<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 29, 1997
REGISTRATION NO. 333-34397
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STERI-OSS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3843 13-3915553
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
22895 EASTPARK DRIVE
YORBA LINDA, CALIFORNIA 92887
(714) 282-6515
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
KENNETH A. DARIENZO
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
STERI-OSS, INC.
22895 EASTPARK DRIVE
YORBA LINDA, CALIFORNIA 92887
(714) 282-6515
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
FREDERIC A. RANDALL, JR., ESQ. BARBARA L. BORDEN, ESQ.
BROBECK, PHLEGER & HARRISON LLP COOLEY GODWARD LLP
4675 MACARTHUR COURT, SUITE 1000 4365 EXECUTIVE DRIVE, SUITE 1100
NEWPORT BEACH, CALIFORNIA 92660 SAN DIEGO, CALIFORNIA 92121
(714) 752-7535 (619) 550-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
Subject to Completion, Dated December 29, 1997
PROSPECTUS
3,000,000 Shares
[STERI-OSS LOGO]
Common Stock
---------------------------
All of the 3,000,000 shares of Common Stock offered hereby (the "Offering")
are being sold by Steri-Oss, Inc. ("Steri-Oss" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$11.00 and $13.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Common
Stock has been approved for quotation on the Nasdaq National Market under the
symbol "STRI."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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===============================================================================================
Underwriting
Price to Discounts Proceeds to
Public and Commissions(1) Company(2)
- -----------------------------------------------------------------------------------------------
Per Share.......................... $ $ $
- -----------------------------------------------------------------------------------------------
Total(3)........................... $ $ $
===============================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $1,000,000.
(3) The Company has granted to the Underwriters an option, exercisable within
30 days from the date hereof, to purchase up to 450,000 additional shares
of Common Stock, on the same terms as set forth above, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public will be $ , the Underwriting Discounts and
Commissions will be $ and the Proceeds to the Company will be
$ . See "Underwriting."
---------------------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and to certain other
conditions. It is expected that delivery of such shares will be made through the
offices of UBS Securities LLC, 299 Park Avenue, New York, New York, on or about
, 1998.
---------------------------
UBS Securities Furman Selz
, 1998
<PAGE> 3
[COLOR PHOTOS CONSIST OF THE COMPANY'S IMPLANTS, CORPORATE HEADQUARTERS, CNC
MACHINES AND OTHER MANUFACTURING EQUIPMENT, A CLEAN ROOM TECHNICIAN AND IN-HOUSE
TRAINING FACILITIES.]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. Steri-Oss, Inc.
currently conducts its business through its wholly-owned subsidiaries.
THE COMPANY
Steri-Oss, Inc. develops, manufactures and markets a broad line of dental
implant systems. Dental implants are small titanium screws or cylinders that are
surgically placed directly into the jaw and are used to replace missing teeth.
The Company believes that its dental implant systems are superior to traditional
restorative treatments such as bridges and dentures because the permanent nature
of dental implants permits patients to regain most of the functionality of their
natural teeth. Dental implants also may reduce the progressive atrophy of the
jaw often caused by the absence of teeth. The Company has experienced
significant growth over the last several years. The Company's net sales
increased to $32.2 million for 1996 from $16.8 million for 1993. Net sales also
increased 25.5% to $29.4 million for the nine months ended September 30, 1997
from $23.4 million for the comparable nine month period in 1996.
The American Dental Association estimates that 110 million people in the
United States are missing one or more teeth, representing approximately 40% of
the United States population. Traditional restorative alternatives to address
tooth loss have consisted primarily of dentures and bridges. Since the
introduction of the first modern dental implants in 1982, implants have
continued to gain acceptance as an attractive alternative to dentures and
bridges. Medical Data International ("MDI") estimates that dental implant sales
in the United States exceeded $130 million in 1996 and are expected to grow at a
rate of approximately 6% per year. The Company estimates that sales of dental
implants outside the United States were approximately $250 million in 1996 and
are expected to grow at a rate of approximately 10% per year.
The Company markets its products to dental professionals involved in the
implant procedure, including oral surgeons, periodontists and implantologists
who typically perform the implant surgery, as well as general dentists and
prosthodontists who often prepare the crown or other prosthetic device that is
affixed on top of the abutment. The Company currently distributes its products
in the United States and Canada through its direct sales force consisting of
more than 40 persons, which the Company believes is the largest North American
direct sales force for dental implant products. The Company markets its products
internationally (outside the United States and Canada) in more than 35 countries
through 26 exclusive independent distributors. The Company seeks to build upon
customer loyalty by providing high quality customer service and support. In
addition to its educational courses and training seminars, the Company offers to
send a technical sales representative to assist dental professionals with their
first implant procedure using Steri-Oss products.
The Company's objective is to become the leading worldwide developer,
manufacturer and marketer of dental implants and related products, while
increasing its profitability. The Company believes that over the last three
years, it has been one of the fastest growing participants in the United States
implant market. Furthermore, as a result of the Company's acquisition of the
dental business of Interpore International ("Interpore") in May 1997, the
Company believes its implant unit sales, on a combined basis in the United
States in 1995, exceeded those of any of its competitors. To achieve its
objective, the Company intends to: (i) increase market share in the United
States and foreign markets; (ii) continue to develop innovative implant
products; (iii) expand into additional dental specialty markets; (iv) acquire
complementary dental implant businesses, products and technologies and (v)
continue to improve operating efficiencies.
The Company's predecessor sold its first dental implant in 1986 and was
acquired by the Company from Bausch & Lomb Incorporated ("Bausch & Lomb") in
November 1996 (the "Acquisition"). In connection with the Acquisition, the
Company incurred $39.5 million of debt and issued $35.2 million of mandatorily
redeemable Preferred Stock. In addition, $59.2 million of tax-deductible
goodwill was recorded in connection with the Acquisition. Upon consummation of
the Offering, approximately $15.5 million of debt and accrued interest will be
retired and approximately $10.0 million of Class B 8% Cumulative Convertible
Preferred Stock (the "Class B Preferred Stock") will be redeemed, together with
accrued interest and dividends. The holders of Class A 8.8% Cumulative
Redeemable Preferred Stock (the "Class A Preferred Stock") and Class C 8.0%
Junior Cumulative Redeemable Preferred Stock (the "Class C Preferred Stock")
have agreed to convert all of their shares of Preferred Stock into Common Stock
upon consummation of the Offering, in lieu of exercising their redemption
rights.
3
<PAGE> 5
THE OFFERING
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<S> <C>
Common Stock Offered by the Company........... 3,000,000 shares
Common Stock Outstanding after the Offering... 10,056,719 shares (1)
Use of Proceeds............................... The Company intends to use the net proceeds
from the Offering to repay indebtedness, to
redeem all outstanding shares of Class B
Preferred Stock and for general corporate
purposes, including working capital
requirements. See "Use of Proceeds."
Proposed Nasdaq National Market symbol........ STRI
</TABLE>
- ---------------
(1) Excludes (i) 400,000 shares of Common Stock reserved for issuance under the
1997 Stock Incentive Issuance Plan (the "1997 Plan"), which includes options
to purchase 330,000 shares of Common Stock outstanding as of December 15,
1997 that were granted at an exercise price equal to the initial public
offering price in the Offering and (ii) outstanding options to purchase
733,344 shares of Common Stock granted at a weighted average exercise price
of $0.58 per share. See Note 9 of Notes to Consolidated Financial
Statements.
------------------------
Unless otherwise indicated, all references to the "Company" and "Steri-Oss"
refer to Steri-Oss, Inc. and its combined subsidiaries and predecessors. Because
the Company uses a 52/53 week fiscal year, fiscal periods may not end on the
same day as the end of the respective calendar periods. For convenience of
presentation, the consolidated financial data throughout this Prospectus has
been shown as of and for the last day of the applicable period unless otherwise
indicated. Except as otherwise indicated, the information contained in this
Prospectus gives effect to the 50-for-1 stock split effected in October 1997 and
assumes: (i) the conversion (the "Preferred Stock Conversion") of 22,000 shares
of the Company's Class A Preferred Stock and 3,185 shares of the Company's Class
C Preferred Stock into an aggregate of 2,256,719 shares of Common Stock upon
consummation of the Offering (assuming an initial public offering price of
$12.00 per share), (ii) the redemption upon consummation of the Offering of all
outstanding shares of Class B Preferred Stock, (iii) the exercise of outstanding
warrants to purchase 4,750,000 shares of Common Stock prior to the consummation
of the Offering, (iv) no exercise of outstanding options to purchase 1,063,344
shares of Common Stock and (v) no exercise of the Underwriters' over-allotment
option.
The Company's principal executive offices are located at 22895 Eastpark
Drive, Yorba Linda, California 92887. The Company's telephone number is (714)
282-6515.
Steri-Oss(R), EZ Steps(R) and Replace(TM) are trademarks of the Company.
This Prospectus also includes trademarks of companies other than the Company.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR(1) -----------------------------------------------------
------------------------------------------ NINE MONTHS ENDED
JANUARY 1 NOVEMBER 16 PRO FORMA SEPTEMBER 30,
YEARS ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED -----------------------
--------------------------- NOVEMBER 15, DECEMBER 31, DECEMBER 31, PRO FORMA PRO FORMA
1993 1994 1995 1996 1996 1996(2) 1996(3) 1997(3)(4)
------- ------- ------- ------------ ------------ ------------ ---------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................. $16,845 $22,168 $27,361 $ 28,108 $4,089 $ 32,197 $ 23,387 $ 29,361
Gross profit............... 11,718 15,502 19,496 20,678 2,733 23,411 17,250 21,343
Selling, general and
administrative expense... 8,698 11,393 14,241 14,791 1,929 17,219 12,626 16,313
Research and development
expense.................. 1,618 1,781 2,225 2,116 352 2,468 1,775 1,942
Noncash compensation
expense.................. -- -- -- -- -- -- -- 569
Income from operations..... 1,402 2,328 3,030 3,771 452 3,724 2,849 2,519
Interest expense........... 50 -- -- -- 1,065 2,507 1,858 1,858
Income before income
taxes.................... 1,352 2,328 3,030 3,771 (613) 1,217 991 661
Net income................. $ 516 $ 1,075 $ 1,458 $ 1,919 $ (613) $ 730 $ 595 $ 397
======= ======= ======= ======= ====== ======== ======= =======
Net income per share(5).... $ 0.07 $ 0.06 $ 0.04
======== ======= =======
Shares outstanding(5)...... 10,754,618 10,754,618 10,754,618
OTHER DATA:
Depreciation............... $ 161 $ 363 $ 595 $ 712 $ 132 $ 844 $ 558 $ 905
Amortization(6)............ 738 868 941 912 211 1,622 1,209 1,294
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-------------------------
ACTUAL PRO FORMA(7)(8)
------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................................. $ 524 $ 2,524
Working capital....................................................................................... 2,578 5,129
Total assets.......................................................................................... 84,172 83,640
Total long-term debt(9)............................................................................... 77,702 25,689
Total stockholders' equity (deficit).................................................................. (2,171) 49,861
</TABLE>
- ---------------
(1) Represents the historical financial data of the Company's predecessor,
Steri-Oss, Inc. ("S-O"), a wholly-owned subsidiary of Bausch & Lomb.
(2) The financial data for the period from January 1, 1996 through November 15,
1996 for S-O and from November 16, 1996 through December 31, 1996 for the
Company has been combined and adjusted to give effect to the Acquisition,
the Preferred Stock Conversion, the Offering and the application of the net
proceeds of the Offering, as if each had occurred on January 1, 1996, to
present the pro forma operating results for the year ended December 31,
1996. The Acquisition was accounted for as a purchase for financial
reporting purposes.
(3) The pro forma statement of operations data for the nine months ended
September 30, 1996 reflects adjustments as if the Acquisition, the Preferred
Stock Conversion, the Offering and the application of the net proceeds of
the Offering had occurred on January 1, 1996. The pro forma statement of
operations data for the nine months ended September 30, 1997 reflects
adjustments as if the Preferred Stock Conversion, the Offering and the
application of the net proceeds of the Offering had occurred on January 1,
1996. Excludes the effect of the extraordinary charge described in footnote
7 below.
(4) The financial data for the nine months ended September 30, 1997 includes the
results of operations of the dental business of Interpore subsequent to its
acquisition in May 1997. This acquisition was accounted for as a purchase
for financial reporting purposes.
(5) Share and per share data are not considered meaningful since S-O operated as
a wholly-owned subsidiary of Bausch & Lomb from 1993 through November 15,
1996. Computed based on weighted average shares outstanding assuming the
Preferred Stock Conversion and the Offering and the application of the net
proceeds therefrom were consummated on January 1, 1996. Also includes the
effect of Common Stock and equivalents issued within one year from the
filing of the Registration Statement of which this Prospectus is a part at
prices per share below the initial public offering price, using the treasury
stock method using an assumed initial public offering price of $12.00 per
share.
(6) Pro forma data includes the effect of amortization over a 40 year period of
$59.2 million of tax-deductible goodwill (approximately $1.5 million
annually) recorded in connection with the Acquisition.
(7) The pro forma balance sheet data reflects adjustments as if the Preferred
Stock Conversion and the Offering and the application of the net proceeds
therefrom had occurred on September 30, 1997 and includes the effect of an
extraordinary charge of $7.5 million, net of the related tax benefit,
relating to (i) the elimination of deferred financing costs of $4.6 million
associated with the repayment of the Company's 16% Series A Subordinated
Note and 14% Series B Subordinated Notes (collectively, the "Subordinated
Notes") and a portion of the Company's secured credit facility (the "Bank
Facility") with Union Bank of California, N.A. ("Union Bank") and First
Source Financial LLP and the conversion and/or redemption of all mandatorily
redeemable Preferred Stock, (ii) the charge of $1.9 million related to the
Preferred Stock Conversion and (iii) the prepayment penalties of $1.0
million incurred in connection with the repayment of the Subordinated Notes.
See "Unaudited Pro Forma Consolidated Financial Data."
(8) Includes the effect of a compensation charge of $1.3 million related to
options granted below the fair value per share at the date of grant, which
options are either fully vested or vest immediately upon consummation of the
Offering. See "Unaudited Pro Forma Consolidated Financial Data."
(9) Includes current portion of long-term debt and mandatorily redeemable
Preferred Stock.
5
<PAGE> 7
RISK FACTORS
Prospective investors in the shares of Common Stock offered hereby should
carefully consider the following risk factors, in addition to the other
information contained in this Prospectus.
Highly Competitive Industry. The dental implant industry is characterized
by intense competition. Steri-Oss competes directly with a number of companies
offering dental implants and related products both in the United States and
abroad, including Nobel Biocare AB, Friatec AG, Implant Innovations, Inc. ("3i")
and Sulzer Calcitek Inc., certain of which have substantially greater financial,
marketing, sales, distribution and development resources than the Company. Such
competitors may be able to devote greater resources to the development,
promotion, sale and support of their products than the Company. Certain of the
Company's competitors also have established a greater international presence
than the Company. In several countries, including Germany and Switzerland, the
Company competes with companies that are based in such countries. The
competitors' local presence in such markets may provide them with a competitive
advantage over the Company. In addition, several competitors in foreign markets
sell directly in such markets, which may be more effective than the Company's
indirect distribution channels in such markets. Increased competition or the
failure to compete effectively in the dental implant industry may result in
price reductions, reduced profit margins and loss of market share, all of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's products also compete against alternative restorative
treatments such as bridges and dentures, which are generally less expensive to
the patient, are less invasive and can be implemented more quickly. New
restorative technologies may be developed that are as effective as, or more
effective or easier to use than, those offered by the Company, which could
render the Company's products less competitive or obsolete. See
"Business -- Competition."
Extensive Government Regulation of Medical Devices and Continuing
Compliance Requirements. The Company's products are subject to extensive
regulation by the United States Food and Drug Administration (the "FDA") and
certain other federal, state and local governmental authorities and similar
regulatory agencies in other countries. Such regulations cover the testing,
manufacture, labeling, distribution and promotion of medical devices and
record-keeping with respect thereto. The process of obtaining marketing
clearances and approvals from the FDA for new products or enhancements to
existing products can be time-consuming and expensive, and there is no assurance
that such clearances will be granted or that FDA review will not involve delays
adversely affecting the marketing and sale of products by the Company. Since
January 1, 1994, the Company has obtained FDA clearance of 34 Section 510(k)
premarket notifications ("510(k)") covering a broad range of products. In the
future, the FDA may require the submission of a premarket approval application
("PMA") for certain dental implants, which approval process is time-consuming,
costly and would result in a diversion of management's efforts. While the
Company has been collecting clinical data to support a potential PMA, there can
be no assurance that the Company would receive a PMA approval, if required, for
its dental implant products on a timely basis, if at all.
Governmental regulation may also prevent or substantially delay the
marketing of the Company's proposed products, cause the Company to undertake
costly procedures and furnish a competitive advantage to certain of the
Company's competitors who have greater financial, administrative and research
and development resources. After approval, the FDA may require post-marketing
approval surveillance programs to monitor the effects of an approved medical
device. FDA approval may be withdrawn for noncompliance with regulatory
standards or the occurrence of unforeseen problems following initial marketing.
In addition, product modifications may require the submission of a new 510(k) or
PMA supplement and future products may require 510(k) clearance or PMA approval.
There can be no assurance that marketing clearances or approvals will be
obtained on a timely basis or at all. Delays in receiving, the failure to
receive or the cost of complying with such clearances or approvals could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is also subject to periodic inspection by the FDA and state
agencies such as the Food and Drug Branch of the California Department of Health
Services to determine whether the Company is in compliance with various
regulations relating to medical device manufacturing, including the FDA's
Quality
6
<PAGE> 8
System Regulations ("QSR"), formerly known as the Good Manufacturing Practices
regulations, which govern manufacturing, design, testing, quality control and
product labeling of medical devices. In connection with the FDA's inspection of
the Company's facilities in April 1997, the FDA issued a warning letter to the
Company citing the Company's failure to comply with certain provisions of the
regulations. The warning letter did not prohibit the Company from obtaining
premarket clearance or approval for new products nor did it require the Company
to withdraw or remove any of its products from the market. While the Company
believes that it has taken appropriate corrective actions to address each of the
violations cited in the warning letter, there can be no assurance that the FDA
will issue a compliance letter on a timely basis, if at all. Any failure by the
Company to remedy the citations in the warning letter to the satisfaction of the
FDA could prevent or significantly limit the Company's ability to market its
products in the United States until such citations have been corrected to the
satisfaction of the FDA and result in the recall or seizure of products, the
total or partial suspension of production, civil penalties, fines or criminal
prosecution.
The Company must comply with similar registration requirements of foreign
governments and with import and export regulations when distributing its
products to foreign nations. Each foreign country's regulatory requirements for
product approval and distribution are unique and may require the expenditure of
substantial time, money and effort to obtain and maintain. The regulation of
medical devices in a number of such jurisdictions, particularly in the European
Union, continues to develop and there can be no assurance that new laws or
regulations will not have a material adverse effect on the Company's business,
financial condition and results of operations. Noncompliance with state, local,
federal or foreign regulatory requirements can result in fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, delay or denial or withdrawal of premarket clearance or approval of
devices and criminal prosecution. See "Business -- Government Regulation."
Fluctuations in Quarterly Operating Results. The Company has experienced
and may in the future continue to experience significant fluctuations in
revenues and operating results from quarter to quarter as a result of a number
of factors including, without limitation: competition; changes in regulatory
requirements or other regulatory issues; the volume and timing of orders from,
and shipments to, international distributors; market acceptance of the Company's
products; changes in pricing policies or price reductions by the Company or its
competitors; variations in the Company's distribution channels or the mix of
product sales; the timing of new product announcements and product introductions
by the Company or its competitors; product obsolescence resulting from new
product introductions or changes in customer demand; expenses associated with
the acquisition of technologies or businesses and currency fluctuations. While
the Company engages in price discounting from time to time, particularly for its
surgical instruments, significant discounts in a particular quarter could
adversely affect the results of operations for such quarter. In addition,
significant and continuing discounts due to competition or other factors could
adversely affect the Company's business, financial condition and results of
operations. The Company has from time to time experienced decreased net sales in
the third quarter of each year compared to the second quarter due in part to
fewer implant procedures performed during the summer vacation months. The
Company has also experienced flat to slightly decreased net sales in the first
quarter of each year compared to the prior fourth quarter due in part to some
increases in net sales during the fourth quarter largely as a result of the
Company's increased marketing activities in the latter portion of the year. The
impact of the foregoing factors may cause the Company's operating results to be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock could be materially adversely affected.
Quarterly results are not necessarily indicative of future performance for any
particular period, and there can be no assurance that the Company will attain or
sustain growth in net sales and profitability on a quarterly or annual basis.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Uncertain Market Acceptance; Limited Insurance Coverage. Dental implants
have historically constituted a small percentage of the total market for dental
restorative products and represent a relatively new form of dental restorative
treatment. The dental implant procedure is invasive and typically takes three to
six months to complete, and may take up to nine months in certain circumstances.
This procedure also involves several consultations with the patient's dentist
and one or more surgical procedures. In addition, in the United States and most
other countries, dental implants and related procedures generally are not
covered under private or government sponsored health care plans, or, if covered,
are subject to a cap on coverage that only covers a
7
<PAGE> 9
portion of the cost to the patient. Many competing products, such as bridges and
dentures, are covered under such plans and are, in general, less expensive than
dental implants. There can be no assurance concerning the extent to which the
Company's implant products will be reimbursed under health care plans in the
future. The absence of insurance coverage and the cost of implants may adversely
impact the market for dental implants. Due to the foregoing factors, there can
be no assurance that the demand for implant products such as the Company's will
continue at current levels or will increase relative to the demand for
alternative restorative products. See "Business -- Industry Background" and
"-- Customers, Marketing and Sales."
High Degree of Leverage; Future Capital Requirements. The Company has
expended, and expects to continue to expend in the future, substantial funds to
pursue product development and acquisition efforts, expand its sales and
marketing activities and expand its manufacturing capabilities. Following the
Offering, the Company will be highly leveraged. After the net proceeds of the
Offering are applied to repay indebtedness under the Company's Subordinated
Notes and a portion of its Bank Facility, the Company expects that it will have
$25.7 million outstanding under the Bank Facility. While the Company has
received a commitment letter from Union Bank for the establishment of a new
revolving line of credit (the "New Facility") to replace the Bank Facility, the
New Facility is subject to certain conditions and there can be no assurance that
the New Facility will be issued. The Company's failure to obtain the New
Facility would have a material adverse effect on the Company's business and
ability to implement its business strategy. The Company's future capital
requirements and the adequacy of available funds will depend on numerous factors
which are difficult to predict, including the timing and cost of acquisitions,
efforts to expand manufacturing and marketing and costs of product development.
If funds available under the Bank Facility or the New Facility and cash flows
from operations are insufficient to meet current or planned operating
requirements, the Company will be required to obtain additional funds through
equity or debt financings or through other sources. The terms of any equity
financings may be dilutive to stockholders and the terms of any debt financings
may contain restrictive covenants which limit the Company's ability to pursue
certain courses of action. In addition, the Bank Facility and the New Facility
limit the Company's ability to incur debt other than pursuant to the facility
and require significant prepayment upon the closing of certain equity
financings. There can be no assurance that additional funding will be available
on acceptable terms, if at all. If adequate funds are not available, the Company
may be required to forego strategic acquisitions or delay, scale-back or
eliminate certain aspects of its operations, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Strategy."
Risks Associated with Acquisitions. The Company's business strategy
includes the expansion of its product offerings, distribution channels, and
market share through acquisitions. Acquisitions involve numerous risks, such as
difficulties in the assimilation of the operations, products and personnel of
the acquired companies, the ability to manage effectively geographically remote
units, the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has limited or no direct
experience, and the potential loss of key employees of the acquired companies.
In addition, acquisitions may result in dilutive issuances of equity securities,
the incurrence of additional debt, reduction of existing cash balances,
amortization expenses related to goodwill and other intangible assets and other
effects on the Company that may materially adversely affect the Company's
results of operations. The Company is currently in negotiations for the
acquisition of manufacturing operations in Germany and certain license and
distribution rights for related dental implant technologies and products.
Negotiations for this transaction are still at an early stage. If the
transaction is consummated, it could result in cash payments by the Company of
up to $6.5 million, as well as additional royalty payments in the form of cash
and warrants to purchase the Company's Common Stock. However, the proposed
transaction contains several independent components and it is not certain as to
what components, if any, will ultimately be consummated. Although management
expects to analyze any opportunity carefully before committing the Company's
resources, no assurances can be given as to the effect of any acquisition on the
Company's business, financial condition and results of operations. See
"Business -- Strategy."
Dependence on Independent International Distributors. In addition to
utilizing a direct sales force in North America, the Company markets and sells
its products through 26 independent distributors in more than 35 foreign
countries. Approximately 41.2% and 40.0% of the Company's net sales during 1996
and for the
8
<PAGE> 10
nine month period ended September 30, 1997, respectively, were generated in
international markets. The Company anticipates that a significant percentage of
its net sales will come from international markets in the future. The Company
relies on its international distributors to obtain any necessary regulatory
approvals in the foreign countries in which they operate. The Company does not
have any long-term agreements with any of its distributors, and there can be no
assurance that the Company's distributors will continue to market the Company's
products or have the financial stability to assure their continuing presence in
their respective markets. A distributor's inability or unwillingness to perform
its obligations, or a disruption in the Company's relationship with a
distributor, could result in a substantial delay in the Company's international
efforts in the distributor's applicable territory. There can be no assurance
that the Company will be able to replace any of its current distributors or that
any such replacement will be able to obtain the necessary regulatory approvals
to conduct business in the applicable territory. There can also be no assurance
that the Company can retain qualified distributors in any additional territories
targeted by the Company. As a result, there can be no assurance that the Company
will maintain or increase its market share for dental implants in international
markets. See "Business -- Customers, Marketing and Sales."
Risks Relating to International Operations. International operations
involve a number of significant risks, including, but not limited to,
governmental regulations, export license requirements, political instability,
trade restrictions, changes in tariffs, difficulties in managing international
operations, import restrictions and fluctuations in foreign currency exchange
rates. Although the Company's international sales are currently denominated in
United States dollars, fluctuations in currency exchange rates have, from time
to time, caused the Company's products to become relatively more expensive to
customers in a particular country, leading to a reduction in the Company's net
sales or profitability in that country. Furthermore, future international
activity may result in foreign currency denominated sales and, in such event,
gains and losses on the conversion to United States dollars of accounts
receivable and accounts payable arising from international operations may
contribute to fluctuations in the Company's results of operations. There can be
no assurance that fluctuations in currency rates will not adversely impact the
Company's business, financial condition and results of operations in the future.
The international nature of the Company's business subjects it and its
distributors to the laws and regulations of the foreign jurisdictions in which
they operate and in which the Company's products are sold. See
"Business -- Government Regulation."
Dependence on Significant Customer. Metaux Precieux Metalor Deutschland
GmbH ("Metalor"), a distributor of dental alloys and instruments, accounted for
approximately 8.2% of the Company's net sales during 1996 and 9.7% during the
nine month period ended September 30, 1997. In 1990, the Company entered into an
exclusive one year distribution agreement with Metalor to distribute the
Company's products in Germany and the Netherlands, which agreement automatically
renews each July for successive one year terms unless the Company and Metalor
cannot agree to purchase terms for the following year. The Company also entered
into similar exclusive distribution agreements with certain affiliates of
Metalor who distribute the Company's products in France, Switzerland and the
United Kingdom. Metalor and its three affiliates collectively accounted for
approximately 12.1% of the Company's net sales during 1996 and 13.1% of the
Company's net sales during the nine months ended September 30, 1997. If Metalor
and its affiliates were to cease marketing the Company's products for any
reason, the Company's business, financial condition and results of operations
would be materially and adversely affected. See "Business -- Customers,
Marketing and Sales."
Product Liability Risks. The nature of the Company's business subjects the
Company to the risk of product liability claims that may involve significant
defense costs. From time to time, the Company has been the subject of such
claims. Bausch & Lomb has agreed to indemnify the Company up to an aggregate
amount of $28.5 million against any claims and losses from defects in the
design, manufacture or production of any product sold by S-O prior to the
Acquisition. While the Company currently has one product liability claim
pending, the Company believes Bausch & Lomb is contractually obligated to
indemnify the Company for this claim. There can be no assurance that product
liability claims will not be asserted against the Company in the future.
Although the Company maintains product liability insurance, there can be no
assurance that this coverage will be adequate to protect the Company against
future product liability claims. In addition, product liability insurance is
expensive and there can be no assurance that, in the future, product liability
insurance will be available to the Company in amounts or on terms satisfactory
to the Company, if at all. A successful
9
<PAGE> 11
product liability claim or series of claims brought against the Company in
excess of its insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Product Liability and Legal Proceedings; Insurance."
Risk of Interruption of Manufacturing. The Company's manufacturing
facilities include a Class 10,000 clean room and extensive specialized
equipment, and are subject to the current QSR regulations. The cutting,
machining and initial cleaning of the Company's products take place at leased
facilities a short distance from the Company's headquarters in Yorba Linda,
California. Final cleaning, sterilization, assembly (in certain circumstances),
packaging, coating and testing take place at the Company's headquarters. If a
disaster (such as an earthquake or fire) were to destroy or significantly damage
its facilities, the Company would need to repair its existing facilities or
develop a new facility and obtain the necessary regulatory approvals of the
facility, which could take a substantial period of time. Customer orders would
have to be supplied from limited inventory. While the Company has business
interruption insurance to cover a portion of this loss, such insurance would not
compensate the Company for the loss of opportunity and the potential adverse
impact on relations with existing customers created by an inability to deliver
its products. The loss of the Company's manufacturing capability from a disaster
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing."
Dependence on Proprietary Rights. The Company relies to some extent on
proprietary technology, which it protects primarily through trade secrets,
licensing arrangements, patents, non-disclosure agreements and other
intellectual property laws. The Company also seeks to protect its brand names
through registered and common law trademarks. The Company currently holds five
United States patents relating to its products and has applications pending for
seven additional United States patents. In addition, the Company currently
licenses a number of patents relating to the DIA Anatomic Abutment and
Bio-Esthetic Abutment systems and the Immediate Impression Implant. There can be
no assurance that any future patents or licenses will be issued, that any issued
patents or other intellectual property rights of the Company will provide
meaningful protection for the Company's proprietary technology or that the steps
taken by the Company to protect its proprietary technologies will be adequate to
prevent misappropriation by third parties in the United States or abroad. In
addition, the Company has been subject to infringement claims in the past, and
there can be no assurances that infringement claims will not be asserted against
the Company in the future. Any such claims, with or without merit, could be
time-consuming, result in costly litigation and a diversion of management's
efforts, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all.
Furthermore, if infringement was established, the Company could be required to
pay damages or be enjoined from making, using or selling the infringing product.
Any of the foregoing could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Business --
Proprietary Rights."
Dependence Upon Key Personnel and Consultants. The Company's success
depends in significant part upon the continued service of its key management and
marketing personnel, particularly its executive officers. The Company is
dependent on its ability to identify, hire, train, integrate, retain and
motivate high quality personnel. The industry in which the Company competes is
characterized by intense competition for skilled personnel. The Company's
employees may terminate their employment with the Company at any time.
Accordingly, there can be no assurance that any of the Company's current
employees will continue to work for the Company. The Company relies, in part, on
its relationships with consultants in the dental industry to gain and maintain
brand recognition and customer loyalty. Loss of services of key employees or key
consultants could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management."
Control by Directors, Executive Officers and Affiliated Entities. The
Company's directors, executive officers and certain of their affiliates will, in
the aggregate, beneficially own approximately 51.8% of the Company's outstanding
shares of Common Stock following the completion of the Offering. The 1818 Fund
II, L.P., which is represented by three members of the Company's Board of
Directors, Messrs. Cowen, Grist and Long, will beneficially own 41.3% of the
Company's outstanding shares of Common Stock following the completion of the
Offering. This stockholder would be able to significantly influence all matters
requiring approval by the
10
<PAGE> 12
stockholders of the Company, including the election of directors and the
approval of mergers or other business combination transactions. See "Certain
Transactions" and "Principal Stockholders."
Benefits of Offering to Certain Affiliates and Stockholders of the
Company. The Offering will provide several significant benefits to certain
affiliates and stockholders of the Company. In particular, all of the
outstanding shares of Class A Preferred Stock and Class C Preferred Stock will
be automatically converted into an aggregate of 2,256,719 shares of Common Stock
upon consummation of the Offering pursuant to the Preferred Stock Conversion.
The conversion price will be equal to 93% of the initial public offering price
in the Offering. The sole holder of the Class A Preferred Stock is The 1818 Fund
II, L.P. Holders of the Class C Preferred Stock include (i) Anvers, L.P., an
affiliate of Furman Selz LLC, one of the Underwriters, (ii) a Managing Director
of Furman Selz LLC and (iii) Henry Wendt and Douglas E. Rogers, directors of the
Company. In addition, the Company plans to use approximately $17.8 million of
the net proceeds from the Offering to repay the Company's indebtedness under its
Subordinated Notes and a portion of the Bank Facility, including accrued
interest and prepayment penalties. Holders of the Company's Subordinated Notes
include Exeter Equity Partners, L.P., Exeter Venture Lenders, L.P. and The
Equitable Life Assurance Society of the United States. Finally, the Company
intends to use approximately $10.0 million of the net proceeds of this Offering
to redeem all of the outstanding shares of Class B Preferred Stock, all of which
shares are held by Bausch & Lomb. See "Use of Proceeds" and "Certain
Transactions."
No Prior Public Market; Possible Volatility of Stock Price. Prior to the
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active trading market will develop or be sustained for the
Common Stock after the Offering or that the market price of the Common Stock
will not decline below the initial public offering price. The initial public
offering price will be determined by negotiations among the Company and the
representatives of the Underwriters. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
stock market has experienced extreme price and volume fluctuations that have, in
the past, particularly affected the market price for many medical device
companies, and that have, on occasion, been unrelated to the operating
performance of these companies. These broad market fluctuations, as well as
other factors, may adversely affect the market price of the Company's Common
Stock. The Company's net sales or results of operations in future quarters may
be below the expectations of public market securities analysts and investors. In
such event, the price of the Company's Common Stock would likely decline,
perhaps substantially. Furthermore, factors such as announcements of
acquisitions; general economic conditions; quarterly fluctuations in financial
results and market conditions for stocks similar to that of the Company; new
products or product enhancements by the Company or its competitors; developments
in patents or other intellectual property rights; changes in the Company's
relationships with distributors and suppliers and other factors could have
significant impact on the market price of the Common Stock.
Environmental Regulations. The Company is subject to a variety of
governmental regulations relating to the use, storage, discharge, handling and
disposal of toxic or other hazardous substances, chemicals, materials or waste.
Small amounts of hazardous substances are used in the Company's manufacturing
process, and the Company contracts with third parties for the disposal of such
waste. Any failure to comply with current or future regulations could result in
civil penalties or criminal fines being imposed on the Company, or its officers,
directors or employees, suspension of production, alteration of its
manufacturing process or cessation of operations. Such regulations could require
the Company to acquire expensive remediation or abatement equipment or to incur
expenses to comply with environmental regulations. Any failure by the Company to
properly manage the use, disposal or storage of, or adequately restrict the
release of, hazardous or toxic substances could subject the Company to
significant liabilities. See "Business -- Manufacturing."
Potential Anti-Takeover Effects of Delaware Law and the Company's
Certificate of Incorporation and Bylaws. The Company's Board of Directors has
the authority, without further action by the stockholders, to issue from time to
time up to 5,000,000 shares of Preferred Stock in one or more classes or series,
and to fix the rights and preferences of such Preferred Stock. The Company's
Certificate of Incorporation, as amended, (the "Certificate") provides for
staggered terms for members of the Board of Directors and does not permit
stockholders to act without a meeting. The Company is also subject to provisions
of Delaware corporate law that, subject to certain exceptions, will prohibit the
Company from engaging in any "business combination" with a person
11
<PAGE> 13
who, together with affiliates and associates, owns 15% or more of the Company's
Common Stock (an "Interested Stockholder") for a period of three years following
the time that such person became an Interested Stockholder, unless the business
combination is approved in a prescribed manner. In addition, the Company's
bylaws, as amended (the "Bylaws"), establish an advance notice procedure for
stockholder proposals and for nominating candidates for election as directors.
These provisions of Delaware law and of the Company's Certificate and Bylaws may
have the effect of delaying, deterring or preventing a change in control of the
Company, may discourage bids for the Common Stock at a premium over the
prevailing market price and may adversely affect the market price, and the
voting and other rights of the holders, of the Common Stock. See "Description of
Capital Stock."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market after the Offering could adversely affect the market
price of the Common Stock and the ability of the Company to raise additional
capital. Upon the completion of the Offering, the Company will have a total of
10,056,719 shares of Common Stock outstanding, of which only the 3,000,000
shares offered hereby will be freely tradeable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"). All of the remaining
7,056,719 shares are "restricted securities" as defined by Rule 144 promulgated
under the Securities Act, of which 4,800,000 shares will be eligible for sale in
the public market in reliance on Rule 144 (subject to the volume and other
applicable restrictions of Rule 144) commencing 90 days following the date of
this Prospectus. The holders of 4,750,000 of such shares, however, have agreed
not to dispose of their shares until 180 days after the date of this Prospectus.
Upon the consummation of the Offering, approximately 1,063,344 shares will be
issuable upon exercise of outstanding options, all of which will be subject to
lock-up agreements. Following the Offering, the Company intends to file a
registration statement covering shares of Common Stock reserved for issuance
under outstanding options and under the 1997 Plan. Subject to Rule 144 volume
limitations applicable to affiliates, such shares will be available for sale in
the open market at the time they are exercised by the holder thereof. See
"Management -- Compensation Plans and Arrangements," "Principal Stockholders"
and "Shares Eligible for Future Sale."
Risk of Substantial Dilution. Purchasers of the Common Stock in the
Offering will suffer an immediate and substantial dilution of $13.31 per share
in the pro forma net tangible book value of the Common Stock from the initial
public offering price. Moreover, to the extent outstanding options or warrants
to purchase the Company's Common Stock are exercised in the future, there will
be further dilution. See "Dilution."
Forward-Looking Statements. This Prospectus includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). All statements, other than statements of
historical facts, included in this Prospectus which address activities, events
or developments which the Company expects or anticipates will or may occur in
the future, including, among others, the projected growth rate of the dental
implant market, the average selling prices of the Company's products, the
anticipated cash flows from operations, the anticipated growth rate for the
Company's domestic and international sales, and the Company's ability to execute
its business strategies. These statements are based on certain assumptions and
analyses made by the Company in light of its experience and its perception of
historical trends, current conditions and expected future developments as well
as other factors it believes are appropriate in the circumstances. However,
whether actual results and developments will conform with the Company's
expectations and predictions is subject to a number of risks and uncertainties
which could cause actual results to differ materially from the Company's
expectations, including the risk factors discussed in this Prospectus and other
factors, many of which are beyond the control of the Company. Consequently, all
of the forward-looking statements made in this Prospectus are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the Company will be realized, or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations. The Company assumes no
obligation to update publicly any such forward-looking statements, whether as a
result of new information, future events or otherwise. See "Managements'
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
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<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $32.5 million
($37.5 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $12.00 per share after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
The Company intends to use approximately $12.9 million of the net proceeds
of the Offering to repay the Subordinated Notes. Assuming the Offering closes on
February 9, 1998, the Company estimates that it will be required to pay
approximately $2.6 million of accrued dividends on the Preferred Stock,
approximately $551,000 of accrued interest on the Subordinated Notes and the
Bank Facility and approximately $1.8 million of prepayment penalties in
connection with the early retirement of the Subordinated Notes. Interest on the
Subordinated Notes is payable in quarterly installments and the outstanding
principal amounts are due and payable in May 2003. The proceeds from the
Subordinated Notes were used to fund the Acquisition in November 1996. The
Company also intends to use approximately $10.0 million of the net proceeds from
the Offering to redeem all of the outstanding shares of Class B Preferred Stock.
See "Certain Transactions."
The Company intends to use approximately $2.0 million of the net proceeds
of the Offering to repay the outstanding balance on the working capital line
under the Bank Facility and approximately $600,000 of the net proceeds of the
Offering to repay a portion of the $17.4 million revolving credit line under the
Bank Facility. The Bank Facility also includes a $7.5 million term loan, (of
which $7.4 million was outstanding at September 30, 1997) and a $3.0 million
capital expenditure line (of which $1.4 million was outstanding at September 30,
1997), both of which will remain outstanding following the Offering. Interest
accrues on such indebtedness as follows: (i) the reference rate announced by the
First Bank of Chicago as its base rate (the "Reference Rate") plus 1.5% per
annum or LIBOR plus 3.0% per annum on the revolving credit line, (ii) the
Reference Rate plus 2.0% per annum or LIBOR plus 3.75% per annum on the term
loan, (iii) the Reference Rate plus 1.5% per annum or LIBOR plus 2.75% per annum
on the working capital line and (iv) the Reference Rate plus 1.5% per annum or
LIBOR plus 3.0% per annum on the capital expenditure line. The outstanding
principal amounts on the revolving credit line, term loan, working capital line
and capital expenditure line are currently due on November 15, 2001, November
15, 2002, November 15, 1999 and November 15, 2002, respectively. The proceeds
from the capital expenditure line were used to fund the Company's acquisition of
certain manufacturing equipment, including the Computer Numerical Controlled
("CNC") machines. The proceeds of the working capital line were used for general
working capital purposes, and approximately $1.5 million of the revolving credit
line was used to fund the acquisition of Interpore. Substantially all of the
remaining proceeds of the Bank Facility were used to fund the Acquisition in
November 1996. The Company has received a commitment letter from Union Bank for
the establishment of a $40.0 million revolving line of credit to replace the
Bank Facility, which line of credit is subject to the completion of the Offering
and the satisfaction of certain other conditions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Any remaining proceeds from the Offering will be used for working capital
and other general corporate purposes. Pending the uses outlined above, the net
proceeds are expected to be invested in short-term, interest-bearing investment
grade or United States government securities.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock.
The Company currently intends to retain earnings to finance its operations and
future growth and does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The Company's Bank Facility and the
Subordinated Notes prohibit, and the Company's proposed bank facility may limit,
the payment of dividends without the consent of the lenders thereunder.
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<PAGE> 15
CAPITALIZATION
The following table sets forth (i) actual capitalization of the Company as
of September 30, 1997, (ii) the pro forma capitalization of the Company as of
September 30, 1997, reflecting the Preferred Stock Conversion, and (iii) the pro
forma capitalization of the Company as of September 30, 1997, as adjusted to
give effect to the Offering. See "Use of Proceeds," "Unaudited Pro Forma
Consolidated Financial Data" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------- ------------ ---------------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 524 $ 524 $ 2,524
======= ======== ========
Long-term debt (including current portion)(3):
Bank Facility........................................ $28,290 $ 28,290 $ 25,689
16% Series A Subordinated Notes...................... 10,286 10,286 --
14% Series B Subordinated Notes...................... 2,515 2,515 --
Class A 8.8% Cumulative Redeemable Preferred Stock,
$.0001 par value, 100,000 shares authorized;
22,000 shares issued and outstanding actual; and
no shares issued and outstanding pro forma........ 22,686 686 --
Class B 8.0% Cumulative Convertible Redeemable
Preferred Stock, $.0001 par value, 10,000 shares
authorized, issued and outstanding actual; and no
shares issued and outstanding pro forma........... 10,700 10,700 --
Class C 8.0% Junior Cumulative Redeemable Preferred
Stock, $.0001 par value, 3,200 shares authorized,
3,185 shares issued and outstanding actual; and no
shares issued and outstanding pro forma........... 3,225 40 --
Stockholder's equity (deficit):
Common Stock, $.0001 par value, 35,000,000 shares
authorized; 50,000(4) issued and outstanding
actual; and 10,056,719(5) shares issued and
outstanding pro forma............................. -- -- 1
Additional paid-in capital........................... 2,470 29,551 62,744
Accumulated deficit............................... (4,641) (6,537) (12,884)(6)(7)
------- -------- --------
Total stockholders' equity (deficit)......... (2,171) 23,014 49,861
------- -------- --------
Total capitalization......................... $75,531 $ 75,531 $ 75,550
======= ======== ========
</TABLE>
- ---------------
(1) Gives effect to the conversion of 22,000 shares of Class A Preferred Stock
and 3,185 shares of Class C Preferred Stock into an aggregate of 2,256,719
shares of Common Stock.
(2) Gives effect to (i) the conversion of 22,000 shares of Class A Preferred
Stock and 3,185 shares of Class C Preferred Stock into an aggregate of
2,256,719 shares of Common Stock and (ii) the Offering and the application
of the estimated proceeds therefrom (assuming an initial public offering
price of $12.00 per share). See "Use of Proceeds" and "Unaudited Pro Forma
Consolidated Financial Data."
(3) Net of unamortized debt discount.
(4) Excludes 4,750,000 shares of Common Stock issuable upon the exercise of
outstanding warrants, 968,344 shares of Common Stock issuable upon the
exercise of outstanding options and 2,256,719 shares of Common Stock
issuable in connection with the Preferred Stock Conversion.
(5) Excludes 968,344 shares of Common Stock issuable upon the exercise of
outstanding options.
(6) Includes the effect of an extraordinary charge of $7.5 million, net of
related tax benefit, relating to (i) the elimination of deferred financing
costs of $4.6 million associated with the repayment of the Subordinated
Notes and a portion of the Bank Facility and the conversion and/or
redemption of all mandatorily redeemable Preferred Stock, (ii) the charge of
$1.9 million related to the Preferred Stock Conversion, and (iii) the
prepayment penalties of $1.0 million incurred in connection with the
repayment of the Subordinated Notes.
(7) Includes the effect of a compensation charge of $1.3 million related to
options granted below the fair value per share at the date of grant, which
options are either fully vested or vest immediately upon consummation of the
Offering.
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<PAGE> 16
DILUTION
The net tangible book value (deficit) of the Company as of September 30,
1997 was approximately $(66,625,000), or $(13.88) per share of Common Stock
based upon 4,800,000 shares of Common Stock outstanding. The net tangible book
value per share represents the amount of the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the conversion of 22,000 shares of Class A
Preferred Stock and 3,185 shares of Class C Preferred Stock having an aggregate
liquidation preference of approximately $25,185,000 into 2,256,719 shares of
Common Stock, the pro forma net tangible book value (deficit) of the Company as
of September 30, 1997 before the Offering, would have been $(41,440,000), or
$(5.87) per share of Common Stock. After giving effect to the sale of 3,000,000
shares of Common Stock offered by the Company hereby and the receipt of the net
proceeds of $32,480,000 therefrom at an assumed initial public offering price of
$12.00 per share, the pro forma net tangible book value of the Company as of
September 30, 1997 would have been approximately $(13,193,000), or $(1.31) per
share of Common Stock. This represents an immediate increase in net tangible
book value of $12.57 per share to existing stockholders and an immediate
dilution of $13.31 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $12.00
Net tangible book value (deficit) per share as of September 30,
1997......................................................... $(13.88)
Increase per share attributable to conversion of Preferred
Stock........................................................ 8.01
------
Pro forma net tangible book value (deficit) per share as of
September 30, 1997.............................................. (5.87)
Increase per share attributable to new investors................ 4.56
------
Pro forma net tangible book value (deficit) per share after the
Offering........................................................ (1.31)
------
Dilution per share to new investors............................... $13.31
======
</TABLE>
As of September 30, 1997, options to purchase an aggregate of 968,344
shares of Common Stock were outstanding at a weighted average exercise price of
$0.58 per share. The computations in the foregoing table assume no exercise of
these stock options. To the extent these options or warrants are exercised,
there will be further dilution to new investors. See Note 9 of Notes to
Consolidated Financial Statements.
The following table summarizes as of September 30, 1997, after giving pro
forma effect to the sale of the Shares in the Offering and the Preferred Stock
Conversion, the differences between the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by existing stockholders and by new investors purchasing shares
in the Offering (assuming an initial public offering price of $12.00 per share
and before deducting underwriting discounts and commissions and estimated
offering expenses).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... 7,056,719 70.2% $25,185,000 41.2% $ 3.57
New investors.............. 3,000,000 29.8 36,000,000 58.8 12.00
---------- ----- ----------- -----
Total................. 10,056,719 100.0% $61,185,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) If the over-allotment option is exercised in full, the percentage of the
shares held by existing stockholders and new investors will be 67.2% and
32.8%, respectively, of the total number of shares outstanding after this
Offering.
15
<PAGE> 17
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited condensed consolidated pro forma financial data
(the "Unaudited Pro Forma Financial Data") as of September 30, 1997 and for the
nine months ended September 30, 1996 and 1997 is prepared from the application
of pro forma adjustments to data derived from the unaudited historical
consolidated financial statements of the Company. The unaudited condensed
consolidated pro forma financial data for the year ended December 31, 1996 is
prepared from the application of pro forma adjustments to data derived from the
audited historical consolidated financial statements for the period from January
1 through November 15, 1996 of the Company's predecessor, S-O, a wholly-owned
subsidiary of Bausch & Lomb, and the period from November 16, 1996 through
December 31, 1996 of the Company. The unaudited pro forma condensed consolidated
statements of operations for the nine months ended September 30, 1996 and 1997
and the year ended December 31, 1996 gives effect to: (i) the Acquisition, (ii)
the Preferred Stock Conversion and (iii) the Offering and application of the net
proceeds therefrom, as if each transaction had occurred on January 1, 1996. The
unaudited pro forma condensed consolidated balance sheet gives effect to (ii)
and (iii) as if each had occurred on September 30, 1997. The adjustments are
described in the accompanying footnotes. The Unaudited Pro Forma Financial Data
does not purport to represent what the Company's results of operations actually
would have been if those transactions had been consummated on the date or for
the periods indicated, or what such results will be for any future date or for
any future period. The Unaudited Pro Forma Consolidated Financial Data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Registration Statement.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
JAN. 1, NOV. 16,
1996 1996
THROUGH THROUGH COMBINED
NOV. 15, DEC. 31, YEAR ENDED
1996 1996 DECEMBER 31, ACQUISITION OFFERING
(PREDECESSOR) (COMPANY) 1996 ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- --------- ------------ ----------- ----------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $28,108 $ 4,089 $ 32,197 $ 32,197
Cost of sales..................... 7,430 1,356 8,786 8,786
------- ------- -------- ----------
Gross profit...................... 20,678 2,733 23,411 23,411
Selling, general and
administrative expense.......... 14,791 1,929 16,720 $ 499(1) 17,219
Research and development
expense......................... 2,116 352 2,468 2,468
Interest expense.................. 1,065 1,065 7,552(2) $(6,110)(3) 2,507
------- ------- -------- ------- ------- ----------
Income (loss) before income
taxes........................... 3,771 (613) 3,158 (8,051) 6,110 1,217
Income taxes...................... (1,852) (1,852) 3,220(4) (1,855)(4) 487
------- ------- -------- ------- ------- ----------
Net income (loss)(5).............. $ 1,919 $ (613) $ 1,306 $(4,831) $ 4,255 $ 730
======= ======= ======== ======= ======= ==========
Net income per share(5)(6)........ $ 0.07
==========
Shares outstanding(6)............. 10,754,618
</TABLE>
- ---------------
(1) Reflects the effect of additional amortization of $59.2 million of
tax-deductible goodwill recorded in connection with the Acquisition, which
amounts to approximately $1.5 million annually, for the period from January
1, 1996 through November 15, 1996.
(2) Reflects the increase in interest expense and amortization of deferred
financing costs related to the Subordinated Notes, the Bank Facility and the
mandatorily redeemable Preferred Stock issued in connection with the
Acquisition assuming the Acquisition occurred on January 1, 1996. The
Subordinated Notes consisted of the following at December 31, 1996 (i) 16%
Series A Subordinated Note with a principal amount of $10.0 million and (ii)
14% Series B Subordinated Notes with an aggregate principal amount of $2.5
million. The Bank Facility consisted of the following at December 31, 1996:
(i) a working capital loan with a principal amount of $1.3 million and a
variable interest rate of 9.75%, (ii) a revolving term loan with a principal
amount of $17.5 million and a variable interest rate of 9.75% and (iii) a
term loan with a principal amount of $7.5 million and a variable interest
rate of 10.25%. At December 31, 1996, the mandatorily redeemable Preferred
Stock
16
<PAGE> 18
consisted of 22,000 shares of Class A Preferred Stock, 10,000 shares of Class B
Preferred Stock and 3,185 shares of Class C Preferred Stock, with face amounts
of $22.0 million, $10.0 million and $3.2 million, respectively, and dividend
rates of 8.8%, 8.0% and 8.0%, respectively. At December 31, 1996, deferred
financing costs consisted of approximately $2.3 million relating to the
Subordinated Notes and Bank Facility and $2.9 million relating to the
issuance of mandatorily redeemable Preferred Stock.
(3) Reflects the reduction in interest expense by (i) $2.1 million as a result
of the repayment of the Subordinated Notes and a portion of the Bank
Facility, (ii) $3.0 million as a result of the elimination of dividends on
the mandatorily redeemable Preferred Stock as a result of the Preferred
Stock Conversion and (iii) $1.0 million as a result of the elimination of
amortization of deferred financing costs and debt discounts.
(4) Reflects adjustment to increase pro forma income tax expense to result in a
statutory income tax rate of 40%.
(5) Excludes the effect of an extraordinary charge of $7.5 million, net of the
related tax benefit, relating to (i) the elimination of deferred financing
costs of $4.6 million associated with the repayment of the Subordinated
Notes and a portion of the Bank Facility and the conversion and/or
redemption of all mandatorily redeemable Preferred Stock, (ii) the charge of
$1.9 million related to the Preferred Stock Conversion, and (iii) the
prepayment penalties of $1.0 million incurred in connection with the
repayment of Subordinated Notes.
(6) Computed based on weighted average shares outstanding assuming the Preferred
Stock Conversion and the Offering and the application of the net proceeds
therefrom were consummated on January 1, 1996. Also includes the effect of
Common Stock and equivalents issued within one year from the filing of the
Registration Statement of which this Prospectus is a part at prices per
share below the initial public offering price, using the treasury stock
method using an assumed initial public offering price of $12.00 per share.
17
<PAGE> 19
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, OFFERING
1997 ADJUSTMENTS PRO FORMA
------------- ----------- ---------
(in thousands, except share and per share
data)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................. $29,361 $29,361
Cost of sales......................................... 8,018 8,018
------- -------
Gross profit.......................................... 21,343 21,343
Selling, general and administrative expense........... 16,313 16,313
Noncash compensation expense.......................... 569 569
Research and development expense...................... 1,942 1,942
Interest expense...................................... 6,547 $(4,689)(1) 1,858
------- ------- -------
Income (loss) before income taxes..................... (4,028) 4,689 661
Income taxes.......................................... -- (264)(2) (264)
------- ------- -------
Net income (loss)(3).................................. $(4,028) $ 4,425 $ 397
======= ======= =======
Net income per share(3)(4)............................ $ 0.04
=======
Shares outstanding(4)................................. 10,754,618
</TABLE>
- ---------------
(1) Reflects the reduction in interest expense as a result of the redemption of
all outstanding shares of mandatorily redeemable Class B Preferred Stock and
the repayment of the Subordinated Notes and a portion of the Bank Facility.
Also reflects a reduction in interest expense due to the elimination of
dividends on the mandatorily redeemable Class A and Class C Preferred Stock
as a result of the Preferred Stock Conversion.
(2) Reflects adjustment to increase pro forma income tax expense to result in a
statutory income tax rate of 40%.
(3) Excludes the effect of an extraordinary charge of $7.5 million, net of the
related tax benefit, relating to (i) the elimination of deferred financing
costs of $4.6 million associated with the repayment of the Subordinated
Notes and a portion of the Bank Facility and the conversion and/or
redemption of all mandatorily redeemable Preferred Stock, (ii) the charge of
$1.9 million related to the Preferred Stock Conversion, and (iii) the
prepayment penalties of $1.0 million incurred in connection with the
repayment of Subordinated Notes.
(4) Computed based on weighted average shares outstanding assuming the Preferred
Stock Conversion and the Offering and application of the net proceeds
therefrom were consummated on January 1, 1996. Also includes the effect of
Common Stock and equivalents issued within one year from the filing of the
Registration Statement of which this Prospectus is a part at prices per
share below the initial public offering price, using the treasury stock
method using an assumed initial public offering price of $12.00 per share.
18
<PAGE> 20
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, ACQUISITION OFFERING
1996 ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ------------ ------------ ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $23,387 $23,387
Cost of sales............................... 6,137 6,137
------- --------
Gross profit................................ 17,250 17,250
Selling, general and administrative 12,183 $ 443(1) 12,626
expense...................................
Research and development expense............ 1,775 1,775
Interest expense............................ 6,463(2) $ (4,605)(3) 1,858
------- -------- -------- --------
Income (loss) before income taxes........... 3,292 (6,906) 4,605 991
Income taxes................................ (1,608) 2,762(4) (1,550)(4) (396)
------- -------- -------- --------
Net income.................................. $ 1,684 $ (4,144) $ 3,055 $ 595
======= ======== ======== ========
Net income per share(5)..................... $ 0.06
========
Shares outstanding(5)........................ 10,754,618
</TABLE>
- ---------------
(1) Reflects the effect of additional amortization of $59.2 million of
tax-deductible goodwill recorded in connection with the Acquisition, which
amounts to approximately $1.5 million annually, for the period from January
1, 1996 through September 30, 1996.
(2) Reflects the increase in interest expense and amortization of deferred
financing costs related to the Subordinated Notes, the Bank Facility and
mandatorily redeemable Preferred Stock issued in connection with the
Acquisition assuming the Acquisition had occurred on January 1, 1996.
(3) Reflects the reduction in interest expense as a result of the redemption of
all outstanding shares of Class B Preferred Stock and the repayment of the
Subordinated Notes and a portion of the Bank Facility. Also reflects a
reduction in interest expense due to the elimination of dividends on the
Class A and Class C Preferred Stock as a result of the Preferred Stock
Conversion.
(4) Reflects adjustment to increase pro forma income tax expense to result in a
statutory income tax rate of 40%.
(5) Computed based on weighted average shares outstanding assuming the Preferred
Stock Conversion and the Offering and the application of proceeds therefrom
were consummated on January 1, 1996. Also includes the effect of Common
Stock and equivalents issued within one year from the filing of the
Registration Statement of which this Prospectus is a part at prices per
share below the initial public offering price, using the treasury stock
method using an assumed initial public offering price of $12.00 per share.
19
<PAGE> 21
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<CAPTION>
AT PREFERRED STOCK
SEPTEMBER 30, CONVERSION OFFERING
1997 ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- --------------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents................ $ 524 $ 2,000(1) $ 2,524
Accounts receivable, net................. 7,572 7,572
Inventories.............................. 6,359 6,359
Prepaid expenses and other current
assets................................. 368 368
------- --------- --------
Total current assets................... 14,823 2,000 16,823
Fixed assets, net.......................... 4,895 4,895
Goodwill, net.............................. 58,990 58,990
Other assets............................... 5,464 (2,532)(2) 2,932
------- --------- --------
Total assets........................... $84,172 $ (532) $ 83,640
======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt........ $ 3,604 $ 3,604
Accounts payable......................... 2,258 2,258
Accrued liabilities...................... 3,925 $ (551)(3) 3,374
Customer advances........................ 2,458 2,458
------- --------- --------
Total current liabilities.............. 12,245 (551) 11,694
Long-term debt............................. 37,487 (15,402)(3) 22,085
Mandatorily redeemable Preferred Stock..... 36,611 $ (25,185)(4) (11,426)(5)
------- --------- --------- --------
Total liabilities...................... 86,343 (25,185) (27,379) 33,779
------- --------- --------- --------
Stockholders' equity (deficit)
Common Stock and additional paid-in
capital................................ 2,470 27,081(4) 33,194(6) 62,745
Accumulated deficit...................... (4,641) (1,896)(4)(7) (6,347)(7)(8) (12,884)
------- --------- --------- --------
Total stockholders' equity (deficit)... (2,171) 25,185 26,847 49,861
------- --------- --------- --------
Total liabilities and stockholders'
equity............................... $84,172 $ -- $ (532) $ 83,640
======= ========= ========= ========
</TABLE>
- ---------------
(1) Reflects the increase in cash and cash equivalents equal to the net proceeds
from the Offering less the redemption of the outstanding shares of Class B
Preferred Stock and repayment of the Subordinated Notes and a portion of the
Bank Facility upon consummation of the Offering.
(2) Reflects write-off of debt issue costs and Preferred Stock issue costs of
$3.9 million, less deferred income tax asset of $1.4 million recorded for
the extraordinary charge discussed in footnote 7.
(3) Reflects the repayment of the Subordinated Notes and a portion of the Bank
Facility upon consummation of the Offering.
(4) Reflects the conversion of 22,000 shares of Class A Preferred Stock and
3,185 shares of Class C Preferred Stock into an aggregate 2,256,719 shares
of Common Stock at 93% of the initial public offering price upon
consummation of the Offering and the related extraordinary charge of $1.9
million.
(5) Reflects the redemption upon consummation of the Offering of all shares of
Class B Preferred Stock.
(6) This adjustment is recorded as additional paid-in capital and reflects the
application of the estimated net proceeds of $32.5 million from the Offering
and the effect of stock options discussed in footnote 8.
(7) Reflects an extraordinary charge of $7.5 million, net of the related tax
benefit, relating to (i) the elimination of deferred finance costs of $4.6
million associated with the repayment of the Subordinated Notes and a
portion of the Bank Facility and the conversion and/or redemption of all
mandatorily redeemable Preferred Stock, (ii) the charge of $1.9 million
related to the Preferred Stock Conversion, and (iii) the prepayment
penalties of $1.0 million incurred in connection with the repayment of the
Subordinated Notes.
