U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission file number: 0-21214
ORTHOLOGIC CORP.
(Exact name of registrant as specified in its charter)
Delaware 86-0585310
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2850 South 36th Street, Suite 16, Phoenix, Arizona 85034
(Address of principal executive offices)
Issuer's telephone number: (602) 437-5520
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
None N/A
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0005 per share;
Rights to purchase 1/100 of a share of Series A Preferred Stock
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10- K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing bid price of the registrant's Common
Stock as reported on the Nasdaq National Market on February 21, 1997 was
approximately $146,117,400. Shares of Common Stock held by each officer and
director and by each person who owns 10% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive.
The number of outstanding shares of the registrant's Common Stock on
February 21, 1997 was 25,031,846.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1996 are incorporated by reference in Part II
hereof and portions of the Registrant's Proxy Statement for the Annual Meeting
of Stockholders to be held on May 16, 1997 are incorporated by reference in Part
III hereof.
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ORTHOLOGIC CORP.
FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
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PART I
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 11
Item 3. Legal Proceedings............................................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 13
Executive Officers of the Registrant.................................................................. 13
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters..................... 15
Item 6. Selected Financial Data...................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 15
Item 8. Financial Statements and Supplementary Data.................................................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 21
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 22
Item 11. Executive Compensation....................................................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 22
Item 13. Certain Relationships and Related Transactions............................................... 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 22
SIGNATURES............................................................................................S-1
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PART I
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Item 1. Business
General
The Company was incorporated as a Delaware corporation in July 1987 as
IatroMed, Inc. and changed its name to OrthoLogic Corp. in July 1991. Unless the
context otherwise requires, the "Company" or "OrthoLogic" as used herein refers
to Orthologic Corp. and its subsidiaries. The Company's executive offices are
located at 2850 South 36th Street, Phoenix, Arizona 85034, and its telephone
number is (602) 437-5520.
OrthoLogic develops, manufactures and markets proprietary, technologically
advanced orthopaedic devices for the orthopaedic healthcare market including
bone growth stimulation, Continuous Passive Motion ("CPM") devices and ancillary
orthopaedic recovery products. OrthoLogic's devices and other rehabilitation
products are designed to enhance the healing of diseased, damaged, degenerated
or recently repaired musculoskeletal tissue. The Company's products focus on
improving the clinical outcomes and cost-effectiveness of orthopaedic procedures
that are characterized by compromised healing, high-cost, potential for
complication and long recuperation time.
The Company entered the CPM business with its acquisition of Sutter
Corporation ("Sutter") in August 1996. Sutter manufactures and markets CPM
devices. Sutter also offers ancillary orthopaedic products such as bracing and
cryotherapy through its CarePlan. CarePlan is a product and service concept that
enables a sales representative to offer surgeons a range of ancillary
orthopaedic products. The Company has included Sutter's operations in its
consolidated financial statements since August 30, 1996. The Company continued
to develop its CPM business when its newly formed subsidiary, Toronto Medical
Orthopaedics Ltd., a Canada corporation, acquired substantially all of the
assets and business of Toronto Medical Corp, an Ontario corporation, and its
United States subsidiaries in March 1997. The Company also acquired Danninger
Medical Technology, Inc.'s CPM product line in March 1997.
OrthoLogic periodically discusses with third parties the possible
acquisition of technology, product lines and businesses in the orthopaedic
healthcare market and from time to time enters into letters of intent that
provide OrthoLogic with an exclusivity period during which it considers possible
acquisitions.
Products
OrthoLogic's primary products include bone growth stimulation
and fracture fixation devices ("Fracture Healing Products") and CPM devices and
related products ("Orthopaedic Rehabilitation Products"). These products are
sold primarily through the Company's direct sales force. For 1996, 1995 and
1994, revenues from Fracture Healing Products and Orthopaedic Rehabilitation
Products as a percentage of total revenues were as follows:
Percentage of Total Net Revenues,
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Fracture Healing Products 68% 100% 100%
Orthopaedic Rehabilitation Products 32% -0- -0-
Fracture Healing
OrthoLogic(R) 1000. OrthoLogic's bone growth stimulation product is the
OrthoLogic 1000. Prescribed by a physician, the OrthoLogic 1000 is a portable,
noninvasive magnetic field bone growth stimulator designed for home treatment of
patients who have a non-healing fracture. The OrthoLogic 1000 comprises two
magnetic field treatment transducers (coils) and a microprocessor-controlled
signal generator that delivers highly specific, low energy combined static and
alternating magnetic fields.
In 1989, the Company received U.S. Food and Drug Administration ("FDA")
clearance of an Investigational Device Exemption ("IDE") to conduct a clinical
trial of the OrthoLogic 1000 for the treatment of patients with a specific
variety of non-healing fracture called a nonunion fracture of certain long
bones. A nonunion fracture was defined for the purposes of this study as a
fracture that remains unhealed for at least nine months post-
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injury. The patients enrolled in the Company's clinical trial had very severe
nonunion fractures; the average fracture remained non-healing for 2.4 years
post-injury and had an average of 2.5 unsuccessful surgical procedures performed
prior to enrollment. Based on the data submitted to the FDA in the Company's
Pre-Market Approval ("PMA") application, 60.7% of these non-healing fractures
healed. In March 1994, the FDA granted the Company PMA approval to market this
product for treatment of nonunion fractures of certain long bones. As a
condition of the March 1994 PMA approval for the OrthoLogic 1000, the FDA
required the Company to maintain a registry of all patients using the device.
Based on an initial review of the approximately 400 patients who had nonunion
fractures (as defined above) and then completed treatment at the time the
Company submitted registry data in July 1996, approximately 72% of the patients
have healed.
In 1990, the Company received supplemental IDE clearance to conduct
human clinical trials of the OrthoLogic 1000 on patients with another type of
non-healing fracture called a delayed union fracture. For purposes of this
study, a delayed union fracture was defined as a non-healing fracture five to
nine months post-injury. This clinical trial was designed as a double-blind,
placebo-controlled, randomized study. An analysis of the data has been completed
by the Company, and this analysis indicates the benefit of the OrthoLogic 1000
in the treatment of delayed union fractures. However, the Company believes that
a larger number of patients is necessary to establish statistical significance.
Although the data on the active OrthoLogic 1000 units showed a positive effect,
the healing rate in the placebo group was greater than originally anticipated.
The Company recently combined the existing data from the study with delayed
union data collected in the Company's Post Marketing Clinical Registry. This
combined data set has been analyzed and submitted to the FDA to support the
Company's request to expand the non-union definition to include patients five
months post-injury. There can be no assurance that this data will result in
regulatory approval.
SpinaLogic(R) 1000. The SpinaLogic 1000 is a portable, noninvasive
magnetic field bone growth stimulator being developed to enhance the healing
process as either an adjunct to spinal fusion surgery or as treatment for a
failed spinal fusion surgery. The Company believes that the SpinaLogic 1000
offers benefits similar to those of the OrthoLogic 1000 in that it is relatively
easy to use, requires a small power supply and requires only 30 minutes of
treatment per day. The SpinaLogic 1000 consists of one magnetic field treatment
transducer and a microprocessor-controlled signal generator, both of which are
positioned near the spine through use of an adjustable belt which the patient
places around the torso. The Company received approval of an IDE from the FDA in
August 1992 and commenced clinical trials for the SpinaLogic 1000 as an adjunct
to spinal fusion surgery in February 1993. The Company received approval of an
IDE supplement from the FDA in September of 1995 to conduct a clinical trial of
the SpinaLogic 1000 as a noninvasive treatment for a failed spinal fusion
surgery. The Company commenced this on-going clinical trial in the fourth
quarter of 1995. The Company has not yet applied for FDA approval to market the
SpinaLogic 1000, and there can be no assurance that the Company will receive
such approval if sought.
BioLogic(R) Magnetic Field Technology. The natural process of
musculoskeletal tissue healing involves a complex interaction of several
physiological processes, which include the stimulation of specific cells such as
osteoblasts, fibroblasts and endothelial cells. When an injury occurs, growth
factors are produced at the healing site which stimulate selected cells to
initiate the healing cascade. In most cases, these cells are able to initiate
repair in response to an injury and restore the musculoskeletal tissue to its
original strength and structure. Cell stimulation is a necessary component of
tissue regeneration and is dependent upon certain triggering events that
activate the production of connective tissue. The BioLogic technology is a
second generation magnetic field technology licensed to the Company and used in
the OrthoLogic 1000 and SpinaLogic 1000. The technology utilizes a specific
combination of a low energy static magnetic field with a low-energy alternating
magnetic field, which the Company believes increases cell stimulation. The
technologies employed in first generation electromagnetic bone growth
stimulators produce only an alternating magnetic field. The Company believes the
use of combined static and alternating magnetic fields in its BioLogic
technology increases the potency of the treatment and therefore reduces the
required daily treatment time. The BioLogic technology is also a low-energy
technology. The strength of the BioLogic magnetic fields are in the range of the
earth's magnetic field. By comparison, the strength of the magnetic fields
produced by competitive technologies is many times greater than that of the
earth's magnetic field.
In addition to the OrthoLogic 1000 and the SpinaLogic 1000, the Company
is also engaged in research of additional applications of the proprietary
BioLogic technology, including cartilage regeneration and osteoporosis
treatment.
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Fracture Fixation. The Company's fracture fixation products consist of
the OrthoFrame(R) External Fixator, the OrthoFrame/Mayo Wrist Fixator and the
OrthoNail(TM), an intramedullary rod for humeral and tibial fractures.
OrthoFrame products are external fixation devices constructed of non-metallic
carbon fiber-epoxy composite material. The OrthoFrame offers a versatile design
which can be utilized for immobilization of a wide array of fracture types,
including tibia, femur, ankle, elbow and pelvic fractures. The OrthoFrame/Mayo
Wrist Fixator is a specialized device developed in cooperation with the
Orthopaedic Department of the Mayo Clinic, Rochester, Minnesota, for the
treatment of complex wrist (Colles) fractures. The Orthopaedic Department of the
Mayo Clinic has agreed to provide ongoing clinical input on future design
enhancements for the OrthoFrame/Mayo Wrist Fixator. Both products utilize
non-metallic carbon fiber-epoxy materials to reduce device weight and are
radiolucent (i.e., eliminate the blocking of x-rays caused by metallic devices).
The Company believes that the patented fracture alignment mechanism of the
OrthoFrame products allows for simpler application, and the radiolucency and
light weight composite materials of the OrthoFrame products provide benefits to
both surgeon and patient. OrthoFrame products are shipped pre-assembled in
sterile packaging to increase ease-of-use for the surgeon and to reduce handling
and inventory expenses for the hospital. The OrthoNail is an internal fixation
device used to treat fractures of the humerus and tibia. The Company received
510(k) marketing clearance from the FDA in September 1995 and commenced selling
the product for humerus fractures in December 1995. In March 1996, the Company
received 510(k) marketing clearance from the FDA for the version of the
OrthoNail to be used in connection with fractures of the tibia. The Company does
not actively market the OrthoNail.
Orthopaedic Rehabilitation
Continuous Passive Motion. The Company began manufacturing and leasing
CPM products upon its acquisition of Sutter in August 1996. CPM devices provide
controlled, continuous movement of joints and limbs without requiring the
patient to exert muscular effort and are intended to be applied immediately
following trauma or surgery to repair or replace joints. The products are
designed to reduce pain and swelling, accelerate recovery of joint movement,
reduce the length of a hospital stay, and reduce the incidence of complications.
The major market for CPM devices is for use immediately following knee and hip
joint replacement surgeries. CPM devices are used primarily by post-surgery
orthopaedic patients in hospitals and in their homes. CPM devices are also used
in nursing homes, sports medicine clinics and private practice physical therapy
clinics.
The Company's Sutter Legasus Sport CPM(R) and SportLite(R)PB are
designed for knee rehabilitation. The Legasus Sport CPM(R) facilitates full
extension after knee surgery and has an optional patella mobilizer to prevent
scarring. The SportLite(R)PB is an adjustable post-operative knee brace. The
Company also offers a LiteLift(R) CPM specifically designed for hospital use.
The Company's other CPM products include the WaveFlex(TM)C.F.T. hand CPM device
for post-surgical hand rehabilitation and the CPM 9000AT(TM) for ankle
rehabilitation. Sutter recently began marketing its Sutter CarePlan(TM) and
Sutter CarePlan(TM)II to offer physicians a single source for products required
for a patient's rehabilitation and to allow physicians to customize procedures
and streamline rehabilitation protocols. The Sutter CarePlan(TM) and Sutter
CarePlan(TM)II include the Company's Sutter products as well as products that
Sutter purchases from third party suppliers. While the majority of Sutter's
products are designed for the lower extremity, the Company's other CPM products
acquired in 1997 include a wide range of CPM devices for most human joints on
which CPM is used.
Ancillary Orthopaedic Products. The Company offers a line of both
postoperative and functional braces and ancillary orthopaedic products such as
cryotherapy through its CarePlan. Postoperative braces are used in the period
immediately following surgery to provide stability, within a controlled range of
motion, to the operative site. Functional braces are used in the long-term
rehabilitation phase after a patient begins to participate in sporting
activities and can be used for a year or longer after surgery/injury.
Cryotherapy is a treatment modality that cools the operative site to reduce pain
and swelling. There are several types of cryotherapy devices, ranging from ice
packs to clinical units. In 1996, Sutter introduced a new cryotherapy device
called the Blue Arctic. The device provides temperature-controlled cold therapy
using a reservoir of ice water and a pump that circulates the water through a
pad placed over the injury/surgical site.
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Other Product Development
OrthoSound(TM). The Company currently is conducting preclinical and a
pilot clinical trial relating to the design, development and testing of
diagnostic and therapeutic devices utilizing its nonthermal ultrasound
technology ("OrthoSound") for use in medical applications that relate to bone,
cartilage, ligament or tendon diagnostics and healing. In the area of
diagnostics, the OrthoSound research projects address the potential use of
ultrasound for the assessment of bone strength and fracture risk in osteoporotic
patients and the assessment of fracture healing. In therapeutic applications,
the focus of the OrthoSound research is on the potential use of ultrasound for
the treatment of at-risk fractures to increase the healing rate and reduce the
need for subsequent surgical procedures. The Company has not yet applied for FDA
approval to market the OrthoSound, and there can be no assurance that the
Company will do so or that it would receive such approval if sought.
Marketing and Sales
Fracture Healing Products are prescribed by orthopaedic surgeons and
podiatrists practicing in private practices, hospitals and orthopaedic and
podiatric treatment centers. The Company is focusing its marketing and sales
efforts on these groups, with particular emphasis on those clinicians who treat
bone healing problems. CPM products are prescribed by orthopaedic surgeons,
hospitals, orthopaedic trauma centers and allied health professionals. CPM
devices are leased to the patient, typically for a period of one to three weeks.
Additionally, the Company utilizes physician-to-physician selling via
presentations and scientific and clinical articles published in medical
journals.
As a result of the Company's transition during 1996 to an internal
salesforce, the Company's sales and marketing efforts now are primarily
conducted directly through the Company's own sales people. The Company also has
retained selling agreements with two orthopaedic specialty dealers. Of the
Company's approximately 500 employees at December 31, 1996, approximately 290
are involved in sales and marketing. The Company employs 19 area vice presidents
to manage regional sales, each of whom has responsibility for the Company's
direct sales and marketing efforts and the activities of the Company's specialty
dealers in a designated geographic area. See "Item 7. - Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Dependence on
Sales force."
Through the efforts of the Company's specialized direct sales force
servicing third party payors, the Company has contracted with over 320 third
party payors, including various Blue Cross/Blue Shield organizations, and the
Department of Veteran Affairs. In addition, the Company is an approved Medicare
provider and is also an approved Medicaid provider for a majority of states.
OrthoFrame and OrthoFrame/Mayo products are sold internationally
through distributors located in European and South American countries.
Currently, the OrthoLogic 1000 is not marketed internationally. However, the
Company has entered into a cooperative business development arrangement with
Tokyo-based Mitsubishi Chemical Corporation to collaborate in seeking approval
from Japan's Ministry of Health and Welfare for reimbursement and the use of the
OrthoLogic 1000 by Japanese national insurance. The Company's March 1997 Toronto
acquisition may also increase the Company's access to international markets.
Historically, the Company's export sales as a percentage of net sales have been
less than 1%. The Company believes that this percentage may increase due to its
recent acquisitions of businesses with more significant international sales. See
"Item 1 -- Business -- General."
While OrthoLogic has not experienced seasonality of revenues for its
fracture healing products, the Company believes that revenues of its newly
acquired CPM Products may be seasonal. CPM devices are used as adjuncts to
surgery and historically the strongest quarter tends to be the fourth quarter of
the calendar year. The Company believes this trend may be because (i)
individuals tend to put off elective surgical intervention until later in the
year when their insurance deductibles have been met, and (ii) sports-related
injuries tend to increase in the fall and winter months. OrthoLogic recently
entered the CPM business, and it is possible that the Company's future results
may be subject to more seasonality.
4
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Research and Development
The Company's research and development staff presently includes 18
individuals, of whom four hold doctoral (Ph.D. or D.V.M.) degrees. Individuals
within the research and development organization have extensive experience in
the areas of biomaterials, bioengineering, animal modeling and cell biology.
Research and development efforts emphasize product engineering, activities
related to the clinical trials conducted by the Company and basic research. With
regard to basic research, the research and development staff conducts in-house
research projects in the area of fracture healing. The staff also supports and
monitors external research projects in biophysical stimulation of growth factors
and the potential use of ultrasound technology in diagnostic and therapeutic
applications relating to bone, cartilage, ligament or tendon. Both the in-house
and external research and development projects also provide technical marketing
support for the Company's products and explore the development of new products
and also additional therapeutic applications for existing products. Product
engineering activities are primarily related to improvements in the CPM devices.
The Company also has a clinical regulatory group that initiates and monitors
clinical trials at approximately 30 clinical centers in the United States. The
Company's research and development expenditures totaled $2.8 million, $2.1
million and $2.2 million in the years ended December 31, 1994, 1995 and 1996,
respectively. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Manufacturing
The Company assembles the OrthoLogic 1000 from parts supplied by third
parties, performs tests on both the components and assembled product and
calibrates the assembled product to specifications. The Company currently
purchases the microprocessor used in the OrthoLogic 1000 from a sole source
supplier. The OrthoLogic 1000 is not dependent on this microprocessor and the
Company believes that it could be redesigned to incorporate another
microprocessor. At any point in time, the Company maintains a supply of the
microprocessor on hand to meet its sales forecast for at least one year. In
addition, the magnetic field sensor employed in the OrthoLogic 1000 is available
from two sources. Establishment of additional or replacement suppliers for these
components cannot be accomplished quickly. Other components and materials used
in the manufacture and assembly of the OrthoLogic 1000 are available from
multiple sources.
The Company assembles the OrthoFrame and OrthoNail products from parts
supplied by third parties. These products are packaged and sterilized by outside
sources and shipped by the Company from its facilities. The composite material
components of the OrthoFrame products are currently sourced from two vendors.
Establishment of additional or replacement suppliers for these components cannot
be accomplished quickly. The Company maintains a supply of these components on
hand to meet its sales forecast for at least six months. Other components and
materials used in the manufacture and assembly of the OrthoFrame products are
readily available from multiple sources. See "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Dependence on
Key Suppliers."
The Company assembles CPM devices from parts supplied by third parties.
These parts are assembled, calibrated and tested at the Company's facilities.
The Company purchases several CPM components, including microprocessors, motors
and custom key panels, from sole-source suppliers. The Company believes that
these products are not dependent on those components and could be redesigned to
incorporate comparable components. The Company places orders for these
components to meet its sales forecast for the current year. Other components and
materials used in the manufacture and assembly of CPM products are available
from multiple sources.
The Company purchases its other Orthopaedic Rehabilitation Products
fully assembled from third-party suppliers. These products are available from
multiple sources.
Competition
The orthopaedic industry is characterized by rapidly evolving
technology and intense competition. With respect to the treatment of bone
fractures, the Company believes that patients with non-healing fractures are
5
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primarily treated with surgery, and this represents its primary competition
although other manufacturers of noninvasive bone growth stimulators also
represent competition for the OrthoLogic 1000. The Company's main competitors
for these products are Electro-Biology, Inc. ("EBI"), a subsidiary of Biomet,
Inc., OrthoFix International N.V. ("OrthoFix") and Biolectron Inc. Exogen, Inc.
markets a nonthermal ultrasound device for the acceleration of the time to a
healed fracture for closed, cast immobilized, fresh fractures of the tibia and
distal radius. With respect to the adjunctive treatment of spinal fusion
surgery, the Company expects its primary competitors for its products to be EBI
and OrthoFix. With respect to external fixation devices, the Company's primary
competitors are OrthoFix, Howmedica, Inc. (a subsidiary of Pfizer, Inc.), EBI,
Smith & Nephew Richards, Inc., Synthes, Inc. and ACE Orthopedic Manufacturing (a
division of Depuy, Inc.). The same group of companies and Applied OsteoSystems,
Inc. represent its primary competition in the internal fixation market. The
Company believes that it may now be the largest domestic CPM device provider.
