses, and (iv) labor cost increases
resulting from unionized labor or prevailing wage agreements (each of which
items shall not be subject to the Controllable Operating Expense Cap).
2.5.2 MONTHLY PAYMENTS AND ANNUAL RECONCILIATION. On the
first day of each month of the Term, Tenant shall pay Landlord a sum equal to
1/12 of the estimated amount of Additional Rent for that particular year based
on Landlord's reasonable estimate thereof, to be delivered to Tenant on or
about April of each year during the Term. The monthly payments are subject to
increase or decrease as determined by Landlord to reflect revised estimates of
such costs. Tenant shall pay within ten (10) days following demand therefor by
Landlord any increases in estimated Additional Rent upon receipt of any initial
or revised estimate retroactive to January of that calendar year. The payments
made by Tenant shall be reconciled annually (Landlord to use commercially
reasonable efforts to deliver such reconciliation statement on or about May 1
of each year). If Tenant's total payments of Additional Rent are less than the
actual Additional Rent due under Paragraph 2.5.1, Tenant shall pay the
difference within ten (10) days following demand therefor by Landlord; if the
total payments of Additional Rent made by Tenant are more than the actual
Additional Rent due under Paragraph 2.5.1, Landlord shall retain such excess
and credit it to Tenant's next accruing Additional Rent payments, except at the
end of the Term, when any excess will be refunded. Any failure or delay by
Landlord in delivering any estimate, demand or reconciliation shall not affect
the rights and obligations of the parties hereunder.
2.5.3 TENANT'S AUDIT RIGHTS. Provided that Tenant is not
then in default beyond any applicable cure period of its obligations to pay
Rent, or any other payments required to be made by it under this Lease and
provided further that Tenant
-6-
<PAGE> 8
shall have the right, once each calendar year, to reasonably review supporting
data for any portion of an actual statement of annual Operating Expenses
delivered by Landlord (the "Actual Statement") (provided, however, Tenant may
not have an audit right to all documentation relating to Building operations an
this would far-exceed the relevant information necessary to properly document a
pass-through billing statement, but real estate tax statements, and information
an utilities, repairs, maintenance and insurance will be available), in
accordance with the following procedure:
(i) Tenant shall, within thirty (30) days after
any Actual Statement is delivered, deliver a written notice to Landlord
specifying the portions of the Actual Statement that are claimed to be
incorrect, and Tenant shall simultaneously pay to Landlord all amounts due from
Tenant to Landlord as specified in the Actual Statement. In no event shall
Tenant be entitled co withhold, deduct, or offset any monetary obligation of
Tenant to Landlord under the Lease (including without limitation, Tenant's
obligation to make all payments of Rent and all payments of Tenant's Operating
Expenses) pending the completion of and regardless of the results of any review
of records under this Paragraph. The right of Tenant under this Paragraph may
only be exercised once for any Actual Statement, and if Tenant fails to meet
any of the above conditions as a prerequisite to the exercise of such right,
the right of Tenant under this Paragraph for a particular Actual Statement
shall be deemed waived.
(ii) Tenant acknowledges that Landlord maintains
its records for the project at Landlord's main office and Tenant and Landlord
agree that any review of records under this Paragraph shall be conducted by
Tenant's internal accountants or an independent firm of certified public
accountants selected by Tenant and subject to the reasonable approval of
Landlord. Tenant acknowledges and agrees that any records reviewed under this
Paragraph constitute confidential information of Landlord, which shall not be
disclosed to anyone other than the accountants performing the review, the
principals of Tenant who receive the results of the review, and Tenant's
accounting employees. The disclosure of such information to any other person,
whether or not caused by the conduct of Tenant, shall constitute a material
breach of this Lease. Tenant shall pay for the costs of its audit, unless it
is conclusively determined in accordance with Section 2.5.3(iii) that Landlord
has overstated Operating expenses on the Actual Statement by five percent (5%)
or more, in which case Landlord shall pay for Tenant's reasonable out-of-pocket
costs incurred in conducting such audit.
(iii) Any errors disclosed by the review shall be
promptly corrected by Landlord, provided, however, that if Landlord disagrees
with any such claimed errors, Landlord shall have the right to cause another
review to be made by an independent firm of certified public accountants of
national standing. In the event of a disagreement between the two accounting
firms (or between Tenant's internal accountants and Landlord's accounting firm,
as the case may be), the review that discloses the least amount of deviation
from the Actual Statement shall be deemed to be correct. In the event that the
results of the review of records (taking into account, if applicable, the
results of any additional review caused by Landlord) reveal that Tenant has
overpaid obligations for a preceding period, the amount of such overpayment
shall be credited against Tenant's subsequent installment obligations to pay
the estimated Operating Expense. In the event that such results show that
Tenant has underpaid its obligations for a preceding period, the amount of such
underpayment shall be paid by Tenant to Landlord with the next succeeding
installment obligation of estimated Operating Expense.
2.6 PAYMENT. Tenant shall pay Landlord all amounts due from
Tenant to Landlord hereunder, whether for Rent or otherwise,' in lawful money
of the United States, at the place designated for the delivery of notices to
Landlord pursuant to Paragraph 22.21, without any deduction or offset
whatsoever, except as expressly set forth in this Lease to the contrary.
2.7 LATE CHARGES. Tenant acknowledges that late payment by Tenant
of any sum owed to Landlord under this Lease will cause Landlord to incur costs
not contemplated by this Lease, the exact
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amounts of which are extremely difficult and impracticable to fix. Such costs
include, without limitation, processing and accounting charges, time spent
addressing the issue with Tenant, and late charges that may be imposed on
Landlord by the terms of any obligation or note secured by any encumbrance
covering the Premises. Therefore, if any installment of rent or other payment
due from Tenant is not received by Landlord within five (5) days from when due,
Tenant shall pay to Landlord an additional sum equal to five percent (5%) of
the overdue rent or other payment as a late charge. Late charges shall be
deemed Additional Rent. The parties agree that this late charge represents a
fair and reasonable estimate of the administrative and other costs that
Landlord will incur by reason of a late payment by Tenant. Acceptance of any
late payment charge shall not constitute a waiver of Tenant's default with
respect to the overdue payment, nor prevent Landlord from exercising any of the
other rights and remedies available to Landlord under this Lease, at law or in
equity, including, but not limited to, the interest charge imposed pursuant to
Paragraph 22.2.
2.8 BASE RENT CREDIT. Provided that Tenant is not in default
under any of the terms, covenants or conditions of this Lease, Tenant shall be
credited with the payment of one-half (1/2) of the Base Rent due and payable
under this Lease for the first (1st) through the tenth (10th) months of the
Term, as and when the same becomes due (i.e., the credit shall be in the amount
of $12,250.00 per month for each of the first ten (10) months of the Term). No
such Base Rent credit shall reduce or limit any Additional Rent or other sum
due and payable by Tenant under this Lease. Tenant understands and agrees that
the foregoing Base Rent credit is conditioned upon Tenant's not having
wrongfully terminated this Lease or Landlord not having. terminated this Lease
by reason of Tenant's default hereunder (each such termination, a "Trigger
Event"). Accordingly, upon the occurrence of any Trigger Event during any
portion of the Base Rent credit period, the foregoing Base Rent credit shall be
null and void, and all of the Base Rent which, in the absence of such Base Rent
credit, would have been payable during such period up to the date of the
Trigger Event shall become immediately due and payable by Tenant, and Tenant
shall pay Base Rent during the remainder of such Base Rent credit period as
such Base Rent would have become due and payable in the absence of such Base
Rent credit provision.
3. USE.
3.1 USE OF PREMISES. Subject to any additional uses or
limitations on use contained in Item 8 of the Basic Lease Provisions, the
Premises shall be used only for the purpose of receiving, storing, shipping and
selling (other than retail) products, materials and merchandise made and/or
distributed by Tenant and for such other lawful purposes as may be directly
incidental thereto, and for no other use or purpose. Tenant acknowledges that
Landlord has not made any representations or warranties with respect to the
suitability of the Premises for Tenant's uses. Tenant and Tenant's Parties
shall at all times comply with all rules and regulations regarding the
Premises, the Building and/or the Project as Landlord may establish from time
to time. Landlord shall not be responsible for nor liable to Tenant for any
violation and/or enforcement of such rules and regulations by any other tenant
of the Project.
Tenant shall be responsible for and shall at its own cost and
expense obtain any and all licenses and permits necessary for any such use.
Tenant shall comply with all governmental laws, ordinances and regulations
applicable to the use of the Premises, including, without limitation, the
Americans with Disabilities Act of 1990 triggered subsequent to the
Commencement Date as a result of Tenant's alterations or use of the Premises.
Without limiting the generality of the foregoing, and subject to Paragraph 7
below, Tenant shall at its own cost and expense install and construct all
physical improvements to or
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needed to serve the Premises (but not the exterior of the Building unless
triggered by Tenant's alterations or particular use of the Premises) (i)
required by any federal, state or local building code or other law or
regulation enacted or becoming effective after the Commencement Date,
including, but not limited to, special plumbing, railings, ramps and other
improvements for use by the handicapped, or (ii) made necessary by the nature
of Tenant's use of the Premises; provided, however, that Landlord shall have
the option to install and construct such improvements, in which case the cost
thereof shall be equitably allocated by Landlord in its reasonable discretion
among the benefitted premises, and Tenant, upon demand, shall pay to Landlord,
as Additional Rent, such portion of the cost thereof as may be allocated
equitably, in Landlord's reasonable discretion, to the Premises. Tenant shall
not place a load upon the floor of the Premises which exceeds the load per
square foot which such floor was designed to carry and which is allowed by law.
Tenant shall promptly comply with all governmental orders and directives for
the correction, prevention and abatement of nuisances in or upon, or connected
with, the Premises, all at Tenant's sole expense. Tenant shall not permit any
objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to
emanate from the Premises, nor take any other action which would constitute a
nuisance or would disturb or endanger any other tenants of the Project or
unreasonably interfere with their use of their respective premises. Landlord
shall be responsible for the exterior of the Building's compliance with the
Americans with Disabilities Act of 1990 unless any such compliance requirements
are triggered by Tenant's alterations or particular use of the Premises, in
which event Tenant shall be responsible for all such compliance.
Tenant shall not permit the Premises to be used for any purpose
or in any manner (including without limitation any method of storage) which
would render the insurance thereon void or the insurance risk more hazardous or
cause the state insurance authority to disallow any sprinkler credits. If any
increase in the fire and extended coverage insurance premiums paid by Landlord
or other tenants for the Project is caused by Tenant's use and occupancy of the
Premises, or if Tenant vacates the Premises and causes any increase in such
premiums, then Tenant shall pay as additional Rent the amount of such increase
to Landlord, and, upon demand by Landlord, correct at Tenant's expense the
cause of such disallowance, increased cost, penalty or surcharge to the
satisfaction of the particular insurance provider or authority, as applicable.
3.2 HAZARDOUS MATERIALS. Except for the incidental use of certain
products for routine cleaning and maintenance of floors, bathrooms, windows,
kitchens, and administrative offices on the Premises or Project, and certain
oxygen cylinders and adhesives which shall be stored in compliance with all
Environmental Laws, which products have been disclosed by Tenant to Landlord in
the Environmental Questionnaire (as defined below), Tenant hereby represents,
warrants and covenants that Tenant will not produce, use, store or generate any
"Hazardous Materials" (as defined below) on, under or about the Premises and/or
Project. Tenant has fully and accurately completed Landlord's Pre-Leasing
Environmental Exposure Questionnaire ("Environmental Questionnaire"), which is
incorporated herein by reference. Tenant shall not cause or permit any
Hazardous Material to be brought upon, placed, stored, manufactured, generated,
blended, handled, recycled, disposed of, used or released on, in, under or
about the Premises and/or Project by Tenant or Tenant's Parties. Tenant shall
keep, operate and maintain the Premises in full compliance with all federal,
state and local environmental, health and/or safety laws, ordinances, rules,
regulations, codes, orders, directives, guidelines, permits or permit
conditions currently existing and as amended, enacted, issued or adopted in the
future which are applicable to the Premises (collectively, "Environmental
Laws").
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Landlord shall have the right (but not the obligation) to
enter upon the Premises and cure any noncompliance by Tenant with the terms of
this Paragraph 3.2 or any Environmental Laws or any release, discharge, spill,
improper use, storage, handling or disposal of Hazardous Materials on, under,
from, or about the Premises or Project, regardless of the quantity of any such
release, discharge, spill, improper use, storage, handling or disposal of
Hazardous Materials on or about the Premises or Project, the full cost of which
shall be deemed to be Rent and shall be due and payable by Tenant to Landlord
immediately upon demand. If Landlord elects to enter upon the Premises and
cure any such non-compliance or release, discharge, spill, improper use,
storage, handling or disposal of Hazardous Materials on, under, from, or about
the Premises or Project, Tenant shall not be entitled to participate in
Landlord's activities on the Premises.
If any information provided to Landlord by Tenant in the
Environmental Questionnaire, or otherwise relating to information concerning
Hazardous Materials is false, incomplete, or misleading in any material
respect, the same shall be deemed an event of default by Tenant under this
Lease.
Without limiting in any way Tenant's obligations under any
other provision of this Lease, Tenant and its successors and assigns shall
indemnify, protect, defend and hold Landlord, its partners, officers,
directors, shareholders, employees, agents, lenders, contractors and each of
their respective successors and assigns (collectively, the "Indemnified
Parties,") harmless from any and all claims, judgments, damages, penalties,
enforcement actions, taxes, fines, remedial actions, liabilities, losses, costs
and expenses (including, without limitation, reasonable attorneys' fees,
litigation, arbitration and administrative proceeding costs, expert and
consultant fees and laboratory costs) including, without limitation, damages
arising out of the diminution in the value of the Premises or Project or any
portion thereof, damages for the loss of the Premises or Project, damages
arising from any adverse impact on the marketing of space in the Premises or
Project, and sums paid in settlement of claims, which arise during or after the
Term in whole or in part as a result of the presence or suspected presence of
any Hazardous Materials, in, on, under, from or about the Premises or the
Project and/or other adjacent properties due to Tenant's or Tenant's Parties'
activities, or failures to act (including, without limitation, Tenant's failure
to report any spill or release to the appropriate regulatory agencies), on or
about the Premises or Project.
For purposes of this Lease, the term "Hazardous Material"
means any chemical, substance, material, controlled substance, object, waste or
any combination thereof, which is or may be hazardous to human health, safety
or to the environment due to its radioactivity, ignitability, corrosiveness,
reactivity, explosiveness, toxicity, carcinogenicity, infectiousness or other
harmful or potentially harmful properties or effects, including, without
limitation, petroleum and petroleum products, benzene, toluene, ethyl benzene,
xylenes, waste oil, asbestos, radon, polychlorinated biphenyls (PCBs),
degreasers, solvents, and any and all of those chemicals, substances,
materials, controlled substances, objects, wastes or combinations thereof which
are now or may become in the future listed, defined or regulated in any manner
as "hazardous substances", "hazardous wastes", "toxic substances", "solid
wastes," or bearing similar or analogous definitions pursuant to any and all
Environmental Laws.
Notwithstanding anything to the contrary contained in this
Lease, Tenant shall not be responsible, in any manner whatsoever, for any
violation of Environmental Laws regarding Hazardous Materials located in, on or
about the Premises (i) that was not caused or permitted, directly or
indirectly, by the acts or omissions of Tenant or any of Tenant's Parties, (ii)
that
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existed in, on or under the Premises prior to Tenant's occupying of the
Premises unless caused or exacerbated by any acts or omissions of Tenant or any
of Tenant's Parties, (iii) that was caused by Landlord, or its agents,
contractors or employees, or (iv) that was caused by third parties unaffiliated
with Tenant or any of Tenant's Parties or which migrated onto the Premises from
neighboring properties owned and occupied by parties unaffiliated with Tenant
or any of Tenant's Parties.
3.3 USE OF COMMON AREAS. Tenant and Tenant's Parties shall have
the non-exclusive right, in common with the other parties occupying the
Project, to use the grounds, sidewalks, parking areas, driveways and alleys of
the Project, subject to such reasonable rules and regulations as Landlord may
from time to time prescribe. Tenant and Tenant's Parties may park only up to
the maximum number of automobiles shown in Item 9 of the Basic Lease Provisions
near the Premises during normal business hours on a non-exclusive basis;
provided, however, Tenant shall have the right to park up to seventy-five (75)
of such vehicles on an exclusive basis, but only in the area identified on
Exhibit "A" as "Tenant's Reserved Parking Area". If any other tenants of the
Building are unreasonably encroaching on Tenant's parking rights hereunder,
Tenant shall deliver written notice of the same to Landlord, and if Landlord
cannot reasonably present further encroachment by the adjacent tenant, Landlord
shall reserve up to all 150 parking spaces of Tenant (or such lesser number as
is necessary to provide Tenant with use of 150 parking spaces). outside
storage, including without limitation, trucks and other vehicles, is prohibited
without Landlord's prior written consent, which may be withheld in Landlord's
sole and absolute discretion. Tenant shall not succeed to any of Landlord's
easement rights over and relating to the Project, nor shall Tenant obtain any
rights to common areas, as designated by Landlord, other than those rights
specifically granted to Tenant in this Lease. Landlord shall have the sole
right of control over the use, maintenance, configuration, repair and
improvement of the common area. Landlord may make such changes to the use or
configuration of, or improvements comprising, the common area as Landlord may
elect without liability to Tenant (including the right to add or eliminate
buildings from the Project), subject only to Tenant's vehicular parking rights
shown in Item 9 of the Basic Lease Provisions.