(8) Includes the effect of a compensation charge of $1.3 million related to
options granted below the fair value per share at the date of grant, which
options are either fully vested or vest immediately upon consummation of the
Offering.
20
<PAGE> 22
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations data for the
years ended December 31, 1994 and 1995, the period January 1, 1996 through
November 15, 1996, the period November 16, 1996 through December 31, 1996 and
the selected consolidated balance sheet data as of December 31, 1995 and 1996
are derived from the audited Consolidated Financial Statements included
elsewhere in this Prospectus. The selected consolidated statement of operations
data for the nine months ended September 30, 1996 and 1997 and the selected
consolidated balance sheet data as of September 30, 1997 are derived from
unaudited Consolidated Financial Statements included elsewhere in this
Prospectus. The selected consolidated statement of operations data for the years
ended December 31, 1992 and 1993 and the selected consolidated balance sheet
data as of December 31, 1992 and 1993, are derived from the unaudited
Consolidated Financial Statements not included in this Prospectus, which
Consolidated Financial Statements were prepared by management of the Company on
the same basis as the audited Consolidated Financial Statements included
elsewhere herein and, in the opinion of the Company, include all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the information set forth below. The following selected consolidated financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. The Company
uses a 52/53 week fiscal year ending on the last Saturday in December. As a
result, fiscal periods may not end on the same day as the end of the respective
calendar periods.
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR(1) ------------ PREDECESSOR COMPANY
---------------------------------------------------- NOVEMBER 16, ------------- -------------
JANUARY 1, 1996 NINE MONTHS NINE MONTHS
YEAR ENDED DECEMBER 31, THROUGH THROUGH ENDED ENDED
------------------------------------- NOVEMBER 15, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1992 1993 1994 1995 1996 1996(2)(3) 1996 1997(3)(4)
------- ------- ------- ------- ------------ ------------ ------------- -------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................. $12,735 $16,845 $22,168 $27,361 $ 28,108 $ 4,089 $23,387 $29,361
Cost of sales............. 4,042 5,127 6,666 7,865 7,430 1,356 6,137 8,018
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............. 8,693 11,718 15,502 19,496 20,678 2,733 17,250 21,343
Selling, general and
administrative
expense................. 6,164 8,698 11,393 14,241 14,791 1,929 12,183 16,882
Research and development
expense................. 1,218 1,618 1,781 2,225 2,116 352 1,775 1,942
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.... 1,311 1,402 2,328 3,030 3,771 452 3,292 2,519
Interest expense.......... 45 50 -- -- -- 1,065 -- 6,547
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes............ 1,266 1,352 2,328 3,030 3,771 (613) 3,292 (4,028)
Income taxes.............. (506) (836) (1,253) (1,572) (1,852) -- (1,608) --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)......... $ 760 $ 516 $ 1,075 $ 1,458 $ 1,919 $ (613) $ 1,684 $(4,028)
======= ======= ======= ======= ======= ======= ======= =======
Net (loss) per share(5)... $ (0.04) $ (0.31)
======= =======
Shares outstanding(5)..... 7,754,618 7,754,618
OTHER DATA:
Depreciation.............. $ 181 $ 161 $ 363 $ 595 $ 712 $ 132 $ 558 $ 905
Amortization.............. -- 738 868 941 912 211 766 1,294
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash and cash
equivalents............. $ -- $ -- $ 155 $ 120 $ 220 $ 524
Working capital........... 502 1,629 4,585 4,706 2,357 2,578
Total assets.............. 4,266 31,796 33,764 35,648 79,627 84,172
Total long-term debt and
mandatorily redeemable
Preferred Stock(6)...... -- -- -- -- 73,642 77,702
Total stockholders' equity
(deficit)/Predecessor
equity.................. 1,058 27,220 30,698 32,588 1,288 (2,171)
</TABLE>
- ---------------
(1) Represents the historical financial data of the Company's predecessor, S-O,
a wholly-owned subsidiary of Bausch & Lomb. For 1992, represents the
historical financial data of S-O's predecessor.
(2) Includes the results of operations and the assets of S-O subsequent to the
Acquisition in November 1996.
(3) Includes the effect of amortization of $59.2 million of goodwill recorded in
connection with the Acquisition, which is being amortized over a 40 year
period and is tax-deductible.
(4) Includes the results of operations of the dental business of Interpore
subsequent to its acquisition in May 1997.
(5) Share and per share data are not considered meaningful since S-O operated as
a wholly-owned subsidiary of Bausch & Lomb from 1993 through November 15,
1996.
(6) Includes current portion of long-term debt.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. Historical and pro forma results
of operations, percentage relationships and any trends that may be inferred from
the discussion below are not necessarily indicative of the operating results for
any future period.
GENERAL
Steri-Oss develops, manufactures and markets a broad line of dental
implants, abutments and related surgical instruments for distribution in North
America, Europe/the Middle East, Asia and Central and South America. The
Company's products are used by oral surgeons, periodontists and implantologists
who typically perform the implant surgery, as well as general practitioners and
prosthodontists who usually prepare the crown or other prosthetic device that
fits on the abutment. In North America, the Company sells its products through
its direct sales force consisting of over 40 persons. Internationally, the
Company sells its products through 26 independent distributors in more than 35
countries. The Company has experienced significant growth over the last several
years. The Company's net sales increased to $32.2 million for 1996 from $16.8
million for 1993. Net sales also increased 25.5% to $29.4 million for the nine
months ended September 30, 1997 from $23.4 million for the comparable nine month
period in 1996.
The Company's predecessor sold its first dental implant in 1986 and was
acquired by the Company from Bausch & Lomb in November 1996. In May 1997, the
Company acquired the dental operations of Interpore. The Company accounted for
each of its acquisitions as a purchase for financial reporting purposes and, as
a result, the Company's consolidated statement of operations data includes the
operating results of the acquired companies and assets from their respective
dates of acquisition. In connection with the Acquisition, the Company recorded
$59.2 million in goodwill, which is being amortized by the Company over a
40-year period, resulting in tax-deductible amortization of approximately $1.5
million per year.
The Company's products are purchased by dental professionals who bill
patients directly for the implant procedure. In the United States and most other
countries, implants generally are not covered by health insurance and, as a
result, the patient is responsible for payment to the dental professional. While
certain competitive implants are less expensive than the Company's implants, the
Company believes its prices are competitive with other high-quality implant
products. Due in part to the importance of quality and customer service and to
the minor cost of the implant relative to the cost of the implant procedure, the
Company does not believe that price is a major competitive factor within the
industry. The Company does, however, provide its customers, particularly its
international distributors, with discounts. The Company uses such discounts to
encourage international distributors to increase their marketing activities and
training programs. The Company has experienced slight declines in the average
selling prices of its products over the last several years, the effect of which
has been partially offset by a reduction in the Company's cost of goods sold as
a percentage of net sales. While the Company does not anticipate any material
declines in its average selling prices over the next year, any such declines
could adversely affect the Company's net sales, results of operations and cash
flows.
Approximately 52.8% of the Company's net sales for the nine months ended
September 30, 1997 were attributable to dental implants, while abutments and
surgical instrument sales accounted for approximately 31.6% and 15.6% of net
sales, respectively, for the same period. In general, the Company's dental
implants have the highest gross margins of its products, followed by abutments,
which have slightly lower gross margins. The gross margins on surgical
instruments are significantly lower than on dental implants and abutments
because the Company often discounts its surgical instruments to encourage dental
professionals using competitors' products to switch to the Company's implant
systems. The Company generally experiences higher gross margins on new products
and the Company seeks to generate a significant portion of its net sales in any
particular year from recently introduced products.
International sales (sales outside the United States and Canada)
constituted approximately 41.2% and 40.0% of the Company's net sales during 1996
and for the nine months ended September 30, 1997, respectively. The Company
anticipates that international sales will continue to constitute a significant
portion
22
<PAGE> 24
of the Company's net sales in the future. Substantially all of the Company's
international net sales are to independent distributors. In particular, Metalor
and its affiliates accounted for approximately 12.1% of the Company's net sales
during 1996 and 13.1% for the nine months ended September 30, 1997. Although the
Company's international sales are currently denominated in United States
dollars, fluctuations in currency exchange rates have in the past, and could in
the future, impact the Company's net sales or profitability in certain
countries.
Prior to 1993, the Company outsourced most of its manufacturing to
independent vendors. In 1993, the Company leased a new manufacturing facility
and purchased equipment for the purpose of bringing its manufacturing in-house.
In addition, the Company undertook other measures designed to reduce
manufacturing costs and increase operating efficiencies. Primarily as a result
of these actions, the Company reduced cost of sales as a percentage of net sales
from 30.1% in 1994 to 27.3% for the nine months ended September 30, 1997.
Currently, the Company manufactures substantially all of its implants.
The Company's net sales and results of operations have experienced
quarterly fluctuations. The Company's sales in the third quarter of each year
have been historically lower than in the prior quarter. The Company believes the
lower third quarter sales are due in part to fewer implant procedures performed
during the summer vacation months. The Company has also experienced some
increases in net sales during the fourth quarter followed by lower to flat first
quarter sales primarily due to the Company's increased marketing activities in
the latter portion of the year.
The Company's results of operations are affected by a variety of factors.
If the Company were to experience pricing pressure, an adverse shift in product
mix, increased cost of sales, increased discounts to distributors, increased
manufacturing costs or adverse changes in governmental regulations, such factors
could adversely affect the Company's financial condition and results of
operations.
RESULTS OF OPERATIONS
Effective November 16, 1996, the Company acquired substantially all of the
assets of its predecessor, S-O. The historical data of S-O and the Company are
not comparable in certain respects. Accounting for the acquisition of S-O and
the Company have resulted in material differences due to a change in the basis
of accounting between S-O and the Company. The Company's results of operations
since November 16, 1996 have been affected by an increase in interest expense,
amortization of goodwill and debt issuance costs, and depreciation of fixed
assets having a new cost basis. The income tax expense shown in the statement of
operations data for the periods prior to the Acquisition is the estimated amount
that the Company's predecessor would have incurred on a stand-alone basis. The
results of operations of the Company's predecessor for the period January 1,
1996 through November 15, 1996 have been combined with the results of operations
of the Company for the period November 16, 1996 through December 31, 1996 to
present the results of operations for the year ended December 31, 1996. See
"Unaudited Pro Forma Consolidated Financial Data."
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<PAGE> 25
The following table sets forth for the periods indicated certain
consolidated statements of operations data, as a percentage of the Company's net
sales:
<TABLE>
<CAPTION>
PREDECESSOR
------------------------------- COMPANY PREDECESSOR COMPANY
------------ COMBINED ------------- -------------
YEARS ENDED JANUARY 1, NOVEMBER 16, ------------ NINE MONTHS NINE MONTHS
DECEMBER 31, THROUGH THROUGH YEAR ENDED ENDED ENDED
--------------- NOVEMBER 15, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1996 1996 1997
----- ----- ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................. 30.1 28.7 26.4 33.2 27.3 26.2 27.3
----- ----- ----- ----- ----- ----- -----
Gross profit.................. 69.9 71.3 73.6 66.8 72.7 73.8 72.7
Selling, general and
administrative expense...... 51.4 52.1 52.6 47.1 51.9 52.1 57.5
Research and development
expense..................... 8.0 8.1 7.6 8.6 7.7 7.6 6.6
----- ----- ----- ----- ----- ----- -----
Income from operations........ 10.5 11.1 13.4 11.1 13.1 14.1 8.6
Interest expense.............. -- -- -- 26.0 3.3 -- 22.3
Income (loss) before income
taxes....................... 10.5 11.1 13.4 (15.0) 9.8 14.1 (13.7)
Income taxes.................. 5.7 5.8 6.6 -- 5.8 6.9
----- ----- ----- ----- ----- ----- -----
Net income (loss)............. 4.8% 5.3% 6.8% (15.0)% 4.0% 7.2% (13.7)%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1996 and 1997
Net Sales. Net sales increased 25.5% from $23.4 million for the nine months
ended September 30, 1996 to $29.4 million for the nine months ended September
30, 1997, primarily reflecting increased unit sales of dental implants and
abutments. North American net sales increased by 28.0% for the nine month period
ended September 30, 1997 as compared to the comparable period in 1996 primarily
due to sales of the Company's Replace Implant System introduced in March 1997
and, to a lesser extent, net sales attributable to the dental operations
acquired from Interpore. International net sales increased by 22.1% during the
nine months ended September 30, 1997 as compared to the nine months ended
September 30, 1996, primarily due to increased sales in Germany, Korea and
Taiwan.
Gross Profit. Gross profit increased 23.7% from $17.3 million, or 73.8% of
net sales, for the nine months ended September 30, 1996 to $21.3 million, or
72.7% of net sales, for the nine months ended September 30, 1997. The increase
in gross profit was primarily due to the increase in sales across all product
lines. The decrease in gross margin was primarily due to (i) promotional pricing
on surgical kits and other instruments that are used in conjunction with the
Company's new Replace Implant System, (ii) lower international selling prices
resulting from pricing pressures due to the relative strength of the U.S. dollar
compared to the currencies of the Company's major foreign markets and (iii)
increased sales of Interpore products, which generally have lower margins than
certain of the Company's other products. This decrease was partially offset by
lower product costs resulting from the Company's expansion of its manufacturing
capacity to include surgical drills and related products.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 38.6% from $12.2 million, or 52.1% of net
sales, for the nine months ended September 30, 1996 to $16.9 million, or 57.5%
of net sales, for the nine months ended September 30, 1997. This increase was
primarily due to the amortization of tax-deductible goodwill recorded in
connection with the Acquisition, a non-cash compensation charge related to stock
options, the addition of new sales and marketing personnel and increases in
marketing, educational, accounting and financial expenses necessary to
accommodate the Company's growth.
Research and Development Expense. Research and development expense
increased 9.4% from $1.8 million, or 7.6% of net sales, for the nine months
ended September 30, 1996 to $1.9 million, or 6.6% of net sales, for the nine
months ended September 30, 1997. Research and development expense during the
nine month period ended September 30, 1997 primarily consisted of compensation
for engineering and regulatory personnel, project material costs, and clinical
studies and FDA testing related to development activities.
Interest Expense. Interest expense for the nine months ended September 30,
1997 was $6.5 million, of which (i) $3.5 million consisted of interest on
indebtedness under the Company's Bank Facility and
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<PAGE> 26
Subordinated Notes, (ii) $2.2 million consisted of accrued dividends on
mandatorily redeemable Preferred Stock and (iii) $762,000 consisted of the
amortization of deferred financing costs incurred in connection with the
Acquisition. The Company had no interest expense during the nine months ended
September 30, 1996.
Income Taxes. Income taxes were $1.6 million for the nine months ended
September 30, 1996 reflecting the estimated amount the Company's predecessor
would have incurred on a stand-alone basis. Prior to November 16, 1996, the
Company's results of operations were included in the consolidated returns of
Bausch & Lomb. The Company did not incur any income tax expense during the nine
months ended September 30, 1997 as a result of the Company's losses in that
period. At September 30, 1997, the Company had net operating loss carryforwards
of $3.3 million and $1.6 million for federal and California income tax purposes,
respectively, reflecting the amortization of tax-deductible goodwill recorded in
connection with the Acquisition.
Net Income (Loss). Net loss was $4.0 million, or 13.7% of net sales, for
the nine months ended September 30, 1997 compared to net income of $1.7 million,
or 7.2% of net sales, for the nine months ended September 30, 1996, primarily as
a result of increased interest expense and the amortization of tax-deductible
goodwill recorded in connection with the Acquisition in November 1996.
Years Ended December 31, 1995 and 1996
Net Sales. Net sales increased 17.7% from $27.4 million for the year ended
December 31, 1995 to $32.2 million for the year ended December 31, 1996. North
American net sales increased by 13.8% for the year ended December 31, 1996 as
compared to the prior year due, in part, to the addition of new sales and
marketing personnel to support new sales regions. International net sales
increased by 23.7% in 1996 over 1995, reflecting growth in each of the Company's
major sales regions. Sales of implant products increased by approximately $2.6
million in 1996 as compared to the prior year largely due to the introduction of
implants coated with titanium plasma spray ("TPS") and increased sales and
marketing support. In addition, the Company's continued marketing efforts
towards improving sales of abutments resulted in an increase of approximately
$2.2 million in net sales for such products.
Gross Profit. Gross profit increased 20.1% from $19.5 million, or 71.3% of
net sales, for the year ended December 31, 1995 to $23.4 million, or 72.7% of
net sales, for the year ended December 31, 1996. The increase in gross margin
was due to a shift in the Company's product mix toward higher margin implants
and abutments. This improvement in gross margin was also due to the Company's
1996 expansion of its manufacturing capacity to increase its production of
implants and abutments, resulting in lower product costs.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 17.4% from $14.2 million, or 52.1% of net
sales, for the year ended December 31, 1995 to $16.7 million, or 51.9% of net
sales, for the year ended December 31, 1996. This increase was primarily the
result of the addition of new personnel in the Company's sales, marketing and
education and accounting departments, increased charges from Bausch & Lomb as
reimbursement for certain increased employee benefits, and increased media and
advertising expenses.
Research and Development Expense. Research and development expense
increased 10.9% from $2.2 million, or 8.1% of net sales, for the year ended
December 31, 1995 to $2.5 million, or 7.7% of net sales, for the year ended
December 31, 1996, reflecting increased compensation for three additional
engineering personnel as well as increased expenses associated with continued
clinical studies and FDA testing.
Interest Expense. Interest expense for the year ended December 31, 1996 was
$1.1 million, reflecting interest on the Company's Bank Facility and
Subordinated Notes and accrued dividends on mandatorily redeemable Preferred
Stock, incurred and issued as part of the Acquisition. The Company had no
interest expense prior to November 16, 1996.
Income Taxes. Income taxes were $1.6 million and $1.9 million for the years
ended December 31, 1995 and 1996, respectively, reflecting the amounts the
Company's predecessor would have incurred on a stand-alone basis.
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<PAGE> 27
Net Income. Net income decreased 10.4% from $1.5 million, or 5.3% of net
sales, for the year ended December 31, 1995 to $1.3 million, or 4.0% of net
sales, for the year ended December 31, 1996, primarily as a result of increased
interest expense and amortization of tax-deductible goodwill recorded in
connection with the Acquisition in November 1996.
Years Ended December 31, 1994 and 1995
Net Sales. Net sales increased 23.4% from $22.2 million for the year ended
December 31, 1994 to $27.4 million for the year ended December 31, 1995. North
American net sales increased by 18.3% for the year ended December 31, 1995 as
compared to the prior year. International net sales improved by 32.4% in 1995 as
compared to 1994. Growth in net sales occurred in each of the Company's major
sales regions, in particular in the Middle East, reflecting the Company's
expansion into Israel in March 1995. Sales of implant products increased by
approximately $2.4 million in 1995 as compared to the prior year primarily due
to the expansion of the Company's product line. In addition, the Company's
strategic focus on improving sales of abutments generated approximately $2.3
million in additional net sales for such products.
Gross Profit. Gross profit increased 25.8% from $15.5 million, or 69.9% of
net sales, for the year ended December 31, 1994 to $19.5 million, or 71.3% of
net sales, for the year ended December 31, 1995. The increase in gross profit
was primarily due to increased sales of implants and abutments. The improvement
in gross margin was primarily due to the development and expansion of the
Company's implant manufacturing capacities and to a lesser extent due to
increased efficiencies resulting from the implementation of new materials
forecasting and master production scheduling software applications.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 25.0% from $11.4 million, or 51.4% of net
sales, for the year ended December 31, 1994 to $14.2 million, or 52.1% of net
sales, for the year ended December 31, 1995. This increase was primarily the
result of hiring additional personnel in the sales, marketing and education,
customer support and information systems departments. The Company also incurred
increased expenses for additional international travel, consulting expenses for
marketing projects and advertising related to the Company's ten year warranty
program, the introduction of the DIA Anatomic Abutment System and the Company's
sponsorship of an international conference in May 1995.
Research and Development Expense. Research and development expense
increased 24.9% from $1.8 million, or 8.0% of net sales, for the year ended
December 31, 1994 to $2.2 million, or 8.1% of net sales, for the year ended
December 31, 1995. This increase was primarily due to increases in clinical
studies and FDA testing relating to new products.
Income Taxes. Income taxes were $1.3 million and $1.6 million for the years
ended December 31, 1994 and 1995, respectively, reflecting the amount the
Company's predecessor would have incurred on a stand-alone basis.
Net Income. Net income increased 35.6% from $1.1 million, or 4.8% of net
sales, for the year ended December 31, 1994 to $1.5 million, or 5.3% of net
sales, for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's predecessor was a wholly-owned subsidiary of Bausch & Lomb
from 1993 until the Acquisition in November 1996, and during that time financed
working capital from cash generated from operations. In order to finance the
Acquisition, the Company issued Class A Preferred Stock, Class B Preferred
Stock, Class C Preferred Stock and Subordinated Notes, and made an initial draw
down under the Bank Facility. Following the Acquisition, the Company financed
working capital and the acquisition of the dental business of Interpore with
cash generated from operations and borrowings under the Bank Facility.
At September 30, 1997, the Company had outstanding long-term debt of $10.3
million under its 16% Series A Senior Subordinated Note, $2.5 million under its
14% Series B Senior Subordinated Notes, and combined short and long-term
borrowings of $28.3 million under the Bank Facility. The availability of
borrowings under the Bank Facility will be automatically reduced as frequently
as each quarter in increasing
26
<PAGE> 28
amounts until the final maturity in November 2002 when all loans under the Bank
Facility must be repaid and no more borrowing can be made. The Bank Facility is
secured by substantially all of the Company's assets. The Bank Facility requires
the Company to maintain certain financial ratios and limits the Company's
ability to incur additional debt, repurchase its stock and pay dividends. The
Company was in compliance with all such financial ratios and covenants as of
September 30, 1997.
The Company also had outstanding $35.2 million of mandatorily redeemable
Preferred Stock, together with accrued dividends of $2.6 million at September
30, 1997. The Company intends to apply a portion of the net proceeds of the
Offering to repay in full the Subordinated Notes and a portion of its
outstanding indebtedness under the Bank Facility. In addition, the Company
intends to apply a portion of net proceeds of the Offering to redeem in full all
of its outstanding shares of Class B Preferred Stock. Upon consummation of the
Offering, the Company will record an extraordinary charge of $7.5 million, net
of the related tax benefit, resulting from the redemption and conversion of
Preferred Stock and the repayment of the Subordinated Notes and a portion of its
outstanding indebtedness under the Bank Facility. See "Use of Proceeds."
Following the Offering, the Company will have $25.7 million outstanding
indebtedness.
Subject to the completion of the Offering and certain other conditions,
Union Bank and First Source Financial LLP (collectively, the "Senior Lenders")
have agreed to terminate the Bank Facility upon repayment in full. The Company
has received a commitment letter from Union Bank for the establishment of a
$40.0 million revolving line of credit for working capital requirements and
general corporate purposes and to fund future acquisitions. The interest rate on
the New Facility will be tied to either Union Bank's Reference Rate or LIBOR
plus 2.0% - 2.75% (based on the Company's debt to earnings ratio), at the
Company's option. Certain conditions precedent to (i) the Senior Lender's
consent to the Offering and (ii) Union Bank's commitment to provide the New
Facility to the Company include (a) the completion of an initial public offering
of the Company generating gross proceeds of at least $25.0 million, and the
application of the proceeds therefrom to redeem all shares of outstanding Class
B Preferred Stock and to repay all outstanding indebtedness under the
Subordinated Notes and all prepayment penalties in connection with the early
retirement thereof, (b) the completion of loan documentation satisfactory to
Union Bank, and (c) the perfection of a security interest by Union Bank in
substantially all of the Company's assets. No assurance can be given that the
Union Bank commitment letter will result in a binding line of credit and
acquisition facility. The Company's failure to obtain the New Facility would
have a material adverse effect on the Company's business and ability to
implement its business strategy.
The Company's capital expenditures consist primarily of purchases of fixed
assets relating to its manufacturing operations. Capital expenditures decreased
to $1.1 million for the nine months ended September 30, 1997 from $1.7 million
for the comparable period in 1996. Capital expenditures for the years ended
December 31, 1994, 1995 and 1996 were $1.7 million, $1.2 million and $2.2
million, respectively. Capital expenditures increased in 1996 as a result of
acquiring CNC machines and upgrading the Company's information systems.
The Company anticipates making capital expenditures of approximately $2.2
million during the next twelve months to expand its manufacturing operations
into its newly leased facilities and bring the TPS-coating capabilities
in-house. The Company has also entered into several agreements with universities
to provide financing for research and development and promotional studies
related to the Company's products. The Company is required to make future
minimum payments under such agreements in the aggregate of approximately $1.3
million through the year ending December 31, 1999. In addition, in January 1998,
the Company must make a deferred cash payment of up to $723,000 to Interpore to
fund the balance of the purchase price for the Company's acquisition of the
dental operations of Interpore in May 1997.
The Company believes that anticipated cash flows from operations and
amounts available under the New Facility will be sufficient to finance working
capital and meet its anticipated capital expenditures for at least the next
twelve months. There can be no assurance, however, that the New Facility will be
issued or that during this period there will not be acquisition opportunities or
capital expenditure requirements that create the need for additional cash, that
the Company will meet the financial targets under the New Facility to enable the
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<PAGE> 29
Company to borrow under the New Facility, that additional funds will be
available at favorable rates, if at all, or that the Company will not pursue any
equity or debt offerings in the near future.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS
No. 128 establishes a different method of computing net income per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS No. 128, the Company will be required to present both basic
net income per share and diluted net income per share. Basic net income per
share is expected to be higher than the currently presented net income per share
as the effect of dilutive stock options will not be considered in computing
basic net income per share. The impact on diluted net income per share is not
expected to be material.
The Company plans to adopt SFAS No. 128 in its fiscal quarter ending
December 31, 1997, and at that time all historical net income per share data
presented will be restated to conform to the provisions of SFAS No. 128.
28
<PAGE> 30
BUSINESS
OVERVIEW
Steri-Oss develops, manufactures and markets a broad line of dental implant
systems. Dental implants are small titanium screws or cylinders that are
surgically placed directly into the jaw and are used to replace missing teeth.
The Company believes that its dental implant systems are superior to traditional
restorative treatments such as bridges and dentures because the permanent nature
of dental implants permits patients to regain most of the functionality of their
natural teeth. Dental implants also may reduce the progressive atrophy of the
jaw often caused by the absence of teeth. The Company has experienced
significant growth over the last several years. The Company's net sales
increased to $32.2 million for 1996 from $16.8 million for 1993. Net sales also
increased 25.5% to $29.4 million for the nine months ended September 30, 1997
from $23.4 million for the comparable nine month period in 1996.
INDUSTRY BACKGROUND
The American Dental Association estimates that 110 million people in the
United States are missing one or more teeth, representing approximately 40% of
the United States population. Tooth loss is caused by a variety of factors,
including trauma and periodontal disease, which is a leading cause of
destruction of tooth-supporting structures such as bone, gingiva and periodontal
ligament. Medical Data International ("MDI") estimates that 70% to 80% of all
adults in the United States have some form of periodontal disease.
Traditional restorative alternatives to address tooth loss have consisted
primarily of dentures and bridges. Since the introduction of the first modern
dental implants in 1982, dental implants have continued to gain acceptance as an
attractive alternative to dentures and bridges. According to MDI, the number of
implants placed annually by dental professionals in the United States has more
than tripled in less than a decade growing from approximately 120,000 implants
placed in 1987 to approximately 415,000 in 1995. MDI estimates that an average
of 2.5 to 3.0 implants are placed in each implant procedure. MDI estimates
dental implant sales in the United States exceeded $130 million in 1996 and are
expected to grow at a rate of approximately 6% per year. The Company estimates
that sales of dental implants outside the United States were approximately $250
million in 1996 and estimates that the international dental implant market is
growing at a rate of approximately 10% per year.
Utilization of dental implants by dental professionals and patients has
increased over the past few years, and the Company believes that significant
opportunities for growth still exist in the dental implant market because only
2% of patients in the United States who are missing one or more teeth have
undergone the implant procedure. Dental implants offer significant advantages
over other restorative products such as dentures and bridges. Dentures are
artificial teeth that may be attached to the surface of a patient's gum with an
adhesive. The adhesives used to attach dentures generally do not provide
long-term fixation to the gum and must be periodically reapplied. Dentures also
tend to move around in a patient's mouth, which may restrict the wearer's
ability to eat certain foods, and can trap food, which may lead to the
degradation of the adjacent natural teeth. A bridge generally consists of one or
more artificial teeth that are attached to a patient's natural teeth to span a
gap caused by missing teeth. In order to place a bridge into a patient's mouth,
the dental practitioner must grind or cut down the adjacent healthy, natural
teeth to prepare them to accommodate the bridge. Natural teeth that have been
ground down and shaped may deteriorate more rapidly than other healthy teeth.
Wearers of full or partial dentures do not benefit from the essential
stimulation and support that tooth roots provide to the surrounding jaw. This
can result in atrophy of the jaw and, over time, unsightly malformation of the
jaw.
Dental implants, in contrast, serve as permanent replacements for a
patient's missing teeth and reduce the likelihood of bone resorption. Once
dental implants are surgically placed in the jaw, the bone typically fuses to
the implant, creating a secure, permanent anchor for an artificial tooth. The
secure nature of implants permits patients to regain most of the functionality
of their natural teeth. In addition, the implant procedure does not require the
destruction of the adjacent healthy teeth. Furthermore, implants typically
stimulate bone growth and allow a patient's jaw to retain its shape and
features.
29
<PAGE> 31
STRATEGY
The Company's objective is to become the leading worldwide developer,
manufacturer and marketer of dental implants and related products, while
increasing its profitability. The Company believes that over the last three
years, it has been one of the fastest growing participants in the United States
implant market. Furthermore, as a result of the Company's acquisition of the
dental business of Interpore in May 1997, the Company believes its implant unit
sales, on a combined basis in the United States in 1995, exceeded those of any
of its competitors. To achieve its objective, the Company intends to:
- Increase Market Share in the United States and Foreign Markets. Steri-Oss
has established itself as a worldwide leader in the dental implant market. The
Company intends to capitalize on its reputation for quality products and service
to continue to increase its market share both domestically and internationally.
Increased utilization of the Company's implants by dental professionals is
necessary for continued market penetration. Accordingly, Steri-Oss intends to
increase its involvement in sponsoring and providing educational and training
programs for dental professionals and to expand marketing support to its 26
independent international distributors.
- Continue to Develop Innovative Implant Products. The Company intends to
utilize its expertise in dental implant technology and to work closely with
clinicians to continue to develop new and enhanced dental implants and related
products. New and enhanced products have historically constituted a significant
portion of the Company's net sales. The Company was the first to introduce a
variety of innovative products, including precleaned sterile implants,
hydroxylapatite ("HA") coated threaded implants and a color-coded implant
system. The Company intends to continue to develop enhanced implant products to
meet evolving market needs, incorporate technological advancements and satisfy
clinicians' preferences.
- Expand into Additional Dental Specialty Markets. The Company intends to
take advantage of its broad distribution channels and strong reputation in the
dental industry to market additional dental specialty products to its customers.
The Company plans to focus on products that enhance the professionals' practice
and address the needs of growing markets, particularly the periodontal market.
In furtherance of this strategy, the Company recently commenced marketing two
products owned and manufactured by third parties, a periodontal tissue
monitoring kit and an HA bone filler for periodontal defects. The Company
intends to acquire, license or distribute additional dental specialty products
and to market these products through its existing distribution channels.
- Acquire Complementary Dental Implant Businesses, Products and
Technologies. The Company believes that consolidation opportunities exist in the
dental implant market that will enable the Company to increase its penetration
of this market. For example, in May 1997, the Company acquired the dental
operations of Interpore, a manufacturer and distributor of dental implant
products and other periodontal products. In addition, the Company is currently
in negotiations for the acquisition of certain manufacturing operations in
Europe and certain new product distribution rights. See "Risk Factors -- Risks
Associated with Acquisitions." The Company intends to continue to expand its
product offerings, distribution channels and market share through acquisitions
in the dental implant market. Potential acquisitions may include complementary
businesses, product lines, distribution rights, technologies or other assets.
- Continue to Improve Operating Efficiencies. By manufacturing a greater
proportion of its products in-house, the Company has been able to operate more
cost-effectively and benefit from greater economies of scale. Primarily as a
result of actions taken by the Company to reduce manufacturing costs and
increase operating efficiencies, the Company has reduced its cost of sales as a
percentage of net sales to 27.3% for 1996 from 30.4% for 1993. The Company
intends to continue to improve operating efficiencies primarily by expanding and
refining its manufacturing processes.
THE IMPLANT PROCEDURE
The implant procedure involves a number of steps. During the initial step,
which typically is performed under a local anesthetic, an oral surgeon or
periodontist drills a hole in the patient's jaw and surgically inserts the
implant directly into the jaw. The implant typically integrates with the
patient's bone over the three to six
30
<PAGE> 32
months following the initial surgery. Once the implant has attached itself
firmly to the jaw, the general dentist or prosthodontist then screws an abutment
into or onto the implant. The dental professional makes an impression of the
patient's teeth and jaws so that an artificial tooth can be fabricated for the
patient. In the final step of the implant procedure, the general dentist or the
prosthodontist affixes an artificial tooth, which is usually fabricated at a
dental laboratory, onto the abutment.
PRODUCTS
The Company manufactures and markets a broad line of implant systems,
including: (i) titanium implants that are surgically placed into the patient's
jaw; (ii) titanium abutments that are attached to the implants to serve as
connectors onto which artificial teeth are attached; and (iii) surgical
instruments that are used to insert and place implants and abutments, including
surgical consoles, drills and dental wrenches. Implants, abutments and surgical
instruments accounted for approximately 55.8%, 32.4% and 11.8%, respectively, of
the Company's net sales in 1996. Steri-Oss believes its product lines,
consisting of over 1,400 products, are sufficiently broad to meet the
requirements of most dental professionals. The Company continues to work closely
with clinicians to enhance its existing product lines and create new product
offerings. See "-- Product Innovations."
Implants
The Company currently manufactures 16 types of implants in various sizes.
All of the Company's implants are manufactured from titanium because it promotes
integration with surrounding jawbone ("osseointegration") and generally will not
be rejected by the surrounding tissue due to titanium's biocompatible nature. In
the United States, the list prices for the Company's implants currently range
from approximately $200 to $250 per unit, and the average selling prices have
remained relatively stable over the past three years.
The Company's implants are offered in both threaded and cylindrical form in
a variety of diameters, lengths and shapes in order to suit the varying needs of
implant patients and dental professionals. The appropriate size and shape
required for a particular patient will depend on the structure of the patient's
jaw, the location of the implant site in the patient's jaw, the angle of
insertion and the bone density at the implant site. The Company's implants are
also offered uncoated or with one of two different coatings to suit differing
preferences among dental professionals and their patients.
The Company currently makes implants in diameters ranging from 3.25 mm to 6
mm and in lengths ranging from 8 mm to 18 mm in the following categories:
- Threaded Implants. Threaded implants are screwed into the patient's
jawbone. The Company uses a proprietary thread design that enhances
osseointegration by increasing the amount of bone volume between threads by 32%
over traditional V-shaped threads.
- Cylindrical Implants. Cylindrical implants are smooth and have a simpler
surgical implantation protocol than threaded implants. Cylindrical implants
contain an indentation at the bottom of the implant and/or a depression running
length-wise up the implant to promote osseointegration.
- Coated Implants (Threaded or Cylindrical). In addition to uncoated
implants, the Company offers both threaded and cylindrical implants with two
different rough coatings, HA and titanium plasma spray ("TPS"). The Company was
the first to market an HA-coated threaded implant and has the only HA-coated
threaded implant that has been granted provisional approval by the American
Dental Association. HA is a bio-active ceramic coating commonly used with
orthopedic implants that facilitates osseointegration. Approximately 53% of the
Company's implant sales during 1996 were HA-coated. The Company estimates that
the worldwide market for HA-coated implants is currently 20% of the total
implant market, and the Company believes it is the largest manufacturer of
HA-coated implants. TPS was first introduced by the Company in 1995 and creates
a highly textured titanium surface, which increases the surface area of the
implants and the contact with bone. Approximately 16.4% of the Company's implant
sales during 1996 were TPS-coated.
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- Replace Implant System. The Replace Implant System was introduced in
March 1997 and incorporates a tapered design that closely resembles the shape of
a tooth root. The tapered implants are particularly beneficial for immediate
extraction sites in the anterior section of the mouth, between converging
implants or roots of adjacent teeth and wherever anatomically limiting
conditions exist. The implant products in the Replace Implant System are
color-coded for simple identification by the various professionals involved in
implant procedure. Replace implants are also offered in various lengths and
diameters, either uncoated or with HA or TPS coatings.
Abutments
Steri-Oss designs, manufactures and markets abutments that are typically
screwed into or onto the implants after the implants have fused with the jaw.
Abutments serve as connectors on which artificial teeth may be placed. The
Company has designed a variety of abutments to meet the requirements and
preferences of dental professionals and patients. In the past few years, the
Company has also commenced marketing two new types of abutments that the Company
licenses from Dental Imaging Associates, Inc. ("DIA"). The DIA Anatomic Abutment
is designed to accommodate the natural tooth diameter, tissue depth and gingival
tissue configurations. The second type of abutment, the Bio-Esthetic Abutment,
is designed to match natural root contours and requires minimal preparation. The
Company believes Bio-Esthetic Abutments typically offer a superior aesthetic
result.
The Company's abutments are designed to provide maximum flexibility and
optimal aesthetic design, which the Company believes are critical to dentists in
developing treatment plans for their patients. The Company has designed its
abutments to be compatible with other companies' implants. The list prices in
the United States for the Company's abutments range from $35 to $160 per unit.
Surgical Instruments
The Company designs and manufactures, or has manufactured for it, surgical
tools and instruments for use with its implants and abutments. These instruments
include: (i) surgical instrument sets, including drills, dental wrenches and
kits for sizing abutments, which are typically packaged in containers for easy
sterilization and are color-coded and labeled for ease of use and storage, and
(ii) surgical consoles and hand tools to perform and monitor drilling and
placement procedures. The Company's instrument sets are designed to be used with
a variety of the Company's implants. While the list prices in the United States
for the Company's instrument sets range from $2,000 to $3,250 per set, the
Company may discount its surgical instruments to encourage practitioners to
switch to the Company's products.
PRODUCT INNOVATIONS
Product innovations in the dental implant market usually consist of
refinements or enhancements of existing dental implant or abutment designs or
related products. Over the past few years, the Company has developed several
innovative new products. For example, Steri-Oss was the first dental implant
manufacturer to introduce precleaned sterile implants, HA-coated threaded
implants and a tapered, color-coded implant system.
The Company's most recent product innovations include: (i) the Replace
Implant System, which consists of tapered implants and corresponding abutments
and instrument kits that are color-coded for simple identification by the
various professionals involved in the implant procedure; (ii) the 6 mm implant,
a wider diameter implant line, enabling the Company to offer expanded treatment
options that allow for improved aesthetics; and (iii) the Immediate Impression
Implant System, a sterile insertion instrument licensed from a third party that
allows the dental professional to take an immediate impression upon implant
insertion, which may reduce the number of patient visits during the implant
process.
The Company derives a significant portion of its net sales each year from
sales of new products. The Company has focused its product development efforts
on both broadening its existing product lines and introducing new products. In
both cases, the objective is to offer enhanced implant solutions to patients and
professionals. The Company's research and development staff consists of five
employees who focus on new
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product concepts and eight employees who focus on product engineering and the
technical aspects of product design. The Company also provides funding to
several universities to finance research and promotional studies related to the
Company's products.
The Company's development efforts are the result of concepts developed
internally or through the Company's relationships with leading dental
professionals, including customers who provide feedback to the Company on their
preferences and needs. The Company also actively seeks licensing arrangements
with dental professionals or researchers to secure the right to manufacture and
market new product innovations created by such groups. For example, the Company
holds an exclusive license to manufacture and market the DIA Anatomic Abutments
and Bio-Esthetic Abutments under a licensing arrangement with a group of well
known prosthodontists and periodontists. Such licensing arrangements create
important relationships with dentists and academic institutions, thereby
enhancing the Company's reputation and visibility within the dental community.
CUSTOMERS, MARKETING AND SALES
Dental Professionals
The Company sells its products directly to dental professionals in the
United States and Canada through its sales representatives and uses independent
distributors to sell its products to dental professionals abroad. Because the
dental implant procedure involves a number of steps and requires the use of
surgical as well as restorative techniques, several professionals are usually
involved in the implant process. Accordingly, the Company's customers include
practitioners from multiple disciplines in dentistry, including oral surgeons,
periodontists, implantologists, prosthodontists and general dentists.
Typically, a general dentist will refer a patient to an oral surgeon or
periodontist to perform the initial implant surgery. After the oral surgeon or
periodontist has inserted the implant, the general dentist will usually perform
all or part of the restorative work (i.e., the final placement of the artificial
tooth) or will refer the patient to a prosthodontist for such work. Less
frequently, a general dentist will perform the entire implant procedure alone.
Such a general dentist is commonly referred to as an implantologist. The actual
artificial tooth used by the general dentist, prosthodontist or implantologist
is usually fabricated at a dental laboratory. In Europe, where specialization is
less common, the general practitioner typically performs most, if not all, of
the implant procedure.
According to the American Dental Association, in 1991, there were
approximately 6,800 oral surgeons, 4,700 periodontists, 2,900 prosthodontists
and 115,000 general dentists in the United States.
Marketing
The Company markets its products to all dental professionals involved in
the implant procedure. Steri-Oss has historically targeted oral surgeons,
periodontists and implantologists as its primary customers because approximately
91% of all oral surgeons and 55% of all periodontists in the United States have
performed a dental implant procedure. The Company has also focused its marketing
efforts on general dentists by encouraging them to participate in and recommend
dental implants to their patients. The Company has chosen to target this market
segment because general dentists usually have the most contact with potential
implant patients and often serve as a referral source for oral surgeons and
periodontists. In addition, the Company believes that a large number of general
dentists have yet to use dental implants on a regular basis and represent a
significant number of potential new customers. Because the Company's customers
have varying experience with dental implants, the Company's marketing efforts
must address the particular needs and requirements of professionals who already
practice implant dentistry as well as general practitioners who may not be
familiar with the implant procedure.
The Company's marketing efforts are directed towards three distinct goals:
(i) encourage dental professionals using competitor's products to switch to the
Company's products, (ii) service existing customers by introducing additional
products and providing training and educational programs to them, and (iii)
introduce implants more broadly to a large population of dental professionals
who have yet to realize the
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advantages of dental implants. In addition to utilizing a direct sales force in
North America and distributors abroad, the Company has initiated a variety of
different marketing programs to accomplish each of these goals, including:
- Educational and Training Programs. The Company sponsors several
introductory level educational programs both in the United States and
abroad and holds training seminars and surgery training programs at its own
facilities. The Company also offers a number of advanced courses tailored
to the needs of professionals who regularly perform implant procedures.
Although the Company historically has focused its efforts on providing
educational and training programs to clinicians in North America, it
intends to expand its involvement in providing such programs abroad. In
1996, over 18,000 members of the dental community attended educational
programs sponsored by the Company. The Company works with major dental
organizations (American Association of Oral Maxillofacial Surgeons,
American Association of Periodontists and Academy of Osseointegration),
dental schools, key customers, international distributors and leading
clinicians to maximize exposure of the Company's products at continuing
education programs worldwide. In addition, the Company promotes educational
programs at select private practices, which offer the opportunity to
witness live surgical procedures. In 1995, the Company added a training
facility and surgical suite to its Yorba Linda headquarters. The Company
has entered into a consulting agreement with Dr. Jack Hahn, a general
dentist and dental implant specialist, to conduct training programs for the
Company and advise the Company on technical issues. Dr. Hahn is a world
renowned lecturer on dental implants.
- International Conferences. The Company has sponsored four major
international conferences within the past five years that have attracted
many members of the global dental implant community. In 1997, the Company
held a four day international conference on "Exceeding Patients'
Expectations: An Integrated Surgical, Prosthetic and Marketing Approach to
Excellence in Implant Dentistry" in Orlando, Florida. This conference was
attended by more than 600 dental professionals from 20 countries
representing various dental disciplines.
- Strategic Relationships with Vendors and Clinicians. The Company has
formed strategic relationships with key vendors, clinicians, dental
publishers, dental advertising agencies, and dental practice management
consulting groups. The Company believes its strategic relationships enable
it to gain and maintain brand recognition among all types of dental
practitioners.
- Printed Advertising Materials and Video Tapes. Using its in-house
graphics department and outside consultants, the Company has developed
extensive training videos and printed promotional materials. The Company
distributes such materials to dental professionals through its sales
representatives and international distributors, as well as through direct
mail advertising campaigns.
- Newsletter. The Company publishes a newsletter three times each year
containing information relating to recent developments in the dental
implant market, the Company's products, training and educational programs
on dental implant procedures and results from clinical studies on dental
implants. This newsletter is distributed to over 20,000 dental
professionals in the United States and Canada. The Company publishes a
similar newsletter twice each year that is translated into German, French,
Italian, Spanish, Japanese and Korean and distributed to approximately
15,000 dental professionals in foreign countries.
- Journal of Dental Symposia. In order to promote a broad
understanding of the Company's educational efforts, the Company has entered
into a collaborative effort with a publisher to publish the Journal of
Dental Symposia, which is distributed annually to more than 10,000 dental
professionals, including approximately 3,000 members of the Academy of
Osseointegration. This journal includes academic articles relating to
topics discussed at seminars and workshops at the Company's international
conferences.
Sales and Distribution
The Company currently employs over 40 sales representatives throughout the
United States and Canada who call directly on oral surgeons, periodontists,
prosthodontists and implantologists, as well as select general dentists and
dental laboratories. The Company believes that its direct sales force is
essential to its ability to
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maintain brand loyalty among its customers in North America and to increase its
market share. The Company's sales force is currently organized by geographic
regions into five different territories. The Company plans to increase its
direct sales force commensurate with sales increases in North America.
The Company also markets and sells its products through 26 independent
distributors in more than 35 foreign countries, including Australia, Belgium,
Brazil, France, Germany, Israel, Italy, Japan, Korea, Mexico, the Netherlands,
New Zealand, Portugal, Spain, Switzerland and the United Kingdom.
Metalor, the Company's distributor in Germany and the Netherlands,
dedicated 24 members of its sales staff in 1997 to the sale of the Company's
products exclusively. Metalor accounted for approximately 8.2% of the Company's
net sales during 1996 and 9.7% of net sales for the nine months ended September
30, 1997. In 1990, the Company entered into an exclusive one year distribution
agreement with Metalor that automatically renews each July for successive one
year terms unless the Company and Metalor cannot agree to purchase terms for the
following year. This agreement prohibits Metalor from selling any competitor's
dental implants or related products within Metalor's territory. The Company also
entered into similar one year distribution agreements with three affiliates of
Metalor who distribute the Company's products in France, Switzerland and the
United Kingdom. Metalor and its affiliates collectively accounted for
approximately 12.1% of the Company's net sales during 1996 and 13.1% of net
sales for the nine months ended September 30, 1997.
The Company believes that the international dental implant market will
continue to grow at a more rapid rate than North American dental implant market
for the next few years, particularly in Europe where dental implants have a
longer history. In an effort to take advantage of the anticipated growth in
international markets, the Company intends to continue to provide increased
marketing support to its international distributors.
CUSTOMER SERVICE AND SUPPORT
The Company seeks to build upon customer loyalty by providing high quality
customer service and support. In addition to its educational courses and
training seminars, the Company offers to send a technical sales representative
to assist dental professionals with their first implant procedure using
Steri-Oss products. The Company also employs a full-time staff dentist and three
full-time certified dental technicians to respond to customers' technical
questions regarding the Company's products and the implant procedure. In
addition, Steri-Oss employs both domestic and international customer support
representatives to answer general customer inquiries and to assist customers
with order and re-order information. The Company maintains a direct relationship
with its dental community customers by handling all shipping and invoicing
functions through its customer support organization.
The Company offers a ten year warranty on all of its implants and
abutments. If a product fails prior to the expiration of the warranty, the
Company agrees to replace it at no cost and to give the customer a credit
towards the purchase of new products. Since the introduction of this program in
1993, the Company has not experienced any significant warranty expenses.
MANUFACTURING
The Company manufactures substantially all of its implants at its two
facilities in Yorba Linda, California and has received ISO 9001 certification.
The Company has made a substantial investment in these facilities, which include
a Class 10,000 clean room (a clean room with fewer than 10,000 particles which
are five microns or larger per cubic foot), precision automated equipment,
including CNC machines, and a robotically controlled coating area for the
Company's proprietary HA-coating system.
The Company's facilities are subject to applicable regulatory requirements.
The FDA periodically inspects the Company's manufacturing systems to confirm
continued compliance with the FDA's current QSR regulations. The Company's
facilities are also subject to regulation and periodic inspection by the State
of California. See "-- Government Regulation."
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The Company has received certification of conformance to ISO 9001 Standards
and Medical Device Directives, as well as the Commission Europeen (CE) Mark of
Conformity from National Standards Authority of Ireland. These approvals
represent international symbols of quality system assurance and compliance with
applicable European Medical Device Directives, which assist the international
marketing of the Company's products.
The Company has substantially increased its manufacturing capabilities
since 1993 in an effort to enhance profit margins and increase quality. The
Company currently manufactures a substantial portion of its own products and
performs all of the HA-coating for its products, but currently relies on outside
suppliers to coat its TPS-coated implants and to manufacture certain components
including electrical consoles, hand tools, and those short-run products for
which the Company cannot achieve cost efficiencies. The Company plans to bring
TPS-coating capabilities in-house. The Company's manufacturing activities
primarily consist of (i) cutting, machining and initial cleaning, which are
performed at a leased facility close to its headquarters, and (ii) final
cleaning, sterilization, assembly (in certain circumstances), packaging, coating
and testing, which are conducted at the Company's headquarters. The principal
raw materials used in the Company's products, including titanium and HA, are
available from a number of suppliers. The Company does not maintain any
long-term supply contracts with any of its suppliers. The Company currently
operates three shifts per day, five days per week.
The Company also uses small amounts of hazardous substances in its
manufacturing processes. As a result, the Company is subject to a variety of
governmental regulations relating to the use, storage, discharge, handling and
disposal of toxic or other hazardous substances, chemicals, materials or waste.
The Company has engaged a third party contractor to handle the removal of such
hazardous substances.
Steri-Oss has established a number of quality control procedures to
maintain the quality of its products. All products manufactured by the Company
undergo a series of inspections and tests throughout the manufacturing process
to ensure that each product complies with the Company's product specifications
and aesthetic requirements. For example, each implant manufactured by Steri-Oss
will receive no fewer than nine separate inspections. Any product that does not
conform to the Company's visual, functional and aesthetic requirements will be
rejected. In addition, all products purchased by outside suppliers are inspected
by the Company's personnel. Steri-Oss also conducts periodic self audits to
review and ensure its compliance with the Company's quality controls and QSR and
environmental regulations.
COMPETITION
The dental implant industry is characterized by intense competition.
Steri-Oss competes directly with a number of companies offering dental implants
and related products both in the United States and abroad, including Nobel
Biocare AB, Friatec AG, 3i and Sulzer Calcitek Inc., certain of which have
substantially greater financial, marketing, sales, distribution and development
resources than the Company. Certain of the Company's competitors also have
established a greater international presence than the Company. In several
countries, including Germany and Switzerland, the Company competes with
companies that are based in such countries. The competitors' local presence in
such markets may provide them with a competitive advantage over the Company. In
addition, several competitors in foreign markets sell directly in such markets,
which may be more effective than the Company's indirect distribution channels in
such markets.
The Company believes the principal competitive factors in the dental
implant market are product performance, breadth of product line, brand name
recognition, customer loyalty, customer service, scope of regulatory approvals
and clinical trials, price and sales and marketing capabilities. The Company
believes its prices are competitive with other high quality implant products.
Due in part to the importance of quality and customer service and to the minor
cost of the implant relative to the implant procedure, the Company does not
believe that price is a major competitive factor.
The Company believes that it competes favorably against other dental
implant companies due to the Company's broad range of quality dental implants
and related products and provides extensive training and educational programs
for dental professionals. Increased competition or the failure to compete
effectively in
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the implant industry may result in price reductions, reduced gross margins and
loss of market share, all of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's products also compete against alternative restorative
treatments such as bridges and dentures, which are generally less expensive to
the patient, are less invasive and can be implemented more quickly. New
restorative technologies may be developed that are as effective as, or more
effective or easier to use than, those offered by the Company, which could
render the Company's products noncompetitive or obsolete.
GOVERNMENT REGULATION
The Company's products are subject to extensive regulation by the FDA and
certain other federal, state and local governmental authorities, as well as
similar regulatory agencies in other countries. Such regulations cover the
preclinical and clinical testing, manufacture, labeling, distribution and
promotion of medical devices and record keeping with respect thereto. The FDA
generally classifies medical devices in commercial distribution into one of
three classes: Class I, Class II or Class III devices, which classifications are
based upon the controls the FDA deems necessary to reasonably ensure the safety
and effectiveness of the medical devices. A new medical device cannot be
commercially distributed until the FDA has accepted for review and cleared a
510(k) or has approved a PMA on such medical device or implant.
The 510(k) process requires a manufacturer to demonstrate that the new
product is substantially equivalent (in terms of safety, efficacy and intended
use) to certain 510(k) Class I, Class II or pre-1976 Class III medical devices
(for which the FDA has not called for a PMA) that are already commercially
available and lawfully being sold on the market. The PMA approval process is
more time-consuming and burdensome than the 510(k) process and generally
requires more detailed preclinical and clinical studies, as well as
manufacturing data and other information.
Class I and Class II devices may be approved pursuant to a 510(k)
notification process as opposed to the lengthy PMA process required for most
post-1976 Class III products. While dental implants are technically classified
as Class III products, to date, the FDA has permitted the manufacturers of
dental implants to use the 510(k) notification procedure to clear the commercial
sale of dental implants. Since January 1, 1994, the Company has obtained FDA
clearance for 34 510(k)s from the FDA covering a broad range of the Company's
products.
In 1990, Congress enacted the Safe Medical Device Act of 1990, which
required the FDA to either down-classify certain Class III devices (including
dental implants) to Class I or II, or publish a date for the call for PMAs for
any remaining Class III devices on the market. The Company expects that at some
future date certain dental implants will be down-classified to Class II, but
others will remain as Class III. There is a possibility that some of the
Company's dental implants may remain Class III. For those dental implants that
remain in Class III, the FDA will require the submission of a PMA. The Federal
Food, Drug and Cosmetic Act provides that a company must submit a PMA within 90
days from the date that the FDA issues a final regulation calling for the
submission of PMAs. There can be no assurance that if the FDA calls for a PMA
for dental implants, the Company would receive a PMA approval, if required, for
its dental implants on a timely basis, if at all. In the event the FDA requires
the submission of a PMA, the Company may be required to cease marketing the
relevant product or products in the United States until an acceptable PMA is
filed or approved. Although the Company has been collecting clinical data in
anticipation of being required to submit PMAs for its dental implants, there can
be no assurance that such data will be adequate to demonstrate that the
Company's dental implants are safe and effective, as required for approval of a
PMA. The FDA's refusal to approve any PMAs that the Company may submit or the
Company's failure to submit required PMAs in a timely fashion could have a
material and adverse effect on the Company's business, financial condition and
results of operations.
Governmental regulation may also prevent or substantially delay the
marketing of the Company's proposed products, cause the Company to undertake
costly procedures and furnish a competitive advantage to certain of the
Company's competitors who have greater financial, administrative and research
and develop-
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ment resources. After approval, the FDA may require post-marketing approval
surveillance programs to monitor the effects of an approved medical device. FDA
approval may be withdrawn for noncompliance with regulatory standards or the
occurrence of unforeseen problems following initial marketing. In addition,
product modifications may require the submission of a new 510(k) notification or
PMA supplement and future products may require 510(k) clearance or PMA approval.
There can be no assurance that marketing clearances or approvals will be
obtained on a timely basis or at all. Delays in receiving, the failure to
receive or the cost of complying with such clearances could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company is also registered as a medical device manufacturer with the
FDA and with state agencies such as the Food and Drug Branch of the California
Department of Health Services. The FDA and state agencies inspect the Company
from time to time to determine whether the Company is in compliance with various
regulations relating to medical device manufacturing, including the FDA's QSR
regulations that govern manufacturing, design, testing, quality control and
product labeling of medical devices. In connection with the FDA's inspection of
the Company's facilities in April 1997, the FDA issued a warning letter to the
Company citing the Company's failure to comply with certain provisions of the
regulations. The Company believes that it has taken appropriate corrective
actions to address each of the violations cited in the warning letter. The
warning letter did not prohibit the Company from obtaining premarket clearance
or approval for new products nor did it require the Company to withdraw or
remove any of its products from the market.
The Company must also comply with similar registration requirements of
foreign governments and with import and export regulations when distributing its
products to foreign nations. Each foreign country's regulatory requirements for
product approval and distribution are unique and may require the expenditure of
substantial time, money and effort to obtain and maintain.
PROPRIETARY RIGHTS
The Company relies to some extent on proprietary technology, which it
protects primarily through trade secrets, licensing arrangements, patents,
non-disclosure agreements and other intellectual property laws. The Company also
seeks to protect its brand names through registered and common law trademarks.
The Company currently holds five United States patents relating to its products
and has applications pending for seven additional United States patents. The
Company's patents expire beginning in August 2006. The Company believes that
although the patents often are necessary to protect its technology and products,
they do not serve as significant barriers to entry into the dental implant
market. The Company believes, however, that extensive FDA approval and
compliance requirements, proprietary manufacturing processes, customer loyalty
and access to distribution channels constitute the primary barriers to entry
into the dental implant market.
The Company licenses certain of its core technology pursuant to exclusive
and semi-exclusive licenses. In April 1994, the Company entered into a five year
exclusive, worldwide license to manufacture and market the DIA Anatomic Abutment
System and the Bio-Esthetic Abutment System and the Immediate Impression Implant
(covered by nine United States patents). The Company pays royalties to DIA based
on a percentage of the Company's net sales of the licensed products, subject to
certain annual minimum royalties. The Company also licenses two dental implants
(covered by seven United States patents) from VentPlant, pursuant to a semi-
exclusive license agreement entered into in September 1991 that provides for a
fixed royalty per unit sold. This agreement terminates upon the expiration of
the licensed patents, subject to earlier termination for cause. In addition, the
Company is currently distributing the IMZ Dental Implant System in the United
States pursuant to an oral agreement with Dr. Axel Kirsch, a world renowned oral
surgeon and the inventor of such products. If the Company is required to obtain
licenses under patents or proprietary rights of others, there can be no
assurance that any required licenses would be made available on terms acceptable
to the Company, if at all.
The Company has been subject to infringement claims in the past, and there
can be no assurance that any future patents or licenses will be issued, that any
issued patents or other intellectual property rights of the Company will provide
meaningful protection for the Company's proprietary technology or that the steps
taken by the Company to protect its proprietary technologies will be adequate to
prevent misappropriation by
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third parties in the United States or abroad. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights as fully as do
the laws of the United States. Accordingly, effective protection of intellectual
property may be unavailable or limited in certain foreign countries.
Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to determine the validity and scope of the
proprietary rights of others or to defend the Company against claims of
infringement or invalidity by others. The cost of addressing any intellectual
property litigation claim, both in terms of legal fees and expenses and the
diversion of management's efforts, regardless of whether the claim is valid,
could be significant. An adverse outcome in such litigation or similar
proceedings could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from others, or require the
Company to cease marketing or using certain products, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company requires each of its employees to enter into a proprietary
rights and nondisclosure agreement pursuant to which the employee agrees to
maintain the confidentiality of all of the Company's proprietary information
and, subject to certain exceptions, to assign to the Company all rights in any
proprietary information or technology made or contributed by the employee during
his or her employment. In addition, the Company regularly enters into
nondisclosure agreements with third parties, such as consultants and suppliers.
In spite of these precautions, it may be possible for third parties to copy,
develop or otherwise obtain and use the Company's proprietary technology without
authorization or to develop similar technology independently.
EMPLOYEES
As of November 23, 1997, the Company had 246 full-time employees, including
11 employees engaged in research and development, 91 engaged in manufacturing,
22 engaged in regulatory affairs and quality assurance, 70 engaged in sales and
marketing, 16 engaged in customer service and support and 36 engaged in general
administration and finance activities. None of these employees is represented by
a union, and the Company has never experienced a work stoppage or strike. The
Company considers its employee relations to be good.
FACILITIES
The Company leases two facilities, which have approximately 51,000 square
feet and 35,000 square feet, respectively, in Yorba Linda, California, pursuant
to leases that expire in October 31, 1999 and December 31, 2003, respectively.
These buildings are used as the Company's headquarters and include
administration, manufacturing, marketing and sales, storage, customer service
and distribution facilities. The Company also leases approximately 1,500 square
feet in Toronto, Canada, which is used for distribution, training and sales.