The Company's primary competitors in the United States for CPM devices are
privately held Thera-Kinetics, Inc., many independent owners/lessors of CPM
devices, and suppliers of traditional orthopaedic rehabilitation services
including orthopaedic immobilization and follow up physical therapy. The Company
also believes that there are several foreign CPM device manufacturers and
providers that it will encounter if it expands international sales or as those
competitors sell in the United States.
Many of the Company's competitors have substantially greater resources
and experience in research and development, obtaining regulatory approvals,
manufacturing, and marketing and sales of medical devices, and therefore
represent significant competition for the Company. The Company is aware that its
competitors are conducting clinical trials for other medical applications of
their respective technologies. In addition, other companies are developing or
may develop a variety of other products and technologies to be used in CPM
devices, the treatment of fractures and spinal fusions, including growth
factors, bone graft substitutes combined with growth factors, and nonthermal
ultrasound. The Company believes that competition is based on, among other
factors, the safety and efficacy of products in the marketplace, physician
familiarity with the product, ease of patient use, product reliability,
reputation, price, sales and marketing capability and reimbursement.
Any product developed by the Company that gains any necessary
regulatory approval will have to compete for market acceptance and market share
in an intensely competitive market. An important factor in such competition may
be the timing of market introduction of competitive products. Accordingly, the
relative speed with which the Company can develop products, complete clinical
testing as well as any necessary regulatory approval processes, and supply
commercial quantities of the product to the market will be critical to its
competitive success. There can be no assurance the Company can successfully
compete on these bases. See "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Intense Competition" and "--
Rapid Technological Change."
Patents, Licenses and Proprietary Rights
The Company's practice is to require its employees, consultants and
advisors to execute a confidentiality agreement upon the commencement of an
employment or consulting relationship with the Company. The agreements provide
that all confidential information developed by or made known to an individual
during the course of the employment or consulting relationship will be kept
confidential and not disclosed to third parties except in specified
circumstances. In the case of employees, the agreements provide that all
inventions conceived by the individual relating to the Company's business while
employed by the Company shall be the exclusive property of the Company. There
can be no assurance, however, that these agreements will provide meaningful
protection for the Company's trade secrets in the event of unauthorized use or
disclosure of such information.
It is also the Company's policy to protect its owned and licensed
technology by, among other things, filing patent applications for the
technologies that it considers important to the development of its business. The
Company uses the Biologic(R) technology through a worldwide exclusive license
granted by a corporation owned by university professors who discovered the
technology. With respect to the BioLogic technology, the delivery of such
technology to the patient and specific applications of such technology, the
Company holds title to four United States patents and to patents issued in
Australia, Switzerland, Germany, France, and the United Kingdom, as well as to a
pending patent application in Japan, and holds an exclusive worldwide license to
28 United States patents, eight Australian
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patents, five Canadian patents, and one Japanese patent. Currently there are
five pending United States patent applications and multiple pending patent
applications in Canada, Japan, and Europe. The Company's license for the
BioLogic technology extends for the life of the underlying patents (which are
due to expire over a period of years beginning in 2006 and extending through
2014) and covers all improvements and applies to the use of the technology for
all medical applications in man and animals. The license provides for payment of
royalties by the Company from the net sales revenues of products using the
BioLogic technology. The license agreement can be terminated for breach of any
material provision of the license. See Note 4 of Notes to Consolidated Financial
Statements.
The Company holds an exclusive worldwide license to four United States
patents covering OrthoFrame products. The license, which extends for the life of
the underlying patents (the earliest of which was issued in 1986) and covers all
improvements, provides for payment of royalties by the Company from the sales
revenues of OrthoFrame products. The license provides for minimum royalties of
$100,000 per calendar year. The license agreement can be terminated for breach
of any material provision of the license and, at the Company's option, upon 60
days' notice to the licensor.
The Company has been assigned four United States patents covering
methods for ultrasonic bone assessment by noninvasively and quantitatively
evaluating the status of bone tissue in vivo through measurement of bone mineral
density, strength and fracture risk. Additionally, patent applications are
pending for this technology in the United States, Canada, Japan, and Europe as
well as two pending international applications.
With respect to CPM technology, the Company currently owns sixteen
United States patents, three pending United States patent applications, two
Canadian patents, three Canadian patent applications, two Japanese patents, and
a European patent. The issued United States patents on this technology are due
to expire over a period of years beginning in the year 2001 and extending
through 2013. These patents could expire at an earlier date if the patents are
not maintained by paying certain fees and/or annuities to the United States
Patent and Trademark Office and/or appropriate foreign patent offices at certain
intervals over the life of the patents. The pending United States patents, if
issued, would begin to expire over a period of time beginning around 2015, and
could expire at an earlier date, if not maintained as noted in the previous
sentence.
OrthoLogic(R), OrthoLogic & Design(R), OrthoFrame(R), BioLogic(R),
SpinaLogic(R), Tomorrow's Technology Today(R), CaseLog(R), OrthoSonic(R),
Legasus Sport CPM(R), LiteLift(R), Sportlite(R), Sutter(R), Danninger
Medical(R), Mobilimb(R), and Totalcare(R) are federally registered trademarks of
the Company. Additionally, the Company claims trademark rights in
PerioLogic(TM), OsteoLogic(TM), OrthoNail(TM), OrthoSound(TM), Quickfix(TM), CPM
9000AT(TM), Legasus CPM(TM), WaveFlex(TM), Sutter CarePlan(TM), Home Rehab
System(TM) and Danniflex(TM).
The Company has become aware of an assertion in Germany against one of
its recently acquired CPM patents. The Company is in the early stages of
investigating the assertion, but it does not currently believe that it will have
a material effect on the Company. The Company is not aware of any other claims
that have been asserted against the Company for infringement of proprietary
rights of third parties. There can be no assurance, however, that third parties
will not assert infringement claims against the Company in the future.
Government Regulation
The activities of the Company are regulated by foreign, federal, state
and local governments. Government regulation in the United States and other
countries is a significant factor in the development and marketing of the
Company's products and in the Company's ongoing manufacturing and research and
development activities. The Company and its products are regulated by the FDA
under a number of statutes, including the Medical Device Amendments Act of 1976
to the Federal Food, Drug and Cosmetic Act and the Safe Medical Devices Act of
1990 (collectively, the "FDC Act"). The Company's current BioLogic
technology-based products are classified as Class III Significant Risk Devices,
which are subject to the most stringent FDA review, and are required to be
tested under an IDE clinical trial and approved for marketing under a PMA.
7
<PAGE>
To begin human clinical studies the Company must apply to the FDA for
an IDE. Generally, preclinical laboratory and animal tests are required to
establish a scientific basis for granting of an IDE. Once an IDE is granted,
clinical trials can commence which involve rigorous data collection as specified
in the IDE protocol. After the clinical trial is completed, the data are
compiled and submitted to the FDA in a PMA application. FDA approval of a PMA
application occurs after the applicant has established safety and efficacy to
the satisfaction of the FDA. The FDA approval process may include review by an
FDA advisory panel. Approval of a PMA application includes specific requirements
for labeling of the medical device with regard to appropriate indications for
use. Among the conditions for PMA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures comply
with the FDA regulations setting forth Good Manufacturing Practices ("GMP"). The
FDA monitors compliance with these requirements by requiring manufacturers to
register with the FDA, which subjects them to periodic FDA inspections of
manufacturing facilities. In addition, the Company must comply with
post-approval reporting requirements of the FDA. If violations of applicable
regulations are noted during FDA inspections, the continued marketing of any
products manufactured by the Company may be adversely affected. No significant
deficiencies have been noted in FDA inspections of manufacturing facilities
under the Company's operation.
The Company's external fixation devices, the OrthoFrame and the
OrthoFrame/Mayo Wrist Fixator, and the Company's internal fixation product,
OrthoNail, are Class II devices. If a medical device manufacturer can establish
that a newly developed device is "substantially equivalent" to a device that was
legally marketed prior to May 28, 1976, the date on which the Medical Device
Amendments Act of 1976 was enacted, the manufacturer may seek marketing
clearance from the FDA to market the device by filing a 510(k) pre-market
notification with the agency. The Company obtained 510(k) pre-market
notification clearances from the FDA for the OrthoFrame and OrthoNail product
lines.
The Company's CPM devices are Class I devices which do not require
510(k) pre-market notification. However, CPM manufacturers must comply with GMP
regulations. The devices must also meet Underwriters Laboratories standards for
electrical safety. For sales to the European Community, CPM devices must meet
established electromechanical safety and electromagnetic emissions regulations.
The Company also expects that the European Community will soon require
compliance with quality control standards. The Company believes that it
currently complies with these regulations.
Manufacturers outside the United States that export devices to the
United States may be subject to FDA inspection. The FDA generally inspects
companies every few years. The frequency of inspection depends upon the
company's status with respect to regulatory compliance. To date, the Company's
foreign operations have not been the subject of any inspections conducted by the
FDA.
Under Canada's Food and Drugs Act and the rules and regulations
thereunder (the "Food and Drugs Act"), the CPM devices sold by the Company do
not require any Canadian regulatory approvals prior to their introduction to the
market. However, the Company must provide Health and Welfare Canada with notice
concerning the sale of a device. Notice for all of the CPM devices currently
manufactured by the Company in Canada has been provided to Health and Welfare
Canada. Subsequent to such notification, Health and Welfare Canada may request
the Company to provide it with the results of the testing conducted on the
device. If the results of such testing do not substantiate the nature of the
benefits claimed to be obtainable from the use of the device or the performance
characteristics claimed for such device to the satisfaction of Health and
Welfare Canada, the sale of the device in Canada would be prohibited until
appropriate results had been submitted. The Company has not been asked to
provide such testing results to the Canadian authorities.
CPM devices must comply with the applicable provincial regulations
regarding the sale of electrical products by receiving the prior approval of
either the Canadian Standards Association ("CSA") or the provincial
hydro-electric authority, unless the device is otherwise exempt from such
requirement. To date, the Company believes that its CPM devices have, unless
otherwise exempt, obtained such necessary approvals prior to introduction to the
market.
8
<PAGE>
The FDC Act regulates the labeling of medical devices to indicate the
uses for which they are approved, both in connection with PMA approval and
thereafter, including any sponsored promotional activities or marketing
materials distributed by or on behalf of the manufacturer or seller. A
determination by the FDA that a manufacturer or seller is engaged in marketing
of a product for other than its approved use may result in administrative, civil
or criminal actions against the manufacturer or seller. In a warning letter
issued May 31, 1996, the FDA raised various issues regarding certain promotional
literature covering the OrthoLogic 1000 and other issues regarding the marketing
and alleged custom configuration of the device. Primarily, the FDA questioned
the use in the Company's literature of the patient success rate reflected in the
patient registry data for the OrthoLogic 1000, focusing on differences between
the patient populations in the original PMA and the subsequent patient registry
data with respect to the time from injury to treatment. The FDA did not question
the accuracy of the information reported in the patient registry data or the
patient success rate reflected in that data. In its May 31, 1996 letter, the FDA
also questioned whether changes had been made in the signal frequency of the
OrthoLogic 1000, and raised issues with respect to use of the FDA's name in
promotional materials, the promotion of the device as having the ability to
stimulate the human growth factor IGF-II pathway, as well as an independent
distributor's promotion of the device for treatment of the non-appendicular
skeleton. The Company responded to the issues addressed in the FDA's letter,
including the submission of a PMA supplement that included only registry data
for patients who met the original PMA criteria. The Company has agreed not to
refer to the IGF-II growth factor data or use the FDA name in its promotional
literature, agreed not to promote or inventory devices for indications beyond
those currently approved, and instituted a policy covering individual
promotional correspondence between sales representatives and customers. The
Company also reaffirmed that at no time had the Company modified the signal
frequency of the OrthoLogic 1000, and agreed not to promote or inventory
reconfigured devices until supplementary PMA approval is received. The Company
and the FDA have resolved all of the issues raised in the May 31, 1996 letter.
The previous owners of certain of the Company's CPM businesses received
correspondence from the FDA regarding operating procedures and deviations from
GMP practices. The Company believes that those issues were resolved before it
acquired the businesses.
Regulations governing human clinical studies outside the United States
vary widely from country to country. Historically, some countries have permitted
human studies earlier in the product development cycle than the United States.
This disparity in regulation of medical devices may result in more rapid product
approvals in certain foreign countries than the United States, while approvals
in countries such as Japan may require longer periods than in the United States.
In addition, although certain of the Company's products have undergone clinical
trials in the United States and Canada, such products have not undergone
clinical studies in any other foreign country and the Company does not currently
have any arrangements to begin any such foreign studies.
The process of obtaining necessary government approvals is
time-consuming and expensive. There can be no assurance that the necessary
approvals for new products or applications will be obtained by the Company or,
if they are obtained, that they will be obtained on a timely basis. Furthermore,
the Company or the FDA must suspend clinical trials upon a determination that
the subjects or patients are being exposed to an unreasonable health risk. The
FDA may also require post-approval testing and surveillance programs to monitor
the effects of the Company's products. In addition to regulations enforced by
the FDA, the Company is also subject to regulations under the Occupational
Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act and other present and
potential future federal, state and local regulations. The ability of the
Company to operate profitably will depend in part upon the Company obtaining and
maintaining all necessary certificates, permits, approvals and clearances from
the United States and foreign and other regulatory authorities and operating in
compliance with applicable regulations. Failure to comply with regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. Regulations regarding the
manufacture and sale of the Company's current products or other products that
may be developed or acquired by the Company are subject to change. The Company
cannot predict what impact, if any, such changes might have on its business. See
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Government Regulation" and " -- Condition of Acquired
facilities."
9
<PAGE>
Third Party Payment
Most medical procedures are reimbursed by a variety of third party
payors, including Medicare and private insurers. The Company's strategy for
obtaining reimbursement authorization for its products is to establish their
safety, efficacy and cost effectiveness as compared to other treatments. The
Company is an approved Medicare provider and is also an approved Medicaid
provider for a majority of states. The Company contracts with over 320 third
party payors as an approved provider, including the Department of Veterans
Affairs and various Blue Cross/Blue Shield organizations. Because the process of
obtaining reimbursement for products through third-party payors is longer than
through direct invoicing of patients, the Company must maintain sufficient
working capital to support operations during the collection cycle. In addition,
third party payors as an industry have undergone consolidation and that trend
appears to be continuing. The concentration of such economic power may result in
third party payors obtaining additional leverage and thus negatively affecting
the Company's margins.
As part of the Company's efforts to establish its primary products as
treatments of choice among third party payors, the Company has entered into two
consulting agreements with practicing physicians. These physicians were retained
by the Company to increase product acceptance, respond to inquiries from other
clinicians regarding the Company's products or to assist the Company in seeking
third party payor endorsement of practice pattern changes. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products such as of those that may be offered by the Company, and there can be
no assurance that adequate third party coverage will continue to be available
for the Company's products at current levels. See "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Limitations on Third Party Payment; Uncertain Effects of Managed Care."
Product Liability Insurance
The business of the Company entails the risk of product liability
claims. The Company maintains a product liability and general liability
insurance policy and an umbrella excess liability policy. There can be no
assurance that liability claims will not exceed the coverage limit of such
policies or that such insurance will continue to be available on commercially
reasonable terms or at all. Consequently, product liability claims could have a
material adverse effect on the business, financial condition and results of
operations of the Company. The Company has not experienced any product liability
claims to date resulting from its Fracture Healing Products. To date, liability
claims resulting from the Company's CPM Products have not had a material adverse
effect on business. Additionally, the agreements by which the Company acquired
its CPM businesses generally require the seller to retain liability for claims
arising before the acquisition. See "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk of Product
Liability Claims."
Employees
As of December 31, 1996, the Company had 512 employees, including 290
in sales and marketing, 18 in research and development and clinical and
regulatory affairs, 15 in managed care, approximately 71 in reimbursement and
118 in manufacturing, finance and administration. The managed care staff is
charged with changing the practice patterns of the orthopaedic community through
the influence of third party payors on treatment regimes. The Company believes
that the success of its business will depend, in part, on its ability to
identify, attract and retain qualified personnel. In the future, the Company
will need to add additional skilled personnel or retain consultants in such
areas as research and development, manufacturing and marketing and sales. The
Company considers its relationship with its employees to be good. See "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Dependence on Key Personnel; Recent Management Change."
10
<PAGE>
Item 2. Properties
The Company leases facilities in Arizona and CPM facilities in
California, Toronto (Canada) and Ohio. These facilities are designed and
constructed for industrial purposes and are located in industrial districts.
Each facility is suitable for the Company's purposes and is effectively
utilized. The table below sets forth certain information about the Company's
principal facilities.
<TABLE>
<CAPTION>
Approx.
Location Square Feet Lease Expires Description Principal Activity
- -------- ----------- ------------- ----------- ------------------
<S> <C> <C> <C> <C>
Phoenix, Arizona 22,500 12/97 2-story Fracture Healing
building in Products operations and
industrial park executive offices
San Diego, California 18,766 8/98 1-story in Sutter CPM Products
industrial park assembly
26,970 9/98 2-story in CPM Product
industrial park administration
Toronto, Ontario, Canada 28,547 2/28/99 1-story in CPM assembly
industrial park
</TABLE>
The Company believes that each facility is well maintained, except for
damage due to excess moisture from water leaking into its San Diego facilities.
The Company is currently taking steps to repair the source of the leaks and
resulting damage. The Company is working with both the landlord and Sutter's
prior owner to allocate the expenses of such repair.
In March 1997, the Company began a restructuring plan to consolidate
all CPM manufacturing in its Toronto facility and all CPM administrative and
service functions in Phoenix. The Company intends to close all of its other CPM
facilities. The Company also intends to move its Phoenix operations to a new
leased facility in Phoenix before the Company's lease on its current Phoenix
facility expires.
Item 3. Legal Proceedings
On June 24, 1996, and on several days thereafter, lawsuits were filed
in the United States District Court for the District of Arizona against the
Company and certain officers and directors alleging violations of Sections 10(b)
of the Securities Exchange Act of 1934 ("Exchange Act") and SEC Rule 10b-5
promulgated thereunder, and, as to other defendants, Section 20(a) of the
Exchange Act. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition Results of Operations -- Potential Adverse Outcome of Litigation."
These lawsuits are:
Mark Silveria v. Allan M. Weinstein, Allen R. Dunaway, David E.
Derminio and OrthoLogic Corporation, Cause No. CIV 96-1563 PHX EHC, filed in the
United States District Court for the District of Arizona (Phoenix Division) on
July 1, 1996.
Derric C. Chan and Anna Chan as attorney in fact for Moon-Yung Chow, on
behalf of themselves and all others similarly situated v. OrthoLogic
Corporation, Allan M. Weinstein, Frank P. Magee and David E. Derminio, Cause No.
CIV 96-1514 PHX RCB, filed in the United States District Court for the District
of Arizona (Phoenix Division) on June 21, 1996.
11
<PAGE>
Jeffrey M. Boren and Charles E. Peterson, Jr., on behalf of themselves
and all other similarly situated v. Allan M. Weinstein and OrthoLogic Corp.,
Cause No. CIV 96-1520 PHX RCB, filed in the United States District Court for the
District of Arizona on June 24, 1996.
Dorothy Cohen, on behalf of herself and all others similarly situated
v. OrthoLogic Corp. and Allan M. Weinstein, Cause No. CIV 96-1615 PHX SMM, filed
in the United States District Court for the District of Arizona (Phoenix
Division) on July 9, 1996.
Joseph C. Barton, on behalf of himself and all others similarly
situated v. OrthoLogic Corp. and Allan M. Weinstein, Cause No. CIV 96-1643 PHX
ROS, filed in the United States District Court for the District of Arizona
(Phoenix Division) on July 12, 1996.
Jeffrey Draker, on behalf of himself and all others similarly situated
v. Allan M. Weinstein and OrthoLogic Corp., Cause No. CIV 96-1667 PHX RCB, filed
in the United States District Court for the District of Arizona (Phoenix
Division) on July 16, 1996.
Edward and Eleanor Katz v. OrthoLogic Corp. and Allan M. Weinstein,
Cause No. CIV 96-1668 PHX RGS, filed in the United States District Court for the
District of Arizona (Phoenix Division) on July 17, 1996.
Mark J. Rutkin, Paul A. Wallace, Malcolm E. Brathwaite, Elaine K.
Davies and David G. Davies, Larry E. Carder and Carl Hust, on behalf of
themselves and all others similarly situated v. Allan M. Weinstein, Allen R.
Dunaway, David E. Derminio and OrthoLogic Corp., Cause No. CIV 96-1678 PHX EHC,
filed in the United States District Court for the District of Arizona (Phoenix
Division), on July 17, 1996.
Frank J. DeFelice, on behalf of himself and all others similarly
situated v. OrthoLogic Corp. and Allan M. Weinstein, Cause No. CIV 96-1713 PHX
EHC, filed in the United States District Court for the District of Arizona
(Phoenix Division), on July 23, 1996.