4. TAXES.
4.1 PAYMENT OF REAL PROPERTY TAXES. Landlord agrees to pay,
before they become delinquent, all real property taxes; current installments of
any general or special assessments; license fees, commercial rental taxes, in
lieu taxes, levies, charges, penalties or similar impositions imposed by any
authority having the direct power to tax, and are paid or incurred by Landlord,
including but not limited to, the following: (a) any tax on or measured by Rent
received by Landlord from the Project or as against Landlord's business of
leasing any of the Project; (b) any assessment, tax, fee, levy or charge
imposed by governmental agencies for such services as fire protection, street,
sidewalk and road maintenance, transportation, refuse removal and for other
governmental services formerly provided without charge to property owners or
occupants; (c) assessments due to deed restrictions and/or owner associations;
and (d) costs of determining, filing, contesting and appealing any such tax,
assessment or charge, including accountants', attorneys' and consultants' fees,
but excluding any income, inheritance, estate or corporate franchise taxes of
Landlord (collectively, "Taxes").
Taxes shall also include any assessment, tax, fee, levy or charge in
substitution, partially or totally, of any assessment, tax, fee, levy or charge
previously included within the definition of Taxes. It is hereby acknowledged
by Tenant and Landlord that Proposition 13 was adopted by the voters of
California in June 1978 and that assessments, taxes, fees, levies
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and charges may be imposed by governmental agencies for such services as fire
protection, street, sidewalk and road maintenance, transportation, refuse
removal and other governmental services formerly provided without charge to
property owners or occupants. It is the intention of Tenant and Landlord that
all such new and increased assessments, taxes, fees, levies and charges, and
all similar assessments, taxes, fees, levies and charges be included within the
definition of Taxes for purposes of this Lease, and all property tax refunds
received by Landlord which relate to periods for which Tenant previously paid
Tenant's Proportionate Share of Taxes based on the amount of Taxes without
taking into account the refund shall be applied to reduce Tenant's next coming
due payment of Taxes.
4.2 LIABILITY FOR ALL PERSONAL PROPERTY TAXES. Tenant shall be
liable for all taxes levied or assessed against personal property, furniture,
fixtures, above-standard Tenant Improvements and alterations, additions or
improvements placed by or for Tenant in the Premises. If any such taxes for
which Tenant is liable are levied or assessed against Landlord or Landlord's
property and if Landlord elects to pay the same or if the assessed value of
Landlord's property is increased by inclusion of personal property, furniture,
fixtures, above-standard Tenant Improvements or alterations, additions or
improvements placed by or for Tenant in the Premises, and Landlord elects to
pay the Taxes based on such increase, Tenant shall pay to Landlord, within ten
(10) days of written demand therefor, that portion of the Taxes.
5. LANDLORD'S MAINTENANCE AND REPAIR.
5.1 LANDLORD'S MAINTENANCE. Subject to Tenant's obligation to
reimburse Landlord for all costs and expenses incurred by Landlord, Landlord
shall maintain and repair the exterior portions of the roof, and the foundation
and the structural soundness of the exterior walls of the Building and utility
facilities stubbed to the Premises in good condition, reasonable wear and tear
excepted. The term "walls" as used herein shall not include windows, glass or
plate glass, doors, special store fronts or office entries, unless otherwise
specified by Landlord in writing. Landlord shall also maintain, repair and
repaint the exterior walls, overhead doors, canopies, entries, handrails,
gutters and other exposed parts of the Building as deemed necessary by Landlord
to maintain safety and aesthetic standards, and Landlord shall maintain,
repair, and operate the common areas of the Project, including but not limited
to, mowing grass and general landscaping, maintenance of parking areas,
driveways and alleys, parking lot sweeping, paving and restriping, exterior
lighting, painting, pest control and window washing. The cost of all of the
foregoing, including the cost of all supplies, uniforms, equipment, tools and
materials, together with utility costs not otherwise charged directly to Tenant
or other tenants, all wages and benefits of employees and independent
contractors engaged in the operation, maintenance and repair of the Project,
all expenses for security and safety services and equipment, any license,
permit and inspection fees required in connection with the operation,
maintenance or repair of the Project (but not related to improvements to tenant
space), management, consulting, legal and accounting fees of independent
contractors engaged by Landlord (but not related to the negotiation or
enforcement of leases), other costs and expenses actually incurred by Landlord
in connection with the ownership, operation, leasing and management of the
Project, and other usual costs and expenses which are typically paid by other
landlords to provide on-site operation of industrial, warehouse and service
center projects, are collectively referred to herein as "Operating Expenses"
and are subject to reimbursement by Tenant in accordance with Paragraph 2.5.1
above. To the extent that an Operating Expense consists of a maintenance or
repair (including renovation and refurbishment) expense that is not properly
fully deductible as an expense in the year incurred in accordance with
generally accepted accounting principles, such expense shall be
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amortized over its useful life. Any amounts which are amortized shall result
in equal payments being included in operating Expenses for the year of
expenditure and succeeding years during the amortization period.
5.2 PROCEDURE AND LIABILITY. Tenant shall immediately give
Landlord written notice of any defect or the teed for repair of the items for
which Landlord is responsible, after which Landlord shall have reasonable
opportunity to repair the same or cure such defect. Landlord's liability with
respect to any defects, repairs or maintenance for which Landlord is
responsible under any of the provisions of this Lease shall be limited to the
cost of such repairs or maintenance or the curing of such defect. If Tenant or
Tenant's Parties caused any damage necessitating such repair, then Tenant shall
pay the cost thereof, upon demand. Tenant hereby waives the benefit of
California Civil Code Sections 1941 and 1942, and any other statute providing a
right to make repairs and deduct the cost thereof from the Rent. Tenant waives
any right to terminate this Lease or offset or abate Rent by reason of any
failure of Landlord to make repairs to the Premises.
6. TENANT'S MAINTENANCE AND REPAIR.
6.1 TENANT'S MAINTENANCE. Tenant shall, at its own cost and
expense, keep and maintain all parts of the Premises (except those listed as
Landlord's responsibility in Paragraph 5.1 above) in good and sanitary
condition, ordinary wear and tear excepted, promptly making all necessary
repairs and replacements, including but not limited to, windows, glass and
plate glass, doors, any special store front or office entry, interior walls and
finish work, floors and floor covering, heating and air conditioning systems,
dock boards, truck doors, dock bumpers, plumbing work and fixtures, termite and
pest extermination, and regular removal of trash and debris. If Tenant shall
fail to make any repair for which Tenant is responsible within ten (10) days
following notice from Landlord requiring the same, Landlord and its agents and
contractors shall have the right, but not the obligation, to enter upon the
Premises and perform such repairs, the full cost of which shall be deemed to be
Rent and shall be due and payable by Tenant to Landlord immediately within ten
(10) days following Landlord's written demand therefor; provided, however, that
if such disrepair is not susceptible to cure within such ten (10) day period,
Landlord shall not be permitted to perform the same at Tenant's expense so long
as Tenant has commenced such repair within such ten (10) day period and
thereafter diligently prosecutes the same to completion. In the case of
emergency, Landlord, its agents and contractors may enter upon the Premises to
perform such repairs without the necessity of prior notice to Tenant. Repairs
shall be made in accordance with all applicable laws, including without
limitation, the Americans with Disabilities Act of 1990. The cost of
maintenance and repair of any common party wall (any wall, divider, partition
or any other structure separating the Premises from any adjacent premises
occupied by other tenants) shall be shared equally by Tenant and the tenant(s)
occupying such adjacent premises. Tenant shall not damage any party wall or
disturb the integrity and support provided by any party wall and shall, at its
sole cost and expense, promptly repair any damage or injury to any party wall
caused by Tenant or Tenant's Parties.
6.2 MAINTENANCE/SERVICE CONTRACTS. Tenant shall, at its own cost
and expense, enter into a regularly scheduled preventive maintenance/service
contract with a maintenance contractor for servicing all hot water, heating and
air conditioning systems and equipment within the Premises. The maintenance
contractor and the contract must be approved in writing by Landlord in advance.
The service contract shall include all services recommended by the equipment
manufacturer within the operation/maintenance manual and shall become effective
(and a copy thereof delivered to Landlord) within thirty (30) days following
the date Tenant takes possession of the Premises.
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7. ALTERATIONS.
Tenant shall make no alterations, additions or improvements to the
Premises (including, without limitation, roof and wall penetrations) or any
part thereof without obtaining the prior written consent of Landlord in each
instance. Such consent may be granted or withheld in Landlord's reasonable
discretion (except if such alterations are of a structural nature or affect the
exterior of the Building, in which event Landlord may withhold its consent in
its sole and absolute discretion); provided, however, Tenant may make
non-mechanical, non-electrical, non-structural alterations to the Premises
without the prior written consent of Landlord (but nevertheless requiring
advance written notice to Landlord) provided that the cost of such alterations
does not exceed $25,000.00 in any one instance or $100,000.00 in the aggregate
over the Term; provided further that such alterations do not affect the
exterior of the Premises or the Building. Landlord may impose as a condition
to such consent such requirements as Landlord may deem necessary, in its
reasonable discretion, including, without limitation that: (a) Landlord be
furnished with working drawings before work commences; (b) Landlord approve the
contractor by whom the work is to be performed; and (c) adequate course of
construction and general liability insurance be in place and Landlord be named
as an additional insured under the contractor's liability and property
insurance policies. All such alterations, additions or improvements must be
performed in a good and workmanlike manner in compliance with all laws, rules
and regulations, including, without limitation, the Americans with Disabilities
Act of 1990, and diligently prosecuted to completion. Tenant shall deliver to
Landlord upon commencement of such work, a copy of the building permit with
respect thereto, and a certificate of occupancy, if applicable, immediately
upon completion of the work. All such work shall be performed so as not to
obstruct the access to the premises of any other tenant in the Building or
Project. Should Tenant make any alterations without Landlord's prior written
consent, or without satisfaction of any of the conditions established by
Landlord in conjunction with granting such consent, Landlord shall have the
right, in addition to and without limitation of any right or remedy Landlord
may have under this Lease, at law or in equity, to require Tenant to remove all
or some of the alterations, additions or improvements at Tenant's sole cost and
restore the Premises to the same condition as existed prior to undertaking the
alterations, or if Tenant shall fail to do so, Landlord may cause such removal
or restoration to be performed at Tenant's expense and the cost thereof shall
be Additional Rent to be paid by Tenant within ten (10) days following written
demand therefor. Subject to the terms of Paragraph 16, Landlord shall have the
right to require Tenant, at Tenant's expense, to remove any and all
alterations, additions or improvements and to restore the Premises to its prior
condition upon the expiration or sooner termination of this Lease. Tenant
shall notify Landlord in writing at least ten (10) days prior to the
commencement of any such work in or about the Premises, and Landlord shall have
the right at any time and from time to time to post and maintain notices of
nonresponsibility in or about the Premises.
8. LIENS.
Tenant shall have no authority, express or implied, to create or place
any lien or encumbrance of any kind or nature whatsoever upon, or in any manner
to bind, the interest of Landlord or Tenant in the Premises or to charge the
Rent payable hereunder for any claim in favor of any person dealing with
Tenant, including those who may furnish materials or perform labor for any
construction or repairs. Tenant shall pay or cause to be paid all sums legally
due and payable by it on account of any labor performed or materials furnished
in connection with any work performed by Tenant on the Premises. Tenant shall
discharge of record by payment, bonding or otherwise any lien filed against the
Premises on account of any labor performed or materials
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furnished in connection with any work performed by Tenant on the Premises
immediately upon the filing of any claim of lien. Tenant shall indemnify,
defend and hold Landlord harmless from any and all liability, loss, cost or
expense based on or arising out of asserted claims or liens against the
leasehold estate or against the right, title and interest of Landlord in the
Project or this Lease arising from the act or agreement of Tenant. Tenant
agrees to give Landlord immediate written notice of the placing of any lien or
encumbrance against the Premises. Landlord shall have the right, at Landlord's
option, of paying and discharging the same or any portion thereof without
inquiry as to the validity thereof, and any amounts so paid, including expenses
and applicable late charge, shall be Additional Rent immediately due and
payable by Tenant upon rendition of a bill therefor; provided, however, with
respect to any liens which appear of record and for which Landlord receives
written notice during the first ninety (90) days of the Term only, Landlord
must provide at least twenty (20) days prior written notice to Tenant before
paying and discharging any such lien at Tenant's expense.
9. SIGNS.
9.1 SIGNAGE. Subject to compliance with all laws, rules,
regulations, ordinances and CC&Rs, Tenant shall have the nonexclusive right to
install a sign of its name on the Building, the exact size, location and
appearance of which shall be subject to Landlord's approval. Any and all costs
in connection with the fabrication, installation, maintenance and removal of
such sign shall be borne by Tenant at its sole cost and expense. Tenant's
signage rights contained herein are personal to CHAD Therapeutics, Inc. and may
not be assigned under any circumstances, whether voluntarily or involuntarily,
except with Landlord's prior written consent, which consent shall not be
unreasonably withheld.
9.2 CRITERIA FOR CHANGES. Tenant shall not, without Landlord's
prior written consent, which may be withheld in Landlord's sole and absolute
discretion: (a) make any changes to or paint the exterior of the Building; (b)
install any exterior lights, decorations or paintings; or (c) erect or install
any signs, window or door lettering, placards, decorations or advertising media
of any type which can be viewed from the exterior of the Premises. All signs,
decorations, advertising media, blinds, draperies and other window treatment or
bars or other security installations visible from outside the Premises shall be
subject to the prior written approval of Landlord as to construction, method of
attachment, size, shape, height, design, lighting, color and general
appearance. All signs shall be in compliance with all applicable laws and
regulations and all covenants, conditions and restrictions relating to the
Premises. All signs shall be kept in good condition and in proper operating
order at all times.
10. UTILITIES.
Tenant shall pay for all separately metered water, gas, heat, light,
telephone, sewer and sprinkler charges and for other utilities and services
used on or from the Premises, together with any taxes, penalties, surcharges or
the like pertaining thereto and any maintenance charges for utilities, and
shall furnish all electric light bulbs and tubes. If any utilities serving the
Premises are not separately metered, Tenant shall pay to Landlord its
proportionate share of the cost thereof as reasonably determined by Landlord.
Landlord shall in no event be liable for any damages directly or indirectly
resulting from or arising out of the interruption or failure of utility
services on the Premises. Tenant shall have no right to terminate this Lease
nor shall Tenant be entitled to any abatement in Rent as a result of any such
interruption or failure of utility services. No such interruption or failure
of utility services shall be deemed to constitute a constructive eviction of
Tenant. Notwithstanding the foregoing, if any of the utilities are interrupted
and not
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available ("Interruption") for more than five (5) consecutive business days,
then beginning on the sixth (6th) consecutive business day of Interruption
through the last day of such Interruption, Tenant shall be entitled to an
abatement of Rent, and the Term shall be extended the same number of days, but
only if (i) the Interruption is not caused by a casualty covered by Paragraph
11 of this Lease or by an act or omission of Tenant or Tenant's Parties, (ii)
Tenant is materially prevented by the Interruption from using and does not use
the Premises or any portion thereof, and (iii) Tenant has provided Landlord
with written notice of the same.
11. FIRE AND CASUALTY DAMAGE.
11.1 NOTICE OF DESTRUCTION. If the Premises are damaged or
destroyed by fire, earthquake or other casualty, Tenant shall give immediate
written notice thereof to Landlord.
11.2 LOSS COVERED BY INSURANCE. If at any time prior to the
expiration or termination of this Lease, the Premises or the Project are wholly
or partially damaged or destroyed, the loss to Landlord from which is fully
covered (except for any applicable deductibles) by proceeds of insurance
maintained or required to be maintained by Landlord or for Landlord's benefit,
which damage renders the Premises totally or partially inaccessible or unusable
by Tenant in the ordinary conduct of Tenant's business, then:
(a) If all repairs to the Premises or Project can, in
Landlord's judgment, be completed within two hundred (200) days following the
date of notice to Landlord of such damage or destruction without the payment of
overtime or other premiums, and if such damage or destruction is not the result
of the negligence or willful misconduct or omission of Tenant or Tenant's
Parties (as contemplated in Paragraph 11.4), Landlord shall notify Tenant of
the same within sixty (60) days following the date of notice to Landlord of
such damage or destruction, and Landlord shall, at Landlord's expense (other
than the deductible) (provided Landlord can obtain all necessary governmental
permits and approvals therefor at reasonable cost and on reasonable
conditions), repair the same, and this Lease shall remain in full force and
effect and a proportionate reduction of Rent shall be allowed Tenant for such
portion of the Premises as shall be rendered inaccessible or unusable to Tenant
during the period of time that such portion is unusable or inaccessible. There
shall be no proportionate reduction of Rent by reason of any portion of the
Premises being unusable or inaccessible for a period equal to five (5)
consecutive business days or less.