PRODUCT LIABILITY AND LEGAL PROCEEDINGS; INSURANCE
The Company is subject to an inherent risk of product liability claims that
may involve significant defense costs. Bausch & Lomb has agreed to indemnify the
Company up to an aggregate amount of $28.5 million against any claims and losses
from defects in the design, manufacture or production of any product sold by S-O
prior to the Acquisition. In August 1995, one implant patient filed an action in
the Superior Court of California, County of Riverside, alleging that a defect in
the manufacturing of the Company's implants caused the implant to fracture. The
Company believes that Bausch & Lomb is contractually obligated to indemnify the
Company for this claim, and Bausch & Lomb has assumed the defense of this
matter. Although the Company currently has product liability insurance there can
be no assurance that this coverage will be adequate to protect the Company
against future claims. In the event the Company is held liable for damages in
excess of its insurance coverage limits or outside of its insurance coverage,
which damages are not indemnified by Bausch & Lomb, the Company's business,
financial condition and results of operations could be materially and adversely
affected.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Set forth below is certain information regarding the directors, executive
officers and key employees of the Company as of December 15, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- ---- ------------------------------------------------------------
<S> <C> <C>
Kenneth A. Darienzo 58 Chairman of the Board and Chief Executive Officer
Martin J. Dymek 41 President
Kenneth K. Krueger 52 Executive Vice President, Operations
Bruce D. Nye 53 Vice President, Chief Financial Officer and Corporate
Secretary
Andrew C. Cowen(1)(2) 27 Director
Walter W. Grist(1)(2) 57 Director
T. Michael Long 54 Director
Douglas E. Rogers(2) 43 Director
Frederic M. Seegal(1) 49 Director
Henry Wendt 64 Director
Don A. Kennard 50 Vice President, Research and Development
Dennis G. Locke 43 Vice President, Finance
Hugh A. O'Donnell 43 Vice President, International Sales
Phillip E. Ohlsson 59 Vice President, Institutional Accounts
Thomas M. Olsen 40 Vice President, Domestic Sales and Marketing
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Directors and Executive Officers
Kenneth A. Darienzo has served as the Chief Executive Officer of the
Company and its predecessors since August 1989 and has been a Director of the
Company since the Acquisition in November 1996. Mr. Darienzo served as the
President of the Company until the appointment of Mr. Dymek in May 1997 and
became the Company's Chairman of the Board in August 1997. From 1988 to 1989,
Mr. Darienzo was the General Manager of Unitek, a global orthodontic company and
a subsidiary of the Minnesota Mining & Manufacturing Co. ("3M"). Mr. Darienzo
also served in a number of management positions with 3M from 1975 to 1988,
including positions as the Marketing Director for its Dental Division and the
National Sales Manager of its orthopedic business.
Martin J. Dymek has been the President of the Company since May 1997, and
prior to that served as the Senior Vice President, Marketing and Sales of the
Company and its predecessor since 1995, as Vice President of Marketing of the
Company's predecessor from 1991 to 1995 and as International Sales Manager of
the Company's predecessor in 1990 and 1991. Mr. Dymek continues to be
responsible for the Company's sales and marketing activities. Prior to joining
S-O, Mr. Dymek held marketing and sales positions with Shofu Dental, a Japanese
dental manufacturing company, from 1982 to 1990. Mr. Dymek is currently a member
of the International Congress of Oral Implantologists and is active in the
Dental Manufacturers of America.
Kenneth K. Krueger has been the Executive Vice President, Operations of the
Company and its predecessors since 1987. Prior to that, Mr. Krueger served in a
number of operational and general management positions at the Company's
predecessor from 1984 to 1987. From 1981 to 1984, Mr. Krueger was the Manager of
the Cardiovascular Research and Development Division of Shiley, Inc., a Pfizer
company, and from 1966 to 1981, he served in management positions in operations,
research and development, production technology and production engineering with
Shiley, Inc. Mr. Krueger is currently a member of the Society for Biomaterials,
the International Congress of Oral Implantologists, the American Society of
Testing Material, the Academy of Implant Dentistry and the International
Association for Dental Research.
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<PAGE> 42
Bruce D. Nye joined the Company in May 1997 as its Vice President, Chief
Financial Officer and Corporate Secretary. Prior to joining the Company, Mr. Nye
was the Senior Vice President of Corporate Development and prior to that Vice
President and Chief Financial Officer of The Cerplex Group, Inc., a company that
provides repair services for electronic equipment, from August 1993 to May 1997.
From 1992 to July 1993, Mr. Nye was Vice President and Chief Financial Officer
for Sparta, Inc. and from 1991 to 1992, he acted as an independent consultant
and principal in an asset acquisition for Aluminum Precision Products. Mr. Nye
was Senior Vice President and Chief Financial Officer for Hadson Defense
Systems, Inc. from 1983 to 1990. Prior to 1983, he was a Senior Audit Manager
with Price Waterhouse LLP.
Andrew C. Cowen has been a member of the Company's Board of Directors since
the Acquisition in November 1996. Mr. Cowen is currently an Assistant Manager of
Brown Brothers Harriman & Co., a private banking and investment management
company ("Brown Brothers"), where he has been employed for the past five years.
Brown Brothers is the general partner of The 1818 Fund II, L.P., a New York
limited partnership. Mr. Cowen is also a director of Computerized Medical
Systems, Inc.
Walter W. Grist has been a member of the Board of Directors of the Company
since the Acquisition in November 1996. For more than the past five years, Mr.
Grist has been a Senior Manager of Brown Brothers. Mr. Grist is also a director
of Computerized Medical Systems, Inc. and WellCare Management Group, Inc.
T. Michael Long has been a member of the Board of Directors of the Company
since the Acquisition in November 1996. Mr. Long is currently a partner of Brown
Brothers, where he has been employed since 1971. He is the co-manager of The
1818 Fund, L.P. and The 1818 Fund II, L.P. Mr. Long is also a director of
Columbia/HCA Healthcare Corp., Computerized Medical Systems, Inc., Ecko Group,
Inc., Gulf Canada Resources, Ltd., Nuevo Energy Company and Sports Holdings
Corporation. Mr. Long is a Trustee of The Hospital Chaplainry, Inc., a nonprofit
agency that trains chaplains from over 50 religious traditions.
Douglas E. Rogers has served as a member of the Board of Directors of the
Company since the Acquisition in November 1996. Mr. Rogers is currently a
Managing Director of DLJ Merchant Banking II, Inc. Since 1992, Mr. Rogers has
been engaged in the development, organization and financing of numerous health
care companies. From 1995 to 1997, he was a Managing Director of Lighthouse
Capital Partners and its affiliates, which were involved in providing financial
services and advice to small to medium sized medical product and dental
companies. From 1987 to 1992, he was a Director of Baring Brothers & Co., Inc.
where he was responsible for United States investment banking activities. From
1983 to 1987, Mr. Rogers was a Senior Vice President at Lehman Brothers. Prior
to that, Mr. Rogers was a Vice President and founder of the Health Care Group at
Kidder, Peabody & Co. Mr. Rogers is also a founder of several pharmaceutical
research companies, including Neurogen Corporation and Texas Biotechnology
Group. Mr. Rogers is also a Director of Wilson Greatbatch Ltd. and Computerized
Medical Systems, Inc. and has served as a Director of Cold Spring Harbor
Laboratory Associates.
Frederic M. Seegal has been a member of the Company's Board of Directors
since January 1997. Mr. Seegal is currently the President of Wasserstein Perella
Group, Inc., an investment banking firm, where he has been employed for three
years. From 1990 to 1994, Mr. Seegal was a Managing Director of Salomon
Brothers. Prior to that Mr. Seegal was a Managing Director of Lehman Brothers
where he was employed from 1974 to 1990.
Henry Wendt has served as a member of the Board of Directors of the Company
since the Acquisition in November 1996 and was the Chairman of the Board of the
Company until August 1997. He is currently a Managing Director of DLJ Merchant
Banking II, Inc. From 1995 to 1997, he was a Managing Director of Lighthouse
Capital Partners and its affiliates. Mr. Wendt was Chairman of the Board of
SmithKline Beecham p.l.c., a pharmaceutical company, and its subsidiary,
SmithKline Beecham Corporation, from 1989 until his retirement in 1994. Mr.
Wendt is also a director of Allergan, Inc., Atlantic Richfield Co., The Egypt
Investment Company and West Marine Corp. He is a trustee of the Trilateral
Commission and Trustee Emeritus of the American Enterprise Institute. In 1994
Mr. Wendt was awarded the Order of the Rising Sun Gold and Silver Star by the
Government of Japan, the highest honor given to a foreigner. In 1995, he was
named as Honorary Commander of the British Empire by HRH Queen Elizabeth II.
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<PAGE> 43
Key Employees
Don A. Kennard has served as the Vice President, Research and Development
of the Company since May 1997, the Vice President of Regulatory Affairs of the
Company and its predecessor from 1993 to 1997, and prior to that as the Director
of Regulatory Affairs with its predecessor from 1991 to 1992.
Dennis G. Locke has served as the Vice President, Finance of the Company
and its predecessor since November 1995, and prior to that as its Controller
from 1990 to 1995.
Hugh A. O'Donnell has served as the Vice President, International Sales of
the Company since July 1997, the Vice President, Technical Services and Training
of the Company from January 1997 to July 1997, the Vice President of Prosthetic
Business of the Company and its predecessor from 1995 to 1997, and prior to that
as the Vice President, Business Development of the Company's predecessor from
1993 to 1995. Prior to joining the Company, Mr. O'Donnell served as the General
Manager of the Implant Division of Dentsply -- Canada from 1987 to 1993.
Phillip E. Ohlsson has served as the Vice President, Institutional Accounts
of the Company since May 1997, as the Vice President, Western Region and
National Accounts of the Company and its predecessor from 1995 to 1997, and
prior to that, in various sales positions with the Company's predecessor,
including the Vice President of Sales from 1991 to 1995.
Thomas M. Olsen has served as Vice President of Domestic Sales and
Marketing of the Company since January 1997, as Vice President of Domestic Sales
of the Company's predecessor from 1995 to 1997, and as Director of Domestic
Sales from 1994 to 1995. Prior to joining the Company, Mr. Olsen served as the
Vice President of Sales and Marketing, with Denar Corp. from 1993 to 1994, and
prior to that as the Western Regional Manager of 3M Unitek.
BOARD OF DIRECTORS
The Company's Certificate provides for the Board of Directors to be divided
into three classes, with each class to be as nearly equal in number of directors
as possible. At each annual meeting of the stockholders, the successors to the
class of directors whose term expires at the time are elected to hold office for
a term of three years, and until their respective successors are elected and
qualified, so that the term of one class of directors expires at each such
annual meeting. The terms of office of the Company's directors expire as
follows: Messrs. Cowen and Grist in 1998; Messrs. Long and Rogers in 1999; and
Messrs. Darienzo, Seegal and Wendt in 2000. See "Description of Capital
Stock -- Certain Provisions of the Company's Certificate of Incorporation and
Bylaws."
The Board of Directors has a Compensation Committee (the "Compensation
Committee"), which is responsible for making recommendations regarding salaries,
bonuses and other compensation matters for the Company's executive officers. The
Compensation Committee serves as the administrator of the 1997 Plan. The members
of the Compensation Committee are Messrs. Cowen, Grist and Rogers. None of these
individuals were at any time during 1996 an officer or employee of the Company.
The Board of Directors also has an Audit Committee (the "Audit Committee"),
which supervises and makes recommendations and decisions with respect to the
periodic audits of the Company's financial results. The members of the Audit
Committee are Messrs. Cowen, Grist and Seegal.
DIRECTOR COMPENSATION
Except as described below, the directors do not receive cash compensation
for services on the Board of Directors or any Committee thereof. All
non-employee Board members are reimbursed for their out-of-pocket expenses
incurred in connection with serving on the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and its three other
most highly compensated executive officers (the "Named Executive Officers")
whose total salary and bonus for 1997 exceeded $100,000 for services rendered
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<PAGE> 44
to the Company and its predecessors in all capacities during that year. The
Named Executive Officers are the only executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------------
AWARDS
ANNUAL COMPENSATION ------------------
NAME AND -------------------- SECURITIES ALL OTHER
PRINCIPAL POSITION(S) SALARY BONUS(1) UNDERLYING OPTIONS COMPENSATION(2)
- -------------------------------------- -------- ------- ------------------ ------------
<S> <C> <C> <C> <C>
Kenneth A. Darienzo................... $311,553 $75,000 294,411 $6,400
Chairman of the Board and
Chief Executive Officer
Martin J. Dymek....................... 180,690 50,000 149,825 6,400
President
Kenneth K. Krueger.................... 155,477 30,000 139,825 6,400
Executive Vice President, Operations
Bruce D. Nye.......................... 103,346(3) 30,000 46,055 4,374
Vice President, Chief Financial
Officer
and Corporate Secretary
</TABLE>
- ---------------
(1) Represents bonuses earned in 1997 which will be paid in 1998.
(2) Consists of matching contributions made by the Company under its Section
401(k) Profit Sharing Plan.
(3) Mr. Nye joined the Company as its Vice President, Chief Financial Officer
and Corporate Secretary in May 1997. He is currently paid an annual salary
of $160,000.
The following table sets forth for each of the Named Executive Officers,
the number of options granted during the year ended December 31, 1997 and the
potential realizable value of such grants.
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS EMPLOYEES BASE PRICE EXPIRATION -----------------
NAME GRANTED IN 1997 ($/SH)(1) DATE 5% 10%
- --------------------------------- ---------- ------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Kenneth A. Darienzo.............. 100,000(3) 9.4% $0.40 01/07/07 $25,156 $63,750
134,411(4) 12.6 0.40 05/15/07 33,812 85,687
30,000(5) 2.8 12.00(6) 08/19/07 226,402 573,747
30,000(5) 2.8 12.00(6) 12/08/07 226,402 573,747
Martin J. Dymek.................. 50,000(3) 4.7 0.40 01/07/07 12,578 31,875
53,825(4) 5.0 12.00(6) 05/15/07 13,540 34,313
21,000(5) 2.0 12.00(6) 08/19/07 158,481 401,623
25,000(5) 2.4 12.00(6) 12/08/07 188,668 478,123
Kenneth K. Krueger............... 50,000(3) 4.7 0.40 01/07/07 12,578 31,875
53,825(4) 5.0 0.40 05/15/07 13,540 34,313
16,000(5) 1.5 12.00(6) 08/19/07 120,748 305,999
20,000(5) 1.9 12.00(6) 12/08/07 150,935 382,498
Bruce D. Nye..................... 16,055(4) 1.5 0.40 05/15/07 4,039 10,235
10,000(5) 1.0 12.00(6) 08/19/07 75,467 191,249
20,000(5) 1.9 12.00(6) 12/08/07 150,935 382,498
</TABLE>
- ---------------
(1) These options were granted at exercise prices equal to the fair market value
of the Common Stock on the date of grant as determined by the Board of
Directors of the Company.
(2) The 5% and 10% assumed rates of appreciation are prescribed by the rules and
regulations of the Commission and do not represent the Company's estimate or
projection of future trading prices of the Common Stock.
(3) Represents nonqualified stock options to purchase Common Stock, which were
fully vested on the grant date.
(4) Represents nonqualified stock options to purchase Common Stock, which vest
at the earlier of the consummation of the Offering or in equal annual
installments if the Company attains certain financial criteria in the year.
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<PAGE> 45
(5) Represents incentive stock options granted under the 1997 Plan. See
"Management -- Compensation Plans and Arrangements -- 1997 Stock Incentive
Plan." Twenty-five percent of such options vest on the first anniversary of
the grant date and the remaining options vest thereafter in 36 equal
installments. Such options will automatically accelerate in the event of the
termination of such holder's employment within 18 months following a change
in control of the Company.
(6) The exercise price of such options is equal to the initial public offering
price. For the purpose of this table, the Company has used an assumed
initial public offering price of $12.00 per share.
The following table sets forth information with respect to each exercise of
stock options during the year ended December 31, 1997, by each of the Named
Executive Officers and the number of options held at year end and the aggregate
value of in-the-money options held at December 31, 1997.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND OPTION VALUES FOR FISCAL
YEAR 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OF SHARES VALUE OPTIONS AT DECEMBER 31, 1997 AT DECEMBER 31, 1997($)(1)
ACQUIRED ON REALIZED ------------------------------- -----------------------------
NAME EXERCISE IN 1997($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth A.
Darienzo........... -- -- 234,411 60,000 $ 2,719,168 $ --
Martin J. Dymek...... -- -- 103,825 46,000 1,204,370 --
Kenneth K. Krueger... -- -- 103,825 36,000 1,204,370 --
Bruce D. Nye......... -- -- 16,055 30,000 186,238 --
</TABLE>
- ---------------
(1) There was no established public trading market for the Common Stock as of
December 31, 1997. Accordingly, these values have been calculated on the
basis of an assumed initial public offering price of $12.00 per share, less
the applicable option exercise price per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company serves as a member of the Board of
Directors or Compensation Committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee.
COMPENSATION PLANS AND ARRANGEMENTS
Employment Contracts
In November 1996, the Company entered into an employment agreement with
each of Messrs. Darienzo, Dymek and Krueger for a term ending December 31, 1999.
The annual base salaries of Messrs. Darienzo, Dymek and Krueger as of the date
hereof are $300,000, $199,000 and $155,000, respectively. Each of such officers
is also eligible to receive a bonus based upon the Company's attainment of
certain performance criteria, which bonus will not exceed 100% of such officer's
annual base salary. The employment agreements provide that the Board may
increase the annual base salaries and bonuses of such officers as appropriate.
In the event the Company terminates any such agreement other than for cause, the
Company must pay to such officer, in addition to all accrued and unpaid salary
and benefits, his salary for the remaining term of the agreement (but in no
event an amount less than 18 months salary) and certain benefits for the
remaining term of the agreement. If the Company terminates such officer's
employment for cause or if such officer terminates his employment for any reason
whatsoever, then the officer will be entitled to receive only accrued but unpaid
salary through the date of such termination.
1997 Stock Incentive Plan
The Company's 1997 Plan is intended to serve as a comprehensive equity
incentive program for the employees, non-employee members of the Company's Board
of Directors (the "Board") or the board of directors of any parent or subsidiary
of the Company, and independent consultants who provide valuable services to the
Company. The 1997 Plan became effective on August 20, 1997 upon adoption by the
Board and was subsequently approved by the stockholders in August 1997. A total
of 400,000 shares of Common
44
<PAGE> 46
Stock has been reserved for issuance under the 1997 Plan. The share reserve will
be increased automatically on the first day of January of each calendar year,
beginning in January 1998, by a number of shares equal to 2% of the number of
shares of Common Stock outstanding on the last day of the immediately preceding
calendar year. In no event may any one participant in the 1997 Plan receive
option grants or direct stock issuances for more than 200,000 shares in the
aggregate per calendar year.
The 1997 Plan is divided into four separate incentive programs: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers and other employees,
non-employee Board members and independent consultants) may, at the discretion
of the Plan Administrator, be granted options to purchase shares of Common Stock
at an exercise price not less than 85% of their fair market value on the grant
date, (ii) the Stock Issuance Program under which such individuals may, in the
Plan Administrator's discretion, be issued shares of Common Stock directly
through the purchase of such shares at a price not less than 100% of their fair
market value at the time of issuance or as a bonus tied to the performance of
services, (iii) the Salary Investment Option Grant Program under which executive
officers and other highly compensated employees may elect to apply a portion of
their base salary to the acquisition of special stock option grants, and (iv)
the Director Fee Option Grant Program pursuant to which the non-employee Board
members may apply a portion of the annual retainer fee otherwise payable to them
in cash each year to the acquisition of special stock option grants.
The Discretionary Option Grant, Stock Issuance and Salary Investment Option
Grant Programs will be administered by the Compensation Committee. The
Compensation Committee, as Plan Administrator, will have complete discretion to
determine which eligible individuals are to receive option grants or stock
issuances, the time or times when such option grants or stock issuances are to
be made, the number of shares subject to each such grant or issuance, the
vesting schedule to be in effect for the option grants or stock issuances, the
maximum term for which any granted option is to remain outstanding and the
status of any granted option as either an incentive stock option or a
non-statutory stock option under the federal tax laws, except that all options
granted under the Salary Investment Option Grant Program will be non-statutory
stock options. The administration of the Director Fee Option Grant Program will
be self-executing in accordance with the express provisions of that program.
The exercise price for the shares of Common Stock subject to option grants
made under the 1997 Plan may be paid in cash or in shares of Common Stock valued
at fair market value on the exercise date. The option may also be exercised
through a same-day sale program without any cash outlay by the optionee. In
addition, the Plan Administrator may provide financial assistance to one or more
optionees in the exercise of their outstanding options by allowing such
individuals to deliver a full-recourse, interest-bearing promissory note in
payment of the exercise price and any associated withholding taxes incurred in
connection with such exercise.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Stock Issuance Program will immediately vest,
except to the extent the Company's repurchase rights with respect to those
shares are to be assigned to the successor corporation. The Plan Administrator
will have the authority under the Discretionary Option Grant and Stock Issuance
Programs to grant options and to structure repurchase rights so that the shares
subject to those options or repurchase rights will automatically vest in the
event the individual's service is terminated, whether involuntarily or through a
resignation for good reason, within a specified period (not to exceed eighteen
(18) months) following (i) a merger or asset sale in which those options are
assumed or those repurchase rights are assigned or (ii) a change in control of
the Company effected by a successful tender offer for more than 50% of the
outstanding voting stock or by proxy contest for the election of Board members.
The Plan Administrator will also have the discretion to provide for the
automatic acceleration of options and the lapse of any repurchase rights upon
(i) a change in control of the Company effected by a successful tender offer for
more than 50% of the Company's outstanding voting stock or by proxy contest for
the election of Board members or (ii) the termination of the individual's
service, whether involuntarily or through a resignation for good reason, within
a specified period (not to exceed eighteen (18) months) following such a change
in control.
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<PAGE> 47
Stock appreciation rights may be issued in tandem with option grants made
under the Discretionary Option Grant Program. The holders of such rights will
have the opportunity to elect between the exercise of their outstanding stock
options for shares of Common Stock or the surrender of those options for an
appreciation distribution from the Company equal to the excess of (i) the fair
market value of the vested shares of Common Stock subject to the surrendered
option over (ii) the aggregate exercise price payable for such shares. Such
appreciation distribution may be made in cash or in shares of Common Stock.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program in return for
the grant of new options for the same or different number of option shares with
an exercise price per share based upon the fair market value of the Common Stock
on the new grant date.
In the event the Plan Administrator elects to activate the Salary
Investment Option Grant Program, each executive officer and other highly
compensated employee of the Company selected for participation may elect, prior
to the start of the calendar year, to reduce his or her base salary for that
calendar year by a specified dollar amount not less than $10,000 nor more than
$50,000. If such election is approved by the Plan Administrator, the officer
will be granted, on or before the last trading day in January in the calendar
year for which the salary reduction is to be in effect, a non-statutory option
to purchase that number of shares of Common Stock determined by dividing the
salary reduction amount by two-thirds of the fair market value per share of
Common Stock on the grant date. The option will be exercisable at a price per
share equal to one-third of the fair market value of the option shares on the
grant date. As a result, the total spread on the option shares at the time of
grant will be equal to the amount of salary invested in that option. The option
will vest in a series of twelve (12) equal monthly installments over the
calendar year for which the salary reduction is in effect and will be subject to
full and immediate vesting upon certain changes in the ownership or control of
the Company.
In the event the Director Fee Option Grant Program is activated in the
future, each non-employee Board member would have the opportunity to apply all
or a portion of any annual retainer fee otherwise payable in cash to the
acquisition of a below-market option grant. The option grant would automatically
be made on the first trading day in January in the year for which the retainer
fee would otherwise be payable in cash. The option will have an exercise price
per share equal to one-third of the fair market value of the option shares on
the grant date, and the number of shares subject to the option will be
determined by dividing the amount of the retainer fee applied to the program by
two-thirds of the fair market value per share of Common Stock on the grant date.
As a result, the total spread on the option (the fair market value of the option
shares on the grant date less the aggregate exercise price payable for those
shares) will be equal to the portion of the retainer fee invested in that
option. The option will become exercisable for the option shares in a series of
twelve (12) equal monthly installments over the calendar year for which the
election is in effect. However, the option will become immediately exercisable
for all the option shares upon (i) certain changes in the ownership or control
of the Company or (ii) the death or disability of the optionee while serving as
a Board member.
The Board may amend or modify the 1997 Plan at any time. The 1997 Plan will
terminate on August 19, 2007, unless sooner terminated by the Board.
On August 20, 1997, the Company granted options to purchase an aggregate of
226,000 shares of Common Stock under the 1997 Plan to certain employees of the
Company, including the Named Executive Officers. On September 25, 1997, the
Company granted options to purchase an aggregate of 9,000 shares of Common Stock
under the 1997 Plan to three employees of the Company. On December 9, 1997, the
Company granted options to purchase an aggregate of 95,000 shares of Common
Stock under the 1997 Plan to the Named Executive Officers. All of the options
granted under the 1997 Plan vest at the rate of 25% on the first anniversary of
their respective grant dates and thereafter vest in 36 equal monthly
installments. All of such options have an exercise price equal to the initial
public offering price.
401(k) PROFIT SHARING PLAN
The Company has an employee profit sharing plan that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code
(the "401(k) Plan"). The 401(k) Plan allows eligible employees to
46
<PAGE> 48
defer up to 15% of their pretax earnings, subject to the Internal Revenue
Service annual contribution limit. The Company makes matching contributions
equal to 100% of employee contributions up to 4% of the participant's eligible
compensation. The Company's contributions to the 401(k) Plan for the year ended
December 31, 1997 totaled approximately $346,000.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate provides that, pursuant to Delaware law, the
Company's directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty of care to the Company and its stockholders. This
provision in the Certificate does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief against the directors will remain available under
Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company or its
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
Under Section 145 of the Delaware General Corporation Law, the Company can
indemnify its directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. The Company's Bylaws
provide that the Company will indemnify its directors and officers to the
fullest extent permitted by law and require the Company to advance litigation
expenses upon receipt by the Company of an undertaking by the director or
officer to repay such advances if it is ultimately determined that the director
or officer is not entitled to indemnification. The Bylaws further provide that
rights conferred under such Bylaws do not exclude any other right such persons
may have or acquire under any bylaw, agreement, vote of the stockholders or
disinterested directors or otherwise.
The Company has entered into agreements to indemnify its executive officers
and all of its directors in addition to the indemnification provided for in the
Bylaws. These agreements will, among other things, indemnify those parties for
certain expenses (including attorneys' fees), judgments, fines and settlement
amounts incurred by such person in any action or proceeding, including any
action by or in the right of the Company, on account of services by such person
as an officer or a director of the Company, or as an officer or a director of
any other company or enterprise to which the person provides services at the
request of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the indemnification agreements or the Company's charter documents,
the Company has been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Company has also obtained directors' and officers' liability insurance
for its directors and executive officers.
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<PAGE> 49
CERTAIN TRANSACTIONS
ACQUISITION
In November 1996, the Company acquired certain of the assets of its
predecessor, S-O, from Bausch & Lomb. In conjunction with the Acquisition, the
Company entered into a Securities Purchase Agreement with The 1818 Fund II, L.P.
(the "1818 Fund"), pursuant to which the Company sold 22,000 shares of Class A
Preferred Stock and warrants to purchase 2,900,000 shares of Common Stock at a
nominal exercise price to the 1818 Fund for $22.0 million. T. Michael Long,
Walter W. Grist and Andrew C. Cowen, directors of the Company, are a partner,
senior manager and assistant manager, respectively, of Brown Brothers, which is
the general partner of the 1818 Fund, and were elected to the Company's Board
pursuant to rights granted to the 1818 Fund in connection with the Acquisition.
The 1818 Fund's right to require the Company to nominate up to three individuals
designated by it as directors terminates upon the consummation of the Offering.
In conjunction with the Acquisition, the Company also sold (i) 3,185 shares
of Class C Preferred Stock and warrants to purchase 477,750 shares of Common
Stock at a nominal exercise price to Exeter Venture Lenders, L.P. and Exeter
Equity Partners, L.P. (collectively, "Exeter") and S-O Acquisition LLC for $3.2
million, and (ii) 50,000 shares of Common Stock and warrants to purchase 745,400
shares of Common Stock to S-O Management LLC at a nominal exercise price for
$1,000. The Company pays S-O Management LLC $250,000 per year pursuant to a
Management Services Agreement that terminates upon consummation of the Offering.
Prior to the consummation of the Offering, each of S-O Acquisition LLC and S-O
Management LLC will distribute the shares of Common Stock and Class C Preferred
Stock held by such entity to the individual members of each such entity (the
"LLC Distribution"). As a result of the LLC Distribution (i) Henry Wendt, a
director of the Company, will own 346,201 shares of Common Stock and
approximately 494 shares of Class C Preferred Stock, (ii) Anvers L.P., one of
the general partners of which is an affiliate of Furman Selz LLC, will own
74,999 shares of Common Stock and approximately 500 shares of Class C Preferred
Stock, (iii) Douglas E. Rogers, a director of the Company, will own 266,975
shares of Common Stock and approximately nine shares of Class C Preferred Stock,
(iv) a Managing Director of Furman Selz LLC will own 151,118 shares of Common
Stock and approximately five shares of Class C Preferred Stock and (v)
Wasserstein Perella Group, Inc. will own 79,540 shares of Common Stock. Frederic
M. Seegal, a director of the Company, is the President of Wasserstein Perella
Group, Inc.
In addition, in connection with the Acquisition, the Company entered into
Note and Warrant Purchase Agreements with Equitable Life and Exeter. Under the
terms of the Note and Warrant Purchase Agreements, the Company sold (i) $10.0
million aggregate principal amount of its 16% Series A Subordinated Note and
warrants to purchase 240,000 shares of Common Stock at a nominal exercise price
to Equitable Life and (ii) $2.5 million aggregate principal amount of its 14%
Series B Subordinated Notes and warrants to purchase 88,000 shares of Common
Stock at a nominal exercise price to Exeter.
Concurrently with the Acquisition, the Company entered into (i) a
registration rights agreement with the 1818 Fund, the S-O Parties, Exeter and
Equitable Life and (ii) a stockholders agreement, which terminates upon
consummation of the Offering, with such parties and Messrs. Wendt, Rogers and
Gumer. See "Description of Capital Stock."
DIRECTOR OPTIONS
In January 1997, the Company granted each member of the Company's Board of
Directors (other than Mr. Darienzo) a stock option to acquire 35,700 shares of
the Company's Common Stock at an exercise price of $1.00 per share.
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<PAGE> 50
PREFERRED STOCK CONVERSION
Upon the approval of all holders of Preferred Stock, the Company will amend
its Certificate of Incorporation to provide for the automatic conversion (in
lieu of mandatory redemption) of all 22,000 shares of Class A Preferred Stock
and all 3,185 shares of Class C Preferred Stock into an aggregate of 2,256,719
shares of Common Stock upon consummation of the Offering (assuming an initial
public offering price of $12.00 per share). The conversion price will be equal
to 93% of the initial public offering price (the initial public offering price
less underwriting discounts and commissions). As discussed above, certain
affiliates of the Company are holders of such shares of Class A Preferred Stock
and Class C Preferred Stock.
49
<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock by (i) each person (or group
of affiliated persons) known by the Company to beneficially own more than five
percent of the outstanding shares of Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, and (iv) all directors
and executive officers of the Company as a group. Except as otherwise indicated,
the Company believes that the beneficial owners listed below have sole
investment and voting power with respect to such shares, subject to community
property laws, where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF
CLASS(1)
NUMBER ---------------------
BENEFICIALLY BEFORE AFTER
OWNED(1) OFFERING OFFERING
------------ -------- --------
<S> <C> <C> <C>
The 1818 Fund II, L.P.(2)..................................... 4,152,401 58.8% 41.3%
c/o Brown Brothers Harriman & Co.
59 Wall Street
New York, NY 10005
Kenneth A. Darienzo(3)........................................ 234,411 3.2 2.3
Martin J. Dymek(4)............................................ 103,825 1.5 1.0
Kenneth Krueger(5)............................................ 103,825 1.5 1.0
Bruce D. Nye(6)............................................... 16,055 * *
Andrew C. Cowen(7)............................................ 35,700 * *
Walter W. Grist(8)............................................ 35,700 * *
T. Michael Long(9)............................................ 4,188,101 59.1 41.5
Douglas E. Rogers(10)......................................... 303,507 4.3 3.0
Frederic M. Seegal(11)........................................ 115,240 1.6 1.1
Henry Wendt(12)............................................... 426,211 6.0 4.2
All directors and executive officers as a group (10
persons)(13)................................................ 5,562,575 72.0% 51.8%
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is based on 7,056,719 shares of Common Stock deemed
outstanding as of December 15, 1997 and 10,056,719 shares of Common Stock
outstanding after completion of the Offering. Shares of Common Stock
subject to options that are currently exercisable or exercisable within 60
days of the date of this Prospectus are deemed to be outstanding and
beneficially owned by the person holding such option for the purpose of
computing beneficial ownership of such person, but are not treated as
outstanding for the purposes of computing the percentage ownership of any
other person. As of December 15, 1997, S-O Acquisition LLC was the record
owner of 348,584 shares of Common Stock and S-O Management LLC was the
record owner of 800,573 shares of Common Stock. Each of these entities will
distribute the shares of Common Stock held by it to the individual members
of such entity prior to the consummation of the Offering. This table
assumes that such distributions have been made, and each owner of an equity
interest in S-O Acquisition LLC and S-O Management LLC is presented as the
beneficial owner of a percentage of the shares of Common Stock owned by S-O
Acquisition LLC and S-O Management LLC equal to such owner's proportionate
equity interest in each such entity.
(2) The general partner of the 1818 Fund is Brown Brothers. T. Michael Long, a
director of the Company, is a general partner of Brown Brothers. See
footnote 9.
(3) Mr. Darienzo's shares include (i) 100,000 shares of Common Stock issuable
upon exercise of fully-vested stock options and (ii) 134,411 shares of
Common Stock issuable upon exercise of stock options that will vest upon
consummation of the Offering.
(4) Mr. Dymek's shares include (i) 50,000 shares of Common Stock issuable upon
exercise of fully-vested stock options and (ii) 53,825 shares of Common
Stock issuable upon exercise of stock options that will vest upon
consummation of the Offering.
(5) Mr. Krueger's shares include (i) 50,000 shares of Common Stock issuable
upon exercise of fully-vested stock options and (ii) 53,825 shares of
Common Stock issuable upon exercise of stock options that will vest upon
consummation of the Offering.
50
<PAGE> 52
(6) Mr. Nye's shares include 16,055 shares of Common Stock issuable upon
exercise of stock options that will vest upon consummation of the Offering.
(7) Mr. Cowen's shares include 35,700 shares of Common Stock issuable upon
exercise of fully-vested stock options.
(8) Mr. Grist's shares include 35,700 shares of Common Stock issuable upon
exercise of fully-vested stock options.
(9) Mr. Long's shares include (i) 35,700 shares of Common Stock issuable upon
exercise of fully-vested stock options and (ii) 4,152,401 shares of Common
Stock owned by the 1818 Fund, which Mr. Long may be deemed to beneficially
own because he has voting power of the 1818 Fund's shares of Common Stock.
Mr. Long disclaims beneficial ownership of all shares referenced in (ii)
above.
(10) Mr. Rogers' shares include 35,700 shares of Common Stock issuable upon
exercise of fully-vested stock options.
(11) Mr. Seegal's shares include (i) 35,700 shares of Common Stock issuable upon
exercise of fully-vested stock options and (ii) 79,540 shares of Common
Stock owned by Wasserstein Perella Group, Inc., which Mr. Seegal may be
deemed to beneficially own because he has voting power of such shares of
Common Stock. Mr. Seegal disclaims beneficial ownership of all shares
referenced in (ii) above.
(12) Mr. Wendt's shares include 35,700 shares of Common Stock issuable upon
exercise of fully-vested stock options.
(13) The shares held by the officers and directors as a group include 672,316
shares of Common Stock issuable upon exercise of options exercisable within
60 days of the date of this Prospectus.
51
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offering and the concurrent exercise of all
outstanding warrants to acquire Common Stock, and conversion to Common Stock or
redemption of all outstanding shares of Preferred Stock, the authorized capital
stock of the Company will consist of 35,000,000 shares of Common Stock, $.0001
par value per share, of which 10,056,719 shares will be outstanding, and
5,000,000 shares of Preferred Stock, $.0001 par value per share, none of which
will be outstanding. The following description of the capital stock of the
Company and certain provisions of the Company's Certificate and Bylaws gives
effect to the exercise of all outstanding warrants and the conversion to Common
Stock or redemption of all outstanding shares of Preferred Stock. The
description below is a summary and is qualified in its entirety by the
provisions of the Certificate and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held.
Following the Offering, the holders of Common Stock, voting as a single class,
will be entitled to elect all of the directors of the Company. Holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
would be entitled to share ratably in the Company's assets remaining after the
payment of liabilities and the satisfaction of any liquidation preference
granted to the holders of any outstanding shares of Preferred Stock. Holders of
Common Stock have no preemptive or other subscription rights. The shares of
Common Stock are not convertible into any other security. The outstanding shares
of Common Stock are, and the shares being offered hereby will be, upon issuance
and sale, fully paid and nonassessable.
PREFERRED STOCK
The Certificate authorizes 5,000,000 shares of Preferred Stock that may be
issued in series from time to time with such designations, relative rights,
priorities, preferences, qualifications, limitations and restrictions thereof,
to the extent that such are not fixed in the Company's Certificate, as the Board
of Directors determines. The rights, preferences, limitations and restrictions
of different series of Preferred Stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions and other matters. The Board of
Directors may authorize the issuance of Preferred Stock that ranks senior to the
Common Stock with respect to the payment of dividends and the distribution of
assets on liquidation. In addition, the Board of Directors is authorized to fix
the limitations and restrictions, if any, upon the payment of dividends on
Common Stock to be effective while any shares of Preferred Stock are
outstanding. The Board of Directors, without stockholder approval, can issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. The Company believes that the
Preferred Stock will provide the Company with increased flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs that might arise. Having such authorized shares available for
issuance will allow the Company to issue shares of Preferred Stock without the
expense and delay of a special stockholders' meeting. Although the Company's
Board of Directors has no intention at the present time of doing so, it could
issue a series of Preferred Stock, the terms of which, subject to certain
limitations imposed by the securities laws, could impede the completion of a
merger, tender offer or other takeover attempt. The Company's Board of Directors
will make any determination to issue such shares based on its judgment as to the
best interests of the Company and its stockholders at the time of issuance. The
Company's Board of Directors, in so acting, could issue Preferred Stock having
terms that could discourage an acquisition attempt or other transaction that
some, or a majority, of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock over
the then market price of such stock.
DELAWARE LAW
Upon consummation of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prohibits a publicly held
52
<PAGE> 54
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of a corporation's outstanding
voting stock. This provision may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
Provisions of the Company's Certificate and Bylaws may make more difficult
the acquisition of control of the Company by various means, such as a tender
offer, open market purchases not approved by the Company's Board of Directors, a
proxy contest or otherwise and could thereby deprive the stockholders of
opportunities to realize a premium on their Common Stock. In addition, they may
adversely affect the prevailing market price of the stock. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors of the Company and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions, described below, which may involve an actual or threatened change
in control of the Company. The provisions are also intended to discourage
certain tactics that may be used in proxy fights. These provisions also
encourage persons seeking to acquire control of the Company to consult first
with the Company's Board of Directors to negotiate the terms of any proposed
business combination or offer. The provisions are designed to reduce the
vulnerability of the Company to an unsolicited proposal for a takeover that does
not contemplate the acquisition of all outstanding shares of the Company or that
is otherwise unfair to stockholders of the Company. The Board of Directors
believes that, as a general rule, such takeover proposals would not be in the
best interests of the Company and its stockholders. See "Risk
Factors -- Potential Anti-Takeover Effects of Delaware Law and the Company's
Certificate of Incorporation and Bylaws."
Directors; Classified Board; Removal; Filling Vacancies and Amendment. The
Certificate provides that the number of directors will be fixed from time to
time by resolution adopted by a majority of the directors then in office.
Currently, the number is set at seven. The Certificate provides for the Board of
Directors to be divided into three classes, with each class to be as nearly
equal in number of directors as possible. Further, subject to the rights of the
holders of any series of Preferred Stock then outstanding, the Certificate
authorizes only the Board of Directors to fill vacancies, including newly
created directorships. Accordingly, this provision could prevent a stockholder
from obtaining majority representation on the Board of Directors by enlarging
the Board of Directors and filling the new directorships with its own nominees.
The Certificate also provides that directors of the Company may be removed by
stockholders only for cause and only by the affirmative vote of holders of
two-thirds of the outstanding shares of voting stock.
Special Stockholder Meetings. The Certificate provides that special
meetings of the stockholders, for any purpose or purposes, unless required by
law, shall be called by the Chief Executive Officer or Secretary pursuant to a
request in writing of the Chief Executive Officer, a majority of the entire
Board of Directors or stockholders owning not less than 50% of the entire voting
stock of the Company then issued and outstanding. A special meeting may not be
held absent such a written request. The request shall state the purpose or
purposes of the proposed meeting. Such limitation on the right of stockholders
to call a special meeting could make it more difficult for stockholders to
initiate action that is opposed by the Board of Directors. Such action on the
part of stockholders could include the removal of an incumbent director, the
election of a stockholder nominee as a director or the implementation of a rule
requiring stockholder ratification of specific defensive strategies that have
been adopted by the Board of Directors with respect to unsolicited takeover
bids. In addition, the limited ability of the stockholders to call a special
meeting of stockholders may make it more difficult to change the existing Board
of Directors and management.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Certificate establishes an advance notice procedure for the
nomination, other than by or at the discretion of the Board of Directors or a
committee thereof, of candidates for election as directors as well as for other
stockholder proposals to be
53
<PAGE> 55
considered at special or annual stockholders' meetings. Notice of stockholder
proposals and director nominations must be timely given in writing to the
Secretary of the Company prior to the meeting at which the matters are to be
acted upon or the directors are to be elected. To be timely, notice must be
received in general at the principal offices of the Company not less than 60
days nor more than 90 days prior to the meeting of stockholders. The purpose of
requiring advance notice is to afford the Board of Directors an opportunity to
consider the qualifications of the proposed nominees or the merits of other
stockholder proposals and, to the extent deemed necessary or desirable by the
Board of Directors, to inform stockholders about those matters.
Written Consent; Special Meetings of Stockholders. The Certificate
prohibits the taking of stockholder action by written consent without a meeting.
These provisions will make it more difficult for stockholders to take action
opposed by the Board of Directors.
Amendment of Certain Provisions of the Certificate. The Certificate
generally requires the affirmative vote of the holders of at least two-thirds of
the outstanding voting stock in order to amend any provisions of the Certificate
concerning (i) the removal or appointment of directors, (ii) the authority of
stockholders to act by written consent, (iii) the required vote to amend the
Certificate, (iv) calling a special meeting of stockholders, (v) procedure and
content of stockholder proposals concerning business to be conducted at a
meeting of stockholders, and (vi) director nominations by stockholders. These
voting requirements will make it more difficult for minority stockholders to
make changes in the Certificate that could be designed to facilitate the
exercise of control over the Company. On the other hand, the requirement for
approval by at least a two-thirds stockholder vote will enable the holders of a
minority of the voting stock of the Company to prevent the holders of a majority
or more of such securities from amending such provisions of the Certificate.
Following the completion of the offering, the Company's present directors and
executive officers and their respective affiliates will beneficially own
approximately 51.8% of the outstanding Common Stock, giving them veto power with
respect to any stockholder action or approval requiring a two-thirds vote.
REGISTRATION RIGHTS
After the Offering, pursuant to registration rights agreements (the
"Registration Rights Agreements") entered into in connection with the
Acquisition, holders (the "Holders") of approximately 7,056,719 shares of Common
Stock will be entitled to certain demand and piggy-back registration rights with
respect to such shares. Pursuant to the Registration Rights Agreements, as
modified by certain waivers of rights thereunder that were agreed upon in
connection with the Offering, certain Holders may, after the consummation of the
Offering, request that the Company file a registration statement under the
Securities Act and, upon such request and subject to certain conditions and
restrictions, the Company generally will be required to use its best efforts to
effect one such registration. Additionally, within 24 months following the
consummation of the Offering, the Company is required to file a shelf
registration statement on Form S-3 to register 2,900,000 shares of Common Stock
acquired as a result of the exercise of warrants held by the Class A Preferred
Stock investors and possibly any additional shares of Common Stock held by such
investors; however, such required registration is subject to postponement if it
would interfere with certain material transactions of the Company then under
consideration. In addition, if the Company proposes to register any of its
securities either for its own account or for the account of other stockholders,
the Company is required, with certain exceptions, to notify the Holders and,
subject to certain limitations, include in any underwritten registration all of
the shares of Common Stock requested to be included by the Holders. The Company
is generally obligated to bear the expenses, other than underwriting discounts
and sales commissions, of these registrations. For a period of 180 days after
the date of this Prospectus, the Company has agreed not to file any registration
statement with respect to, and each of its executive officers, directors and
certain stockholders of the Company has agreed not to make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable into
Common Stock, other than registration statements on Form S-8 covering
outstanding options and securities issuable under the 1997 Plan, without UBS
Securities LLC's prior written consent.
TRANSFER AGENT AND REGISTRATION
The transfer agent and registrar for the Common Stock is U.S. Stock
Transfer Corporation.
54
<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 10,056,719 shares of
Common Stock outstanding. Of these shares, the 3,000,000 shares sold in the
Offering (plus any additional shares sold upon the Underwriters' exercise of
their over-allotment option) will be freely transferable immediately following
the Offering without restriction under the Securities Act. Of the remaining
7,056,719 shares of Common Stock, 4,800,000 will become transferable 90 days
following the date of this Prospectus subject to compliance with the applicable
provisions of Rule 144, assuming the lock-up discussed below is not applicable.
Each of the Company, its executive officers and directors and certain
stockholders of the Company who in the aggregate beneficially own approximately
99% of the total number of outstanding shares of Common Stock not sold in the
Offering, has agreed (except, in the case of the Company, for the grant of
options or issuance of stock under the 1997 Plan or upon conversion of the
Preferred Stock) not to (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or (ii) enter into any swap
or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any Common Stock (regardless of
whether any of the transactions described in clause (i) or (ii) is to be settled
by the delivery of Common Stock, or such other securities, in cash or otherwise)
(the "Lock-Up") for a period of 180 days (the "Lock-up Period") after the date
of this Prospectus without the prior written consent of UBS Securities LLC.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this Prospectus a number of shares that does not exceed the greater
of (i) 1% of the then outstanding shares of the Common Stock (approximately
100,567 shares immediately after the Offering) or (ii) the average weekly
trading volume during the four calendar weeks preceding such sale, subject to
the filing of a Form 144 with respect to such sale. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale who has
beneficially owned his or her shares for at least two years is entitled to sell
such shares pursuant to Rule 144(k) without regard to the limitations described
above. Persons deemed to be affiliates of the Company must always sell pursuant
to the volume limitations under Rule 144, even after the applicable holding
periods have been satisfied.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, since this will depend on the market price for the Common Stock
of the Company, the personal circumstances of the sellers and other factors.
Prior to the Offering, there has been no public market for the Common Stock, and
there can be no assurance that a significant public market for the Common Stock
will develop or be sustained after the Offering. Any future sale of substantial
amounts of Common Stock in the open market may adversely affect the market price
of the Common Stock offered hereby.
Pursuant to the Registration Rights Agreements, holders of 7,056,719 shares
of Common Stock will be entitled to certain demand and piggy-back registration
rights with respect to such shares. See "Certain Transactions -- Acquisition"
and "Description of Capital Stock -- Registration Rights." During the Lock-up
Period, the Company has agreed not to file any registration statement with
respect to, and each of its executive officers, directors and certain
stockholders of the Company has agreed not to make any demand for, or exercise
any right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable into Common Stock,
other than a registration statement on Form S-8 covering shares issuable upon
exercise of stock options, without UBS Securities LLC's prior written consent.
The Company intends to file registration statements on Form S-8 under the
Securities Act to register shares of Common Stock issuable upon exercise of
options pursuant to outstanding options or grants under the 1997 Plan. However,
all holders of such options have entered into lock-up agreements.
55
<PAGE> 57
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters for whom UBS Securities LLC and Furman Selz LLC are acting as
representatives (the "Representatives"), have agreed to purchase from the
Company the following respective number of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------ ---------
<S> <C>
UBS Securities LLC................................................
Furman Selz LLC...................................................
---------
Total................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligations is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased. The Underwriting Agreement contains certain provisions whereby if any
Underwriter defaults in its obligations to purchase shares, and the aggregate
obligations of the Underwriters so defaulting do not exceed ten percent of the
shares offered hereby, the remaining Underwriters, or some of them, must assume
such obligations.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering price
set forth on the cover of this Prospectus, and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may allow
and such dealers may reallow a concession not in excess of $ per share to
certain other dealers. After the public offering of the shares of Common Stock,
the offering price and other selling terms may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date, of this Prospectus, to purchase up to 450,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. To the extent that the Underwriters
exercise this option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the number of shares of
Common Stock to be purchased by it shown in the above table bears to the total
number of shares of Common Stock offered hereby. The Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot the Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
Underwriters may reclaim selling concessions from syndicate members in the
Offering if the syndicate repurchases previously distributed Common Stock in
syndicate covering transactions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the Common
Stock above independent market levels. The Underwriters are not required to
engage in these activities, and may end any of these activities at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
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<PAGE> 58
The executive officers, directors, employees and certain other stockholders
of the Company who beneficially own or have dispositive power over substantially
all of the shares of Common Stock outstanding prior to this Offering, including
Common Stock to be issued upon the completion of this Offering pursuant to the
Preferred Stock Conversion, have agreed that they will not, without the prior
written consent of UBS Securities LLC, offer, sell or otherwise dispose of any
shares of Common Stock or securities exchangeable for or convertible into shares
of Common Stock owned by them for a period of 180 days after the date of this
Prospectus. The Company has agreed that it will not, without the prior written
consent of UBS Securities LLC, offer, sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus, except
that the Company may grant options under the 1997 Plan and may issue shares
pursuant to other currently outstanding options.
An affiliate of Furman Selz LLC, one of the Underwriters, is the general
partner of Anvers, L.P., which will beneficially own 74,999 shares of Common
Stock, and 500 shares of Class C Preferred Stock of the Company following the
LLC Distribution. Such shares of Class C Preferred Stock will be converted into
44,802 shares of Common Stock.
A Managing Director of Furman Selz LLC, will beneficially own 151,118
shares of Common Stock and approximately five shares of Class C Preferred Stock
following the LLC Distribution. Such shares of Class C Preferred Stock will be
converted into approximately 471 shares of Common Stock in the Preferred Stock
Conversion.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority in excess of five percent of the number of shares of Common Stock
offered hereby.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. The initial public offering price has been determined by
negotiations between the Company and the Representatives and may not be
indicative of the market price at which the Common Stock of the Company will
trade after this Offering. Among the factors considered in such negotiations, in
addition to prevailing market conditions, were certain financial information of
the Company, market valuations of other companies that the Company and the
Representatives believed to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant. The initial public offering price
set forth on the cover page of this Prospectus should not, however, be
considered an indication of the actual value of the Common Stock. Such price is
subject to change as a result of market conditions and other factors. There can
be no assurance that an active trading market will develop for the Common Stock
or that the Common Stock will trade in the public market subsequent to this
Offering at or above the initial offering price.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Brobeck, Phleger & Harrison LLP, Newport Beach,
California. Certain legal matters with respect to the Offering will be passed
upon for the Underwriters by Cooley Godward LLP, San Diego, California.
EXPERTS
The consolidated financial statements as of December 31, 1995 and 1996 and
for the years ended December 31, 1994 and 1995, for the period January 1, 1996
through November 15, 1996, and for the period November 16, 1996 through December
31, 1996 included in this Prospectus have been so included in reliance on the
reports of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
57
<PAGE> 59
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act (the
"Registration Statement") with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract of
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each statement being qualified in all
respects by such reference. The Registration Statement, including the exhibits
and schedules thereto, may be inspected without charge at the principal office
of the Commission in Washington, D.C. and copies of all or any part of which may
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at
the Commission's Regional Offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material may be obtained at
prescribed rates by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains an Internet site at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants,
including the Company, that file electronically with the Commission.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available quarterly reports for the first three quarters of each year
following the end of each such quarter.
58
<PAGE> 60
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants -- The Company....................................... F-2
Report of Independent Accountants -- The Predecessor................................... F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997
(unaudited).......................................................................... F-4
Consolidated Statements of Operations for the years ended December 31, 1994 and 1995,
the period January 1, 1996 through November 15, 1996, the period November 16, 1996
through December 31, 1996, and the nine months ended September 30, 1996 (unaudited)
and 1997 (unaudited)................................................................. F-5
Consolidated Statements of Stockholders' Equity (Deficit)/Predecessor Equity for the
years ended December 31, 1994 and 1995, the period January 1, 1996 through November
15, 1996, the period November 16, 1996 through December 31, 1996 and the nine months
ended September 30, 1997 (unaudited)................................................. F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995,
the period January 1, 1996 through November 15, 1996, the period November 16, 1996
through December 31, 1996, and the nine months ended September 30, 1996 (unaudited)
and 1997 (unaudited)................................................................. F-7
Notes to Consolidated Financial Statements............................................. F-8
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Steri-Oss, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Steri-Oss, Inc. (the "Company") and its subsidiaries at December 31, 1996 and
the results of their operations and their cash flows for the period from
November 16, 1996 through December 31, 1996 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, effective
November 16, 1996 the Company acquired certain assets and assumed certain
liabilities of the Predecessor in a transaction accounted for as a purchase. As
a result of the acquisition, the consolidated financial information for the
period after the acquisition is presented on a different cost basis than that
for the periods before the acquisition and is, therefore, not comparable.
PRICE WATERHOUSE LLP
Costa Mesa, California
October 3, 1997, except for
Notes 8 and 14 as to which
the dates are November 15, 1997
and December 29, 1997,
respectively.
F-2
<PAGE> 62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Steri-Oss, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, Predecessor equity and of cash flows present fairly, in all
material respects, the financial position of Steri-Oss, a wholly owned
subsidiary of Bausch and Lomb Incorporated, as described in Note 1 (the
"Predecessor") at December 31, 1995, and the results of its operations and its
cash flows for the years ended December 31, 1994 and 1995 and for the period
from January 1, 1996 through November 15, 1996 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Predecessor's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, effective
November 16, 1996 the Company acquired certain assets and assumed certain
liabilities of the Predecessor in a transaction accounted for as a purchase. As
a result of the acquisition, the consolidated financial information for the
period after the acquisition is presented on a different cost basis than that
for the periods before the acquisition and is, therefore, not comparable.
PRICE WATERHOUSE LLP
Costa Mesa, California
October 3, 1997
F-3
<PAGE> 63
STERI-OSS, INC.
CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
ASSETS
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR --------------------------------------------
------------ PRO FORMA
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
(NOTE 2)
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents.................. $ 120 $ 220 $ 524 $ 524
Accounts receivable, net of allowance for
doubtful accounts of $79, $0 and $227,
respectively............................ 3,649 5,114 7,572 7,572
Inventories (Note 4)....................... 3,749 4,426 6,359 6,359
Prepaid expenses and other current
assets.................................. 248 314 368 368
-------- -------- ------- -------
Total current assets.................... 7,766 10,074 14,823 14,823
Fixed assets, net (Note 5)................... 2,857 4,674 4,895 4,895
Goodwill, net of accumulated amortization of
$1,820, $183 and $1,319, respectively...... 24,646 58,971 58,990 58,990
Other assets (Notes 6 and 7)................. 379 5,908 5,464 5,464
-------- -------- ------- -------
$ 35,648 $ 79,627 $84,172 $84,172
======== ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)/PREDECESSOR EQUITY
Current liabilities
Current portion of long-term debt (Note 6). $ $ 3,020 $ 3,604 $ 3,604
Accounts payable........................... 506 712 2,258 2,258
Accrued liabilities........................ 2,511 2,890 3,925 3,925
Customer advances.......................... 43 1,095 2,458 2,458
-------- -------- ------- -------
Total current liabilities............... 3,060 7,717 12,245 12,245
Long-term debt (Note 6)...................... 36,396 37,487 37,487
Mandatorily redeemable preferred stock
classified as debt (Notes 7 and 14)........ 34,226 36,611 11,426
-------- -------- ------- -------
Total liabilities............................ 3,060 78,339 86,343 61,158
-------- -------- ------- -------
Commitments and contingencies (Note 8)
Stockholders' equity (deficit)/predecessor
equity (Notes 1, 2, 9 and 14)
Common stock $0.0001 par value, 35,000,000
shares authorized, 50,000 shares issued
and outstanding at December 31, 1996 and
September 30, 1997 (unaudited),
respectively, and 2,306,719 shares
issued and outstanding on a pro forma
basis at September 30, 1997.............
Additional paid-in capital................. 1,901 2,470 29,551
Accumulated deficit........................ (613) (4,641) (6,537)
Predecessor equity......................... 32,588
-------- -------- ------- -------
Total stockholders' equity
(deficit)/predecessor equity.......... 32,588 1,288 (2,171) 23,014
-------- -------- ------- -------
$ 35,648 $ 79,627 $84,172 $84,172
======== ======== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 64
STERI-OSS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------- COMPANY PREDECESSOR COMPANY
------------ ------------- -------------
YEAR ENDED JANUARY 1, NOVEMBER 16, NINE MONTHS NINE MONTHS
DECEMBER 31, THROUGH THROUGH ENDED ENDED
----------------- NOVEMBER 15, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1996 1997
------- ------- ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $22,168 $27,361 $ 28,108 $ 4,089 $23,387 $ 29,361
Cost of sales........................ 6,666 7,865 7,430 1,356 6,137 8,018
------- ------- -------- ---------- -------- ----------
Gross profit....................... 15,502 19,496 20,678 2,733 17,250 21,343
Selling, general and administrative
expense............................ 11,393 14,241 14,791 1,929 12,183 16,882
Research and development expense..... 1,781 2,225 2,116 352 1,775 1,942
------- ------- -------- ---------- -------- ----------
Income from operations............... 2,328 3,030 3,771 452 3,292 2,519
Interest expense..................... 1,065 6,547
------- ------- -------- ---------- -------- ----------
Income (loss) before income
taxes........................... 2,328 3,030 3,771 (613) 3,292 (4,028)
Income taxes......................... 1,253 1,572 1,852 1,608
------- ------- -------- ---------- -------- ----------
Net income (loss).................. $ 1,075 $ 1,458 $ 1,919 $ (613) $ 1,684 $ (4,028)
======= ======= ======== ========== ======== ==========
Unaudited per share information
(Notes 2 and 14)
Pro forma net loss per share....... $ (0.04) $ (0.31)
========== ==========
Weighted average shares
outstanding..................... 7,754,618 7,754,618
========== ==========
Supplemental net income per
share........................... $ 0.00 $ 0.01
========== ==========
Weighted average shares
outstanding..................... 10,754,618 10,754,618
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 65
STERI-OSS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)/PREDECESSOR EQUITY
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL
--------------- PAID-IN ACCUMULATED PREDECESSOR
SHARES AMOUNT CAPITAL DEFICIT EQUITY TOTAL
------ ------ ------------ ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994................... $ $ $ $ 27,220 $ 27,220
Net income.................................. 1,075 1,075
Net transfer from Bausch & Lomb............. 2,403 2,403
------ ------ ------ ------- -------- --------
Balances at December 31, 1994................. 30,698 30,698
Net income.................................. 1,458 1,458
Net transfer from Bausch & Lomb............. 432 432
------ ------ ------ ------- -------- --------
Balances at December 31, 1995................. 32,588 32,588
Net income.................................. 1,919 1,919
Net transfer to Bausch & Lomb............... (634) (634)
------ ------ ------ ------- -------- --------
Balances at November 15, 1996................. 33,873 33,873
Change in ownership in connection with the
formation of the Company................. (33,873) (33,873)
Issuance of stock in connection with the
formation of the Company................. 50,000 1 1
Issuance of warrants to purchase common
stock.................................... 1,900 1,900
Net loss.................................... (613) (613)
------ ------ ------ ------- -------- --------
Balances at December 31, 1996................. 50,000 1,901 (613) 1,288
Issuance of options to purchase common
stock.................................... 569 569
Net loss.................................... (4,028) (4,028)
------ ------ ------ ------- -------- --------
Balances at September 30, 1997 (unaudited).... 50,000 $ $2,470 $(4,641) $ $ (2,171)
====== ====== ====== ======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 66
STERI-OSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------- COMPANY PREDECESSOR COMPANY
------------ ------------- -------------
YEAR ENDED JANUARY 1, NOVEMBER 16, NINE MONTHS NINE MONTHS
DECEMBER 31, THROUGH THROUGH ENDED ENDED
----------------- NOVEMBER 15, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1996 1997
------- ------- ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)......................... $ 1,075 $ 1,458 $ 1,919 $ (613) $ 1,684 $(4,028)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities
Depreciation and amortization........... 1,231 1,536 1,624 343 1,324 2,199
Compensation expense on issuance of
stock options......................... 569
Dividends and interest on mandatorily
redeemable preferred stock and
subordinated debt..................... 542 3,376
Provision for income taxes of
Predecessor........................... 1,253 1,572 1,852 1,608
Changes in operating assets and
liabilities, net of acquisitions
Accounts receivable................... (178) (1,202) (879) (585) (907) (1,702)
Inventories........................... (677) (864) (823) 351 (569) (1,307)
Prepaid expenses and other current
assets............................. (444) (200) (157) (26) (192) (39)
Accounts payable...................... (403) 114 974 (472) 232 1,180
Accrued liabilities................... 263 856 (522) 936 (214) 260
Customer advances..................... (440) 43 1,446 (394) 1,989 1,363
------- ------- -------- -------- ------- -------
Net cash provided by operating
activities............................ 1,680 3,313 5,434 82 4,955 1,871
Cash flows from investing activities
Payment for purchase of net assets from
Bausch and Lomb......................... (58,744)
Interpore............................... (1,737)
Purchases of fixed assets, net.......... (1,702) (1,190) (1,957) (250) (1,713) (1,115)
------- ------- -------- -------- ------- -------
Net cash used in investing activities... (1,702) (1,190) (1,957) (58,994) (1,713) (2,852)
Cash flows from financing activities
Proceeds from issuance of mandatorily
redeemable preferred stock.............. 22,448
Payment of note payable to Bausch &
Lomb.................................... (714)
Proceeds from issuance of long-term
debt.................................... 38,823 1,999
Payment of issue costs.................... (2,140)
Advances from (to) Bausch & Lomb.......... 177 (2,158) (3,597) (2,762)
Proceeds from issuance of common stock.... 1
------- ------- -------- -------- ------- -------
Net cash provided by (used in) financing
activities............................ 177 (2,158) (3,597) 59,132 (2,762) 1,285
------- ------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents............................... 155 (35) (120) 220 480 304
Cash and cash equivalents, beginning of
period.................................... 155 120 120 220
------- ------- -------- -------- ------- -------
Cash and cash equivalents, end of period.... $ 155 $ 120 $ $ 220 $ 600 $ 524
======= ======= ======== ======== ======= =======
Supplemental disclosure of cash flow
information
Cash paid for interest.................... $ -- $ -- $ -- $ 122 $ -- $ 2,750
======= ======= ======== ======== ======= =======
</TABLE>
Supplemental schedule of noncash investing and financing activities:
As described in Notes 3 and 7, the Company issued mandatorily redeemable
preferred stock totaling $10,000 directly to Bausch & Lomb as partial
consideration for the purchase of net assets of the Predecessor.