Scott Longacre, Joseph E. Sheedy, Trustee, Rickie Trainor, W. Preston
Battle, III, Taylor D. Shepherd, Dianna Lynn Shepherd, Gordon H. Hogan, Trustee,
and Dallas Warehouse Corp., Inc., on behalf of themselves and all others
similarly situated v. Allan M. Weinstein, Allen R. Dunaway, David E. Derminio,
Frank P. Magee and OrthoLogic Corp., Cause No. CIV 96-1891 PHX PGR, filed in the
United States District Court for the District of Arizona (Phoenix Division) on
August 16, 1996.
Jeffrey D. Bailey, Milton Berg, Bryan Boatwright, Charles R. Campbell,
Mark and Cathy Daniel, Tom Drotar, Rudy Gonnella, David Gross, Janet Gustafson,
Willa P. Koretz, Dr. Richard Lewis, John Maynard, Margaret Milosh, Michelle
Milosh, Theresa L. Onn, Ward B. Perry, William Schillings, Darwin and Merle Sen,
Nestor Serrano and Larry E. and Gloria M. Swanson v. Allan M. Weinstein, Allen
R. Dunaway, David E. Derminio and OrthoLogic Corporation, Cause No. CIV 96-1910
PHX PGR, filed in the United States District Court for the District of Arizona
(Phoenix Division) on August 19, 1996.
Nancy Z. Kyser and Mark L. Nichols, on behalf of themselves and all
others similarly situated v. OrthoLogic Corporation, Allan M. Weinstein, Frank
P. Magee and David E. Derminio, Cause No. CIV 96-1937 PHX ROS, filed in the
United States District Court for the District of Arizona (Phoenix Division) on
August 22, 1996.
Plaintiffs in these actions allege generally that information
concerning the May 31, 1996 letter received by the Company from the FDA
regarding the Company's OrthoLogic 1000 Bone Growth Stimulator, and the matters
set forth therein, was material and undisclosed, leading to an artificially
inflated stock price. Plaintiffs further allege that the Company's
non-disclosure of the FDA correspondence and of the alleged practices referenced
in that correspondence operated as a fraud against plaintiffs, in that the
Company allegedly made untrue statements of material facts or omitted to state
material facts necessary in order to make the statements not misleading.
Plaintiffs further allege that once the FDA letter became known, a material
decline in the stock price of the Company
12
<PAGE>
occurred, causing damage to plaintiffs. All plaintiffs seek class action status,
unspecified compensatory damages, fees and costs. Plaintiffs also seek
extraordinary, equitable and/or injunctive relief as permitted by law. Pursuant
to court orders dated December 17, 1996 and January 19, 1997, the preceding
actions have been consolidated for all purposes, and lead plaintiffs and counsel
have been appointed. A consolidated complaint has yet to be filed.
On or about June 20, 1996, a lawsuit entitled Norman Cooper, et al. v.
OrthoLogic Corp., et al., Cause No. CV 96-10799, was filed in the Superior
Court, Maricopa County, Arizona. The plaintiffs allege violations of Arizona
Revised Statutes Sections 44-1991 (state securities fraud) and 44-1522 (consumer
fraud) and common law fraud based upon factual allegations substantially similar
to those alleged in the federal court class action complaints. Plaintiffs also
seek class action status, unspecified compensatory and punitive damages, fees
and costs. Plaintiffs also seek injunctive and/or equitable relief. By agreement
of the parties, that action has been stayed while the federal actions proceed.
On or about July 16, 1996, Jacob B. Rapoport filed a Shareholder
Derivative Complaint for Breach of Fiduciary Duty and Misappropriation of
Confidential Corporation Information (based on similar factual issues underlying
the above lawsuits) in the Superior Court of the State of Arizona, Maricopa
County, No. CV 96-12406 against Allan M. Weinstein, John M. Holliman, Augustus
A. White, Fredric J. Feldman, Elwood D. Howse, George A. Oram, Frank P. Magee
and David E. Derminio, Defendants and OrthoLogic Corp., Nominal Defendant. On
October 29, 1996 the defendants removed the case to the United States District
Court for the District of Arizona (Phoenix Division) No. CIV 96-2451 PHX RCB on
grounds of diversity pursuant to 28 U.S.C. ss. 1332. Defendants filed a motion
to dismiss the complaint. By agreement of the parties, the case has been stayed
pending a decision on defendants' anticipated motion to dismiss the consolidated
federal class action lawsuits.
The Company denies the substantive allegations in the aforesaid
lawsuits and plans to defend the actions vigorously.
In February 1997, the Company received a letter from the California
Department of Industrial Relations Division of Occupational Safety and Health
regarding an informal complaint involving certain physical problems with one of
Sutter's facilities. The Company responded to the letter in March 1997 and
believes that it has addressed or is in the process of addressing the issues
raised. See "Item 2 -- Properties" and "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Condition of
Acquired Facilities."
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
The following table sets forth information regarding the executive
officers of the Company:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
Allan M. Weinstein, Ph.D. 51 Chairman of the Board, Chief Executive Officer, President and Director
Frank P. Magee, D.V.M. 40 Executive Vice President, Research and Development
David E. Derminio 44 Vice President, Marketing and Sales
Allen R. Dunaway 42 Vice President, Chief Financial Officer and Secretary
James B. Koeneman, Ph.D. 60 Vice President, Engineering
MaryAnn G. Miller 39 Vice President, Human Resources
Nicholas A. Skaff 41 Vice President, Managed Care
</TABLE>
13
<PAGE>
Allan M. Weinstein, Ph.D. has been the Chairman of the Board, President
and Chief Executive Officer and a Director of the Company since its inception in
1987. Dr. Weinstein is a member of the Board of Directors of the Health Industry
Manufacturers Association and Raymedica, Inc., a privately held spinal implant
company.
Frank P. Magee, D.V.M. joined the Company as a Vice President in
November 1989 and became Executive Vice President, Research and Development in
1991.
David E. Derminio joined the Company in March 1993 as Vice President,
Marketing and Sales. From 1984 to 1993 he served as the Vice President of Sales
for Med-Tech West, Inc., a distributor of orthopaedic and neurosurgical
products.
Allen R. Dunaway joined the Company in February 1992 as its Vice
President and Chief Financial Officer. From 1991 to 1992, he served as
Operations Manager and Chief Financial Officer for Gentron Corporation, an
electronics manufacturer.
James B. Koeneman, Ph.D. joined OrthoLogic as Director of Engineering
in May 1994 and became Vice President, Engineering in September 1994. From 1984
to 1994, Dr. Koeneman was the Head of the Bioengineering Division at Harrington
Arthritis Research Center.
MaryAnn G. Miller joined the Company as Vice President of Human
Resources in October 1996. From November 1995 to June 1996, Ms. Miller was Human
Resources Director for Southwestco Wireless, Inc. doing business as CellularOne,
a subsidiary of Bell Atlantic Nynex Mobile, a provider of wireless
telecommunications services in the Southwest. From October 1992 to July 1995,
Ms. Miller was a human resources officer with Firstar Corporation, a
Wisconsin-based bank holding company. She was most recently First Vice President
and Regional Human Resources Director of Firstar from January 1994 to July 1995.
Nicholas A. Skaff joined the Company as Vice President, Managed Care in
April 1996. From January 1996 to April 1996, Mr. Skaff was the Southwest Region
Area Vice President for Olsten Corp., a home care company, and President of
Children's HomeCare, a pediatric home care joint venture between Olsten Corp.
and Phoenix Children's Hospital. From January 1995 to December 1995, he was the
Area Vice President of Olsten Corp.'s neuro rehabilitation group. From January
1994 to December 1994, he was the President and Chief Executive Officer of RWW
Associates, Inc., a neurologic rehabilitation company. From August 1987 to
December 1993, Mr. Skaff was the Chief Financial Officer of NeuroCare, a
neurologic rehabilitation home care company.
14
<PAGE>
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The information under the heading "Stockholder Information" on page 15
of the Company's Annual Report to Stockholders for the year ended December 31,
1996 (the "Annual Report") is incorporated herein by reference.
On October 15, 1996, the Company issued a warrant to purchase 5,000
shares of the Company's Stock at $2.41 per share to an investor relations
consultant in exchange for a previously issued warrant to purchase 50,000 shares
at $2.41 per share and as part of the termination of the consultant's services
for the Company. The October 1996 warrant is exercisable at any time until March
14, 2001. Exemption for this transaction was claimed pursuant to Section 4(2) of
the Securities Act of 1933, as the purchaser was familiar with and capable of
evaluating the financial condition and business activities of the Company.
Item 6. Selected Financial Data
The information on page 15 of the Annual Report under the heading
"Selected Financial Data" is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information on pages 13 and 14 of the Annual Report under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations" is incorporated herein by reference.
The Company may from time to time make written or oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission and its reports to stockholders. This Report
contains forward-looking statements made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. In
connection with these "safe harbor" provisions, the Company identifies important
factors that could cause actual results to differ materially from those
contained in any forward-looking statements made by or on behalf of the Company.
Any such forward-looking statement is qualified by reference to the following
cautionary statements.
Limited History of Profitability; Quarterly Fluctuations in Operating
Results. The Company was founded in 1987 and only began generating revenues from
the sale of its primary product in 1994. The Company has experienced significant
operating losses since its inception and had an accumulated deficit of
approximately $16.9 million at December 31, 1996. While the Company was first
profitable in the fourth quarter of 1995, there can be no assurance that the
Company will ever generate sufficient revenues to attain operating profitability
or retain net profitability on an on-going annual basis. In addition, the
Company may experience fluctuations in revenues and operating results based on
such factors as demand for the Company's products, the timing, cost and
acceptance of product introductions and enhancements made by the Company or
others, levels of third party payment, alternative treatments which currently
exist or may be introduced in the future, completion of acquisitions, changes in
practice patterns, competitive conditions, regulatory announcements and changes
affecting the Company's products in the industry and general economic
conditions. The development and commercialization by the Company of additional
products will require substantial product development, and regulatory, clinical
and other expenditures. See "Item 1 -- Business -- Competition."
Potential Adverse Outcome of Litigation. The Company is a defendant in
a number of investor lawsuits relating generally to correspondence received by
the Company from the FDA in mid-1996 regarding the promotion and configuration
of the Company's OrthoLogic 1000 Bone Growth Stimulator. See "Item 1 -- Business
- -- Governmental Regulation" and "Item 3 -- Legal Proceedings." The Company
intends to defend these lawsuits
15
<PAGE>
vigorously. However, an adverse outcome in this litigation could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Salesforce. A substantial portion of the Company's sales
are generated through the Company's internal salesforce of approximately 290
employees. During 1996, the Company shifted its primary focus from sales through
independent orthopaedic specialty dealers to an internal salesforce. This
internal salesforce requires the Company to devote greater resources to sales
training and management. In addition, the Company is faced with the challenge of
managing and effectively motivating a much larger sales force than it has ever
had. Moreover, many of those new salespeople are inexperienced in selling the
Company's products, and salespeople historically experience a learning curve
before they become efficient, if at all. There can be no assurance that the
internal salesforce will be able to maintain or exceed the Company's historic
sales through independent specialty dealers. The Company's marketing success
depends in large part upon the ability of sales and marketing personnel to
demonstrate to potential customers the benefits of the Company's products and
their advantages over competing products and surgical procedures. See "Item 1 --
Business -- Marketing and Sales."
Dependence on Key Personnel; Recent Management Change. The success of
the Company is dependent in large part on the ability of the Company to attract
and retain its key management, operating, technical, marketing and sales
personnel as well as clinical investigators who are not employees of the
Company. Such individuals are in high demand, and the identification, attraction
and retention of such personnel could be lengthy, difficult and costly. The
Company competes for its employees and clinical investigators with other
companies in the orthopaedic industry and research and academic institutions.
There can be no assurance that the Company will be able to attract and retain
the qualified personnel necessary for the expansion of its business. In 1996,
the Company hired a new President and Chief Operating Officer who subsequently
resigned in February 1997. Such loss of services of one or more members of the
senior management group or the Company's inability to hire additional personnel
as necessary could have an adverse effect on the Company's business, financial
condition and results of operations. See "Item 1 -- Business -- Employees."
Dependence on Primary Product and Future Products. Over two-thirds of
the Company's 1996 revenues were derived from the sales of the OrthoLogic 1000
for the treatment of non-healing fractures. While the Company believes that
revenues from CPM devices will reduce the Company's dependence on revenues from
the OrthoLogic 1000, the Company believes that, to sustain long-term growth, it
must develop and introduce additional products and expand approved indications
for its existing products. The development and commercialization by the Company
of additional products will require substantial product development, regulatory,
clinical and other expenditures. There can be no assurance that the Company's
technologies will allow it to develop new products and/or expand indications for
existing products in the future or that the Company will be able to manufacture
or market such products successfully. Any failure by the Company to develop new
products and/or expand indications could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Item 1
- -- Business -- Products" and "Item 1 -- Business -- Competition."
Uncertainty of Market Acceptance. The Company believes that the demand
for bone growth stimulators is still developing, and the Company's success will
depend in part upon the continued growth of this demand. There can be no
assurance that this demand will develop. The long-term commercial success of the
OrthoLogic 1000 will also depend in significant part upon its widespread
acceptance by a significant portion of the medical community as a safe,
efficacious and cost-effective alternative to invasive procedures. The Company
is unable to predict how quickly, if at all, its products may be accepted by
members of the orthopaedic medical community. The widespread acceptance of the
Company's primary products represents a significant change in practice patterns
for the orthopaedic medical community and in reimbursement policy for third
party payors. Historically, some orthopaedic medical professionals have
indicated hesitancy in prescribing bone growth stimulator products such as those
manufactured by the Company. Failure of the Company's products to achieve
widespread market acceptance by the orthopaedic medical community and third
party payors would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Item 1 -- Business -- Third
Party Payment."
16
<PAGE>
Selection and Integration of Acquisitions. A key element of the
Company's strategy is expansion through acquisitions of products, technologies
and businesses. The Company acquired Sutter Corporation in August 1996, and
certain assets of Toronto Medical Corp. and Danninger Medical Technology, Inc.
in March 1997. See "Item 1 -- Business - General." There can be no assurance,
however, that the Company will be successful in identifying additional
appropriate opportunities or negotiating favorable terms. In addition,
successful integration of such acquisitions is critical to the future financial
performance of the combined Company. Complete integration of any acquisition
could take several quarters or more to accomplish and will require, among other
things, integration of the companies' respective product offerings and
coordination of their sales and marketing, manufacturing and research and
development efforts. There can be no assurance that present and potential
customers of the Company and any acquired entity would continue their historic
buying patterns without regard to the acquisition, and any significant delay or
reduction in orders could have an adverse effect on the Company's business,
financial condition and results of operations. The process of integrating
companies may also cause management's attention to be diverted from operating
the Company, and any difficulties encountered in the transition process could
have an adverse impact on the business, financial condition and operating
results of the Company. In addition, the process of combining two organizations
could cause the interruption of, or a loss of momentum in, the activities of
either or both of the companies' businesses, which could have an adverse effect
on their combined operations.
The difficulty of combining companies is increased by the need to
integrate the personnel and the geographic distance between companies. Changes
brought about by any acquisition may cause key employees or distributors to
terminate their relationship with the Company. There can be no assurance that
the combined Company will retain the employees and dealer relationships or that
the Company will realize any potential benefits of any acquisitions. In
addition, the Company might incur significant integration or additional
operating costs associated with an acquisition. There can be no assurance that
such costs will not have an adverse effect upon the Company's operating results,
particularly in the fiscal quarters following the consummation of any
acquisition, while the operations of the acquired business are being integrated
into the Company's operations. There can be no assurance that, following any
acquisition, the Company will be able to operate any acquired business on a
profitable basis.
Limited Combined Operating History and Results. In August 1996, the
Company entered the CPM business with its acquisition of Sutter. Financial
results of Sutter before August 1996 reflect operations when Sutter was not
under current control or management and as such may not be indicative of future
operating results. Although the Company does not anticipate incurring
significant additional operating costs associated with Sutter, there can be no
assurance that such costs will not be incurred or that the purchase, or any
other acquisition, will not have an adverse effect upon the Company's operating
results, while the operations of the purchased business are being integrated
into the Company's operations. There can be no assurance that, following any
acquisition, the Company will be able to operate the purchased business on a
profitable basis or that the Company will be able to recover any excess of the
purchase price of the business acquired over its tangible book value.
Condition of Acquired Facilities. In connection with the Company's
recent acquisition of Sutter, it determined that the acquired facilities had
several physical problems primarily resulting from excess moisture from water
leaking into the facility. The Company is currently taking steps to correct the
resulting damage. Certain Sutter employees have also reported adverse personal
effects resulting from these problems. The Company has notified both the
landlord and prior owner of Sutter concerning these claims and the Company is
working with the landlord and prior owner to resolve these issues. As the
Company seeks to resolve these issues, these damages and claims and any future
discoveries regarding the facilities' management under past ownership could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Item 3 -- Legal Proceedings" and "Item 2 --
Properties."
Management of Growth. The Company has experienced a period of rapid
growth that has placed, and could continue to place, a significant strain on the
Company's financial, management and other resources. The Company's future
performance will depend in part on its ability to manage change in its
operations, including integration of acquired businesses. In addition, the
Company's ability to manage its growth effectively will require it to continue
to improve its manufacturing, operational and financial control systems and
infrastructure and management information systems, and to attract, train,
motivate, manage and retain key employees. If the Company's
17
<PAGE>
management were to become unable to manage growth effectively, the Company's
business, financial condition, and results of operations could be adversely
affected.
Limitations on Third Party Payment; Uncertain Effects of Managed Care.
The Company's ability to commercialize its products successfully in the United
States and in other countries will depend in part on the extent to which
acceptance of payment for such products and related treatment will continue to
be available from government health administration authorities, private health
insurers and other payors. Cost control measures adopted by third party payors
in recent years have had and may continue to have a significant effect on the
purchasing and practice patterns of many health care providers, generally
causing them to be more selective in the purchase of medical products. In
addition, payors are increasingly challenging the prices and clinical efficacy
of medical products and services. Payors may deny reimbursement if they
determine that the product used in a procedure was experimental, was used for a
nonapproved indication or was unnecessary, inappropriate, not cost-effective,
unsafe, or ineffective. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, and there can be no assurance
that adequate third party coverage will continue to be available to the Company
at current levels. Failure to continue to obtain reimbursement from payors at
levels acceptable to the Company could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Item 1
- -- Business -- Third Party Payment."
Uncertainty and Potential Negative Effects of Health Care Reform. The
health care industry is undergoing fundamental changes resulting from political,
economic and regulatory influences. In the United States, comprehensive programs
have been proposed that seek to (i) increase access to health care for the
uninsured, (ii) control the escalation of health care expenditures within the
economy, and (iii) use health care reimbursement policies to help control the
federal deficit. The Company anticipates that Congress and state legislatures
will continue to review and assess alternative health care delivery systems and
methods of payment, and public debate of these issues will likely continue. Due
to uncertainties regarding the outcome of reform initiatives and their enactment
and implementation, the Company cannot predict which, if any, of such reform
proposals will be adopted and when they might be adopted. Other countries also
are considering health care reform. The Company's plans for increased
international sales are largely dependent upon other countries' adoption of
managed care systems and their acceptance of the potential benefits of the
Company's products and the belief that managed care plans will have a positive
effect on sales. For the reasons identified in this and in the preceding
paragraph, however, those assumptions may be incorrect. Significant changes in
health care systems are likely to have a substantial impact over time on the
manner in which the Company conducts its business and could have a material
adverse effect on the Company's business, financial condition and results of
operations, and ability to market its products as currently contemplated.
Intense Competition. The orthopaedic industry is characterized by
intense competition. Currently, there are three major competitors other than the
Company selling electromagnetic bone growth stimulation products approved by the
FDA for the treatment of nonunion fractures and one large domestic and several
foreign manufacturers of CPM devices. The Company also competes with many
independent owners/lessors of CPM devices in addition to the providers of
traditional orthopaedic immobilization products and rehabilitation services. The
Company estimates that one of its competitors has a dominant share of the market
for electromagnetic bone growth stimulation products for non-healing fractures
in the United States, and another has a dominant share of the market for use of
their device as an adjunct to spinal fusion surgery. In addition, there are
several large, well-established companies that sell fracture fixation devices
similar in function to those sold by the Company. Many participants in the
medical technology industry, including the Company's competitors, have
substantially greater capital resources, research and development staffs and
facilities than the Company. Such participants have developed or are developing
products that may be competitive with the products that have been or are being
developed or researched by the Company. Other companies are developing a variety
of other products and technologies to be used in CPM devices, the treatment of
fractures and spinal fusions, including growth factors, bone graft substitutes
combined with growth factors, and nonthermal ultrasound. One company has
received FDA approval for a nonthermal ultrasound device to treat nonsevere
fresh fractures of the lower leg and lower forearm. There can be no assurance
that products marketed by these or other companies will not be sold for use in
treating non-healing fractures or spinal fusions, even in the absence of
regulatory approval to do so. Any such sales could have a
18
<PAGE>
material adverse effect on the Company. Many of the Company's competitors have
substantially greater experience than the Company in conducting research and
development, obtaining regulatory approvals, manufacturing and marketing and
selling medical devices. Any failure by the Company to develop products that
compete favorably in the marketplace would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Item 1
- -- Business -- Research and Development" and "Item 1 -- Business --
Competition."