(b) If such damage or destruction is not the result of
the negligence or willful misconduct or omission of Tenant or Tenant's Parties,
and if all such repairs cannot, in Landlord's judgment, be completed within two
hundred (200) days following the date of notice to Landlord of such damage or
destruction without the payment of overtime or other premiums, Landlord shall
notify Tenant of the same within sixty (60) days following the date of notice
to Landlord of such damage or destruction, in which event either party may, at
its sole and absolute option, by written notice to the other given within
twenty (20) days following the date of Landlord's notice to Tenant stating that
all such repairs cannot in Landlord's judgment, be completed within said two
hundred (200) days, terminate this Lease as of the date of the occurrence of
such damage or destruction; provided, however, if neither party elects to
terminate this Lease within said twenty (20) day period, then this Lease shall
remain in full force and effect, but the Rent shall be proportionately reduced
as provided in Paragraph 11.2(a).
Notwithstanding anything to the contrary contained in this
Paragraph 11, Tenant shall pay to Landlord, within ten (10) days following
Landlord's demand therefor, the amount of the
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deductible under Landlord's insurance policy (Tenant's Proportionate Share of
which shall not exceed (i) $25,000.00 per occurrence for casualties covered
under Landlord's all risk property insurance, and (ii) $100,000.00 per
occurrence under Landlord's earthquake coverage, if any). If the damage
involves portions of the Project other than the Premises, Tenant shall pay only
a portion of the deductible based on the ratio of the cost of repairing the
damage in the Premises to the total cost of repairing all of the damage in the
Project.
11.3 LOSS NOT COVERED BY INSURANCE. If, at any time prior to the
expiration or termination of this Lease, the Premises or the Project are
totally or partially damaged or destroyed from a risk, the loss to Landlord
from which is not fully covered (except for any applicable deductibles) by
insurance maintained or required to be maintained by Landlord or for Landlord's
benefit, which damage renders the Premises inaccessible or unusable to Tenant
in the ordinary course of its business, and if such damage or destruction is
not the result of the negligence or willful misconduct or omission of Tenant or
Tenant's Parties, Landlord may, at its option, upon written notice to Tenant
within thirty (30) days after notice to Landlord of the occurrence of such
damage or destruction, elect to repair or restore such damage or destruction,
or Landlord may elect to terminate this Lease. If Landlord elects to repair or
restore such damage or destruction, this Lease shall continue in full force and
effect, but the Rent shall be proportionately reduced as provided in Paragraph
11.2(a). If Landlord elects to terminate this Lease, such termination shall be
effective as of the date of the occurrence of such damage or destruction.
Notwithstanding anything to the contrary contained in this Paragraph 11.3, if
all such repairs cannot, in Landlord's judgment, be completed within two
hundred (200) days following the date of notice to Landlord of such damage or
destruction without the payment of overtime or other premiums, Landlord shall
notify Tenant of the same within sixty (60) days following the date of notice
to Landlord of such damage or destruction, in which event either party may, at
its sole and absolute option, by written notice to the other given within
twenty (20) days following the date of Landlord's notice to Tenant stating that
all such repairs cannot, in Landlord's judgment, be completed within said two
hundred (200) days, terminate this Lease as of the date of occurrence of such
damage or destruction; provided, however, if neither party elects to terminate
this Lease within said twenty (20) day period, then this Lease shall remain in
full force and effect but the Rent shall be proportionately reduced as provided
in Paragraph 11.2(a).
11.4 LOSS CAUSED BY TENANT OR TENANT'S PARTIES. If the Premises or
the Project are wholly or partially damaged or destroyed as a result of the
negligence or willful misconduct or omission of Tenant or Tenant's Parties,
Tenant shall forthwith diligently undertake to repair or restore all such
damage or destruction at Tenant's sole cost and expense, or Landlord may at its
option undertake such repair or restoration at Tenant's sole cost and expense;
provided, however, that Tenant shall be relieved of its repair and payment
obligations pursuant to this Paragraph 11.4 to the extent such damage is
covered by insurance carried or required to be carried by Landlord hereunder,
although Tenant shall in all such events pay to Landlord the full amount of the
deductible under Landlord's insurance policy and any amounts not insured. This
Lease shall continue in full force and effect without any abatement or
reduction in Rent or other payments owed by Tenant.
11.5 DESTRUCTION NEAR END OF TERM. Notwithstanding the foregoing,
if the Premises or the Project are wholly or partially damaged or destroyed
(such that the same cannot, in Landlord's judgment, be repaired or restored
within sixty (60) days) within the final nine (9) months of the Term, either
party may, at its option, elect to terminate this Lease upon written notice
given
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to the other within thirty (30) days following such damage or destruction..
11.6 DESTRUCTION OF IMPROVEMENTS AND PERSONAL PROPERTY. In the
event of any damage to or destruction of the Premises or the Project, under no
circumstances shall Landlord be required to repair, replace or compensate
Tenant, Tenant's Parties or any other person for the personal property, trade
fixtures, machinery, equipment or furniture of Tenant or any of Tenant's
Parties, or any alterations, additions or improvements installed in the
Premises by Tenant, and Tenant shall promptly repair and replace all such
personal property and improvements at Tenant's sole cost and expense.
11.7 EXCLUSIVE REMEDY. The provisions of this Paragraph 11 shall
constitute Tenant's sole and exclusive remedy in the event of damage or
destruction to the Premises or the Project, and Tenant waives and releases all
statutory rights and remedies in favor of Tenant in the event of damage or
destruction, including without limitation those available under California
Civil Code Sections 1932 and 1933(4). No damages, compensation or claim shall
be payable by Landlord for any inconvenience, any interruption or cessation of
Tenant's business, or any annoyance, arising from any damage or destruction of
all or any portion of the Premises or the Project.
11.8 LENDER DISCRETION. Notwithstanding anything herein to the
contrary, in the event the holder of any indebtedness secured by a mortgage or
deed of trust covering the Premises requires that the insurance proceeds from
insurance held by Landlord be applied to such indebtedness, then Landlord shall
have the right to deliver written notice to Tenant terminating. this Lease.
12. INDEMNITY AND INSURANCE.
12.1 INDEMNITY. Tenant shall indemnify, protect, defend and hold
the Indemnified Parties harmless from any and all claims, judgments, damages,
liabilities, losses, sums paid in settlement of claims, costs and expenses
(including, but not limited to, reasonable attorneys, fees and litigation
costs), obligations, liens and causes of action, whether threatened or actual,
direct or indirect (collectively, "Claims"), which arise in any way, directly
or indirectly, resulting from or in connection with, in whole or in part,
Tenant's or Tenant's Parties' activities in, on or about the Premises or
Project, including, without limitation, Tenant's breach or default of any
obligation of Tenant to be performed under the terms of this Lease, the conduct
of Tenant's business, the nonobservance or nonperformance of any law, ordinance
or regulation or the negligence or misconduct of Tenant or Tenant's Parties,
except injury to persons or damage to property the sole cause of which is the
negligence or willful misconduct of Landlord, or the wrongful failure of
Landlord to repair any part of the Project which Landlord is obligated to
repair and maintain hereunder within a reasonable time after the receipt of
written notice from Tenant of needed repairs. Landlord shall not be liable to
Tenant for any damages arising from any act, omission or neglect of any other
tenant in the Project.
12.2 LANDLORD'S INSURANCE. Landlord shall maintain (i) fire
insurance and extended all risk insurance covering the Building in an amount
not less than 100% of the replacement cost thereof, and (ii) such other types
(and in amounts) of insurance as Landlord deems necessary or desirable in its
sole discretion, which may include, without limitation, liability, property
damage and/or loss of rental income coverage. Such insurance shall be for the
sole benefit of Landlord and under its sole control. The premiums for any such
insurance shall be an Operating Expense.
12.3 TENANT'S INSURANCE OBLIGATIONS. Tenant agrees that at all
times from and after the date Tenant is given access to
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the Premises for any reason, Tenant shall carry and maintain, at its sole cost
and expense, the following types, amounts and forms of insurance:
12.3.1 GENERAL LIABILITY INSURANCE. A broad form
comprehensive general liability or commercial general liability policy covering
property damage, personal injury, advertising injury and bodily injury, and
including blanket contractual liability coverage for obligations under this
Lease, covering the Project in an amount of not less than the amount per
occurrence specified in Item 10 of the Basic Lease Provisions. Such policy
shall be in the occurrence form with a per location general aggregate. Each
policy shall name Landlord and any management agent from time to time
designated by Landlord and any lender of Landlord as additional insureds, and
shall provide that any coverage to additional insureds shall be primary; when
any policy issued to Landlord provides duplicate coverage or is similar in
coverage, Landlord's policy will be excess over Tenant's policies. No
deductibles in excess of Five Thousand Dollars ($5,000) per occurrence shall be
permitted. Tenant shall pay any deductibles.
12.3.2 PROPERTY INSURANCE. A policy or policies, including
the Boiler and Machinery Perils and the Special Causes of Loss form of coverage
("All Risks"), including vandalism and malicious mischief, theft, sprinkler
leakage (including earthquake sprinkler leakage) and water damage coverage in
an amount equal to the full replacement value, new without deduction for
depreciation, on an agreed amount basis (no co-insurance requirement), of all
trade fixtures, furniture and equipment in the Premises, and all alterations,
additions and improvements to the Premises installed by or for Tenant or
provided to Tenant. Such insurance shall also include business interruption
and extra expense coverage for Tenant's operations and debris removal coverage
for removal of property of Tenant and Tenant's Parties which may be damaged
within the Premises. Such coverage shall name the Landlord as an additional
insured and/or loss payee as its interest may appear. No deductibles in excess
of Five Thousand Dollars ($5,000) shall be permitted. Tenant shall pay any
deductibles.
12.3.3 WORKERS' COMPENSATION INSURANCE. Workers'
compensation insurance, including employers, liability coverage, shall comply
with applicable California law. Such insurance shall include a waiver of
subrogation in favor of Landlord, if available.
12.4 EVIDENCE OF COVERAGE. All of the policies required to be
obtained by Tenant pursuant to Paragraph 12.3 shall be with companies and in
form satisfactory to Landlord. Each insurance company providing coverage shall
have a current Best's Rating of "A-XII" or better. Upon notice from Landlord,
Tenant shall add any mortgagee of the Building and any management agent
designated by Landlord as an additional insured or loss payee, as applicable.
Tenant shall provide Landlord with certificates and copies of endorsements (and
upon request, policies) of insurance acceptable to Landlord issued by each of
the insurance companies issuing any of the policies required pursuant to the
provisions of Paragraph 12.3, and said certificates and endorsements shall
provide that the insurance issued thereunder shall not be altered, cancelled or
non-renewed until after thirty (30) days, written notice to Landlord. "Claims
made" policies shall not be permitted. Each policy shall permit the waiver in
Section 12.5 below. Evidence of insurance coverage shall be furnished to
Landlord prior to Tenant's possession of the Premises and thereafter not fewer
than fifteen (15) days prior to the expiration date of any required policy.
Tenant may satisfy its insurance obligations hereunder by carrying such
insurance under a so-called blanket policy or policies of insurance which are
acceptable to Landlord. If Tenant fails to obtain any insurance required
hereby or provide evidence thereof to Landlord, Landlord may, but shall not be
obligated to, and Tenant hereby appoints
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Landlord as its agent to, procure such insurance and bill the cost of
the-insurance plus a twenty percent (20%) handling charge to Tenant. Tenant
shall pay such costs to Landlord as Additional Rent with the next monthly
payment of Rent.
12.5 WAIVERS OF SUBROGATION. Landlord waives any and all rights of
recovery against Tenant for or arising out of damage to, or destruction of the
Building or the Premises to the extent that Landlord's insurance policies then
in force or the policies required to be carried by Landlord under the terms of
this Lease, whichever is broader, insure against such damage-or destruction and
permit such waiver. Tenant waives any and all rights of recovery against
Landlord for or arising out of damage to or destruction of any property of
Tenant to the extent that Tenant's insurance policies then in force or the
policies required by this Lease, whichever is broader, insure against such
damage or destruction.
13. LANDLORD'S RIGHT OF ACCESS.
Tenant shall permit Landlord and its employees and agents, at all
reasonable times upon reasonable notice and at any time (without any
requirement of notice) in case of emergency, in such manner as to cause as
little disturbance to Tenant as reasonably practicable (a) to enter into and
upon the Premises to inspect them, to protect the Landlord's interest therein,
or to post notices of non-responsibility, (b) to take all necessary materials
and equipment into the Premises, and perform necessary work therein, and (c) to
perform periodic environmental audits, inspections, investigations, testing and
sampling of the Premises and/or the Project, and to review and copy any
documents, materials, data, inventories, financial data, notices or
correspondence to or from private parties or governmental authorities in
connection therewith. No such work shall cause or permit any rebate of Rent to
Tenant for any loss of occupancy or quiet enjoyment of the Premises, or damage,
injury or inconvenience thereby occasioned, or constitute constructive
eviction. Landlord may at any time place on or about the Building any ordinary
"for sale" and "for lease" signs. Tenant shall also permit Landlord and its
employees and agents, upon request, to enter the Premises or any part thereof,
at reasonable times during normal business hours, to show the Premises to any
fee owners, lessors of superior leases, holders of encumbrances on the interest
of Landlord under the Lease, or prospective purchasers, mortgagees or lessees
of the Project or Building as an entirety. During the period of six (6) months
prior to the expiration date of this Lease, Landlord may exhibit the Premises
to prospective tenants.
14. ASSIGNMENT AND SUBLETTING.
14.1 LANDLORD'S CONSENT. Tenant shall not assign all or any
portion of its interest in this Lease, whether voluntarily, by operation of law
or otherwise, and shall not sublet all or any portion of the Premises,
including, but not limited to, sharing them, permitting another party to occupy
them or granting concessions or licenses to another party, except with the
prior written consent of Landlord, which Landlord may withhold for any
reasonable condition, including, but not limited to: (a) Tenant is in default
of this Lease; (b) the assignee or subtenant is unwilling to assume in writing
all of Tenant's obligations hereunder; (c) the assignee or subtenant has a
financial condition which is reasonably unsatisfactory to Landlord or
Landlord's mortgagee; (d) the Premises will be used for different purposes than
those set forth in Paragraph 3 or for a use requiring or generating increased
or different Hazardous Materials; (e) the proposed assignee or subtenant or its
business is subject to compliance with additional requirements of the law
(including related resolutions) commonly known as the Americans with
Disabilities Act of 1990 beyond those requirements applicable to Tenant; (f)
Tenant proposes to assign less than all of its interest in this Lease or to
sublet the Premises in units
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that are unusually small for the Project; and (g) the assignee or subtenant
requires extensive alterations to the Premises.
14.2 FEES. Tenant shall pay Landlord's reasonable attorneys' fees
incurred in evaluating any proposed assignment or sublease and documenting
Landlord's consent.
14.3 PROCEDURE. Whenever Tenant has obtained an offer to assign
any interest in this Lease or to sublease all or any portion of the Premises,
Tenant shall provide to Landlord the name and address of said proposed assignee
or sublessee, the base rent and all other compensation to be paid to Tenant,
the proposed use by the proposed assignee or sublessee, the proposed effective
date of the assignment or subletting, and any other business terms which are
material to the offer and/or which differ from the provisions of this Lease
("Notice of Offer"). Tenant shall also provide to Landlord the nature of
business, financial statement and business experience resume for the
immediately preceding five (5) years of the proposed assignee or sublessee and
such other information concerning such proposed assignee or sublessee as
Landlord may require. The foregoing information shall be in writing and shall
be received by Landlord no less than forty-five (45) days prior to the
effective date of the proposed assignment or sublease.
Within thirty (30) days following its receipt of a Notice of
Offer for the proposed assignment or subletting, Landlord shall be entitled to
terminate this Lease as to all of the Premises (unless Tenant proposes a
sublease of a portion of the Premises, in which event Landlord may terminate
this Lease as to such portion) by written notice to Tenant ("Termination
Notice"), and such termination shall be effective as of the proposed effective
date of the proposed assignment or sublease. If Landlord does not elect to
terminate this Lease, Landlord shall either notify Tenant that Landlord
consents to the proposed assignment or subletting or withholds its consent for
reasons to be specified in the notice. If Landlord does not provide a
Termination Notice or a notice withholding its consent to Tenant within thirty
(30) days following its receipt of a Notice of Offer, Landlord shall be deemed
to have consented to the proposed assignment or subletting.
14.4 BONUS RENT. If any interest in this Lease is assigned or all
or any portion of the Premises is subleased, Landlord shall receive all of the
"bonus rent" to be realized from such assignment or subletting. The bonus rent
shall mean any lump sum payment or other value received by Tenant, plus any
base rent, percentage rent or periodic compensation received by Tenant from or
for the benefit of an assignee or sublessee in excess of (a) all amounts owed
for Rent and other charges pursuant to this Lease, and (b) all reasonable
commissions and fees paid to any real estate broker or finder who is
unaffiliated with Tenant in connection with the assignment or subletting. If a
portion of the Premises is subleased, the amount in clause (a) shall be
prorated based on the portion of the Premises, rentable area to be subleased.