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE> 67
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
1. ORGANIZATION AND BUSINESS
S-O Operating Corp. was incorporated in Delaware on October 17, 1996. S-O
Operating Corp. is a wholly owned subsidiary of S-O Acquisition Corp., which was
incorporated in Delaware on July 11, 1996. On August 22, 1997, S-O Acquisition
Corp. changed its name to Steri-Oss, Inc. (the "Company").
Effective November 16, 1996, the Company acquired the assets and
liabilities of the Steri-Oss subsidiary (the "Predecessor") of Bausch & Lomb
Incorporated ("Bausch & Lomb"). For financial statement purposes the acquisition
was accounted for as a purchase and, accordingly, the results of the Predecessor
are included in the consolidated financial statements of the Company from the
date of acquisition.
Effective May 1, 1997, the Company acquired certain assets and liabilities
relating to the dental operations of Interpore International, Inc.
("Interpore"). For financial statement purposes, the acquisition was accounted
for using the purchase method of accounting, and accordingly, the purchase price
has been allocated to the assets purchased and the liabilities assumed based
upon the fair values at the date of acquisition. This acquisition was not
material to the results of operations, financial position or customer base of
the Company.
The Company manufactures dental implants and related products. The
Company's business activity is largely concentrated directly with dental implant
specialists in North America and with independent distributors in Europe and the
Middle East, Asia, and Central and South America.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
Revenue Recognition
Revenues from the sale of dental implants and related products are
recognized when products are shipped.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash on hand and short-term,
liquid investments with original maturities of three months or less.
Disclosures About Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable and accounts payable
approximate fair value because of the short maturity of these instruments. The
carrying amounts of the Company's senior and subordinated notes payable and
mandatorily redeemable preferred stock approximate fair value based upon the
current rates offered to the Company for obligations of the same remaining
maturities.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost
is determined on the first-in, first-out method.
F-8
<PAGE> 68
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
Fixed Assets
Additions and expenditures which substantially increase the useful lives of
assets are capitalized at cost, while maintenance and repair costs are expensed
as incurred. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, which range from three to eight years.
Goodwill
Goodwill is the excess of the cost of net assets acquired over their fair
value and is amortized on a straight-line basis over the expected periods to be
benefited. It is the Company's policy to periodically evaluate the carrying
value of its operating assets, including goodwill, and to recognize impairments
when the estimated future undiscounted net operating cash flows from the use of
assets are less than their carrying value.
Debt Issuance Costs and Debt Discounts
Debt issuance costs are recorded as deferred charges and are amortized over
the term of the related debt by a charge to interest expense. Debt discounts are
reflected as a deduction in the carrying value of the related note and amortized
using the effective interest method.
Research and Development
Research and development costs incurred by the Company are charged to
operations as incurred.
Income Taxes
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No. 109 ("SFAS No.
109"), "Accounting for Income Taxes." SFAS No. 109 is an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future tax
consequences, SFAS No. 109 generally considers all expected future events
including enactment of changes in tax laws or rates. A valuation allowance is
provided for deferred tax assets when it is more likely than not that such
assets will not be realized through future operations.
Income taxes during the years ended December 31, 1994, 1995 and for the
period from January 1, 1996 through November 15, 1996, were provided on a
separate return basis. The Predecessor was included in the consolidated income
tax returns of Bausch & Lomb.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and related notes to financial statements. Changes in such estimates
may affect amounts reported in future periods.
Unaudited Per Share Information
Unaudited pro forma net loss per share is based on the weighted average
common shares outstanding after retroactively reflecting the 50 for one stock
split (Note 14). In accordance with Staff Accounting Bulletin ("SAB") No. 83
issued by the Securities and Exchange Commission (the "Commission"), all common
stock and common stock equivalents issued within one year of the initial filing
of a registration statement at per share prices below the initial public
offering (the "Offering") price per share are included in the number of shares
outstanding at the beginning of the respective period, using the treasury stock
method of accounting
F-9
<PAGE> 69
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
using an assumed Offering price per share of $12, even though their effects may
be antidilutive. The Company has also included the effects of the conversion of
Class A 8.8% mandatorily redeemable preferred stock totaling $22,000 and Class C
8.0% mandatorily redeemable preferred stock totaling $3,185, into 2,256,719
shares of common stock as if the conversion was consummated at the date of
issuance. The assumed conversion of the preferred stock reduced the Company's
net loss by $274 and $1,643 and the net loss per share by $0.04 and $0.31 for
the period from November 16, 1996 through December 31, 1996 and the nine months
ended September 30, 1997, respectively. Management does not believe that
historical per share information is meaningful and accordingly, such information
is not presented.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share." SFAS No. 128 simplifies the standards for computing Earnings Per Share
("EPS"), eliminating the presentation of primary EPS (currently required by
Accounting Principles Board Opinion No. 15, "Earnings Per Share") and requiring
dual presentation of basic and diluted EPS on the face of the income statement
for all public corporations with complex capital structures. SFAS No. 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption is not permitted, although pro forma
disclosure is optional. SFAS No. 128 is not expected to have a significant
impact on per share data.
Unaudited Supplemental Data
Unaudited supplemental net income per share adjusts the pro forma net
income per share to give effect to the repayment of approximately $25,100 of
mandatorily redeemable preferred stock and long-term debt using a portion of the
proceeds from the Offering. The assumed repayment of mandatorily redeemable
preferred stock and long-term debt increased the Company's pro forma net income
by $339 and $2,385 for the periods ended December 31, 1996 and September 30,
1997, respectively.
Unaudited Pro Forma Balance Sheet Data
Unaudited pro forma balance sheet data adjusts the interim September 30,
1997 balance sheet to reflect the conversion of $25,185 of Class A and Class C
mandatorily redeemable preferred stock into 2,256,719 shares of common stock.
Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25 and related interpretations. The
disclosures required by Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," have been included
in Note 9.
Fiscal Periods
The Company uses a fifty-two/fifty-three week fiscal year ending on the
last Saturday in December. Fiscal year 1994 was a fifty-three week year and
fiscal years 1995 and 1996 were fifty-two week years. As a result, fiscal
periods may not end on the same day as the end of the respective calendar
period. Fiscal years 1994, 1995 and 1996 ended on December 31, December 30 and
December 28, respectively. The first nine months of 1996 and 1997 ended on
September 28 and September 27, respectively. For convenience of presentation,
the financial statements are shown as ending on December 31, and September 30.
Reclassifications
Certain prior period amounts have been reclassified to conform with current
period presentations.
F-10
<PAGE> 70
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
Interim Financial Information
The accompanying interim statements of operations and cash flows for the
nine months ended September 30, 1996 and 1997 are unaudited but include all
adjustments, consisting only of normal recurring adjustments, which management
considers necessary for a fair presentation of results of operations and of cash
flows. The results of operations and cash flows for the nine months ended
September 30, 1996 and 1997 are not necessarily indicative of the results of
operations and cash flows for the full year.
3. ACQUISITIONS
Steri-Oss
The aggregate purchase price of $69,000 in connection with the Company's
acquisition of the Predecessor on November 16, 1996 (Note 1) was allocated to
acquired assets based upon their respective fair market values as follows:
<TABLE>
<S> <C>
Current assets..................................... $ 9,800
Fixed assets....................................... 4,500
Goodwill........................................... 59,200
Current liabilities................................ (4,500)
-------
$69,000
=======
</TABLE>
Goodwill is being amortized over 40 years. Amortization for the period
November 16, 1996 to December 31, 1996 and the nine month period ended September
30, 1997 (unaudited) amounted to $183 and $1,136, respectively. The acquisition
was financed by the issuance of mandatorily redeemable preferred stock,
subordinated debt and the Bank Facility (Note 7).
Bausch & Lomb purchased the Predecessor in 1993 for an initial price of
approximately $26,000 subject to an earn-out provision based on profitability.
During the years ended December 31, 1994 and 1995, and for the period from
January 1, 1996 through November 15, 1996, earn-outs of $973, $1,018 and $1,111,
respectively, were incurred and capitalized to goodwill. The aggregate purchase
price paid by Bausch & Lomb, including direct acquisition costs, amounted to
approximately $31,000. Bausch & Lomb allocated the excess cost over fair value
of the net assets acquired to goodwill, which prior to November 15, 1996 was
being amortized over 40 years. Amortization expense for the years ended December
31, 1994 and 1995, and for the period January 1, 1996 through November 15, 1996
amounted to $832, $856 and $798, respectively.
4. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------ ------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials....................... $1,824 $2,036 $ 2,806
Work-in process..................... 507 583 615
Finished goods...................... 1,418 1,807 2,938
------ ------ -------
$3,749 $4,426 $ 6,359
====== ====== =======
</TABLE>
F-11
<PAGE> 71
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
5. FIXED ASSETS:
Fixed assets consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------ ------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements.............. $ 230 $ 297 $ 317
Machinery and equipment............. 2,168 2,829 3,168
Office furniture and fixtures....... 1,256 1,439 2,092
Construction in progress............ 87 241 354
------ ------ -------
3,741 4,806 5,931
Less: accumulated depreciation...... (884) (132) (1,036)
------ ------ -------
$2,857 $4,674 $ 4,895
====== ====== =======
</TABLE>
Depreciation expense for the years ended December 31, 1994 and 1995, the
period January 1 through November 15, 1996, the period November 16 through
December 31, 1996, the nine months ended September 30, 1996 (unaudited) and 1997
(unaudited) totaled $363, $595, $712, $132, $558 and $905, respectively.
F-12
<PAGE> 72
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
COMPANY
-----------------------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Working Capital Loan which expires on November 15, 1999; variable interest
rate based on a bank's referenced base rate (the "Reference Rate") plus
1.5% per annum (10.00% at September 30, 1997 (unaudited)) or LIBOR plus
2.75% per annum. Maximum borrowing under this loan is $5,000............. $ 1,323 $ 2,039
Revolving Term Loan due in quarterly installments ranging from $750 to
$1,000 through November 15, 2001; interest rate based on the Reference
Rate plus 1.5% per annum (10.00% at September 30, 1997 (unaudited)) or
LIBOR plus 3.0% per annum. Maximum borrowing under this loan is $17,500
and $17,436, respectively................................................ 17,500 17,436
Term Loan due in quarterly installments of $19 through January 1, 2001, at
which time such payments increase in the range of $550 to $1,700 through
November 15, 2002; variable interest rate based on the Reference Rate
plus 2.0% per annum (10.50% at September 30, 1997 (unaudited)) or LIBOR
plus 3.75% per annum; net of unamortized discount of $39 and $33 at
December 31, 1996 and September 30, 1997 (unaudited), respectively....... 7,461 7,430
Capital Expenditure Loan which expires on November 15, 2002; variable
interest rate based on the Reference Rate plus 1.5% per annum (10.00% at
September 30, 1997 (unaudited)) or LIBOR plus 3.0% per annum. Maximum
borrowing under this loan is $3,000...................................... 1,385
16% Series A Senior Subordinated Notes due in one lump sum on May 15, 2003,
with an acceleration clause of 25% of outstanding principal upon an
initial public offering, with an effective interest rate of 16.99%; net
of unamortized discount of $103 and $91 at December 31, 1996 and
September 30, 1997 (unaudited), respectively............................. 9,947 10,286
14% Series B Senior Subordinated Notes due in one lump sum on May 15, 2003,
with an acceleration clause of 25% of outstanding principal upon an
initial public offering, with an effective interest rate of 14.75%; net
of unamortized discount of $35 and $31 at December 31, 1996 and September
30, 1997 (unaudited), respectively....................................... 2,471 2,515
10.25% acquisition note payable to Bausch & Lomb, repaid February 14,
1997..................................................................... 714
-------- -------
Total long-term debt................................................... 39,416 41,091
Less current portion................................................... (3,020) (3,604)
-------- -------
Long-term debt......................................................... $ 36,396 $37,487
======== =======
</TABLE>
The Working Capital Loan, Revolving Term Loan, Term Loan and Capital
Expenditure Loan (collectively the "Bank Facility") are senior to all
indebtedness of the Company and are secured by substantially all of the
Company's assets. The Company is obligated to pay a commitment fee of 0.5% per
annum of the unused portion of the Working Capital Loan, Revolving Term Loan and
Capital Expenditure Loan. Under the provisions of the Company's credit
agreements the Company is required to adhere to certain restrictive covenants
including the maintenance of certain financial ratios. Credit agreements also
prohibit, among other things, the payment of dividends without the consent of
the Company's lenders.
The Bank Facility loans and Senior Subordinated Notes were issued with
detachable warrants for the purchase of common stock. The fair value of these
warrants has been recorded as additional paid-in capital of the Company with a
corresponding reduction in the carrying value of the notes. Such reductions have
been treated as debt discount. Debt issue costs aggregating $2,259 and $1,795 at
December 31, 1996 and September 30, 1997 (unaudited), respectively, are included
in other assets in the consolidated balance sheets. Interest accrued on the Bank
Facility and Senior Subordinated Notes aggregated $430 and $551 at December 31,
1996 and September 30, 1997 (unaudited), respectively.
F-13
<PAGE> 73
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
Scheduled future annual maturities of long-term debt as of September 30,
1997 (unaudited) are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997................................................. $ 833
1998.............................................. 3,740
1999.............................................. 5,994
2000.............................................. 4,308
2001.............................................. 6,513
Thereafter........................................ 19,858
-------
$41,246
=======
</TABLE>
7. MANDATORILY REDEEMABLE PREFERRED STOCK
In conjunction with the acquisition of net assets from Bausch & Lomb as
described in Notes 1 and 3, the Company issued cumulative mandatorily redeemable
preferred stock (classified and accounted for as debt) in the aggregate
liquidation amount of $35,200. This consisted of 22,000 shares of Class A,
10,000 shares of Class B and 3,185 shares of Class C mandatorily redeemable
preferred stock ($0.01 par value), with face amounts of $22,000, $10,000 and
$3,185 and dividend rates of 8.8%, 8.0% and 8.0%, respectively. Class B
preferred stock was issued to Bausch & Lomb in the amount of $10,000 as partial
consideration for the purchase price. The Class B preferred stock is
convertible, at the option of the holder, into common stock at the time the
Company first sells shares in an initial public offering. All classes of such
preferred stock are mandatorily redeemable on September 15, 2003 and have voting
rights as a separate class. The Company records accrued dividends on this
redeemable preferred stock to increase the carrying value of the preferred stock
with a corresponding charge to interest expense. At December 31, 1996 and
September 30, 1997 (unaudited) accrued interest on mandatorily redeemable
preferred stock included in the carrying value of such preferred stock amounted
to $374 and $2,617, respectively.
The Class A and Class C mandatorily redeemable preferred stock was issued
with detachable warrants for the purchase of the Company's common stock. The
fair value of these warrants has been recorded as additional paid-in capital of
the Company, with a corresponding reduction to the carrying value of such
preferred stock. Such reduction has been treated as a discount that is being
accreted to increase the carrying value to the redemption value of the preferred
stock with a corresponding charge to interest expense. The Company also incurred
costs of approximately $2,900 relating to the issuance of the preferred stock.
These costs have been capitalized as debt issue costs and included in other
assets in the accompanying consolidated balance sheets at December 31, 1996 and
September 30, 1997 (unaudited) and included as interest expense in the related
consolidated statements of operations. The unamortized debt issue costs related
to mandatorily redeemable preferred stock at December 31, 1996 and September 30,
1997 (unaudited) aggregated $2,886 and $2,395, respectively.
8. COMMITMENTS AND CONTINGENCIES
Commitments
The principal operating leases of the Company are for its headquarters and
manufacturing facilities and certain equipment. The facility leases provide that
the Company shall pay for utilities, insurance, taxes and maintenance. One of
the facility leases, which was to expire on December 31, 1997, was renewed on
November 15, 1997 prior to its termination. The renewed lease expires on
December 31, 2003. The remaining leases expire through the year 1999 with
renewal options available.
F-14
<PAGE> 74
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
Future annual minimum rental payments required under noncancelable
operating leases that have initial or remaining lease terms in excess of one
year as of September 30, 1997 (unaudited) are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997.................................................. $ 76
1998............................................... 402
1999............................................... 485
2000............................................... 253
2001............................................... 253
Thereafter......................................... 506
------
$1,975
======
</TABLE>
The Company has also entered into several agreements to provide financing
for research and development and promotional studies related to the Company's
products. Future annual minimum payments under these agreements as of September
30, 1997 (unaudited) are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997.................................................. $ 150
1998............................................... 653
1999............................................... 469
2000............................................... 342
2001............................................... 177
Thereafter......................................... 66
------
$1,857
======
</TABLE>
Legal Contingencies
The Company is subject to various claims and actions which arise in the
ordinary course of business. Management is unaware of any claims or actions
which would have a material adverse effect upon the Company's financial
position, results of operations or cash flows. Bausch & Lomb has agreed to
indemnify the Company, subject to certain exceptions, against any claims and
losses from defects in the design, manufacture or production of any product sold
prior to the acquisition of the Predecessor in November 1996.
9. STOCKHOLDERS' EQUITY
Stock Options (unaudited)
On January 8, 1997, the Company issued options to purchase 242,061 shares
of common stock pursuant to Performance Stock Option Agreements at $0.40 per
share. These options vest over a period of six years, which can be accelerated
upon the attainment of certain performance criteria over three years, or vest
immediately upon the consummation of a public offering of the stock of the
Company. Compensation expense aggregating $46 has been charged to operations
during the nine months ended September 30, 1997 (unaudited) for such options
based on a grant date fair value of $1.93 per share. These options expire in
2007.
On January 8, 1997, the Company issued options to purchase 200,000 shares
of common stock to certain officers at $0.40 per share pursuant to Executive
Officer NonQualified Stock Option Agreements. Compensation expense aggregating
$306 has been charged to operations during the nine months ended September 30,
1997 (unaudited) for such options based on a grant date fair value of $1.93 per
share. These options immediately vested on the date of grant, January 8, 1997.
These options expire in 2007.
F-15
<PAGE> 75
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
On January 8, 1997, the Company granted certain of its Board members
options to purchase 214,200 shares of common stock at $1.00 per share pursuant
to Director Stock Option Agreements. Compensation expense aggregating $199 has
been charged to operations during the nine months ended September 30, 1997
(unaudited) for such options based on a grant date fair value of $1.93 per
share. These options vested immediately on the date of grant.
On May 16, 1997, the Company issued options to purchase 77,083 shares of
common stock pursuant to Performance Stock Option Agreements at $0.40 per share.
These options vest over a period of six years, which can be accelerated upon the
attainment of certain performance criteria over three years, or vest immediately
upon the consummation of a public offering of the stock of the Company.
Compensation expense aggregating $26 has been charged to operations during the
nine months ended September 30, 1997 (unaudited) for such options based on a
grant date fair value of $5.69 per share.
The Company accounts for these plans under Accounting Principles Board
Opinion No. 25. Compensation expense is calculated based upon the difference
between (i) the grant date fair value of the underlying common stock and (ii)
the exercise price of the options. Had compensation cost for these plans been
determined consistent with SFAS No. 123, using the Black-Scholes Option Pricing
Model with the following assumptions: 0% expected dividend yield; 6.81% risk
free interest rate; 10 year expected life of options, the Company's net loss and
earnings per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
SEPTEMBER
30,
1997
-----------
(UNAUDITED)
<S> <C>
Net loss:
As reported..................................................... $(4,028)
=======
Pro Forma....................................................... $(3,453)
=======
Pro forma net loss per share:
As reported..................................................... $ (0.31)
=======
Pro Forma....................................................... $ (0.23)
=======
Supplemental net income per share:
As reported..................................................... $ 0.01
=======
Pro forma....................................................... $ 0.05
=======
</TABLE>
A summary of activity of the Plan at September 30, 1997 (unaudited) and
during the period then ended is presented in the table below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
(UNAUDITED)
---------------------------
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE PER SHARE
------- ---------------
<S> <C> <C>
Outstanding at beginning of period........................... $
Granted...................................................... 733,344 0.58
------- -----
Outstanding at end of period................................. 733,344 0.58
------- -----
Exercisable at end of period................................. 449,276 $0.58
------- -----
</TABLE>
The weighted average grant date fair value of options granted during the
nine month period ended September 30, 1997 (unaudited) amounted to $2.33.
F-16
<PAGE> 76
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
Stock Warrants
In connection with the issuance of long-term debt (Note 6) and mandatorily
redeemable preferred stock (Note 7), the Company issued warrants to purchase
4,750,000 shares of common stock at $0.0002. The Company recorded these warrants
at fair value on the date of issuance in the amount of $1,900.
10. INCOME TAXES
The components of income taxes for the periods presented are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------- ------------------------------
YEAR ENDED JANUARY 1, NOVEMBER 16, NINE MONTHS
DECEMBER 31, THROUGH THROUGH ENDED
----------------- NOVEMBER 15, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1996 1997
------ ------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal................ $ 599 $ 670 $1,292
State.................. 246 252 385
Deferred:
Federal................ 378 558 145 $(46) $(689)
State.................. 30 92 30 6 (63)
------ ------ ------ ---- ------
1,253 1,572 1,852 (40) (752)
Valuation allowance...... 40 752
------ ------ ------ ---- ------
$1,253 $1,572 $1,852 $ -- $ --
====== ====== ====== ==== ======
</TABLE>
The Company has recorded a full valuation allowance for net deferred tax
assets based on future reversal of temporary differences and the uncertainty of
future taxable income.
Income taxes for the nine months ended September 30, 1996 (unaudited) and
1997 (unaudited), are based on the effective income tax rate for the respective
year.
The difference between the income taxes computed at the statutory Federal
rate of 34% and the amount in the consolidated statements of operations is
primarily attributable to the following:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------- ----------------------------
YEAR ENDED JANUARY 1, NOVEMBER 16, NINE MONTHS
DECEMBER 31, THROUGH THROUGH ENDED
------------- NOVEMBER 15, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1996 1997
---- ---- ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal tax at statutory rate.............. 34.0% 34.0% 34.0% (34.0%) (34.0%)
State taxes, net........................... 7.8 7.5 7.2 0.0 0.0
Amortization of intangibles................ 12.1 9.6 7.2 0.0 0.0
Preferred stock dividends.................. 0.0 0.0 0.0 28.4 18.9
Research and development credit............ (1.5) (0.6) (0.2) 0.0 0.0
Increase in valuation allowance............ 0.0 0.0 0.0 6.6 14.7
Other, net................................. 1.4 1.4 0.9 (1.0) 0.4
---- ---- ---- ----- -----
Income taxes at the Company's effective
rate..................................... 53.8% 51.9% 49.1% 0.0% 0.0%
==== ==== ==== ===== =====
</TABLE>
F-17
<PAGE> 77
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
Deferred taxes reflect the impact of future tax consequences associated
with temporary differences between the amount of assets and liabilities recorded
for tax and financial accounting purposes. Temporary differences and
carryforwards which give rise to a significant portion of deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------ ---------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax liabilities:
Fixed assets.................................. $ (426) $ (32) $ (112)
Goodwill...................................... (118) (860)
------ ------ -----
Total deferred tax liabilities............. (426) (150) (972)
------ ------ -----
Deferred tax assets:
Net operating loss carryforward............... 96 130 1,204
Reserves and accruals......................... 570 60 429
Research and development credit
carryforward............................... 91
------ ------ -----
Total deferred tax assets.................. 666 190 1,724
------ ------ -----
Valuation allowance............................. (40) (752)
------ ------ -----
Net deferred tax assets.................... $ 240 $ -- $ --
====== ====== =====
</TABLE>
At September 30, 1997 (unaudited), the Company has net operating loss
("NOL") carryforwards of $3,255 and $1,628 for Federal and California purposes,
respectively. The losses begin to expire in 2011 and 2001 for Federal and
California purposes, respectively.
The Internal Revenue Code of 1986, as amended, includes provisions that
limit a company's ability to utilize NOL and tax credit carryforwards when there
is a significant change in ownership. Should such a change in ownership occur,
the amount of NOL and tax credit carryforwards that may be utilized in any given
year will be subject to an annual limitation based on the value of the company
on the date immediately preceding such ownership change.
11. PROFIT SHARING PLAN
The Company has an employee profit sharing plan that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code
(the "401(k) Plan"). The Company makes matching contributions equal to employee
contributions up to 4% of the participant's eligible compensation. The Company's
contributions to the 401(k) Plan for the period November 16, 1996 through
December 31, 1996 and the nine months ended September 30, 1997 (unaudited)
totaled $33 and $254, respectively.
F-18
<PAGE> 78
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
12. SEGMENT INFORMATION AND CONCENTRATIONS OF CREDIT RISK
The Company operates in one segment -- dental implants and related
products. Presented below is net sales information on the geographic areas in
which the Company operates:
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------- COMPANY
------------
YEAR ENDED JANUARY 1 NOVEMBER 16, PREDECESSOR COMPANY
DECEMBER 31, THROUGH THROUGH ------------- -------------
----------------- NOVEMBER 15, DECEMBER 31, NINE MONTHS NINE MONTHS
1994 1995 1996 1996 ENDED ENDED
------- ------- ------------ ------------ SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
United States............ $13,461 $15,702 $ 15,298 $2,072 $12,703 $16,180
Canada................... 607 938 1,375 187 1,069 1,442
------- ------- -------- ------ -------- --------
North America............ 14,068 16,640 16,673 2,259 13,772 17,622
Europe and the Middle
East................... 4,686 6,192 6,567 1,100 5,545 6,680
Asia..................... 2,427 3,208 3,325 610 2,894 3,396
Other.................... 987 1,321 1,543 120 1,176 1,663
------- ------- -------- ------ -------- --------
$22,168 $27,361 $ 28,108 $4,089 23,387 29,361
======= ======= ======== ====== ======== ========
</TABLE>
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. A
concentration of credit risk may exist with respect to trade receivables as
substantially all customers are affiliated with the dental industry. However,
the Company's customer base is made up of a large number of geographically
diverse worldwide customers, except for one European distributor and its
affiliates which account for 11%, 12%, 12%, 12%, 13% and 13% of sales for the
years ended December 31, 1994 and 1995, the period January 1, 1996 through
November 15, 1996, the period November 16, 1996 through December 31, 1996, and
nine months ended September 30, 1996 (unaudited) and 1997 (unaudited),
respectively. The Company controls credit risk through credit approvals, credit
limits and monitoring procedures.
13. RELATED PARTY TRANSACTIONS
Effective November 16, 1996, the Company entered into a five year
management services agreement with S-O Management LLC, the sole stockholder of
the Company. The agreement provides for management and other advisory services
to the Company for an annual fee of $250. Such agreement terminates upon
consummation of an initial public offering of the Company's Common Stock.
Bausch & Lomb provided certain payroll related benefits to the employees of
the Predecessor. Such costs have been charged to the Predecessor by Bausch &
Lomb based on a percentage of payroll and are included in the consolidated
statements of operations as selling, general and administrative expense for the
years ended December 31, 1994 and 1995 and the period January 1 through November
15, 1996 in the amounts of $108, $649 and $1,390, respectively. Management
believes that the method used to charge these expenses reasonably reflects the
actual costs of such benefits provided and that such expenses on a stand-alone
basis would not produce materially different results.
14. SUBSEQUENT EVENTS
In August 1997, the Company amended its Restated and Amended Certificate of
Incorporation to (i) increase the number of authorized shares of Common Stock
from 1,000 to 35,000,000, (ii) decrease the par value per share of the common
stock from $.01 to $.0001, (iii) amend the conversion rights on the Class B
Preferred Stock to delay automatic conversion until the later of the closing of
the Company's initial public offering or March 31, 1998, and (iv) provide for
the automatic conversion of $20,000 of the outstanding shares
F-19
<PAGE> 79
STERI-OSS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
of Class A and Class C mandatorily redeemable preferred stock into an aggregate
of 1,433,537 shares of common stock, upon consummation of the Offering, in lieu
of exercising their redemption rights. The Company intends to further amend its
Certificate of Incorporation to provide for the automatic conversion of the
remaining outstanding shares of Class A and Class C mandatorily redeemable
Preferred Stock totaling $5,185 into an aggregate of 823,182 shares of common
stock upon consummation of the Offering. The remaining $10,000 of mandatorily
redeemable preferred stock will be redeemed by using the proceeds from the
Offering.
In August 1997, the Board of Directors declared a 50-for-one split of its
common stock which was effected in October 1997. All share and per share data
for the Company have been adjusted to give retroactive effect for this stock
split.
In August 1997, the Board of Directors authorized the filing of a
registration statement for the Offering of the Company's $0.0001 par value
common stock.
In August 1997, the Board of Directors established a stock option plan (the
"Plan"). The Plan is divided into the following separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board Members and
consultants) may be granted options to purchase shares of common stock at an
exercise price not less than their fair market value on the grant date, (ii) the
Stock Issuance Program under which such individuals may, in the Plan
Administrator's discretion, be issued shares of Common Stock directly through
the purchase of shares at a price not less than 100% of their fair market value
at the time of issuance or as a bonus tied to the performance of services, (iii)
the Stock Investment Option Grant Program under which executive officers and
other highly compensated employees may elect to apply a portion of their base
salary to the acquisition of special stock option grants, and (iv) the Director
Fee Option Grant Program, pursuant to which the non-employee Board members may
apply a portion of the annual retainer fee otherwise payable to them in cash
each year to the acquisition of special stock option grants.
In August 1997, the Company granted options to purchase an aggregate of
226,000 shares of common stock under the Plan to certain employees of the
Company. In September 1997, the Company granted options to purchase an aggregate
of 9,000 shares of common stock under the Plan to three employees of the
Company. In December 1997, the Company granted options to purchase an aggregate
of 95,000 shares of common stock under the Plan to four officers of the Company.
All of such options were granted at an exercise price equal to the Offering
price.
In September 1997, the holders of warrants to purchase an aggregate of
4,750,000 shares of common stock irrevocably elected to exercise all of such
warrants immediately prior to the consummation of the Offering.
F-20
<PAGE> 80
======================================================
No dealer, salesperson or other person has been authorized to give any
information or make any representation not contained in this Prospectus in
connection with the offer made by this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any of the securities offered
hereby by anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date of this
Prospectus or that there has been no change in the affairs of the Company since
such date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 6
Use of Proceeds........................... 13
Dividend Policy........................... 13
Capitalization............................ 14
Dilution.................................. 15
Unaudited Pro Forma Consolidated Financial
Data.................................... 16
Selected Historical Consolidated Financial
Data.................................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 22
Business.................................. 29
Management................................ 40
Certain Transactions...................... 48
Principal Stockholders.................... 50
Description of Capital Stock.............. 52
Shares Eligible for Future Sale........... 55
Underwriting.............................. 56
Legal Matters............................. 57
Experts................................... 57
Additional Information.................... 58
Index to Consolidated Financial
Statements.............................. F-1
</TABLE>
------------------------
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
3,000,000 Shares
[STERI-OSS LOGO]
Common Stock
----------------------------
PROSPECTUS
, 1998
----------------------------
UBS Securities
Furman Selz
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission and NASD registration fees. All of
the expenses below will be paid by the Registrant.
<TABLE>
<CAPTION>
ITEM
-------------------------------------------------------------------------
<S> <C>
Registration fee......................................................... $ 26,204
NASD Filing Fee.......................................................... 9,148
Nasdaq National Market listing fee....................................... 20,000
Blue sky fees and expenses............................................... 5,000
Printing and engraving expenses.......................................... 150,000
Legal fees and expenses.................................................. 350,000
Accounting fees and expenses............................................. 350,000
Transfer Agent and Registrar fees........................................ 5,000
Miscellaneous............................................................ 84,648
----------
Total.......................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933. The Registrant's Bylaws (Exhibit 3.3 hereto) provide that the
Registrant shall indemnify its directors and officers to the fullest extent
permitted by Delaware law. The Bylaws require the Registrant, subject to certain
limitations, to advance litigation expenses in the case of stockholder
derivative actions or other actions, against an undertaking by the directors and
officers to repay such advances if it is ultimately determined that the
directors or officers are not entitled to indemnification. The Bylaws further
provide that rights conferred under such Bylaws shall not be deemed to be
exclusive of any other right such persons may have or acquire under any
agreement, vote of stockholders or disinterested directors, or otherwise. The
Registrant believes that indemnification under its Bylaws covers at least
negligence and gross negligence.
In addition, the Registrant's Certificate (Exhibit 3.1 hereto) provides
that the Registrant shall indemnify its directors and officers if such persons
acted (i) in good faith, (ii) in a manner reasonably believed to be in or not
opposed to the best interests of the Registrant, and (iii) with respect to any
criminal action or proceeding, with reasonable cause to believe such conduct was
lawful. The Certificate also provides that, pursuant to Delaware law, its
directors shall not be liable for monetary damages for breach of the directors'
fiduciary duty of care to the Registrant and its stockholders. This provision in
the Certificate does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Registrant for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Certificate further provides that the
Registrant is authorized to indemnify its directors and officers to the fullest
extent permitted by law through the Bylaws, agreement, vote of stockholders or
disinterested directors, or otherwise.
The Registrant intends to obtain directors' and officers' liability
insurance in connection with the Offering.
II-1
<PAGE> 82
In addition, the Registrant has entered or, concurrently with the Offering,
will enter, into agreements to indemnify its directors and certain of its
officers in addition to the indemnification provided for in the Certificate of
Incorporation and Bylaws. These agreements will, among other things, indemnify
the Registrant's directors and certain of its officers for certain expenses
(including attorneys fees), judgments, fines and settlement amounts incurred by
such person in any action or proceeding, including any action by or in the right
of the Registrant, on account of services by that person as a director or
officer of the Registrant or as a director or officer of any subsidiary of the
Registrant, or as a director or officer of any other company or enterprise that
the person provides services to at the request of the Registrant.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the Registrant and its officers and
directors, and by the Registrant of the Underwriters, for certain liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Registrant during the
last three years preceding the date of this Registration Statement involving
sales of the Registrant's securities that were not registered under the
Securities Act:
1. In November 1996 in connection with the Acquisition, the
Registrant issued (i) 22,000 shares of Class A Preferred Stock and warrants
to purchase 2,900,000 shares of Common Stock at an exercise price of
$0.0002 per share to one accredited investor for an aggregate consideration
of $22.0 million; (ii) 10,000 shares of Class B Preferred Stock to Bausch &
Lomb in consideration for the payment of a portion of the purchase price
for the assets of S-O ($10.0 million); (iii) 3,185 shares of Class C
Preferred Stock and warrants to purchase 477,750 shares of Common Stock at
an exercise price of $0.0002 per share to three accredited investors for an
aggregate consideration of $3.2 million, which included the cancellation of
indebtedness in the amount of $10,000; (iv) 50,000 shares of Common Stock
and warrants to purchase 745,400 shares of Common Stock at an exercise
price of $0.0002 per share to one accredited investor for an aggregate
consideration of $1,000; and (v) warrants to purchase an aggregate of
428,000 shares of Common Stock at an exercise price of $0.0002 per share
granted to the Registrant's senior lenders and subordinated lenders in
consideration for making loans to the Registrant and (vi) warrants to
purchase an aggregate of 198,850 shares of Common Stock at an exercise
price of $.0002 per share granted to Larkspur Capital Corporation. The
foregoing issuances were exempt from the registration requirements of the
Securities Act on the basis that such transactions did not involve any
public offering. Larkspur Capital Corporation acted as placement agent for
this transaction.
2. In January 1997, the Registrant granted performance stock options
and executive stock options to certain members of the Company's senior
management team for the purchase of up to an aggregate of 442,061 shares of
Common Stock at an exercise price equal to $0.40 per share. The executive
stock options are fully vested and the performance options will vest in
full upon consummation of the Offering. In January 1997, the Registrant
also granted options to purchase an aggregate of 214,200 shares of Common
Stock to the Directors of the Registrant at an exercise price of $1.00 per
share. Such options are fully-vested. In May 1997, the Registrant granted
performance options to purchase an aggregate of 77,089 shares of Common
Stock at an exercise price of $0.40 per share to certain other employees of
the Registrant. Such options will vest in full upon consummation of the
Offering. Between August 1997 and December 1997, the Registrant granted
options to purchase an aggregate of 330,000 shares of Common Stock under
the 1997 Plan to certain employees of the Registrant at an exercise price
per share equal to the initial public offering price. All of the options
granted under the 1997 Plan vest at the rate of 25% on the first
anniversary of their respective grant dates and thereafter vest in 36 equal
monthly installments. None of the optionees referred to in this Item 2 paid
any cash consideration for these options. The grant of all of such options
did not involve a "sale" of securities and, therefore, no registration was
required. The issuance of Common Stock upon exercise of such options is
exempt by reason of Section 4(2) of the Securities Act and Rule 701
thereunder.
II-2
<PAGE> 83
3. In August 1997, the Registrant amended its Certificate of
Incorporation and Certificates of Designation to (i) reduce the authorized
par value of the Registrant's Common Stock and Preferred Stock from $.01
per share to $0.0001 per share and (ii) provide for the automatic
conversion of a portion of the Registrant's Class A Preferred Stock and
Class C Preferred Stock upon consummation of a qualifying initial public
offering. In January 1998, the Registrant plans to amend its Certificate of
Incorporation and Certificate of Designation to provide for the automatic
conversion of the remaining outstanding shares of the Registrant's Class A
Preferred Stock and Class C Preferred Stock upon consummation of the
Offering. The issuance of shares of Common Stock upon conversion of the
mandatorily redeemable Preferred Stock in the Preferred Stock Conversion
will not be registered under the Securities Act by reason of the exemption
provided by Section 3(a)(9) thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.
3.1* Certificate of Amendment of Restated Certificate of Incorporation of the
Registrant as filed with the Delaware Secretary of State on August 25,
1997.
3.2* Amended and Restated Certificate of Incorporation of the Registrant to
be filed with the Delaware Secretary of State upon consummation of the
Offering.
3.3* Amended and Restated Bylaws of the Registrant.
3.4 Certificate of Amendment of Restated Certificate of Incorporation of the
Registrant to be filed with the Delaware Secretary of State in January
1998.
4.1* Specimen certificate representing shares of Common Stock of the
Registrant.
4.2* 1997 Stock Incentive Plan, together with form of related Stock Option
Agreement (and related Notice of Grant of Option) and Stock Issuance
Agreement.
4.3* Form of Performance Stock Option.
4.4* Form of Executive Officer Non-Qualified Stock Option Agreement.
4.5* Form of Director Stock Option Agreement.
5.1 Form of Opinion of Brobeck, Phleger & Harrison LLP.
10.1* Form of Indemnification Agreement.
10.2* Securities Purchase Agreement dated November 15, 1996, between the
Registrant and The 1818 Fund II, L.P.
10.3* Secured Credit Agreement dated November 15, 1996, among the Registrant,
First Source Financial LLP and Union Bank of California, N.A. (the
"Lenders"), together with Security Agreement dated November 15, 1996,
between the Registrant and First Source Financial LLP, as Collateral
Agent for the Lenders, and Pledge Agreement dated November 15, 1996,
between the Registrant and First Source Financial LLP, as Collateral
Agent for the Lenders.
10.4* Registration Rights Agreement dated November 15, 1996, among the
Registrant, The 1818 Fund II, L.P., S-O Acquisition LLC, S-O Management
LLC, Larkspur Capital Corporation, First Source Financial LLP, Union
Bank of California, N.A., The Equitable Life Assurance Society of the
United States, Exeter Venture Lenders, L.P. and Exeter Equity Partners,
L.P.
10.5* Form of Warrant to Purchase Shares of Common Stock
10.6+* Letter Agreement dated July 19, 1990, between the Registrant and Metaux
Precieux Metalor Deutschland Gmbh.
10.7 Intentionally omitted.
</TABLE>
II-3
<PAGE> 84
<TABLE>
<S> <C>
10.8+ License Agreement dated April 28, 1994, between the Registrant and
Dental Imaging Associates, Inc., together with Addendum thereto dated
April 11, 1995, between the Registrant and Dental Imaging Associates,
Inc.
10.9* Employment Agreement dated November 15, 1996, between the Registrant and
Kenneth A. Darienzo.
10.10* Employment Agreement dated November 15, 1996, between the Registrant and
Martin J. Dymek.
10.11* Employment Agreement dated November 15, 1996, between the Registrant and
Kenneth K. Krueger.
10.12* Sublease dated January 6, 1993, between the Registrant and Great Western
Real Estate.
10.13* Asset Purchase Agreement dated July 22, 1996, between the Registrant,
S-O and Bausch & Lomb.
10.14* Distribution Agreement dated April 18, 1997, between Registrant and
Interpore Orthopaedics, Inc.
10.15* License Agreement dated April 18, 1997, between the Registrant and
Interpore International.
10.16 Commitment Letter Agreement dated December 24, 1997, between Union Bank
and S-O Operating Corp.
10.17 Sublease Agreement dated September 30, 1997, between the Registrant and
John H. Harland Company, together with Standard Form Lease dated January
31, 1989 between Metropolitan Life Insurance Company and Interchecks,
Incorporated and all amendments thereto.
10.18 Standard Industrial/Commercial Single-Tenant Lease dated November 15,
1997, among the Registrant, Koll Yorba Linda Associates and DK Northwest
Holdings, L.P.
11.1 Statement Regarding Computation of Pro Forma Net Loss Per Share.
11.2 Statement Regarding Computation of Supplemental Net Income Per Share.
21.1* List of Subsidiaries.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2 Consent of Price Waterhouse LLP, Independent Accountants.
23.3 Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit 5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have been
filed separately with the Securities and Exchange Commission.
(B) FINANCIAL STATEMENT SCHEDULES
(1) Schedule II. Valuation and Qualifying Accounts and Reserves.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise,
II-4
<PAGE> 85
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus as filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 5 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Yorba Linda, State of California, on December 29, 1997.
STERI-OSS, INC.
By: /s/ KENNETH A. DARIENZO
------------------------------------
Kenneth A. Darienzo
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- ------------------
<S> <C> <C>
/s/ KENNETH A. DARIENZO Chairman of the Board and December 29, 1997
- --------------------------------------------- Chief Executive Officer
Kenneth A. Darienzo (Principal Executive
Officer)
* Director December 29, 1997
- ---------------------------------------------
Henry Wendt
* Director December 29, 1997
- ---------------------------------------------
Walter W. Grist
* Director December 29, 1997
- ---------------------------------------------
T. Michael Long
* Director December 29, 1997
- ---------------------------------------------
Douglas E. Rogers
* Director December 29, 1997
- ---------------------------------------------
Andrew C. Cowen
* Director December 29, 1997
- ---------------------------------------------
Fredric M. Seegal
/s/ BRUCE D. NYE Vice President and Chief December 29, 1997
- --------------------------------------------- Financial Officer
Bruce D. Nye (Principal Accounting and
Financial Officer)
</TABLE>
*By: /s/ KENNETH A. DARIENZO
---------------------------------
Kenneth A. Darienzo
(Attorney-in-fact)
II-6
<PAGE> 87
SCHEDULE II
STERI-OSS INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BEGINNING BAD DEBT ENDING
DESCRIPTION BALANCE EXPENSE WRITE-OFFS BALANCE
- --------------------------------------------------- --------- -------- ---------- -------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended December 31, 1994....................... 55 36 (28) 63
Year ended December 31, 1995....................... 63 27 (11) 79
January 1, 1996 through November 15, 1996.......... 79 179 (108) 150
November 16, 1996 through December 31, 1996........ -- -- -- --
</TABLE>
DEFERRED TAX VALUATION ALLOWANCE
<TABLE>
<CAPTION>
BEGINNING INCOME TAX ENDING
BALANCE EXPENSE BALANCE
--------- ---------- -------
<S> <C> <C> <C>
November 16, 1996 through December 31, 1996.................. -- 40 40
</TABLE>
<PAGE> 88
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ --------------------------------------------------------------------- ------------
<S> <C> <C>
1.1 Form of Underwriting Agreement.
3.1* Certificate of Amendment of Restated Certificate of Incorporation of
the Registrant as filed with the Delaware Secretary of State on
August 25, 1997.
3.2* Amended and Restated Certificate of Incorporation of the Registrant
to be filed with the Delaware Secretary of State upon consummation of
the Offering.
3.3* Amended and Restated Bylaws of the Registrant.
3.4 Certificate of Amendment of Restated Certificate of Incorporation of
the Registrant to be filed with the Delaware Secretary of State in
January 1998.
4.1* Specimen certificate representing shares of Common Stock of the
Registrant.
4.2* 1997 Stock Incentive Plan, together with form of related Stock Option
Agreement (and related Notice of Grant of Option) and Stock Issuance
Agreement.
4.3* Form of Performance Stock Option.
4.4* Form of Executive Officer Non-Qualified Stock Option Agreement.
4.5* Form of Director Stock Option Agreement.
5.1 Form of Opinion of Brobeck, Phleger & Harrison LLP.
10.1* Form of Indemnification Agreement.
10.2* Securities Purchase Agreement dated November 15, 1996, between the
Registrant and The 1818 Fund II, L.P.
10.3* Secured Credit Agreement dated November 15, 1996, among the
Registrant, First Source Financial LLP and Union Bank of California,
N.A. (the "Lenders"), together with Security Agreement dated November
15, 1996, between the Registrant and First Source Financial LLP, as
Collateral Agent for the Lenders, and Pledge Agreement dated November
15, 1996, between the Registrant and First Source Financial LLP, as
Collateral Agent for the Lenders.
10.4* Registration Rights Agreement dated November 15, 1996, among the
Registrant, The 1818 Fund II, L.P., S-O Acquisition LLC, S-O
Management LLC, Larkspur Capital Corporation, First Source Financial
LLP, Union Bank of California, N.A., The Equitable Life Assurance
Society of the United States, Exeter Venture Lenders, L.P. and Exeter
Equity Partners, L.P.
10.5* Form of Warrant to Purchase Shares of Common Stock
10.6+* Letter Agreement dated July 19, 1990, between the Registrant and
Metaux Precieux Metalor Deutschland Gmbh.
10.7 Intentionally omitted.
10.8+ License Agreement dated April 28, 1994, between the Registrant and
Dental Imaging Associates, Inc., together with Addendum thereto dated
April 11, 1995, between the Registrant and Dental Imaging Associates,
Inc.
10.9* Employment Agreement dated November 15, 1996, between the Registrant
and Kenneth A. Darienzo.
10.10* Employment Agreement dated November 15, 1996, between the Registrant
and Martin J. Dymek.
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ --------------------------------------------------------------------- ------------
<S> <C> <C>
10.11* Employment Agreement dated November 15, 1996, between the Registrant
and Kenneth K. Krueger.
10.12* Sublease dated January 6, 1993, between the Registrant and Great
Western Real Estate.
10.13* Asset Purchase Agreement dated July 22, 1996, between the Registrant,
S-O and Bausch & Lomb.
10.14* Distribution Agreement dated April 18, 1997, between Registrant and
Interpore Orthopaedics, Inc.
10.15* License Agreement dated April 18, 1997, between the Registrant and
Interpore International.
10.16 Commitment Letter Agreement dated December 24, 1997, between Union
Bank and S-O Operating Corp.
10.17 Sublease Agreement dated September 30, 1997, between the Registrant
and John H. Harland Company, together with Standard Form Lease dated
January 31, 1989 between Metropolitan Life Insurance Company and
Interchecks, Incorporated and all amendments thereto.
10.18 Standard Industrial/Commercial Single-Tenant Lease dated November 15,
1997, among the Registrant, Koll Yorba Linda Associates and DK
Northwest Holdings, L.P.
11.1 Statement Regarding Computation of Pro Forma Net Loss Per Share.
11.2 Statement Regarding Computation of Supplemental Net Income Per Share.
21.1* List of Subsidiaries.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2 Consent of Price Waterhouse LLP, Independent Accountants.
23.3 Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit
5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have been
filed separately with the Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 1.1
3,450,000 SHARES
STERI-OSS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
February __, 1998
UBS Securities LLC
Furman Selz LLC
As Representatives of the Several Underwriters
c/o UBS Securities LLC
299 Park Avenue
New York, NY 10171
Ladies and Gentlemen:
Steri-Oss, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell 3,000,000 shares (the "Firm Shares") of its authorized but
unissued Common Stock, $.001 par value per share (the "Common Stock"), to the
several underwriters listed on Schedule A to this Agreement (collectively, the
"Underwriters"). The Company also proposes to grant to the Underwriters an
option to purchase up to 450,000 additional shares (the "Option Shares") of
Common Stock on the terms and for the purposes set forth in Section 3(c). The
Firm Shares and the Option Shares are hereinafter collectively referred to as
the "Shares."
The Company wishes to confirm as follows its agreement with you (the
"Representatives") and the other Underwriters on whose behalf you are acting in
connection with the several purchases by the Underwriters of the Shares.
1. REGISTRATION STATEMENT. A registration statement on Form S-1 (File No.
333-34397) including a prospectus relating to the Shares and each amendment
thereto has been prepared by the Company in conformity with the requirements of
the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder, and has been filed with the
Commission. There have been delivered to you three signed copies of such
registration statement and amendments, together with three copies of each
exhibit filed therewith. Copies of such registration statement and amendments
(but without exhibits) and of the related preliminary prospectus have been
delivered to you in such reasonable quantities as you have requested for each of
the Underwriters. If such registration statement has not become effective as of
the date hereof, a further amendment to such registration statement, including a
form of final prospectus, necessary to permit such registration statement to
become effective as of the date hereof will be filed promptly by the Company
with the Commission. If such registration statement has become effective, a
final prospectus containing all Rule 430A Information (as hereinafter defined)
will be filed by the Company with the Commission in accordance with Rule 424(b)
of the Rules and Regulations on or before the second business day after the date
hereof (or such earlier time as may be required by the Rules and Regulations).
The term "Registration Statement" as used in this Agreement shall mean
such registration statement (including all exhibits and financial statements and
notes thereto and all documents incorporated
1.
<PAGE> 2
by reference therein) at the time such registration statement becomes or became
effective and, in the event any post-effective amendment thereto becomes
effective prior to the Closing Date (as hereinafter defined), shall also mean
such registration statement as so amended; provided, however, that such term
shall include all Rule 430A Information deemed to be included in such
registration statement at the time such registration statement becomes effective
as provided by Rule 430A of the Rules and Regulations and shall also mean any
registration statement filed pursuant to Rule 462(b) of the Rules and
Regulations with respect to the Shares. The term "Preliminary Prospectus" shall
mean any preliminary prospectus referred to in the preceding paragraph and any
preliminary prospectus included in the Registration Statement at the time it
becomes effective that omits Rule 430A Information. The term "Prospectus" as
used in this Agreement shall mean the prospectus relating to the Shares in the
form in which it is first filed with the Commission pursuant to Rule 424(b) of
the Rules and Regulations or, if no filing pursuant to Rule 424(b) of the Rules
and Regulations is required, shall mean the form of final prospectus included in
the Registration Statement at the time such registration statement becomes
effective. The term "Rule 430A Information" means information with respect to
the Shares and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A of the
Rules and Regulations.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants as follows:
a. The Company has not received, and has no notice of, any order of
the Commission preventing or suspending the use of any Preliminary Prospectus,
or instituted proceedings for that purpose, and each Preliminary Prospectus, at
the time of filing thereof, conformed in all material respects to the
requirements of the Act and the Rules and Regulations. When the Registration
Statement became or becomes, as the case may be, effective (the "Effective
Date") and at all times subsequent thereto up to and at the Closing Date (as
hereinafter defined), any later date on which Option Shares are to be purchased
(the "Option Closing Date") and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, (i) the Registration Statement and
Prospectus, and any amendments or supplements thereto, will contain all
statements which are required to be stated therein by, and will comply with the
requirements of, the Act and the Rules and Regulations, and (ii) neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The foregoing representations and warranties
in this section 2(a) do not apply to any statements or omissions made in
reliance on and in conformity with the information contained in the section of
the Prospectus entitled "Underwriting" (except for the sixth paragraph thereof)
and the information in the last paragraph on the front cover page of the
Prospectus. The Company has not distributed any offering material in connection
with the offering or sale of the Shares other than the Registration Statement,
the Preliminary Prospectus, the Prospectus or any other materials, if any,
permitted by the Act.
b. The Company and each of its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of Delaware, with full corporate power and authority to own,
lease and operate its properties and conduct its business as described in the
Registration Statement. The Company and each of its subsidiaries is duly
qualified to do business as a foreign corporation in good standing in each
jurisdiction where the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to so qualify
would not have a material adverse effect on the business, operations,
properties, financial assets, condition (financial or otherwise) or results of
operations of the Company (a "Material Adverse Effect").
2.
<PAGE> 3
c. The Company has full power and authority (corporate and
otherwise) to enter into this Agreement and to perform the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement on the part of the
Company, enforceable against the Company in accordance with its terms, except as
rights to indemnity and contribution hereunder may be limited by applicable laws
or equitable principles and except as enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws relating
to or affecting creditors' rights generally or by general equitable principles.
The performance of this Agreement by the Company and the consummation by the
Company of the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any indenture, mortgage, deed of trust, loan agreement, bond, debenture,
note agreement or other evidence of indebtedness, or any lease, contract or
other agreement or instrument to which the Company is a party or by which its
properties are bound, or (ii) the certificate of incorporation or bylaws of the
Company or (iii) any law, order, rule, regulation, writ, injunction or decree of
any court or governmental agency or body to which the Company is subject. The
Company is not required to obtain or make (as the case may be) any consent,
approval, authorization, order, designation or filing by or with any court or
regulatory, administrative or other governmental agency or body as a requirement
for the consummation by the Company of the transactions herein contemplated,
except such as may be required under the Act, the Securities Exchange Act of
1934, as amended (the "Exchange Act") or under state securities or blue sky
("Blue Sky") laws or under the rules and regulations of the National Association
of Securities Dealers, Inc. ("NASD").
d. Except as disclosed in the Prospectus, there is not pending or,
to the Company's knowledge, threatened, any action, suit, claim, proceeding or
investigation against the Company or any of its subsidiaries or any of their
respective officers or any of their respective properties, assets or rights
before any court or governmental agency or body or otherwise which might result
in a Material Adverse Effect or have a material adverse effect on the Company's
properties, assets or rights, or prevent consummation of the transactions
contemplated hereby. There are no statutes, rules, regulations, agreements,
contracts, leases or documents that are required to be described in the
Prospectus, or to be filed as exhibits to the Registration Statement by the Act
or by the Rules and Regulations that have not been accurately described in all
material respects in the Prospectus or filed as exhibits to the Registration
Statement.
e. All outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws, were not
issued in violation of any preemptive right, resale right, right of first
refusal or similar right. The authorized and outstanding capital stock of the
Company conforms in all material respects to the description thereof contained
in the Registration Statement and the Prospectus (and such description correctly
states the substance of the provisions of the instruments defining the capital
stock of the Company). The Shares have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and, when issued and
delivered by the Company against payment therefor in accordance with the terms
of this Agreement, will be duly and validly issued and fully paid and
nonassessable. Except as set forth in the Prospectus, no preemptive right,
co-sale right, right of first refusal or other similar right of securityholders
exists with respect to any of the Shares or the issue and sale thereof other
than those that have been expressly waived prior to the date hereof. No holder
of securities of the Company has the right to cause the Company to include such
holder's securities in the Registration Statement, other than those rights that
have been waived. No further approval or authorization of any security holder,
the Board of Directors or any duly appointed committee thereof or others is
required for the issuance and sale or transfer of the Shares by the Company,
except as may be required under the Act, the Exchange Act or under state
securities or Blue Sky laws. Except as disclosed in or contemplated by the
Prospectus and the financial
3.
<PAGE> 4
statements of the Company (and the related notes thereto) included in the
Prospectus, the Company does not have outstanding any options or warrants to
purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such options,
rights, convertible securities or obligations. The description of the Company's
stock option and other plans or arrangements, and the options or other rights
granted and exercised thereunder, set forth in the Prospectus accurately and
fairly presents, in all material respects, the information required by the Rules
and Regulations to be shown with respect to such plans, arrangements, options
and rights.
f. Price Waterhouse LLP (the "Accountants"), who have examined the
financial statements, together with the related schedules and notes, of the
Company filed with the Commission as a part of the Registration Statement, which
are included in the Prospectus, are independent public accountants within the
meaning of the Act and the Rules and Regulations. The financial statements of
the Company, together with the related schedules and notes, forming part of the
Registration Statement and the Prospectus, fairly present the financial position
and the results of operations of the Company and its subsidiaries at the
respective dates and for the respective periods to which they apply. All
financial statements, together with the related schedules and notes, filed with
the Commission as part of the Registration Statement have been prepared in
accordance with generally accepted accounting principles as in effect in the
United States consistently applied throughout the periods involved except as may
be otherwise stated in the Registration Statement. The selected and summary
financial and statistical data included in the Registration Statement present
fairly the information shown therein and have been compiled on a basis
consistent with the financial statements presented therein. No other financial
statements or schedules are required by the Act or the Rules and Regulations to
be included in the Registration Statement.
g. Except as set forth in the Prospectus, (i) the Company has good
and marketable title to all material properties and assets described in the
Prospectus as owned by it, free and clear of any pledge, lien, security
interest, charge, encumbrance, claim, equitable interest, or restriction, (ii)
the agreements to which the Company is a party described in the Prospectus are
valid agreements, enforceable against the Company in accordance with their
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles, and,
to the Company's knowledge, the other contracting party or parties thereto are
not in material breach or default under any of such agreements and (iii) the
Company has valid and enforceable leases for the properties described in the
Prospectus as leased by it, except as enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting the creditors' rights generally or by general
equitable principles, and such leases conform in all material respects to the
description thereof, if any, set forth in the Registration Statement.
h. The Company now holds and at the Closing Date and any later
Option Closing Date, as the case may be, will hold, all licenses, certificates,
approvals and permits from all state, United States, foreign and other
regulatory authorities, including but not limited to the United States Food and
Drug Administration (the "FDA") and any foreign regulatory authorities
performing functions similar to those performed by the FDA, that are material to
the conduct of the business of the Company (as such business is currently
conducted), except for such licenses, certificates, approvals and permits the
failure of which to hold would not have a Material Adverse Effect), all of which
are valid and in full force and effect (and there is no proceeding pending or,
to the knowledge of the Company, threatened which may cause any such license,
certificate, approval or permit to be withdrawn, canceled, suspended or not
renewed). The Company is not in violation of its certificate of incorporation or
bylaws, or, except for defaults or
4.