Rapid Technological Change. The medical device industry is
characterized by rapid and significant technological change. There can be no
assurance that the Company's competitors will not succeed in developing or
marketing products or technologies that are more effective and/or less costly
and which render the Company's products obsolete or non-competitive. In
addition, new technologies, procedures and medications could be developed that
replace or reduce the value of the Company's products. The Company's success
will depend in part on its ability to respond quickly to medical and
technological changes through the development and introduction of new products.
There can be no assurance that the Company's new product development efforts
will result in any commercially successful products. A failure to develop new
products could have a material adverse effect on the company's business,
financial condition and results of operations. See "Item 1 -- Business --
Research and Develop ment."
Government Regulation. The Company's current and future products and
manufacturing activities are and will be regulated under the Medical Device
Amendments Act of 1976 to the Food, Drug and Cosmetic Act and the 1990 Safe
Medical Devices Act. The Company's current BioLogic technology-based products
are classified as Class III Significant Risk Devices, which are subject to the
most stringent level of FDA review for medical devices and are required to be
tested under IDE clinical trials and approved for marketing under a PMA. The
Company's fracture fixation devices are Class II devices that are marketed
pursuant to 510(k) clearance from the FDA. The Company received PMA approval
from the FDA in March 1994 and commenced marketing the OrthoLogic 1000 for the
treatment of nonunion fractures. The Company has completed a data analysis of a
clinical trial of the OrthoLogic 1000 for the treatment of delayed union
fractures, and based on this analysis, the Company believes that a larger number
of patients is required to establish statistical significance before it submits
a supplement to its existing PMA for such indication. There can be no assurance
that the FDA will allow expansion of the study without requiring a new clinical
trial. If a new trial is required, there can be no assurance that it will
establish statistical significance leading to product approval. However, the
Company recently combined the existing data from the study with delayed union
data collected in the Company's Post Marketing Clinical Registry. This combined
data set has been analyzed and submitted to the FDA to support the Company's
request to expand the non-union definition to include patients five months
post-injury. There can be no assurance that this data will result in regulatory
approval.
The Company received approval of an IDE for the SpinaLogic 1000 for use
as an adjunct to spinal fusion surgery in August 1992 and commenced clinical
trials for this product in February 1993. In September 1995, the Company
received an approval of an IDE supplement for the SpinaLogic 1000 for treatment
of failed spinal fusions. The Company commenced this study in the fourth quarter
of 1995. There can be no assurance that any such clinical trials will be
successfully completed or that, if completed, the results of such studies will
demonstrate clinical benefits or that the Company will receive regulatory
approval for the OrthoLogic 1000 for the treatment of delayed union fractures or
other broader indications or for the SpinaLogic 1000 or for any other products.
Any significant delay in receiving or failure to receive regulatory approval of
the Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1 -- Business
- -- Products" and "Item 1 -- Business -- Government Regulation."
The FDA and comparable agencies in many foreign countries and in
state and local governments impose substantial limitations on the introduction
of medical devices through costly and time-consuming laboratory and clinical
testing and other procedures. The process of obtaining FDA and other required
regulatory approvals is lengthy, expensive and uncertain. Moreover, regulatory
approvals, if granted, typically include significant limitations on the
indicated uses for which a product may be marketed. In addition, approved
products may be subject to additional testing and surveillance programs required
by regulatory agencies, and product approvals could be withdrawn and labelling
restrictions may be imposed for failure to comply with regulatory standards or
upon the occurrence of unforeseen problems following initial marketing.
19
<PAGE>
The Company is also required to adhere to applicable requirements for
FDA Good Manufacturing Practices and to engage in extensive record keeping and
reporting and to make available its manufacturing facilities for periodic
inspections by governmental agencies, including the FDA, and comparable agencies
in other countries. Failure to comply with these and other applicable regulatory
requirements could result in, among other things, significant fines, suspension
of approvals, seizures or recalls of products, or operating restrictions and
criminal prosecutions. The Company has received letters from the FDA regarding
its regulatory compliance. The Company believes that all issues raised in the
letters have been resolved. See "Item 1 -- Business - Government Regulation."
Changes in existing regulations or interpretations of existing
regulations or adoption of new or additional restrictive regulations could
prevent the Company from obtaining, or affect the timing of, future regulatory
approvals. If the Company experiences a delay in receiving or fails to obtain
any governmental approval for any of its current or future products or fails to
comply with any regulatory requirements, the Company's business, financial
condition and results of operations could be materially adversely affected. See
"Item 1 -- Business -- Products" and "Item 1 -- Business -- Government
Regulation."
Dependence on Key Suppliers. The Company purchases the microprocessor
used in the OrthoLogic 1000 from a sole source supplier, Phillips N.V. In
addition, there are two suppliers for another component used in the OrthoLogic
1000 and two suppliers for the composite material components of the OrthoFrame
products. Establishment of additional or replacement suppliers for the
components cannot be accomplished quickly. While the Company maintains a supply
of certain OrthoLogic 1000 components to meet sales forecasts for one year and
OrthoFrame components to meet sales forecasts for six months, any delay or
interruption in supply of these components could significantly impair the
Company's ability to manufacture its products in sufficient quantities, and
therefore, could have a material adverse effect on its business, financial
condition and results of operations. See "Item 1 -- Business--Manufacturing."
Dependence on Patents, Licenses and Proprietary Rights. The Company's
success will depend in significant part on its ability to obtain and maintain
patent protection for products and processes, to preserve its trade secrets and
proprietary know-how and to operate without infringing the proprietary rights of
third parties. While the Company holds title to numerous United States and
foreign patents and patent applications, as well as licenses to numerous United
States and foreign patents (see "Item 1 -- Business -- Patents, Licenses and
Proprietary Rights"), no assurance can be given that any additional patents will
be issued or that the scope of any patent protection will exclude competitors or
that any of the patents held by or licensed to the Company will be held valid if
subsequently challenged. The validity and breadth of claims covered in medical
technology patents involves complex legal and factual questions and therefore
may be highly uncertain. In addition, although the Company holds or licenses
patents for its technologies, others may hold or receive patents which contain
claims having a scope that covers products developed by the Company. There can
be no assurance that licensing rights to the patents of others, if required for
the Company's products, will be available at all or at a cost acceptable to the
Company.
The Company licenses covering the BioLogic and OrthoFrame technologies
provide for payment by the Company of royalties. Each license may be terminated
if the Company breaches any material provision of such license. The termination
of any license would have a material adverse effect on the Company's business,
financial condition and results of operations. See Note 4 of Notes to
Consolidated Financial Statements.
The Company also relies on unpatented trade secrets and know-how. The
Company generally requires its employees, consultants, advisors and
investigators to enter into confidentiality agreements which include, among
other things, an agreement to assign to the Company all inventions that were
developed by the employee while employed by the Company that are related to its
business. There can be no assurance, however, that these agreements will protect
the Company's proprietary information or that others will not gain access to, or
independently develop similar trade secrets or know-how.
There has been substantial litigation regarding patent and other
intellectual property rights in the orthopaedic industry. Litigation, which
could result in substantial cost to, and diversion of effort by, the Company may
be necessary to enforce patents issued or licensed to the Company, to protect
trade secrets or know-how owned by the
20
<PAGE>
Company or to defend the Company against claimed infringement of the rights of
others and to determine the scope and validity of the proprietary rights of
others. There can be no assurance that the results of such litigation would be
favorable to the Company. In addition, competitors may employ litigation to gain
a competitive advantage. Adverse determinations in litigation could subject the
Company to significant liabilities, and could require the Company to seek
licenses from third parties or prevent the Company from manufacturing, selling
or using its products, any of which determinations could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Item 1 -- Business -- Patents, Licenses and Proprietary Rights."
Risk of Product Liability Claims. The Company faces an inherent
business risk of exposure to product liability claims in the event that the use
of its technology or products is alleged to have resulted in adverse effects. To
date, no product liability claims have been asserted against the Company. The
Company maintains a product liability and general liability insurance policy
with coverage of an annual aggregate maximum of $2.0 million. The Company's
product liability and general liability policy is provided on an occurrence
basis. The policy is subject to annual renewal. In addition, the Company
maintains an umbrella excess liability policy which covers product and general
liability with coverage of an additional annual aggregate maximum of $10.0
million. There can be no assurance that liability claims will not exceed the
coverage limits of such policies or that such insurance will continue to be
available on commercially reasonable terms or at all. If the Company does not or
cannot maintain sufficient liability insurance, its ability to market its
products may be significantly impaired. In addition, product liability claims
could have a material adverse effect on the business, financial condition and
results of operations of the Company. See "Item 1 -- Business -- Product
Liability Insurance."
Possible Volatility of Stock Price. The market price of the Company's
Common Stock is likely to be highly volatile. Factors such as fluctuations in
the Company's operating results, announcements and timing of potential
acquisitions, announcements of technological innovations or new products by the
Company or its competitors, FDA and international regulatory actions, actions
with respect to reimbursement matters, developments with respect to patents or
proprietary rights, public concern as to the safety of products developed by the
Company or others, changes in health care policy in the United States and
internationally, changes in stock market analyst recommendations regarding the
Company, other medical device companies or the medical device industry generally
and general market conditions may have a significant effect on the market price
of the Common Stock. In addition, the stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock.
Developments in any of these areas, which are more fully described
elsewhere in "Item 1 -- Business," "Item 3 -- Legal Proceedings," and "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 13 and 14 of the Company's 1996 Annual Report to
stockholders, each of which is incorporated into this section by reference,
could cause the Company's results to differ materially from results that have
been or may be projected by or on behalf of the Company.
The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
Item 8. Financial Statements and Supplementary Data
The information on pages 16 through 27 of the Annual Report is
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
21
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
Information in response to this Item is incorporated by reference to
(i) the information relating to the Company's directors under the caption
"Election of Directors" and the information relating to Section 16 under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive Proxy Statement for its Annual Meeting of Stockholders to
be held May 16, 1997 (the "Proxy Statement"), and (ii) the information under the
caption "Executive Officers of the Registrant" in Part I hereof. The Company
anticipates filing the Proxy Statement within 120 days after December 31, 1996.
Item 11. Executive Compensation
The information under the heading "Executive Compensation" and
"Compensation of Directors" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the heading "Voting Securities and Principal
Holders Thereof - Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the heading "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
---------------------------------------------------------
1. Financial Statements
The following financial statements of OrthoLogic Corp. and Independent
Auditors' Report are incorporated by reference from pages 16 through 27
of the Annual Report:
Balance Sheets - December 31, 1996 and 1995.
Statements of Operations - Each of the three years in the period
ended December 31, 1996.
Statements of Stockholders' Equity - Each of the three years in the
period ended December 31, 1996.
Statements of Cash Flows - Each of the three years in the period
ended December 31, 1996.
Notes to Financial Statements
2. Financial Statement Schedules
Schedules have been omitted because they are not applicable or are not
required or the information required to be set forth therein is included in
the Financial Statements or notes thereto.
22
<PAGE>
3. Exhibits and Management Contracts, and Compensatory Plans and
Arrangements
All management contracts and compensatory plans and arrangements are
identified by footnote after the Exhibit Descriptions on the attached
Exhibit Index.
(b) Reports on Form 8-K.
--------------------
On September 13, 1996, the Company filed a current report on Form 8-K dated
August 30, 1996, to report in Item 2 the consummation of its acquisition of
the capital stock of Sutter Corporation. The Form 8-K was amended on
November 14, 1996 to include the following financial statements:
-- Unaudited Pro-Forma Balance Sheet as of June 30, 1996.
-- Unaudited Pro-Forma Statement of Income for the six-month
period ended June 30, 1996
-- Unaudited Pro-Forma Consolidated Statement of Operations
for the year ended December 31, 1995.
-- Audited financial statements of Sutter Corporation for the
years ended December 31, 1995, 1994 and 1993 and
independent auditor's report.
-- Unaudited balance sheet of Sutter Corporation as of June
30, 1996.
-- Unaudited statements of income of Sutter for the six-month
periods ended June 30, 1996 and 1995.
(c) Exhibits
--------
See the Exhibit Index immediately following the signature page of this
report, which Index is incorporated herein by reference.
(d) Financial Statements and Schedules
----------------------------------
See Item 14(a)(1) and (2) above.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ORTHOLOGIC CORP.
Date: March 28 , 1997 By /s/ Allan M. Weinstein
------- ------------------------
Allan M. Weinstein
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Allan M. Weinstein Chairman of the Board of Directors, March 28, 1997
- --------------------------------- President and Chief Executive Officer
Allan M. Weinstein (Principal Executive Officer)
March 28, 1997
/s/ Fredric J. Feldman Director
- ---------------------------------
Fredric J. Feldman
March 28, 1997
/s/ John M. Holliman III Director
- ---------------------------------
John M. Holliman III
/s/ Elwood D. Howse, Jr. Director March 28, 1997
- ---------------------------------
Elwood D. Howse, Jr.
/s/ George A. Oram, Jr. Director March 28, 1997
- ---------------------------------
George A. Oram, Jr.
/s/ Augustus A. White III, M.D. Director March 28, 1997
- ---------------------------------
Augustus A. White III, M.D.
/s/ Allen R. Dunaway Vice President and Chief Financial Officer March 28, 1997
- --------------------------------- (Principal Financial and Accounting
Allen R. Dunaway Officer)
</TABLE>
S-1
<PAGE>
ORTHOLOGIC CORP.
EXHIBIT INDEX TO REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
<S> <C> <C> <C>
2.1 Stock Purchase Agreement dated Exhibit 2.1 to the Company's Current
August 30, 1996 by and among the Report on Form 8-K filed on
Company, Sutter Corporation and September 13, 1996
Smith Laboratories, Inc.
2.2 Purchase and Sale Agreement dated as Exhibit 2.1 to the Company's
Current of December 30, 1996 by and among Report on Form 8-K filed
on March the Company and Toronto Medical 18, 1997 ("March 1997 8-K")
Corp., an Ontario corporation
2.3 Amendment to Purchase and Sale Exhibit 2.2 to March 1997 8-K
Agreement dated as of January 13,
1997 by and among the Company and
Toronto Medical Corp., an Ontario
corporation
2.4 Second Amendment to Purchase and Exhibit 2.3 to March 1997 8-K
Sale Agreement dated as of March 1,
1997 by and among the Company and
Toronto Medical Corp., an Ontario
corporation
2.5 Assignment of Purchase and Sale Exhibit 2.4 to March 1997 8-K
Agreement dated as of March 1, 1997
by and among the Company, Toronto
Medical Orthopaedics Ltd., a Canada
corporation and Toronto Medical
Corp., an Ontario corporation
2.6 Asset Purchase Agreement dated March Exhibit 2.1 to the Company's Current
12, 1997 by and among the Company, Report on Form 8-K filed on March
Danninger Medical Technology, Inc., a 27, 1997
Delaware corporation, and Danninger
Healthcare, Inc., an Ohio corporation
3.1 Composite Certificate of Incorporation Exhibit 3.1 to Company's Form 10-Q
of the Company, as amended for the quarter ended March 31, 1996
(File No. 0-21214)
3.2 Bylaws of the Company Exhibit 3.4 to Company's
Amendment No. 2 to Registration
Statement on Form S-1 (No. 33-
47569) filed with the SEC on January
25, 1993 ("January 1993 S-1")
4.1 Articles 5, 9 and 11 of Amended Form Exhibit 3.2 to January 1993 S-1
of Amendment to Certificate of
Incorporation of the Company
4.2 Articles II and III.2(c)(ii) of Bylaws of Exhibit 3.4 to January 1993 S-1
the Company
</TABLE>
EX-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
<S> <C> <C> <C>
4.3 Specimen Common Stock Certificate Exhibit 4.1 to January 1993 S-1
4.4 Stock Option Plan of the Company, as Incorporated by reference to Exhibit
amended and approved by stockholders 99.1 to the Company's Registration
(1) Statement on Form S-8 (No. 333-
09785) filed with the SEC on August
8, 1996
4.5 Stock Purchase Warrant, dated August Exhibit 4.6 to the Company's Form
18, 1993, issued to CyberLogic, Inc. 10-K for the fiscal year ended
December 31, 1994 ("1994 10-K")
4.6 Stock Purchase Warrant, dated Exhibit 4.6 to Company's
September 20, 1995, issued to Registration Statement on Form S-1
Registered Consulting Group, Inc. (No. 33-97438) filed with the SEC on
September 27, 1995 ("1995 S-1")
4.7 Stock Purchase Warrant, dated October
15, 1996, issued to Registered X
Consulting Group, Inc.
4.8 Rights Agreement dated as of March 4, Exhibit 4.1 to the Company's
1997 between the Company and Bank Registration Statement on Form 8-A
of New York, and Exhibits A, B and C filed with the SEC on March 6, 1997
thereto
10.1 License Agreement dated September 3, Exhibit 10.6 to January 1993 S-1
1987 between the Company and Life
Resonances, Inc.
10.2 Invention, Confidential Information and Exhibit 10.7 to January 1993 S-1
Non-Competition Agreement dated
September 18, 1987 between the
Company and Weinstein
10.3 Lease between the Company and Exhibit 10.8 to January 1993 S-1
MeraBank dated January 26, 1989
10.4 First Amendment to Lease, dated Exhibit 10.8.1 to January 1993 S-1
March 15, 1989 between the Company
and MeraBank
10.5 Second Amendment to Lease, dated Exhibit 10.8.2 to January 1993 S-1
September 17, 1990 between the
Company and MeraBank
10.6 Third Amendment to Lease, dated Exhibit 10.8.3 to January 1993 S-1
November 4, 1991 between the
Company and Cook Inlet Region,
Incorporated
10.7 Fourth Amendment to Lease, dated Exhibit 10.9 to the Company's Form
March 24, 1992 between the Company 10-Q for the quarter ended September
and Cook Inlet Region, Incorporated 30, 1994, File No. 0-21214
("September 30, 1994 10-Q")
</TABLE>
EX-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
<S> <C> <C> <C>
10.8 Fifth Amendment to Lease, dated Exhibit 10.10 to the Company's
September 14, 1993 between the September 30, 1994 10-Q
Company and Cook Inlet Region,
Incorporated
10.9 Invention, Confidential Information and Exhibit 10.11 to January 1993 S-1
Non-Competition Agreement dated
January 10, 1989 between the Company
and Frank P. Magee
10.10 Addendum to Lease between the Exhibit 10.8.1 to the Registration
Company and Cook Inlet Region, Inc. Statement on Form S-3 (No. 333-
commencing April 1, 1996 3082) filed with the SEC on April 2,
1996 ("April 1996 S-3")
10.11 1995 Officer Bonus Plan(1) Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the
year ended December 31, 1995
("1995 10-K")
10.12 1996 Officer Bonus Plan(1) Exhibit 10.11 to 1995 10-K
10.13 1997 Officer Bonus Plan(1) X
10.14 Form of Indemnification Agreement* Exhibit 10.16 to January 1993 S-1
10.15 License Agreement dated December 2, Exhibit 10.22 to January 1993 S-1
1992 between Orthotic Limited
Partnership and Company
10.16 Consulting Agreement dated May 1, Exhibit 10.11 to the Company's
1990 between Augustus A. White III September 30, 1994 Form 10-Q
and the Company(1)
10.17 Letter of employment dated March 5, Exhibit 10.29 to the Company's Form
1993 between the Company and David 10-K for the year ended December
E. Derminio(1) 31, 1992, File No.
0-21214
10.18 Amendment to Employment Agreement Exhibit 10.18 to 1995 10-K
between the Company and David E.
Derminio dated July 12, 1995(1)
10.19 Loan Modification Agreement dated Exhibit 10.22 to 1995 S-1
March 23, 1995 between Company and
Silicon Valley Bank
10.20 Employment Agreement dated Exhibit 10.9 to January 1993 S-1
December 17, 1992 between Allan M.
Weinstein and the Company(1)
10.21 Renewal of Employment Agreement of Exhibit 10.22.1 to 1994 10-K
Allan M. Weinstein dated March 28,
1995(1)
10.22 Employment Agreement dated Exhibit 10.10 to January 1993 S-1
December 17, 1992 between Frank P.
Magee and the Company(1)
</TABLE>
EX-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
<S> <C> <C> <C>
10.23 Renewal of Employment Agreement of Exhibit 10.23 to 1994 10-K
Frank P. Magee dated March 28,
1995(1)
10.24 Employment Agreement dated Exhibit 10.24 to 1995 10-K
February 27, 1992 between Allen R.
Dunaway and the Company(1)
10.25 Amendment to Employment Agreement Exhibit 10.25 to 1995 10-K
between the Company and Allen R.
Dunaway dated February 14, 1996(1)
10.26 Underwriting Agreement between the Exhibit 1.1 to 1995 S-1
Company and Volpe, Welty & Co. and
Dain Bosworth, Inc., as Representa
tives of the Underwriters
10.27 Underwriting Agreement between the Exhibit 1.1 to April 1996 S-3
Company and Volpe, Welty &
Company Hambrecht & Quist and Dain
Bosworth, Inc., as Representatives of
the Underwriters
10.28 Maturity Modification Letter dated Exhibit 10.21 to April 1996 S-3
March 29, 1996, by Silicon Valley
Bank
10.29 Employment Agreement dated March Exhibit 10.28 to April 1996 S-3
28, 1996 between the Company and
Nicholas A. Skaff(1)
10.30 Employment Agreement dated July 1, Exhibit 10.5 to Company's Quarterly
1996 between the Company and Report on Form 10-Q for the quarter
George A. Oram, Jr.(1) ended June 30, 1996
10.34 Lease made March 1997 between X
Toronto Medical Corp. and Toronto
Medical Orthopaedics Ltd.