The bonus rent shall be paid on the first (1st) day of each calendar month next
following tenant's receipt of each payment from its assignee or sublessee,
after reduction for all amounts described in clauses (a) and (b) above,
amortized over the full term of the assignment or sublease.
14.5 CONTINUING TENANT OBLIGATIONS. No subleasing or assignment
shall relieve Tenant from liability for payment of all forms of Rent and other
charges herein provided or from Tenant's obligations to keep and be bound by
the terms, conditions and covenants of this Lease.
14.6 WAIVER, DEFAULT AND CONSENT. The acceptance of Rent from any
other person shall not be deemed to be a waiver of any of the provisions of
this Lease or a consent to the assignment or subletting of the Premises. Any
assignment or sublease without the Landlord's prior written consent shall be
voidable, at
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Landlord's election, and shall constitute a noncurable event of default under
this Lease. Consent to any assignment or subletting shall not be deemed a
consent to any future assignment or subletting.
14.7 RESTRUCTURING OF BUSINESS ORGANIZATIONS. Any transfer of
corporate shares or partnership interests of Tenant, so as to result in a
change in the present voting control of Tenant by the person or persons owning
a majority of said corporate shares or partnership interests on the date of
this Lease (except for trading on an exchange), shall constitute an assignment
and shall be subject to the provisions of this Paragraph 14. Notwithstanding
the foregoing, an assignment of this Lease by operation of law as a result of a
merger or consolidation of Tenant, or an assignment of this Lease in
conjunction with (i) the sale of all or substantially all of Tenant's assets,
or (ii) a public offering of the stock of Tenant, shall not constitute an
assignment of this Lease under this Paragraph 14, provided that, and only so
long as, the surviving tenant or assignee has a net worth greater than or equal
to that of Tenant as of the date hereof. Notwithstanding the foregoing, an
assignment of this Lease to an entity ("Affiliate Entity") which owns, or is
owned by, Tenant, shall not constitute an assignment of this Lease under this
paragraph 14, provided that (a) such entity owns more than fifty percent (50%)
of the outstanding shares of all classes of voting stock of Tenant, or Tenant
owns more than fifty percent (50%) of all ownership and controlling interests
of such assignee, and (b) in either such case, the assignee has a net worth
greater than or equal to that of Tenant as of the date hereof.
14.8 ASSIGNMENT OF SUBLEASE RENT. Tenant immediately and
irrevocably assigns to Landlord, as security for Tenant's obligations under
this Lease, all rents from any subletting of all or any part of the Premises,
and Landlord, as assignee and as attorney-in-fact for Tenant for purposes
hereof, or a receiver for Tenant appointed on Landlord's application, may
collect such rents and apply same toward Tenant's obligations under this Lease,
except that, until the occurrence of an event of default by Tenant, Tenant
shall have the right and license to collect such rents.
14.9 ASSIGNMENT IN BANKRUPTCY. If this Lease is assigned to any
person or entity pursuant to the provisions of the United States Bankruptcy
Code, 11 U.S.C. Section 101 et seq., or such similar laws or amendments thereto
which may be enacted from time to time (the "Bankruptcy Code"), any and all
monies or other considerations payable or otherwise to be delivered in
connection with such assignment shall be paid or delivered to Landlord, shall
be and remain the exclusive property of Landlord and shall not constitute
property of Tenant or of the estate of Tenant within the meaning of the
Bankruptcy Code. Any and all monies or other considerations constituting
Landlord's property under the preceding sentence not paid or delivered to
Landlord shall be held in trust for the benefit of Landlord and be promptly
paid or delivered to Landlord.
14.10 ASSUMPTION OF OBLIGATIONS. Any person or entity to which this
Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be
deemed, without further act or deed, to have assumed all of the obligations
arising under this Lease on and after the date of such assignment. Any such
assignee shall upon demand execute and deliver to Landlord an instrument
confirming such assumption.
15. CONDEMNATION.
15.1 TOTAL TAKING. If the whole or any substantial part of the
Premises or the Project shall be taken or damaged because of the exercise of
the power of eminent domain, whether by condemnation proceedings or otherwise,
including acts or omissions constituting inverse condemnation, or any transfer
of
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the Premises or Project or portion thereof in avoidance of the exercise of the
power of eminent domain (collectively, a "Taking"), and the Taking would
prevent or materially interfere with the use of the Premises for the purpose
for which they are being used, this Lease shall terminate effective when the
physical Taking of the Premises shall occur.
15.2 PARTIAL TAKING. If part of the Premises shall be subject to a
Taking and this Lease is not terminated as provided in the Paragraph 15.1
above, this Lease shall not terminate but the Rent payable hereunder during the
unexpired portion of this Lease shall be reduced in proportion to the area of
the Premises rendered unusable by Tenant.
15.3 CONDEMNATION AWARD. The entire award or compensation for any
Taking of the Project and/or the Premises, or any part thereof, or for
diminution in value, shall be the property of Landlord, and Tenant hereby
assigns its interest in any such award to Landlord; provided, however, Landlord
shall have no interest in any separate award made to Tenant for loss of
business, for relocation purposes, or for the taking of Tenant's fixtures and
improvements.
15.4 EXCLUSIVE REMEDY. This Paragraph 15 shall be Tenant's sole
and exclusive remedy in the event of any Taking. Tenant hereby waives the
benefits of California Code of Civil Procedure Section 1265.130 or any other
statute granting Tenant specific rights in the event of a Taking which are
contrary to the provisions of this Paragraph 15.
16. SURRENDER AND HOLDING OVER.
16.1 SURRENDER. Upon the expiration or sooner termination of this
Lease, Tenant shall surrender the Premises in as good condition as when
received, reasonable wear and tear excepted, broom clean and free of trash and
rubbish, and free from all tenancies or occupancies by any person. Tenant
shall remove all trade fixtures, furniture, equipment and other personal
property installed in the Premises prior to the expiration or earlier
termination of this Lease. Unless otherwise provided in Paragraph 7 or waived
by Landlord in writing prior to the expiration or earlier termination of this
Lease, Tenant shall remove at its sole cost all alterations, additions and
improvements (other than the Tenant Improvements, as set forth in the plans
delivered by Tenant and received by Landlord prior to the date of this Lease)
made by Tenant to the Premises; provided, however, Landlord shall, upon
Tenant's written request therefor, notify Tenant in writing at the time of
Landlord's written consent (if applicable) whether Landlord will require the
removal of such alterations. Alterations, additions and improvements remaining
on the Premises at the expiration or earlier termination of this Lease shall
become the property of Landlord. Tenant shall, at its own cost, completely
repair any and all damage to the Premises and the Building resulting from or
caused by such removal. The provisions of Paragraph 7 shall apply to such
removal and repair work.
16.2 HOLDING OVER. If Landlord agrees in writing that Tenant may
hold over after the expiration or earlier termination of this Lease, unless the
parties hereto otherwise agree in writing as to the terms of such holding over,
the holdover tenancy shall be subject to termination by Landlord or Tenant at..
any time upon not less than thirty (30) days, prior written notice. If Tenant
holds over without the consent of Landlord, the same shall be a tenancy at will
terminable at any time, and Tenant shall be liable to Landlord for, and Tenant
shall indemnify, protect, defend and hold Landlord harmless from and against,
any damages, liabilities, losses, costs, expenses or claims suffered or caused
by such holdover, including damages and costs related to any successor tenant
of the Premises to whom Landlord could not deliver possession of the Premises
when promised. All of the other terms and provisions of this Lease
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shall be applicable during any holdover period, with or without consent, except
that Tenant shall pay to Landlord from time to time upon demand, as Rent for
the period of any holdover, an amount equal to one hundred fifty percent (150%)
of the then applicable Base Rent plus all Additional Rent in effect on the
termination date, computed on a daily basis for each day of the holdover
period. No holding over by Tenant, whether with or without consent of
Landlord, shall operate to extend this Lease. The preceding provisions of this
Paragraph 16.2 shall not be construed as Landlord's consent to any holding over
by Tenant.
16.3 ENTRY AT END OF TERM. If during the last month of the Term,
Tenant shall have removed substantially all of Tenant's property and personnel
from the Premises, Landlord may enter the Premises and repair, alter and
redecorate the same, without abatement of Rent and without liability to Tenant,
and such acts shall have no effect on this Lease. Tenant shall give written
notice to Landlord at least thirty (30) days prior to vacating the Premises and
shall arrange to meet with Landlord for a joint inspection of the Premises
prior to vacating. In the event of Tenant's failure to give such notice or
arrange such joint inspection, Landlord's inspection at or after Tenant's
vacation of the Premises shall be conclusively deemed correct for purposes of
determining Tenant's responsibility for repairs and restoration.
17. QUIET ENJOYMENT.
Landlord represents and warrants that it has full rights and authority
to enter into this Lease and that Tenant, upon paying the Rent and performing
its other covenants and agreements herein set forth, shall peaceably and
quietly have, hold and enjoy the Premises for the Term without hindrance or
molestation from Landlord, subject to the terms and provisions of this Lease,
any ground lease, any mortgage or deed of trust now or hereafter encumbering
the Premises or the Project, and all matters of record.
18. EVENTS OF DEFAULT.
The following events shall be deemed to be events of default by Tenant
under this Lease:
18.1 FAILURE TO PAY RENT. Tenant shall fail to pay any installment
of the Rent herein reserved within five (5) days following written notice that
Rent is due, or any other payment or reimbursement to Landlord required herein
within five (5) days following written notice that Rent is due.
18.2 INSOLVENCY. Tenant or any guarantor of Tenant's obligations
hereunder shall generally not pay its debts as they become due or shall admit
in writing the inability to pay its debts or shall make a general assignment
for the benefit of creditors.
18.3 APPOINTMENT OF RECEIVER. A receiver or trustee (or similar
official) shall be appointed for all or substantially all of the assets of
Tenant.
18.4 BANKRUPTCY. The filing of any voluntary petition by Tenant
under the Bankruptcy Code, or the filing of an involuntary petition by Tenant's
creditors, which involuntary petition remains undischarged for a period of
forty-five (45) days.
18.5 ATTACHMENT. The attachment, execution or other judicial
seizure or non-judicial seizure of all or substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease or the Premises,
if such attachment or other seizure remains undismissed or undischarged for a
period of ten (10) business days after the levy thereof.
18.6 INTENTIONALLY OMITTED.
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18.7 CERTIFICATES. Tenant shall fail to deliver to Landlord any
subordination agreement within the time limit prescribed iii Paragraph 21
below, or a Certificate of occupancy, all financial statements or an estoppel
certificate within the time limits prescribed in Paragraph 22.7 below.
18.8 FAILURE TO DISCHARGE LIENS. Tenant shall fail to discharge
any lien placed upon the Premises in violation of Paragraph 8 hereof.
18.9 FALSE FINANCIAL STATEMENT. Landlord discovers that any
financial statement given to Landlord by Tenant, any assignee, subtenant or
successor in interest of Tenant, or any guarantor of Tenant's obligations
hereunder, or any of them, was materially false when given to Landlord.
18.10 FAILURE TO COMPLY WITH LEASE TERMS. Tenant shall fail to
comply with any other term, provision or covenant of this Lease, and shall not
cure such failure within twenty (20) days after written notice thereof to
Tenant; provided, however, if the nature of the obligation is such that it
cannot be cured within twenty (20) days, Tenant shall not be in default so long
as it commences performance of such cure with all diligence (and in no event
later than 20 days) and thereafter diligently prosecutes the same to
completion.
19. LANDLORD'S REMEDIES.
Upon the occurrence of any event of default, Landlord may, at its
option without further notice or demand and in addition to any other rights and
remedies hereunder or at law or in equity, do any or all of the following:
19.1 TERMINATION. Terminate Tenant's right to possession of the
Premises by any lawful means upon at least 3 days' written notice (which notice
may be satisfied by any notice which may be given by Landlord pursuant to
Paragraph 18, if applicable), in which case Tenant shall immediately surrender
possession of the Premises to Landlord and, in addition to any rights and
remedies Landlord may have at law or in equity, Landlord shall have the
following rights:
(a) To re-enter the Premises then or at any time
thereafter and remove all persons and property and possess the
Premises, without prejudice to any other remedies Landlord may
have by reason of Tenant's default or of such termination, and
Tenant shall have no further claim hereunder.
(b) To recover all damages incurred by Landlord by reason
of the default, including without limitation (i) the worth at
the time of the award of the payments owed by Tenant to
Landlord under this Lease that were earned but unpaid at the
time of termination; (ii) the worth at the time of the award
of the amount by which the payments owed by Tenant to Landlord
under the Lease that would have been earned after the date of
termination until the time of the award exceeds the amount of
the loss of payments owed by Tenant to Landlord under this
Lease for the same period that Tenant proves could have been
reasonably avoided; (iii) the worth at the time of the award
of the amount by which the payments owed by Tenant to Landlord
for the balance of the Term after the time. of the award
exceeds the amount of the loss of payments owed by Tenant for
the same period that Tenant proves could have been reasonably
avoided; (iv) all costs incurred by Landlord in retaking
possession of the Premises and restoring them to good order
and condition; (v) all costs, including without limitation
brokerage commissions, advertising costs and restoration and
remodeling costs, incurred by
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Landlord in reletting the Premises; plus (vi) any other
amount, including without limitation reasonable attorneys'
fees and audit expenses, necessary to compensate Landlord for
all detriment proximately caused by Tenant's failure to
perform its obligations under this Lease or which in the
ordinary course of things would be likely to result therefrom.
"The worth at the time of the award," as used in clauses (i)
and (ii) of this paragraph, is to be determined by computing
interest as to each unpaid payment owed by Tenant to Landlord
under the Lease, at the highest interest rate permitted by
law. "The worth at the time of the award," as referred to in
clause (iii) of this paragraph, is to be determined by
discounting such amount, as of the time of award, at the
discount rate of the San Francisco Federal Reserve Bank, plus
1%.
(c) To remove, at Tenant's sole risk, any and all
personal property in the Premises and place such in a public
or private warehouse or elsewhere at the sole cost and expense
and in the name of Tenant. Any such warehouser shall have all
of the rights and remedies provided by law against Tenant as
owner of such property. If Tenant shall not pay the cost of
such storage within thirty (30) days following Landlord's
demand, Landlord may, subject to the provisions of applicable
law, sell any or all such property at a public or private sale
in such manner and at such times and places as Landlord deems
proper, without notice to or demand upon Tenant. Tenant
waives all claims for damages caused by Landlord's removal,
storage or sale of the property and shall indemnify and hold
Landlord free and harmless from and against any and all loss,
cost and damage, including without limitation court costs and
attorneys' fees. Tenant hereby irrevocably appoints Landlord
as Tenant's attorney-in-fact, coupled with an interest, with
all rights and powers necessary to effectuate the provisions
of this subparagraph.
19.2 CONTINUATION OF LEASE. Maintain Tenant's right to possession,
in which case this Lease shall continue in effect whether or not Tenant shall
have abandoned the Premises. In such event, Landlord may enforce all of
Landlord's rights and remedies under this Lease, including the right to recover
rent as it becomes due hereunder, and, at Landlord's election, to re-enter and
relet the Premises on such terms and conditions as Landlord deems appropriate.
Without limiting the generality of the foregoing, Landlord shall have the
remedy described in California Civil Code Section 1951.4 (lessor may continue
lease in effect after lessee's breach and abandonment and recover rent as it
becomes due, if lessee has right to sublet or assign, subject only to
reasonable limitations). If Landlord relets the Premises or any portion
thereof, any rent collected shall be applied against amounts due from Tenant.
Landlord may execute any lease made pursuant hereto in its own name, and Tenant
shall have no right to collect any such rent or other proceeds. Landlord's
reentry and/or reletting of the Premises, or any other acts, shall not be
deemed an acceptance of surrender of the Premises or Tenant's interest therein,
a termination of this Lease or a waiver or release of Tenant's obligations
hereunder. Landlord shall have the same rights with respect to Tenant's
improvements and personal property as under Paragraph 19.1 above, even though
such re-entry and/or reletting do not constitute acceptance of surrender of the
Premises or termination of this Lease.
19.3 APPOINTMENT OF RECEIVER. Cause a receiver to be appointed in
any action against Tenant and to cause such receiver to take possession of the
Premises and to collect the rents or bonus rent derived therefrom. The
foregoing shall not constitute
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an election by Landlord to terminate this Lease unless specific notice of such
intent is given.
19.4 LATE CHARGE. Subject to the terms of Paragraph 2.7, charge
late charges.
19.5 INTEREST. Subject to the terms of Paragraph 22.2, charge
interest on any amount not paid when due. Interest shall accrue from the date
funds are first due or, if the payment is for funds expended by Landlord on
Tenant's behalf, from the date Landlord expends such funds.
19.6 ATTORNEYS' FEES. Collect, upon demand, all reasonable
attorneys' fees and expenses incurred by Landlord in enforcing its rights and
remedies hereunder.
19.7 INJUNCTION. To restrain by injunction or other equitable
means any breach or anticipated breach of this Lease.