<PAGE> 5
violations which would not have a Material Adverse Effect, in default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of indebtedness or in
any contract, indenture, mortgage, loan agreement, joint venture or other
agreement or instrument to which it is a party or by which it or any of its
properties are bound, or in violation of any law, order, rule, regulation, writ,
injunction or decree of any court or governmental agency or body, including, but
not limited to, the FDA. All of the descriptions in the Registration Statement
and Prospectus of the legal and governmental proceedings by or before the FDA or
any foreign, state or local government body exercising comparable authority are
true, complete and accurate in all material respects.
i. The Company has filed on a timely basis all necessary federal,
state and foreign income, franchise and other tax returns and has paid all taxes
shown thereon as due, and the Company has no knowledge of any tax deficiency
which has been or might be asserted against the Company which might have a
Material Adverse Effect. All material tax liabilities are adequately provided
for within the financial statements of the Company.
j. The Company maintains insurance of the types and in the amounts
adequate for their its business and consistent with insurance coverage
maintained by similar companies in similar businesses, including, but not
limited to, insurance covering clinical trial liability, product liability and
real and personal property owned or leased against theft, damage, destruction,
acts of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
k. No collective bargaining agreement is applicable to any employees
of the Company. There are no labor disputes between the Company and any such
employees that might reasonably be expected to materially adversely affect the
conduct of its business or any unresolved labor union grievances or unfair labor
practice or labor arbitration proceedings pending, or to the knowledge of the
Company, threatened, relating to the business of the Company. There are no
discrimination charges (relating to sex, age, religion, race, national origin,
ethnicity, handicap or veteran status) pending before any federal or state
agency or authority against the Company.
l. Except as described in the Prospectus, the Company owns or
possesses adequate licenses or other rights to use all patents, patent
applications, trademarks, trademark applications, service marks, service mark
applications, trade names, copyrights, manufacturing processes, formulae, trade
secrets, know-how, franchises, and other material intellectual property rights
and assets (collectively, "Intellectual Property") necessary to the conduct of
its business substantially as now conducted and as proposed to be conducted as
described in the Prospectus. The Company's rights to use the Intellectual
Property are valid, enforceable and in good standing. The Company has no
knowledge of any facts which would preclude it from having rights to its
Intellectual Property referenced in the Prospectus, except as described in the
Prospectus. The Company has no knowledge that it lacks or will be unable to
obtain any rights or licenses to use any of the Intellectual Property necessary
to conduct the business substantially as now conducted or proposed to be
conducted by it as described in the Prospectus, except as described in the
Prospectus or where the failure to so possess or obtain any such rights or
licenses would not have a Material Adverse Effect. The Prospectus fairly and
accurately describes the Company's rights with respect to the Intellectual
Property. The Company has not received any notice of infringement or of conflict
with rights or claims of others with respect to any Intellectual Property. The
Company is not aware of any asserted rights or patents of others which are
infringed upon by potential products or processes referred to in the Prospectus,
except as described in the Prospectus. The Company has duly and properly filed
or caused to be filed with the United States Patent and Trademark Office (the
"PTO") and applicable foreign and international patent authorities all patent
applications described or referred to in the Prospectus, and believes it has
complied with the PTO's duty of candor and disclosure for each of the United
States patent
5.
<PAGE> 6
applications described or referred to in the Prospectus; the Company is unaware
of any facts which would preclude the grant of a patent from each of the patent
applications described or referred to in the Prospectus; and the Company has no
knowledge of any facts which would preclude it from having clear title to its
patent applications described or referred to in the Prospectus.
m. The Company is conducting its business in compliance with all of
the laws, rules and regulations of the jurisdictions in which it is conducting
business, including, but not limited to, the laws, rules and regulations
administered or promulgated by the FDA.
n. The Company has not incurred any liability for a fee, commission,
or other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than the
underwriting discounts and commissions contemplated hereby.
o. The Company is (i) in compliance with any and all applicable
United States, state and local environmental laws, rules, regulations, treaties,
statutes and codes promulgated by any and all governmental authorities relating
to the protection of human health and safety, the environment or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
has received all permits, licenses or other approvals required of it under
applicable Environmental Laws to conduct its business as currently conducted,
and (iii) is in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with Environmental Laws,
failure to receive required permit licenses or other approvals would not,
individually or in the aggregate, have a Material Adverse Effect. No action,
proceeding, revocation proceeding, writ, injunction or claim is pending or
threatened relating to the Environmental Laws or to the Company's activities
involving Hazardous Materials. "Hazardous Materials" means any material or
substance (i) that is prohibited or regulated by any environmental law, rule,
regulation, order, treaty, statute or code promulgated by any governmental
authority, or any amendment or modification thereto, or (ii) that has been
designated or regulated by any governmental authority as radioactive, toxic,
hazardous or otherwise a danger to health, reproduction or the environment.
p. The Company has not engaged in the generation, use, manufacture,
transportation or storage of any Hazardous Materials on any of the Company's
properties or former properties, except where such use, manufacture,
transportation or storage is in compliance with Environmental Laws. No Hazardous
Materials have been treated or disposed of on any of the Company's properties or
on properties formerly owned or leased by the Company during the time of such
ownership or lease, except in compliance with Environmental Laws. No spills,
discharges, releases, deposits, emplacements, leaks or disposal of any Hazardous
Materials have occurred on or under or have emanated from any of the Company's
properties or former properties.
q. The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets and
reasonable and appropriate action is taken with respect to any differences.
r. The Company has not at any time during the last five years (i)
made any unlawful contribution to any candidate for foreign office, or failed to
disclose fully any contribution in violation of law, or (ii) made any payment to
any foreign, United States federal or state governmental officer or official,
6.
<PAGE> 7
or other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States. To the
knowledge of the Company, no employee, officer or director of the Company, has
been debarred under section 306(a) or 306(b) of the Federal Food, Drug and
Cosmetic Act or has, within the last five years, been convicted of (x) a
criminal offense relating to the development or approval process of any drug
product, or (y) a felony involving bribery, payment of illegal gratuities,
fraud, perjury, false statements, racketeering, blackmail, extortion,
falsification or destruction of records, or interference with, obstruction of an
investigation into, or prosecution of, any criminal offense or a conspiracy to
commit, aid or abet such felony.
s. The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act. The Shares have been duly authorized for quotation on the National
Association of Securities Dealers, Inc. Automated Quotation System National
Market System ("Nasdaq National Market"). The Company has taken no action
designed to, or likely to have the effect of, terminating the registration of
the Common Stock under the Exchange Act or delisting the Common Stock from the
Nasdaq National Market, nor has the Company received any notification that the
Commission or the Nasdaq National Market is contemplating terminating such
registration or listing.
t. Neither the Company nor, to its knowledge, any of its officers,
directors or affiliates has taken, and at the Closing Date and at any later
Option Closing Date, neither the Company nor, to its knowledge, any of its
officers, directors or affiliates will have taken, directly or indirectly, any
action which has constituted, or might reasonably be expected to constitute, the
stabilization or manipulation of the price of sale or resale of the Shares.
u. The Company has timely and properly filed with the Commission all
reports and other documents required to have been filed by it with the
Commission pursuant to the Act and the Rules and Regulations. True and complete
copies of all such reports and other documents have been delivered to you.
v. Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been (i)
any material adverse change, or any development which, in the Company's
reasonable judgment, is likely to cause a material adverse change, in the
business, properties or assets described or referred to in the Registration
Statement, or the results of operations, condition (financial or otherwise),
business or operations of the Company, (ii) any transaction which is material to
the Company, except transactions described or referred to in the Prospectus and
transactions in the ordinary course of business, (iii) any obligation, direct or
contingent, which is material to the Company, incurred by the Company or any of
its subsidiaries, except obligations incurred in the ordinary course of
business, (iv) any change in the capital stock or outstanding indebtedness of
the Company, other than as contemplated by the Prospectus and shares of Common
Stock that may be issued upon the exercise of outstanding stock options and
warrants, (v) any material change by the Company in its accounting methods,
principles or practices, (vi) any revaluation by the Company of any material
amount of its assets, (vii) any sale of a material amount of property of the
Company, (viii) any discharge or satisfaction by the Company of any material
lien, security interest, charge or other encumbrance or any payment by the
Company of any material obligation or liability (fixed or contingent), other
than in the ordinary course of business, (ix) any material investment by the
Company of a capital nature, whether by purchase of stock or securities,
contributions to capital, property transfers or otherwise, in any other
partnership, corporation or other entity, (x) any waiver or release by the
Company of any rights of material value, including, without limitation, any
rights in any Intellectual Property of material value, or (xi) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company. The
7.
<PAGE> 8
Company has no material contingent obligations which are not disclosed in the
Registration Statement and the Prospectus.
3. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
a. On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
the Firm Shares to the several Underwriters, and each of the Underwriters agrees
to purchase from the Company, the respective aggregate number of Firm Shares set
forth opposite its name on Schedule A, plus such additional number of Firm
Shares which such Underwriter may become obligated to purchase pursuant to
Section 3(b) hereof. The price at which such Firm Shares shall be sold by the
Company and purchased by the several Underwriters shall be $_____ per share. In
making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of Firm
Shares specified on Schedule A.
b. If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 10 hereof) to purchase and pay
for the number of Firm Shares agreed to be purchased by such Underwriter or
Underwriters, the non-defaulting Underwriters shall have the right within
twenty-four (24) hours after such default to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the Firm Shares which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such Firm
Shares and portion, the number of Firm Shares which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis (as adjusted by you in such manner
as you deem advisable to avoid fractional shares) to absorb the remaining Firm
Shares and portion which the defaulting Underwriter or Underwriters agreed to
purchase; provided, however, that the non-defaulting Underwriters shall not be
obligated to purchase the Firm Shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase if the aggregate number of such
Firm Shares exceeds 10% of the total number of Firm Shares which all
Underwriters agreed to purchase hereunder. If the total number of Firm Shares
which the defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within twenty-four (24) hours next succeeding the
24-hour period referred to above, to make arrangements with other underwriters
or purchasers reasonably satisfactory to you for purchase of such Firm Shares
and portion on the terms herein set forth. In any such case, either you or the
Company shall have the right to postpone the Closing Date determined as provided
in Section 5 hereof for not more than seven business days after the date
originally fixed as the Closing Date pursuant to said Section 5 in order that
any necessary changes in the Registration Statement, the Prospectus or any other
documents or arrangements may be made. If the aggregate number of Firm Shares
which the defaulting Underwriter or Underwriters agreed to purchase exceeds 10%
of the total number of Firm Shares which all Underwriters agreed to purchase
hereunder, and if neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the Shares which the defaulting Underwriter or Underwriters agreed to
purchase hereunder, this Agreement shall be terminated without further act or
deed and without any liability on the part of the Company to any non-defaulting
Underwriter and without any liability on the part of any non-defaulting
Underwriter to the Company. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
c. On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several
8.
<PAGE> 9
Underwriters to purchase all or any portion of the Option Shares from the
Company at the same price per share as the Underwriters shall pay for the Firm
Shares. Said option may be exercised only to cover over-allotments in the sale
of the Firm Shares by the Underwriters and may be exercised in whole or in part
at any time (but not more than once) on or before the 30th day after the date of
this Agreement upon written or facsimile notice by you to the Company setting
forth the aggregate number of shares of the Option Shares as to which the
several Underwriters are exercising the option. Delivery of certificates for the
shares of Option Shares, and payment therefor, shall be made as provided in
Section 5 hereof. Each Underwriter will purchase such percentage of the Option
Shares as is equal to the percentage of Firm Shares that such Underwriter is
purchasing, the exact number of shares to be adjusted by you in such manner as
you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
a. The terms of the offering of the Shares in the United States by
the Underwriters shall be as set forth in the Prospectus. The Underwriters may
from time to time change the public offering price after the closing of the
initial public offering and increase or decrease the concessions and discounts
to dealers as they may determine.
b. You, on behalf of the Underwriters, represent and warrant that
(i) the information set forth in the last paragraph on the outside front cover
page and the section of the Prospectus entitled "Underwriting" (except for
paragraph six thereof) in the Registration Statement, any Preliminary Prospectus
and the Prospectus relating to the Shares (insofar as such information relates
to the Underwriters) constitutes the only information furnished by the
Underwriters to the Company for inclusion in the Registration Statement, any
Preliminary Prospectus, and the Prospectus, and that the statements made therein
are correct and do not omit to state any material fact required to be stated
therein or necessary to make the statements made therein in light of the
circumstances under which they were made not misleading, and (ii) the
Underwriters have not distributed and will not distribute prior to the Closing
Date or on any Option Closing Date, as the case may be, any of offering material
in connection with the offering and sale of the shares other than the
Preliminary Prospectus, the Prospectus, the Registration Statement, and other
materials permitted by the Act.
5. DELIVERY OF AND PAYMENT FOR THE SHARES.
a. Delivery of certificates for the Firm Shares and the Option
Shares (if the option granted pursuant to Section 3(c) hereof shall have been
exercised not later than 1:00 p.m., New York City time, on the date at least two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San
Diego, CA 92121 at 10:00 a.m., New York City time, on the fourth business day
after the date of this Agreement, or at such time on such other day, not later
than seven full business days after such fourth business day, as shall be agreed
upon in writing by the Company and you (the "Closing Date").
b. If the option granted pursuant to Section 3(c) hereof shall be
exercised after 1:00 p.m., New York City time, on the date two business days
preceding the Closing Date, and on or before the 30th day after the date of this
Agreement, delivery of certificates for the Option Shares, and payment therefor,
shall be made at the office of Cooley Godward LLP, 4365 Executive Drive, Suite
1100, San Diego, CA 92121 at 10:00 a.m., New York City time, on the third
business day after the exercise of such option.
9.
<PAGE> 10
c. Payment for the Shares purchased from the Company shall be made
to the Company or its order, by either a same day funds check or Federal Funds
wire transfer. Such payment shall be made upon delivery of certificates for the
Shares to you for the respective accounts of the several Underwriters against
receipt therefor signed by you. Certificates for the Shares to be delivered to
you shall be registered in such name or names and shall be in such denominations
as you may request at least three business days before the Closing Date, in the
case of Firm Shares, and at least two business days prior to the Option Closing
Date, in the case of the Option Shares. Such certificates will be made available
to the Underwriters for inspection, checking and packaging at a location in New
York, New York, designated by the Underwriters not less than one full business
day prior to the Closing Date or, in the case of the Option Shares, by 3:00
p.m., New York City time, on the business day preceding the Option Closing Date.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check funds shall not have
been received by you on the Closing Date or any later Option Closing Date. Any
such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
with the several Underwriters as follows:
a. The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; it will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement or any
subsequent amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed. If the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a), the Company will provide evidence satisfactory to
you that the Prospectus contains such information and has been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (1) or (4)
of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission. If for any reason the filing of the
final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed. The Company will notify you promptly of any request by the
Commission for the amending or supplementing of the Registration Statement or
the Prospectus or for additional information. Promptly upon your request, it
will prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the reasonable opinion of counsel
to the several Underwriters ("Underwriters' Counsel"), may be necessary or
advisable in connection with the distribution of the Shares by the Underwriters.
The Company will promptly prepare and file with the Commission, and promptly
notify you of the filing of, any amendments or supplements to the Registration
Statement or Prospectus which may be necessary to correct any statements or
omissions, if, at any time when a prospectus relating to the Shares is required
to be delivered under the Act, any event shall have occurred as a result of
which the Prospectus or any other prospectus relating to the Shares as then in
effect would include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. In case any
Underwriter is required to deliver a prospectus within the nine-month period
referred to in Section 10(a)(3) of the Act in connection with the sale of the
Shares, the Company will prepare promptly upon request, but at the expense of
such Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act. The Company will file no
amendment or supplement to the Registration
10.
<PAGE> 11
Statement or Prospectus that shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing or which is not in compliance with the Act and
Rules and Regulations or the provisions of this Agreement.
b. The Company will advise you, promptly after it shall receive
notice or obtain knowledge thereof of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the initiation or threat of any proceeding for that
purpose; and it will promptly use its best efforts to prevent the issuance of
any such stop order or to obtain its withdrawal at the earliest possible moment
if such stop order should be issued.
c. The Company will cooperate with you in endeavoring to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation, or to execute a general consent to service
of process in any jurisdiction, or to make any undertaking with respect to the
conduct of its business. In each jurisdiction in which the Shares shall have
been qualified, the Company will make and file such statements, reports and
other documents in each year as are or may be reasonably required by the laws of
such jurisdictions so as to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Shares, or as
otherwise may be required by law.
d. The Company will furnish to you, as soon as available, copies of
the Registration Statement (three of which will be signed and which will include
(including all exhibits), each Preliminary Prospectus, the Prospectus and any
amendments or supplements to such documents, including any prospectus prepared
to permit compliance with Section 10(a)(3) of the Act, all in such quantities as
you may from time to time reasonably request.
e. The Company will make generally available to its stockholders as
soon as practicable, but in any event not later than the 45th day following the
end of the fiscal quarter first occurring after the first anniversary of the
effective date of the Registration Statement, an earnings statement (which will
be in reasonable detail but need not be audited) complying with the provisions
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and
covering a twelve-month period beginning after the effective date of the
Registration Statement, and will advise you in writing when such statement has
been made available.
f. During a period of five years after the date hereof, the Company
will furnish to each Representative and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a copy
of its annual report to stockholders for such year; and the Company will furnish
to the Representatives (i) as soon as available, a copy of each report or
definitive proxy statement of the Company filed with the Commission under the
Exchange Act or mailed to stockholders, and (ii) from time to time, such other
information concerning the Company as the Representatives may reasonably
request.
g. Prior to or simultaneously with the execution and delivery of
this Agreement, the Company will obtain "lock-up" agreements in the form of
Exhibit A from each beneficial owner of the Company's Common Stock listed on
Schedule B to this Agreement.
h. The Company shall not, during the 90 days following the effective
date of the Registration Statement, except with the prior written consent of UBS
Securities LLC, file a registration
11.
<PAGE> 12
statement covering any of its shares of capital stock, except that one or more
registration statements on Form S-8 may be filed at any time following the
effective date of the Registration Statement.
i. The Company shall not, during the 90 days following the effective
date of the Registration Statement, except with the prior written consent of UBS
Securities LLC, issue, sell, offer or agree to sell, grant, distribute or
otherwise dispose of, directly or indirectly, any shares of Common Stock, or any
options, rights or warrants with respect to shares of Common Stock, or any
securities convertible into or exchangeable for Common Stock, other than (i) the
sale of Shares hereunder, (ii) the grant of options or the issuance of shares of
Common Stock under the Company's stock option plans or stock purchase plan, as
the case may be, existing on the date hereof, (iii) the issuance of shares of
Common Stock upon exercise of the currently outstanding options or warrants
described in the Registration Statement.
j. The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
k. The Company will maintain a Transfer Agent and, if necessary
under the jurisdiction of incorporation of the Company, a Registrar (which may
be the same entity as the Transfer Agent) for its Common Stock.
l. The Company will use its best efforts to maintain listing of its
shares of Common Stock on the Nasdaq National Market.
m. If at any time during the 90-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your reasonable
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, consult with you in good faith regarding the necessity of disseminating a
press release or other public statement responding to or commenting on such
rumor, publication or event and, if the Company in its reasonable judgment
determines that such a press release or other public statement is appropriate,
the substance of any press release or other public statement.
7. EXPENSES. The Company agrees with each Underwriter that:
a. The Company will pay and bear all costs, fees and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto; the
reproduction of this Agreement, the Master Agreement Among Underwriters, the
Master Selected Dealer Agreement, the Preliminary Blue Sky Memoranda and any
Supplemental Blue Sky Memoranda and any instruments related to any of the
foregoing; the issuance and delivery of the Shares hereunder to the several
Underwriters, including transfer taxes, if any; the cost of all stock
certificates representing the Shares and Transfer Agents' and Registrars' fees;
the fees and disbursements of corporate, patent and regulatory counsel for the
Company; all fees and other charges of the Company's independent public
accountants; the cost of furnishing to the several Underwriters copies of the
Registration Statement (including appropriate exhibits), Preliminary
Prospectuses and the Prospectus, and any amendments or supplements to any of the
foregoing; NASD filing fees and expenses incident to securing any required
review and the cost of qualifying the Shares under the laws of such
jurisdictions within the United States as you may designate (including filing
fees and fees and disbursements of Underwriters' Counsel in connection with such
NASD
12.
<PAGE> 13
filings and Blue Sky qualifications); listing application fees of the Nasdaq
National Market; and all other expenses directly incurred by the Company in
connection with the performance of its obligations hereunder.
b. If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company to
perform any agreement on its part to be performed hereunder or to fulfill any
condition of the Underwriters' obligations hereunder, the Company will, in
addition to paying the expenses described in clause (a) above, reimburse the
several Underwriters for all out-of-pocket expenses (including reasonable fees
and disbursements of Underwriters' Counsel) incurred by the Underwriters in
reviewing the Registration Statement and the Prospectus and in otherwise
investigating, preparing to market or marketing the Shares. The Company will in
not any event be liable to any of the several Underwriters for any loss of
anticipated profits from the sale by them of the Shares.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS.
The obligations of the several Underwriters to purchase and pay for the
Shares, as provided herein, shall be subject to the accuracy, as of the date
hereof and the Closing Date and any later Option Closing Date, as the case may
be, of the representations and warranties of the Company herein, to the
performance by the Company of its obligations hereunder and to the following
additional conditions:
a. The Registration Statement shall have become effective not later
than 9:00 a.m., New York City time, on the date following the date of this
Agreement, or such later time or date as shall be consented to in writing by
you. If the filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b) and Rule 430A of the Rules and Regulations, the
Prospectus shall have been filed in the manner and within the time period
required by Rule 424(b) and Rule 430A of the Rules and Regulations. No stop
order suspending the effectiveness of the Registration Statement shall have been
issued and no proceeding for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the reasonable satisfaction of Underwriters' Counsel.
b. All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this subsection.
c. You shall have received, at no cost to you, on the Closing Date
and on any later Option Closing Date, as the case may be, the opinion of Brobeck
Phleger & Harrison LLP, corporate counsel to the Company, in substantially the
form attached hereto on Appendix A, dated the Closing Date or such later Option
Closing Date, addressed to the Underwriters and with reproduced copies of signed
counterparts thereof for each of the Representatives.
d. You shall have received from Cooley Godward LLP, Underwriters'
Counsel, an opinion or opinions, dated the Closing Date or on any later Option
Closing Date, as the case may be, in form and substance reasonably satisfactory
to you, with respect to the sufficiency of all corporate proceedings undertaken
by the Company and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as it may have reasonably
requested for the purpose of enabling it to pass upon such matters.
13.
<PAGE> 14
e. You shall have received on the Closing Date and on any later
Option Closing Date, as the case may be, a letter from the Accountants addressed
to the Company and the Underwriters, dated the Closing Date or such later Option
Closing Date, as the case may be, confirming that it is an independent certified
public accountant with respect to the Company within the meaning of the Act and
the Rules and Regulations thereunder and based upon the procedures described in
its letter delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more than
three days prior to the Closing Date or any such later Option Closing Date, as
the case may be, (i) confirming that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later Option
Closing Date, as the case may be; and (ii) setting forth any revisions and
additions to the statements and conclusions set forth in the Original Letter
that are necessary to reflect any changes in the facts described in the Original
Letter since the date of such letter, or to reflect the availability of more
recent financial statements, data or information. The letter shall not disclose
any change, or any development involving a prospective change, in or affecting
the business or properties of the Company or any of its subsidiaries which, in
your reasonable judgment, makes it impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus. In
addition, you shall have received from the Accountants a letter addressed to the
Company and made available to you for the use of the Underwriters stating that
its review of the Company's system of internal accounting controls, to the
extent it deemed necessary in establishing the scope of its latest examination
of the Company's financial statements, did not disclose any weaknesses in
internal controls that it considered to be material weaknesses. All such letters
shall be in a form reasonably satisfactory to the Representatives and their
counsel.
f. You shall have received on the Closing Date and on any later
Option Closing Date, as the case may be, a certificate of the President and the
Chief Financial Officer of the Company, dated the Closing Date or such later
date, to the effect that as of such date (and you shall be satisfied that as of
such date):
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or any
later Option Closing Date, as the case may be; and the Company has complied with
all of the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to the Closing Date or any later Option
Closing Date, as the case may be;
(ii) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration Statement
or preventing or suspending the use of the Prospectus has been issued, and no
proceedings for that purpose have been instituted or are pending or, to the best
of their knowledge, threatened under the Act;
(iii) They have carefully reviewed the Registration Statement and
the Prospectus; and, when the Registration Statement became effective and at all
times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus and any amendments or supplements
thereto contained all statements and information required to be included therein
or necessary to make the statements therein not misleading; and when the
Registration Statement became effective, and at all times subsequent thereto up
to the delivery of such certificate, none of the Registration Statement, the
Prospectus or any amendment or supplement thereto included any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and, since
the effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented that has not been so set
forth; and
14.
<PAGE> 15
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, there has not been
(A) any material adverse change in the properties or assets described or
referred to in the Registration Statement and the Prospectus or in the condition
(financial or otherwise), operations, business or prospects of the Company and
its subsidiares, (B) any transaction which is material to the Company or any of
its subsidiaries, except transactions entered into in the ordinary course of
business, (C) any obligation, direct or contingent, incurred by the Company or
any of its subsidiaries, which is material to the Company or any of its
subsidiaries, (D) any change in the capital stock or outstanding indebtedness of
the which is material to the Company or any of its subsidiaries or (E) any
dividend or distribution of any kind declared, paid or made on the capital stock
of the Company or any of its subsidiaries.
g. The Company shall have furnished to you such further certificates
and documents as you shall reasonably request as to the accuracy of the
representations and warranties of the Company herein, as to the performance by
the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder.
h. The Firm Shares and the Option Shares, if any, shall have been
approved for designation upon notice of issuance on the Nasdaq National Market.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
9. INDEMNIFICATION AND CONTRIBUTION.
a. Subject to the provisions of paragraph (f) below, the Company
agrees to indemnify and hold harmless each Underwriter and each person
(including each partner or officer thereof) who controls any Underwriter within
the meaning of Section 15 of the Act from and against any and all losses,
claims, damages or liabilities, joint or several, to which such indemnified
parties or any of them may become subject under the Act, the Exchange Act, or
the common law or otherwise, and the Company agrees to reimburse each such
Underwriter and controlling person for any legal or other out-of-pocket expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any 462(b) registration statement)
or any post-effective amendment thereto (including any 462(b) registration
statement), or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (ii) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission is contained in
the section of the Prospectus entitled "Underwriting" (except for the sixth
paragraph thereof) or the last paragraph of text on
15.
<PAGE> 16
the outside cover page of the Prospectus and (2) the indemnity agreement
contained in this paragraph (a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages, liabilities or expenses purchased the Shares which
is the subject thereof (or to the benefit of any person controlling such
Underwriter) if at or prior to the written confirmation of the sale of such
Shares a copy of the Prospectus (or the Prospectus as amended or supplemented)
was not sent or delivered to such person (excluding any documents incorporated
therein by reference) within the time required by the Act and the regulations
thereunder and the untrue statement or omission of a material fact contained in
such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus
as amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (a) of Section 6 hereof. The indemnity agreements of
the Company contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 2 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of any payment
for the Shares.
b. Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its executive officers, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Act, from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Act, the Exchange Act, or the common law or
otherwise and to reimburse each of them for any legal or other expenses
including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel, incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that in the cases of clauses (i) and (ii) above,
such statement or omission is contained in the Section of the Prospectus
entitled "Underwriting" (except for the six paragraph thereof) or the last
paragraph on the outside cover page of the Prospectus. The indemnity agreement
of each Underwriter contained in this paragraph (b) shall remain operative and
in full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Shares.
c. Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 9 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against it, in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (a "Notice") of such service or
notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be available
to any party who shall fail so to give the Notice if the party to whom such
Notice was not given was unaware of the action, suit, investigation, inquiry or
proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification
16.
<PAGE> 17
shall not relieve such indemnifying party or parties from any liability which it
or they may have to the indemnified party for contribution or otherwise than on
account of such indemnity agreement. Any indemnifying party shall be entitled at
its own expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any indemnifying
party shall be entitled, if it so elects within a reasonable time after receipt
of the Notice by giving written notice (the "Notice of Defense") to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled, at its or their own expense to have counsel chosen by such indemnified
party or parties participate in, but not conduct, the defense. It is understood
that the indemnifying parties shall not, in respect of the legal defenses of any
indemnified party in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for (a) the fees and expenses of more than one
separate firm (in addition to any local counsel) for all of the Underwriters and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act, and (b) the fees and expenses of more than one separate firm (in
addition to any local counsel) for the Company, its directors, its officers who
sign the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act. If, within a reasonable
time after receipt of the Notice, an indemnifying party gives a Notice of
Defense and the counsel chosen by the indemnifying party or parties is
reasonably satisfactory to the indemnified party or parties, the indemnifying
party or parties will not be liable under paragraphs (a) and (b) of this Section
9 for any legal or other expenses subsequently incurred by the indemnified party
or parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding, except that (A) the indemnifying party or parties shall
bear the legal and other expenses incurred in connection with the conduct of the
defense as referred to in clause (i) of the proviso to the second preceding
sentence and (B) the indemnifying party or parties shall bear such other
expenses as it or they have authorized to be incurred by the indemnified party
or parties. If, within a reasonable time after receipt of the Notice, no Notice
of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding. The indemnifying party or parties shall not be liable for
any settlement of any proceeding effected without its or their written consent,
provided such consent has not been unreasonably withheld.
d. If the indemnification provided for in this Section 9 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 9, then each indemnifying party shall, in
lieu of indemnifying such indemnified party, contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 9 in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
17.
<PAGE> 18
Company, on the one hand, and the Underwriters, on the other, shall be deemed to
be in the same respective proportions as the total net proceeds from the
offering of the Shares received by the Company and the total underwriting
discount received by the Underwriters, as set forth in the table on the cover
page of the Prospectus, bear to the aggregate public offering price of the
Shares. Relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by each indemnifying party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparation to defend or defense against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this paragraph (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 9).
e. The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of such Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
f. The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof, including without limitation the
provisions of this Section 9 and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 9 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
18.
<PAGE> 19
10. TERMINATION.
This Agreement may be terminated by you at any time on or prior to the Closing
Date or on or prior to any later Option Closing Date, as the case may be, (i) if
the Company shall have failed, refused or been unable, at or prior to the
Closing Date, or on or prior to any later Option Closing Date, as the case may
be, to perform any agreement on its part to be performed, or because any other
condition of the Underwriters' obligations hereunder required to be fulfilled by
the Company is not fulfilled, or (ii) if trading on the New York Stock Exchange,
the American Stock Exchange or the Nasdaq National Market shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required on the New
York Stock Exchange, the American Stock Exchange or the Nasdaq National Market,
by such trading exchanges or by order of the Commission or any other
governmental authority having jurisdiction, or if a banking moratorium shall
have been declared by federal or New York authorities, or (iii) if the Company
shall have sustained a loss by strike, fire, flood, accident or other calamity
of such character as to have a Material Adverse Effect regardless of whether or
not such loss shall have been insured, or (iv) if there shall have been a
material adverse change in the general political or economic conditions or
financial markets in the United States as in the judgment of the Representatives
makes it inadvisable or impracticable to proceed with the offering, sale and
delivery of the Shares, or (v) if there shall have occurred an outbreak or
escalation of hostilities between the United States and any foreign power or of
any other insurrection or armed conflict involving the United States or other
national or international calamity, hostilities or crisis or the declaration by
the United States of a national emergency which, in the judgment of the
Representatives, adversely affects the marketability of the Shares, or (vi) if
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, there shall have occurred any material adverse
change or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the Company or the business
affairs, management, or business prospects of the Company, whether or not
arising in the ordinary course of business, or (vii) if any foreign, federal or
state statute, regulation, rule or order of any court or other governmental
authority shall have been enacted, published, decreed or otherwise promulgated
which in the judgment of the Representatives materially and adversely affects or
will materially and adversely affect the business or operations of the Company,
or trading in the Common Stock shall have been suspended, or (viii) there shall
have occurred a material adverse decline in the value of securities generally on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market or (ix) action shall be taken by any foreign, federal, state or local
government or agency in respect of its monetary or fiscal affairs which, in the
judgment of the Representatives, has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated in
accordance with this Section 10, there shall be no liability of the Company to
the Underwriters and no liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in Section 7.
If you elect to terminate this Agreement as provided in this Section
10, the Company shall be notified promptly by you by telephone, facsimile or
telegram, confirmed by letter.
11. REIMBURSEMENT OF CERTAIN EXPENSES.
a. In addition to its obligations under Section 9 of this Agreement,
the Company hereby agrees to reimburse on a quarterly basis the Underwriters for
all reasonable legal and other expenses incurred in connection with
investigating or defending any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission,
19.
<PAGE> 20
described in paragraph (a) of Section 9 of this Agreement, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the obligations under this Section 11 and the possibility that such payments
might later be held to be improper; provided, however, that (i) to the extent
any such payment is ultimately held to be improper, the persons receiving such
payments shall promptly refund them and (ii) such persons shall provide to the
Company, upon request, reasonable assurances of their ability to effect any
refund, when and if due.
b. In addition to their other obligations under Section 9 of this
Agreement, the Underwriters hereby agree to reimburse on a quarterly basis the
Company for all reasonable legal and other expenses incurred in connection with
investigating or defending any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in paragraph (b) of Section 9 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 11 and the
possibility that such payments might later be held to be improper; provided,
however, that (i) to the extent any such payment is ultimately held to be
improper, the Company shall promptly refund it and (ii) the Company shall
provide to the Underwriter, upon request, reasonable assurances of its ability
to effect any refund, when and if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT.
This Agreement shall inure to the benefit of the Company and the
several Underwriters and, with respect to the provisions of Section 9 hereof,
the several parties (in addition to the Company and the several Underwriters)
indemnified under the provisions of said Section 9, and their respective
personal representatives, successors and assigns. Nothing in this Agreement is
intended or shall be construed to give to any other person, firm or corporation
any legal or equitable remedy or claim under or in respect of this Agreement or
any provision herein contained. The term "successors and assigns" as herein used
shall not include any purchaser, as such purchaser, of any of the Shares from
any of the several Underwriters.
13. NOTICES.
Except as otherwise provided herein, all communications hereunder shall
be in writing or by facsimile and, if to the Underwriters, shall be mailed, sent
by facsimile or delivered to UBS Securities LLC, 299 Park Avenue, New York, NY
10171, Attention: Mr. Richard Messina, with a copy to Barbara L. Borden, Cooley
Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, CA 92121; if to the
Company, shall be mailed, sent by facsimile or delivered to it at its office,
Steri-Oss, Inc., 22895 Eastpark Drive, Yorba Linda, CA 92887, Attention:
President, with a copy to Frederick Randall, Brobeck Phleger & Harrison, 4675
MacArthur Court, Suite 1000, Newport Beach, CA 92660. All notices given by
facsimile or telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (i) any
investigation made by or on behalf of any Underwriter or controlling person
thereof, or by or on behalf of the Company or its respective directors of
officers, and (ii) delivery of and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
20.
<PAGE> 21
You will act as Representatives of the several Underwriters in all
dealings with the Company under this Agreement, and any action under or in
respect of this Agreement taken by you jointly or by UBS Securities LLC, as
Representatives, will be binding upon all of the Underwriters.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York.
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement among the Company
and the several Underwriters in accordance with its terms.
Very truly yours,
STERI-OSS, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
UBS SECURITIES LLC
FURMAN SELZ LLC
By: UBS Securities LLC
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Acting on behalf of the several
Underwriters, including themselves,
named on Schedule A hereto.
SIGNATURE PAGE TO UNDERWRITING AGREEMENT
21.
<PAGE> 22
SCHEDULE A
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Shares to be
Underwriters Purchased
- ------------ ------------
<S> <C>
UBS Securities LLC..........................................................
Furman Selz LLC.............................................................
Total 3,000,000
=========
</TABLE>
<PAGE> 23
SCHEDULE B
LOCK-UP AGREEMENTS
<PAGE> 24
EXHIBIT A
FORM OF LOCK-UP AGREEMENT
<PAGE> 25
APPENDIX A
1. OPINION OF COUNSEL TO THE COMPANY
Brobeck Phleger & Harrison LLP shall opine to the
effect that:
a. The Company and each of its subsidiaries has been duly
organized and is validly existing as a corporation, and is in good standing
under, the laws of the State of Delaware;
b. The Company and each of its subsidiaries has the corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus; the Company and each of its
subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in all jurisdictions in which the ownership or leasing of its
properties or the conduct of its business requires such qualification;
c. The Company does not own or control, directly or indirectly,
any corporation, association or other entity;
d. The authorized, issued and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the Prospectus;
all necessary and proper corporate proceedings have been taken in order to
validly authorize the Common Stock referred to therein; the issued and
outstanding shares of the Company's capital stock have been duly authorized and
validly issued and are fully paid and nonassessable, and have not been issued in
violation of any preemptive right, co-sale right, registration right, right of
first refusal or other similar right known to such counsel; the securities
listed in Item 15 of Part II of the Registration Statement have been issued in
compliance with federal and state securities laws;
e. The Shares have been duly authorized and will be, upon
issuance and delivery against payment therefor in accordance with the terms
hereof, validly issued, fully paid and nonassessable, and, to the knowledge of
such counsel, the stockholders of the Company do not have any preemptive right,
co-sale right, registration right, right of first refusal or other similar
right, which rights have not previously been waived, in connection with the
purchase or sale of any of the Shares;
f. The Company has full corporate power and authority to enter
into this Agreement and to issue, sell and deliver to the Underwriters the Firm
Shares or the Option Shares, as the case may be, to be issued and sold by it
hereunder;
g. This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and is a valid and binding agreement of the Company,
enforceable in accordance with its terms (standard exceptions permitted);
h. The Registration Statement has become effective under the
Act and, to such counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement or suspending or preventing the use of the
Prospectus has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act; any required filing of
the Prospectus and any supplement thereto pursuant to Rule 424 (b) of the Rules
and Regulations has been made in the manner and within the time period required
by such Rule 424 (b);
1.
<PAGE> 26
i. The Registration Statement, all Preliminary Prospectuses,
the Prospectus, and each amendment or supplement thereto (other than the
financial statements, financial data and supporting schedules included therein,
as to which such counsel need express no opinion), comply as to form in all
material respects with the requirements of the Act and the applicable Rules and
Regulations and to such counsel's knowledge, there are no agreements, contracts,
leases or documents of a character required to be described in, or filed as an
exhibit to, the Registration Statement which are not described or filed as
required by the Act and the applicable Rules and Regulations;
j. The terms and provisions of the capital stock of the Company
conform to the description thereof contained in the Registration Statement and
the Prospectus, and the information in the Prospectus under the caption
"Description of Capital Stock", to the extent that it constitutes matters of law
or legal conclusions, has been reviewed by such counsel and is correct, and the
form of certificate evidencing the Common Stock complies with the applicable
provisions of Delaware law;
k. The statements in the Registration Statement and the
Prospectus summarizing statutes, rules and regulations, including the Delaware
General Corporation Law and the description of the certificate of incorporation
and bylaws are accurate and fairly and correctly present the information
required to be presented by the Act or the Rules and Regulations in all material
respects; and such counsel does not know of any statutes, rules or regulations
required to be described in the Registration Statement or the Prospectus that
are not described or referred to therein as required;
l. The statements under the captions "Risk Factors - Dependence
on Significant Customer," " - Control By Directors, Executive Officers and
Affiliated Entities," " - Shares Eligible for Future Sale", " - Potential
Anti-Takeover Effects of Delaware Law and the Company's Certificate of
Incorporation and Bylaws," "Business - Customers, Marketing and Sales," "-
Proprietary Rights," "- Product Liability and Legal Proceedings; Insurance,"
"Management - Compensation Plans and Arrangements," "401(k) Profit Sharing
Plan," " - Limitation of Liability and Indemnification," "Certain Transactions,"
"Description of Capital Stock," and "Shares Eligible for Future Sale" in the
Prospectus, insofar as such statements constitute a summary of documents
referred to therein or matters of law, are accurate summaries and fairly and
correctly present, in all material respects, the information called for with
respect to such documents and matters; provided that such counsel shall be
entitled to rely on representations of the Company with respect to certain
factual matters contained in such statements, and provided further that such
counsel shall state that nothing has come to the attention of such counsel which
leads them to believe that such representations are not true and correct in all
material respects;
m. The execution, delivery and performance of this Agreement
and the consummation of the transactions therein contemplated do not and will
not (a) conflict with or result in a breach of any of the terms or provisions of
or, constitute a default under, the certificate of incorporation or bylaws of
the Company, any agreement or document filed as an exhibit to the Registration
Statement, or any statute, rule or regulation applicable to the Company (except
that no opinion need to be expressed with respect to compliance with federal and
state securities laws) or (b) to the knowledge of such counsel, result in the
creation or imposition of any lien or encumbrance upon any of the assets of the
Company pursuant to the terms or provisions of, or result in a breach or
violation of any of the terms or provisions of, or constitute a default or
result in the acceleration of any obligation under, any indenture, mortgage,
deed of trust, loan agreement, bond, debenture, note agreement, other evidence
of indebtedness, lease, contract or other agreement or instrument to which the
Company is a party or by which its property is bound or (c) to the knowledge of
such counsel, conflict with or result in a violation or breach of, or constitute
a default under, any applicable license, authorization, approval, permit,
judgment, franchise, order, writ or decree of any court or governmental agency
or body;
2.
<PAGE> 27
n. The Company has the corporate power and authority to own or
lease all of the assets owned or leased by it and to conduct its business, in
each case as described in the Registration Statement and the Prospectus, except
where failure to have such power and authority would not have a Material Adverse
Effect, and has all licenses, permits, consents, orders, approvals and
authorizations of any federal or state government authority that are necessary
to conduct its business as described in the Registration Statement and the
Prospectus, except where failure to have such licenses, permits, consents,
orders, approvals and authorizations would not have a Material Adverse Effect.
o. No authorization, approval, consent, order, designation or
declaration of or filing by or with any governmental authority or agency is
necessary in connection with the execution and delivery of this Agreement by the
Company and the consummation of the transactions therein contemplated except
such as may have been obtained under the Act and the Rules and Regulations or
such as may be required under state securities or Blue Sky laws or by the bylaws
and rules of the NASD in connection with the purchase and distribution of the
Shares by the Underwriters;
p. The Company is not in violation of its certificate of
incorporation or bylaws, and to the best of such counsel's knowledge, the
Company is not in breach of or default with respect to any provision of any
agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit
or other instrument by which it or any of its properties may be bound or
affected, except where such default would not materially adversely affect the
Company and, to the best of such counsel's knowledge, the Company is in
compliance with all laws, rules, regulations, judgments, decrees, orders and
statutes of any court or jurisdiction to which it is subject, except where
noncompliance would not materially adversely affect the Company;
q. To such counsel's knowledge, there are no pending or
threatened actions, suits, claims, proceedings or investigations that, if
successful, would have a Material Adverse Effect or would limit, revoke, cancel,
suspend, or cause not to be renewed any existing license, certificate,
registration, approval or permit, known to such counsel, from any state,
federal, or regulatory authority that is material to the conduct of the business
of the Company as presently conducted, or that is of a character otherwise
required to be disclosed in the Registration Statement or the Prospectus under
the Act or the applicable Rules and Regulations;
r. To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of shares of Common Stock or
other securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration Statement
and Prospectus, all holders of securities of the Company having registration
rights with respect to shares of Common Stock or other securities have, with
respect to the offering contemplated hereby, waived such rights or such rights
have otherwise been waived or such rights have expired by reason of lapse of
time following notification of the Company's intent to file the Registration
Statement.
s. No transfer taxes are required to be paid in connection with
the sale or delivery to the Underwriters of the Firm Shares or the Option
Shares;
In addition, such counsel shall include a statement to the effect that
such counsel has participated in conferences with officials and other
representatives of the Company, the Representatives, Underwriters' Counsel and
the independent public accountants of the Company, at which conferences the
contents of the Registration Statement and the Prospectus and related matters
were discussed, and although they have not
3.
<PAGE> 28
verified the accuracy or completeness of the statements contained in the
Registration Statement or the Prospectus, nothing has come to the attention of
such counsel which caused them to believe that, at the time the Registration
Statement became effective the Registration Statement (except as to financial
statements, financial and statistical data and supporting schedules contained
therein, as to which such counsel need express no opinion) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or at
the Closing Date or any later Option Closing Date, as the case may be, the
Registration Statement or the Prospectus (except as aforesaid) contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under, which they were made, not misleading.
Counsel rendering the foregoing may rely (i) as to questions of law not
involving the federal laws of the United States or the General Corporation Law
of the State of Delaware upon opinions of local counsel, and (ii) as to
questions of fact upon representations or certificates of officers of the
Company and of governmental officials, as the case may be, in which case its
opinion is to state that it is so doing and that it has no actual knowledge of
any material misstatement or inaccuracy in such opinions, representations or
certificates, and that they believe that they and the Underwriters are justified
in relying on such opinions or certificates. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
4.
<PAGE> 1
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
STERI-OSS, INC.
Kenneth A. Darienzo and Bruce D. Nye do hereby certify that:
1. They are the Chief Executive Officer and Secretary, respectively, of
Steri-Oss, Inc., a Delaware corporation (the "Corporation").
2. The original Certificate of Incorporation of the Corporation (the
"Original Certificate") was filed with the Secretary of State of Delaware on
July 11, 1996. On November 15, 1996, the Corporation filed a Restated
Certificate of Incorporation (the "Restated Certificate") to amend and restate
the Original Certificate. On August 25, 1997, the Corporation filed a
Certificate of Amendment of Restated Certificate of Incorporation, to amend the
Restated Certificate (the Restated Certificate, as amended, is referred to
herein as the "Certificate of Incorporation").
3. On December 9, 1997, the Corporation's Board of Directors adopted
resolutions setting forth proposed amendments to the Certificate of
Incorporation and declaring such amendments to be advisable. The resolutions
setting forth the proposed amendments are set forth in full as follows:
NOW, THEREFORE, BE IT RESOLVED, that Section 4(e)(1) of this
Corporation's Certificate of Incorporation be amended in its entirety to
read in full as follows:
"(1) Conversion to Common Stock at Option of Holder. The
holders of shares of Preferred Stock, Class B shall have the
right at their option, to convert each share of Preferred Stock,
Class B into shares of Common Stock of the Corporation
("Shares") at any time after the later to occur of (i) June 30,
1998 or (ii) the date on which the Corporation or holders of
Shares first sell Shares in an initial public offering
registered under the Securities Act of 1933 (the "IPO") and the
Shares are listed on a United States national securities
exchange or for quotation on the National Association of
Securities Dealers NASDAQ quotation system (the "listing"), by
giving notice to the Corporation (which may be by facsimile) at
the principal executive office of the Corporation at 22895
Eastpark Drive, Yorba Linda, California 92887, Attention:
President (a "Conversion Notice") and surrendering the
certificates therefor in accordance with Section 4(e)(9). The
date of receipt by the Corporation of such notice shall be
referred to herein as the "Conversion Date." The Corporation
shall send a notice to the holders of the Preferred
<PAGE> 2
Stock, Class B that the Corporation proposes to list the Common
Stock not less than 10 nor more than 60 days prior to the date
of listing.
For purposes of this Restated Certificate of
Incorporation, the term "Business Day" shall mean any day that
is not Saturday, Sunday or a national holiday."
RESOLVED FURTHER, that the officers of this Corporation be, and
they hereby are, authorized to take such additional actions, including
the filing of any certificates or other instruments required by
applicable law, to effect the amendment of the Certificate of
Incorporation of this Corporation in the manner specified above.
4. Following the adoption of the resolutions referenced above by the
Corporation's Board of Directors, such resolutions were approved by the
Stockholders of the Corporation entitled to vote thereon by unanimous written
consent in accordance with Section 228 of the Delaware General Corporation Law.
5. The amendment described above was duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law.
2
<PAGE> 3
IN WITNESS WHEREOF, the Board of Directors of the Corporation has
caused this Certificate to be signed by Kenneth A. Darienzo, its President, and
attested by Bruce D. Nye, its Secretary, this ____ day of January 1998.
S-O ACQUISITION CORP.
By:______________________________
Kenneth A. Darienzo
Chief Executive Officer
ATTEST:
By:______________________________
Bruce D. Nye
Secretary
Kenneth A. Darienzo and Bruce D. Nye declare under penalty of perjury
that they have read the foregoing instrument and know the contents thereof, and
that the same is true of their own knowledge and constitutes an authorized act
of the Company.
Executed at Yorba Linda, California, on January __, 1998.
______________________________
Kenneth A. Darienzo
______________________________
Bruce D. Nye
3
<PAGE> 1
EXHIBIT 5.1
December 29, 1997
Steri-Oss, Inc.
22895 Eastpark Drive
Yorba Linda, California 92887
Attention: Kenneth A. Darienzo
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (Registration
No. 333-34397) filed by Steri-Oss, Inc. (the "Company") with the Securities and
Exchange Commission on August 26, 1997 (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of up to 3,450,000 shares of Common Stock, $.0001 par value (the "Shares") which
includes an over-allotment option granted to the Underwriters to purchase
additional Shares. The Shares are to be sold to the Underwriters as described in
the Registration Statement for resale to the public. As your counsel in
connection with this transaction, we have examined the proceedings taken and are
familiar with the proceedings proposed to be taken by you in connection with the
sale and issuance of the Shares.
It is our opinion that, upon conclusion of the proceedings being taken
or contemplated by us to be taken prior to the issuance of the Shares, and upon
completion of the proceedings being taken in order to permit the transactions to
be carried out in accordance with the securities laws of the various states
where required, the Shares, when issued and sold in the manner described in the
Registration Statement, will be legally issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to all references to our name wherever appearing
in such Registration Statement, including the Prospectus constituting a part
thereof, and any amendment thereto. Subject to the foregoing sentence, this
opinion is given as of the date hereof solely for your benefit and may not be
relied upon, circulated, quoted or otherwise referred to for any purpose without
our prior written consent.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE> 1
EXHIBIT 10.16
September 24, 1997
Mr. Bruce D. Nye
Chief Financial Officer
S-O Operating Corp.
22895 Eastpark Drive
Yorba Linda, CA 92887
Re: COMMITMENT LETTER
-----------------
Dear Bruce:
We are pleased to advise you that Union Bank of California, N.A.
("Bank") is willing to make available a credit facility (the "Facility") to S-O
Operating Corp., formerly known as Steri-Oss, Inc. ("Steri-Oss" or "Company") in
the aggregate amount of Thirty-Five Million Dollars ($35,000,000) subject to the
terms and conditions set forth in the Summary of Indicative Terms and Conditions
dated September 24, 1997 ("Summary of Terms"), a copy of which is attached
hereto and incorporated herein by reference, and to those contained in such
other loan documents as Bank may require in order to evidence the Facility.
This commitment letter ("Letter") is not meant to be, nor should it be
construed as, an attempt to define all of the terms and conditions of the
Facility. Rather, it is intended only to outline certain major terms around
which the final terms and documentation for the Facility are to be structured.
Further negotiations adding to or modifying the general scope of these major
terms shall not be precluded by the issuance of this Letter and its acceptance
by Company. Bank's commitment to make the Facility available to Company is
subject to the negotiation, execution and delivery of a definitive credit
agreement ("Credit Agreement"), security agreements, and other related
instruments, documents and agreements (together with the Credit Agreement, the
"Credit Documents"), in each case satisfactory to Bank and its counsel, and
reflecting each of the terms and conditions set forth herein and in the Summary
of Terms. The Credit Documents shall also contain representations and warranties
from Company's authorized agents and such other covenants, terms, conditions,
indemnities, representations and warranties, and events of default as may
reasonably be required by Bank.
By accepting this Letter, Company represents and warrants that the
information and data heretofore, now or hereafter provided or made available by
Company or its agents in connection with the transaction outlined hereunder are
complete, timely, accurate and correct
<PAGE> 2
Mr. Bruce D. Nye
September 24, 1997
Page 2
in all material respects. Company agrees to notify Bank promptly in writing
should Company determine or discover that any such information or data is
incomplete, inaccurate or misleading. If, in the course of Bank's review of such
information or data or otherwise, facts are discovered which Bank believes will
or may have a material adverse impact on the financial condition, operations or
prospects of Company, Bank may, in its sole discretion, suggest alternative
financing arrangements or may decline to provide financing to Company.
Subject to satisfaction of the conditions set forth in the Summary of
Terms, Bank shall use its reasonable efforts to cause the financing contemplated
by this Letter to close on or before March 30, 1998 (the "Closing Date").
Notwithstanding the foregoing sentence, in the event that: (i) an event occurs
or a condition develops which Bank believes will or may have a material adverse
impact on the financial condition, operations or prospects of Company; (ii)
prior to the Closing Date, the Credit Documents have not been executed by
Company. Bank and any other person or entity a party thereto, or all of the
conditions set forth therein have not been compiled with to the satisfaction of
Bank and its counsel and the initial funding under the Credit Agreement has not
been made; (iii) any change in any law or regulation affecting Bank's ability to
enter into the Facility shall impose upon Bank any material obligation, fee,
liability, loss, cost, expense or damage which is not contemplated by this
Letter; or (iv) any financial or other information or data submitted by Company
or any representations or warranties of Company are determined to be materially
incomplete, inaccurate or misleading; then Bank may, in its sole discretion,
terminate all of its obligations hereunder. Within ten (10) days of such
termination, Company shall pay to Bank any and all costs and expenses of Bank in
connection herewith as provided below.
The reasonable costs and expenses of Bank including, without
limitation, the reasonable allocated fees and expenses of its counsel (which
counsel may include any local or foreign outside counsel, or in-house counsel),
incident to Bank's due diligence incurred prior to the Closing Date, or arising
in connection with the structuring, negotiation and documentation of the
transactions contemplated by this Letter and the Credit Documents, shall be for
Company's account and shall be paid or reimbursed by Company, whether or not the
Closing Date occurs or the Facility is funded.
Company hereby agrees that the contents of this Letter are confidential
and are provided to Company solely for the purposes described herein. This
Letter may not be relied upon by, and Company shall not deliver, display,
duplicate or otherwise disclose the contents thereof to any third party (except
to the extent required by law) without the prior written consent of Bank. This
commitment is not assignable by Company to any person or entity, is solely for
<PAGE> 3
Mr. Bruce D. Nye
September 24, 1997
Page 3
the benefit of Company, and may not be relied upon by any other person or
entity, except with the written consent of the Bank.
The terms of this Letter may not be waived, amended, modified or
altered except by a writing signed by the parties hereto.
By execution and return of this letter Company agrees as follows:
Company will pay all out-of-pocket fees and expenses which may be
incurred by the Bank and their respective affiliates in connection with this
financing transaction, whether or not the financing transaction contemplated by
this letter is provided, or other financing is arranged.
Company will (i) indemnify and hold harmless the Bank, any lender or
prospective lender and their respective affiliates, officers, directors,
employees and agents (each an "Indemnified Person") against all claims, damages,
liabilities and expenses which may be incurred by or asserted against any of
them in connection with the statements contained in this letter or the
transaction contemplated by this letter, whether or not the financings
contemplated by this letter are provided; (ii) reimburse each Indemnified
Person, upon their demand, for any reasonable legal or other expenses incurred
in connection with investigating, defending or participating in any such loss,
claim, damage, liability or action or other proceeding, whether commenced or
threatened (whether or not any such person is a party to any action or
proceeding out of which any such expenses arise), or in any way relating to the
extension of the financing contemplated by this letter or from any use or
intended use of any of the proceeds thereof except, in the case of any
indemnified Person, to the extent any such loss, claim, damage or liability is
determined by a final judgment of a court of competent jurisdiction to be
attributable solely to the gross negligence or willful misconduct of such
Indemnified Person; and (iii) provide the Bank and its respective affiliates
with all information required for their due diligence analysis, regardless of
when, by whom or for whom prepaid.
Your obligation to indemnify such Indemnified Persons and pay such
expenses shall remain effective regardless of whether a definitive financing
agreement is executed. None of the Bank or any other indemnified Person shall be
responsible or liable to any other party hereto or any person for consequential,
indirect, punitive or exemplary damages which may be alleged as a result of this
letter or the transactions contemplated hereby. The provisions of this paragraph
shall be in addition to any rights that the Bank or any other Indemnified Person
may have at common law or otherwise, including, but not limited to, and right of
contribution.
<PAGE> 4
Mr. Bruce D. Nye
September 24, 1997
Page 4
By its acceptance of this Letter, the Company agrees that this Letter
supersedes any and all discussions, negotiations, understandings or agreements,
written or oral, express or implied, between us.
THIS LETTER MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY ACTUAL OR
ALLEGED PRIOR, CONTEMPORANEOUS OR SUBSEQUENT UNDERSTANDINGS OR AGREEMENTS OF THE
PARTIES, WRITTEN OR ORAL, EXPRESS OR IMPLIED, OTHER THAN A WRITING WHICH
EXPRESSLY AMENDS OR SUPERSEDES THIS LETTER. ALL OTHER WRITINGS, INCLUDING,
WITHOUT LIMITATION, THE LETTER OF INTEREST, ISSUED BY THE BANK TO COMPANY PRIOR
TO THE DATE HEREOF, ARE NULL AND VOID AND OF NO EFFECT. THERE ARE NO UNWRITTEN
ORAL UNDERSTANDINGS OR AGREEMENTS BETWEEN THE PARTIES.
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF CALIFORNIA WITHOUT REFERENCE TO PRINCIPLES OF
CONFLICTS OF LAW.
This Letter may be executed in counterparts, each of which shall be
deemed an original and all of which counterparts shall constitute one and the
same document.
BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL
TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND
EXPERT PERSON AND THE PARTIES WISH APPLICABLE ARBITRATION RULES TO APPLY, THE
PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE OR REFEREE APPLYING
SUCH APPLICABLE RULES. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE
BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO ENFORCE OR
DEFEND ANY RIGHTS OR REMEDIES UNDER THIS LETTER OR ANY OF THE DEFINITIVE
DOCUMENTATION AND CONSENT TO ARBITRATION OF ANY SUCH DISPUTES.
If the terms of this Letter are acceptable to you, we ask that you
return to us an executed copy of this Letter. The Bank's commitment pursuant to
this Letter shall expire at 5:00 p.m. on September 30, 1997, unless this Letter
is accepted by you and delivered to us, prior to such time and date. Upon
execution of this Letter, the Company agrees to pay to the Bank a commitment fee
in the amount of $50,000, as set forth in the Summary of Terms.
<PAGE> 5
Mr. Bruce D. Nye
September 24, 1997
Page 5
Notwithstanding the expiration or termination of the Bank commitment with
respect to providing financing hereunder, the provisions set forth herein shall
survive such expiration or termination.
Very truly yours,
UNION BANK OF CALIFORNIA, N.A.
By: /s/ SEAN M. SPRING
--------------------------------------
Name: Sean M. Spring
Title: Assistant Vice President
THE AFORESAID IS ACCEPTED, ACKNOWLEDGED AND AGREED TO ON THIS _____ DAY OF
SEPTEMBER, 1997.
S-O OPERATING CORP.
By:
-------------------------------------
Name:
---------------------------
Title:
---------------------------
<PAGE> 6
SUMMARY OF INDICATIVE TERMS AND CONDITIONS
$35 MILLION SENIOR SECURED CREDIT FACILITIES
SEPTEMBER 24, 1997
BORROWER: S-O Operating Corp., formerly Steri-Oss, Inc. ("Steri-Oss"
or the "Company").
AGENT: Union Bank of California, N.A. ("Union Bank" or "Bank").
ISSUING BANK: Union Bank.
TYPE AND AMOUNT: The facilities shall consist of a Revolving
Credit Facility and an Acquisition Facility (collectively,
the "Total Credit Facility").
Revolving Credit Facility. The Revolving Credit Facility
will have a final maturity date of March 2002, and be in an
initial amount of up to $15 million under which working
capital loans may be made and under which letters of credit
may be issued up to a Sublimit to be agreed upon; provided
that no letter of credit may extend beyond the final
maturity date of the Revolving Credit Facility. Steri-Oss
would have the option to increase the Revolving Credit
Facility in a $5 million increment to $20 million,
provided:
(1) No Default or Event of Default (as defined in the
definitive documentation) shall have occurred and be
continuing.
(2) Borrower pays to Agent the Revolving Credit Facility
Line Increase Fee (as hereinafter defined).
Acquisition Facility. The Acquisition Facility will have a
final maturity date of March 2002, and be in an initial
amount of up to $15 million. Draws under the Acquisition
Facility would be permitted until March 31, 2000. The
initial minimum draw will be in the amount of $1 million
and increments of $100,000 will be permitted thereunder.
Until March 31, 2000, all loan balances under the
Acquisition Facility will be charged interest only,
thereafter, the amount outstanding will amortize quarterly
as follows:
<TABLE>
<CAPTION>
Payment amount as % of march 31, 2000
Payment Date Acquisition Facility Loan Balance
------------ ---------------------------------
<S> <C>
July 1, 2000 7%
October 1, 2000 7%
January 1, 2001 7%
April 1, 2001 7%
July 1, 2001 10%
October 1, 2001 10%
January 1, 2002 10%
March 31, 2002 42%
</TABLE>
<PAGE> 7
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 2
If the Revolving Credit Facility were terminated, the
Acquisition Facility would immediately be due and payable.
Advances against the Acquisition Facility must meet the
following tests and conditions:
i) Target must have positive EBITDA for the trailing twelve
month period.
ii) The purchase price of any acquisition is not to exceed
$5 million. A maximum of $5 million in the aggregate of the
Acquisition Facility may be used for international
acquisitions.
iii) Target must be in the dental care industry, or be a
medical device company, or be in a closely related line of
business.
iv) Both before and after giving effect to any acquisition,
Steri-Oss must be in compliance with all financial
covenants of the Total Credit Facility on a pro-forma
basis.
v) There shall not exist any material present or future
contingent liabilities.
vi) Steri-Oss is the surviving entity.
vii) The Agent shall have received all applicable legal
documentation.
USE OF PROCEEDS: The initial proceeds of up to $20 million
under the Revolving Credit Facility, together with not less
than $60 million in gross proceeds from an initial public
offering with respect to the Parent ("IPO") shall be used
as follows:
1) with respect to the Parent, to (a) redeem all
outstanding shares of the Class B Preferred Stock; (b) pay
all accrued dividends on Class A Preferred Stock, Class B
Preferred Stock and Class C Preferred Stock; (c) redeem the
balance of Class A Preferred Stock and Class C Preferred
Stock not converting into Common Stock in the Preferred
Stock Conversion as contemplated in the Form S-1 dated
August 26, 1997, upon consummation of the IPO, provided
that no more than $20 million of cash shall be utilized to
redeem the principal amount of the Class A Preferred Stock,
Class B Preferred Stock, and Class C Preferred Stock, in
the aggregate.
<PAGE> 8
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 3
2) to repay the Subordinated Notes, and the accrued
interest and prepayment penalties in connection with the
early retirement of the Subordinated Notes.