10.35 Lease dated September 4, 1991 by and X
between Greystone Realty Corporation
and Sutter Corporation
10.36 Lease dated February 10, 1988 X
between MIC Four Points and Sutter
Biomedical, Inc.
10.37 First Addendum to Lease dated X
February 15, 1988 by and between
MIC Four Points and Sutter
Biomedical, Inc.
10.38 October 7, 1988 Second Addendum to X
Lease dated February 10, 1988 between
MIC Four Points and Sutter
Biomedical, Inc.
</TABLE>
EX-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
<S> <C> <C> <C>
10.39 Severance Agreement effective February X
18, 1997 by and between George A.
Oram, Jr. and the Company (1)
10.40 Promissory Note dated November 15, X
1996 made by George A. Oram, Jr. in
favor of the Company (1)
11.1 Statement of Computation of Net X
Income (Loss) per Weighted Average
Number of Common and Common Equivalent
Shares Outstanding
13.1 Portions of 1996 Annual Report to X
Stockholders
21.1 Subsidiaries of Registrant X
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedule X
</TABLE>
- --------------------------------------
(1) Management contract or compensatory plan or arrangement
* The Company has entered into a separate indemnification agreement with
each of its current direct and executive officers that differ only in
party names and dates. Pursuant to the instructions accompanying Item
601 of Regulation S-K, the Company has filed the form of such
indemnification agreement.
EX-5
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE OR OTHER
JURISDICTION ("BLUE SKY LAWS"), AND CANNOT BE RESOLD UNLESS THEY ARE REGISTERED
UNDER THE ACT AND ANY APPLICABLE BLUE SKY LAWS, UNLESS AN EXEMPTION IS
AVAILABLE. THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF.
ORTHOLOGIC CORP.
STOCK PURCHASE WARRANT
WARRANT TO PURCHASE 5,000 SHARES OF
COMMON STOCK AS DESCRIBED HEREIN
Dated: October 15, 1996 Warrant No. RCG 2
This certifies that, for valuable consideration received:
Name: Registered Consulting Group, Inc.
Address: 7373 N. Scottsdale Rd., Suite D-115
Scottsdale, Arizona 85253
Facsimile: 602-998-8804
or its registered permitted assigns are entitled to purchase from OrthoLogic
Corp., a Delaware corporation (the "Company"), having its principal office at
2850 South 36th Street, Phoenix, Arizona 85034 (Facsimile: 602-437-5524), five
thousand (5,000) fully paid and nonassessable shares of Common Stock, $.0005 par
value, of the Company the ("Common Stock"), subject to the terms set forth
herein. This Warrant shall be exercisable during the time periods set forth in
Section 1 hereof, at the price indicated therein. The holder of this Warrant
shall be referred to herein as the "Warrantholder." By accepting this Warrant,
Registered Consulting Group, Inc. ("RCG") acknowledges that the issuance of this
Warrant satisfies the Company's obligation to issue "options," as described in
the Compensation Attachment to the Engagement Agreement dated March 15, 1995
between the Company and RCG (the "Agreement"), as it has been modified and
amended through the date of this Warrant and that this Warrant fully replaces
Warrant No. RCG 1, which is now void for all purposes.
1. The purchase rights to 5,000 shares of Common Stock as represented
by this Warrant may be exercised by the Warrantholder or its duly authorized
attorney or representative, to the extent that such purchase rights are vested
as described in Section 2 of this Warrant, at any time or from time to time,
during the period commencing on the date of this Warrant (the "Commencement
Date") and expiring at 4:30 p.m., Mountain Time, on March 14, 2001 (the
1
<PAGE>
"Expiration Date"), upon presentation of this Warrant at the principal office of
the Company with the purchase form attached hereto duly completed and signed,
and upon payment to the Company in cash or by certified check or bank draft of
$2.41 per share of Common Stock purchased (the "Warrant Price").
2. Rights to purchase Common Stock pursuant to this Warrant are fully
vested.
3. The issuance and delivery of shares of Common Stock pursuant to the
terms of this Warrant shall be subject to and comply with all relevant
provisions of law including, without limitation, the Act, the Securities
Exchange Act of 1934, as amended, the rules and regulations promulgated
thereunder, and any applicable state securities or "Blue Sky" law or laws, and
the requirements of any stock exchange upon which the Common Stock may then be
listed.
4. The Company agrees that the Warrantholder will be deemed the record
owner of any shares purchased pursuant to Section 1 hereof as of the close of
business on the date on which the Warrant shall have been presented and payment
shall have been made for such shares as aforesaid. Certificates for the shares
of Common Stock so purchased shall be delivered to the Warrantholder within a
reasonable time, not exceeding 20 days, after the exercise in full of the rights
represented by this Warrant.
5. The number of shares purchasable upon exercise is subject to
adjustment from time to time as follows:
(a) In case the Company shall (i) pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, or (iv) issue by
reclassification of its shares of Common Stock other securities of the Company,
the number of shares of Common Stock purchasable upon exercise of this Warrant
immediately prior thereto shall be adjusted so that the Warrantholder shall be
entitled to receive the kind and number of shares of Common Stock or other
securities of the Company which he would have owned or have been entitled to
receive at the happening of any of the events described above, had such Warrant
been exercised immediately prior to the happening of such event or any record
date with respect thereto. An adjustment made pursuant to this Section 5(a)
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
(b) Whenever the number of shares of Common Stock purchasable
upon the exercise of this Warrant is adjusted, as herein provided, the aggregate
Warrant Price shall remain unchanged (the Warrant Price calculated on a per
share basis, however, shall
2
<PAGE>
be adjusted by multiplying such per share Warrant Price immediately prior to
such adjustment by a fraction, of which the numerator shall be the number of
shares of Common Stock purchasable upon the exercise of this Warrant immediately
prior to such adjustment, and of which the denominator shall be the number of
shares of Common Stock so purchasable immediately thereafter).
In the event of any adjustment pursuant to this Section 5, no fractional shares
of Common Stock shall be issued in connection with the exercise of this Warrant,
but the Company shall, in lieu of such fractional shares, make such cash payment
therefor on the basis of the current market price on the date immediately prior
to exercise. Irrespective of any adjustments pursuant to this Section 5 to the
number of shares or other securities or other property obtainable upon exercise
of this Warrant, this Warrant may continue to state the price and the number of
shares obtainable upon exercise as the same price and number of shares stated
herein.
6. This Warrant shall be void after 4:30 p.m. Mountain Time, on the
Expiration Date, except for the provisions of Section 10 which shall survive the
termination of this Warrant.
7. The Company covenants and agrees that:
(a) During the period during which this Warrant may be
exercised, the Company will at all times reserve and keep available, free from
preemptive rights out of the aggregate of its authorized but unissued Common
Stock, for the purpose of enabling it to satisfy any obligation to issue shares
of Common Stock upon the exercise of this Warrant, the number of shares of
Common Stock deliverable upon the exercise of this Warrant. If at any time the
number of shares of authorized Common Stock shall not be sufficient to effect
the exercise of this Warrant, the Company will take such corporate actions as
may be necessary to increase its authorized but unissued Common Stock to such
number of shares as shall be sufficient for such purpose;
(b) All Common Stock that may be issued upon exercise of the
rights represented by this Warrant will, upon issuance, be validly issued, fully
paid, nonassessable, and free from all taxes, liens, and charges with respect to
the issue thereof; and
(c) All original issue taxes payable with respect to the
issuance of shares upon the exercise of the rights represented by this Warrant
will be borne by the Company but in no event will the Company be responsible or
liable either for income taxes or for transfer taxes upon the transfer of any
Warrant.
8. Until exercised, this Warrant shall not entitle the Warrantholder to
any voting rights or other rights as a stockholder of the Company.
3
<PAGE>
9. This Warrant may not be sold, transferred, assigned, pledged or
hypothecated. The Common Stock issuable upon the exercise hereof may not be
sold, transferred, assigned, pledged or hypothecated unless the Company shall
have been supplied with evidence reasonably satisfactory to it that such
transfer is not in violation of the Securities Act of 1933, as amended (the
"Act"), any applicable state laws, and any provision of this Warrant.
The Company may place a legend referencing the transfer restrictions on
this Warrant or any replacement Warrant and on any certificates representing
shares issuable upon exercise of this Warrant.
10. (a) If at any time after November 30, 1995 but before December 31,
2001, the Company proposes to register under the Act and/or any applicable state
securities law any of its Common Stock for sale for cash in an offering in which
other shareholders will be participating, to the extent not limited by either
existing contractual arrangements or by this Warrant, the Warrantholder shall
have the right to include any part or all of the shares of Common Stock for
which Warrantholder possesses exercisable purchase rights pursuant to this
Warrant in any such registration.
(b) Notwithstanding (a) above, the Company shall include in
any registration made pursuant to this Section 10 only those shares of Common
Stock covered by this Warrant as to which it has received assurances reasonably
satisfactory to it that all exercise rights as to the Warrant will be exercised
and that such Warrant will be converted to Common Stock on or prior to the date
on which a registration statement has become effective or the sale thereof to
underwriters has been consummated so that only Common Stock shall be distributed
to the public under such registration statement.
If Common Stock is proposed to be registered pursuant to
Section 10(a), the Company shall give written notice to the Warrantholder of the
proposed filing not later than one week prior to the date of its intention to do
so and, upon the written request of the Warrantholder given to the Company not
more than four calendar days later (which request shall state the intended
method of disposition of such of its securities to be included in the
registration statement by the Warrantholder), the Company shall cause such
number of shares of the Common Stock acquired or to be acquired by the
Warrantholder pursuant to this Warrant (but not the Warrant itself) to be
included in the registration statement to be registered under the Act as
provided above.
Any request of the Warrantholder for inclusion in any
registration of Common Stock pursuant to this Section 10 shall also include the
agreement of the Warrantholder to sell the applicable amount of Common Stock
only through the underwriters, if applicable, and at the price and upon the
terms fixed by the
4
<PAGE>
agreement among the Company and the underwriters or brokers for such
transaction. Additionally, in connection with any such registration,
participation by the Warrantholder will be conditioned upon its execution of the
underwriting documents (which shall include standard indemnification provisions)
negotiated by the Company or the other selling stockholders, and the execution
by the Warrantholder of a lockup of up to 120 days for any shares owned by it
and not sold in the offering.
(c) Any registration of shares pursuant to Section 10(a) shall
be effected at the Company's expense, exclusive of underwriting discounts and
commissions and of legal fees and expenses for counsel to the Warrantholder.
(d) In connection with any registration of shares pursuant to
this Section 10, the persons whose shares are being registered shall furnish the
Company with such information concerning such persons and the proposed sale or
distribution as shall, in the opinion of counsel for the Company, be required
for use in the preparation of the registration statement, and such person shall
cooperate fully in the preparation and filing of the registration statement. In
addition, Warrantholder shall indemnify the Company, its officers and directors
("Indemnified Persons") against all claims, losses or damages Indemnified
Persons incur as a result of any information supplied by such Warrantholder that
was included in the registration statement which either contained any untrue
statement or alleged untrue statement of material fact or failed to disclose
material facts required to make those stated not misleading.
(e) The rights represented by this Section 10 shall expire for
any shares registered pursuant to this Section 10 or otherwise.
(f) The obligations of the Company and the Warrantholder under
this Section 10 shall survive the expiration of this Warrant.
11. If this Warrant is lost, stolen, mutilated or destroyed, the
Company shall, on such terms as the Company may reasonably impose, including a
requirement that the Warrantholder obtain a bond, issue a new Warrant of like
denomination, tenor, and date. Any such new Warrant shall constitute an original
contractual obligation of the Company, whether or not the allegedly lost,
stolen, mutilated or destroyed Warrant shall be at any time enforceable by
anyone.
12. Any Warrant issued pursuant to the provisions of Section 11 shall
set forth each provision set forth in Sections 1 through 18, inclusive, of this
Warrant as each such provision is set forth herein, and shall be duly executed
on behalf of the Company by an executive officer.
5
<PAGE>
13. Upon surrender of this Warrant or upon the exercise hereof, this
Warrant shall be canceled by the Company, shall not be reissued by the Company,
and no Warrant shall be issued in lieu thereof. Any new Warrant certificate
shall be issued promptly but no later than seven days after receipt of the old
Warrant certificate; provided, however, that the obligation of the Company to
issue the shares of Common Stock upon the exercise of this Warrant shall be
subject to compliance with Sections 3 and 9 hereof.
14. This Warrant shall inure to the benefit and be binding upon the
Warrantholder, the Company, and their respective successors and assigns, except
as provided otherwise herein.
15. All notices required hereunder shall be in writing and shall be
deemed received when delivered personally, one business day after delivery to a
nationally recognized commercial overnight courier service, or upon sending if
sent by confirmed facsimile to the Company or the Warrantholder, at the address
or facsimile number of such party as set forth on the first page of this
Warrant, or at such other address or facsimile number of which the Company or
Warrantholder has been advised by notice hereunder.
16. In the case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, recapitalization, or other
change in the capital structure of the Company or in the case of a sale or other
transfer of its property, assets, or business substantially as an entirety to
another corporation, appropriate adjustment shall be made so that the
Warrantholder shall have the right thereafter to receive upon the exercise of
this Warrant the amount of shares of Common Stock which such holder would have
been entitled to receive if immediately prior to such event, such holder had
held the number of shares of Common Stock which were then purchasable upon the
exercise of this Warrant. Appropriate adjustment shall be made in the
application of the provisions of this Warrant so that the provisions set forth
herein shall thereafter be applicable, as nearly as reasonable, to any shares of
stock thereafter deliverable upon the exercise of this Warrant.
17. The validity, interpretation, and performance of this Warrant and
of the terms and provisions hereof shall be governed by and construed and
enforced in accordance of the internal laws of the State of Arizona without
giving effect to the principles of conflict of laws, except as otherwise
required by the General Corporation Law of the State of Delaware.
18. This Warrant may not be modified, amended or supplemented without
the approval of the holder of the Warrant and except upon the execution and
delivery of a written agreement executed by the Company and the Warrantholder.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed effective as of October 15, 1996.
ORTHOLOGIC CORP.
By: /s/ Allan M. Weinstein
----------------------------
Allan M. Weinstein
Its: Chairman of the Board, and
Chief Executive Officer
7
<PAGE>
PURCHASE FORM
-------------
To Be Executed
Upon Exercise of Warrant
The undersigned hereby exercises the right to purchase shares of Common
Stock, evidenced by the attached Warrant, according to the terms and conditions
thereof, and herewith makes payment of the purchase price in full. The
undersigned requests that certificate(s) for such shares shall be issued in the
name set forth below.
DATED: [NAME OF HOLDER]
By _____________________________
(Signature)
Name:___________________________
(Please Print)
Address: _______________________
_______________________
_______________________
_______________________
Employer Identification No.,
Social Security No. or other
identifying number:
________________________________
8
OrthoLogic Corp.
Phoenix, Arizona
1997 Executive Bonus Plan
Bonus Plan 1997 -- The executive bonus opportunity for 1997 will be based on
meeting 100% of objectives as recommended by the Compensation Committee:
The bonus eligibility for 1997 is as follows:
President/CEO 50%
Executive Vice President 45%
Vice Presidents 40%
The Board will determine the overall Company performance and the individual
performance of the President/CEO. The President/CEO will determine the
individual performance of the Vice Presidents, subject to review by the Board.
L E A S E
---------
THIS LEASE made this day of March, 1997.
IN PURSUANCE OF THE SHORT FORMS OF LEASES ACT
B E T W E E N:
TORONTO MEDICAL CORP.,
----------------------
(the "Landlord")
OF THE FIRST PART
A N D :
TORONTO MEDICAL ORTHOPAEDICS LTD.,
----------------------------------
(the "Tenant")
OF THE SECOND PART
WHEREAS the Landlord has agreed to lease to the Tenant, and
the Tenant has agreed to lease from the Landlord the lands hereinafter
described, together with the building and improvements situate thereon on the
terms and provisions hereinafter set forth:
1.00 - GRANT AND TERM
- ---------------------
.1 Grant
-----
In consideration of the rents and covenants herein
contained on the part of the Tenant, the Landlord hereby leases to the Tenant
the lands and premises municipally known as 901 Dillingham Road, Pickering,
Ontario, containing a free standing single storey industrial building (the
"Building") with a gross floor area of 28,547 square feet, more or less, as more
particularly described in Schedule "A" hereto, and all rights and appurtenances
(collectively the "Premises").
.2 Term
----
To hold the Premises for the term of 2 years (the "Term") from
March 1, 1997 (the "Commencement Date") until February 28, 1999.
2.00 - RENT
- -----------
.1 Rent
----
<PAGE>
-2-
The Tenant paying therefor yearly during the Term the
sum of $142,285.00 of lawful money of Canada in 12 equal monthly instalments of
$11,857.00 in advance on the first day of each and every month, the first of
such instalments to become due and payable on March 1, 1997 (the "Base Rent").
.2 Prepaid Rent/Security Deposit
-----------------------------
The Tenant hereby covenants to pay on the execution
of this Lease the sum of:
(a) Prepaid Rent
------------
$23,714.00 plus GST, $11,857.00 plus GST of which
is to be applied to the account of the first
month's rent and the balance on account of the
last month's rent.
(b) Security Deposit
----------------
INTENTIONALLY DELETED
.3 Additional Rent
---------------
The Tenant covenants and agrees to pay therefor as
additional rent (the "Additional Rent") the moneys and other charges, costs and
expenses herein provided to be paid by the Tenant at the several times when they
become payable.
.4 Rent Past Due
-------------
If the Tenant fails to pay when the same is due and
payable hereunder any Base Rent, Additional Rent or any other amount payable by
the Tenant under this Lease, such unpaid amounts shall bear interest from the
due date thereof to the date of payment at a rate per annum, which is three (3)
percentage points in excess of the Prime Rate.
3.00 - TENANT'S COVENANTS
- -------------------------
The Tenant covenants with the Landlord as follows:
.1 Rent
----
<PAGE>
-3-
During the Term, to pay to the Landlord the Base Rent
hereby reserved and all Additional Rent in the manner and at the times herein
provided, without deduction, abatement or set-off except as may otherwise be
provided herein, all rent in arrears to bear interest at three (3) percentage
points in excess of the Prime Rate per annum until paid. During the initial Term
(but not during the First Renewal Term or the Second Renewal Term (as
hereinafter defined)), Tenant shall have the set-off rights provided for in
section 8.1(d) of the Purchase and Sale Agreement dated December 30, 1996, among
Tenant as buyer, and Landlord as seller.