20. TENANT'S REMEDIES.
20.1 LANDLORD'S DEFAULT. Landlord shall not be in default under
this Lease unless Landlord fails to perform obligations required of Landlord
within sixty (60) days after written notice is delivered by Tenant to Landlord
and to the holder of any mortgages or deeds of trust (collectively, "Lender")
covering the Premises whose name and address shall have theretofore been
furnished to Tenant in writing, specifying the obligation which Landlord has
failed to perform; provided, however, that if the nature of Landlord's
obligation is such that more than sixty (60) days are required for performance,
then Landlord shall not be in default if Landlord or Lender commences
performance within such sixty (60) day period and thereafter diligently
prosecutes the same to completion. All obligations of Landlord hereunder shall
be construed as covenants, not conditions.
20.2 TENANT'S REMEDIES. In the event of any default, breach or
violation of Tenant's rights under this Lease by Landlord, Tenant's exclusive
remedies shall be an action for specific performance or action for actual
damages. Tenant hereby waives the benefit of any laws granting it the right to
perform Landlord's obligation, a lien upon the property of Landlord and/or upon
Rent due Landlord, or the right to terminate this Lease or withhold Rent on
account of any Landlord default. Notwithstanding the foregoing, if Landlord
fails to make any repair required of Landlord under this Lease within the time
period specified in Paragraph 20.1 above, then five (5) business days following
Landlord's receipt of a new written notice from Tenant stating that such
failure remains uncured (and provided such cure has not then been performed),
Tenant may cause such repairs (other than work affecting the structural
integrity of the Building) to be made, and Landlord shall reimburse Tenant for
the reasonable cost thereof within thirty (30) days of Landlord's receipt of
paid invoices for such repairs.
20.3 NON-RECOURSE. Notwithstanding anything to the contrary in
this Lease, any judgment obtained by Tenant or any of Tenant's Parties against
Landlord or any Indemnified Parties shall be satisfied only out of Landlord's
interest in the Building and the legal parcel of land on which it sits.
Neither Landlord nor any Indemnified Parties shall have any personal liability
for any matter in connection with this Lease or its obligations as Landlord of
the Premises, except as provided above. Tenant shall not institute, seek or
enforce any personal or deficiency judgment against Landlord or any Indemnified
Parties, and none of their property shall be available to satisfy any judgment
hereunder, except as provided in this Paragraph 20.3.
20.4 SALE OF PREMISES. In the event of any sale or transfer of the
Premises (and provided that any security deposit held by the seller, transferor
or assignor (collectively,
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"Seller") is delivered or credited to the purchaser, transferee or assignee
(collectively, "Purchaser"), the Seller shall be and hereby is entirely freed
and relieved of all agreements, covenants and obligations of Landlord
thereafter to be performed and it shall be deemed and construed without further
agreement between the parties or their successors in interest or between the
Seller and the Purchaser on any such sale, transfer or assignment that such
Purchaser has assumed and agreed to carry out any and all agreements, covenants
and obligations of Landlord hereunder.
21. MORTGAGES.
Tenant accepts this Lease subject and subordinate to any ground lease,
mortgage and/or deed of trust now or at any time hereafter constituting a lien
or encumbrance upon the Premises; provided, however, with respect to future
mortgages, such subordination is conditioned upon Tenant receiving a
nondisturbance agreement (on such mortgagee's then standard form).
Notwithstanding any such subordination, Tenant's right to quiet possession of
the Premises shall not be disturbed if Tenant is not in default and so long as
Tenant shall pay the Rent and observe and perform all of its obligations
hereunder, unless this Lease is otherwise terminated pursuant to its terms. If
any ground lessor, mortgagee or beneficiary under a deed of trust elects to
have Tenant's interest in this Lease superior to any such instrument, then by
notice to Tenant from such ground lessor, mortgagee or beneficiary, this Lease
shall be deemed superior to such ground lease or lien, whether this Lease was
executed before or after said ground lease, mortgage or deed of trust. Tenant
shall at any time hereafter on demand execute any instruments, releases or
other documents which may be required by any ground lessor or mortgagee for the
purpose of attornment or subjecting and subordinating this Lease to any ground
lease or the lien of any such mortgage; provided, however, the foregoing
obligation of Tenant to execute a subordination agreement is conditioned upon
such subordination agreement also containing a nondisturbance provision.
Tenant's failure to execute each instrument, release or document within ten
(10) days after written demand shall constitute an event of default by Tenant
hereunder without further notice to Tenant, or at Landlord's option Landlord
shall execute such instrument, release or document on behalf of Tenant as
Tenant's attorney-in-fact. Tenant does hereby make, constitute and irrevocably
appoint Landlord as Tenant's attorney-in-fact, coupled with an interest, and
in Tenant's name, place and stead, to execute such documents in accordance with
this Paragraph 21. Landlord hereby agrees to use all commercially reasonable
efforts to provide Tenant, within forty-five (45) days following the mutual
execution and delivery of this Lease (the "SNDA Outside Date"), with a
subordination, nondisturbance and attornment agreement ("SNDA") from the
current beneficiary of the deed of trust encumbering the Building, provided
that Landlord's sole obligation shall be to provide the SNDA on such current
beneficiary's then current standard form. If Landlord is unable to deliver the
SNDA to Tenant on or before the SNDA Outside Date, and such failure is not due
in whole or in part to any act or omission of Tenant or Tenant's Parties, then
for each day of delay in Landlord's delivery to Tenant of the SNDA beyond the
SNDA Outside Date which actually causes a delay in the construction of the
Tenant Improvements, the Commencement Date shall be delayed by one (1) day.
22. GENERAL PROVISIONS.
22.1 SINGULAR AND PLURAL. Words of any gender used in this Lease
shall be held and construed to include any other gender, and words in the
singular number shall be held to include the plural, unless the context
otherwise requires.
22.2 INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein
provided to the contrary, any amount due to Landlord not paid within five (5)
days from when due shall bear
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interest at the maximum rate then allowable by law from the date due. Payment
of such interest shall not excuse or cure any default by Tenant under this
Lease, provided, however, that interest shall not be payable on late charges
incurred by Tenant.
22.3 TIME OF ESSENCE. Time is of the essence.
22.4 BINDING EFFECT. The terms, provisions and covenants and
conditions contained in this Lease shall apply to, inure to the benefit of, and
be binding upon, the parties hereto and upon their respective heirs, legal
representatives, successors and permitted assigns, except as otherwise herein
expressly provided.
22.5 CHOICE OF LAW. This Lease shall be governed by the laws of
the State of California applicable to contracts made and to be performed in
such state.
22.6 CAPTIONS. The captions inserted in this Lease are for
convenience only and in no way define, limit or otherwise describe the scope or
intent of this Lease, or any provision hereof, or in any way affect the
interpretation of this Lease.
22.7 CERTIFICATES. Tenant agrees from time to time within ten (10)
days after request of Landlord, to deliver to Landlord, or Landlord's designee,
a Certificate of Occupancy for work performed by Tenant or Tenant's Parties in
the Premises, annual financial statements for each of the previous three (3)
fiscal years of Tenant, and an estoppel certificate stating 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), the date to which Rent has been paid, the unexpired Term of
this Lease and such other matters pertaining to this Lease as may be requested
by Landlord or Landlord's designee. Any such certificate may be conclusively
relied upon by Landlord or Landlord's designee. At Landlord's option, Tenant's
failure to timely deliver such certificate shall be an event of default by
Tenant, without further notice to Tenant, or it shall be conclusive upon Tenant
that this Lease is in full force and effect, without modification except as may
be represented by Landlord, that there are no uncured defaults in Landlord's
performance, and that not more than one (1) month's rent has been paid in
advance.
22.8 AMENDMENTS. This Lease may not be altered, changed or amended
except by an instrument in writing signed and dated by both parties hereto.
Tenant agrees to make such reasonable modifications to this Lease as may be
required by any lender in connection with the obtaining of financing or
refinancing of the Project or any portion thereof.
22.9 ENTIRE AGREEMENT. This Lease constitutes the entire
understanding and agreement of Landlord and Tenant with respect to the subject
matter of this Lease, and contains all of the covenants and agreements of
Landlord and Tenant with respect thereto, and supersedes all prior agreements
or understandings. Landlord and Tenant each acknowledge that no
representations, inducements, promises or agreements, oral or written, have
been made by Landlord or Tenant, or anyone acting on behalf of Landlord or
Tenant, which are not contained herein, and any prior agreements, promises,
negotiations, or representations not expressly set forth in this Lease are of
no force or effect.
22.10 WAIVERS. The waiver by Landlord of any term, covenant,
agreement or condition herein contained shall not be deemed to be a waiver of
any subsequent breach of the same or any other term, covenant, agreement or
condition herein contained, nor shall any custom or practice which may arise
between the parties in the administration of this Lease be construed to waive
or lessen the right of Landlord to insist upon the performance by Tenant in
strict accordance with all of the provisions of this Lease. The subsequent
acceptance of Rent hereunder by Landlord
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shall not be deemed to be a waiver of any preceding breach by Tenant of any
provisions, covenant, agreement or condition of this Lease, other than the
failure of Tenant to pay the particular Rent so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
Rent.
22.11 ATTORNEYS' FEES. If either Landlord or Tenant commences or
engages in, or threatens to commence or engage in, an action by or against the
other party arising out of or in connection with this Lease or the Premises,
including but not limited to any action for recovery of Rent due and unpaid, to
recover possession or for damages for breach of this Lease, the prevailing
party shall be entitled to have and recover from the losing party reasonable
attorneys' fees and other costs incurred in connection with the action,
preparation for such action, any appeals relating thereto and enforcing any
judgments rendered in connection therewith. If Landlord becomes involved in
any action, threatened or actual, by or against anyone not a party to this
Lease, but arising by reason of or related to any act or omission of Tenant or
Tenant's Parties, Tenant agrees to pay Landlord's reasonable attorneys, fees
and other costs incurred in connection with the action, preparation for such
action, any appeals relating thereto and enforcing any judgments rendered in
connection therewith.
22.12 MERGER. The voluntary or other surrender of this Lease by
Tenant or a mutual cancellation hereof shall not constitute a merger. Such
event shall, at the option of Landlord, either terminate all or any existing
subtenancies or operate as an assignment to Landlord of any or all of such
subtenancies.
22.13 SURVIVAL OF OBLIGATIONS. Paragraphs 2, 3.2, 4.2, 5.2, 8,
12.1, 12.5, 15.3, 16, 19, 20 and 22 and all obligations of Tenant hereunder not
fully performed as of the expiration or earlier termination of the Term shall
survive the expiration or earlier termination of the Term, including without
limitation, all payment obligations with respect to Rent and all obligations
concerning the condition of the Premises. Upon the expiration or earlier
termination of the Term, and prior to Tenant vacating the Premises, Tenant
shall pay to Landlord any amount reasonably estimated by Landlord (i) as
necessary to perform Tenant's duties under paragraphs 6.1 and 16.1 and put the
Premises, including without limitation, all heating and air conditioning
systems and equipment therein, in good condition and repair, and (ii) as
sufficient to meet Tenant's obligation hereunder for prorated Additional Rent
for the year in which the Lease expires or terminates. All such amounts shall
be used and held by Landlord for payment of such obligations, with Tenant being
liable for any additional costs therefor upon demand by Landlord, or with any
excess to be returned to Tenant after all such obligations have been determined
and satisfied as the case may be. Any Security Deposit held by Landlord shall
be credited against the amounts payable by Tenant under this Paragraph 22.13.
22.14 SEVERABILITY. If any clause or provision of this Lease is
illegal, invalid or unenforceable under present or future laws effective during
the Term, the remainder of this Lease shall not be affected thereby, and in
lieu of each clause or provision of this Lease that is illegal, invalid or
unenforceable, there shall be added as a part of this Lease a clause or
provision as similar in terms to such illegal, invalid or unenforceable clause
or provision as may be possible and be legal, valid and enforceable.
22.15 SECURITY MEASURES. Tenant hereby acknowledges that the Rent
payable to Landlord hereunder does not include the cost of guard service or
other security measures, and that Landlord shall have no obligation whatsoever
to provide same. Tenant assumes all responsibility for the protection of
Tenant, Tenants' Parties and their property from acts of third parties.
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22.16 EASEMENTS. Landlord reserves to itself the right, from time
to time, to grant such easements, rights and dedications that Landlord deems
necessary or desirable, and to cause the recordation of parcel maps, easement
agreements and covenants, conditions and restrictions, so long as such
easements, rights, dedications, maps and covenants, conditions and restrictions
do not unreasonably interfere with the permitted use of the Premises by Tenant.
Tenant shall sign any of the aforementioned documents upon request of Landlord
and failure to do so shall constitute a material breach of this Lease.
22.17 MULTIPLE PARTIES. If more than one person or entity is named
as Tenant herein, the obligations of Tenant hereunder shall be the joint and
several responsibility of all persons or entities so named.
22.18 CONFLICT. Any conflict between the printed provisions of this
Lease and any typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
22.19 NO THIRD PARTY BENEFICIARIES. This Lease is not intended by
either party to confer any benefit on any third party, including without
limitations any broker, finder, or brokerage firm.
22.20 EFFECTIVE DATE/NONBINDING OFFER. Submission of this Lease for
examination or signature by Tenant does not constitute an offer or option for
lease, and it is not effective as a lease or otherwise until executed and
delivered by both Landlord and Tenant.
22.21 NOTICES. Each provision of this Lease or of any applicable
governmental laws, ordinances, regulations and other requirements with
reference to the sending, mailing or delivery of any notice or the making of
any payment by one party to the other shall be deemed to be complied with when
and if the following steps are taken:
(a) All Rent and other Payments required to be made
hereunder shall be payable to the applicable party hereto as follows: to
Landlord at the address set forth in Item 12 of the Basic Lease Provisions, and
to Tenant at the Premises, or at such other addresses as the parties may have
hereafter specified by written notice. All obligations to pay Rent and/or any
other amounts under the terms of this Lease shall not be deemed satisfied until
such Rent and other amounts have been actually received by the respective
party.
(b) Wherever any notice is required or permitted
hereunder, such notice shall be in writing. Any notice or document required or
permitted to be delivered hereunder shall be deemed to be delivered (i) upon
personal delivery; (ii) seventy-two (72) hours after deposit thereof in the
United States mail, postage prepaid, certified or registered mail, return
receipt requested; (iii) upon confirmation of delivery by Federal Express or
other reputable overnight delivery service; or (iv) upon written confirmation
of delivery by telegraph, telecopy or other electronic written transmission
device; correctly addressed to the parties hereto as follows: if to Tenant
before the Commencement Date, then at the address specified in Item 11 of the
Basic Lease Provisions; if to Tenant after the Commencement Date, then at the
Premises; and if to Landlord, then at the address specified in Item 12 of the
Basic Lease Provisions; or at such other address (but no more than one (1)
address at a time, except as provided in Paragraph 20.1) as the recipient may
theretofore have specified by written notice.
22.22 WATER, OIL AND MINERAL RIGHTS. Landlord reserves all right,
title or interest in water, oil, gas or other hydrocarbons, other mineral
rights and air and development rights, together with the sole and exclusive
right of Landlord to
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sell, lease, assign or otherwise transfer the same, but without any right of
Landlord or any such transferee to enter upon the Premises during the Term
except as otherwise provided herein.
22.23 CONFIDENTIALITY. Tenant agrees to keep the Lease and its
terms, covenants, obligations and conditions strictly confidential and not to
disclose such matters to any other landlord, tenant, prospective tenant, or
broker; provided, however, Tenant may provide a copy of this Lease to its
attorneys, accountants and bankers, and to a non-party solely in conjunction
with Tenant's reasonable and good faith effort to secure an assignee or
sublessee for the Premises.
22.24 BROKER'S FEES. Tenant represents and warrants that it has
dealt with no broker, agent or other person in connection with this transaction
and that no broker, agent or other person brought about this transaction, other
than the brokerage firm specified in Item 13 of the Basic Lease Provisions, if
any, and Tenant shall indemnify, defend, protect and hold Landlord harmless
from and against any claims, losses, liabilities, demands, costs, expenses or
causes of action by any other broker, agent or other person claiming a
commission or other form of compensation by virtue of having dealt with Tenant
with regard to this leasing transaction.
22.25 REMEDIES CUMULATIVE. All rights, privileges and remedies of
the parties are cumulative and not alternative or exclusive to the extent
permitted by law, except as otherwise provided herein.
22.26 RETURN OF CHECK. If Tenant's check, given to Landlord in
payment of any sum, is returned by the bank for nonpayment, Tenant shall pay to
Landlord immediately on demand, as Additional Rent, all expenses incurred by
Landlord as a result thereof.
22.27 NO RECORDATION OF LEASE. Neither this Lease nor any
memorandum hereof may be recorded.
22.28 AUTHORITY. If Tenant is a corporation or partnership, each
individual executing this Lease on behalf of such entity represents and
warrants that he or she is duly authorized to execute and deliver this Lease.
Tenant shall, within thirty (30) days following execution of this Lease,
deliver to Landlord evidence of such authority satisfactory to Landlord.
22.29 INTERPRETATION. This Lease shall be construed fairly
according to its terms without regard to which party, or which party's
attorneys, prepared its form.