3) to pay for fees and expenses that are specifically
associated with the IPO, prepayment of subordinated debt,
and other amounts that are associated with obtaining the
total Credit Facility.
Upon the closing of the Total Credit Facility, the
Revolving Credit Facility would be available to provide for
the working capital requirements and general corporate
purposes of the Company and its subsidiaries and, subject
to a sublimit to be agreed upon, to issue standby letters
of credit.
GUARANTORS: Borrowings are to be guaranteed by Steri-Oss, Inc.
(formerly S-O Acquisition Corp.) ("Parent") and all of the
Parent's and Company's material present and future direct
and indirect subsidiaries.
SECURITY: All extensions of credit to Steri-Oss, and any guaranties
related thereto, will be cross-defaulted,
cross-collateralized, and secured by first priority
perfected security interests in all of the existing and
after-acquired personal and real property of Parent,
Steri-Oss and their subsidiaries, including a pledge of the
stock of Steri-Oss and its subsidiaries, as well as a
pledge of the stock of any future subsidiaries of the
Parent, and all intangibles of parent, Steri-Oss and their
subsidiaries, and any intercompany debt obligations.
To grant liens securing the Total Credit Facility,
Steri-Oss, parent and their subsidiaries shall execute and
deliver to the Agent all pledge agreements, security
agreements, financing statements, deeds of trust, mortgages
and other documents and instruments as are necessary to
grant a first priority perfected security interest in and
lien upon all such property.
INTEREST RATES: All amounts outstanding under the Revolving Credit
Facility and Acquisition Facility shall bear interest, at
Steri-Oss' option, as follows (subject to the second
succeeding paragraph):
A. at the Reference Rate plus the Reference Rate Margin per
annum set forth in the Pricing Grid below; or
B. at the Adjusted London Interbank Offered Rate (LIBOR)
plus the LIBOR Margin per annum set forth in the Pricing
Grid below.
<PAGE> 9
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 4
Notwithstanding the foregoing, during the period from the
Closing Date to the date of delivery of the audited
financial statements of Steri-Oss for the fiscal year
ending December 31, 1997, the Reference Rate Margin shall
be 0.00% and the LIBOR Margin and the Letter of Credit Fees
shall be 1.25%. From and after the delivery of such
financial statements, pricing shall be determined in
accordance with the Pricing Grid below and adjusted on the
basis of the most recent quarterly financial statements
received from time to time by the Agent.
As used herein,
The Union Bank of California, N.A. Reference Rate is
defined as the variable rate of interest, per annum, most
recently announced by Union Bank of California, N.A. at its
Corporate Headquarters as the "Union Bank of California,
N.A. Reference Rate"; with the understanding that the
"Union Bank of California, N.A. Reference Rate" is one of
the Bank's index rates and merely serves as a basis upon
which effective rates of interest are calculated for loans
making reference thereto and may not be the lowest or best
rate at which the Bank calculates interest or extends
credit.
The Adjusted London Interbank Offered Rate (LIBOR) is
defined as the rate determined by Union Bank of California,
N.A. to be the rate per annum (rounded upward, if
necessary, to the nearest 1/100 of 1%) at which dollar
deposits, in immediately available funds and in lawful
money of the United States, would be offered to Union Bank
of California, N.A., outside of the United States, for a
term corresponding to the interest period applicable to
Union Bank of California, N.A.'s advance to Borrower, for
an amount of principal covered by the Borrower's interest
rate election, and adjusted to reflect Union Bank of
California, N.A.'s costs. LIBOR draws must be in minimum
increments of $500,000, with a maturity of one, two, three,
or six months. No more than four LIBOR tranches may be
outstanding at any time.
<PAGE> 10
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 5
REVOLVER CREDIT FACILITY AND ACQUISITION FACILITY PRICING GRID
<TABLE>
<CAPTION>
============================================================================================================================
Pricing Level I: Pricing Level II: Pricing Level III: Pricing Level IV:
---------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Ratio of Funded Debt Equal to or < > 1.00 and = > 1.50 and = Greater than
< <
to DBITDA(1) 1.00 1.50 2.00 2.00
- ----------------------------------------------------------------------------------------------------------------------------
Unused Fee: 0.250% 0.250% 0.375% 0.500%
- ----------------------------------------------------------------------------------------------------------------------------
LIBOR Margin and
Letter of Credit Fees: 1.25 1.50% 1.75% 2.00%
- ----------------------------------------------------------------------------------------------------------------------------
Reference Rate Margin: 0.00% 0.00% 0.25% 0.50%
============================================================================================================================
</TABLE>
(1) Based on a quarterly measurement of Funded Debt, at that point in time, to
EBITDA, as calculated on a rolling four quarter basis.
INTEREST PAYMENTS: Monthly for Reference Rate Loans; on the last day
of selected interest periods (which shall be 1, 2, 3 and 6
months) for LIBOR Loans (and at the end of every three
months, in the case of interest periods of longer than
three months); and in each case upon prepayment.
LETTER OF CREDIT
FEE: The standby letter of credit fee shall be
the applicable Letter of Credit Fee set forth in the
Pricing Grid above, and an additional 0.25% per annum to be
retained by the Issuing Bank issuing any letter of credit
calculated on the face amount of such letter of credit. In
addition, the issuing Bank shall receive usual and
customary letter of credit issuance, amendment and
administration fees.
UNUSED FEE: The Unused Fee shall be the applicable Unused Fee set
forth in the Pricing Grid above times the daily average
unused portion of the Revolving Credit Facility and the
Acquisition Facility, and shall accrue from the Closing
Date. The Unused Fee shall be payable quarterly in arrears
on the unused portion of the Revolving Credit Facility and
the Acquisition Facility and computed on the basis of a 360
day year.
COMMITMENT LETTER
DELIVERY FEE: A fully earned and non-refundable
Commitment Letter Delivery Fee of $50,000 would be due and
payable upon Borrower's acceptance of a commitment letter,
should one be issued.
<PAGE> 11
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 6
CLOSING FEE: A Closing Fee of $162,500, payable on the closing
Date, against which would be credited the Commitment Letter
Delivery Fee. Additionally, should Steri-Oss utilize the
option to increase the Revolving Credit Facility, in a
one-time $5 million increment, to an aggregate Revolving
Credit Facility amount of $20 million, Steri-Oss would pay
to Agent a fee of $12,500 (the "Revolving Credit Facility
Line Increase Fee").
DRAWDOWNS: Drawdowns are at the Borrower's option with same day notice
(by 10:00 a.m. Los Angeles time) for Reference Rate Loans
and three business days' advance notice for LIBOR Loans (by
10:00 a.m. Los Angeles time the day of the LIBOR request).
VOLUNTARY
PREPAYMENTS: Reference Rate Loans may be repaid at any
time. LIBOR Loans may be prepaid at any time with at least
two business days' advance notice, subject to compensating
the Agent for any funding losses, breakage costs, and
related expenses. Prepayments are subject to minimum
amounts of $1 million and integral multiples of $100,000
thereof.
REDUCTION OF THE
REVOLVING CREDIT
FACILITY: The Borrower may irrevocably reduce the Revolving
Credit Facility in amounts of at least $1 million at
any time on thirty business days' notice; provided,
however, that the Revolving Credit Facility will not
be reduced below $10 million.
REDUCTION OF THE
ACQUISITION
FACILITY: The Borrower may irrevocably reduce the Acquisition
Facility in amounts of at least $1 million at any time on
thirty business days' notice; provided, however, that the
Acquisition Facility will not be reduced below $5 million.
Borrowing and re-borrowing of amounts under the Acquisition
Facility will be allowed as follows:
(a) Amounts under the Acquisition Facility may be
borrowed and reborrowed until March 31, 2000;
(b) Provided no Default or Event of Default (as defined
in the definitive documentation) shall have occurred and be
continuing, on March 31, 2000 the Acquisition Facility will
convert to an amortizing
<PAGE> 12
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 7
term debt facility as provided herein. After the conversion
of the Acquisition Facility to an amortizing term loan, no
further borrowings under the Acquisition Facility will be
permitted.
(c) Any principal prepayments of the Acquisition Facility
after it has been converted will be applied to principal
due in the inverse order of maturity.
MANDATORY
PREPAYMENTS: The Borrower shall make the following mandatory prepayments
(subject to certain exceptions and basket amounts to be
negotiated in the definitive Financing Documentation).
Prior to March 31, 2000, Mandatory Prepayments shall be
applied to reduce outstanding loan balances, if any, on the
Revolving Credit Facility. Subsequent to march 31, 2000,
mandatory Prepayments shall be applied first to reduce
amounts outstanding under the Acquisition Facility in the
inverse order of maturity, until reduced to zero, and
thereafter to reduce amounts, if any, outstanding under the
Revolving Credit Facility:
1. Asset Sales - prepayments in an amount equal to 100% of
the net after-tax cash proceeds from the sale or other
disposition of any property or assets (other than inventory
sold in the ordinary course of business) of the Borrower or
its subsidiaries (including casualty insurance proceeds),
payable upon receipt;
2. Debt Financing - prepayments in an amount equal to 100%
of the net cash proceeds received from debt financing of
the Borrower or its subsidiaries, payable upon receipt; and
3. Equity Offerings - prepayments in an amount equal to 50%
of the net cash proceeds received from the issuance of
equity securities of Parent or the Borrower or its
subsidiaries, payable upon receipt.
REPRESENTATIONS
AND WARRANTIES: Customary and appropriate as to Parent, the Borrower and
its subsidiaries, including without limitation, due
organization and authorization, no conflict, financial
condition, no material adverse changes, no contingent
liabilities, title to properties, books and records, liens,
litigation, subsidiaries, payment of taxes, no material
adverse agreements,
<PAGE> 13
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 8
compliance with laws, environmental liabilities, pension
and welfare plans, investment company act and public
utility holding company act, no acquisition of margin
stock, solvency, insurance, labor matters, intellectual
property, and full disclosure.
AFFIRMATIVE
COVENANTS: Usual and customary for a credit agreement of this type as
to Parent, the borrower and its subsidiaries, including but
not limited to the following:
o Financial information.
o Certified balance sheet, dated as of the Closing Date
and after giving effect to the IPO and the financing
contemplated herein, to be delivered within 30 days of
the Closing Date.
o Notice of default, litigation, environmental violation,
disposition of assets, etc.
o Reports to SEC, shareholders and holders of debt.
o Conduct of business; maintenance of existence.
o Maintenance of property; insurance.
o Compliance with laws, including ERISA and environmental
regulations.
o Payment of taxes and obligations.
o Books and records.
o Guaranty and collateral obligations.
NEGATIVE
COVENANTS: Usual and customary for a credit agreement of
this type, as to the Parent, the Borrower and its
subsidiaries, including but not limited to the following:
o Liens.
o Limitations on indebtedness.
o Consolidation, Merger, etc.
o Asset Dispositions.
o Cash Dividends.
o Investments.
o Rental Obligations.
o Other Agreements.
o Business Activities.
o Change of Location or Name.
o Capital expenditure limitations.
<PAGE> 14
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 9
o Transactions with affiliates.
o Employee benefit plans.
o Environmental compliance.
FINANCIAL
REPORTING: o Audit Report. Within ninety (90) days after the end of
each fiscal year deliver: the consolidated
and consolidating audited balance sheet of Borrower and
its subsidiaries as at the end of such fiscal year and
the audited related statements of earnings,
stockholders=equity and cash flow; these audited
financial statements would be prepared by a national
accounting firm acceptable to Agent.
o Quarterly Reports. As soon as available, but in any
event within forty-five (45) days
after the end of each fiscal quarter of the Borrower,
deliver copies of the unaudited consolidated and
consolidating balance sheet as at the end of such fiscal
quarter and the related unaudited statements of
earnings, stockholders' equity and cash flow for such
fiscal quarter and the portion of the fiscal year
through such fiscal quarter, in each case setting forth
in comparative form the figures for the corresponding
periods of the previous fiscal year, prepared in
reasonable detail and in accordance with GAAP (subject
to normal year-end audit adjustments and absence of
footnotes).
o Compliance Certificate. Contemporaneously with the
furnishing of a copy of the Audit Report and the
Quarterly Reports, deliver a duly completed certificate
("Compliance Certificate") signed by the chief financial
officer or other authorized officer of the Borrower.
o Business Plan. As soon as available, but in any event,
within 30 days prior to the beginning of each fiscal
year of the Borrower, deliver a copy of the plan and
forecast (including a projected closing consolidated and
consolidating balance sheet, income statement and funds
flow statement) of the Borrower and its subsidiaries for
such fiscal year.
o Reports to SEC and to Stockholders. Promptly upon the
filing or making thereof, deliver to Agent copies of
each filing and report
<PAGE> 15
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 10
made by the Parent, the borrower or any of its
subsidiaries with or to any securities exchange or the
Securities and Exchange Commission and of each
communication from the borrower or to stockholders
generally.
FINANCIAL
COVENANTS: (Levels to be agreed upon)
I. Maximum Funded Debt to Twelve month trailing EBITDA,
measured quarterly.
II. Minimum Fixed Charge Coverage Ratio, measured
quarterly based on Twelve month trailing EBITDA.
III. Minimum Twelve month trailing EBITDA.
EVENTS OF DEFAULT: Customary and appropriate, including without
limitation, failure to make payments of principal, interest
and fees when due, defaults under other agreements or
instruments of indebtedness, noncompliance with covenants,
breaches of representations and warranties,
bankruptcy/insolvency, judgments in excess of specified
amounts, pension plan defaults, non- compliance with ERISA,
impairment of security interests in collateral, invalidity
of guarantees and "changes of control" (to be defined in a
mutually agreed upon manner), and subject to threshold
amounts and grace periods to be negotiated.
CERTAIN CONDITIONS
PRECEDENT TO INITIAL
FUNDING: Customary and appropriate conditions precedent to the
Closing of the Total Credit Facility will include, without
limitation, the following:
o Satisfactory evidence of the consummation of an initial
public offering of the Parent generating gross proceeds
in an amount not less than $60 million.
o Satisfactory Documentation. The definitive financing
documentation evidencing the facilities shall be
prepared by counsel to the Agent and shall be in form
and substance satisfactory to the Agent.
o Appropriately completed: (a) revolving line of credit
note, and (b) acquisition line note.
<PAGE> 16
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 11
o An executed security agreement.
o A completed officer's certificate of the Borrower and
its subsidiaries.
o Evidence of appropriate insurance coverage as required
in the definitive documentation.
o Borrower shall have paid to the Agent the fees and
expenses provided for herein.
o Evidence of each filing, registration or recordation
(and payment of any necessary fee, tax or expense
relating thereto) with respect to each document
(including, without limitation, any UCC financing
statement) required by the related documents or under
law or reasonably requested by the Agent to be filed,
registered or recorded in order to create, in favor of
the Agent, a perfected first lien on the collateral
(subject to permitted liens).
o No Material Adverse Change. Since the time period in
which the financial statements are dated as required
hereunder, there shall have occurred no material adverse
change in the condition (financial or other), business,
assets, liabilities, properties, results of operations
or prospects of the Company or its subsidiaries. The
Agent shall have been promptly notified of any
conditions or events not previously disclosed to the
Agent and of any new information or additional
developments concerning conditions or events previously
disclosed to the Agent which may have a Material Adverse
Effect.
o Financial Statements. The Agent shall have received: (i)
the unaudited consolidated and consolidating financial
statements of the Company and its subsidiaries for the
most recent quarter and year- to-date period ending
prior to the Closing Date, and (ii) such other financial
statements and information as may be requested by the
Agent.
o After giving effect to the IPO, there will be no other
Funded Debt at closing except for debt secured by
permitted liens or permitted lease obligations (as
defined in the definitive documentation).
o Expenses. All accrued and invoiced fees and expenses of
the Agent, including reasonable legal fees (including
allocated cost of internal and outside counsel) and
related out-of-pocket expenses, shall have been paid.
o Such other information and documents as may reasonably
be required by the Agent and the Agent's counsel.
<PAGE> 17
S-O Operating Corp.
Summary of Indicative
Terms and Conditions
September 24, 1997
Page 12
BORROWINGS: The conditions to all borrowings will include requirements
relating to prior written notice of borrowing, the accuracy
of representations and warranties, and the absence of any
default or potential event of default, and will otherwise
be customary and appropriate for financings of this type.
ASSIGNMENTS AND
PARTICIPATIONS: The Agent may assign all or, in an amount of not less than
$5 million, any part of the Total Credit Facility to
affiliates or one or more banks or other entities that are
eligible assignees (to be described in the Financing
Documentation) to which the Borrower consents (such consent
not to be unreasonably withheld or delayed), and upon such
assignment, such affiliate, bank or entity shall become a
lender for all purposes of the definitive Financing
Documentation; provided that assignments made to affiliates
and other lenders shall not be subject to the $5 million
minimum assignment requirement. Any new lenders, if any,
will have the right to sell participations, subject to
customary limitations on voting rights and other terms to
be negotiated, in their share of the Total Credit Facility.
REQUIRED LENDERS: Except for certain fundamental matters, to be
determined, lenders holding in the aggregate more than
66.67% of the outstandings under the Total Credit Facility,
or, if there are no outstandings, more than 66.67% of the
commitments under the Total Credit Facility.
RESERVE REQUIREMENTS
& INDEMNITIES: The Financing Documentation will contain
customary provisions for indemnification of Bank entities,
lenders and their respective directors, officers,
employees, agents, attorneys and officers, increased costs
of capital resulting from reserve requirements or
otherwise, other increased costs (including LIBOR breakage
costs), capital adequacy and similar provisions.
GOVERNING LAW
AND JURISDICTION: California.
CLOSING DATE: Within 30 days of an IPO, but in no instance later than
March 31, 1998.
<PAGE> 1
EXHIBIT 10.17
SUBLEASE AGREEMENT
This Sublease Agreement ("Agreement") dated as of September 30, 1997
between JOHN H. HARLAND COMPANY, a Georgia Corporation ("Tenant"), and
STERI-OSS, INC. a California corporation ("Subtenant").
WHEREAS, Tenant (through its predecessor Interchecks, Incorporated) has
previously entered into that certain lease dated as of January 31, 1989, which
lease has previously been amended by amendments dated as of June 15, 1989,
September 14, 1992, February 25, 1993 and May 19, 1993, with Metropolitan Life
Insurance Company ("Landlord"), a New York corporation (collectively, the
"Lease"), covering the premises known as 22725 Savi Ranch Parkway, Yorba Linda,
California (the "Premises").
WHEREAS, conditioned upon the consent of the Landlord to this Agreement,
Tenant hereby agrees to sublease the Premises to Subtenant, consisting of
approximately 51,213 rentable square feet (the "Subleased Premises").
NOW, THEREFORE, in consideration of the covenants and agreements set forth
herein, and subject to the terms and conditions of the Lease, Tenant hereby
transfers all right, title and interest in and to the Subleased Premises to
Subtenant and Subtenant hereby accepts same from Tenant upon the terms set forth
below:
1. Term. This Agreement shall be for a term commencing December 1, 1997
and terminating on October 31, 1999. In no event shall the term hereof survive
the termination or expiration of the Lease.
2. Base Rent. Subtenant shall pay to Tenant, in advance on the first
day of each calendar month, commencing April 1, 1998, without notice or demand
and without deduction or setoff of any amount for any reason whatsoever, the
sum of $23,046, amounting to $0.45 per rentable square foot of the Subleased
Premises.
3. Operating Expenses and Taxes. In addition to the Base Rent, Subtenant
shall pay the sums that Tenant is required to pay to Landlord pursuant to the
Lease for Subtenant's pro-rata share of the Operating Expenses (as set forth in
the Lease) and real estate taxes for the Subleased Premises and the common area
of the project of which the Premises are a part.
4. Security Deposit. Subtenant shall pay to Tenant upon execution and
delivery of this Agreement the sum of $23,046 to be held by Tenant without
<PAGE> 2
interest as a security deposit which shall be returned to Subtenant upon
satisfactory performance of all Subtenant's obligations under this Agreement.
5. Repairs and Maintenance. The Premises are being subleased in their
"as is" condition. However, Tenant shall be responsible for maintenance of the
structural components, exterior and demising walls and building foundation,
roof structure, membrane components and major building systems, except for
damage resulting from the abuse, negligence or willful misconduct of Subtenant.
6. Use. The Premises shall be used for general and administrative
office, light manufacturing, sale and distribution of dental related products,
and any other related legal uses.
7. Notices. All notices required or permitted under this Agreement
shall be given by overnight express mail service, or by registered or certified
U.S. mail, return receipt requested, or by facsimile transmission with receipt
confirmed at the following address or to such other address as either party
shall in writing advise the other.
If to Tenant: John H. Harland Company
2939 Miller Road
Decatur, GA 30035
Attention: John C. Walters
Senior Vice President
If to Subtenant: Steri-Oss, Inc.
Attention: Ken Krueger
Executive Vice President
8. Subordination. This Agreement and Subtenant's rights hereunder are
subject and subordinate to the Lease and the lien of any mortgage, deed of
trust or similar instrument now or hereafter encumbering the Premises.
Subtenant shall, within 15 days following request therefor, deliver to Tenant
or such third party designated by Tenant a statement, in recordable form,
evidencing such subordination.
9. Assumption. In addition to the terms and conditions of this
Agreement, Subtenant agrees that this Agreement is subject to all of the terms
and conditions of the Lease and of the rights of Landlord, Tenant and any
person claiming by or through either of them thereunder. Subtenant covenants
and agrees to perform all of the obligations of Tenant with respect to the
Subleased
<PAGE> 3
Premises set forth in the Lease as if Subtenant were the tenant thereunder and
Tenant was the landlord thereunder, and in turn Tenant shall have all of the
rights and privileges in the Lease as if Tenant were the landlord thereunder.
Subtenant hereby acknowledges that it has received and read a copy of the Lease
and agrees, subject to the terms of this Agreement, to be bound by the terms
thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
JOHN H. HARLAND COMPANY
By: /s/ JOHN WALTERS
----------------------------
John C. Walters
Senior Vice President
STERI-OSS, INC.
By: /s/ KEN KRUEGER
----------------------------
Ken Krueger
Executive Vice President
<PAGE> 4
STANDARD FORM LEASE
(Multi-Tenant; Net)
METROPOLITAN LIFE INSURANCE COMPANY, Landlord
INTERCHECKS, INCORPORATED, Tenant
Lease Summary:
(a) Lease Date: January 31, 1989
(b) Landlord: METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation
(c) Address of Landlord:
c/o O'Donnell Armstrong Brigham & Partners
2201 Dupont Drive, Suite 100 and: 101 Lincoln Center Drive
Irvine, California 92715 Foster City, California 94404
(d) Tenant: INTERCHECKS, INCORPORATED, a Washington corporation
(e) Address of Tenant:
520 Pike Tower
Suite 1601
Seattle, Washington 98124
(f) Contact: Mr. Walter Zabriskie, President Telephone: (714) 938-0660
(g) Premises Square Footage: Approximately 25,000 Square Feet
(h) Building Address:
22725 Savi Ranch Parkway
Yorba Linda, California
(i) Building Square Footage: Approximately 51,680 Square Feet
(j) Anticipated Commencement Date: June 1, 1989
(k) Term: Ten (10) years and No (0) months
(l) Initial Monthly Rent: $14,250/month $171,000/year SEE ADDENDUM, #43
(m) Security Deposit: $14,250
(n) Permitted Uses: General office use, warehousing of paper products and
printing
(o) Brokers: Collins Fuller Corp. &
Coldwell Banker Commercial Real Estate Services
(p) Insuring Party: Landlord
(q) Tenant's Percentage: 48.40 SEE ADDENDUM, PARAGRAPH NO. 48
Exhibit(s) A-1, A-2 and Preliminary Space Plan
Rider(s) ADDENDUM
LEASE
1. Parties. THIS LEASE ("Lease"), is dated for reference purposes only as of
the date set forth in Paragraph (a) of the Lease Summary and is entered into by
and between the Landlord identified in Paragraph (b) of the Lease Summary
("Landlord"), whose address is set forth in Paragraph (c) of the Lease Summary
and the Tenant identified in Paragraph (d) of the Lease Summary ("Tenant"),
whose address is set forth in Paragraph (e) of the Lease Summary.
2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord those certain premises consisting of a portion of that certain building
located at the address set forth in Paragraph (h) of the Lease Summary and as
shown on Exhibit "A-1" attached hereto, together with the property appurtenant
thereto, if any, for the exclusive use of Tenant as shown on said Exhibit "A-1".
Tenant shall have the right to use, on a non-exclusive basis, parking areas and
ancillary facilities located within the Common Area of the Project, subject to
the terms of this Lease.
3. Definitions. The following terms shall have the following meanings in this
Lease:
(a) "Alterations" shall mean any alterations, decorations, additions or
improvements made in, on or about the Premises after the Commencement Date,
including, but not limited to, lighting, HVAC and electrical fixtures, pipes
and conduits, partitioning, drapery, wall coverings, cabinetry, carpeting
and/or other floor covering, ceiling tile, fixtures and carpentry installations.
(b) "Building" shall mean that certain building identified in Paragraph
(h) of the Lease Summary.
(c) "City" shall mean the city in which the Premises are located.
(d) "Commencement Date" shall mean the first day of the Term of this
Lease as described in Paragraph 4(a).
(e) "Common Area" shall mean all areas and facilities within the Project
exclusive of the Premises and other portions of the Project leased exclusively
to other tenants. The Common Area includes, but is not limited to, striped
parking areas, access and perimeter roads, sidewalks, landscaped areas and
similar areas and facilities. Tenant's use of the Common Area and its rights
and obligations with respect thereto are more particularly described in
Paragraph 39 below.
(f) "County" shall mean the county in which the Premises are located.
(g) "HVAC" shall mean the heating, ventilating and air conditioning
system serving the building.
(h) "Interest Rate" shall mean the greater of ten percent (10%) per annum
or five percent (5%) in excess of the discount rates of the Federal Reserve
Bank of San Francisco in effect on the twenty-fifth (25th) day of the calendar
month immediately prior to the event giving rise to the Interest Rate
imposition.
(i) "Landlord's Agents" shall mean landlord's authorized agents,
contractors, partners, subsidiaries, directors, officers and employees.
(j) "Lease Summary" shall mean the summary of Lease information set forth
above.
(k) "Monthly Rent" shall mean the rent payable pursuant to paragraph
5(a), as adjusted from time to time pursuant to the terms of this Lease.
(l) "Operating Expenses" shall mean all costs and expenses for the
maintenance and operation of the Building and of Common Area of the Project as
more particularly described in Paragraph 16(b) below. SEE ADDENDUM #48.
(m) "Premises" shall mean the property leased hereby including all areas
appurtenant thereto for the exclusive use of Tenant as shown on Exhibit "A-1"
hereto.
(n) "Project" shall mean that certain real property, and all improvements
thereon, including the Building, other buildings, if any, and related
improvements as shown on Exhibit "A-2" hereto.
(o) "Real Property Taxes" shall mean any form of tax, assessment, license,
fee, rent tax, levy, penalty (if a result of Tenant's delinquency), real
property or other tax (other than landlord's net income, estate, succession,
inheritance, or franchise taxes), now or hereafter imposed by any authority
having the direct or indirect power to tax, or by any city, county, state or
federal government or any improvement district or other district or division
thereof, whether such tax or any portion thereof: (i) is determined by the area
of the Premises or any part thereof or the rent and other sums payable hereunder
by Tenant including, but not limited to, any gross income or excise tax levied
by any of the foregoing authorities with respect to receipt of such rent or
other sums due under this Lease; (ii) is levied or assessed in lieu of, in
substitution for, or in addition to, existing or additional taxes with respect
to the Premises whether or not now customary or within the contemplation of the
parties; or (iii) is based upon any legal or equitable interest of Landlord in
the Premises or any part thereof.
(p) "Rent" shall mean Monthly Rent plus the Additional Rent defined in
Paragraph 5(c).
(q) "Security Deposit" shall mean that amount paid by Tenant pursuant to
Paragraph 7.
(r) "Tenant Improvements" shall mean those certain improvements to the
Premises, if any, to be constructed pursuant hereto.
(s) "Tenant's Percentage" shall mean the percentage set forth in
Paragraph (q) of the Lease Summary.
(t) "Tenant's Personal Property" shall mean Tenant's removable trade
fixtures, furniture, equipment and other personal property in the Premises.
(u) "Term" shall mean that period of years and/or months as set forth in
Paragraph (k) of the Lease Summary, as said Term may be extended pursuant to
the proper exercise of any option or options to extend the Term as may be
granted herein or as may be sooner terminated pursuant to any provision hereof.
4. Lease Term.
(a) Term. The Term of this Lease shall be for that period of years and
months set forth in Paragraph (k) of the Lease Summary, commencing on the
Anticipated Commencement Date as defined in Paragraph 41 of the Addendum
attached hereto and made a part hereof, unless extended in accordance with any
option or options to extend the Term granted herein, or unless sooner
terminated pursuant to any provision hereof.
1
<PAGE> 5
(b) Early Entry. If Tenant is permitted in writing by Landlord (which
permission shall not be unreasonably withheld), to occupy
the Premises prior to the Commencement Date for the purpose of ____________ the
Building or for any other purposes permitted in such writing, such early entry
shall be at Tenant's sole risk and subject to all the terms and provisions
hereof, except for the payment of Monthly Rent which shall commence on the
Commencement Date. Landlord shall have the right to impose such additional
conditions on Tenant's early entry as Landlord shall deem appropriate, and shall
further have the right to require that Tenant execute an early entry agreement
containing such conditions prior to Tenant's early entry.
(c) Delay in Possession. Notwithstanding said Commencement Date, if for
any reason Landlord cannot deliver possession of the Premises to Tenant on said
date, Landlord shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Tenant hereunder
or extend the term hereof, but in such case, Tenant shall not be obligated to
pay Monthly Rent until possession of the Premises is tendered to Tenant,
provided, however, if Landlord shall not have delivered possession of the
Premises within one hundred twenty (120) days from said Commencement Date for
reasons other than delays caused in whole or in part by Tenant, Tenant may, at
Tenant's option, by notice in writing to Landlord within ten (10) days
thereafter, cancel this Lease, in which event the parties shall be discharged
from all obligations hereunder, provided further, however, that if such written
notice of Tenant is not received by Landlord within said ten (10) day period,
Tenant's right to cancel this Lease hereunder shall terminate and be of no
further force or effect.
5. Rent.
(a) Monthly Rent. Tenant shall pay to Landlord, in lawful money of the
United States, for each calendar month of the Term, the Monthly Rent set forth
in Paragraph (i) of the Lease Summary, subject to adjustment as provided in
Paragraph 5(b) below, in advance, on the first day of each calendar month,
without abatement, deduction, claim, offset, prior notice or demand. Landlord
hereby acknowledges receipt of Tenant's payment of Monthly Rent for the
first month of the term.
(b) Adjustments. SEE ADDENDUM, #43
(c) Additional Rent. All monies required to be paid by Tenant under this
Lease, including, without limitation, Real Property Taxes payable pursuant to
Paragraph 14 hereof, repair and maintenance charges payable pursuant to
Paragraph 16 hereof and insurance premiums payable pursuant to Paragraph 20
hereof shall constitute Additional Rent. Landlord shall have the right to
estimate and collect from Tenant in advance on a quarterly or monthly basis any
and all such Additional Rent pursuant to the provisions set forth for such
procedure in Paragraph 16(a) and (b) of this Lease.
(d) Prorations. If the Commencement Date is not the first (1st) day of a
month, or if the expiration of the Term of this Lease is not the last day of a
month, a prorated installment of Monthly Rent based on a thirty (30) day month
shall be paid for the fractional month during which the Term commences or
terminates.
6. Late Payment Charges. Tenant acknowledges that late payment by Tenant to
Landlord of Rent and other charges provided for under this Lease will cause
Landlord to incur costs not contemplated by this Lease, the exact amount of such
costs bring extremely difficult or impracticable to fix. Such costs include, but
are not limited to, processing and accounting charges, and late charges that may
be imposed on Landlord by the terms of any encumbrance and notes secured by any
encumbrance covering the Premises, or late charges and penalties due to late
payment of Real Property Taxes due on the Premises. Therefore, if any
installment of Rent or any other charge due from Tenant is not received by
Landlord when due, Tenant shall pay to Landlord an additional sum equal to the
greater of Fifty Dollars (50.00) or five percent (5%) of the amount overdue as a
late charge for every month or portion thereof that the Rent or other charges
remain unpaid. The parties agree that this late charge represents a fair and
reasonable estimate of the costs that Landlord will incur by reason of the late
payment by Tenant. Acceptance of any late charge shall not constitute a waiver
by Landlord of Tenant's default with respect to the overdue amount, and shall
not prevent Landlord from exercising any of the other rights and remedies
available to Landlord for any other breach of Tenant under this Lease.
Notwithstanding the foregoing, upon the second occurrence during any
twelve-month period of Tenant's failure to pay Monthly Rent or Additional Rent
when due, Landlord may condition its acceptance of future Rent upon a
requirement that Tenant concurrently execute an amendment to this Lease which
provides that Monthly Rent for the balance of the term of this Lease shall be
made in quarterly installments, in advance, in an amount equal to the sum of the
Monthly Rent amounts payable during such three (3) month period.
7. Security Deposit. Tenant has deposited with Landlord the sum set forth in
Paragraph (m) of the Lease Summary as a Security Deposit for the full and
faithful performance of every provision of this Lease to be performed by Tenant.
If Tenant defaults with respect to any provision of this Lease, Landlord may
apply all or any part of the Security Deposit for the payment of any Rent or
other sum in default, the repair of such damage to the Premises or the payment
of any other amount which Landlord may spend or become obligated to spend by
reason of Tenant's default or to compensate Landlord for any other loss or
damage which Landlord may suffer by reason of Tenant's default to the full
extent permitted by law. If any portion of the Security Deposit is so applied,
Tenant shall, within ten (10) days after written demand therefor, deposit cash
with Landlord in an amount sufficient to restore the Security Deposit to its
original amount, and Tenant's failure to do so shall be a default under this
Lease. Upon any increase in the Monthly Rent during the Term, Tenant shall
deposit with Landlord additional funds such that the amount of the Security
Deposit held by Landlord shall at all times bear the same proportion to the then
current Monthly Rent as the original Security Deposit bears to the initial
Monthly Rent. Landlord shall not be required to keep the Security Deposit
separate from its general funds, and Tenant shall not be entitled to interest on
the Security Deposit. If Tenant is not otherwise in default, the Security
Deposit or any balance thereof shall be returned to Tenant within thirty (30)
days of the Termination Date.
8. Holding Over. If Tenant remains in possession of all or any part of the
Premises after the expiration of the Term hereof with the prior written consent
of Landlord, such possession shall constitute a month-to-month tenancy only and
shall not constitute a renewal or extension for any further term. In such event,
Monthly Rent shall be increased to an amount equal to one hundred twenty-five
percent for the first three months of such holdover and thereafter to one
hundred fifty percent (150%) of the Monthly Rent payable during the last month
of the Term, and any other sums due hereunder shall be payable in the amount
and at the times specified in this Lease. Such month-to-month tenancy shall be
subject to every other term, condition, and covenant contained herein.
9. Condition of Premises. By taking possession of the Premises, Tenant shall
be deemed to have accepted the Premises in a good, clean and completed
condition and state of repair, in compliance with all applicable laws, codes and
ordinances. Tenant acknowledges that neither Landlord nor Landlord's Agents has
made any representations or warranties as to the suitability or fitness of the
Premises for the conduct of Tenant's business or for any other purpose, and
that neither Landlord nor Landlord's Agents has agreed to undertake any
alterations or construct any Tenant improvements to the Premises except as
expressly provided in this Lease.
10. Use of the Premises.
(a) Tenant's Use. Tenant shall use the Premises solely for the purposes
set forth in Paragraph (n) of the Lease Summary and shall not use the Premises
for any other purpose without obtaining the prior written consent of Landlord.
(b) Compliance.
(i) Tenant shall not use the Premises or suffer or permit anything
to be done in or about the Premises which will in any way conflict with any
law, statute, zoning restriction, ordinance or governmental law, rule,
regulation or requirement of any duly constituted public authority having
jurisdiction over the Premises now in force or which may hereafter be in
force, or the requirements of the Board of Fire Underwriters or other similar
body now or hereafter constituted relating to or affecting the condition, use
or occupancy of the Premises or any covenants, conditions, easements or
restrictions now or hereafter encumbering the Premises. Tenant shall not commit
any public or private nuisance or any other act or thing which might or would
disturb the quiet enjoyment of any other tenant of Landlord or any occupant of
nearby property. Tenant shall place no loads upon the floors, walls or ceilings
in excess of the maximum designed load specified by Landlords or which
may damage the Building or outside areas; nor place any harmful liquids in the
drainage systems; nor dump or store waste materials, refuse or other materials
or allow such to remain outside the Building proper, except in the enclosed
trash areas provided.
(ii) In particular, Tenant, at its sole cost, shall comply with all
laws relating to the storage, use and disposal of hazardous, toxic or
radioactive matter, including those materials identified in Sections 66680
through 66685 of Title 22 of the California Administrative Code, Division 4,
Chapter 30 ("Title 22") as amended from time to time (collectively "Toxic
Materials"). If Tenant does store, use or dispose of any Toxic Materials, Tenant
shall notify Landlord in writing at least ten (10) days prior to their first
appearance on the Premises and Tenant's failure to do so shall constitute a
default under this Lease. Tenant shall be solely responsible for and shall
defend, indemnify and hold Landlord and Landlord's Agents harmless from and
against all claims, costs and liabilities, including attorneys' fees and costs,
arising out of or in connection with its storage, use and disposal of Toxic
Materials. Tenant shall further be solely responsible for and shall defend,
indemnify and hold Landlord, Landlord's Agents and the Premises harmless from
and against all claims, costs, and liabilities, including attorneys' fees and
costs, arising out of or in connection with the removal, clean-up and
restoration work and materials necessary to return the Premises and any other
property of whatever nature to their condition existing prior to the appearance
of the Toxic Materials on the Premises. Tenant's obligations hereunder shall
survive the termination of this Lease. See Addendum 44.
11. Quiet Enjoyment. Subject to the right of any lender of record, Landlord
covenants that Tenant, upon performing the terms, conditions and covenants of
this Lease, shall have quiet and peaceful possession of the Premises as against
any person claiming the same by, through or under Landlord.
12. Alterations.
(a) Permitted Alterations. After the Commencement Date, Tenant shall not
make or permit any Alterations in, on or about the Premises, except for
non-structural Alterations not exceeding Five Thousand Dollars ($5,000.00) in
aggregate cost over the Term of the Lease, without the prior written consent of
Landlord, which consent may be withheld in Landlord's discretion. All
Alterations shall be constructed pursuant to plans and specifications approved
in writing by Landlord. Notwithstanding the foregoing, Tenant shall not, without
the prior written consent of Landlord, make any: (i) Alterations to the interior
of the Building or the Common Area; (ii) Alterations to or penetrations of the
structural portions of the Building including, without limitation, the roof, or
which will interfere with the proper functioning of any HVAC, electrical or
mechanical facilities or equipment located in the Building; or (iii) Alterations
visible from outside the Building to which Landlord may withhold its consent
based on wholly aesthetic grounds.
All Alterations shall be instituted by a licensed contractor at Tenant's
expense in compliance with all applicable laws and covenants, conditions and
restrictions of record. The work shall be done in a good and workmanlike manner
conforming in quality and design with the Premises existing as of the
Commencement Date, and shall not diminish the value of the Premises. Tenant
shall, if required by Landlord, obtain and pay for, at its own expense, a
completion and indemnity bond, the form and amount of which shall be subject to
the approval of Landlord. All Alterations made by Tenant shall be and become the
property of Landlord upon the installation thereof and shall not be deemed
Tenant's Personal Property; provided, however, that Landlord may, at its option,
require that Tenant, upon the termination of this Lease, at Tenant's expense,
remove any or all non-structural Alterations installed by Tenant and return the
Premises to its condition as of the Commencement Date of this Lease, normal wear
and tear excepted. Notwithstanding any other provisions of this Lease, Tenant
shall be solely responsible for the maintenance, repair and replacement of any
and all Alterations made by it to the Premises.
<PAGE> 6
(ii) Landlord shall, subject to receiving Tenant's contributions as
called for in Paragraph 16(a) above, maintain in good and sanitary condition and
repair the roof of the Building in which the Premises are located and the normal
maintenance services for the HVAC for the Premises, if any, and paint the
exterior of the Building within which the Premises are located as and when such
painting becomes reasonably necessary in Landlord's sole discretion. Landlord
shall not be required to make any repairs to the roof unless and until Tenant
has notified Landlord in writing of the need for such repair and Landlord shall
have a reasonable period of time thereafter to commence and complete such
repair. SEE ADDENDUM #52.
(iii) Tenant hereby waives all right to make repairs at the expense of
Landlord and further hereby waives all rights provided for by the Civil Code of
State of California, as amended from time to time, to make such repairs.
(iv) Tenant agrees that it will not, nor will it authorize any person
to go onto the roof of the Building of which the Premises are a part without
the prior written consent of Landlord.
(d) Action by Landlord if Tenant Fails to Maintain. If Tenant refuses or
neglects to repair and maintain the Premises property as required hereunder and
to the reasonable satisfaction of Landlord, Landlord at any time following ten
(10) days from the date on which Landlord shall make a written demand on Tenant
to effect such repair and maintenance, may enter upon the Premises and make such
repairs and or maintenance without liability to Tenant for any loss or damage
that may accrue to Tenant's merchandise, fixtures or other property or to
Tenant's business by reason thereof, and upon completion thereof. Tenant shall
pay to Landlord Landlord's costs for making such repairs plus twenty percent
(20%) for overhead, upon presentation of a bill therefor, as Additional Rent.
Said bill shall include interest at the Interest Rate on said costs from the
date of completion of the maintenance and repairs by Landlord.
(e) Compliance with Government Regulations. Tenant shall, at its own cost
and expense, promptly and properly observe and comply with, including the making
by Tenant of any Alteration to the Premises, all present and future orders,
regulations, directions, rules, laws, ordinances and requirements of all
governmental authorities (including, without limitation, state, municipal,
county and federal governments and their departments, bureaus, boards and
officials) arising from the use or occupancy of, or applicable to, the Premises
or privileges appurtenant to or in connection with the enjoyment of the
Premises.
(f) Failure to Pay. Tenant's failure timely to pay any of the charges in
connection with the performance of its maintenance and repair obligations to be
paid under this Paragraph shall constitute a material default under this Lese.
17. Fixtures. Tenant shall, at its own expense, provide, install and maintain
in good condition all its Personal Property required in the conduct of its
business in the Premises.
18. Landlord's Right to Enter the Premises. Tenant shall permit Landlord and
Landlord's Agents to enter the Premises at all reasonable times upon reasonable
notice, except for emergencies in which case no notice shall be required to
inspect the same, to post Notices or Nonresponsibility and similar notices and
signs indicating the availability of the Premises for sale, to show the Premises
to interested parties such as prospective lenders and purchasers, to make
necessary Alterations or repairs, to discharge Tenant's obligations hereunder
when Tenant has failed to do so within a reasonable time after written notice
from Landlord, and at any reasonable time after one hundred eighty (180) days
prior to the expiration of the Term, to place upon the Premises such reasonable
signs indicating availability of the Premises for lease and to show the Premises
to prospective tenants. The above rights are subject to reasonable security
regulations of Tenant, and to the requirement that Landlord shall at all times
act in a manner to cause the least possible interference with Tenant's business.
19. Signs. Landlord shall designate the location on the Premises, if any, for
one or more exterior Tenant identification sign(s). Tenant shall have no right
to maintain Tenant identification signs in any other location in, on or about
the Premises and shall not display or erect any other signs, displays or other
advertising materials that are visible from the exterior of the Building. The
size, design, color and other physical aspects of permitted sign(s) shall be
subject to the Landlord's written approval prior to installation, which approval
may be withheld in Landlord's discretion, any covenants, conditions or
restrictions encumbering the Premises and any applicable municipal or other
governmental permits and approvals. The cost of the sign(s), including the
installation, maintenance and removal thereof shall be at Tenant's sole cost
and expense. If Tenant fails to maintain its sign(s), or if Tenant fails to
remove same upon termination of this Lease and repair any damage caused by such
removal (including, without limitation, repainting the Building, if required by
Landlord), Landlord may do so at Tenant's expense. Tenant shall reimburse
Landlord for all costs incurred by Landlord to effect such removal, which
amounts shall be deemed Additional Rent, and shall include, without limitation,
all sums disbursed, incurred or deposited by Landlord including Landlord's
costs, expenses and actual attorney's fees with interest thereon at the
interest rate.
20. Indemnity; Insurance.
(a) Indemnification. Tenant hereby agrees to defend (with attorneys
acceptable to Landlord), indemnify and hold harmless Landlord and Landlord's
Agents from and against any and all damage to the Premises, Building or Project
and any and all damage, loss, liability and expense including, without
limitation, actual attorneys' fees and legal costs incurred directly or by
reason of any claim, suit or judgment brought by or on demand of any person or
persons for damage, loss or expense due to, but not limited to, bodily injury or
property damage sustained by such person or persons which arise out of, are
occasioned by, or are in any way attributable to the use or occupancy of the
Premises, the acts or omissions of the Tenant, its agents, employees or
contractors, except to the extent caused by the gross negligence or willful
misconduct of Landlord. Tenant agrees that the obligations of Tenant herein
shall survive the expiration or earlier termination of this Lease.
(b) Insuring Party. As used in this Paragraph the term "insuring party"
shall mean the party designated in the Lease Summary who has the obligation to
obtain the property insurance required hereunder. If Landlord is the insuring
party, Landlord shall not be required to name Tenant as an additional insured
under any such policy. Whether the insuring party is Landlord or Tenant, Tenant
shall, as Additional Rent for the Premises, pay the cost of all insurance
required hereunder. If Landlord is the insuring party, Tenant shall, within ten
(10) days following demand by Landlord, reimburse Landlord for the cost of the
insurance so obtained.
(c) Tenant's Insurance. Tenant agrees to maintain in full force and effect
at all times during the Term, at its own expense, for the protection of Tenant
and Landlord, as their interests may appear, policies of insurance issued by a
carrier or carriers acceptable to Landlord and as lender(s) of record which
afford the following coverages; (i) worker's compensation, statutory limits;
(ii) employer's liability, as required by law, (iii) comprehensive general
liability insurance including blanket contractual liability, broad form property
damage, personal injury, completed operations, products liability, and fire
damage of not less than Two Million Dollars ($2,000,000.00) with a combined
single limit for both bodily injury and property damage and naming Landlord,
Landlord's Agents and mortgagees as additional insureds, (iv) boiler and
machinery insurance including, but not limited to, steam pipes, pressure pipes,
condensation return pipes and other pressure vessels and HVAC equipment, with
limits per accident of not less than the replacement cost of all leasehold
improvements and of all boilers, pressure valves, HVAC equipment and
miscellaneous electrical and mechanical equipment on the Premises, (v)
plateglass insurance, if applicable, and (vi) such other insurance, in such form
and amounts as may be reasonably required by Landlord or its lender(s) from time
to time.
(d) Property Insurance. The insuring party shall obtain and keep in force
during the Term of this Lease a policy or policies of insurance covering loss
or damage to the Premises, in the amount of the full replacement cost thereof,
as the same may exist from time to time, but in the event less than the local
amount required by lender(s) having liens on the Premises, against all ________
included within the classification of fire, extended coverage, vandalism,
malicious mischief, flood (if required by any lender(s) having lien(s) on the
Premises), and special extended ________ ("all risk" as such term is used in the
insurance industry). Said insurance shall provide for payment of loss thereunder
to Landlord or to the holders of mortgages or deeds of trust on the Premises.
The insuring party shall, in addition, obtain and keep in force during the
Term of this Lease a policy of rental value insurance covering a period of one
(1) year, with loss payable to Landlord, which insurance shall also cover all
real estate taxes and insurance costs for said period. A stipulated value or
agreed amount endorsement deleting the coinsurance provision of the policy
shall be procured with said insurance as well as an automatic increase in
insurance endorsement causing the increase in annual property insurance
coverage by 2% per quarter. If such insurance coverage has a deductible clause,
the deductible amount shall not exceed Ten Thousand Dollars ($10,000) per
occurrence, and Tenant shall be liable for such deductible amount. If the
Premises are part of a larger building, or if the Premises are part of a group
of buildings owned by Landlord which are adjacent to the Premises, then Tenant
shall pay for any increase in the property insurance of such other building or
buildings if said increase is caused by Tenant's acts, emissions, use or
occupancy of the Premises. If the Landlord is the insuring party, Landlord will
not insure Tenant's fixtures, equipment or Tenant improvements the insurance
for which shall be obtained by Tenant at its sole cost and expense.
(e) Deductibles. Any policy of insurance required of Tenant pursuant to
this Lease containing a deductible must be approved in writing by Landlord
prior to the issuance of such policies if being understood and agreed that
Tenant shall be solely responsible for the payment of any such deductible.
(f) Certificates. Tenant shall deliver to Landlord at least thirty (30)
days prior to the time such insurance is first required to be carried by
Tenant, and thereafter at least thirty (30) days prior to expiration of each
such policy, certificates of insurance evidencing the above coverage with limits
not less than those specified above. The certificates shall expressly provide
that the interest of Landlord therein shall not be affected by any breach of
Tenant of any policy provision for which such certificates evidence coverage.
(g) Increased Coverage. Upon demand, Tenant shall provide Landlord, at
Tenant's expense, with such increased amount of existing insurance, and such
other insurance as Landlord or Landlord's lender(s) may reasonably require.
(h) Co-Insurer. If, on account of the failure of Tenant to comply with
the foregoing provisions, Landlord is adjudged a co-insurer by its insurance
carrier, than any loss or damage Landlord shall sustain by reason thereof,
including attorneys' fees and costs, shall be borne by Tenant and shall be
immediately paid by Tenant upon receipt of a bill therefor and evidence of
such loss.
(i) Sufficiency of Coverage, Neither Landlord nor Landlord's Agents makes
any representation that the limits of liability specified to be carried by
Tenant under this Lease are adequate to protect Tenant. If Tenant believes that
any such insurance coverage is insufficient, Tenant shall provide, at its own
expense, such additional insurance as Tenant deems adequate.
(j) Insurance Requirements. All such insurance: (i) shall be in a form
satisfactory to Landlord and its lender(s) and shall be carried with companies
that have a general policyholder's rating of not less than "A" and a financial
rating of not less than Class "X" in the most current edition of Best's
Insurance Reports; (ii) shall provide that such policies shall not be subject
to material alterations or cancellation except after at least thirty (30) days'
prior written notice to Landlord: and (iii) shall be primary as to Landlord.
The policy or policies, or duly executed certificates for them, together with
satisfactory evidence of payment of the premium therefor shall be deposited
with Landlord prior to the Commencement Date, and upon renewal of such policies
not less than thirty (30) days prior to the expiration of the term of such
coverage. If Tenant fails to procure and maintain the insurance required to be
procured by Tenant hereunder, Landlord may, but shall not be required to, order
such insurance at Tenant's expense and Tenant shall reimburse Landlord for all
costs incurred by Landlord with respect thereto. Tenant's reimbursement to
Landlord for such amounts shall be deemed Additional Rent, and shall include
all sums disbursed, incurred or deposited by Landlord including Landlord's
costs, expenses and actual attorney's fees, with interest thereon at the
interest rate.
(k) Landlord's Disclaimer. Landlord and Landlord's Agents shall not be
liable for any loss or damage to persons or property resulting from fire,
explosion, falling plaster, glass, tile or sheetrock, steam, gas, electricity,
water or rain which may leak from any part of the Premises, or from the pipes,
appliances or plumbing works therein or from the roof, street or subsurface or
whatsoever, unless caused by or due to the gross negligence or willful acts of
Landlord. Landlord and Landlord's Agents shall not be liable for interference
with light or air, or for any latent defect in the Premises. Tenant shall give
prompt written notice to Landlord in case of a casualty, accident or repair
needed to the Premises or Common Area.
(l) Failure to Pay, The failure to obtain and pay for any insurance
required to be obtained and paid for by it hereunder shall constitute a material
default under the Lease.
<PAGE> 7
21. Waiver of Subrogation. Landlord and Tenant each hereby waive all rights of
recovery against the other on account of loss and damage occasioned to such
waivering party for its property or the property of others under its control to
the extent that such loss or damage is insured against under any insurance
policies in force at the time of such loss or damage. Tenant and Landlord shall,
upon obtaining policies of insurance required hereunder, give notice to the
insurance carrier that the foregoing mutual waiver of subrogation is contained
in this Lease and Tenant and Landlord shall cause each insurance policy obtained
by such party to provide that the insurance company waives all right of recovery
by way of subrogation against either Landlord or Tenant in connection with any
damage covered by such policy.
22. Damage or Destruction.
(a) Landlord's Obligation to Rebuild. If the Premises are damaged or
destroyed, Landlord shall promptly and diligently repair the Premises unless it
has the right to terminate this Lease as provided in subparagraph (b) next
below and it elects to so terminate.
(b) Landlord's Right to Terminate. Landlord shall have the right to
terminate this Lease following damage to or destruction of the Premises if any
of the following occurs: (i) insurance proceeds together with additional
amounts Tenant agrees to contribute are not available to Landlord to pay one
hundred percent (100%) of the cost to fully repair the damaged Premises,
excluding the deductible for which Tenant shall also be responsible, (ii) the
Premises cannot, with reasonable diligence, be fully repaired by Landlord
within one hundred eighty (180) days after the date of the damage or
destruction, (iii) the Premises cannot be safely repaired because of the
presence of hazardous factors, including, but not limited to, earthquake faults,
radiation, chemical waste and other similar dangers, (iv) the Premises are
destroyed or damaged during the last twelve (12) months of the Term; or (v)
Tenant is in default under the terms of this Lease at the time of such damage
or destruction. SEE ADDENDUM #53.
If Landlord elects to terminate this Lease, Landlord may give Tenant
written notice of its election to terminate within thirty (30) days after it has
knowledge of such damage or destruction, and this Lease shall terminate fifteen
(15) days after the date Tenant receives such notice. If this Lease is
terminated, Landlord shall, subject to the rights of its lender(s) be entitled
to receive and retain all the insurance proceeds resulting from such damage,
except for those proceeds payable under policies obtained by Tenant which
specifically insure Tenant's Personal Property. If Landlord elects not to
terminate the Lease, Landlord shall, promptly following the date of such damage
or destruction and receipt of amounts required of Tenant pursuant to
subparagraph (b)(i) above, commence the process of obtaining necessary permits
and approvals, and shall commence repair of the Premises as soon as practicable
and thereafter prosecute the same diligently to completion in which event this
Lease will continue in full force and affect.
(c) Limited Obligation to Repair. Landlord's obligation, should it elect
or be obligated to repair or rebuild, shall be limited to the Premises and
Tenant Improvements, and Tenant shall, at its expense, replace or fully repair
all Tenant's Personal Property and any Alterations installed by Tenant existing
at the time of such damage or destruction. If the Premises are to be repaired
in accordance with the foregoing, Landlord shall make available to Tenant any
portion of the insurance proceeds it receives which are allocable to the
Alterations constructed by Tenant pursuant to this Lease provided Tenant is not
then in default.
(d) Abatement of Rent. Rent shall be temporarily abated proportionately,
but only to the extent of any proceeds received by Landlord from rental
abatement insurance described in Paragraph 20(d), during any period when, by
reason of such damage or destruction, Landlord reasonably determines that there
is substantial interference with Tenant's use of the Building. Such abatement
shall commence upon such damage or destruction and end upon substantial
completion by Landlord of the repair or reconstruction which Landlord is
obligated or undertakes to do. Tenant shall not be entitled to any compensation
or damages from Landlord for loss of the use of the Premises, damage to
Tenant's Personal Property or any inconvenience occasioned by such damage,
repair or restoration. Tenant hereby waives the provisions of Section 1932(2)
and Section 1933(4) of the California Civil Code, and the provisions of any
similar law hereinafter enacted.
(e) Replacement Cost. The determination in good faith by Landlord of the
estimated cost of repair of any damage, of the replacement cost, or of the time
period required for repair shall be conclusive for purposes of this Paragraph.
23. Condemnation.
(a) Total Taking -- Termination. If title to all of the Premises or so
much thereof is taken for any public or quasi-public use under any statute or
by right of eminent domain so that reconstruction of the Premises will not
result in the Premises being reasonably suitable for Tenant's continued
occupancy for the uses and purposes permitted by this Lease. This Lease shall
terminate as of the date possession of the Premises or part thereof be taken.
(b) Partial Taking. If any part of the Premises is taken and the
remaining part is reasonably suitable for Tenant's continued occupancy for the
purposes and uses permitted by this Lease, this Lease shall, as to the part so
taken, terminate as of the date that possession of such part of the Premises is
taken and the Monthly Rent shall be reduced in the same proportion that the
floor area of the portion of the Building so taken (less any addition thereto by
reason of any reconstruction) bears to the original floor area of the Building,
Landlord shall, at its own cost and expense, make all necessary repairs or
alterations to the Building so as to make the portion of the Building not taken
a complete architectural unit. Such work shall not, however, exceed the scope of
the work done by Landlord in originally constructing the Building. Monthly Rent
due and payable hereunder shall be temporarily abated during such restoration
period in proportion to the degree to which Tenant's use of the Premises is
impaired. Each party hereby waives the provisions of Section 1265.130 of the
California Code of Civil Procedure allowing either party to petition the
Superior Court to terminate this Lease in the event of a partial taking of the
Building or Premises.
(c) No Apportionment of Award. No award for any partial or total taking
shall be apportioned, it being agreed and understood that Landlord shall be
entitled to the entire award for any partial or total taking. Tenant assigns to
Landlord its interest in any award which may be made in such taking or
condemnation, together with any and all rights of Tenant arising in or to the
same or any part thereof. Nothing contained herein shall be deemed to give
Landlord any interest in or require Tenant to assign to Landlord any separate
award made to Tenant for the taking of Tenant's Personal Property, for the
interruption of Tenant's business, or its moving costs, or for the loss of its
goodwill.
(d) Temporary Taking. No temporary taking of the Premises shall
terminate this Lease or give Tenant any right to any abatement of Rent. Any
award made to Tenant by reason of such temporary taking shall belong entirely
to Tenant and Landlord shall not be entitled to share therein. Each party
agrees to execute and deliver to the other all instruments that may be required
to effectuate the provisions of this subparagraph.
(e) Sale Under Threat of Condemnation. A sale by Landlord to any
authority having the power of eminent domain, either under threat of
condemnation or while condemnation proceedings are pending, shall be deemed a
taking under the power of eminent domain for all purposes of this Paragraph.
24. Assignment and Subletting.
(a) Prohibition. Tenant shall not assign, mortgage, hypothecate,
encumber, grant any license or concession, pledge or otherwise transfer
(collectively, "assignment") this Lease, in whole or in part, nor sublet or
permit occupancy by any person other than Tenant of all or any part of the
Premises, without the prior written consent of Landlord in each instance, which
consent shall not be unreasonably withheld. Any purported assignment or
subletting contrary to the provisions hereof without consent shall be void. The
consent by Landlord to any assignment or subletting shall not constitute a
waiver of the necessity for such consent to any subsequent assignment or
subletting. As Additional Rent hereunder, Tenant shall reimburse Landlord for
actual legal and other expenses incurred by Landlord in connection with any
request by Tenant for consent to assignment or subletting in connection with any
proposed assignment or sublease. Tenant shall submit to Landlord in writing (i)
the name of the proposed assignee or sublessee, (ii) such information as to such
assignee's or sublessee's financial responsibility and standing as Landlord may
reasonably require, (iii) the proposed use of the Premises by such assignee or
sublessee; (iv) all of the terms and conditions upon which the proposed
assignment or subletting is to be made, and (v) an instrument of assignment or
sublease wherein such assignee or sublessee assumes all of Tenant's obligations
hereunder and agrees to be bound by the terms hereof.
(b) Excess Sublease Rental or Assignment Consideration. If, after the
first two years of the term hereof for any sublease or assignment, Tenant
receives rent or other consideration, either initially or over the term of the
sublease or assignment, in excess of the Monthly Rent called for hereunder, or
in case of the sublease of a portion of the Premises, in excess of such Monthly
Rent fairly allocable to such portion, promptly following its receipt thereof,
Tenant shall pay to Landlord, as Additional Rent hereunder, seventy-five percent
(75%) of the excess of each such payment of rent or other consideration in
excess of the Monthly Rent called for hereunder.
(c) Scope. The prohibition against assigning or subletting contained in
this Paragraph shall be construed to include a prohibition against any
assignment or subletting by operation of law, whether voluntary or involuntary.
If this Lease be assigned, or if the underlying beneficial interest of Tenant be
transferred, or if the Premises or any part thereof be sublet or occupied by any
person other than Tenant, Landlord may collect rent from the assignee, subtenant
or occupant and apply the net amount collected to the Monthly Rent herein
reserved and apportion any excess rent so collected in accordance with the terms
of subparagraph (b) next above, but no such assignment, subletting, occupancy or
collection shall be deemed a waiver of this covenant, or the acceptance of the
assignee, subtenant or occupant as tenant, or a release of Tenant from the
further performance by Tenant of covenants on the part of Tenant herein
contained. No assignment or subletting shall affect the continuing primary
liability of Tenant (which, following assignment, shall be joint and several
with the assignee), and Tenant shall not be released from performing any of the
terms, covenants and conditions of this Lease.