.2 Additional Rent
---------------
As Additional Rent hereunder, to promptly discharge
and pay when due (subject to the right of contestation as hereinafter mentioned)
before any fine, penalty, interest or cost may be added thereto: all real
property taxes, rates, duties, assessments, impost charges, local improvement
charges and levies, whether general or specified, and other public charges,
excluding any income or capital taxes which shall be payable by the Landlord,
which prior to the commencement of the Term have been, or during the Term may
be, levied, rated, charged or assessed against the Premises and all equipment
and facilities thereon or therein, and any property now or hereafter on the
Premises, whether or not owned or brought thereon by the Tenant, and any taxes
or other amounts that are imposed on the Landlord in lieu of, in substitution
for or in addition to any real property taxes (whether currently contemplated or
not) provided that any such taxes, rates, duties, assessments, charges or levies
which have been levied prior to the commencement of the Term shall be
apportioned such that the Tenant shall be responsible only for the portion of
same pertaining to the period following the Commencement Date; any goods and
services taxes imposed with respect to Base Rent or Additional Rent, whether
characterized as a goods and services tax, value-added tax, sales tax or
otherwise; any commercial concentration levy tax or other similar tax; every
tax, licence fee, business tax and other public charge which before the
commencement of the Term has been or during the Term may be assessed, levied or
charged in respect of the Premises, whether or not caused by the occupancy of
the Tenant or the business carried on therein by the Tenant or the property of
the Tenant therein, whether such taxes, rates, assessments, licence fees and
other public charges are assessed, levied or charged by municipal, provincial,
federal, school or other public body; and all charges for electric current, gas,
telephone, water and other rates in connection with the Premises; and the Tenant
shall indemnify the Landlord against the payment of all such tax, rate, duty,
assessment, licence fee or other public charge, electric current, rate and other
utility charges, and against all loss, liability, cost, charge and expense by
reason of the Tenant's failure to pay such sums when due; and the Tenant shall
forthwith after payment of the foregoing items and charges produce to the
Landlord on request evidence satisfactory to the Landlord of the fact of such
payment; PROVIDED that the Tenant may contest, if it has delivered to the
Landlord security for such taxes, rates, etc. that the Landlord requires, the
validity or the
<PAGE>
-4-
amount of any tax, rate, assessment or other public charge (if meanwhile such
contestation will involve no forfeiture, foreclosure, escheat, sale or
termination of the Landlord's title to the Premises or any part thereof), but
upon a final determination of any such contest, the Tenant shall immediately pay
and satisfy the amount of any such tax, rate, assessment or other public charge
declared or found to be due, together with all proper costs, penalties, interest
or other charges payable in connection therewith; and upon being provided with
suitable indemnity or security satisfactory to it, in relation to any costs,
charges, rates, assessments or expenses which it may incur or be likely to
incur, the Landlord agrees to join in any such contest if the Tenant shall
require and if its presence is reasonably necessary to perfect the proceedings
in relation thereto, but the Landlord shall not be responsible for the conduct
or carriage of such proceedings nor incur any liability whatsoever by reason of
having joined therein and the Tenant shall indemnify and save the Landlord
against any such liability. The Tenant agrees to provide the Landlord within 10
days after receipt thereof with a copy of any separate tax bills and separate
tax notices of assessments for the Premises. The Tenant will promptly deliver to
the Landlord evidence of payments satisfactory to the Landlord, acting
reasonably, of all such taxes paid to any such taxing authorities aforesaid and
will furnish such other information in connection therewith as the Landlord may
reasonably require. Notwithstanding the foregoing, Additional Rent should not
include any of the following:
(a) borrowing costs, depreciation, interest and principal on
mortgages and other debt costs, except to the extent included
as set forth above;
(b) any costs incurred as a result of the gross negligence or
wilful misconduct of the Landlord or any of its agents,
contractors or employees;
(c) costs of all repair and replacement to the structure of the
Building including, without limitation, foundations, bearing
walls, structural columns and beams, and the roof structure,
excluding the roof membrane, whether or not they are paid for
from proceeds of insurance or as damages by third parties,
save and except those repairs and replacements resulting from
the acts or omission of the Tenant or any of its agents,
contractors or employees or those for whom it is in law
responsible, which shall be the Tenant's responsibility;
(d) ground rent and other monies payable under any ground lease of
the lands or any part thereof or any lease senior to this
Lease, except for amounts which would be included in
Additional Rent if incurred under this Lease;
(e) proceeds of insurance and damages paid by third parties; and
<PAGE>
-5-
(f) any costs relating to any violation of or costs of compliance
with Environmental Laws (as defined in Section 11.1) other
than those for which the Tenant is otherwise responsible under
this Lease.
.3 Maintenance
-----------
At its own cost and expense, to operate, maintain and
keep the Premises and all equipment and fixtures thereon in good order and
condition, reasonable wear and tear excepted, and promptly to make all repairs
and replacements of any nature, whether of a capital nature or otherwise, to the
Premises when needed (both inside and outside, structural or otherwise),
provided, however, that the Tenant shall not be responsible for the costs or
expense of operation, maintenance, replacement or repair of those items
described in Sections 3.2(b), 3.2(c) or 3.2(f). Subject to Section 7.5 hereof,
if the Tenant shall at any time fail to make any such repairs or replacements
when needed, the Landlord may make them or cause them to be made and the cost
thereof, together with interest thereon computed at the Prime Rate from the date
of payment by the Landlord, shall be charged to and paid by the Tenant as
Additional Rent due on the next ensuing rent day. The Tenant shall permit the
Landlord and its representatives at all reasonable times upon 24 hours prior
written notice (except in the case of an emergency) to enter upon and view the
Premises and the state of repair and to make such needed repairs and
replacements as the Landlord may specify in writing.
.4 Condition of Premises
---------------------
To keep the Premises and every part thereof in a
clean and tidy condition and not to permit waste paper, garbage, ashes or waste
or objectionable material to accumulate thereon and, at its expense, to keep the
driveways, walks, grounds, sidewalks and curbs forming part of or adjoining the
Premises clean and free of snow and ice.
.5 Overloading Floors
------------------
Not to bring upon the Premises or any part thereof
any machinery, equipment, article or thing that by reason of its weight, size or
use might damage the Premises and not at any time to overload the floors of the
Premises, and if any damage is caused to the Premises by any machinery,
equipment, article or thing or by overloading or by any act, neglect or misuse
on the part of the Tenant or any of its servants, agents or employees or any
person having business with the Tenant, to forthwith repair or pay to the
Landlord the cost of making good such damage. The Tenant shall not bring or
permit any heavy vehicles on the Premises which might damage any parking areas
or driveways.
.6 Heat
----
<PAGE>
-6-
To heat the Premises at its own expense to the extent
required by it for its business purposes with the heating systems currently in
the Building, but always to such temperature as may be necessary to prevent
damage to the Premises by frost.
.7 Compliance with Fire and Other Regulations
------------------------------------------
That the Tenant has inspected the Premises and
acknowledges that it is accepting the Premises on an "as is, where is and what
is basis" and that the Landlord is making no covenants, agreements,
representations, warranties or acknowledgements with respect to the condition of
the Premises and finds them to be in a satisfactory condition and that in the
maintenance, use and occupation of the Premises, it will at its own cost and
expense comply with every applicable regulation or order of the Canadian Fire
Underwriters Association, or any body having similar functions, and of any
liability or fire insurance company by which the Landlord or the Tenant may be
insured, and with all applicable laws, ordinances and regulations of duly
constituted public authorities having jurisdiction now or hereafter in any
manner affecting the Premises or the use or occupation thereof, whether or not
such regulations, orders, laws or ordinances which may hereafter be promulgated,
issued or enacted involve a change of policy or require structural or other
changes or alterations in or about the Premises.
.8 Construction and Other Liens
----------------------------
Not at any time to permit any construction,
labourer's, materialman's or similar lien to stand against the Premises for any
labour or materials furnished to or with the consent of the Tenant, its agents
or contractors, in connection with work of any character performed or claimed to
have been performed on the Premises by or at the direction or sufferance of the
Tenant; PROVIDED, however, that the Tenant shall have the right to contest, if
it has delivered to the Landlord security for such lien, as required by the
Landlord, the validity of or the amount claimed under or in respect of any such
lien, provided such contestation shall involve no forfeiture, foreclosure or
sale of the Premises or any part thereof, but upon a final determination of such
contest, the Tenant shall immediately pay and satisfy any judgement or decree
rendered against the Tenant, with all proper costs and charges, and cause such
lien to be discharged and released of record, all without cost or expense to the
Landlord; provided further that on the Tenant's failure promptly to remove or
contest any such lien and all amounts paid by or on behalf of the Landlord,
together with all expenses incurred in connection therewith and interest thereon
at the Prime Rate from the date of payment by or for the Landlord, shall be
charged to and paid by the Tenant as Additional Rent due on the next ensuing
rent day.
.9 Indemnity
---------
<PAGE>
-7-
To indemnify the Landlord against all liability,
claims, demands, actions and causes of action of any nature whatsoever, and any
expense incident thereto, for injury to or death of persons or loss of or damage
to property occurring on the Premises or the adjoining walks, drives, ways or
streets or in any manner growing out of or in connection with the Tenant's use
or occupation of the Premises or the condition thereof or the adjoining walks,
drives, ways or streets during the Term or arising out of any breach of the
Tenant's covenants herein or out of any work being done in or about the Premises
unless such liability, claims, demands, actions and causes of actions arise as a
result of the gross negligence or wilful misconduct of the Landlord or those for
whom it is at law responsible.
.10 Insurance
---------
During the whole of the Term, at its expense:
(a) to insure the Premises, excluding
foundations, in a stated amount as determined by the
Landlord's insurance advisors, but not exceeding the
full insurable value thereof, against all risk of
loss or damage caused by or resulting from fire,
lightning, explosion, collapse of any boilers, pipes
or accessories in or about the Premises or any peril
defined in a standard fire insurance additional
perils supplementary contract normally in use from
time to time during the Term or any extension thereof
for buildings and structures in the Town of Pickering
similar in nature to the Premises. Insurance under
this Section shall be maintained at the full
replacement value with a by-law compliance
endorsement;
(b) to maintain public liability and property
damage insurance, including personal injury
liability, contractual liability, non-owned
automobile liability, employers' liability and
owners' and contractors' protective insurance
coverage with respect to the Premises and the
Tenant's use thereof, coverage to include the
activities and operation conducted by the Tenant and
any other person on the Premises and by the Tenant
and any other person performing work on behalf of the
Tenant and those for whom the Tenant is in law
responsible in any part of the Premises. Such
policies shall:
(i) be written on a comprehensive basis
with inclusive limits of not less than
$2,000,000.00 for bodily injury to any one
or more persons or property damage or such
higher limits as the Landlord, acting
<PAGE>
-8-
reasonably, or any mortgagee of the Premises
requires from time to time; and
(ii) contain a SEVERABILITY of interests
clause and cross- liability clause;
(c) to maintain broad form boiler and machinery
insurance on a blanket repair and replacement basis
with limits for each accident in an amount not less
than the replacement cost of all boilers, pressure
vessels, air-conditioning equipment and miscellaneous
electrical apparatus owned or operated by the
Landlord and the Tenant or by others in the Premises
or relating to or serving the Premises;
(d) to maintain business interruption insurance
to reimburse the Tenant for direct or indirect loss
of earnings attributable to all perils insured
against in Sections 3.10(a) and (c) and other perils
commonly insured against by prudent tenants or
attributable to prevention of access to the Premises
as a result of such perils and, for this purpose, to
the extent that such coverage is not provided for in
the business interruption insurance, shall maintain
the appropriate endorsements to the fire policy (loss
of rental income) and to the boiler policy (use and
occupancy), the limits of which endorsements shall be
equal to the annual rent and Additional Rent
calculated by the Landlord or its insurance advisors;
(e) to maintain tenants' legal liability
insurance for the actual cash value of the Premises,
including loss of use thereof;
(f) to maintain any other form of insurance as
the Landlord, acting as a prudent owner and as is
customary practice for landlords of buildings of a
similar nature, or any mortgagee of the Premises
reasonably requires from time to time in form, in
amounts and for insurance risks against which a
prudent owner would insure; and
(g) to alter or improve any of the insurance
policies placed pursuant to this Section 3.10 as the
Landlord, acting as a prudent owner, or any mortgagee
of the Premises requires from time to time.
All such contracts of insurance placed by the Tenant
hereunder shall, to the extent available, show the Landlord, Tenant and any
mortgagee (to an amount that the Landlord's insurance advisors feel a prudent
owner and landlord should be insured for) as joint insured, as their interests
may from time to time appear,
<PAGE>
-9-
and shall contain a waiver of any subrogation rights which the Tenant's insurers
may have against the Landlord and those for whom the Landlord is at law
responsible, whether any such damage is caused by the act, omission or
negligence of the Landlord or those for whom the Landlord is at law responsible.
To the extent available, and provided that it does not increase the cost
otherwise payable by the Landlord for its insurance, the Landlord's insurance in
respect of the Premises shall contain a waiver of any subrogation rights which
the Landlord's insurers may have against the Tenant and those for whom the
Tenant is at law responsible, whether any damage is caused by the act, omission
or negligence of the Tenant or those for whom the Tenant is at law responsible.
If the Tenant fails to obtain the policies of
insurance required hereunder, the Landlord may itself obtain such policies and
shall give the Tenant a notice setting out the amount and dates of payment of
all costs and expenses incurred by the Landlord in connection therewith to the
date of such notice; the Tenant will, with the next instalment of rent which
becomes due, pay the same to the Landlord with interest at three (3) percentage
points in excess of the Prime Rate per annum calculated on the various amounts
from the respective dates of payment thereof by the Landlord to the date of
repayment by the Tenant. Any sum so expended by the Landlord, together with such
interest as aforesaid, shall constitute rent hereunder and be collectable as
such rent and be due and payable on demand by the Landlord.
The Tenant shall furnish the Landlord with certified
copies of policies or other acceptable evidence of all such insurance promptly
upon request, provided no review or approval of any such policies by the
Landlord shall derogate from or diminish the Landlord's rights or the Tenant's
obligations contained in this Lease or this Article.
.11 Surrender at Expiration of Term
-------------------------------
At the expiration or earlier termination of this
Lease, peaceably to surrender and yield up to the Landlord the Premises in good
and substantial repair and condition, subject to reasonable wear and tear.
PROVIDED that the Tenant may at the expiration of this Lease, if it shall not
then be in default hereunder, remove from the Premises all the Tenant's
fixtures, but shall, in such removal, do no damage to the Premises or shall
promptly make good any damage which may be occasioned thereto and restore them
to their condition prior to such removal.
.12 Use of Premises
---------------
Not to use the Premises other than for the purposes
of manufacturing of orthopaedic medical devices or other medical products
related thereto, warehousing inventory and general office use and not to carry
on, or permit to be carried on in or upon the Premises any noxious or offensive
trade or business which shall be a nuisance at law or by which the buildings or
erections on the Premises shall
<PAGE>
-10-
be injuriously affected or by reason of which it shall become impossible to
obtain and maintain insurance against fire and the usual perils.
.13 Waiver re Distress
------------------
To waive and renounce (so far as it may be permitted
to do so by applicable legislation) the benefit of any present or future act in
force in the Province of Ontario which takes away or limits the Landlord's right
of distress, and that the Landlord may seize and sell the Tenant's goods and
chattels for payment of Base Rent and Additional Rent and costs as fully as the
Landlord might have done if such act had not been enacted or passed.
.14 Roof
----
That it will not place anything on the roof, whether
signs or otherwise, or in any way make any opening in the roof for stacks or
other purposes, or in any way alter the walls or structure of the Premises
without the written consent of the Landlord.
.15 Evidence of Payments by Tenant
------------------------------
The Tenant shall from time to time at the request of
the Landlord produce to the Landlord satisfactory evidence of the due payment by
the Tenant of all payments required to be made by the Tenant under this Lease.
.16 Air-Conditioning
----------------
Not to place or attach anything to the outside of the
windows or the exterior of the Premises. No air conditioning equipment shall be
placed in the windows or shall extend from the exterior of the Premises without
the consent in writing of the Landlord, which consent may be arbitrarily
withheld.
<PAGE>
-11-
.17 Application to Amend By-Laws
----------------------------
The Tenant will not make any application or
representation to or for any governmental body which would have the effect of,
in any way, amending or varying the provisions of any governmental by-laws,
rules, regulations or requirements affecting the Premises or the building and
lands of which the Premises form a part without first obtaining the written
consent and authorization of the Landlord, which may be arbitrarily withheld.
.18 Financial Statements
--------------------
The Tenant will at the request of the Landlord supply
copies of its financial statements to the Landlord or to the first mortgagee of
the Premises or a prospective first mortgagee or prospective purchaser of the
Premises.
.19 Additions and Fixtures
----------------------
Subject to Section 3.11, any building, erection or
improvement placed or erected upon the Premises shall become a part thereof and
shall not be removed and shall be subject to all the provisions of this Lease,
but no building, erection or improvement shall be erected upon the Premises
without the prior written consent of the Landlord.
.20 Inspection by Interested Parties
--------------------------------
During the Term, any person or persons may inspect
the Premises and all parts thereof at all reasonable times on 24 hours prior
written notice on producing a written order to that effect signed by the
Landlord or its agents, provided such inspection does not unreasonably interfere
with the business of the Tenant.
.21 Notices for Sale or to Let
--------------------------
The Landlord may at any time during the Term or any
renewal thereof enter upon the Premises and affix thereto in some prominent
location which will not interfere with the business of the Tenant a notice or
sign to the effect that the Premises are for sale and within 6 months prior to
the end of the Term a sign to the effect that the Premises are available for
leasing, and the Tenant shall not remove the said notice or sign or permit it to
be removed unless requested to do so by the Landlord.
4.00 - TRANSFERS
- ----------------
.1 Assigning and Subletting
------------------------
<PAGE>
-12-
(a) The Tenant will not assign this Lease in
whole or in part, nor sublet all or any part of the
Premises, nor mortgage or encumber this Lease or the
Premises or any part thereof, nor suffer or permit
the occupation of, or part with or share possession
of all or any part of the Premises by any person (all
of the foregoing being hereinafter collectively
referred to as a "Transfer") without the prior
written consent of the Landlord in each instance,
which consent shall not be unreasonably withheld or
delayed, provided that, notwithstanding any statutory
provision to the contrary, it shall not be considered
unreasonable for the Landlord to take into account
the following factors in deciding whether to grant
its consent:
(i) whether any such Transfer is in
violation or breach of any covenants or
restrictions granted by the Landlord to
other tenants or occupants or prospective
tenants or occupants; and
(ii) whether in the Landlord's
reasonable opinion the financial background,
business history and capability of the
proposed Transferee is satisfactory.
The consent by the Landlord to any Transfer, if
granted, shall not constitute a waiver of the
necessity for such consent to any subsequent
Transfer. This prohibition against a Transfer is
construed so as to include a prohibition against any
Transfer by operation of law and no Transfer shall
take place by reason of a failure by the Landlord to
give notice to the Tenant within 30 days as required
by Section 4.2(b).
(b) If the Tenant intends to effect a Transfer
of all or any part of the Premises or this Lease in
whole or in part, or any estate or interest
hereunder, then and so often as such event shall
occur, the Tenant shall give prior written notice to
the Landlord of such intent specifying therein the
proposed assignee, subtenant or occupant (all of the
foregoing being hereinafter collectively referred to
as the "Transferee") and providing such information
with respect thereto, including, without limitation,
information concerning the principals thereof and as
to any credit, financial or business information
relating to the proposed Transferee as the Landlord
or the mortgagee requires, and the Landlord shall
within 30 days after having received such notice and
all such necessary information, notify the Tenant in
writing either that:
<PAGE>
-13-
(i) it consents or does not consent to
the Transfer in accordance with the
provisions and qualifications in this
Article 4.00; or
(ii) it elects to cancel this Lease in
preference to giving of such consent.
If the Landlord elects to cancel this Lease as aforesaid,
the Tenant shall notify the Landlord in writing within 15
days thereafter of the Tenant's intention either to
refrain from such Transfer or to accept the cancellation
of this Lease. If the Tenant fails to deliver such notice
within such period of 15 days, this Lease will thereby be
terminated upon the expiration of the said 15-day period.
If the Tenant advises the Landlord it intends to refrain
from such Transfer, then the Landlord's election to cancel
this Lease as aforesaid shall become null and void in such
instance.
.2 Corporate Ownership
-------------------
If the Tenant is a corporation or if the Landlord has
consented to a Transfer of this Lease to a corporation, any transfer or issue by
sale, assignment, bequest, inheritance, operation of law or other disposition,
or by subscription from time to time of all or any part of the corporate shares
of the Tenant or of any parent or subsidiary corporation of the Tenant or any
corporation which is an associate or affiliate of the Tenant (as those terms are
defined pursuant to the Business Corporations Act [Ontario] and amendments
thereto (the "OBCA")), which results in any change in the present effective
voting control of the Tenant by the person holding such voting control at the
date of execution of this Lease (or at the date a Transfer of this Lease to a
corporation is permitted) and which does not receive the prior written consent
of the Landlord in each instance (which consent may be unreasonably withheld,
notwithstanding any statutory provision to the contrary) entitles the Landlord
to terminate this Lease upon 5 days' written notice to the Tenant. If the
Landlord elects to cancel this Lease as aforesaid, the Tenant shall have the
right to advise the Landlord within 15 days after written notice of the
Landlord's election, that the Tenant elects to have this Lease reinstated by the
transfer, sale, assignment or other disposition (the "Re-Transfer") from the
shareholders of the Tenant after such change in control to the shareholders of
the Tenant existing as at the Commencement Date (or at the date that a Transfer
of this Lease to a corporation is permitted). If the Tenant effects such
Re-Transfer within 30 days following the Landlord's election and forthwith
thereafter provides the Landlord with evidence satisfactory to the Landlord of
such Re-Transfer, this Lease will be reinstated for the balance of the Term as
of the date of the termination by the Landlord as aforesaid. If this Lease is
terminated as
<PAGE>
-14-
aforesaid, the Landlord may re-enter and take possession of the Premises,
whereupon the Landlord's rights and remedies contained in Article 7.00 shall
apply. The Tenant shall:
(a) when requesting consent to a sale of shares
as aforesaid, provide the Landlord with such
information as to the proposed purchaser as the
Landlord requires, including, without limitation,
information concerning credit worthiness, financial
standing and business history; and
make available to the Landlord or its lawful
representatives all corporate books and records of the Tenant for inspection at
all reasonable times in order to ascertain whether there has been any change in
control of the Tenant corporation.However, this Section 4.2 shall not apply if
and so long as the Tenant is a public corporation whose shares are, and after
such change in control will continue to be, publicly traded and listed on any
recognized stock exchange in Canada or the United States.
.3 Transfers by Landlord
---------------------
The Landlord, at any time and from time to time, may
sell, transfer, lease, assign or otherwise dispose of the whole or any part of
its interest in the Premises, and at any time and from time to time may enter
into any mortgage of the whole or any of its interest in the Premises. If the
party acquiring such interest shall have agreed that so long as it holds such
interest, to assume and to perform each of the covenants, obligations and
agreements of the Landlord under this Lease in the same manner and to the same
extent as if originally named as the Landlord in this Lease, the Landlord shall
thereupon be released from all of its covenants and obligations under this
Lease.