22.30 LANDLORD'S APPROVALS. Except where the provisions of this
Lease expressly provide that Landlord's consent or approval must be reasonably
given, all consents or approvals of Landlord sought or required pursuant to the
terms of this Lease may be given or withheld in Landlord's sole and absolute
discretion.
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22.31 ADDITIONAL PROVISIONS. Those additional provisions set forth
in Exhibit "C", if any, are hereby incorporated by this reference as if fully
set forth herein.
LANDLORD:
TCEP II PROPERTIES JOINT VENTURE, a Texas joint venture
By: TCEP II Properties/First Plaza Limited Partnership,
a Texas limited partnership, Co-Venturer
By: TCV/TCEP II Properties Limited Partnership,
a Texas limited partnership, General Partner
By: Trammell Crow Ventures #3, Ltd., a Texas
limited partnership, General Partner
By: Trammell Crow Ventures Management Company, Inc.,
a Texas corporation, General Partner
By: /s/ JEFFREY C. CHAVEZ
Name: JEFFREY C. CHAVEZ
Title: VICE PRESIDENT
By: Trammell Crow Equity Partners II, Ltd., a Texas limited
partnership Co-Venturer
By: Trammell Crow Ventures #2, Ltd., a Texas limited
partnership, General Partner
By: Trammell Crow Ventures #3, Ltd., a Texas
limited partnership, General Partner
By: Trammell Crow Ventures Management Company, Inc.,
a Texas corporation, General Partner
By: /s/ JEFFREY C. CHAVEZ
Name: JEFFREY C. CHAVEZ
Title: VICE PRESIDENT
TENANT:
CHAD THERAPEUTICS, INC.,
a California corporation
By: /s/ CHARLES R. ADAMS
Name: CHARLES R. ADAMS
Title: CHMN./C.E.O.
By: /s/ EARL L. YAGER
Name: EARL L. YAGER
Title: CFO
-33-
<PAGE> 35
EXHIBIT "A"
CHAD THERAPEUTICS TOTAL PARKING SPACES (150) of which
are DESIGNATED PARKING SPACES (75 SPACES)
---------------------------------
CHATSWORTH, CA
[REPRESENTATION OF PARKING AREA]
/x/ = reserved spaces
<PAGE> 36
EXHIBIT "B"
WORK LETTER AND CONSTRUCTION AGREEMENT
(Tenant to Construct Improvements)
1. TENANT'S IMPROVEMENTS.
Except as set forth in the Lease to the contrary, Tenant accepts the
Premises and existing improvements therein in their "as is" condition. Tenant
shall, at its sole cost and expense, furnish and install within the Premises
those improvements (the "Tenant Improvements") shown on the plans and
specifications finally approved by Landlord and Tenant, pursuant to Paragraph 2
below, in compliance with all applicable codes and regulations. All Tenant
Improvements shall be constructed pursuant to this Work Letter and shall be
performed by Tenant's general contractor utilizing those subcontractors
approved by Landlord in accordance with this Work Letter.
2. PLANS AND SPECIFICATIONS FOR IMPROVEMENTS.
2.1 Tenant shall retain a licensed architect of its choice,
subject to Landlord's reasonable approval, to prepare the plans and
specifications described hereinafter for the Tenant Improvements. The plans
and specifications shall be subject to Landlord's approval, which approval
shall not be unreasonably withheld or delayed.
2.2 Promptly following the date of execution of the Lease by
Tenant, Tenant shall cause its architect to furnish to Landlord for Landlord's
approval space plans sufficient to convey the architectural design of the
Premises, including, without limitation, the location of doors, partitions,
electrical and telephone outlets, plumbing fixtures, heavy floor loads and
other special requirements (collectively, the "Space Plan"). If required by
Landlord, Tenant's architect shall consult with Landlord's engineer in
preparing the Space Plan and incorporate such engineer's requirements into the
Space Plan. The fees of such engineer shall be a Cost of Tenant Improvements
(as hereafter defined). If Landlord fails to disapprove the Space Plan within
the ten (10) day period following its receipt of the Space Plan, the Space Plan
shall be deemed approved. If Landlord shall disapprove of any portion of the
Space Plan within such ten (10) day period, Landlord shall advise Tenant of the
reasons therefor and shall notify Tenant of the revisions to the Space Plan
that are reasonably required by Landlord for the purpose of obtaining approval.
Tenant shall thereafter promptly submit to Landlord, for Landlord's approval, a
redesign of the Space Plan, incorporating the revisions required by Landlord.
If the redesign of the Space Plan is not approved by Landlord within ten (10)
days following Landlord's receipt of same, then at Landlord's election, this
Lease may be terminated.
2.3 Tenant shall cause its architect to prepare from Tenant's
approved Space Plan, complete architectural plans, drawings and specifications
promptly after Landlord approves the Space Plan. Such complete plans, drawings
and specifications are referred to herein as the "Plans". Tenant's Plans shall
(i) be compatible with the Building shell and with the design, construction and
equipment of the Building; (ii) comply with all applicable laws and ordinances,
and the rules and regulations of all governmental authorities having
jurisdiction; (iii) comply with all applicable insurance regulations, and (iv)
be consistent with the Space Plan. Tenant shall submit the Plans for the
approval of Landlord in the same manner as provided in Subparagraph 2.2 above
for approval by Landlord of Tenant's Space Plan.
2.4 Tenant shall cause its architect to provide documentation for
all changes to the Plans at the time each change is authorized for
construction, pursuant to the
-1-
<PAGE> 37
requirements of paragraph 6. At the conclusion of construction, Tenant shall
cause its architect to update Tenant's plans and specifications as necessary to
reflect all changes to the Plans during the course of construction and to issue
a set of sepias to the contractor for its review and mark up. Tenant shall
cause its architect to review and certify the contractor's marked up plans and
provide to Landlord's designated construction representative a "record set" of
as-built sepias within thirty (30) days following completion of the Tenant
Improvements. Landlord shall have no liability to Tenant or to any other
person for errors or omissions in the Plans, Landlord's review being for
Landlord's own purposes. Tenant shall rely solely on the advice and experience
of Tenant's architect in assuring the accuracy and sufficiency of the Plans for
Tenant's purposes.
3. NON-STANDARD TENANT IMPROVEMENTS.
3.1 Subject to obtaining Landlord's prior written consent, which
consent shall not be unreasonably withheld or delayed, Tenant may install
non-standard floor covering and wall finishes. Such non-standard floor
covering and wall finish deviations shall not be of a lesser quality than the
improvements delivered to Tenant as of the Commencement Date.
3.2 Landlord shall not be required to approve any non-standard
finishes that: (1) do not conform to applicable government regulations or are
disapproved by any governmental agency; or (2) are, in Landlord's reasonable
opinion, of a nature or quality that are inconsistent with the objectives of
Landlord.
4. BUILDING SHELL CHANGES.
If the Plans or any amendment thereof or supplement thereto shall
require changes in the Building shell, the cost of the Building shell work
caused by such Plans, amendment or supplement, shall be charged against Tenant.
The preceding sentence shall not be construed as requiring that Landlord must
approve any Plans which specify changes in the Building shell. If Building
shell work is permitted by Landlord, the cost thereof shall include all
architectural and/or engineering fees and expenses in connection therewith, as
well as compensation to Landlord for the costs of any delays which arise from
such changes. Landlord shall, at its sole cost and expense, repair any defects
in the initial construction of the Building shell, and comply with any
requirements imposed by any governmental agency pertaining to the Building
shell, unless such requirements arise out of laws, codes or ordinances enacted
or effective after the Commencement Date, or out of the Tenant Improvements to
the Premises or Tenant's use of the Premises.
5. TENANT IMPROVEMENT APPROVAL AND COST.
5.1 Promptly upon completion of the Plans, Tenant shall submit the
Plans to Tenant's general contractor to bid the project to subcontractors to
determine the cost of construction of the Tenant Improvements. Tenant shall
obtain Landlord's prior approval of Tenant's general contractor and the form of
contract to be used, such approval not to be unreasonably withheld or delayed.
The general contractor and all subcontractors shall be appropriately licensed.
The subcontractors shall be chosen from a list provided by Tenant and approved
by Landlord.
5.2 Tenant shall be solely responsible for any and all costs
incurred in connection with or otherwise arising out of the Tenant Improvements
and Tenant shall indemnify, defend, protect and hold Landlord and the
Indemnified Parties (as defined in the Lease) harmless from and against any
Claims (as defined in the Lease) suffered by Landlord (or any of the
Indemnified Parties) which arise in any way out of the construction of the
Tenant Improvements including, without limitation, any mechanics liens
resulting from Tenant's failure to timely pay the same.
-2-
<PAGE> 38
5.3 Subject to the terms of Paragraph 16.1 of the Lease, all of
the Tenant improvements shall become the property of Landlord upon expiration
or earlier termination of the Lease and shall remain on the Premises at all
times during the Term.
6. TENANT CHANGES.
Tenant may request a change, addition or alteration in the Tenant
Improvements as shown by the Plans after Landlord's final approval of such
Plans (a "Change Order") by delivery of a written request to Landlord, for its
approval. Tenant's architect shall complete all working drawings necessary to
show the change, addition or alteration, and a change Order in form
satisfactory to Landlord. Following its approval of the Change Order and any
delays in construction occasioned by the Change Order, Landlord shall deliver
to Tenant its written approval of the Change Order and authorization to proceed
with the work as shown by the Change Order. Landlord may decline any proposed
Change Order if the change is inconsistent with the provisions of any of
paragraphs 1 through 5 above.
7. CONSTRUCTION OF TENANT IMPROVEMENTS.
7.1 Upon approval by Landlord of the Plans and Tenant's general
contractor, Tenant shall cause its general contractor to proceed to secure a
building permit and commence construction.
7.2 Subject to the terms of Paragraph 1.3 of the Lease, the
Commencement Date shall not be later than July 1, 1996, irrespective of the
date Tenant has substantially completed the Tenant Improvements.
7.3 The construction of Tenant Improvements by Tenant and Tenant's
general contractor shall comply with all of the following:
(i) Tenant shall reimburse Landlord for all costs
directly or indirectly related to the Tenant
Improvements, including, without limitation: costs of
site services, facilities and utilities (such as
trash removal, electrical service, etc.); costs of
remedying deficient or faulty work or inadequate
clean-up done by Tenant or its contractor(s).
(ii) All Tenant improvements shall be installed in
coordination with Landlord or its designated agents.
(iii) Subject to the terms of Paragraph 8 of the Lease,
Tenant will promptly pay all contractors,
subcontractors and materialmen with respect to the
Tenant Improvements and will obtain unconditional lien
releases as reasonably required by Landlord within
thirty (30) days following Tenant's commencement of
business operations from the Premises.
7.4 Tenant shall assure that Tenant's general contractor secures
the insurance specified herein, and maintains the same until substantial
completion and final acceptance of the work. Certificates of insurance
affording evidence of same shall be obtained from Tenant's general contractor
by Tenant and delivered to Landlord prior to the commencement of any work by
Tenant's general contractor. The required insurance coverage is as follows:
(i) Worker's compensation and employer's liability
insurance affording 30 days' written notice of
cancellation to Landlord. The employer's liability
minimum limits required are as follows:
Bodily Injury by Accident - $100,000 each accident
Bodily Injury by Disease - $500,000 policy limit
Bodily Injury by Disease - $100,000 each employee
-3-
<PAGE> 39
(ii) General liability insurance in the amount of
$2,000,000 for each occurrence for bodily injury
and/or property damage combined, written on an
occurrence basis and including:
(a) Premises and operations coverage with X, C
and U exclusions deleted, if any.
(b) Owner's and contractor's protective coverage.
(c) Products and completed operations coverage.
(d) Blanket contractual coverage.
(e) Personal injury coverage.
(f) Broad form property damage coverage,
including completed operations.
(g) An endorsement naming Landlord as additional
insured.
(h) An endorsement affording 30 days' prior
written notice to Landlord in the event of
cancellation or nonrenewal.
(i) An endorsement providing that such insurance
as is afforded under such policy is primary
insurance as respects Landlord, and that any
other insurance maintained by Landlord is
excess and noncontributing with the insurance
required hereunder.
(j) An endorsement which states that the general
aggregate limit applies separately to each
project away from the premises owned by or
rented to Tenant's general contractor.
No endorsement limiting or excluding a required coverage shall
be permitted. No deductible in excess of $5,000 per occurrence shall be
permitted. Tenant's general contractor shall be responsible for payment of any
deductible. Claims-made coverage shall not be acceptable.
(iii) Business auto liability insurance written in the
amount of $2,000,000 for each occurrence for bodily
injury and/or property damage liability combined,
including:
(a) Owned autos;
(b) Hired autos;
(c) Non-owned autos; and
(d) An endorsement affording 30 days, prior
written notice to Landlord in the event of
cancellation or nonrenewal.
A certificate and endorsements affording evidence of the
coverage required under paragraphs (i) through (iii) must be delivered to
Landlord before Tenant's general contractor performs any work at or prepares or
delivers materials to the construction site. Tenant shall require its general
contractor to cause its subcontractors to provide insurance where Tenant's
general contractor would be required to carry insurance under this insurance
section and to be responsible for obtaining (and providing to Landlord on
request) the appropriate certificates or other evidence of insurance; provided,
however, each subcontractor need not carry in excess of One Million Dollars
($1,000,000.00) liability insurance. The requirements for the foregoing
insurance shall not derogate from the provisions for
-4-
<PAGE> 40
indemnification of Landlord by Tenant under this Lease. All insurance, except
workers' compensation, maintained by Tenant's general contractor and its
subcontractors, shall preclude subrogation claims by the insurer against anyone
insured thereunder.
Tenant's general contractor shall maintain all of the
foregoing insurance coverage in force until the work under this Work Letter and
Construction Agreement is fully completed and accepted except as to products
and completed operations liability coverage with amendments specified in 7.4(i)
above, which shall be maintained in force until such time as an action on
account of any matter covered by such insurance is barred by any applicable
statute of limitations. This insurance obligation shall survive the expiration
or termination of this Lease.
If Tenant fails to secure and maintain the required insurance
from Tenant's general contractor, Landlord shall have the right (but without
any obligation to do so) to secure same in the name and for the account of
Tenant's general contractor, in which event Tenant shall pay the cost thereof,
together with a twenty percent (20%) servicing fee, as Additional Rent and
shall furnish upon demand all information that may be required in connection
therewith.
8. MISCELLANEOUS.
8.1 Landlord may impose such rules and regulations regarding the
construction of the Tenant Improvements and the conduct of Tenant's general
contractor and subcontractors as Landlord may reasonably elect from time to
time. If Landlord or its agents discover any work which is either not in
substantial conformity with the Plans or not in compliance with any laws or
regulations, Landlord may without liability to Tenant require Tenant to stop
the work and replace all defective or non-conforming work.
8.2 Any default of Tenant in this Work Letter and Construction
Agreement shall constitute a default of Tenant under the Lease, and Landlord's
remedies shall be as set forth therein. All provisions of the Lease are fully
incorporated in this Exhibit "B" as though set forth herein at length.
8.3 Tenant shall designate one (1) construction representative
authorized to act for Tenant upon whom Landlord can rely, and who shall consult
with Landlord and Landlord's contractors, employees and agents in connection
with the construction of the Tenant Improvements.
8.4 Tenant shall indemnify, defend, protect and hold the
Indemnified Parties harmless from all Claims (as defined in the Lease) which
arise in any way, directly or indirectly, from or in connection with the design
or construction of the Tenant Improvements, including without limitation
arising from the work of Tenant's architect, engineer, general contractor,
subcontractors, suppliers, laborers, employees or agents.
8.5 Tenant hereby agrees to cause its general contractor to
construct a demising wall ("Demising Wall") dividing the Premises from the
remaining space within the Building, such Demising Wall to be in accordance
with plans and specifications approved by Landlord. In consideration of
Tenant's construction of the Demising Wall as described above, Landlord agrees
to reimburse Tenant, within thirty (30) days following Landlord's receipt of
paid invoices therefor, for all costs incurred by Tenant in connection with the
construction of the Demising Wall, but only to the extent such costs exceed
$3,223.00, and provided further that in no event shall Landlord's reimbursement
obligation hereunder exceed the sum of $9,669.00.
-5-
<PAGE> 41
EXHIBIT "C"
ADDITIONAL LEASE PROVISIONS
A. Option to Extend Term. Landlord grants to Tenant one (1)
option to extend the Term of this Lease for a sixty (60) month period (the
"Option") commencing upon the expiration of the initial Term (or upon the
expiration of the preceding Option if any), upon each of the following
conditions and terms:
1. Tenant shall give to Landlord, and Landlord shall
actually receive, on a date which is at least six (6) months and not more than
twelve (12) months prior to the then scheduled expiration date of the Term, a
written notice of Tenant's exercise of such Option (the "Option Notice"), time
being of the essence. If the Option Notice is not timely so given and
received, such Option shall automatically expire.