(d) Waiver. Notwithstanding any assignment or sublease, or any
indulgences, waivers or extensions of time granted by Landlord to any assignee
or sublessee, or failure by Landlord to take action against any assignee or
sublessee, Tenant waives notice of any default of any assignee or sublessee
other than any notice and time to cure to which Tenant is otherwise entitled to
hereunder, and agrees that Landlord may, at its option, proceed against Tenant
without having taken action against or joined such assignee or sublessee,
except that Tenant shall have the benefit of any indulgences, waivers and
extensions of time granted to any such assignee or sublessee.
25. Default.
(a) Tenant's Default. At the option of Landlord, a default under this
Lease by Tenant shall exist if any of the following events shall occur: (i) if
Tenant shall have failed to pay Rent or any other sum required to be paid
hereunder when due; or (ii) if Tenant shall have failed to perform any term,
covenant or condition of this Lease other than those requiring the payment of
money, and Tenant shall have failed to cure such failure within fifteen (15)
days after written notice from Landlord where such failure could reasonably be
cured within such fifteen (15) day period, provided however, that where such
failure could not reasonably be cured within the fifteen (15) day period, that
Tenant shall not be in default if it has commenced such cure within the fifteen
(15) day period and diligently thereafter prosecutes the same to completion
which in all events must occur within sixty (60) days thereafter; (iii) if
Tenant shall have assigned its assets for the benefit of its creditors; (iv) if
the sequestration or attachment of or execution on any material part of Tenant's
Personal Property essential to the conduct of Tenant's business shall have
occurred, and Tenant shall have failed to obtain a return or release of such
Personal Property within thirty (30) days thereafter, or prior to sale pursuant
to such sequestration, attachment or levy, whichever is earlier; (v) if Tenant
shall have failed to continuously or uninterruptedly conduct its business in the
Premises, or shall have abandoned or vacated the Premises; (vi) if a court shall
have made or entered any decree or order other than under the bankruptcy laws of
the United States or any state adjudging Tenant to be insolvent; or approving as
properly filed a petition seeking reorganization of Tenant; or directing the
winding up or liquidation of Tenant and such decree or order shall have
continued for a period of thirty (30) days; (vii) the filing of a voluntary
petition in bankruptcy by Tenant, a voluntary petition for arrangement, a
voluntary or involuntary petition for reorganization, or the filing of an
involuntary petition by Tenant's creditors, immediately (unless involuntary,
which case when the petition remains undischarged for a period of thirty (30)
days); (viii) if Tenant shall have failed to timely comply with the provisions
of Paragraph 26 or 29 of this Lease.
(b) Remedies. Upon a default, Landlord shall have the following
remedies, in addition to all other rights and remedies provided by law in
equity or otherwise provided in this Lease, to which Landlord may resort
cumulatively or in the alternative: (i) Landlord may continue this Lease in
full force and effect, and this Lease shall continue in full force and effect
as long as Landlord does not terminate this Lease, and Landlord shall have the
right to collect Rent when due; (ii) Landlord may, with or without terminating
this Lease, re-enter the Premises and remove all persons and property from the
premises, such property may be
<PAGE> 8
removed and stored in a public warehouse or elsewhere at the cost of and for the
account of Tenant. No re-entry or taking possession of the Premises by Landlord
pursuant to the subparagraph shall be construed as an election to terminate this
Lease unless a written notice of such intention is given to Tenant, (iii)
Landlord may terminate Tenant's right to possession of the Premises at any time
by giving written notice to that effect, and relet the Premises or any part
thereof. Tenant shall be liable immediately to Landlord for all costs Landlord
incurs in reletting the Premises or any part thereof, including, without
limitation, brokers commissions, expenses of cleaning, redecorating, and further
improving the Premises and like costs. Reletting may be for a period shorter or
longer than the remaining term of this Lease. No act by Landlord other than
giving written notice to Tenant shall terminate this Lease. Acts of maintenance,
efforts to relet the Premises or the appointment of a receiver on Landlord's
initiative to protect Landlord's interest under this Lease shall not constitute
a termination of Tenant's right to possession. Upon termination, Landlord shall
have the right to remove all of Tenant's Personal Property and store same at
Tenant's cost and to recover from Tenant as damages (A) the worth at the time of
award of any unpaid rent and other sums due and payable which had been earned at
the time of termination; plus (B) the worth at the time of award of the amount
by which the unpaid rent and other sums which would have been payable after
termination until the time of award exceeds the amount of such Rent loss that
Tenant proves could have been reasonably avoided, plus (C) the worth at the time
of award of the amount by which the unpaid Rent and other sums due for the
balance of the Term after the time of award exceeds the amount of such Rent loss
that Tenant proves could be reasonably avoided, plus (D) any other amounts to
compensate Landlord for all the detriment proximately caused by Tenant's failure
to perform Tenant's obligations under this Lease, or which, in the ordinary
course of things, would be likely to result therefrom, including, without
limitation, any costs or expenses incurred by Landlord: (i) in retaking
possession of the Premises; (ii) in maintaining, repairing, preserving,
restoring, replacing, cleaning, altering or rehabilitating the Premises or any
portion thereof, including such acts for reletting to a new tenant or tenants;
(iii) for leasing commissions; or (iv) for any other costs necessary or
appropriate to relet the Premises; plus (E) at Landlord's election, such other
amounts and remedies in addition to or in lieu of the foregoing as may be
permitted from time to time by the laws of the State of California including,
without limitation, the remedies provided by California Civil Code Section 1951
4, as amended from time to time.
The "worth at the time of award" of the amounts referred to in
subparagraphs (b)(iii)(A) and (b)(iii)(B) above is computed by allowing
interest at the Interest Rate on the unpaid Rent and other sums due and payable
from the termination date through the date of award. The "worth at the time of
award" of the amount referred to in subparagraph (b)(iii)(C) is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%). Tenant waives redemption
or relief from forfeiture under California Code of Civil Procedure Sections
1174 and 1179, or under any other present or future law, in the event Tenant is
evicted or Landlord takes possession of the Premises by reason of any default
of Tenant hereunder.
(c) Landlord's Default. Landlord shall not be deemed to be in default in
the performance of any obligation required to be performed by it hereunder
unless and until it has failed to perform such obligation within thirty (30)
days after receipt of written notice by Tenant to Landlord (and its lendor(s) of
record who have provided Tenant with notice) specifying the nature of such
default, provided, however, that if the nature of Landlord's obligation is such
that more than thirty (30) days are required for its performance, then Landlord
shall not be deemed to be in default if it shall commence such performance
within such thirty (30) day period and thereafter diligently prosecute the same
to completion.
26. Subordination. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any bona fide mortgagee or deed of trust beneficiary
with a lien on all or any portion of the Premises or any ground lessor with
respect to the land of which the Premises are a part, this Lease shall be
subject and subordinate at all times to: (i) all ground leases or underlying
leases which may now exist or hereafter be executed affecting the Building or
the land upon which the Building is situated or both, and (ii) the lien of any
mortgage or deed of trust which may now exist or hereafter be executed in any
amount for which the Building, land, ground leases or underlying leases, or
Landlord's interest or estate in any of said items is specified as security.
Notwithstanding the foregoing, Landlord or any such ground lessor, mortgagee, or
beneficiary shall have the right to subordinate or cause to be subordinated any
such ground leases or underlying leases or any such liens to this Lease. If any
ground lease or underlying lease terminates for any reason or any mortgage or
deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for
any reason, Tenant shall, notwithstanding any subordination and upon the request
of such successor in interest to Landlord, attorn to and become the Tenant of
the successor in interest to Landlord. Tenant covenants and agrees to execute
and deliver, within ten (10) days following a demand by Landlord and in the form
requested by Landlord, ground lessor, mortgagee or beneficiary, any additional
documents evidencing the priority or subordination of this Lease with respect to
any such ground leases or underlying leases or the lien of any such mortgage or
deed of trust. Tenant's failure to timely execute and deliver such additional
documents shall, at Landlord's option, constitute an additional default
hereunder. Tenant hereby irrevocably appoints Landlord as attorney-in-fact of
Tenant, which appointment is coupled with an interest, to execute, deliver and
record any such documents in the name and on behalf of Tenant.
27. Notices. Any notice or demand required or desired to be given under this
Lease shall be in writing and shall be personally served or in lieu of personal
service may be given by mail. If given by mail, such notice shall be deemed to
have been given when seventy-two (72) hours have elapsed from the time when
such notice was deposited in the United States mail, registered or certified,
postage prepaid, return receipt requested, addressed to the party to be served.
At the date of execution of this Lease, the addresses of Landlord and Tenant
are as set forth in Paragraph 1. After the Commencement Date, the address of
Tenant shall be the address of the Premises. Either party may change its
address by giving notice of same in accordance with this Paragraph.
28. Attorneys' Fees. If either party brings any action or legal proceeding for
damages for an alleged breach of any provision of this Lease, to recover Rent or
other sums due, to terminate this Lease or to enforce, project or establish any
term, condition or covenant of this Lease or the right of either party hereunder
or at law, the prevailing party shall be entitled to recover as a part of such
action or proceedings, or in a separate action brought for that purposes, actual
attorneys' fees and costs.
29. Estoppel Certificate. Tenant shall within seven (7) days following written
request by Landlord:
(a) Tenant Obligations. Execute and deliver to Landlord any documents,
including estoppel certificates, in a form prepared by Landlord (i) certifying
that this lease is unmodified and in full force and effect or, if modified,
stating the nature of such modification and certifying this Lease, as so
modified, is in full force and effect and the date to which the Rent and other
charges are paid in advance, if any; (ii) acknowledging that there are not, to
Tenant's knowledge, any uncured defaults on the part of the Landlord or stating
the nature of any uncured defaults; (iii) evidencing the status of the Lease as
may be required either by a lender making a loan to Landlord to be secured by
deed of trust or mortgage covering the Premises or a purchaser of the Premises
from Landlord; (iv) certifying the current Monthly Rent amount and the amount
and form of Security Deposit on deposit with Landlord; and (v) certifying to
such other information as Landlord, Landlord's Agents, mortgagees, prospective
mortgagees and purchasers may reasonably request.
Tenant's failure to deliver an estoppel certificate within seven (7) days
after delivery of Landlord's written request therefor shall be conclusive upon
Tenant (i) that this Lease is in full force and effect, without modification
except as may be represented by Landlord; (ii) that there are now no uncured
defaults in Landlord's performance; (iii) that not more than one (1) month's
Monthly Rent has been paid in advance; and (iv) that the other information
requested by Landlord is correct as stated in the form presented by Landlord.
Tenant hereby irrevocably appoints Landlord as Tenant's attorney-in-fact,
which appointment is coupled with an interest, to act in Tenant's name, place
and stead to execute such estoppel certificate on Tenant's behalf.
(b) Financial Information. Deliver to Landlord the current financial
statements of Tenant, and financial statements of the two (2) years prior to
the current financial statement's year, with an unqualified opinion of a
certified public accountant, including a balance sheet and profit and loss
statement for the most recent prior year, all prepared in accordance with
generally accepted accounting principles consistently applied.
30. Transfer of the Premises by Landlord. Upon any conveyance of the Premises
and assignment by Landlord of this Lease, Landlord shall be and is hereby
entirely released from all liability under any and all of its covenants and
obligations contained in or derived from this Lease occurring after the date of
such conveyance and assignment, and Tenant agrees to attorn to any entity
purchasing or otherwise acquiring the Premises.
31. Landlord's Right to Perform Tenant's Covenants. If Tenant shall at any
time fail to make any payment or perform any other act on its part to be made
or performed under this Lease, Landlord may, but shall not be obligated to and
without waiving or releasing Tenant from any obligation of Tenant under this
Lease, make such payment or perform such other act to the extent Landlord may
deem desirable, and in connection therewith, pay expenses and employ counsel.
All sums so paid by Landlord and all penalties, interest and costs in
connection therewith shall be due and payable by Tenant to Landlord on the next
day after such payment by Landlord, together with interest thereon at the
Interest Rate from such date to the date of payment thereof by Tenant to
Landlord, plus collection costs and attorneys' fees. Landlord shall have the
same rights and remedies for the nonpayment thereof as in the case of default
in the payment of Rent.
32. Tenant's Remedy. The obligations of Landlord do not constitute the
personal obligation of the individual partners, trustees, directors, officers
or shareholders of Landlord or its constituent partners. If Landlord shall fail
to perform any covenant, term, or condition of this Lease upon Landlord's part
to be performed, Tenant shall be required to deliver to Landlord written notice
of the same. If, as a consequence of such default, Tenant shall recover a money
judgment against Landlord, such judgment shall be satisfied only out of the
proceeds of sale received upon execution of such judgment and levied thereon
against the right, title and interest of Landlord in the Premises and out of
Rent or other income from such property receivable by Landlord or out of
consideration received by Landlord from the sale or other disposition of all or
any part of Landlord's right, title or interest in the Premises, and no action
for any deficiency may be sought or obtained by Tenant.
33. Mortgagee Protection. Upon any default on the part of Landlord, Tenant
will give notice by registered or certified mail to any beneficiary of a deed
of trust or mortgagee of a mortgage covering the Premises who has provided
Tenant with notice of their interest together with an address for receiving
notice, and shall offer such beneficiary or mortgagee a reasonable opportunity
to cure the default (which, in no event shall be less than ninety (90) days),
including time to obtain possession of the Premises by power of sale or a
judicial foreclosure, if such should prove necessary to effect a cure. Tenant
agrees that each lender to whom this Lease has been assigned by Landlord is an
express third party beneficiary hereof. Tenant shall not make any prepayment of
Monthly Rent more than one (1) month in advance without the prior written
consent of each such lender. Tenant waives the collection of any deposit from
such lender(s) or any purchaser at a foreclosure sale of such lender(s) deed
of trust unless the lender(s) or such purchaser shall have actually received
and not refunded the deposit. Tenant agrees to make all payments under the
Lease to the lender with the most senior encumbrance upon receiving a
direction, in writing, to pay said amounts to such lender. Tenant shall comply
with such written direction to pay without determining whether an event of
default exists under such lender's loan to Landlord.
34. Brokers. Landlord and Tenant each warrant and represent to the other that
neither has had any dealings with any real estate broker, agent or finder in
connection with the negotiation of this Lease or the introduction of the
parties to this transaction, except for the brokers identified in Paragraph (o)
of the Lease Summary, and that it knows of no other real estate broker, agent
or finder who is or might be entitled to a commission or fee in connection with
this Lease. In the event of any such additional claims for brokers' or finders'
fees with respect to this Lease, then Tenant shall indemnify, save harmless and
defend Landlord from and against such claims if they shall be based upon any
statement or representation or agreement by Tenant, and Landlord shall
indemnify, save harmless and defend Tenant if such claims shall be based upon
any statement, representation or agreement made by Landlord.
35. Examination of Lease. Submission of this Lease for examination or
signature by Tenant does not create a reservation of or option to Lease. This
Lease shall only become effective and binding upon full execution hereof by
both Landlord and Tenant.
36. Recording. Tenant shall not record this Lease nor a short form memorandum
thereof without Landlord's prior written consent.
37. Quitclaim. Upon any termination of this Lease, Tenant shall, at Landlord's
request, execute, have acknowledged and deliver to Landlord a quitclaim deed of
the Premises.
<PAGE> 9
38. Modifications for Lender. If, in connection with obtaining financing for
the Premises or any portion thereof, Landlord's lender shall request reasonable
modification to this Lease as a condition to such financing, Tenant shall not
unreasonably withhold, delay or defer its consent thereto, provided such
modifications do not materially adversely affect Tenant's rights hereunder.
39. Parking and Use of Common Area and Facilities.
(a) Grant of Non-Exclusive Common Area License and Right. Landlord hereby
grants to Tenant and its successors and assigns, a non-exclusive license and
right for Tenant and its permitted subtenants in common with Landlord and all
persons, firms and corporations conducting business in the Project and their
respective customers, guests, licensees, invitees, subtenants, employees and
agents, to use the Common Area within the Project for vehicular parking for
pedestrian and vehicular ingress, egress and travel, and for such other
purposes and for doing such other things as may be provided for, authorized
and/or permitted by any covenants, conditions, easements or restrictions now or
hereafter encumbering the Premises, such non-exclusive license and right to be
appurtenant to Tenant's leasehold estate in and to the leased Premises created
by this Lease. The non-exclusive license and right granted pursuant to the
provisions of this Paragraph shall be subject to any and all covenants,
conditions, easements and restrictions now or hereafter encumbering the
Premises, which pertain in any way to the Common Area covered by such
encumbrances; and the provisions of this Lease.
(b) Use of Common Area. Notwithstanding anything to the contrary herein.
tenant agrees for itself and for its successors, assigns, employees, and agents
that it and they shall use the Common Area within the Project only for the
purposes permitted hereby and by any covenants, conditions, easements or
restrictions now or hereafter encumbering the Premises. It is understood that
all uses permitted within the Common Area shall be undertaken with reason and
judgment so as not to interfere with the primary use of said Common Area which
is to provide parking and vehicular and pedestrian access throughout the Common
Area within the Project and to adjacent public streets for the Landlord, its
tenants, subtenants and all persons, firms and corporations conducting business
within the Project and their respective customers, guests, and licensees. In no
event shall tenant erect or cause to be erected any structures, building,
trailer, fence, wall, signs or other obstructions on the Common Area within the
Project except as otherwise permitted herein or by any covenants, conditions
or restrictions now or hereafter encumbering the Premises nor shall Tenant store
or sell any merchandise, equipment and/or materials on the Common Area within
the Project.
(c) Control and Maintenance of Common Area.
(i) Subject to provisions of any covenants, conditions, easements or
restrictions now or hereafter encumbering the Premises, it is understood and
agreed that all Common Area within the Project and all improvements located from
time to time within such Common Area, are for the general use, in common, of
the Landlord and its tenants and subtenants and all persons, firms and
corporations conducting business in the Project and their respective customers,
guests, licensees, invitees, employees and agents, and shall at all times be
subject to the exclusive control and management of the Landlord.
(ii) Landlord shall have the right to construct, maintain and operate
lighting facilities within the Common Area; to police the Common Area from time
to time, to change the area, level, location and arrangement of the parking
areas and other improvements within the Common Area; to restrict parking by
tenants, their officers, agents and employees to employee parking areas, to
enforce parking charges (by operation of meters or otherwise); to close all or
any portion of the Common Area or improvements therein to such extent as may,
in the opinion of counsel for Landlord, be legally sufficient to prevent a
dedication thereof or the accrual of any rights to any person or to the public
therein; to close temporarily all or any portion of the Common Area and/or the
improvements thereon, to discourage non-customer parking, and to do and perform
such other acts in and to said Common Area and improvements thereon as, in the
use of good business judgment, Landlord shall determine to be advisable.
(iii) subject to the provisions of any covenants, conditions, and
restrictions now or hereafter encumbering the Premises, Landlord shall
operate and maintain or cause to be operated and maintained, the Common Area
within the Project in such a manner as Landlord in its sole discretion shall
determine from time to time. Without limiting the scope of such discretion,
Landlord shall have the full right to employ or cause to be employed all
personnel and to make or cause to be made all rules and regulations pertaining
to or necessary for the proper operation and maintenance of the Common Area and
the improvements located thereon.
(iv) It is hereby further agreed that the use of the Common Area by
Tenant, its permitted subtenants, if any, and their respective customers,
guests, licensees, invitees, employees and agents may and shall be restricted
such that no part of the Common Area may be used for the storage of any items,
including without limitation, vehicles, materials, inventory and or equipment.
All trash and other refuse shall be placed in designated receptacles. There
shall be no overnight parking of any vehicles of any kind, and vehicles which
have been abandoned or parked in violation of the terms hereof may be towed
away at the owner's expense. No work of any kind, including, without
limitation, painting, drying, cleaning, repairing, manufacturing, assembling,
cutting, merchandising and/or displaying shall be permitted. Parking within the
Common Area shall be limited to striped parking stalls, and no parking shall be
permitted in any driveways, accessways and/or in any area which would prohibit
or impede the free flow of traffic within the Common Area.
(v) Any use of the Common Area in violation of the restrictions set
forth hereinabove shall constitute a material default under this Lease.
(d) Revocation of License. All Common Area and improvements located
therein which Tenant is permitted to use and occupy pursuant to the provisions
of this lease, are to be used and occupied under a revocable license and right,
and if any such license be revoked, or if the amount of such areas be
diminished, Landlord shall not be subject to any liability nor shall Tenant be
entitled to compensation or diminution or abatement of rent, nor shall such
revocation or diminution of such areas be deemed constructive or actual
eviction. It is understood and agreed that the condemnation or other taking or
appropriation by any public or quasi-public authority, or sale in lieu of
condemnation, of all or any portion of the Common Area within the Project, shall
not constitute a violation of Landlord's agreements hereunder, nor shall Tenant
be entitled to participate in or make any claim for any award or other
condemnation proceeds arising from any such taking or appropriation of the
Common Area.
(e) Landlord's Reserved Rights. Provided Landlord does not unreasonably
interfere with Tenant's use of the Premises, Landlord reserves the right to
install, use, maintain, repair, relocate and replace pipes, ducts, conduits,
wires and appurtenant meters and equipment included in the Premises or outside
the Premises, change the boundary lines of the Project and install, use,
maintain, repair, alter or relocate, expand and replace any Common Area. Such
right of Landlord shall include, without limitation, designating from time to
time certain portions of the Common Area as exclusively for the benefit of
certain tenants in the Project.
40. General
(a) Captions. The captions and headings used in this Lease are for the
purpose of convenience only and shall not be construed to limit or extend the
meaning of any part of this Lease.
(b) Executed Copy. Any fully executed copy of this Lease shall be deemed
an original for all purposes.
(c) Time. Time is of the essence for the performance of each item,
condition and covenant of this Lease.
(d) Severability. If any one or more of the provisions contained herein
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality, or unenforceability shall not affect any
other provision of this Lease, but this Lease shall be construed as if such
invalid, illegal or unenforceable provision had not been contained herein.
(e) Choice of Law. This Lease shall be construed and enforced in
accordance with the laws of the State of California. The language in all parts
of this Lease shall in all cases be construed as a whole according to its fair
meaning and not strictly for or against either Landlord or Tenant.
(f) Gender; Singular, Plural. When the context of this Lease requires,
the neuter gender includes the masculine, the feminine, a partnership or
corporation or joint venture, and the singular includes the plural.
(g) Binding Effect. The covenants and agreement contained in this Lease
shall be binding on the parties hereto and on their respective successors and
assigns to the extent this Lease is assignable.
(h) Waiver. The waiver by Landlord of any breach of any term, condition
or covenant of this Lease shall not be deemed to be a waiver of such provision
or any subsequent breach of the same or any other term, condition or covenant
of this Lease. The subsequent acceptance of Rent hereunder by Landlord shall
not be deemed to be a waiver of any preceding breach at the time of acceptance
of such payment. No covenant, term or condition of this Lease shall be deemed
to have been waived by Landlord unless such waiver is in writing signed by
Landlord.
(i) Entire Agreement. This Lease is the entire agreement between the
parties, and supersedes any prior agreements, representations, negotiations or
correspondence between the parties except as expressed herein. Except as
otherwise provided herein, no subsequent change or addition to this Lease shall
be binding unless in writing and signed by the parties hereto.
(j) Authority. If Tenant is a corporation or a partnership, each
individual executing this Lease on behalf of said corporation or partnership,
as the case may be, represents and warrants that he is duly authorized to
execute and deliver this Lease on behalf of said entity in accordance with its
corporate bylaws, statement of partnership or certificate of limited
partnership, as the case may be, and that this Lease is binding upon said
entity in accordance with its terms. Landlord, at its option, may require a
copy of such written authorization to enter into this Lease. The failure of
Tenant to deliver the same to Landlord within seven (7) days of Landlord's
request therefor shall be deemed a default under this Lease.
(k) Exhibits. All exhibits, amendments, riders and addenda attached
hereto are hereby incorporated herein and made a part hereof.
(l) Lease Summary. The Lease Summary at the beginning of this Lease is
intended to provide general information only. In the event of any inconsistency
between the Lease Summary and the specific provisions of this Lease, the
specific provisions of this Lease shall prevail.
41. Other Provisions:
SEE ADDENDUM ATTACHED HERETO AND
MADE A PART HEREOF
TENANT: LANDLORD:
INTERCHECKS, INCORPORATED METROPOLITAN LIFE INSURANCE COMPANY
By: [SIG] By: [SIG]
----------------------------- --------------------------------
Its: [TITLE] Its: [TITLE]
----------------------------- --------------------------------
By: [SIG]
-----------------------------
<PAGE> 10
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE (the "First Amendment") is made and entered
into as of June 15, 1989 by and between Metropolitan Life Insurance Company, a
New York corporation ("Landlord"), and Interchecks, Incorporated, a Washington
corporation ("Tenant").
R E C I T A L S:
---------------
A. Landlord and Tenant have heretofore entered into that certain
Standard Form Lease (Multi-Tenant; Net) dated as of January 31, 1989 (the
"Lease") pursuant to which Landlord has leased to Tenant certain premises in one
of the buildings comprising Savi Tech Center, said building being commonly known
as 22725 Savi Ranch Parkway, Yorba Linda, California, all as more particularly
described therein (the "Premises").
B. Landlord and Tenant now desire to amend the Lease to, among other
things, modify the Anticipated Commencement Date, the Initial Monthly Rent and
certain of the provisions dealing with the initial tenant improvement work to
be performed in the Premises.
NOW, THEREFORE, the parties hereto agree as follows:
1. Defined Terms. Unless defined otherwise herein, all capitalized
terms used in this First Amendment shall have the meanings attributed to such
terms in the Lease.
<PAGE> 11
2. Anticipated Commencement Date. The Anticipated Commencement Date set
forth in Paragraph (j) of the Lease Summary portion of the Lease is hereby
changed from June 1, 1989 to August 7, 1989.
3. Rent.
(a) The Initial Monthly Rent set forth in Paragraph (1) of the Lease
Summary portion of the Lease is hereby changed from $14,250 to $15,600 per
month and from $171,000 to $187,200 per year.
(b) Subparagraph (a) of Paragraph 43 of the Addendum to the Lease is
deleted in its entirety and is of no further force or effect.
(c) Subparagraph (b) of said Paragraph 43 of the Addendum is amended
in its entirety to read as follows:
"(b) The Initial Monthly Rental of $15,600 set forth in Paragraph (1) of
the Lease Summary on Page 1 hereof shall be applicable to the period
commencing on the Commencement Date (as such term is defined in
subparagraph (a) of Paragraph 41 hereof) to and including the last day of
the thirty-sixth (36th) month of the initial Term hereof."
(d) The reference to "$14,250" is the fourth line of subsection (i)
of subparagraph (c) of said Paragraph 43 of the Addendum is revised to read
"$15,600".
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<PAGE> 12
4. Construction of Tenant Improvements.
(a) The first sentence of subparagraph (b) of Paragraph 46 of the
Addendum to the Lease is amended in its entirety to read as follows:
"Landlord at its own cost (except as otherwise provided in subparagraph (d)
below), shall, through a guaranteed maximum cost construction contract
("Construction Contract") with a contractor selected by Landlord
("Contract"), cause the construction of the Tenant Improvements to be
carried out in substantial conformance with the Working Plans approved by
Landlord and by Tenant (a copy of which is attached hereto as Exhibit A and
incorporated herein by reference) and in a good and workmanlike manner."
(b) The last phrase in the second sentence of subparagraph (b) of
said Paragraph 46 of the Addendum, commencing with the words "the cost of which
. . ." is deleted in its entirety and is of no further force or effect.
5. Allowance. Subparagraph (c) of Paragraph 46 of the Addendum to the
Lease is amended in its entirety to read as follows:
(c) Allowance. Intentionally omitted."
--------- ------------- -------
6. Change Orders: The following is added to subparagraph (d) ("Change
Orders") of Paragraph 46 of the Addendum:
"Notwithstanding anything to the contrary set forth in the preceding
paragraph or elsewhere in this Lease:
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<PAGE> 13
(i) Tenant shall not be liable for the payment of any increase in the cost
of constructing the Tenant Improvements resulting from a change order with
respect to the Working Plans attached hereto as Exhibit A requested by
Landlord.
(ii) Tenant shall be liable for the payment of any increase in the cost of
constructing the Tenant Improvements resulting from change orders with
respect to the Working Plans attached hereto as Exhibit A requested by
Tenant only to the extent that any such increased cost resulting therefrom
increases the total cost of constructing the Tenant Improvements in excess
of $637.600.
(iii) Tenant shall be liable for the payment of only 50% of any increase in
the cost of constructing the Tenant Improvements in excess of $637,600
resulting from change orders with respect to the Working Plans attached
hereto as Exhibit A requested by any governmental entity.
It is agreed and understood that the phrase "cost of constructing the
Tenant Improvements" as used above includes any and all costs incurred by
Landlord or the Contractor in connection with the construction of the
Tenant Improvements, including without limitation any and all reasonable
fees, charges, costs or expenses of any kind or nature reasonably incurred
by Landlord in connection with architectural and space planning and design,
building permits and fees, governmental processing and approval,
construction and completion of the Tenant Improvements."
7. No Claims. Landlord acknowledges that, as of the date hereof, there
are no claims for any delays "due to the fault" of Tenant. Tenant acknowledges
that, as of the date hereof, there are no claims for any delays caused by
Landlord.
- 4 -
<PAGE> 14
8. Additional Provisions. Except as otherwise provided in this First
Amendment, all of the terms, covenants, conditions, provisions and agreements
of the Lease shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
Lease to be executed as of the day and year first above written.
METROPOLITAN LIFE INSURANCE
COMPANY, a New York corporation
By: ELIZABETH S. CLARK
------------------------------
Its: Vice President
-----------------------------
INTERCHECKS, INCORPORATED,
a Washington corporation
By: [SIG]
------------------------------
Its: President, Western Division
-----------------------------
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<PAGE> 15
SECOND AMENDMENT
TO LEASE
THIS SECOND AMENDMENT TO LEASE ("Second Amendment") is made and entered
into as of this 14 day of September, 1992 ("Execution Date") by and between
METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation ("Landlord") and
JOHN H. HARLAND COMPANY, a Georgia corporation, as successor-in-interest to
INTERCHECKS INC., a Washington corporation ("Tenant"), with reference to the
following facts:
RECITALS
A. Landlord and Interchecks Inc. entered into that certain written lease
dated January 31, 1989, as amended by that First Amendment to Lease dated June
15, 1989, and that Letter Commencement Memorandum dated November 9, 1989
(herein collectively referred to as the "Original Lease"). John H. Harland
Company is the successor-in-interest to Interchecks, Inc. as Tenant, pursuant
to an assignment of lease as outlined in that certain letter consenting to
ownership change dated February 19, 1992.
B. Pursuant to the Original Lease, Landlord leases to Tenant, and Tenant
leases from Landlord, certain premises consisting of approximately Twenty Five
Thousand (25,000) rentable square feet of space in one of the buildings
commonly comprising 22725 Savi Ranch Parkway, Yorba Linda, California, all as
more particularly described in the Original Lease ("the Original Premises").
C. Tenant now desires to lease from Landlord, and Landlord desires to
lease to Tenant, upon the terms and conditions set forth hereinbelow, certain
premises consisting of the first floor of the Premises commonly known as 22725-B
Savi Ranch Parkway, containing approximately Five Thousand (5,000) square feet,
as shown hatched in black on the site plan attached hereto as Exhibit A (the
"Additional Space"). In connection therewith, Tenant and Landlord desire to
modify and amend the Lease as provided in this Second Amendment.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants and conditions set forth herein and of other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Premises. Notwithstanding any conflict with any provision of the
Original Lease, Landlord hereby leased to Tenant and Tenant hereby leases from
Landlord, the Additional space upon all of the terms and conditions set forth
in the Original Lease, as the same are amended or modified by this Second
Amendment. From and after September 1,1992 (the "Effective Date") until the
Termination Date (as defined in Section 2 herein), the term "Premises" shall
mean the Original Premises and the Additional
<PAGE> 16
Space. From and after the Effective Date, the term "Lease" shall mean the
Original Lease as modified by this Amendment.
2. Term. The term of the Lease with respect to the Additional Space,
shall commence on the Effective Date and shall expire sixty (60) days after
either Landlord or Tenant gives notice of termination in accordance with
Section 3 of this Amendment (the "Additional Space Termination Date"), unless
terminated earlier pursuant to the terms of the Lease.
3. Termination. Both Landlord and Tenant shall have the right to
terminate the Lease, with respect to the Additional Space only, by giving sixty
(60) days prior written notice of such termination to the other party.
4. Possession. On the Effective Date, Landlord shall deliver possession
of the Additional Space to Tenant, and Tenant shall accept delivery of the
Additional Space from Landlord, unimproved and in its "As-Is" condition (i.e.,
the condition existing as of the date of said delivery), without any express or
implied representations or warranties of any kind by Landlord or Landlord's
employees, agents, or management regarding the physical condition of the
Additional Space, and without any obligation of Landlord to construct or
install, or to pay for such construction or installation of, any tenant
improvements in the Additional Space.
5. Rent. In addition to the Rent due and payable in accordance with the
Original Lease, from and after the Effective Date, the Monthly Rent for the
Additional Space shall be Two Thousand Three Hundred Dollars ($2,300) payable
in advance on or before the first day of each month. In addition to the Monthly
Rent, Tenant shall pay any rental adjustments and additional payments as and
when provided in the Lease.
6. Tenant's Percentage Operating Expenses. Notwithstanding any other
provision of the Lease, including without limitation, Paragraph (q) of the
Lease Summary on Page 1 of the Lease and Addendum #48 of the Lease thereof, the
parties acknowledge and agree that during the period in which the Additional
Space is part of the Premises, Tenant's Percentage of Operating Expenses is
58.05%. In the event that either party exercises the right set forth in
Paragraph 3 to terminate the Lease with respect to the Additional Space,
Tenant's Percentage of Operating Expenses shall be 48.40%.
7. No Assignment. Tenant's rights and obligations under the Lease with
respect to the Additional Space apply solely to Tenant and may not be assigned.
8. Surrender of Additional Space. At the end of the Additional Space
Term, Tenant shall deliver possession of the
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<PAGE> 17
Additional Space to Landlord in the same condition it was received, reasonable
wear and tear excepted.
9. Compliance with FHA and ADA. Tenant shall take all proper and
necessary action to cause the Premises to be kept, maintained, used and
occupied in compliance with the Fair Housing Act of 1968 (as amended) and the
Americans with Disabilities Act of 1990.
10. Entire Agreement; Amendment. Tenant, as successor-in-interest to
Interchecks, Inc. hereby affirms the Original Lease, as amended by this Second
Amendment, and agrees that the Original Lease, as amended by this Second
Amendment, constitutes the full and complete agreement and understanding
between the parties hereto and shall supersede all prior communications,
representations, understandings or agreements, if any, whether oral or written
concerning the subject matter contained in the Original Lease as so amended,
and no provision of the Original Lease as so amended may be modified, amended,
waived or discharged, in whole or in part, except by a written instrument
executed by all of the parties hereto.
11. Effect of Headings; Recitals. The titles or headings of the various
divisions or Sections hereof are intended solely for convenience and are not
intended and shall not be deemed to or in any way be used to modify, explain or
place any construction upon any of the provisions of this Second Amendment. The
recitals set forth at the beginning of this Second Amendment are true and
correct and constitute a part of this Second Amendment.
12. Authority. Each person executing this Second Amendment represents
and warrants that he or she is duly authorized and empowered to execute it, and
does so as the act of and on behalf of the party indicated below.
13. Defined Terms. Capitalized terms used in this Second Amendment and
not otherwise defined, other than terms capitalized in the ordinary course of
punctuation, shall, unless otherwise specified herein, have the same meanings
and definitions set forth in the Original Lease.
14. Force and Effect. Except as modified by this Second Amendment, the
terms and provisions of the Original Lease are hereby ratified and confirmed
and shall remain in full force and effect. Should any inconsistency arise
between this Second Amendment and the Original Lease as to the specific
matters which are the subject of this Second Amendment, the terms and
conditions of this Second Amendment shall control. This Second Amendment shall
be construed to be a part of the Original Lease and shall be deemed
incorporated in the Original Lease by this reference.
- 3 -
<PAGE> 18
15. Attorneys' Fees and Costs. In the event of any action at law or in
equity between the parties hereto to enforce any of the provisions hereof, any
unsuccessful party to such litigation shall pay to the successful party all
costs and expenses, including actual attorneys' fees (including costs and
expenses incurred in connection with all appeals) incurred therein by such
successful party, and such costs, expenses and attorneys' fees may be included
in and as part of such judgment. A successful party shall be any party who is
entitled to recover its costs of suit, whether or not the suit proceeds to
final judgment.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first set forth above.
TENANT: JOHN H. HARLAND COMPANY,
a Georgia corporation
By: /s/ DONALD K. VOSHALL
---------------------------
Name: Donald K. Voshall
---------------------------
Its: Senior Vice President
---------------------------
By:
---------------------------
Name:
---------------------------
Its:
---------------------------
LANDLORD: METROPOLITAN LIFE INSURANCE COMPANY,
a New York corporation
By: [SIG]
---------------------------
Name: [NAME]
---------------------------
Its: Assistant Vice President
---------------------------
-4-
<PAGE> 19
EXHIBIT A -- Leased Premises
Crosshatched area represents leased premises, commonly known as 22725 Savi Ranch
Parkway, Suite B, Yorba Linda, California. Leased premises is approximately
5,000 rentable square feet.
SAVI TECHNOLOGY CENTER
(Client to provide a fair and accurate description of artwork)
<PAGE> 20
THIRD AMENDMENT TO LEASE
That certain lease dated January 31, 1989, by and between METROPOLITAN LIFE
INSURANCE COMPANY, A New York Corporation, Landlord, and JOHN H. HARLAND
COMPANY, A Georgia Corporation, as successor in interest to INTERCHECKS INC., A
Washington Corporation, Tenant, for the premises located at 22725 Savi Ranch
Parkway, Yorba Linda, California, is amended this 25th day of February, 1993
solely as hereinafter described.
Effective the First day of January, 1993, the following modifications are to be
effective in the Lease agreement:
1. Premises Area: Tenant's Additional Space shall be modified to
approximately 8,000 (eight-thousand) rentable square feet, as shown
hatched in black on the site plan attached hereto as Exhibit A.
2. Rent: Tenant's additional rent payments for the Additional Space
shall be modified to $3,680.00 (Three-thousand-six-hundred-eighty
dollars) per month, payable in advance on or before the first day of
each month. In addition to the monthly Rent, Tenant shall pay any
rental adjustments and additional payments as and when provided in the
lease.
3. Tenant's Percentage Operating Expenses: Notwithstanding any other
provision of the Lease, including without limitation, Paragraph (q) of
the Lease summary on Page 1 of the Lease and Addendum #48 of the Lease
thereof, the parties acknowledge and agree that during the period in
which the Additional Space is part of the Premises, Tenant's
Percentage of Operating Expenses is 63.85% of the Building, and is
9.65% of the Project. In the event that either party exercises the
right set forth in Paragraph 3 of the First Amendment to Lease to
terminate the Lease with respect to the Additional Space, Tenant's
Percentage of Operating Expenses shall be 48.40% of the Building and
7.32% of the Project.
All other terms and conditions of said Lease shall remain in full force and
effect.
IN WITNESS THEREOF, Landlord and Tenant have executed this Amendment as of the
date first written above.
LANDLORD: METROPOLITAN LIFE INSURANCE COMPANY, A New York Corporation
By: /s/ [SIG]
-----------------------------
Its: Investment Officer
----------------------------
TENANT: JOHN HARLAND COMPANY, A Georgia Corporation
By: /s/ [SIG]
-----------------------------
Its: Senior Vice President
----------------------------
<PAGE> 21
FOURTH AMENDMENT TO LEASE
THIS FOURTH AMENDMENT TO LEASE (the "Fourth Amendment") is dated as of
May 19, 1993 by and between METROPOLITAN LIFE INSURANCE COMPANY, a New York
corporation ("Landlord") and JOHN H. HARLAND COMPANY, a Georgia corporation,
successor in interest to Interchecks Inc., a Washington corporation ("Tenant"),
with reference to the following facts:
A. Landlord and Tenant entered into that certain lease dated as of
January 31, 1989 (the "Original Lease"), including an Addendum thereto, for
certain premises consisting of approximately 25,000 square feet (the "Original
Premises") more particularly described in the Original Lease.
B. The Original Lease was amended by a First Amendment dated as of June
15, 1989, a Second Amendment (the "Second Amendment") dated as of September 14,
1992, and a Third Amendment (the "Third Amendment") dated as of February 25,
1993. The Original Lease as so amended is hereby referred to as the Amended
Lease. The Second Amendment and the Third Amendment each incorporated certain
additional premises more particularly described in each (collectively, the
"Amendment Premises") into the Premises.
C. Landlord and Tenant now desire to modify and amend the Amended Lease
to reflect, among other provisions, the addition of certain premises (the
"Additional Premises"), all as more particularly set forth below.
NOW THEREFORE, in consideration of the mutual covenants set forth herein
and other good and valuable consideration, the receipt whereof and sufficiency
of which is hereby acknowledged, the parties hereto agree as follows:
1. Scope of Fourth Amendment. Except as expressly provided in this
Fourth Amendment, the Amended Lease shall remain in full force and effect.
Except as expressly provided in this Fourth Amendment, the term "Lease" as used
in the Amended Lease shall refer to the Amended Lease as modified by this Fourth
Amendment. Capitalized terms used in this Fourth Amendment and not otherwise
defined herein shall have the respective meanings set forth in the Amended
Lease.
2. Modifications to Amended Lease. Effective as of June 1, 1993 (the
"Effective Date"), the Amended Lease is hereby modified as hereinafter set
forth:
(a) The Additional Premises, consisting of approximately 18,213 rentable
square feet, as more particularly described on Exhibit A attached hereto and
made a part hereof, are hereby incorporated into the
- 1 -
<PAGE> 22
attached hereto and made a part hereof, are hereby incorporated into the
Premises. All of the terms and conditions of the Amended Lease shall be
applicable to the Additional Premises, except as specifically set forth in this
Fourth Amendment.
(b) Amending Paragraph 5 of the Second Amendment and Paragraph 2 of
the Third Amendment, the Monthly Rent on account of the Amendment Premises and
the Additional Premises shall be $0.42 per rentable square foot, or $11,009 in
the aggregate, for the entire Term, except as set forth in the following
sentence. With respect to the Amendment Premises and the Additional Premises
only, (1) Tenant shall not be obligated to pay any Monthly Rent for the first
three (3) full months following the Effective Date, and (ii) Tenant shall pay
Monthly Rent in the amount of $0.36 per rentable square foot, or $9,437 in the
aggregate, for the fourth through the forty-eighth full month following the
Effective Date. The rent concession granted pursuant to the immediately
preceding sentence shall be subject to all of the terms of Paragraph 43(a) of
the Addendum to the Original Lease, and the period during which a rent
concession pursuant to the immediately preceding sentence shall be in effect
shall be deemed to be the Monthly Rent Abatement Period for purposes of said
Paragraph 43.
(c) Amending Paragraph (q) of the Lease Summary and Paragraph 48 of
the Addendum to the Original Lease and, after incorporating the Additional
Premises and the Amendment Premises into the Premises, Tenant's Percentage of
48.40 is hereby deleted and Tenant's Percentage of One Hundred (100) is hereby
substituted in its place, and the figure "7.32" on the line of page 13 of the
Addendum to the Original Lease (referring to Tenant's Percentage of Operating
Expenses as to the Project) is hereby deleted and the figure "Fifteen (15)" is
substituted in its place.
(d) The Commencement Date with respect to the Additional Premises
shall be the Effective Date.
(e) Notwithstanding anything in Article 22 or Article 23 of the
Original Lease or Paragraph 53 of the Addendum to the Original Lease to the
contrary, (i) the damage, destruction or the condemnation or taking by eminent
domain of the Additional Premises or the Amendment Premises, or both, shall not
affect Tenant's obligations under the Lease, as amended hereby, as to the
remaining Premises, but shall only affect Tenant's rights and obligations as to
the Additional Premises or the Amendment Premises, as the case may be; and (ii)
the damage, destruction or the condemnation or taking by eminent domain of the
Original Premises shall not affect Tenant's obligations under the Lease as to
the Amendment Premises or the Additional Premises, but shall only affect
Tenant's rights and obligations as to the Original Premises.
(f) Landlord shall provide Tenant with the tenant improvement
allowance (the "Fourth Amendment Allowance") in an amount not to exceed Two
Hundred Fifty Thousand Dollars ($250,000). The tenant improvements to
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<PAGE> 23
be performed in connection with the Fourth Amendment (the "Fourth Amendment
Improvements") shall be performed in accordance with, and the Fourth Amendment
Allowance shall be subject to, Paragraph 46 of the Addendum to the Original
Lease, except that the second paragraph of Paragraph 46(c) shall be deemed to
be deleted and shall be of no force or effect as to the as to the Fourth
Amendment Improvements or the Fourth Amendment Allowance. Upon the completion
of all of the Fourth Amendment Improvements, if the sum of the guaranteed
maximum cost of the Construction Contract and other costs and expenses incurred
by Landlord which are properly chargeable against the Fourth Amendment
Allowance is less than Two Hundred Fifty Thousand Dollars ($250,000)
("Savings"), Landlord shall be entitled to retain the Savings. Attached hereto
as Exhibit B and made a part hereof is a preliminary space plan (the "Fourth
Amendment Space Plan"). As to the Fourth Amendment Improvements, all
references in Paragraph 46 to the Preliminary Plan shall refer to the Fourth
Amendment Space Plan. All such installations shall immediately become and
remain the property of Landlord. Except as expressly set forth in this
Paragraph 2(f), Landlord has no obligation to pay for or to perform any work in
the Original Premises, the Amendment Premises or the Additional Premises and
except as expressly set forth in this Paragraph 2(f), Landlord has no
obligation to improve, alter, repair or remodel the Additional Premises in any
way whatsoever.
(g) If Landlord shall be unable to give possession of the Additional
Premises upon the Effective Date by reason of the fact that the Additional
Premises are not substantially complete in accordance with Exhibit B, or for
any other reason, any such delay resulting therefrom shall be deemed excused
and Landlord shall not be subject to any liability for the failure to give
possession on said date. Under such circumstances, unless such delay is caused
by activities of Tenant, its agents, its representatives or its contractors,
Tenant's shall have no obligation to pay the Monthly Rent allocable to the
Additional Premises until possession of the Additional Premises is given or the
Additional Premises is available for occupancy by Tenant, as fixed in a notice
given by Landlord to Tenant. No such failure to give possession on the
Effective Date shall in any way affect or impair the validity of the Lease or
the obligations of Tenant hereunder, including the payment of Rent for the
Original Premises or the Amendment Premises.
3. Acceptance by Tenant. Tenant hereby acknowledges (i) that Landlord
has performed all of Landlord's obligations with respect to the premises covered
by the Amended Lease, and (ii) that Landlord is not in default under any of the
terms of the Amended Lease. Neither Landlord nor Landlord's representatives
have made any representations or promises with respect to the Additional
Premises except as herein expressly set forth. Tenant acknowledges and agrees
that Tenant has been afforded ample opportunity to inspect the Additional
Premises, and has investigated its condition to the extent Tenant desires to do
so, including its environmental condition. The taking of possession of the
Additional Premises by Tenant shall be conclusive evidence, as against Tenant,
that Tenant accepts the same in its then "AS IS" condition and that the
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<PAGE> 24
Additional Premises is in good and satisfactory condition at the time such
possession was so taken subject to: (i) written punchlist items submitted to
Landlord prior to Tenant's occupancy of the Additional Premises and (ii) latent
defects in Landlord's Work which are reported to Landlord in writing within
thirty (30) days after the Effective Date. As Tenant's sole right and remedy,
and as Landlord's sole obligation, with respect to such punchlist items and
latent defects, Landlord shall, with reasonable diligence, cause such items to
be completed or corrected at its own expense; Landlord shall have no
responsibility, liability, duty to indemnify, defend or hold Tenant harmless
from any damages, losses, claims, liabilities, awards or actions related,
directly or indirectly to such items. For purposes of this Paragraph 3, latent
defects shall not include, among other things, any defects which were apparent
at the time the punchlist was delivered to Landlord. Notwithstanding the
foregoing, Landlord's obligation with respect to latent defects shall not apply
to equipment, materials or items specified by Tenant, but Landlord shall assign
to Tenant Landlord's interest in any warranty from a subcontractor regarding
such equipment or material after Tenant's written request for same. Tenant
acknowledges and agrees that other than providing the tenant improvement
allowance referred to in Section 2 of this Fourth Amendment, Landlord has no
obligation to construct or cause to be constructed any work or other tenant
improvements in connection with the Project, the Building, the Premises, the
Amendment Premises or the Additional Premises as a result of this Fourth
Amendment. Without limiting the generality of the foregoing, Tenant expressly
acknowledges that Landlord shall have no responsibility or obligation to perform
any work with respect to the shell, floor, frontage, walls, ceiling, lighting
fixtures, HVAC system, toilet room, utilities systems or otherwise with respect
to the Project, the Building, the Premises, the Amendment Premises or the
Additional Premises as a result of this Fourth Amendment. The foregoing shall
not affect Landlord's express obligations under the Lease, if any, to maintain
and repair the Premises.
4. Payment of Commission. In connection with this Fourth Amendment,
Tenant acknowledges that it has selected Collins Fuller as its broker. Landlord
has agreed to pay a brokerage commission to Collins Fuller in the amount of
$30,758, and Tenant shall pay Collins Fuller the excess of all fees owing to
Collins Fuller in respect of this Fourth Amendment in excess of such $30,758
payable by Landlord. In addition, in the event of a claim for broker's fee,
finder's fee, commission or other similar compensation in connection herewith
other than to Paragon Group or as set forth above, Tenant hereby agrees to
protect, defend and indemnify Landlord against and hold Landlord harmless from
any and all damages, liabilities, costs, expenses and losses (including,
without limitation, reasonable attorneys' fees and costs) which Landlord may
sustain or incur by reason of such claim. The provisions of this section shall
survive the termination of this Fourth Amendment.
5. Certain Provisions in Amended Lease. Paragraph 42 of the
Addendum to the Original Lease, Paragraph 2, Paragraph 3 and Paragraph 6 of the
Second Amendment, and Paragraph 3 of the Third
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<PAGE> 25
Amendment are each hereby deleted in their entirety, and the Term of the
Amended Lease, including as to the Amendment Premises, shall expire on the date
determined pursuant to paragraph (k) and Paragraph 4 of the Lease Summary in
the Original Lease.
6. Compliance with Law. (a) Tenant acknowledges that the Americans
with Disabilities Act of 1990 and the Fair Housing Act of 1968 (collectively,
as amended and as supplemented by further laws from time to time, the "Acts")
imposes certain requirements upon the owners, lessees and operators of
commercial facilities and places of public accommodation, including, without
limitation, prohibitions on discrimination against any individual on the basis
of disability (which discrimination includes certain failures to design and
construct facilities for first occupancy that are readily accessible to and
usable by individuals with disabilities and certain failures, when making
alternations affecting the usability of a facility, to make the same in such a
manner that such altered portions are readily accessible to and usable by
individuals with disabilities). Accordingly Tenant agrees to take all proper
and necessary action to cause the Premises to be maintained, used and occupied
in compliance with the Acts and, further, to otherwise assume all
responsibility to ensure the Premises' continued compliance with all provisions
of the Acts throughout the Term, as extended pursuant to this Fourth Amendment.
(b) Without limiting its obligations under the Amended Lease, Tenant
covenants and agrees to comply with all laws, rules, regulations and guidelines
now or hereafter made applicable to the Premises by government or other public
authorities respecting the disposal of waste, trash, garbage and other matter
(liquid or solid), generated by Tenant, its employees, agents, contractors,
invitees, licensees, guests and visitors, the disposal of which is not otherwise
the express obligation of Landlord under the Amended Lease, including, but not
limited to, laws, rules, regulations and guidelines respecting recycling and
other forms of reclamation (all of which are herein collectively referred to as
"Waste Management Requirements"). Tenant covenants and agrees to comply with
all rules and regulations established by Landlord to enable Landlord from time
to time to comply with Waste Management Requirements applicable to Landlord (i)
as owner of the Premises and (ii) in performing Landlord's obligations under the
Lease, if any.
7. Waiver. No failure or delay by a party to insist upon the strict
performance of any term, condition or covenant of this Fourth Amendment, or to
exercise any right, power or remedy hereunder shall constitute a waiver of the
same or any other term of this Fourth Amendment or preclude such party from
enforcing or exercising the same or any such other term, conditions, covenant,
right, power or remedy at any later time.
8. California Law. This Fourth Amendment shall be construed and
governed by the laws of the State of California.
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<PAGE> 26
9. Authority. This Fourth Amendment shall be binding upon and inure
to the benefit of the parties hereto, their respective heirs, legal
representatives, successors and assigns. Each party hereto and the persons
signing below warrant that the person signing below on such party's behalf is
authorized to do so and to bind such party to the terms of this Fourth
Amendment.
10. Attorneys' Fees and Costs. In the event of any action at law or in
equity between the parties hereto to enforce any of the provisions hereof, any
unsuccessful party to such litigation shall pay to the successful party all
costs and expenses, including actual attorneys' fees (including costs and
expenses incurred in connection with all appeals) incurred therein by such
successful party, and such costs, expenses and attorneys' fees may be included
in and as part of such judgment. A successful party shall be any party who is
entitled to recover his costs of suit, whether or not the suit proceeds to
final judgment.
11. Entire Agreement; No amendment. This Fourth Amendment constitutes
the entire agreement and understanding between the parties herein named with
respect to the subject of this Fourth Amendment and shall supersede all prior
written and oral agreements concerning the subject matter contained herein.
This Fourth Amendment may not be altered, amended, modified or otherwise
changed in any respect whatsoever except by a writing duly executed by
authorized representatives of the parties hereto. Each party acknowledges that
it has read this Fourth Amendment, fully understands all of this Fourth
Amendment's terms and conditions, and hereby executes this Fourth Amendment
freely, voluntarily and with full knowledge of its significance. This Fourth
Amendment is entered into by the undersigned parties freely and voluntarily and
with and upon advice of counsel.
12. Severability. If any provision of this Fourth Amendment or the
application thereof to any person or circumstances shall be invalid or
unenforceable to any extent, the remainder of this Fourth Amendment and the
application of such provision to other persons or circumstances, other than
those to which it is held invalid, shall not be affected thereby and shall be
enforced to the furthest extent permitted by law, provided that the invalidity
of such provision does not materially affect the benefits accruing to any party
hereto.
13. Counterparts. This Fourth Amendment may be executed in duplicates or
counterparts, or both, and such duplicates or counterparts together shall
constitute but one original of the Fourth Amendment. Each duplicate and
counterpart shall be equally admissible in evidence, and each original shall
fully bind each party who has executed it.
14. Agreement to Perform Necessary Acts. Each party agrees that upon
demand therefor, it shall promptly perform all further acts and execute,
acknowledge and deliver all further instructions, instruments and documents
which may be reasonably necessary or useful to carry out
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<PAGE> 27
the provisions of this Fourth Amendment or to evidence, perfect or otherwise
effectuate the rights and remedies relating to this Fourth Amendment.
15. Captions and Headings. The titles or headings of the various
sections and paragraphs hereof are intended solely for convenience of reference
and are not intended and shall not be deemed to or in any way be used to
modify, explain or place any construction upon any of the provisions of this
Fourth Amendment.
IN WITNESS WHEREOF, the undersigned have duly executed this Fourth
Amendment as of the date first above written.
METROPOLITAN LIFE INSURANCE COMPANY,
a New York corporation
By /s/ [SIG]
----------------------------
Its Investment Officer
---------------------------
JOHN H. HARLAND COMPANY,
a Georgia corporation
By /s/ [SIG]
----------------------------
Its Senior Vice President
---------------------------
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<PAGE> 28
EXHIBIT A -- Leased Premises
The crosshatched area represents leased premises, commonly known as 22725 Savi
Ranch Parkway, Yorba Linda, CA. Leased premises is approximately 18,213
rentable square feet.
SAVI TECHNOLOGY CENTER
(Client to provide a fair and accurate description of artwork)
<PAGE> 29
EXHIBIT B
(Client to provide a fair and accurate description of artwork)
<PAGE> 30
EXHIBIT B (Continued)
(Client to provide a fair and accurate description of artwork)
<PAGE> 1
EXHIBIT 10.18
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET
(Do not use this form for Multi-Tenant Property)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
November 15, 1997, is made BY AND BETWEEN PATRICIAN ASSOCIATES, INC., A
CALIFORNIA CORPORATION, KOLL YORBA LINDA ASSOCIATES, A CALIFORNIA GENERAL
PARTNERSHIP AND DK NORTHWEST HOLDINGS, L.P., A CALIFORNIA LIMITED PARTNERSHIP,
OPERATING PURSUANT TO A JOINT DEVELOPMENT AGREEMENT DOING BUSINESS AS KBC SAVI
("LESSOR") AND STERI-OSS, INC., A CALIFORNIA CORPORATION AND WHOLLY OWNED
SUBSIDIARY OF S-O ACQUISITION CORPORATION ("LESSEE"), (collectively the
"PARTIES," or individually a "PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 22895 Eastpark Drive, Yorba Linda, CA 92887,
located in the County of Orange, State of California, and generally described as
(describe briefly the nature of the property) Single story building consisting
of 34,972 square feet which is a part of the Kill Savi Business Center multi
building project. ("PREMISES"). (See Paragraph 2 for further provisions.)
1.3 TERM: -5- years and -0- months ("ORIGINAL TERM") commencing January
1, 1998 ("COMMENCEMENT DATE") and ending December 31, 2003 ("EXPIRATION DATE").
(See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: Not applicable ("Early Possession Date"). (See
Paragraphs 3.2 and 3.3 for further provisions.)
1.5 BASE RENT: $21,070.00 per month ("BASE RENT"), payable on the 1st
day of each month commencing April 1, 1998 (January, February & March 1998 Base
Rent is abated). CPI increase annually beginning January 1, 1999 not to exceed
4.5%/yr. See Addendum (See Paragraph 4 for further provisions.)
[X] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $21,070.00
1.7 SECURITY DEPOSIT: $23,177.00 ("SECURITY DEPOSIT"). (See Paragraph 5
for further provisions.)
1.8 PERMITTED USE: general office, assembly, warehouse & light mfg as
permitted by applicable government agency laws and regulations (See Paragraph 6
for further provisions.)
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<PAGE> 2
1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)
1.10 REAL ESTATE BROKERS: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
Charles Dunn Real Estate Services, Inc. represents
[X] Lessor exclusively ("LESSOR'S BROKER"); [ ] both Lessor and Lessee, and
T. Rex Thomas represents
[X] Lessee exclusively ("LESSEE'S BROKER"); [ ] both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by Not applicable ("GUARANTOR"). (See Paragraph 37 for further
provisions.)
1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 1 through 49 through 58 and Exhibits A-C all of which constitute a
part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice form Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within thirty
(30) days after the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to
be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except
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<PAGE> 3
as otherwise provided in this Lease, promptly after receipt of written notice
from Lessee setting forth with specificity the nature and extent of such
non-compliance, rectify the same at Lessor's expense. If Lessee does not give
Lessor written notice of a non-compliance with this warranty within six (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease, however, (including but not limited to the obligations to pay Real
Property Taxes and insurance premiums and to maintain the Premises) shall be in
effect during such period. Any such early possession shall not affect nor
advance the Expiration Date of the Original Term.
Initials /s/
---
---
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of this Lease
until Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60)
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<PAGE> 4
days after the Commencement Date, Lessee may, at its option, by notice in
writing to Lessor within ten (10) days thereafter, cancel this Lease, in which
event the Parties shall be discharged from all obligations hereunder; provided,
however, that if such written notice by Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease shall terminate
and be of no further force or effect. Except as may be otherwise provided, and
regardless of when the term actually commences, if possession is not tendered to
Lessee when required by this Lease and Lessee does not terminate this Lease, as
aforesaid, the period free of the obligation to pay Base Rent, if any, that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to what Lessee would otherwise have
enjoyed under the terms hereof, but minus any days of delay caused by the acts,
changes or omissions of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of the calendar month involved. Payment of Base Rent and other charges
shall be made to Lessor at its address stated herein or to such other persons or
at such other addresses as Lessor may from time to time designate in writing to
Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefor
deposit moneys with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional moneys with Lessor sufficient to maintain the same ratio between the
Security Deposit and the Base Rent as those amounts are specified in the Basic
Provisions. Lessor shall not be required to keep all or any part of the Security
Deposit separate from its general accounts. Lessor shall, at the expiration or
earlier termination of the term hereof and after Lessee has vacated the
Premises, return to Lessee (or, at Lessor's option, to the last assignee, if
any, of Lessee's interest herein), that portion of the Security Deposit not used
or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no
part of the Security Deposit shall be considered to be held in trust, to bear
interest or other increment for its use, or to be prepayment for any moneys to
be paid by Lessee under this Lease.
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6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties.
6.2 HAZARDOUS SUBSTANCES. SEE ADDENDUM
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's
warranty as to condition), 2.3 (Lessor's warranty as to compliance with
covenants, etc.) 7.2 (Lessor's obligations to repair), 9 (damage and
destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and
expense and at all times, keep the Premises and every part thereof in good
order, condition and repair, structural and non-structural (whether or not such
portion of the Premises requiring repair, or the means of repairing the same,
are reasonably or readily accessible to Lessee, and whether or not the need for
such repairs occurs
Initials
----
----
as a result of Lessee's use, and prior use, the elements or the age of such
portion of the Premises), including, without limiting the generality of the
foregoing, all equipment or facilities serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, lighting facilities,
boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing system, including fire alarm and/or
smoke detection systems and equipment, fire hydrants, fixtures, walls (interior
and exterior), foundations, ceilings, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls, signs,
sidewalks and parkways located in, on, about, or adjacent to the Premises.