.4 Additional Rent on Sublet or Assignment
---------------------------------------
(a) In the event of any subletting by the Tenant
by virtue of which the Tenant receives a rental in
the form of cash, goods, services or other
considerations from the subtenant which is higher
than the rental payable hereunder to the Landlord for
the premises sublet, the Tenant shall pay 50% of any
such excess to the Landlord in addition to all
rentals and other costs payable hereunder and such
excess for the period of time during which the said
subtenant remains in possession of the premises
sublet to it.
(b) If the Tenant herein shall receive from any
assignee of this Lease, either directly or
indirectly, any consideration for
<PAGE>
-15-
the assignment of this Lease, either in form of cash,
goods or services, the Tenant shall forthwith pay an
amount equivalent to 50% of such consideration shall
be deemed to be further Additional Rent hereunder.
5.00 - LANDLORD'S COVENANTS
- ---------------------------
The Landlord covenants with the Tenant as follows:
.1 Quiet Enjoyment
---------------
That the Tenant, upon paying the Base Rent and
Additional Rent hereby reserved and performing and observing all of the
covenants and provisions herein contained on its part to be performed and
observed, shall peaceably enjoy and possess the Premises for the Term without
any interruption or disturbance from the Landlord or any other person or persons
lawfully claiming by, from or under it; PROVIDED, however, that nothing herein
contained shall be construed as a warranty by the Landlord to the Tenant as
against any adverse claims, encumbrances or defects in title to the Premises
existing before the Landlord acquired title, or asserted by persons claiming by,
from or under a predecessor in title to the Landlord.
6.00 - NET NET LEASE
- --------------------
.1 [Intentionally Deleted]
-----------------------
.2 Adjustment of Taxes
-------------------
The taxes and local improvement rates in respect of
the first and last years of the Term shall be adjusted between the Landlord and
the Tenant.
.3 Net Net Lease
-------------
It is the intention of the parties that the rent
herein provided to be paid shall be absolute net net to the Landlord and clear
of all taxes (except income and capital taxes), costs and charges arising from
or relating to the Premises except as otherwise provided in this Lease and that
the Tenant shall pay all charges, impositions and expenses of every nature and
kind relating to the Premises except as otherwise provided in this Lease, and
the Tenant hereby covenants with the Landlord accordingly.
<PAGE>
-16-
.4 [Intentionally Deleted]
-----------------------
.5 Non-Liability of Landlord
-------------------------
Except in the event of any injury or death caused by
the gross negligence or wilful misconduct of the Landlord or those for whom it
is at law responsible, the Landlord shall not in any event whatsoever be liable
or responsible in any way for any personal injury or death that may be suffered
or sustained by the Tenant or any other person who may be upon the Premises or
for any loss of or damage or injury to any property belonging to the Tenant or
its employees or to any other person while such property is on the Premises and,
in particular, the Landlord shall not be liable for any damage to any such
property caused by steam, water, rain or snow which may leak into, issue or flow
from any part of the building or adjoining Premises or from the water, steam,
sprinkler or drainage pipes or plumbing works of the building or from any other
place or quarter or for any damage caused by or attributable to the condition or
arrangement or any electrical or other wiring.
<PAGE>
-17-
7.00 - DEFAULT
- --------------
.1 Right to Re-Enter
-----------------
If and whenever:
(a) the Tenant fails to pay any Base Rent or
Additional Rent or other sums due hereunder on the
day or dates appointed for the payment thereof
(provided the Landlord first gives five (5) days'
written notice to the Tenant of any such failure); or
(b) the Tenant fails to observe or perform any
other of the terms, covenants or conditions of this
Lease to be observed or performed by the Tenant
(other than the terms, covenants or conditions set
out in Sections 7.1(c) to (l), inclusive, for which
no notice shall be required), provided the Landlord
first gives the Tenant 15 days' (or such shorter
period of time as is otherwise provided herein)
written notice of any such failure to perform and the
Tenant within such period of 15 days fails to
commence diligently and, thereafter, to proceed
diligently to cure any such failure to perform; or
(c) the Tenant or any agent of the Tenant
falsifies any report or statement required to be
furnished to the Landlord pursuant to this Lease; or
(d) the Tenant or any guarantor of this Lease or
any person occupying the Premises or any part thereof
or any licensee, concessionaire or franchisee
operating business in the Premises becomes bankrupt
or insolvent or takes the benefit of any act now or
hereafter in force for bankrupt or insolvent debtors
or files any proposal or makes any assignment for the
benefit of creditors or any arrangement or
compromise; or
(e) a receiver or a receiver and manager is
appointed for all or a portion of the Tenant's
property or any such guarantor's, occupant's,
licensee's, concessionaire's or franchisee's
property; or
(f) any steps are taken or any action or
proceedings are instituted by the Tenant or by any
other party, including, without limitation, any court
or governmental body of competent jurisdiction for
the dissolution, winding-up or liquidation of the
Tenant or its assets; or
<PAGE>
-18-
(g) the Tenant makes a sale in bulk of any of
its assets wherever situate (other than a bulk sale
made to an assignee or sublessee pursuant to a
permitted assignment or subletting hereunder and
pursuant to the Bulk Sales Act (Ontario)); or
(h) the Tenant abandons or attempts to abandon
the Premises or, other than in the ordinary course of
business, sells or disposes of the trade fixtures,
goods or chattels of the Tenant or remove them from
the Premises so that there would not, in the event of
such sale or disposal, be sufficient trade fixtures,
goods or chattels of the Tenant on the Premises
subject to distress to satisfy all rent due or
accruing hereunder for a period of at least 6 months;
or
(i) the Premises become and remain vacant for a
period of 7 consecutive days or are used by any
persons other than such as are entitled to use them
hereunder; or
(j) the Tenant assigns, transfers, encumbers,
sublets or, save and except with respect to an
affiliate (as that term is defined in the OBCA) with
prior written notice to the Landlord, permits the
occupation or use or the parting with or sharing
possession of all or any part of the Premises by
anyone, except in a manner permitted by this Lease;
or
(k) this Lease or any of the Tenant's assets are
taken under any writ of execution; or
(l) re-entry is permitted under any other terms
of this Lease,
then and in every such case the Landlord, in addition
to any other rights or remedies it has pursuant to this Lease or by law, has the
immediate right of re-entry upon the Premises and it may repossess the Premises
and enjoy them as of its former estate and may expel all persons and remove all
property from the Premises and such property may be removed and sold or disposed
of by the Landlord as it deems advisable or may be stored in a public warehouse
or elsewhere at the cost and for the account of the Tenant, all without service
of notice or resort to legal process and without the Landlord being considered
guilty of trespass or becoming liable for any loss or damage which may be
occasioned thereby.
.2 Right to Relet
--------------
(a) If the Landlord elects to re-enter the
Premises as herein provided or if it takes possession
pursuant to legal proceedings
<PAGE>
-19-
or pursuant to any notice provided by law, it may
either terminate this Lease or it may from time to
time without terminating this Lease, make such
alterations and repairs as are necessary in order to
relet the Premises or any part thereof for such term
or terms (which may be for a term extending beyond
the Term) and at such rent and upon such other terms,
covenants and conditions as the Landlord, in its sole
discretion, considers advisable. Upon each such
reletting, all rent received by the Landlord from
such reletting shall be applied, first, to the
payment of any indebtedness other than rent or
Additional Rent due hereunder from the Tenant to the
Landlord; second, to the payment of any costs and
expenses of such reletting, including brokerage fees
and solicitor's fees and of costs of such alterations
and repairs; third, to the payment of rent and
Additional Rent due and unpaid hereunder; and the
residue, if any, shall be held by the Landlord and
applied in payment of future rent as the same becomes
due and payable hereunder. If such rent received from
such reletting during any month is less than that to
be paid during that month by the Tenant hereunder,
the Tenant shall pay any such deficiency which shall
be calculated and paid monthly in advance on or
before the first day of each and every month. No such
re-entry or taking possession of the Premises by the
Landlord shall be construed as an election on its
part to terminate this Lease, unless a written notice
of such intention is given to the Tenant.
Notwithstanding any such reletting without
termination, the Landlord may at any time thereafter
elect to terminate this Lease for such previous
breach.
(b) If the Landlord at any time terminates this
Lease for any breach in addition to any other
remedies it may have, it may recover from the Tenant
all damages it incurs by reason of such breach,
including the cost of recovering the Premises,
solicitor's fees (on a solicitor and his client
basis) and including the worth at the time of such
termination of the excess, if any, of the amount of
rent, Additional Rent and charges equivalent to the
rent, Additional Rent and other charges required to
be paid pursuant to this Lease for the remainder of
the Term over the then reasonable rental value of the
Premises for the remainder of the Term, all of which
amounts shall be immediately due and payable by the
Tenant to the Landlord. In any of the events referred
to in Section 7.2, in addition to any and all other
rights, including the rights referred to in this
Article and in Section
<PAGE>
-20-
7.1, the full amount of the current month's
instalment of rent and of all Additional Rent
payments for the current month and any other payments
required to be made monthly hereunder, together with
the next three (3) months' instalments of Base Rent
and of all Additional Rent and such other payments
for the next 3 months, all of which shall be deemed
to be accruing due on a day-to-day basis, shall
immediately become due and payable as accelerated
rent, and the Landlord may immediately distrain for
the same, together with any arrears then unpaid.
.3 Expenses
--------
If legal action is brought for recovery of possession
of the Premises, for the recovery of Base Rent and Additional Rent or any other
amount due under this Lease, or because of the breach of any other terms,
covenants or conditions herein contained on the part of the Tenant to be kept or
performed, and a breach is established, the Tenant shall pay to the Landlord all
expenses incurred therefor, including a solicitor's fee (on a solicitor and his
client basis) unless a court shall otherwise award.
.4 Waiver of Exemption from Distress
---------------------------------
The Tenant hereby agrees with the Landlord that,
notwithstanding anything contained in section 30 of the Landlord and Tenant Act
(Ontario) (the "Act")or any Statute subsequently passed to take the place of or
amend the Act, none of the goods and chattels of the Tenant at any time during
the continuance of the Term on the Premises shall be exempt from levy by
distress for rent or Additional Rent in arrears by the Tenant as provided for by
any Sections of the Act or any amendments thereto, and that if any claim is made
for such exemption by the Tenant or if a distress is made by the Landlord, this
covenant and agreement may be pleaded as an estoppel against the Tenant in any
action brought to test the right to the levying upon any such goods as are named
as exempted in any sections of the Act or amendments thereto; the Tenant
waiving, as it hereby does, all and every benefit that could or might have
accrued to the Tenant under and by virtue of any sections of the Act or any
amendments thereto but for this covenant.
.5 Landlord May Cure Tenant's Default or Perform
-----------------------------------------------------
Tenant's Covenants
------------------
If the Tenant fails to pay when due any amounts or
charges required to be paid pursuant to this Lease, the Landlord after giving 5
days' notice in writing to the Tenant may, but shall not be obligated to, pay
all or any part of the same. If the Tenant is in default in the performance of
any of its covenants or obligations hereunder
<PAGE>
-21-
(other than the payment of rent, Additional Rent or other sums required to be
paid pursuant to this Lease), the Landlord may, but shall not be obligated to,
from time to time after giving such notice as it considers sufficient (or
without notice in the case of an emergency) having regard to the circumstances
applicable, perform or cause to be performed any of such covenants or
obligations, or any part thereof, and for such purpose may do such things as may
be required, including, without limitation, entering upon the Premises and doing
such things upon or in respect of the Premises or any part thereof as the
Landlord reasonably considers requisite or necessary. All expenses incurred and
expenditures made pursuant to this Section 7.5, plus a sum equal to 10% thereof
representing the Landlord's overhead, shall be paid by the Tenant as Additional
Rent forthwith upon demand. Except for Landlord's gross negligence or wilful
conduct, the Landlord shall have no liability to the Tenant for any loss or
damages resulting from any such action or entry by the Landlord upon the
Premises under Articles 7.00 and 8.00 and same is not a re-entry or breach of
any covenant for quiet enjoyment contained in this Lease or implied by law.
.6 [Intentionally Deleted]
-----------------------
<PAGE>
-22-
.7 Additional Rent
---------------
If the Tenant is in default in the payment of any
amounts or charges required to be paid pursuant to this Lease, they shall, if
not paid when due, be collectible as Additional Rent forthwith on demand, but
nothing herein contained is deemed to suspend or delay the payment of any amount
of money at the time it becomes due and payable hereunder, or limit any other
remedy of the Landlord. The Tenant agrees that the Landlord may, at its option,
apply or allocate any sums received from or due to the Tenant against any
amounts due and payable hereunder in such manner as the Landlord sees fit. All
such moneys payable to the Landlord hereunder shall bear interest at the Prime
Rate per annum from the time such sums become due until paid to the Landlord.
.8 Remedies Generally
------------------
Mention in this Lease of any particular remedy of the
Landlord in respect of the default by the Tenant does not preclude the Landlord
from any other remedy in respect thereof, whether available at law or in equity
or by statute or expressly provided for in this Lease. No remedy shall be
exclusive or dependent upon any other remedy, but the Landlord may from time to
time exercise any one or more of such remedies generally or in combination, such
remedies being cumulative and not alternative. In the event of a breach or
threatened breach by the Tenant of any of the covenants, provisions or terms
hereof, the Landlord shall have the right to invoke any remedy allowed at law or
in equity (including injunction) as if re-entry and other remedies were not
provided for herein.
.9 Holding Over
------------
If the Tenant shall hold over after the original Term
or any extended term hereof, such holding over shall be construed to be a
tenancy from month to month only and shall have no greater effect, any custom,
statute, law or ordinance to the contrary notwithstanding. Such month-to-month
tenancy shall be governed by the terms and conditions hereof, notwithstanding
any statutory provision or rule of law to the contrary; provided, however, that
during any such period of holding over, the Tenant shall be required to pay the
monthly Base Rent payable during the month immediately preceding the expiration
or termination of this Lease plus all Additional Rent payable hereunder.
.10 No Waiver
---------
The failure of the Landlord to insist upon a strict
performance of any of the covenants and provisions herein contained shall not be
deemed a waiver of any
<PAGE>
-23-
rights or remedies that the Landlord may have and shall not be deemed a waiver
of any subsequent breach or default in the covenants and provisions herein
contained, and it is expressly agreed that the rights and remedies of the
Landlord hereunder or otherwise available to it at law may be exercised and
enforced either concurrently or successively.
8.00 - DAMAGE AND DESTRUCTION
- -----------------------------
.1 Destruction
-----------
Provided, and it is hereby expressly agreed, that if
and whenever during the Term the Premises shall be destroyed or damaged by fire,
lightning, tempest or by any of the perils insured against, then and in every
such event:
(a) if the damage or destruction is such that
the Premises are rendered wholly unfit for occupancy
or it is impossible or unsafe to use and occupy them
and if in either event the damage, in the reasonable
opinion of the architect/engineer of the Landlord,
acting independently, to be given to the Tenant
within 30 days of the happening of such damage or
destruction, cannot be repaired with reasonable
diligence within 180 days from the date such
architect/engineer has given its opinion, then the
Landlord or the Tenant may within 5 days next
succeeding the giving of the opinion as aforesaid
terminate this Lease by giving to the other notice in
writing of such termination, in which event this
Lease and the Term shall cease and be at an end as of
the date of such destruction or damage and the rent
and all other payments for which the Tenant is liable
under the terms of this Lease shall be apportioned
and paid in full to the date of such destruction or
damage; in the event that either the Landlord or the
Tenant does not so terminate this Lease, then, to the
extent that insurance proceeds are available, the
Landlord shall repair the Premises with all
reasonable speed and the Base Rent hereby reserved
shall abate from the date of the happening of the
damage until the damage shall be made good to the
extent of enabling the Tenant to use and occupy the
Premises;
(b) if the damage be such that the Premises are
wholly unfit for occupancy or if it is impossible or
unsafe to use or occupy them, but if in either event
the damage, in the reasonable opinion of the
architect/engineer of the Landlord, acting
<PAGE>
-24-
independently, to be given to the Tenant within 30
days from the happening of such damage, can be
repaired with reasonable diligence within 180 days
from the date such architect/engineer has given its
opinion, then the Base Rent hereby reserved shall
abate from the date of the happening of such damage
until the damage shall be made good to the extent of
enabling the Tenant to use and occupy the Premises
and the Landlord shall repair the damage with all
reasonable speed, to the extent that insurance
proceeds are available; if in the reasonable opinion
of the Landlord the damage can be made good as
aforesaid within 180 days from the date the
architect/engineer of the Landlord, acting
independently, has given its opinion and the damage
is such that the Premises are capable of being
partially used for the purposes for which they are
hereby demised, then until such damage has been
repaired the Base Rent shall abate in the proportion
that the part of the Premises which is rendered unfit
for occupancy bears to the whole of the Premises, and
the Landlord shall repair the damage with all
reasonable speed, to the extent that insurance
proceeds are available.
9.00 - RIGHT OF RENEWAL
- -----------------------
.1 Provided that the Tenant shall have given to the Landlord 6 months'
notice in writing before the expiration of the Term of its desire to renew,
subject to what is set out herein, it is mutually agreed and understood that if
the Tenant duly and regularly pays the Base Rent and Additional Rent and
performs all of the provisions and agreements contained herein on the part of
the Tenant to be performed, and provided further that the Tenant is not
habitually (which means, for purposes of Sections 9.1 and 9.2 hereof, on more
than two (2) occasions in any consecutive twelve (12) month period) in default
under the terms of this Lease and is not in default at the time of the exercise
of the option herein, then the Landlord shall at the expiration of the Term,
upon written request of the Tenant, grant to the Tenant a renewal of this Lease
for a further five (5) year term (the "First Renewal Term") upon the same terms
and conditions as contained herein, save as to the rental rate. The Base Rent
for the First Renewal Term shall be at the then current market rate at the
expiration of the Term and as mutually agreed between the Landlord and the
Tenant. In the event that the Landlord and the Tenant are unable to agree upon
the Base Rent for the First Renewal Term, the matter shall be submitted to
arbitration, pursuant to the Arbitrations Act (Ontario).
If the award of the arbitrators is not given before
the commencement date of the First Renewal Term, then the Tenant shall commence
paying Base Rent at
<PAGE>
-25-
the same rate paid during the Term, which shall be adjusted forthwith after the
award of the arbitrators has become final and binding, to be calculated from the
commencement date of the First Renewal Term.
.2 Provided that the Tenant shall have given to the Landlord 6 months'
notice in writing before the expiration of the First Renewal Term of its desire
to renew, subject to what is set out herein, it is mutually agreed and
understood that if the Tenant duly and regularly pays the Base Rent and
Additional Rent and performs all of the provisions and agreements contained
herein on the part of the Tenant to be performed, and provided further that the
Tenant is not habitually in default under the terms of this Lease and is not in
default at the time of the exercise of the option herein, then the Landlord
shall at the expiration of the First Renewal Term, upon written request of the
Tenant, grant to the Tenant a renewal of this Lease for a further five (5) year
term (the "Second Renewal Term") upon the same terms and conditions as contained
herein, save as to the rental rate and save as to any further right of renewal.
The Base Rent for the Second Renewal Term shall be at the then current market
rate at the expiration of the First Renewal Term and as mutually agreed between
the Landlord and the Tenant. In the event that the Landlord and the Tenant are
unable to agree upon the Base Rent for the Second Renewal Term, the matter shall
be submitted to arbitration, pursuant to the Arbitrations Act (Ontario).
If the award of the arbitrators is not given before
the commencement date of the Second Renewal Term, then the Tenant shall commence
paying Base Rent at the same rate paid during the First Renewal Term, which
shall be adjusted forthwith after the award of the arbitrators has become final
and binding, to be calculated from the commencement date of the Second Renewal
Term.
10.00 - GENERAL
- ---------------
.1 Acknowledgement by Tenant
-------------------------
The Tenant further acknowledges that its interest
under this Lease is subject to:
(a) covenants, restrictions, easements,
agreements and reservations of record, provided same
does not interfere with the Tenant's intended use of
the Premises as described in Section 3.12;
(b) all laws, by-laws, ordinances, regulations
and orders of the Town of Pickering, the Regional
Municipality of Durham, the Province of Ontario, the
Government of Canada and of all
<PAGE>
-25-
statutory commissions, boards and bodies having
jurisdiction over the Premises;
(c) the condition of the Landlord's title
existing at the date hereof; and
(d) municipal realty taxes, local improvement
rates, duties, assessments, water and sewer rates and
other impositions accrued or unaccrued.
.2 Registration
------------
(a) Neither the Tenant nor anyone on the
Tenant's behalf or claiming under the Tenant shall
register this Lease or any assignment or sublease of
this Lease or any document evidencing any interest of
the Tenant in this Lease or the Premises. If either
party intends to register a document for the purpose
only of giving notice of this Lease or of any
assignment or sublease of this Lease, then upon
request of such party both parties shall join in the
execution of a short form or notice of this Lease
(the "Short Form") solely for the purpose of
supporting an application for registration of notice
of this Lease or of any assignment or sublease
against the interests of the Landlord or any part
thereof in the Premises. The form of the Short Form
and of the application to register notice of this
Lease or of any assignment or sublease shall:
(i) be prepared by the Tenant or its
solicitors at the Tenant's expense;
(ii) include therein a provision for,
and require consent to, such registration by
or on behalf of the Landlord; and
(iii) only describe the parties, the
Premises and the Commencement Date and the
expiration date of the Term.