2. Tenant shall have no right to exercise an Option,
notwithstanding any provision hereof to the contrary, (a) during the time
commencing from the date Landlord gives to Tenant a notice of default pursuant
to Paragraph 18.10 of this Lease and continuing until the noncompliance alleged
in said notice of default is cured, or (b) during the period of time commencing
on the day after a monetary obligation to Landlord is due from Tenant and
unpaid (without any necessity for notice thereof to Tenant) and continuing
until the obligation is paid, or (c) if Landlord has given to Tenant three or
more notices of default under Paragraph 18.10 of this Lease, whether or not the
defaults are cured, or Tenant has been late on three or more occasions in the
payment of a monetary obligation to Landlord (without any necessity for notice
thereof to Tenant), during the 12 month period of time immediately prior to the
time that Tenant attempts to exercise the Option, or (d) if Tenant has
committed any noncurable breach, or is otherwise in default of any of the
terms, covenants or conditions of this Lease.
3. The period of time within which the Option may be
exercised shall not be extended or enlarged by reason of Tenant's inability to
exercise an Option because of the provisions of Paragraph A.2 above.
4. All Option rights of Tenant under this Paragraph A.
shall terminate and be of no further force or effect, notwithstanding Tenant's
due and timely exercise of the Option, if, after such exercise and during the
initial Term of this Lease (as and if previously extended), (a) Tenant fails to
pay to Landlord a monetary obligation of Tenant for a period of ten (10) days
after such obligation becomes due (without any necessity of Landlord to give
notice thereof to Tenant), or (b) Tenant fails to commence to cure a default
specified in Paragraph 18.10 of this Lease within ten (10) days after the date
that Landlord gives notice to Tenant of such default and/or Tenant fails
thereafter to diligently prosecute said cure to completion within thirty (30)
days after the date of such notice, or (c) Landlord gives to Tenant one (1) or
more notices of default under Paragraph 18.10 of this Lease, or Tenant is late
on one (1) or more occasions in the payment of a monetary obligation to
Landlord (without any necessity of notice thereof to Tenant), whether or not
the defaults are cured, or (d) Tenant has committed any incurable breach, or is
otherwise in default of any of the terms, covenants and conditions of this
Lease.
5. The Option granted to Tenant in this Lease is
personal to the original Tenant and may be exercised only by the original
Tenant while occupying the Premises who does so without the intent of
thereafter assigning this Lease or subletting the Premises or any portion
thereof, and may not be exercised or be assigned, voluntarily or involuntarily,
by or to any person or entity other than Tenant. The Option herein granted to
Tenant is not assignable separate and apart from this Lease, nor may the
-1-
<PAGE> 42
Option be separated from this Lease in any manner, either by reservation or
otherwise.
6. All of the terms and conditions of this Lease except
where specifically modified by this Paragraph A shall apply during the extended
Term (the "Option Period"). Tenant hereby acknowledges and agrees that
Paragraph 2.8 of the Lease (Base Rent Credit) does not apply with respect to
the Option Period, and Tenant shall accept the Premises in its "as-is",
"where-is" condition without any representations or warranties whatsoever from
Landlord during the Option period.
7. The monthly Base Rent payable during the Option period
shall be as follows:
<TABLE>
<CAPTION>
Month of
Option Period Base Rent
------------- ---------
<S> <C>
1-12 $32,240.33 per month
13-24 $33,529.94 per month
25-36 $34,871.14 per month
37-48 $36,265.99 per month
49-60 $37,716.63 per month
</TABLE>
-2-
<PAGE> 1
Exhibit 13.1
NET EARNINGS PER SHARE
[GRAPH]
SHAREHOLDERS' EQUITY
[GRAPH]
TOTAL ASSETS
[GRAPH]
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales $20,359,000 14,518,000 9,470,000 5,805,000 3,232,000
Interest Income 97,000 50,000 28,000 8,000 7,000
Net Earnings 4,310,000 2,606,000 2,053,000 1,237,000 573,000
Earnings Per Common Share .43 .26 .21 .13 .06
Net Working Capital 9,219,000 5,172,000 4,176,000 1,943,000 701,000
Total Assets 10,778,000 6,371,000 5,075,000 2,635,000 1,197,000
Shareholders' Equity 9,775,000 5,574,000 4,507,000 2,180,000 779,000
</TABLE>
No cash dividends have been declared or paid during the periods presented.
CHAD THERAPEUTICS, INC. 3
<PAGE> 2
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31,
-------------------------
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
Current Assets:
Cash $ 1,809,000 1,219,000
Marketable securities 1,029,000 416,000
Accounts receivable, less allowance for doubtful
accounts of $92,000 and $52,000 in 1996 and 1995 2,872,000 2,126,000
Inventories (Note 2) 4,011,000 1,845,000
Income taxes refundable (Note 3) - 84,000
Prepaid expenses 145,000 125,000
Deferred income taxes (Note 3) 356,000 154,000
----------- -----------
Total current assets 10,222,000 5,969,000
----------- -----------
Property and equipment, at cost:
Office equipment and furniture 478,000 257,000
Machinery and equipment 192,000 145,000
Tooling 303,000 303,000
Leasehold improvements 101,000 101,000
----------- -----------
1,074,000 806,000
Less accumulated depreciation and amortization 574,000 460,000
----------- -----------
Net property and equipment 500,000 346,000
----------- -----------
Other assets, net 56,000 56,000
----------- -----------
$10,778,000 6,371,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
----------- -----------
Current liabilities:
Accounts payable $399,000 514,000
Accrued expenses 424,000 283,000
income taxes payable (Note 3) 180,000 -
----------- -----------
Total current liabilities 1,003,000 797,000
----------- -----------
Commitments (Note 6)
Shareholders' equity (Note 4):
Common shares
Authorized 40,000,000 shares;
9,623,000 and 9,620,000 shares issued and outstanding 6,791,000 6,832,000
Retained earnings (accumulated deficit) 3,052,000 (1,258,000)
----------- -----------
9,843,000 5,574,000
Less treasury shares at cost, 5,000 shares at March 31, 1 996 (68,000) -
----------- -----------
Net shareholders' equity 9,775,000 5,574,000
----------- -----------
$10,778,000 6,371,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
14 CHAD THERAPEUTICS, INC.
<PAGE> 3
STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
Net sales $20,359,000 14,518,000 9,470,000
Cost of sales 8,480,000 6,916,000 4,461,000
----------- ---------- ---------
Gross profit 11,879,000 7,602,000 5,009,000
Costs and expenses:
Selling, general and administrative 4,791,000 3,777,000 2,645,000
Research and development 113,000 70,000 11,000
----------- ---------- ---------
Total costs and expenses 4,904,000 3,847,000 2,656,000
----------- ---------- ---------
Operating income 6,975,000 3,755,000 2,353,000
Interest income 97,000 50,000 28,000
----------- ---------- ---------
Earnings before income taxes 7,072,000 3,805,000 2,381,000
Income taxes (Note 3) 2,762,000 1,199,000 328,000
----------- ---------- ---------
Net earnings $ 4,310,000 2,606,000 2,053,000
=========== ========== =========
Net earnings per share $ .43 .26 .21
=========== ========== =========
Weighted average number of common shares
and common share equivalents 9,922,000 9,873,000 9,990,000
=========== ========== =========
</TABLE>
See accompanying notes to financial statements.
CHAD THERAPEUTICS, INC. 15
<PAGE> 4
STATEMENTS OF SHAREHOLDERS" EQUITY
- -------------------------------------------------------------------------------
For the years ended March 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
RETAINED
COMMON SHARES (NOTE 4) EARNINGS
----------------------------- (ACCUMULATED
SHARES AMOUNT DEFICIT) TREASURY SHARES
--------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Balance at March 31, 1993 8,924,000 $ 5,021,000 $(2,841,000) $ -
3% Stock Dividend 267,000 552,000 (552,000) -
Common Shares Repurchased At Cost - - - (70,000)
Common Shares Issued For Purchases
Under Employee Benefit Plan (Note 4) - 46,000 - 42,000
Exercise of Stock Options 247,000 98,000 - -
Tax Benefit From Exercise of
Non-Qualified Stock Options (Note 4) - 158,000 - -
Net Earnings - - 2,053,000 -
--------- ----------- ----------- ---------
Balance at March 31, 1994 9,438,000 5,875,000 (1,340,000) (28,000)
Common Shares Issued For Purchases
Under Employee Benefit Plan (Note 4) - 44,000 - 28,000
Common Shares Repurchased and Retired (307,000) (1,675,000) - -
5% Stock Dividend 459,000 2,524,000 (2,524,000) -
Exercise of Stock Options 30,000 23,000 - -
Tax Benefit From Exercise of
Non-Qualified Stock Options (Note 4) - 41,000 - -
Net Earnings - - 2,606,000 -
--------- ----------- ----------- ---------
Balance at March 31, 1995 9,620,000 6,832,000 (1,258,000) -
Common Shares Repurchased and Retired (71,000) (392,000) - -
Common Shares Repurchased At Cost - - - (228,000)
Common Shares Issued For Purchases
Under Employee Benefit Plan (Note 4) - - - 160,000
Exercise of Stock Options 74,000 187,000 - -
Tax Benefit From Exercise of
Non-Qualified Stock Options (Note 4) - 164,000 - -
Net Earnings - - 4,310,000 -
--------- ----------- ----------- ---------
Balance at March 31, 1996 9,623,000 $ 6,791,000 $ 3,052,000 $ (68,000)
========= =========== =========== =========
</TABLE>
See accompanying notes to financial statements.
16 CHAD THERAPEUTICS, INC.
<PAGE> 5
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH
YEARS ENDED March 31,
------------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 4,310,000 2,606,000 2,053,000
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 114,000 88,000 67,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (746,000) (696,000) (435,000)
Decrease (increase) in inventories (2,166,000) (685,000) (754,000)
Decrease (increase) in income taxes refundable 84,000 (27,000) (57,000)
Decrease (increase) in prepaid expenses (20,000) (59,000) 17,000
Decrease (increase) in deferred income taxes (202,000) (154,000) --
Decrease (increase) in other assets -- (21,000) (5,000)
Increase (decrease) in accounts payable (115,000) 230,000 135,000
Increase (decrease) in accrued expenses 141,000 5,000 47,000
Increase (decrease) in income taxes payable 344,000 35,000 89,000
----------- ---------- ----------
Net cash provided by operating activities 1,744,000 1,322,000 1,157,000
----------- ---------- ----------
Cash flows from investing activities:
Increase in marketable securities (613,000) (416,000) --
Capital expenditures (268,000) (138,000) (156,000)
----------- ---------- ----------
Net cash (used in) investing activities (881,000) (554,000) (156,000)
----------- ---------- ----------
Cash flows from financing activities:
Exercise of stock options 187,000 23,000 98,000
Common shares purchased (620,000) (1,675,000) (70,000)
Common shares issued 160,000 72,000 88,000
----------- ---------- ----------
Net cash provided by (used in) financing activities (273,000) (1,580,000) 116,000
----------- ---------- ----------
Net increase (decrease) in cash 590,000 (812,000) 1,117,000
Cash beginning of year 1,219,000 2,031,000 914,000
----------- ---------- ----------
Cash end of year $ 1,809,000 1,219,000 2,031,000
=========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 2,535,000 1,342,000 296,000
=========== ========== ==========
Supplemental schedule of noncash investing and financing activities:
Tax benefit from exercise of nonqualified stock options $ 164,000 41,000 158,000
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
CHAD THERAPEUTICS, INC. 17
<PAGE> 6
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Chad Therapeutics, Inc. (the Company) is in the business of developing,
producing and marketing respiratory care devices designed to improve the
efficiency of oxygen delivery systems for home health care and hospital
treatment of patients suffering from pulmonary diseases.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate fair value as of
March 31, 1996. The carrying amounts related to cash, accounts receivable,
other current assets, accounts payable and accrued expenses approximate fair
value due to the relatively short maturity of such instruments.
INVENTORIES
Inventories are valued at lower of cost (first-in, first-out) or market.
DEPRECIATION
Depreciation of property and equipment is provided using straight-line methods
based on the estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Office Equipment and Furniture 5-10 Years
Machinery and Equipment 5-10 Years
Tooling 3-7 Years
</TABLE>
Amortization of leasehold improvements is over the life of the related lease.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment of merchandise.
NET EARNINGS PER COMMON SHARE
The net earnings per common share is based upon the weighted average number of
shares and common stock equivalents outstanding during the period. All of the
share, per share and weighted average number of shares have been retroactively
adjusted for a two-for-one stock split distributed on October 15, 1993, to all
shareholders of record on October 1, 1993 and a three-for-two stock split
distributed on October 16, 1995, to all shareholders of record on October 2,
1995. In addition, the weighted average number of shares has been adjusted for
a 3% stock dividend paid on April 14, 1993, to all shareholders of record on
March 31, 1993, which resulted in the issuance of 178,406 new shares and a 5%
stock dividend paid on October 21, 1994, to shareholders of record on October
7, 1994, which resulted in the issuance of 306,017 new shares.
RESEARCH AND DEVELOPMENT COSTS
The Company charges all research and development costs to expense when
incurred.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are
18 CHAD THERAPEUTICS, INC.
<PAGE> 7
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enacted date.
MAJOR CUSTOMER
The Company had export sales to one Western European distributor which
accounted for approximately 5%, 5% and 7% of net sales during the years ended
March 31, 1996, 1995 and 1994, respectively.
MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity Securities," on
April 1, 1994. SFAS 115 requires investments to be classified in one of three
categories: held-to-maturity securities, available-for-sale securities, and
trading securities. The Company classifies its investments, comprised
principally of highly liquid debt instruments with maturities greater than 90
days, as available-for-sale securities. Available-for-sale securities are
reported at fair values, which approximates cost.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's balances to
conform to the 1996 presentation.
NEWLY ISSUED ACCOUNTING STANDARDS
In March, 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed Of," was issued. This statement provides guidelines for
recognition of impairment losses related to long-term assets and is effective
for fiscal years beginning after December 15, 1995. Company management does
not believe that the adoption of this new standard will have a material effect
on the Company's financial statements.
In October, 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("Statement No. 123"), was issued.
This statement encourages, but does not require, a fair value based method of
accounting for employee stock options and will be effective for fiscal years
beginning after December 15, 1995. While the Company is still evaluating
Statement No. 123, it currently expects to elect to continue to measure
compensation costs under APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and to comply with the pro forma disclosure requirements of
Statement No. 123. If the Company makes this election, Statement No. 123 will
have no effect on the Company's financial statements.
(2) INVENTORIES
At March 31, 1996 and 1995, inventories consisted of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Finished goods $ 787,000 555,000
Work in process 1,532,000 572,000
Raw materials
and supplies 1,692,000 718,000
---------- ---------
$4,011,000 1,845,000
========== =========
</TABLE>
CHAD THERAPEUTICS, INC. 19
<PAGE> 8
(3) INCOME TAXES
The provision for income taxes for fiscal 1996, 1995 and 1994 consists of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- -------
<S> <C> <C> <C>
Current:
Federal $2,288,000 967,000 115,000
State 676,000 345,000 163,000
---------- --------- -------
2,964,000 1,312,000 278,000
Deferred:
Federal (181,000) (122,000) 44,000
State (21,000) 9,000 6,000
---------- --------- -------
(202,000) (113,000) 50,000
---------- --------- -------
Total $2,762,000 1,199,000 328,000
========== ========= =======
</TABLE>
A reconciliation of the difference between the Company's provision for income
taxes and the statutory income tax for the years ended March 31, 1996, 1995 and
1994, respectively, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- --------
<S> <C> <C> <C>
Statutory tax
expense $2,404,000 1,294,000 810,000
Benefit of net
carryforward
position -- (243,000) (641,000)
State income tax 432,000 234,000 108,000
Warranty and other (74,000) (86,000) 51,000
---------- --------- --------
$2,762,000 1,199,000 328,000
========== ========= ========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at March 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
State income taxes 222,000 117,000
Other 134,000 37,000
Total gross deferred tax assets 356,000 154,000
-------- -------
Less valuation allowance -- --
-------- -------
Net deferred tax assets $356,000 154,000
======== =======
</TABLE>
(4) SHAREHOLDERS' EQUITY
In 1995 and 1994 the Company purchased its own stock for purposes of funding
contributions to the Company's 401(k) plan. Periodically as common shares are
sold to the plan, the difference between the cost and fair market value at the
date of transfer is credited to shareholders' equity ($44,000 in 1995).