Lessee shall not cause or permit any Hazardous Substance to be spilled or
released in, on, under or about the Premises (including through the plumbing or
sanitary sewer system) and shall promptly, at Lessee's expense, take all
investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the cleanup of any contamination of, and for
the maintenance, security and/or monitoring of, the Premises, the elements
surrounding same, or neighboring properties, that was caused or materially
contributed to by Lessee, or pertaining to or involving any Hazardous Substance
and/or storage tank brought onto the Premises by or for Lessee or under its
control. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair. If Lessee occupies the Premises for seven (7) years or
more, Lessor may require
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Lessee to repaint the exterior of the buildings on the Premises as reasonably
required, but not more frequently than once every seven (7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance. SEE ADDENDUM
7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, the
improvements located thereon, or the equipment therein, whether structural or
non structural, all of which obligations are intended to be that of the Lessee
under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of
this Lease govern the respective obligations of the Parties as to maintenance
and repair of the Premises. Lessee and Lessor expressly waive the benefit of any
statute now or hereafter in effect to the extent it is inconsistent with the
terms of this Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by reason of, any
needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
is used in this Lease to refer to all carpeting, window coverings, air lines,
power panels, electrical distribution, security, fire protection systems,
communications systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "ALTERATIONS"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED
ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor as defined
in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations to the
interior of the Premises (excluding the roof), as long as they are not visible
from the outside, do not involve puncturing, relocating or removing the roof or
any existing walls, and the cumulative cost thereof during the term of this
Lease as extended does not exceed $50,000.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtute of
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Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned
upon: (i) Lessee's acquiring all applicable permits required by governmental
authorities, (ii) the furnishing of copies of such permits together with a copy
of the plans and specifications for the Alteration or Utility Installation to
Lessor prior to commencement of the work thereon, and (iii) the compliance by
Lessee with all conditions of said permits in a prompt and expeditious manner.
Any Alterations or Utility Installations by Lessee during the term of this Lease
shall be done in a good and workmanlike manner, with good and sufficient
materials, and in compliance with all Applicable Law. Lessee shall promptly upon
completion thereof furnish Lessor with as-built plans and specifications
therefor. Lessor may (but without obligation to do so) condition its consent to
any requested Alteration or Utility Installation that costs $25,000 or more.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility in or on the Premises as provided by
law. If Lessee shall, in good faith, contest the validity of any such lien,
claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises. If Lessor shall require, Lessee
shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal
to one and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In addition,
Lessor may require Lessee to pay Lessor's attorney's fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations. and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
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(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, with
all of the improvements, parts and surfaces thereof clean and free of debris and
in good operating order, condition and state of repair, ordinary wear and tear
excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration
that would have been prevented by good maintenance practice or by Lessee
performing all of its obligations under this Lease. Except as otherwise agreed
or specified in writing by Lessor, the Premises, as surrendered, shall include
the Utility Installations. The obligation of Lessee shall include the repair of
any damage occasioned by the installation, maintenance or removal of Lessee's
Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good practice. Lessee's Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee subject to its obligation to repair and
restore the Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability insurance
carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy
periods commencing prior to or extending beyond the Lease term shall be prorated
to correspond to the Lease term. Payment shall be made by Lessee to Lessor
within ten (10) days following receipt of an invoice for any amount due.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $1,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not contain
any intra-insured exclusions as between insured persons or organizations, but
shall include coverage for liability assumed under this Lease as an "insured
contract" for the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance required by this Lease or as carried by
Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of
any obligation hereunder. All insurance to be carried by Lessee shall be primary
to and not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party,
Lessor shall also maintain liability insurance described in Paragraph 8.2(a),
above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured
therein.
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8.3 PROPERTY INSURANCE -- BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("LENDER(S)"), insuring loss
Initials /s/
----
or damage to the Premises. The amount of such insurance shall be equal to the
full replacement cost of the Premises, as the same shall exist from time to
time, or the amount required by Lenders, but in no event more than the
commercially reasonable and available insurable value thereof if, by reason of
the unique nature or age of the improvements involved, such latter amount is
less than full replacement cost. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations shall be insured by Lessee
under Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all risks
of direct physical loss or damage (except the perils of flood and/or earthquake
unless required by a Lender), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Premises required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000 per occurrence,
and Lessee shall be liable for such deductible amount in the event of an Insured
Loss, as defined in Paragraph 9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full
rental and other charges payable by Lessee to Lessor under this Lease for one
(1) year (including all real estate taxes, insurance costs, and any scheduled
rental increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or if the Premises are part of a group of buildings owned by Lessor
which are adjacent to the
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Premises, the Lessee shall pay for any increase in the premiums for the property
insurance of such building or buildings if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
(d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations
and Utility Installations.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Paragraph 8.4 and shall provide Lessor with
written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be required by a Lender having a
lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 8. If Lessee is
the Insuring Party, Lessee shall cause to be delivered to Lessor certified
copies of policies of such insurance or certificates evidencing the existence
and amounts of such insurance with the insureds and loss payable clauses as
required by this Lease. No such policy shall be cancelable or subject to
modification except after thirty (30) days prior written notice to Lessor.
Lessee shall at least thirty (30) days prior to the expiration of such policies,
furnish Lessor with evidence of renewals or "insurance binders" evidencing
renewal thereof, or Lessor may order such insurance and charge the cost thereof
to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the
Insuring Party shall fail to procure and maintain the insurance required to be
carried by the Insuring Party under this Paragraph 8, the other Party may, but
shall not be required to, procure and maintain the same, but at Lessee's
expense.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
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8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
9. DAMAGES OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% of the then Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
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(c) "INSURED LOSS" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations,
which was caused by an event required to be covered by the insurance described
in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits
involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance AS DEFINED IN 50 OF THE LEASE ADDENDUM.
9.2 PARTIAL DAMAGE -- INSURED LOSS. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the Insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, the shortage in proceeds was due to the fact that, by
reason of the unique nature of the improvements, full replacement cost insurance
coverage was not commercially reasonable and available, Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with the funds to
cover same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefore. If Lessor
receives said funds or adequate assurance thereof within said ten (10) day
period, the party responsible for making the repairs shall complete them as soon
as reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If in such case Lessor does not so elect, then this Lease
shall terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE -- UNINSURED LOSS. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event
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Lessee shall make the repairs at Lessee's expense and this Lease shall continue
in full force and effect, but subject to Lessor's rights under Paragraph 13),
Lessor may at Lessor's option, either: (i) repair such damage as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage of Lessor's desire to terminate this Lease as of the date sixty (60) days
following the giving of such notice. In the event Lessor elects to give such
notice of Lessor's intention to terminate this Lease, Lessee shall have the
right within ten (10) days after the receipt of such notice to give written
notice to Lessor of Lessee's commitment to pay for the repair of such damage
totally at Lessee's expense and without reimbursement from Lessor. Lessee shall
provide Lessor with the required funds or satisfactory assurance thereof within
thirty (30) days following Lessee's said commitment. In such event this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
repairs as soon as reasonably possible and the required funds are available. If
Lessee does not give such notice and provide the funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option during
said Exercise Period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
expense repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during said Exercise Period, the Lessor may at
Lessor's option terminate this Lease as of the expiration of said sixty (60) day
period following the occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within ten (10) days after the expiration
of the Exercise Period, notwithstanding any term or provision in the grant of
option to the contrary.
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9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage-Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, given written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "COMMENCE" as used in this Paragraph shall
mean either the unconditional authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever first
occurs.
9.7 HAZARDOUS SUBSTANCE CONDITIONS.* If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, *SEE ADDENDUM
9.8 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the terms of this
Lease. Subject to
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Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior
to the delinquency date of the applicable installment. Lessee shall promptly
furnish Lessor with satisfactory evidence that such taxes have been paid. If any
such taxes to be paid by Lessee shall cover any period of time prior to or after
the expiration or earlier termination of the term hereof, Lessee's share of such
taxes shall be equitably prorated to cover only the period of time within the
tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for
any overpayment after such proration. If Lessee shall fail to pay any Real
Property Taxes required by this Lease to be paid by Lessee, Lessor shall have
the right to pay the same, and Lessee shall reimburse Lessor therefor upon
demand.
(b) ADVANCE PAYMENT. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, to estimate the current Real Property Taxes applicable to the
Premises, and to require such current year's Real Property Taxes to be paid in
advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable delinquency
date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor
elects to require payment monthly in advance, the monthly payment shall be that
equal monthly amount which, over the number of months remaining before the month
in which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payment shall be adjusted as required to provide the fund needed to pay
the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee
under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with other moneys of Lessor and shall not bear
interest. In the event of a Breach by Lessee in the performance of the
obligations of Lessee under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may, subject to proration as provided in
Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security
Deposit under Paragraph 5.
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
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10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIREMENT.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
51% or more of the voting control of Lessee shall constitute a change in control
for this purpose. (Para. 12.1(b) becomes effective 6/1/98)
(c) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than 51% of such Net Worth of Lessee
as it was represented to Lessor at the time of the execution by Lessor of this
Lease or at the time of the most recent assignment to which Lessor has
consented, or as it exists immediately prior to said transaction or transactions
constituting such reduction, at whichever time said Net Worth of Lessee was or
is greater, shall be considered an assignment of this Lease by Lessee to which
Lessor may reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes
of this Lease shall be the net worth of Lessee (excluding any guarantors)
established under generally accepted accounting principles consistently applied.
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(d) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall, at Lessor's option,
be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to
fair market rental value or one hundred ten percent (110%) of the Base Rent then
in effect, whichever is greater. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease. (Para 12.2(b)
becomes effective 6/1/98)
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or sublease and without obtaining their consent,
and such action shall not relieve such persons from liability under this Lease
or sublease.
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(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 or ten percent (10%) of the current monthly
Base Rent, whichever is greater, as reasonable consideration by Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph
12.1(c) shall give Lessor the right (but not the obligation to require) that the
Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a condition to Lessor's
consent to such transaction. (Para 12.2(g) becomes effective 6/1/98)
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premise heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without
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any obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against said sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "DEFAULT" is defined as a
failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH"
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2
and/or 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or failure of
Lessee to fulfill any obligation under this Lease which endangers or
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threatens life or property, where such failure continues for a period of seven
(7) business days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with applicable law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making
by Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C Section101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a guarantor; (ii) the termination of a
guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the
guaranty, or (v) a guarantor's breach of its guaranty obligation of an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such event,
to provide Lessor with written alternative assurance or security, which, when
coupled with the then existing resources of Lessee, equals or exceeds the
combined
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financial resources of Lessee and the guarantors that existed at the time of
execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent. Efforts by Lessor to mitigate damages caused by
Lessee's Default or Breach of this Lease shall not waive Lessor's right to
recover damages under this Paragraph. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding the unpaid rent and damages as are recoverable
therein, or Lessor may reserve therein the right to recover all or any part
thereof in a separate suit for such rent and/or damages. If a notice and grace
period required under subparagraphs 13.1(b), (c) or (d) was not previously
given, a notice to pay rent or quit, or to perform or quit, as the case may be,
given to Lessee under any statute authorizing the forfeiture of leases for
unlawful detainer shall also constitute the applicable notice for grace period
purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the
applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the
unlawful detainer statute shall run concurrently after the one such statutory
notice, and the failure of Lessee to cure the Default within the greater of the
two such grace periods shall
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constitute both an unlawful detainer and a Breach of this Lease entitling Lessor
to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's Breach
and abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of such
acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within ten (10) days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of
such overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of late
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payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's Default or Breach with respect to such overdue
amount, nor prevent Lessor from exercising any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder, whether
or not collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 of any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days after such notice
are reasonably required for its performance, then Lessor shall not be in breach
of this Lease if performance is commenced within such thirty (30) day period and
thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "CONDEMNATION"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the land area
not occupied by any building, is taken by condemnation, Lessee may, at Lessee's
option, to be exercised in writing within ten (10) days after Lessor shall have
given Lessee written notice of such taking (or in the absence of such notice,
within ten (10) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes such
possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
taking of the fee, or as severance damages; provided, however, that Lessee shall
be entitled to any compensation, separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
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15. BROKER'S FEE.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of
this Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers jointly, or in such separate shares as they may mutually designate
in writing, a fee as set forth in a separate written agreement between Lessor
and said Brokers (or in the event there is no separate written agreement between
Lessor and said Brokers, the sum of $___PER AGREEMENT___) for brokerage services
rendered by said Brokers to Lessor in this transaction.
15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor
further agrees that: (a) if Lessee exercises any Option (as defined in Paragraph
39.1) or any Option subsequently granted which is substantially similar to an
Option granted to Lessee in this Lease, or (b) if Lessee acquires any rights to
the Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or (c) if Lessee remains in possession of the Premises,
with the consent of Lessor, after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which Lessor has an interest, or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions, Lessor shall pay
said Brokers a fee in accordance with the schedule of said Brokers in effect at
the time of the execution of this Lease.
15.4 Any buyer or transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a
third party beneficiary of the provisions of this Paragraph 15 to the extent of
its interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.
15.5 Lessee and Lessor each represent and warrant to the other that it
has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. TENANCY STATEMENT.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) business
days after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver
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to the Requesting Party a statement in writing in form similar to the then most
current "TENANCY STATEMENT" form published by the American Industrial Real
Estate Association, plus such additional information, confirmation and/or
statements as may be reasonably requested by the Requesting Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises, or, if this is
a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinafter defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within thirty (30) days
following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
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23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by written notice
to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received on
a Sunday or legal holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any preceding Default or Breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted. Any payment given Lessor by Lessee may be accepted
by Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
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27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reasons of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to
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separately document any such subordination or non-subordination, attornment
and/or non-disturbance agreement as is provided for herein.
31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in the
same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY"
shall include, without limitation, a Party or Broker who substantially obtains
or defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. They attorney's fee award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise with 24 hours notice for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred twenty (120) days of the term
hereof place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee
may, with Lessor's prior written consent, install (but not on the roof) such
signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to
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make a written election to the contrary by written notice to the holder of any
such lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting of
the Premises by Lessee shall not constitute an acknowledgement that no Default
or Breach by Lessee of this Lease exists, nor shall such consent be deemed a
waiver of any then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. GUARANTOR.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the
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right of first refusal to purchase other property of Lessor, or the right of
first offer to purchase other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not
the Defaults are cured, during the twelve (12) month period immediately
preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reasons of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three or more notices of Default under Paragraph 13.1 during any twelve
month period, whether or not the Defaults are cured, or (iii) if Lessee commits
a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor
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shall have no obligation whatsoever to provide same. Lessee assumes all
responsibility for the protection of the Premises, Lessee, its agents and
invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited 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 on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission
of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is
not intended to be binding until executed by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS
LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY
SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A
STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE
PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at ___________________________ Executed at _______________________
on ____________________________________ on ________________________________
by LESSOR: by LESSEE:
PATRICIAN ASSOCIATES, INC., a California STERI-OSS INC., a California
corporation, KOLL YORBA LINDA ASSOCIATES, corporation a wholly owned
a California general partnership and DK subsidiary of S-O Acquisition
NORTHWEST HOLDINGS, L.P., a California Corporation
limited partnership, operating pursuant
to a Joint Development Agreement doing
business as KBC Savi
By ____________________________________ By ________________________________
Name Printed:__________________________ Name Printed:______________________
Title:_________________________________ Title:_____________________________
Address:_______________________________ Address:___________________________
_______________________________________ ___________________________________
Tel. No. (___)______ Fax No. (___)_____ Tel. No.(___)_____ Fax No.(___)____
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NET
NOTICE: These forms are often modified to meet changing requirements of law
and industry needs. Always write or call to make sure you are
utilizing the most current form: American Industrial Real Estate
Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA
90071. (213) 687-6777. Fax No. (213) 687-8616.
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ADDENDUM TO LEASE
The addendum is attached to and made a part of that certain Lease (the "Lease")
of even date herewith between PATRICIAN ASSOCIATES, INC., a California
corporation, KOLL YORBA LINDA ASSOCIATES, a California general partnership and
DK NORTHWEST HOLDINGS, L.P., a California limited partnership, operating
pursuant to a Joint Development Agreement doing business as KBC Savi,
hereinafter called "Lessor" and STERI-OSS INC., a California corporation,
hereinafter called "Lessee", relating to premises located at 22895 Eastpark
Drive, Yorba Linda, California. This Addendum shall supplement and amend the
Lease, and the provisions set forth below shall supersede any inconsistent
provisions set forth in the Lease. Except as may otherwise be specifically
provided below, any terms used below which are defined in the Lease shall have
their respective meanings set forth in the Lease.
ADDITIONAL LEASE PROVISIONS
SECTION 49 - BASE RENT
The Base Rent schedule shall be as follows:
<TABLE>
<CAPTION>
Per SF/Mo Monthly
--------- -------
<S> <C>
January - March, 1998 Base Rent Abated
April 1, 1998 - December 31, 1998 $.6025 $21,070.00
January 1, 1999 CPI increase not to exceed 4.5%
January 1, 2000 CPI increase not to exceed 4.5%
January 1, 2001 CPI increase not to exceed 4.5%
January 1, 2002 CPI increase not to exceed 4.5%
January 1, 2003 CPI increase not to exceed 4.5%
</TABLE>
Base Rent shall be adjusted upward but not downward ("Adjustment Date")
beginning on the first day of January, 1999 of the lease term. The adjustment
shall be not greater than 4.5% per year calculated by referring to the Consumer
Price index - LA-Anaheim-Riverside - All Urban Consumers - All items ("CPI") as
published by the United States Department of Labor, Bureau of Labor Statistics.
The Base Index shall be the CPI for the calendar month which is three month
prior to the Commencement Date which is October 1998. The Base Index shall be
compared by the CPI (the "Comparison Index") for the calendar month which is
three months prior to the month of the Adjustment Date of each Lease year of the
Lease. If the Comparison Index is higher than the Base Index, then the Base Rent
payable by Lessee hereunder shall be increased by the identical percentage of
the Comparison Index over Base Period Index.
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SECTION 50: HAZARDOUS MATERIALS
(a) As used in this Lease, the following words or phrases shall have the
following meanings:
(i) "AGENTS" means Lessee's partners, officers, directors, shareholders,
employees, agents, contractors and any other third parties entering upon the
Project at the request or invitation of Lessee.
(ii) "CLAIMS" means claims, liabilities, losses, actions, environmental
suits, causes of action, legal or administrative proceedings, damages, fines,
penalties, loss of rents, liens, judgments, costs and expenses (including,
without limitation, attorneys' fees and costs of defense, and consultants',
engineers' and other professionals' fees and costs).
(iii) "HAZARDOUS" means (A) hazardous; (B) toxic; (C) reactive; (D)
corrosive; (E) ignitable; (F) carcinogenic; (G) reproductive toxic; (H) any
other attribute of a Substance now or in the future referred to in, or regulated
by, any Hazardous Materials Laws; and (I) potentially injurious to health,
safety or welfare, the environment, the Premises, the Building or the Project.
(iv) "HAZARDOUS MATERIALS" means any (A) Substance which is Hazardous,
regardless of whether that Substance is Hazardous by itself or in combination
with any other Substance; (B) Substance which is regulated by any Hazardous
Materials Laws; (C) asbestos and asbestos- containing materials; (D) urea
formaldehyde; (E) radioactive substance; (F) flammable explosives; (G)
petroleum, including crude oil or any fraction thereof; (H) polychlorinated
biphenyls; and (I) "hazardous substances," "hazardous materials" or "hazardous
wastes" under any Hazardous Materials Laws.
(v) "HAZARDOUS MATERIALS LAWS" means: (A) any existing or future
federal, state or local law, ordinance, regulation or code which protects
health, safety or welfare, or the environment; (B) any existing or future
administrative or legal decision interpreting any such law, ordinance,
regulation or code; and (C) any common law theory which may result in Claims
against Lessor, the Premises, the Building or the Project.
(vi) "PERMITS" means any permit, authorization, license or approval
required by any applicable governmental agency.
(vii) "PROJECT" for purposes of this Paragraph 50 only, shall mean the
Project, the air about the Project and the soil, surface water and ground water
under the surface of the Project.
(viii) "SUBSTANCE" means any substance, material, product, chemical,
waste, contaminant or pollutant.
(ix) "USE" means use, generate, manufacture, produce, store, release or
discharge.
(b)(i) Without limiting the generality of this Lease, and except as
provided in Paragraphs 50(b)(ii) and 50(b)(iii), Lessee covenants and agrees
that Lessee and its Agents shall
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not bring into, maintain upon, engage in any activity involving the Use of, or
Use in or about the Project, or transport to or from the Project, any Hazardous
Materials. Notwithstanding the provisions of Paragraphs 50(b)(ii) or 50(b)(iii),
in no event shall Lessee or its Agents release or dispose of any Hazardous
Materials in, on, under or about the Project.
(i) Notwithstanding the provisions of Paragraph 50(b)(i), if Lessee or
its Agents proposes to Use any Hazardous Materials, or to install or operate any
equipment which will or may Use Hazardous Materials ("EQUIPMENT"), then Lessee
shall first obtain Lessor's prior written consent, which consent may be given or
withheld by Lessor in its subjective, good faith judgment, within thirty (30)
days of Lessor's receipt of the last of documents or information requested by
Lessor as set forth in this Paragraph. Lessee's failure to receive Lessor's
consent within such thirty (30) day period shall be conclusively deemed Lessor's
withholding of consent. Lessee's request for Lessor's consent shall include the
following documents or information: (A) a Hazardous Materials list pursuant to
Paragraph 50(c) regarding the Hazardous Materials Lessee proposes to Use or
Equipment Lessee proposes to install and operate; (B) reasonably satisfactory
evidence that Lessee has obtained all necessary Permits to Use those Hazardous
Materials or to install and operate the proposed Equipment; (C) reasonably
satisfactory evidence that Lessee's Use of the Hazardous Materials or
installation and operation of the Equipment shall comply with all applicable
Hazardous Materials Laws, Lessee's permitted use under this Lease and all
restrictive covenants encumbering the Project; (D) reasonably satisfactory
evidence of Lessee's financial capability and responsibility for potential
Claims associated with the Use of the Hazardous Materials or installation and
operation of the Equipment; and (E) such other documents or information as
Lessor may reasonably request. Lessor may, at its option, condition its consent
upon any terms that Lessor, in its subjective, good faith judgment, deems
necessary to protect itself, the public and the Project against potential
problems, Claims arising out of Lessee's Use of Hazardous Materials or
installation and operation of Equipment including, without limitation, (i)
changes in the insurance provisions of the Lease, (ii) installation of
equipment, fixtures or personal property or alteration of the Premises (all at
Lessee's sole cost) to minimize the likelihood of a violation of Hazardous
Materials Laws as a result of Lessee's Use of the Hazardous Materials or
installation and operation of Equipment; or (iii) increasing the amount of the
security deposit. Neither Lessor's consent nor Lessee's obtaining any Permits
shall relieve Lessee of any of its obligations pursuant to this Paragraph 50.
Lessor's granting of consent to one request to Use Hazardous Materials or
install and operate Equipment shall not be deemed Lessor's consent to any other
such request. If Lessor grants its consent to Lessee's request, no sublessee,
assignee or successor of Lessee shall have the right to Use those Hazardous
Materials or install or operate that Equipment without again complying with the
provisions of this Paragraph 50(b)(ii).
(ii) Notwithstanding the provisions of Paragraphs 50(b)(i) and
50(b)(ii), Lessee may Use any Substance typically found or used in applications
of the type permitted by this Lease so long as: (A) any such Substance is
typically found only in such quantity as is reasonably necessary for Lessee's
permitted use under Paragraph 1.8 of this Lease; (B) any such Substance and all
equipment necessary in connection with the Substance are Used strictly in
accordance with the manufacturers' instructions therefor; (C) no such Substance
is released or disposed of in or about the Project; (D) any such Substance and
all equipment necessary in connection with the Substance are removed from the
Project and transported for Use or disposal by Lessee in compliance with any
applicable Hazardous Materials Laws upon the expiration or earlier
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termination of this Lease; and (E) Lessee and its Agents comply with all
applicable Hazardous Materials Laws. Lessee's obligations to indemnify and hold
Lessor harmless shall not extend to those Hazardous Materials which did not
originate on the Premises or the Property during the term of the Lessee's
occupancy thereof
(iii) Lessee shall not use or install in or about the Premises any
asbestos or asbestos- containing materials.
(c) Lessee shall deliver to Lessor, within thirty (30) days after
Lessee's receipt of Lessor's written request, a written list identifying any
Hazardous Materials that Lessee or its Agents then Uses or has Used within the
last twelve (12) month period in the Project. Each such list shall state: (i)
the use or purpose of each such Hazardous Material; (ii) the approximate
quantity of each such Hazardous Material Used by Lessee; (iii) such other
information as Lessor may reasonably require; and (iv) Lessee's written
certification that neither Lessee nor its Agents have released, discharged or
disposed of any Hazardous Materials in or about the Project, or transported any
Hazardous Materials to or from the Project, in violation of any applicable
Hazardous Materials Laws. Lessor shall not request Lessee to deliver a Hazardous
Materials list more often than once during each twelve (12) month period, unless
Lessor reasonably believes that Lessee or its Agents have violated the
provisions of this Paragraph 50 (in which case (A) Lessor may request such lists
as often as Lessor determines is necessary until such violation is cured, and
(B) Lessee shall provide such lists within ten (10) days of each of Lessor's
requests, or if an emergency exists, such lists shall be immediately provided).
(d) Lessee shall furnish to Lessor copies of all notices, claims,
reports, complaints, warnings, asserted violations, documents or other
communications received or delivered by Lessee, as soon as possible and in any
event within five (5) days of such receipt or delivery, with respect to any
actual or alleged Use, disposal or transportation of Hazardous Materials in or
about the Premises, the Building or the Project. Whether or not Lessee receives
any such notice, claim, report, complaint, warning, asserted violation, document
or communication, Lessee shall immediately notify Lessor, orally and in writing,
if Lessee or any of its Agents knows or has reasonable cause to believe that any
Hazardous Materials, or a condition involving or resulting from the same, is
present, in Use, has been disposed of, or transported to or from the Premises,
the Building or the Project other than as previously consented to by Lessor in
strict accordance with Paragraph 50(b).
(e) Lessee acknowledges that it, and not Lessor, is in possession and
control of the Premises for purposes of all reporting requirements under any
Hazardous Materials Laws. If Lessee or its Agents violate any provision of this
Paragraph 50, then Lessee shall immediately notify Lessor in writing and shall
be obligated, at Lessee's sole cost, to abate, remediate, clean-up or remove
from the Project, and dispose of, all in compliance with all applicable
Hazardous Materials Laws, all Hazardous Materials Used by Lessee or its Agents.
Such work shall include, but not be limited to, all testing and investigation
required by Lessor, Lessor's lender or ground lessor, if any, and any
governmental authorities having jurisdiction, and preparation and implementation
of any remedial action plan required by any governmental authorities having
jurisdiction. All such work shall, in each instance, be conducted to the
satisfaction of Lessor and all governmental authorities having jurisdiction. If
at any time Lessor determines that Lessee is not complying with the provisions
of this Paragraph 50(e), then Lessor may, without
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prejudicing, limiting, releasing or waiving Lessor's rights under this Paragraph
50, separately undertake such work, and Lessee shall reimburse all costs
incurred by Lessor upon demand.
(f) Lessor's right of entry pursuant to Paragraph 32 shall include the
right to enter and inspect the Premises, and the right to inspect Lessee's books
and records, to verify Lessee's compliance with, or violations of, the
provisions of this Paragraph 50. Furthermore, Lessor may conduct such
investigations and tests as Lessor or Lessor's lender or ground lessor may
require. If Lessor determines that Lessee has violated the provisions of this
Paragraph 50, or if any applicable governmental agency requires any such
inspection, investigation or testing, then Lessee, in addition to its other
obligations set forth in this Paragraph 50, shall immediately reimburse Lessor
for all costs incurred therewith.
(g)(i) Lessee shall indemnify, protect, defend (with legal counsel
acceptable to Lessor in its subjective, good faith judgment) and hold harmless
Lessor, its partners and its and their respective successors, assigns, partners,
directors, officers, shareholders, employees, agents, lenders, ground lessors
and attorneys, and the Project, from and against any and all Claims incurred by
such indemnified persons, or any of them, in connection with, or as the result
of: (A) the presence, Use or disposal of any Hazardous Materials into or about
the Project, or the transportation of any Hazardous Materials to or from the
Project, by Lessee or its Agents; (B) any injury to or death of persons or
damage to or destruction of property resulting from the presence, Use or
disposal of any Hazardous Materials Laws; and (D) any failure of Lessee or its
Agents to observe the provisions of this Paragraph 50. Payment shall not be a
condition precedent to enforcement of the foregoing indemnification provision.
Lessee's obligations hereunder shall include, without limitation, and whether
foreseeable or unforeseeable, all costs of any required or necessary testing,
investigation, studies, reports, repair, clean-up, detoxification or
decontamination of the Project, and the preparation and implementation of any
closure, removal, remedial action or other required plans in connection
therewith, and shall survive the expiration or earlier termination of the term
of this Lease. For purposes of these indemnity provisions, any acts or omissions
of Lessee, its assignees, sublessees, Agents or others acting for or on behalf
of Lessee (regardless of whether they are negligent, intentional, willful, or
unlawful) shall be strictly attributable to Lessee.
(i) If at any time after the initiation of any suit, action,
investigation or other proceeding which could create a right of indemnification
under Paragraph 50(g)(i) Lessor determines that Lessee is not complying with the
provisions of Paragraph 50(g)(i), then Lessor may, without prejudicing,
limiting, releasing or waiving the right of indemnification provided herein,
separately defend or retain separate counsel to represent and control the
defense as to Lessor's interest in such suit, action, investigation or other
proceeding. Lessee shall pay all costs of Lessor's separate defense or counsel
upon demand.
(ii) Lessee waives, releases and discharges Lessor, its partners and its
and their respective officers, directors, shareholders, partners, employees,
agents, representatives, attorneys, lenders, ground lessors, attorneys,
successors and assigns from any and all Claims of whatever kind, known or
unknown, including any action under the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.), as amended
("CERCLA") and the provisions of California Health & Safety Code Section 25100
et seq., as amended, which Lessee has or may have, based upon the Use,
migration, disposal
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of or transportation to or from the Premises or the Project of any Hazardous
Materials (unless caused by Lessor's gross negligence or willful misconduct) or
the environmental condition of the Premises or the Project (including without
limitation all facilities, improvements, structures and equipment thereon and
soil and groundwater thereunder). Lessee agrees, represents and warrants that
the matters released herein are not limited to matters which are known,
disclosed or foreseeable, and Lessee waives any and all rights and benefits
which it now has, or may have, conferred upon Lessee by virtue of the provisions
of Section 1542 of the California Civil Code, which provides:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
Lessee agrees, represents and warrants that it is familiar with, has read,
understands, and has consulted legal counsel of its choosing with respect to
California Civil Code Section 1542 and Lessee realizes and acknowledges that
factual matters now unknown to it may have given, or may hereinafter give, rise
to Claims which are presently unknown, unanticipated and unsuspected.
(h) Upon any violation of the provisions of this Paragraph 50, Lessor
shall be entitled to exercise any or all remedies available to a Lessor against
a defaulting Lessee including, but not limited to, those set forth in Paragraph
13.
(i) By its signature of this Lease, Lessee confirms that: (i) Lessor has
not made any representation or warranty regarding the environmental condition of
the Premises, the Building or the Project; and (ii) Lessee has conducted its own
examination of the Premises, the Building and the Project with respect to
Hazardous Materials and accepts the same "AS IS" and with no Hazardous Materials
present thereon.
(j) No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from its obligations under this Paragraph
50 unless specifically agreed to by Lessor in writing at the time of such
agreement.
(k) Lessee's covenants and obligations under this Paragraph 50 shall
also apply to any assignee or sublessee of Lessee, and to any such assignee's or
sublessee's partners, officers, directors, shareholders, employees, agents,
contractors and any other third parties entering upon the Project at the request
or invitation of such assignee or sublessee.
SECTION 51: LESSEE IMPROVEMENTS
(a) Lessor will provide a Lessee Improvement Allowance of $90,170.00
("Allowance"). Such Allowance shall be used for Premises interior carpeting and
painting and exterior painting. If Lessee desires to utilize the Allowance for
any other Premises, Building or site improvements, then lessee must first obtain
Lessors written consent. Building
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improvements shall be defined as those types of improvements that, if made, will
stay with the building and will not be removed from the building by Lessee upon
vacation and specifically excludes furniture or fixtures. All other related
costs such as architectural fees and expenses, engineering fees, construction
management fees, general contractor costs and fees and any and all governmental
fees and costs shall be included within the Allowance. The Lessor shall contract
with and pay directly, all contractors for all work up the amount of the
Allowance. Lessee and Lessor agree to utilize only Qualified Contractors. Lessee
may submit one Qualified Contractor for each project (i.e. interior painting,
carpet, exterior painting) in addition to Lessor's contractor(s). Lessor shall
select the lowest Qualified Contractor. Lessor shall manage the construction
process and consult with the Lessee throughout said process, "Qualified
Contractor", for the purposes of this Lease, shall mean a contractor(s) that
meet minimum lease insurance requirements for general liability and workers
compensation, hold a valid California contractors license, have at least 5 years
experience performing similar work, and, if required, the contractor will sign
the Lessors modified AIA Contract.
SECTION 52: OPERATING EXPENSES REIMBURSEMENT
(a) Operating Expense reimbursements due by Lessee to Lessor are computed by
multiplying Lessee's Proportionate Share (as hereafter defined) by Total
Operating Expenses (as hereafter defined).
(b) The amount computed by multiplying Lessee's Proportionate Share by the
amount by which Total Operating Expenses (as hereafter defined) for any calendar
year is the amount due by Lessee and is hereby deemed to be Additional Rent
under the law. The Lessor shall have the right to estimate in advance the amount
due from Lessee for any calendar year and to charge Lessee therefor on a monthly
basis. In such case, Lessee shall pay one-twelfth (1/12th) of such amount on the
first day of each month during such year. Any overpayments or underpayment will
be adjusted as set forth in this section. Lessor shall endeavor to provide
Lessee with a written notice of the estimated Total Operating Expenses, as
hereinafter defined. No delay by Lessor in delivering to Lessee any such notices
shall affect Lessee's obligations hereunder, which shall be effective as of the
date specified in any such notice. As soon as practicable after the end of each
calendar year during the lease term, Lessor shall provide Lessee with a written
statement of the actual Total Operating Expenses for that year. If actual Total
Operating Expense should exceed the estimated Total Operating Expenses for such
year, then Lessee shall pay to Lessor the additional amount due to Lessor within
thirty (30) days.
(c) "Lessee's Proportionate Share" is defined as that percentage computed by
dividing the Rentable Area of the Premises, as hereinafter defined, by the
Rentable Area of the Building, as hereinafter defined. Lessee acknowledges that
Lessee's Proportionate Share is subject to adjustment, as set forth in 52(e).
(d) "Rentable Area of the Premises" and "Rentable Area of the Building" are
defined as those areas obtained by measuring the Premises and the Building in
accordance with the method of measuring rentable office space specified in the
American National Standards Institute Publication ANSIZ65.1-1980.
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(e) The initial Rentable Area of the Premises, the Rentable Area of the
Building, and Lessee's Proportionate are conclusively deemed to be as stated as
100% of the Building. From time to time, as Lessor deems necessary, Lessor's
architect shall determine and certify in writing the actual Rentable Area of the
Premises and the actual Rentable Area of the Building. Lessor shall provide
Lessee with two copies of the architect's certificate. Lessee shall sign one of
the copies, acknowledging the changes noted therein and shall return the signed
certificate to Lessor. The determination of the architect as to such matters
shall be conclusive, the Lease shall be adjusted accordingly.
(f) "Total Operating Expenses" are defined as those costs and expenses necessary
to operate, manage and maintain the Building in a manner deemed reasonable and
appropriate and for the best interest of the Lessees in the Building, including,
but not limited to, the following:
(i) Wages, salaries and fringe benefits of all employees engaged in the
operation and maintenance of the Building; employer's Social Security
taxes, unemployment taxes or insurance, and any other taxes which may be
levied on such wages and salaries; the cost of disability and
hospitalization insurance and pension or retirement benefits for such
employees;
(ii) All Common Area supplies and materials used in the operation and
maintenance of the Building;
(iii) Common Area expenses including the cost of water, sewer,
electricity, gas, telephone and other utilities used in operation of the
Building and Koll Savi Business Center;
(iv) Common Area expenses including the cost of trash removal, parking
lot sweeping, window washing and landscape maintenance;
(v) Common Area expenses including the cost of replacement of Building
equipment and all maintenance service agreements on Building equipment,
including alarm, security, energy management, mechanical, electrical,
window cleaning and elevator equipment;
(vi) Common Area expenses including the cost of repairs and general
maintenance;
(vi) Any capital improvements made or installed for purposes of saving
labor or otherwise reducing applicable operating costs, not to exceed
the aggregate estimated cost savings annualized on a straight line basis
over the useful life of the capital improvements as determined by Lessor
in accordance with generally accepted accounting principles and
practices in effect at the time of acquisition of capital item
(vii) Cost of casualty and liability insurance applicable to the
Building and Lessor's personal property used in connection therewith
covering loss or damage of such property in the amount of its full
replacement value; such insurance shall also provide protection against
all perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, special extended perils (i.e.,
all risk), sprinkler leakage, earthquakes, plate glass damage, and other
perils which Lessor deems necessary.
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(viii) Cost of all accounting and other professional fees incurred in
connection with the operation of the Building;
(ix) Reasonable depreciation on any equipment, machinery or other items
used in the operation, maintenance and management of the building;
(x) Any management fee, not in excess of current market rates for
similar buildings in the area, payable to Lessor or to any other person
or entity performing management services; and
(xi) Common area costs associated with Koll Savi Business Center and
allocable to the Building.
SECTION 53: OPERATING EXPENSES EXCLUSIONS
Notwithstanding any other provision of the Lease form to the contrary,
the following expenses shall not be included by Lessor as Operating Expenses
under the Lease:
(a) Costs associated with the operation of the business of the entity
that constitutes Lessor (as distinguished from the costs of operation of
the Building), including without limitation, accounting and legal
services, costs of defending any lawsuits with mortgages, costs of
selling or financing any Interest of Lessor in the Building, costs of
disputes between Lessor and any of its employees, disputes with Lessor
and its Building management, and/or professional fees incurred by Lessor
in disputes with other Lessees of the Building.
(b) Costs incurred in connection with the original construction of the
Building.
(c) Costs of alterations off other Lessee's premises in the Building
(however, the cost of routine maintenance and repairs shall be
included).
(d) Interest and principal payments of debt secured by Building.
(e) Legal fees, space planner fees, Leasing commissions and advertising
expenses incurred by Lessor in connection with the development or
leasing of the Building.
(f) Costs for which Lessor is actually reimbursed by its insurance
carrier or any other Lessees insurance carrier.
(g) The cost of extraordinary services provided to other Lessees in the
Building incurred with respect to the installation of Lessee
improvements made for new Lessees or incurred in renovating or otherwise
improving, decorating or painting vacant space for existing Lessees of
the Building.
(h) Any political or charitable contributions made by Lessor.
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(i) Attorney fees, accountant fees, arbitration fees, and other fees or
expenses incurred in connection with any audits conducted by any past or
present Lessee or any existing or prospective leasing, lease renewal,
lease termination, lease modification, or other negotiation or disputes
with employees or contractors, present or prospective Lessees or other
occupants of the building, or their assignees or sublessee's, or lenders
or ground lessors.
(j) Expenditures, including, without limitation, capital expenditures
(except those made or installed for purposes of saving labor or
otherwise reducing applicable operating costs, not to exceed the
aggregate estimated cost savings annualized on a straight line basis
over the useful life of the capital improvements as determined by Lessor
in accordance with generally accepted accounting principles and
practices in effect at the time of acquisition of capital item) required
by laws enacted before the commencement date.
(k) Services provided and costs incurred and reimbursed to Lessor in
connection with the operations of retail, "service retail" or restaurant
operations in the Building.
(l) Rent for space occupied as a Building Management Office to the
extent such rent exceeds the fair market rental for such space or to the
extent the space utilized therefor materially exceeds the average space
so utilized by comparable buildings, to the extent such management
office is used for other purposes, the rent and other charges associated
with such office shall be prorated in an equitable manner.
(m) Costs of acquisition or insurance of sculpture, murals, paintings or
other objects of art.
(n) Any bad debts
SECTION 54: PARKING
Pursuant to the provisions of Exhibit B-1 of the Lease, Lessee shall be provided
free parking throughout the Lease term.
SECTION 55: UTILITIES AND SERVICES
Lessee shall be financially responsible for electric, gas, water, telephone and
other utilities and trash removal that may be required for the Premises. Payment
shall be made directly to the service provider unless the utility or service is
shared by two or more Lessee's, in which case Lessor will be responsible for
payment of the bill and equitably prorating the cost between Lessees benefiting
from the utility or service. The Lessor shall be solely responsible for
determining the method and allocations of any shared Lessee expenses.
SECTION 56: LESSORS ADDITIONAL OBLIGATIONS
The Lessor shall be responsible for the cost of replacing the roof, if required,
during the term of the Lease.
Page 43
<PAGE> 44
SECTION 57: LESSEES ADDITIONAL OBLIGATIONS
The Lessee shall maintain and repair the roof during the term of the Lease.
SECTION 58: PROPERTY INSURANCE
Responsibility for insurance is defined as follows:
<TABLE>
<CAPTION>
Type Insuring Party Payment Responsibility/Method
---- -------------- -----------------------------
<S> <C> <C>
Building & Improvements Lessor Paid by Lessor, Pass through
expense to Lessee
Alterations & Utility Lessee Paid by Lessee
Installations
Rental Value Lessor Paid by Lessor, Pass through
expense to Lessee
Adjacent Premises Lessor Paid by Lessor, Pass through
expense to Lessee
Lessee Improvements Lessee Paid by Lessee
</TABLE>
Page 44
<PAGE> 45
EXHIBIT A
SITE/FLOOR PLAN
Page 45
<PAGE> 46
EXHIBIT "B"
ATTACHED TO AND MADE A PART OF OFFICE LEASE
RULES AND REGULATIONS OF THE BUILDING
1. The sidewalks, entrances, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or
used for any purpose other than ingress and egress. The halls, passages,
entrances, elevators, stairways, balconies and roof are not for the use
of the general public, and Lessor shall in all cases retain the right to
control and prevent access thereto by all persons whose presence, in the
judgment of Lessor, shall be prejudicial to the safety, character,
reputation or interests of the Building and its Lessees, provided that
nothing herein contained shall be construed to prevent such access by
persons with whom Lessee normally deal in the ordinary course of their
business, unless such persons are engaged in illegal activities. No
Lessee and no employees of any Lessee shall go upon the roof of the
Building without taking responsible precautions as to not damage the
roof or roof membrane.
2. No awnings or other projections shall be attached to the
outside walls of the Building without the prior written consent of
Lessor. No hanging planters, television shall be attached to or
suspended from ceilings without the prior written consent of Lessor. No
curtains, blinds, shades or screens shall be attached to or hung in, or
used in connection with, any exterior window or door, without the prior
written consent of Lessor. Except as otherwise specifically approved by
Lessor, all electrical ceiling fixtures hung in offices or spaces along
the perimeter of the Building must be fluorescent, of a quality, type,
design and bulb color approved by Lessor.
3. No sign, advertisement or notice shall be exhibited, painted
or affixed by any Lessee as to be seen from the outside the Building
without the prior written consent of Lessor. In the event of the
violation of the foregoing by any Lessee, Lessor may remove same without
any liability, and may charge the expense incurred in such removal to
the Lessee violating this rule.
4. The wash room partitions, mirrors, wash basins and other
plumbing fixtures shall not be used for any purpose other than those for
which they were constructed, and no sweepings, rubbish, rags, or other
substances shall be thrown therein. All damage resulting from any misuse
of the fixtures shall be borne by the Lessee who, or whose servants,
employees, agents, visitors or licensees, shall have caused the same.
5. No Lessee shall mark, paint, drill into, or in any way deface
the exterior Building. No boring, cutting or stringing of wire or laying
of linoleum or other similar floor coverings shall be permitted except
with the prior written consent of Lessor and as Lessor may direct.
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<PAGE> 47
6. No vehicles or animals shall be brought into or kept in or
about any Lessee's premises. No Lessee shall cause or permit any unusual
or objectionable odors to escape from its premises.
7. No Lessee shall occupy or permit any portion of its premises
to be occupied as an office for a public stenographer or typist, or for
the manufacture or sale of liquor, narcotics, or tobacco in any form, or
as a medical office, or as a barber shop, manicure shop or employment
agency. No Lessee shall engage or pay any employees on its premises
except those actually working for such Lessee on its premises, nor
advertise for laborers giving an address at its premises. No Lessee's
premises shall be used for lodging or sleeping or for any immoral or
illegal purposes.
8. No Lessee shall make, or permit to be made, any unseemly or
disturbing noises, sounds or vibrations, or disturb or interfere with
occupants of this or neighboring buildings or premises or those having
business with them, whether by the use of any musical instrument, radio,
phonograph, unusual noise, or in any other way.
9. All materials and debris disposed of outside the Premises and
Building shall be to the appropriate trash enclosure, dumpster or other
location as required by applicable laws and regulations.
10. No Lessee shall at any time bring or keep upon its premises
any inflammable, combustible or explosive fluid, chemical or substance
without properly maintaining each substance. No Lessee shall do or
permit anything to be done in its premises, or bring or keep anything
therein, which shall in any way increase the rate of fire insurance on
the Building or on the property kept therein, or obstruct or interfere
with the rights of other Lessees, or in any way injure or annoy them, or
conflict with the regulations of the fire department or the fire laws,
or with any insurance policy upon the Building or any part thereof, or
with any rules and ordinances established by the local health authority
or other governmental authority.
11. Lessee shall provide a copy of the key for any locks or bolts
of any kind that are placed upon any of the doors or windows by Lessee.
Each Lessee must, upon the termination of its tenancy, restore to Lessor
all keys of stores, offices, and toilet rooms, whether furnished to or
otherwise procured by Lessee, and in the event of the loss of any keys
so furnished, such Lessee shall pay to the Lessor the cost of replacing
the same or of changing the lock or locks opened by such lost key if
Lessor shall deem it necessary to make such a change.
12. Lessor reserves the right to prohibit or impose conditions
upon the installation of heavy objects which might overload the Building
floors.
13. Lessor shall have the right to prohibit any advertising by
any Lessee which, in Lessor's opinion, tends to impair the reputation of
the Building or its desirability as an office building. Upon written
notice from Lessor, any Lessee shall refrain from or discontinue such
advertising.
Page 47
<PAGE> 48
14. Any persons employed by any Lessee to do janitorial work,
shall, while in the Building and outside of the Lessee's premises, be
subject to and under the control and direction of Lessee and Lessee
shall be responsible for all acts of such persons).
15. All doors opening into public corridors or lobbies shall be
kept closed, if required by local fire codes and regulations.
16. Canvassing, soliciting and peddling in the Building, unless
approved by Lessor, are prohibited and each Lessee shall cooperate to
prevent the same.
17. No air conditioning unit or other similar apparatus shall be
installed by Lessee without the written consent of Lessor.
18. All parking areas, pedestrian walkways, plazas and other
public areas forming a part of the Building shall be under the sole and
absolute control of Lessor with the exclusive right to regulate and
control these areas. Lessee agrees to conform to the rules and
regulations that may be established by Lessor for these areas from time
to time. The Parking Rules and Regulations attached hereto as Exhibit
"B-1" form a part hereof and are subject to change in accordance with
Paragraph 30 hereof. Nothing contained in this rule #24 will allow
Lessor to charge Lessee or any of Lessee's employees any parking fees
nor allow Lessor to charge parking fees to any of Lessee's customers,
vendors, associates, or anyone else who parks a vehicle in the parking
lot for the purpose of transacting business with Lessee.
19. Lessor shall have the right, only if required by a government
agency to do so, exercisable without notice and without liability to
Lessee, to change the name and street address of the Building of which
the Premises are a part.
20. Lessor shall have the right to control and operate the the
public facilities, as well as facilities furnished for the common use of
the Lessees, in such manner as it deems best for the benefit of the
Lessees generally.
21. The term "personal goods or services vendors" as used herein
means persons who periodically enter the Building for the purpose of
selling goods or services to a Lessee, other than goods or services
which are used by the Lessee only for the purpose of conducting its
business on the Premises. "Personal goods or services" include, but are
not limited to, drinking water and other beverages, food, barbering
services, and shoe shining services. Lessor reserves the right to
prohibit personal goods and services vendors from access to the Building
except upon such reasonable terms and conditions, including, but not
limited to, the payment of a reasonable fee and provision for insurance
coverage, as are related to the safety, care and cleanliness of the
Building, the preservation of good order therein, and the relief of any
financial or other burden on the Lessor occasioned by the presence of
such vendors or the sale by them of personal goods or services to the
Lessee or its employees. If necessary for the accomplishment of these
purposes, Lessor may exclude a particular vendor entirely or limit the
number of vendors who may be present at any one time in the Building.
Page 48
<PAGE> 49
22. Lessor may at any time reasonably revoke, supplement or
modify these Rules and Regulations, or any portion thereof, whenever in
Lessor's sole opinion such changes are required for the care,
cleanliness, safety or preservation of good order in the Building. Any
such changes shall be effective five (5) days after delivery to Lessee
of written notice thereof, except in the event of emergency, in which
event they shall be effective immediately upon notice to Lessee.
23. Lessee shall not place, install or operate on the Premises or
in any part of the Building, any engine, or machinery, or conduct
mechanical operations, except equipment that is normally used in
Tenant's light manufacturing operations, thereon or therein, or place or
use in or about the Premises any explosives, gasoline, kerosene, oil,
acids, caustics, or any other inflammable, explosive, or hazardous
material without the prior written consent of Lessor.
24. Lessor will not be responsible for any lost or stolen
personal property, equipment, money, or jewelry from the Premises or
from public rooms, regardless of whether such loss occurs when the area
is locked against entry.
25. No birds or animals shall be brought onto the Project, and no
vehicles shall be brought into or kept in the Building.
26. No draperies, shutters, or window coverings visible from the
outside of the Building shall be installed on exterior windows or on
windows or doors facing public corridors without Lessor's prior written
approval.
27. Employees of Lessee shall contract to render free or paid
services to any Lessee or any Lessee's agents, employees, or invitees;
if any of Lessor's employees perform any such services, such employees
shall be deemed the agent of the Lessee for whom the services are being
performed, regardless of whether or how payment is arranged for
services, and Lessor is expressly relieved from any and all liability
for any injury to persons or damage to property (or any other damages)
in connection with any such services.
Page 49
<PAGE> 50
EXHIBIT "B-1"
PARKING RULES AND REGULATIONS
So long as the Lease to which this Exhibit "B-1" is attached remains in
effect, and so long as the parking rules and regulations adopted by Lessor are
not violated, Lessee or persons designated by Lessee shall be entitled on a
non-exclusive basis to use parking spaces in the Project parking structure (if
any) and on surface parking. Lessor expressly reserves the right to redesignate
parking areas and to modify the parking facilities for other uses or to any
extent, so long as Tenant's ability to park employee, visitor, guests and
vendors vehicles are not hampered and so long as Tenant's deliveries are not
hampered.
A condition of any parking shall be compliance by the parker with
parking facilities rules and regulations, and amendments thereto, including any
sticker or other identification system established by Lessor's parking operator.
The following Parking Rules and Regulations are in effect until notice is given
to Lessee of any change. Lessor reserves the right to modify and/or adopt such
other reasonable and non-discriminatory rules and regulations for the parking
facilities as it deems necessary for the operation of the parking facilities.
Lessor may refuse to permit any person who violates the within rules to park in
the parking facilities, and any violation hereof shall subject the car to
removal at the owner's cost. In either of said events the sticker of any other
form of identification supplied by Lessor shall be returned to Lessor.
1. Hours for the parking facility shall be those allowable by the
applicable government codes or regulations.
2. Cars must be parked entirely within the stall lines painted on the
floor.
3. All directional signs and arrows must be observed.
4. The speed limit shall be 5 miles per hour.
5. Parking is prohibited:
(a) in areas not striped for parking
(b) in aisles
(c) where "no parking" signs are posted
(d) on ramps
(e) in cross hatched areas
(f) in such other areas as may be designated by Lessor's parking
operator.
6. Parking facilities managers or attendants are not authorized to make
or allow any exception to these Parking Rules and Regulations.
7. Every parker is required to park and lock his own car. All
responsibility for damage to cars or persons is assumed by the parker and Lessor
and/or its agent shall have no liability whatsoever in connection therewith.
Page 50
<PAGE> 51
8. Washing, waxing, cleaning or servicing of any vehicle by the Lessee
and/or his agents is prohibited, without prior written consent from Lessor.
9. Lessor and the parking facilities management reserves the right to
refuse use of the parking facilities, to any Lessee or person and/or his agents
or representatives who fail or refuse to comply with the above Parking Rules and
Regulations and with all unposted City, State or Federal legal requirements,
ordinances, laws or agreements.
10. Lessee shall acquaint all persons to whom Lessee assigns parking
spaces with these Parking Rules and Regulations.
Page 51
<PAGE> 52
EXHIBIT "C"
LESSEE ESTOPPEL CERTIFICATE
The undersigned, KOLL YORBA LINDA ASSOCIATES, a California General ("Lessor")
with a mailing address c/o CHARLES DUNN REAL ESTATE SERVICES, INC., 18101 VON
KARMAN AVENUE, SUITE 100, IRVINE, CALIFORNIA 92612 and STERI-OSS INC., a
California Corporation ("Lessee"), hereby certify to ______________, a
_______________, as follows:
1. Attached hereto is a true, correct and complete copy of that certain
lease dated __________________, 1997, between Lessor and Lessee (the
"Lease"), which demises premises located _______________________ (the
"Premises").
The Lease is now in full force and effect and has not been amended,
modified or supplemented, except as set forth in Paragraph 4 below.
2. The Term of the Lease commenced on _______________, 1998.
3. The Term of the Lease shall expire on _______________, 19__.
4. The Lease has: (initial one)
[X] not been amended, modified, supplemented, extended, renewed or
assigned.
[ ] been amended, modified, supplemented, extended, renewed or
assigned by the following described agreements, copies of which are
attached hereto: ______________________________________________________
_______________________________________________________________________.
5. Lessee has accepted and is now in possession of the Premises.
6. Lessee and Lessor acknowledge that the Lease will be assigned to
______________ and that no modification, adjustment, revision or
cancellation of the Lease or amendments thereto shall be effective
unless written consent of _______________ is obtained, and that until
further notice, payments under the Lease may continue as heretofore.
7. The amount of fixed monthly rent is $___________.
8. The amount of security despotism (if any) is $________. No other
security deposits have been made.
9. Lessee is paying the full lease rental which has been paid in full as of
the date hereof. No rent or other charges under the Lease have been paid
for more than thirty (30) days in advance of its due date.
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<PAGE> 53
10. All work required to be performed by Lessor under the Lease has been
completed.
11. There are no defaults on the part of the Lessor or Lessee under the Lease.
12. Lessee has no defense as to its obligations under the Lease and claims
no set-off or counterclaim against Lessor.
13. Lessee has no right to any concession (rental or otherwise) or similar
compensation in connection with renting the space it occupies except as provided
in the Lease. All provisions of the Lease and the amendments thereto (if any)
referred to above are hereby ratified.
The foregoing certification is made with the knowledge that __________________
is about to fund a loan to Lessor or __________________________ is about to
purchase the Project (or part thereof) from Lessor and that
_____________________ is relying upon the representations herein made in funding
such loan or in purchasing the Project (or part thereof).
IN WITNESS THEREOF, this certificate has been duly executed and delivered by the
authorized officers of the undersigned as of ____________________, 19__.
LESSEE:
STERI-OSS INC., A CALIFORNIA CORPORATION
By:____________________________________
Print Name:____________________________
Its:___________________________________
By:____________________________________
Print Name:____________________________
Its:___________________________________
Page 53
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF
PRO FORMA NET LOSS PER SHARE
Weighted average common shares outstanding
<TABLE>
<S> <C> <C> <C>
Common shares issued................................. 50,000
Warrants issued within one year of filing(1)......... 4,750,000
Options issued within one year of filing............. [a] 733,344
Weighted average exercise price per share.......... $ 0.58
--------
Proceeds........................................... 425,340
Mid range of estimated Offering price per share.... $ 12.00
--------
Common shares repurchased.......................... [b] 35,445
--------
Common equivalent shares........................... [a-b] 697,899 697,899
--------
Conversion of Class A and Class C Preferred Stock to
common shares(2)................................... 2,256,719
---------
Total common and common equivalent shares............ 7,754,618
=========
</TABLE>
For the period November 16, 1996 through December 31, 1996 (in thousands,
except per share data)
<TABLE>
<S> <C>
Net loss as reported........................................................ $ (613)
Add - interest on converted preferred stock................................. 274
-------
Pro forma net loss.......................................................... (339)
=======
Pro forma net loss per share................................................ $ (0.04)
=======
</TABLE>
For the nine months ended September 30, 1997 (in thousands, except per
share data)
<TABLE>
<S> <C>
Net loss as reported........................................................ $(4,028)
Add - interest on converted preferred stock................................. 1,643
-------
Pro forma net loss.......................................................... (2,385)
======
Pro forma net loss per share................................................ $ (0.31)
======
</TABLE>
- ---------------
(1) Warrants were issued with exercise prices of $0.0002; all deemed outstanding
during periods presented.
(2) Assumed outstanding at the beginning of respective periods.
<PAGE> 1
EXHIBIT 11.2
STATEMENT REGARDING COMPUTATION OF
SUPPLEMENTAL NET INCOME PER SHARE
Weighted average common shares outstanding
<TABLE>
<S> <C> <C> <C>
Common shares issued................................ 50,000
Warrants issued within one year of filing(1)........ 4,750,000
Options issued within one year of filing............ [a] 733,344
Weighted average exercise price per share......... $ 0.58
--------
Proceeds.......................................... 425,340
Mid range of estimated Offering price per share... $ 12.00
--------
Common shares repurchased......................... [b] 35,445
--------
Common equivalent shares.......................... [a-b] 697,899 697,899
--------
Conversion of Class A and Class C Preferred Stock to
common shares(2).................................. 2,256,719
Shares issued in conjunction with Offering.......... 3,000,000
----------
Total common and common equivalent shares........... 10,754,618
==========
</TABLE>
For the period November 16 through December 31, 1996 (in thousands, except
per share data)
<TABLE>
<S> <C>
Net loss as reported........................................................ $ (613)
Add - Interest on preferred stock........................................... 374
- Interest on debt..................................................... 306
-------
67
Less - tax effect at 40%.................................................... 27
-------
Supplemental net income..................................................... $ 40
=======
Supplemental net income per share........................................... $ 0.00
=======
</TABLE>
For the nine months ended September 30, 1997 (in thousands, except per
share data)
<TABLE>
<S> <C>
Net loss as reported........................................................ $(4,028)
Interest on preferred stock................................................. 2,243
Interest on debt............................................................ 2,044
-------
259
Less - tax effect at 40%.................................................... 104
-------
Supplemental net income..................................................... $ 155
=======
Supplemental net income per share........................................... $ 0.01
=======
</TABLE>
- ---------------
(1) Warrants were issued with exercise prices of $0.0002; all deemed outstanding
during periods presented.
(2) Assumed outstanding at the beginning of respective periods.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated October 3, 1997, relating
to the consolidated financial statements of Steri-Oss, Inc., which appear in
such Prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the period from November 16, 1996 through
December 31, 1996 listed under Item 16(b) of this Registration Statement when
such schedule is read in conjunction with the consolidated financial statements
referred to in our report. The audit referred to in such report also included
this schedule. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Costa Mesa, California
December 29, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated October 3, 1997, relating
to the financial statements of Steri-Oss, Inc., which appear in such Prospectus.
We also consent to the application of such report to the Financial Statement
Schedule for the years ended December 31, 1994 and 1995, and for the period from
January 1, 1996 through November 15, 1996 listed under Item 16(b) of this
Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Costa Mesa, California
December 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 524 220
<SECURITIES> 0 0
<RECEIVABLES> 7,572 5,114
<ALLOWANCES> 227 0
<INVENTORY> 6,359 4,426
<CURRENT-ASSETS> 14,823 10,074
<PP&E> 4,895 4,674
<DEPRECIATION> (905) (132)
<TOTAL-ASSETS> 84,172 79,627
<CURRENT-LIABILITIES> 12,245 7,717
<BONDS> 37,487 36,396
36,611 34,226
0 0
<COMMON> 2,470 1,901
<OTHER-SE> (4,641) (613)
<TOTAL-LIABILITY-AND-EQUITY> 84,172 79,627
<SALES> 29,361 0
<TOTAL-REVENUES> 29,361 32,197
<CGS> 8,018 8,786
<TOTAL-COSTS> 8,018 8,786
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,547 1,065
<INCOME-PRETAX> (4,028) 3,158
<INCOME-TAX> 0 1,852
<INCOME-CONTINUING> (4,028) 1,306
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,028) 1,306
<EPS-PRIMARY> (0.31) 0
<EPS-DILUTED> 0 0
</TABLE>