The Company has an incentive stock option plan (the Plan) for key employees as
defined under Section 422(A) of the Internal Revenue Code. The Plan as
amended, provides that 1,465,000 common shares be reserved for issuance under
the Plan, which expires on September 10, 2004. In addition, the Plan provides
that nonqualified options can be granted to directors and independent
contractors of the Company. Transactions involving the stock option plan are
summarized as follows:
20 CHAD THERAPEUTICS, INC.
<PAGE> 9
<TABLE>
<CAPTION>
OPTION OPTION PRICE
SHARES AMOUNT PER SHARE
-------- ---------- ------------
<S> <C> <C> <C>
Incentive Options:
------------------
Outstanding -
March 31, 1993 229,000 $231,000 .077-1.888
Granted 8,000 34,000 4.286
Exercised (115,000) (19,000) .077- .193
-------- ---------- ------------
Outstanding -
March 31, 1994 122,000 246,000 1.734-4.286
Granted 386,000 2,308,000 5.238-6.167
Exercised (11,000) (18,000) 1.734
-------- ---------- ------------
Outstanding -
March 31, 1995 497,000 6,000 1.734- 6.167
Granted 130,000 1,520,000 5.833-13.875
Exercised (37,000) (89,000) 1.888-5.238
-------- ---------- ------------
Outstanding -
March 31, 1996 590,000 $3,967,000 1.734-13.875
======== ========== ============
Exercisable -
March 31, 1996 162,000 $ 681,000 1.734-6.167
======== ========== ============
Nonqualified Options:
---------------------
Outstanding -
March 31, 1993 209,000 $ 146,000 .077-1.888
Granted 82,000 383,000 4.047
Exercised (132,000) (79,000) .077-1.888
-------- ---------- ------------
Outstanding -
March 31, 1994 159,000 450,000 .193-4.047
Granted 15,000 81,000 5.333
Exercised (19,000) (5,000) .193
-------- ---------- ------------
Outstanding -
March 31, 1995 155,000 526,000 .193-5.333
Granted 60,000 775,000 12.917
Exercised (37,000) (98,000) .193-4.048
-------- ---------- ------------
Outstanding -
March 31, 1996 178,000 $1,203,000 1.888-12.917
======== ========== ============
Exercisable -
March 31, 1996 85,000 $ 279,000 1.888-5.333
======== ========== ============
</TABLE>
Incentive and nonqualified options were granted at prices not less than 100%
of fair market value at dates of grant. Options under the plan become
exercisable on the anniversary of the grant date on a prorata basis over a
defined period and expire 10 years after the date of grant. To the extent the
Company derived a tax benefit from options exercised by employees, such benefit
is credited to Common Stock when realized on the Company's income tax returns.
(5) EMPLOYEE BENEFIT PLAN
In December, 1992, the Company adopted a defined contribution profit sharing
plan, including features under Section 401(k) of the Internal Revenue Code.
The purpose of the plan is to provide an incentive for employees to make
regular savings for their retirement. Company contributions to the profit
sharing plan are discretionary and are determined by the Board of Directors.
The Company has accrued and paid $71,000, $48,000, and $41,000 of the plan
contributions during 1996, 1995 and 1994, respectively.
(6) COMMITMENTS
The Company is currently leasing its administrative and plant facilities and
certain office equipment under noncancellable operating leases which expire
through June, 2003.
The Company's minimum annual rental commitments under these leases are as
follows:
<TABLE>
<S> <C>
1997 $125,000
1998 305,000
1999 325,000
2000 328,000
2001 341,000
Thereafter 816,000
----------
TOTAL: $2,240,000
==========
</TABLE>
Rent expense amounted to $239,000, $192,000, and $171,000 for the years ended
March 31, 1996, 1995 and 1994, respectively.
(7) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized unaudited quarterly financial data for
1996 and 1995:
<TABLE>
<CAPTION>
GROSS NET NET EARNINGS
REVENUE PROFIT EARNINGS PER SHARE
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
1996
----
First Quarter $ 5,283,000 $2,930,000 $ 955,000 $0.10
Second Quarter 5,264,000 3,079,000 1,021,000 0.10
Third Quarter 4,641,000 2,637,000 940,000 0.09
Fourth Quarter 5,171,000 3,233,000 1,394,000 0.14
----------- ----------- ---------- -----
Year $20,359,000 $11,879,000 $4,310,000 $0.43
=========== =========== ========== =====
1995
----
First Quarter $3,465,000 $1,809,000 $ 566,000 $0.05
Second Quarter 3,583,000 1,893,000 606,000 0.06
Third Quarter 3,667,000 1,946,000 649,000 0.07
Fourth Quarter 3,803,000 1,954,000 785,000 0.08
----------- ----------- ---------- -----
Year $14,518,000 $7,602,000 $2,606,000 $0.26
=========== =========== ========== =====
</TABLE>
CHAD THERAPEUTICS, INC. 21
<PAGE> 10
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Chad Therapeutics, Inc.
We have audited the accompanying balance sheets of Chad Therapeutics, Inc. as
of March 31, 1996 and 1995 and the related statements of earnings,
shareholders' equity and cash flows the three years ended March 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits 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 financial position of Chad Therapeutics, Inc. as of
March 31, 1996 and 1995 and the results of its operations and its cash flows
for the three years ended March 31, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
May 22, 1996
22 CHAD THERAPEUTICS, INC.
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the years ended March 31, 1996 and 1995, increased $5,841,000 and
$5,048,000 or 40.2% and 53.3%, respectively, over the prior year's periods.
There were no price increases during the periods presented. The increase in
sales relates primarily to increases in domestic sales of OXYMATIC conservers
and OXYLITE complete portable oxygen systems which are benefiting from the
current marketing environment for home oxygen therapy discussed below.
Sales to foreign distributors represented 12.4% and 12.9% of total sales for
the years ended March 31, 1996 and 1995, respectively, as these sales increased
at a slightly slower rate than domestic sales. Currently, management expects a
smaller increase in sales to foreign distributors during the upcoming fiscal
year and while these sales should continue to increase on an annual basis,
quarter to quarter sales will fluctuate depending on the timing of shipments.
In addition, all foreign sales are transacted in dollars, thus quarter to
quarter unit sales could be affected by foreign currency fluctuations.
In June, 1989, a new procedure for payment by Medicare for home oxygen services
became effective which provides a prospective flat fee monthly payment based
solely on the patient's prescribed oxygen requirement. Previously dealers were
reimbursed on the basis of total oxygen delivered and a rental charge which
varied based on the type of system being used and other factors. The prior
procedure tended to encourage waste and inefficiency. Consequently, with the
incentive now to operate efficiently, inexpensive concentrators have grown in
popularity because of low cost and less frequent servicing requirements. At
the same time, interest heightened in oxygen conserving devices which can
extend the life of oxygen supplies and reduce service calls by dealers.
Management believes the new reimbursement procedures have heightened interest
in the cost savings and increased mobility afforded by oxygen conserving
devices such as the Company's products.
In addition, other changes in the health care delivery system including the
increase in the acceptance and utilization of managed care - have stimulated a
significant consolidation among home oxygen dealers. As major national and
regional home medical equipment chains attempt to secure managed care contracts
and improve their market position, they have expanded their distribution
networks through the acquisition of independent dealers in strategic areas. The
Company's products, which allow homecare dealers to provide cost efficient home
oxygen therapy, are well suited for use in a managed care environment and as a
tool for dealers to increase revenues and profits. To ensure continued
awareness of the benefits of the Company's products by chain headquarters
personnel, a proactive marketing and communications program has been initiated
with all of the major national chains. Management believes that the
consolidation activity being experienced in the home oxygen business is
temporary and should have no adverse effects on the Company's growth.
Cost of sales as a percent of net sales decreased from 47.6% to 41.7% and
increased from 47.1% to 47.6%, respectively, for the years ended March 31, 1996
and 1995, as compared to the prior year's periods. The current year has been
benefitted from decreased production costs associated with bringing certain
manufacturing operations in house. The increase in cost of sales percentage in
the prior year resulted from the start up costs associated with this process.
Management believes the cost per unit should remain at or near current levels
in future periods as efficiencies of in house manufacturing have mostly been
realized.
Selling, general and administrative expenditures decreased as a percentage of
net sales for the years ended March 31, 1996 and 1995, from 26.0% to 23.5% and
from 27.9% to 26.0%, respectively, as compared to the prior year's periods, as
the rate of growth in sales exceeded the increased costs associated with such
growth. Research and development expenses increased by $43,000 and $59,000 for
the years ended March 31, 1996 and 1995, respectively, as compared to the prior
year's periods. Currently, management expects research and development
expenditures to increase by approximately $500,000 in the upcoming fiscal year
on projects to enhance and expand the Company's product line.
At March 31, 1995, the Company had fully utilized its net operating loss
carryforwards for Federal income tax purposes and other tax credit
carryforwards. Future years will therefore be fully taxed and management
estimates that the combined Federal and California income tax rates will be
approximately 40%, as compared to 39.1% in 1996 and 31.5% in 1995.
CHAD THERAPEUTICS, INC. 23
<PAGE> 12
FINANCIAL CONDITION
At March 31, 1996, the Company had cash and marketable securities totaling
$2,838,000 or 26% of total assets, as compared to $1,635,000 (26%) at March 31,
1995. On June 30, 1994, the Company announced that the Board of Directors had
authorized stock repurchases of its common shares in privately negotiated
transactions for a minimum of 10,000 shares. In fiscal 1996, under this plan
the Company has used $392,000 in cash to purchase 71,000 common shares at $5.50
per share, which shares have been retired. In addition, in the current period
the Company purchased approximately 18,000 shares of its own stock at a cost
of $228,000 for purposes of funding contributions to the Company's 401(k)
plan. Net working capital increased from $5,172,000 at March 31, 1995, to
$9,219,000 at March 31, 1996, in spite of the amounts utilized in the
aforementioned stock purchases. Accounts receivable increased $746,000 during
the period ended March 31, 1996, which related to increase in the sales
activity. Future increases or decreases in accounts receivable will generally
coincide with sales volume fluctuations and the timing of shipments to foreign
customers. During the same period, inventories increased $2,166,000. The
Company attempts to maintain sufficient inventories to meet its customer needs
as orders are received. Thus, future inventory and related accounts payable
levels will be impacted by the ability of the Company to maintain its safety
stock levels. If safety stock levels drop below target amounts then
inventories in subsequent periods will increase more rapidly as inventory
balances are replenished.
While historically the Company had relied upon the proceeds derived from the
sale of securities to finance its operations, management believes funds derived
from operations should be adequate to meet the Company's present cash
requirements. The Company expects capital expenditures during the next twelve
months to be approximately $1,200,000, primarily related to the costs
associated with moving to new facilities in 1997. Also, the Company may make
additional stock repurchases pursuant to the Board of Directors authorization.
The Company does not provide post employment retirement benefits.
NEWLY ISSUED ACCOUNTING STANDARDS
In March, 1995, Statement of Financial Accounting Standards N. 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed Of," was issued. This statement provides guidelines for recognition
of impairment losses related to long-term assets and is effective for fiscal
years beginning after December 15, 1995. Company management does not believe
that the adoption of this new standard will have a material effect on the
Company's financial statements.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("Statement No. 123"), was issued.
This statement encourages, but does not require, a fair value based method of
accounting for employee stock options and will be effective for fiscal years
beginning after December 15, 1995. While the Company is still evaluating
Statement No. 123, it currently expects to elect to continue to measure
compensation costs under APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and to comply with the pro forma disclosure requirements of
Statement No. 123. If the Company makes this election, Statement 123 will have
no impact on the Company's consolidated financial statements.
OUTLOOK: ISSUES & RISKS
From time to time, the Company may make forward-looking statements regarding
its anticipated future performance or prospects. All such forward-looking
statements are subject to certain inherent risks and uncertainties. Among the
factors that could cause actual results to differ materially are the following:
Dependence Upon A Single Product Line
Although the Company currently markets a number of products, these products
comprise a single product line for patients requiring supplementary oxygen.
The Company's future performance is thus dependent upon developments affecting
this segment of the health care market and the Company's ability to remain
competitive within this market sector.
Rapid Technological Change
The health care industry is characterized by rapid technological
24 CHAD THERAPEUTICS, INC.
<PAGE> 13
change. The Company's products may become obsolete as a result of new
developments. The Company's ability to remain competitive will depend to a
large extent upon its ability to anticipate and stay abreast of new
technological developments related to oxygen therapy, The Company has limited
internal research and development capabilities. Historically, the Company has
contracted with outside parties to develop new products. Some of the Company's
competitors have substantially greater funds and facilities to pursue research
and development of new products and technologies for oxygen therapy.
Potential Changes in Administration of Health Care
A number of bills proposing to regulate, control or alter the method of
financing health care costs have been discussed and certain of such bills have
been introduced in Congress and various state legislatures. There are wide
variations among these bills and proposals. Because of the uncertain state of
the health care proposals, it is not possible at this time to predict the
effect on the business of the Company if any of these proposals is enacted.
Federal law has altered the payment rates available to providers of Medicare
services in various ways during the last several years. Congress has passed
legislation which would reduce Medicare spending. Some of the savings are to
come from increases in premiums to cover part of the Medicare program cost. It
cannot be predicted, however, what prospective payment system rates or rule
changes will be made to determine how rates will be affected. There can be no
assurance that a change in Medicare reimbursement rates will not have an
adverse effect on the Company's business.
Patents and Trademarks
The Company pursues a policy of obtaining patents for appropriate inventions
related to products marketed or manufactured by the Company. The Company
considers the patentability of its products to be significant to the success of
the Company. To the extent that the products to be marketed by the Company do
not receive patent protection, competitors may be able to manufacture and
market substantially similar products. Such competition could have an adverse
impact upon the Company's business
Products Liability
The nature of the Company's business subjects it to potential claims asserting
that the Company is liable for damages for product liability claims. Although
the Company maintains products liability insurance in an amount which it
believes to be customary in the industry, there is no assurance that this
insurance will be sufficient to cover the costs of defense or judgments which
might be entered against the Company. The type and frequency of these claims
could have an impact on the Company's results of operations and financial
position.
Availability of Third Party Component Products
The Company tests and packages its products in its own facility. Some of its
other manufacturing processes are conducted by other firms and the Company
expects to continue using outside firms for certain manufacturing processes for
the foreseeable future. The Company's agreements with its suppliers are
terminable at will or by notice. The Company believes that other suppliers
would be available in the event of termination of these arrangements. No
assurance can be given, however, that the Company will not suffer a material
disruption in the supply of its products.
Accounting Standards
Accounting standards promulgated by the Financial Accounting Standards Board
change periodically. Changes in such standards may have an impact on the
Company's future reported earnings and financial position.
Additional Risk Factors
Additional risk factors may be listed from time to time in the reports filed by
the Company with the Securities and Exchange Commission.
CHAD THERAPEUTICS, INC. 25
<PAGE> 14
OFFICERS
CHARLES R. ADAMS
Chief Executive Officer
FRANCIS R. FLEMING
President and
Chief Operating Officer
EARL L. YAGER
Senior Vice President,
Chief Financial Officer and Secretary
OSCAR J. SANCHEZ
Vice President, Manufacturing
LOUIE GORYOKA
Vice President, Quality Assurance
and Regulatory Affairs
DIRECTORS
CHARLES R. ADAMS
Chairman and Chief Executive Officer
Chad Therapeutics, Inc.
FRANCIS R. FLEMING
President
Chad Therapeutics, Inc.
EARL L. YAGER
Senior Vice President
Chad Therapeutics, Inc.
DAVID L. CUTTER
Retired Chairman Of The Board
Cutter Laboratories, Inc.
NORMAN COOPER
Retired Chairman
Kallir, Philips, Ross, Inc.
JOHN C. BOYD
Retired
PHILIP T. WOLFSTEIN
President
Wolfstein International, Inc.
CORPORATE DATA
CORPORATE HEADQUARTERS
9445 De Soto Avenue
Chatsworth, CA 91311
(818) 882-0883
LEGAL COUNSEL
Graham & James LLP
AUDITORS
KPMG Peat Marwick LLP
Los Angeles, California
TRANSFER AGENT AND REGISTRAR
American Stock Transfer Company
40 Wall Street
New York, NY 10005
COMMON STOCK PRICE RANGE
The Company's Common Shares were traded on NASDAQ from its initial public
offering on July 20, 1983 through February 10, 1987, under the NASDAQ symbol
3CTHU. From February 10, 1987 to August 3, 1993, the Company's Common Shares
were not part of the automated quotations system. Beginning August 3, 1993,
the Company's common shares were traded on the American Stock Exchange Emerging
Company Marketplace and on June 6, 1994, the Company's shares moved to the
primary list of the American Stock Exchange with the symbol CTU. The following
table sets forth, for the periods indicated, the range of high and low closing
bid prices of the Company's Common Shares, as furnished by the National
Quotation Bureau, incorporated and high and low closing prices as furnished by
the American Stock Exchange. Prices have been adjusted to reflect a 2 for I
split distributed October 15, 1993, and a 3 for 2 split distributed on October
16, 1995.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
-
<S> <C> <C>
June 30, 1994 6 4-1/8
September 30, 1994 6 5-1/16
December 31, 1994 5-1/2 4-1/2
March 31, 1995 6-5/8 4-5/8
June 30, 1995 11-1/8 5-7/16
September 30, 1995 15 9-1/2
December 31, 1995 16 11-3/8
March 31, 1996 15-1/8 11
</TABLE>
Prices prior to August 3, 1993, represent quotations between dealers without
adjustment for retail markups, markdown or commissions and may not represent
actual transactions. As of June 17, 1996, there were approximately 318
shareholders of record of the Company's common stock. No cash dividends have
been paid on the common stock.
SEC FORM 10-K
A copy of the Company's annual report to the Securities and Exchange Commission
on Form 10-K is available without charge upon written request to:
Senior Vice President
Chad Therapeutics, Inc.
9445 De Soto Avenue
Chatsworth, CA 91311
26 CHAD THERAPEUTICS, INC.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
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0
0
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</TABLE>