(b) The Short Form shall contain a provision
whereby the Tenant constitutes and appoints the
Landlord and its nominee as the agent and attorney of
the Tenant for the purpose of executing any
instruments in writing required from the Tenant to
give effect to the provisions of Section 10.4 of this
Lease,
<PAGE>
-27-
including the right to make application at any time
and from time to time to register postponements of
this Lease or the Short Form in favour of any
mortgage pursuant to Section 10.4. The Landlord
agrees not to register a subordination unless the
mortgagee or encumbrancer has provided the
non-disturbance agreement provided in Section 10.4.
All costs, expenses and taxes necessary to register
or file the application to register notice of this
Lease or of any assignment or sublease shall be the
sole responsibility of the Tenant and the Tenant will
complete any necessary affidavits required for
registration purposes, including affidavits necessary
to register the power of attorney contained in the
Short Form. As requested by the Landlord, the Tenant
shall execute promptly a power of attorney at any
time and from time to time as may be required to give
effect to this Section 10.2(b).
.3 Status Statement
----------------
Within 10 days after written request therefor by the
Landlord or if upon any sale, assignment, lease or mortgage of the Premises by
the Landlord a status statement is required from the Tenant, the Tenant shall
deliver in a form supplied by the Landlord a status statement or a certificate
to any proposed mortgagee or proposed purchaser or to the Landlord stating (if
such is the case):
(a) that this Lease is unmodified and in full
force and effect (or if there have been
modifications, that this Lease is in full force and
effect as modified and identifying the modification
agreements) or if this Lease is not in full force and
effect, the certificate shall so state;
(b) the Commencement Date;
(c) the date to which Base Rent and Additional
Rent have been paid under this Lease;
(d) whether or not there is any existing default
by the Tenant in the payment of any rent or other sum
of money under this Lease and whether or not there is
any other existing or alleged default by either party
under this Lease with respect to which a notice of
default has been served and if there is any such
default, specifying the nature and extent thereof;
and
<PAGE>
-28-
(e) whether there are any defences or
counterclaims against enforcement of the obligations
to be performed by the Tenant under this Lease.
.4 Subordination and Attornment
----------------------------
It is a condition of this Lease and the Tenant's
rights granted hereunder that this Lease and all of the rights of the Tenant
hereunder are and shall at all times be subject and subordinate to any and all
mortgages, trust deeds or the charge or lien resulting from, or any instruments
of, any financing, refinancing or collateral financing or any renewals or
extensions thereof from time to time in existence against the lands or the
Premises. Upon request and provided any mortgagee or encumbrancer agrees to
enter a non-disturbance agreement in a form acceptable to the Tenant, acting
reasonably, the Tenant shall subordinate this Lease and all of its rights
hereunder in such form as the Landlord requires to any and all mortgages, trust
deeds or the charge or lien resulting from or any instruments of any financing,
refinancing or collateral financing and to all advances made or hereafter to be
made upon the security thereof and, if requested, the Tenant shall attorn to the
holder thereof.
.5 Attorney
--------
The Tenant shall upon request of the Landlord or the
mortgagee or any other person having an interest in the lands, execute and
deliver promptly such instruments and certificates to carry out the intent of
Sections 10.3 and 10.4 as are requested by the Landlord. If 10 days after the
date of a request by the Landlord to execute and deliver any such instruments
and certificates the Tenant has not executed and delivered the same, the Tenant
hereby irrevocably appoints the Landlord as the Tenant's attorney with full
power and authority to execute and deliver in the name of the Tenant any such
instruments or certificates or the Landlord may at its option terminate this
Lease without incurring any liability on account thereof and the Term is
expressly limited accordingly.
11.00 - ENVIRONMENTAL MATTERS
- -----------------------------
.1 The Tenant covenants with the Landlord that the Tenant will not bring
upon, permit or use any substance, defined or designated as a hazardous or toxic
waste, hazardous or toxic material, a hazardous, toxic or radioactive substance
or other similar term, by any applicable federal, provincial, municipal or local
statute, regulation, by-law or ordinance now or hereafter in effect (the
"Environmental Laws"), or any substance or material, the use or disposition of
which is regulated by any such Environmental Laws (hereinafter called "Hazardous
Substances") in, on or under the Premises except for de minimis amounts used in
the ordinary course of the Tenant's business (as contemplated in Section 3.12)
and, in any event, in compliance with Environmental Laws, and the Tenant will
promptly comply with all statutes, regulations, by-laws and ordinances and with
all orders, decrees or judgements of
<PAGE>
-29-
governmental authorities or courts having jurisdiction, relating to the use,
collection, storage, treatment, control, removal or cleanup of Hazardous
Substances in, on, or under the Premises if the Premises become contaminated
with Hazardous Substances as a result of operations or activities of the Tenant
or any of its agents, contractors or employees or those for whom it is at law
responsible on the Premises, or incorporated in any Tenant's improvements
thereon during the Term or any renewal. The Tenant covenants and agrees to
indemnify and hold the Landlord harmless against any and all losses, damages,
costs, expenses and liabilities suffered or incurred by the Landlord:
(i) by reason of a breach of any of the
covenants aforesaid; or
(ii) arising out of the actual, alleged or
threatened discharge, disbursal, release or escape of
Hazardous Substances at or from the Premises by of
the Tenant, or any of its agents, contractors or
employees, or those for whom it is in law
responsible; or
(iii) the removal from the Premises at the
expiration of the Term of this Lease of all Hazardous
Substances brought onto the Premises by the Tenant or
any of its agents, contractors or employees or those
for whom it is in law responsible,
which indemnity shall survive the expiration or any
surrender or termination of this Lease.
12.00 - GENERAL
- ---------------
.1 Amendments
----------
This Lease shall not be modified or amended except by
an instrument in writing of equal formality herewith and signed by the parties
hereto or by their successors or assigns.
.2 Notice
------
Any demand notice or other communication (the
"Communication") to be given in connection with this Lease shall be given in
writing and shall be given by personal delivery, telecopier transmission or by
mailing by registered mail with postage thereon, fully prepaid in a sealed
envelope addressed to the intended recipient as follows:
<PAGE>
-30-
(a) to the Landlord, at:
Toronto Medical Corp.
1370 Don Mills Road
Suite 200
Don Mills, ON
M3B 3N7
Attention: J.P. Scheidegger
Facsimile: (416) 441-2503
with a copy to:
Koskie, Minsky
Barristers and Solicitors
Suite 900, Box 52
20 Queen Street West
Toronto, ON
M5H 3R3
Attention: George Dzuro
-----------------------
Facsimile No: (416) 977-3316
(b) to the Tenant, at the Premises
Attention: President
---------------------
with a copy to:
Stikeman, Elliott
Barristers & Solicitors
Suite 5300
Commerce Court West
Toronto, ON
M5L 1B9
Attention: David McCarthy
--------------------------
Facsimile No: (416) 947-0866
or to such other addresses, telecopier number or
individual as may be designated by a Communication given by a party to the other
parties as aforesaid. Any Communication given by personal delivery shall be
conclusively deemed to have been given on the day of actual delivery thereof, if
given by registered mail on the 3rd business day following the deposit thereof
in the mail and if given
<PAGE>
-31-
by telecopier transmission, on the business day following the day on which it
was transmitted. If the party giving any Communication knows or reasonably knows
of any difficulties with the postal system which might effect the delivery of
mail, any such Communication shall not be mailed but shall be given by personal
delivery or by telecopier transmission.
For the purposes of this Lease, a "business day"
shall mean any day other than a Saturday, Sunday or statutory holiday in the
Province of Ontario.
.3 Time
----
Time shall in all respects be of the essence of this
Lease.
.4 Prime Rate
----------
For the purpose of this Lease "Prime Rate" shall mean
the prime commercial lending rate charged by the Canadian Imperial Bank of
Commerce from time to time on demand in Canadian funds (any change in such rate
of interest to be effective from the day that a change in such prime commercial
lending rate becomes effective) at its head office in Toronto, Ontario to its
largest and most credit-worthy commercial borrowers and excludes the rate of
interest charged for small business loans referred to as "Prime Small Business
Loan Interest Rate".
.5 Successors
----------
All rights and liabilities herein granted to or
imposed upon the respective parties hereto extend to and bind the successors and
assigns of the Landlord and the heirs, executors, administrators and permitted
successors and assigns of the Tenant, as the case may be. No rights, however,
shall endure to the benefit of any assignee of the Tenant unless the assignment
to such assignee has been approved by the Landlord in writing in accordance with
Article 4.00 hereof. If there is more than one Tenant, they are all bound
jointly and severally by the terms, covenants and conditions herein.
.6 Governing Law
-------------
This Lease shall be construed and governed by the
Laws of the Province of Ontario.
.7 Headings
--------
The Section and Article numbers and headings
appearing in this Lease are inserted only as a matter of convenience and in no
way define, limit, construe or describe the scope or intent of such Sections or
Articles of this Lease nor in any way affect this Lease.
<PAGE>
-32-
.8 Entire Agreement
----------------
This Lease and the schedules attached hereto and
forming a part hereof set forth all the covenants, promises, agreements,
conditions and understandings between the Landlord and Tenant concerning the
Premises and there are no covenants, promises, agreements, conditions or
understandings, either oral or written, between them, other than as are herein
set forth. All agreements and promises contained herein on behalf of the Tenant
shall be construed as covenants. Except as herein otherwise provided, no
subsequent alteration, amendment, change or addition to this Lease shall be
binding upon the Landlord or Tenant unless reduced to writing and signed by
them.
.9 Severability
------------
If any term, covenant or condition of this Lease or
the application thereof to any person or circumstance shall to any extent be
invalid or unenforceable, the remainder of this Lease or the application of such
term, covenant or condition to persons or circumstances other than those as to
which it is held invalid or unenforceable shall not be affected thereby and each
term, covenant or condition of this Lease shall be valid and enforced to the
fullest extent permitted by law.
.10 No Option
---------
The submission of this Lease for examination does not
constitute a reservation of or option for the Premises and this Lease becomes
effective as a lease only upon execution and delivery thereof by Landlord and
Tenant.
.11 Premises
--------
Each obligation or agreement of the Landlord or
Tenant expressed in this Lease, even though not expressed as a covenant, is to
be considered to be a covenant for all purposes.
.12 [Intentionally Deleted]
-----------------------
.13 Place for Payments
------------------
All payments required to be made by the Tenant herein
shall be made to the Landlord at the Landlord's office in Toronto or to such
agent or agents of the Landlord or at such other place as the Landlord shall
hereafter from time to time direct in writing.
<PAGE>
-33-
.14 Extended Meanings
-----------------
The words "hereof", "herein", "hereunder" and similar
expressions used in any section or subsection of this Lease relate to the whole
of this Lease and not to that section or subsection only, unless otherwise
expressly provided. The use of the neuter singular pronoun to refer to the
Landlord or the Tenant is deemed a proper reference, even though the Landlord or
the Tenant is an individual, a partnership, a corporation or a group of two or
more individuals, partnerships or corporations. The necessary grammatical
changes required to make the provisions of this Lease apply in the plural sense
where there is more than one Landlord or Tenant and to either corporations,
associations, partnerships or individuals, males or females, shall in all
instances be assumed as though in each case fully expressed.
.15 No Partnership or Agency
------------------------
The Landlord does not in any way or for any purpose
become a partner of the Tenant in the conduct of its business or otherwise or a
joint venturer or a member of a joint enterprise with the Tenant, nor is the
relationship of principal and agent created.
.16 Force Majeure
-------------
Notwithstanding anything to the contrary contained in
this Lease, if either party hereto is bona fide delayed or hindered in or
prevented from the performance of any term, covenant or act required hereunder
by reason of strikes, labour troubles; inability to procure materials or
services; power failure; restrictive governmental laws or regulations; riots;
insurrection; sabotage; rebellion; war; act of God; or other reason whether of a
like nature or not which is not the fault of the party delayed in performing
work or doing acts required under the terms of this Lease, then performance of
such term, covenant or act is excused for the period of the delay and the party
so delayed shall be entitled to perform such term, covenant or act within the
appropriate time period after the expiration of the period of such delay.
However, the provisions of this Section do not operate to excuse the Tenant from
the prompt payment of rent, Additional Rent or any other payments required by
this Lease.
.17 Accrual of Rent and Additional Rent
-----------------------------------
Rent and Additional Rent shall be considered as
annual and accruing from day to day and when it becomes necessary for any reason
to calculate such rent for an irregular period of less than one year, an
appropriate apportionment and adjustment shall be made. Whenever the calculation
of any Additional Rent is not made until after the termination of this Lease,
the obligation of the Tenant to pay such
<PAGE>
-34-
Additional Rent shall survive the termination of this Lease and such amounts
shall be payable by the Tenant to the Landlord within five (5) days after
demand.
.18 Accord and Satisfaction
-----------------------
No payment by the Tenant or receipt by the Landlord
of a lesser amount than the monthly payment of rent herein stipulated is deemed
to be other than on account of the earliest stipulated rent, nor is any
endorsement or statement on any cheque or any letter accompanying any cheque or
payment as rent deemed an acknowledgement of full payment or an accord and
satisfaction, and the Landlord may accept and cash such cheque or payment
without prejudice to the Landlord's right to recover the balance of such rent or
pursue any other remedy provided in this Lease.
IN WITNESS WHEREOF the parties hereto have hereunto
caused these presents to be executed the day, month and year first above
written.
TORONTO MEDICAL CORP.
Per:
--------------------------------------
(Authorized Signing Officer)
Per:
--------------------------------------
(Authorized Signing Officer)
TORONTO MEDICAL ORTHOPAEDICS LTD.
Per:
--------------------------------------
(Authorized Signing Officer)
Per:
--------------------------------------
(Authorized Signing Officer)
<PAGE>
-35-
SCHEDULE "A"
------------
STANDARD OFFICE LEASE--NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Lease Provisions ("Basic Lease Provisions")
1.1 Parties: This Lease, dated, for reference purposes only. September
4 1991 is made by and between Greystone Realty Corporation (herein called
"Lessor") and Sutter Corporation, a California Corporation doing business under
the name of Sutter Corporation (herein called "Lessee").
1.2 Premises: Suite Number(s) 9465-A 1 floors, consisting of
approximately 18,766 square feet, more or less, as defined in paragraph 2 and as
shown on Exhibit "A" hereto (the "Premises").
1.3 Building: Commonly described as being located at 9465 Farnham
Street in the City of San Diego County of San Diego State of California as more
particularly described in Exhibit A hereto, and as defined in paragraph 2.
1.4 Use: Production of medical products, research and development,
and/or other uses permitted under zoning regulations subject to paragraph 6.
1.5 Term: Eighty-One (81) Months commencing December 1, 1991
(Commencement Date"), and ending August 31, 1998 as defined in paragraph 3.
1.6 Base Rent: See Addendum per month, payable on the 1st day of each
month per paragraph 4.1.
1.8 Rent Paid Upon Execution: Seven Thousand Seven Hundred and No/100
Dollars ($7,700.00) for base rent for month one (1) of this lease .
1.9 Security Deposit: -0- .
1.9 Lessee's Share of Operating Expenses: 36.5% as defined in paragraph
4.2.
2. Premises, Parking and Common Areas.
2.1 Premises. The Premises are a portion of an office building project
herein sometimes referred to as the "Building" identified in paragraph 1.3 of
the Basic Lease Provisions. "Building" shall include adjacent parking structures
used in connection therewith. The Premises, the Building, the Common Areas, the
land upon which the same are located, along with all other buildings and
improvements thereon or thereunder, are herein collectively referred to as the
"Office Building Project." Lessor hereby leases to Lessee and Lessor leases from
Lessor for the term, at the rental, and upon all of the conditions set forth
herein, the real property referred to in the Basic Lease Provisions, paragraph
1.2, as the "Premises," including rights to the Common Areas as hereinafter
specified.
2.2 Vehicle Parking. So long as Lessee is not in default, and subject
to the rules and regulations attached hereto, and as established by Lessor from
time to time, Lessee shall be entitled to use 66 parking spaces in the Office
Building Project. (See Addendum for Reserved Parking)
2.2.1 If Lessee commits, permits or allows any of the
prohibited activities described in the Lease or the rules then in effect, then
Lessor shall have the right, without notice, in addition to such other rights
and remedies that it may have, to remove or tow away the vehicle involved and
charge the cost to Lessee, which cost shall be immediately payable upon demand
by Lessor.
2.2.2 The monthly parking rate per parking space will be $ -0-
per month at the commencement of the term of this Lease, and is subject to
change upon five (5) days prior written notice to Lessee. Monthly parking fees
shall be payable one month in advance prior to the first day of each calendar
month.
2.3 Common Areas--Definition. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Office Building Project that are provided and designated by the Lessor
from time to time for the general non-exclusive use of Lessor, Lessee and other
lessees of the Office Building Project and their respective employees,
suppliers, shippers, customers and invitees, including but not limited to common
entrances, lobbies, corridors, stairways and stairwells, public restrooms,
elevators, escalators, parking areas to the extent not otherwise prohibited by
this Lease, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, ramps, driveways, landscaped areas and decorative walls.
2.4 Common Areas--Rules and Regulations. Lessee agrees to abide by and
conform to the rules and regulations attached hereto as Exhibit B with respect
to the Office Building Project and Common Areas, and to cause its employees,
suppliers, shippers, customers, and invitees to so abide and conform. Lessor or
such other person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time, to
modify, amend and enforce said rules and regulations. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees, their agents, employees and invitees of the Office Building
Project.
2.5 Common Areas--Changes. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Building interior and exterior and
Common Areas, including, without limitation, changes in the location, size,
shape, number, and appearance thereof, including but not limited to the lobbies,
windows, stairways, air shafts, elevators, escalators, restrooms, driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, decorative walls, landscaped areas and walkways;
provided, however, Lessor shall at all times provide the parking facilities
required by applicable law;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
available;
(c) To designate other land and improvements outside the
boundaries of the Office Building Project to be a part of the Common Areas,
provided that such other land and improvements have a reasonable and functional
relationship to the Office Building Project;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Office Building Project, or any
portion thereof;
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Office Building Project
as Lessor may, in the exercise of sound business judgment deem to be
appropriate.
3. Term.
3.1 Term. The term and Commencement Date of this Lease shall be as
specified in paragraph 1.5 of the Basic Lease Provisions.
3.2 Delay in Possession. Notwithstanding said Commencement Date, if for
any reason Lessor cannot deliver possession of the Premises to Lessee on said
date and subject to paragraph 3.2.2, 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 be obligated to pay rent or perform any other obligation of
Lessee under the terms of this Lease, except as may be otherwise provided in
this Lease, until possession of the Premises is tendered to Lessee, as
hereinafter defined, provided, however, that if Lessor shall not have delivered
possession of the Premises within sixty (60) days following said Commencement
Date, as the same may be extended under the terms of a Work Letter executed by
Lessor and Lessee. Lessee may, at Lessee's 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 as to Lessee's obligations, Lessee first reimburses Lessor for all costs
incurred for Non-Standard Improvements and, as to Lessor's obligations, Lessor
shall return any money previously deposited by Lessee (less any offsets due
Lessor for Non-Standard Improvement, and provided further, 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 hereunder shall terminate and
be of no further force or effect.
3.2.1 Possession Tendered--Defined. Possession of the Premises
shall be deemed tendered to Lessee ("Tender of Possession") when (1) the
improvements to be provided by Lessor under this Lease are substantially
completed, (2) the Building utilities are ready for use in the Premises, (3)
Lessee has reasonable access to the Premises, and (4) ten (10) days shall have
expired following advance written notice to Lessee of the occurrence of the
matters described in (1), (2), and (3), above of this paragraph 3.2.1.
3.2.2 Delays Caused by Lessee. There shall be no abatement of
rent, and the sixty (60) day period following the Commencement Date before which
Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed
extended to the extent of any delays caused by acts or omissions of Lessee, its
agents, employees and contractors.
3.3 Early Possession. If Lessee occupies the Premises prior to said
Commencement Date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not change the termination date, and Lessee shall
pay rent for such occupancy.
3.4 Uncertain Commencement. In the event commencement of the Lease term
is defined as the completion of the improvements, Lessee and Lessor shall
execute an amendment to this Lease establishing the date of Tender of Possession
(as defined in paragraph 3.2.1) or the actual taking of possession by Lessee,
whichever first occurs, as the Commencement Date.
4. Rent.
4.1 Base Rent. Subject to adjustment as hereinafter provided in
paragraph 4.3, and except as may be otherwise expressly provided in this Lease,
Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph
1.5 of the Basic Lease Provisions, without offset or deduction. Lessee shall pay
Lessor upon execution hereof the advance Base Rent described in paragraph 1.7 of
the Basic Lease Provisions. Rent for any period during the term hereof which is
for less than one month shall be prorated based upon the actual number of days
of the calendar month involved. Rent shall be payable in lawful money of the
United States to Lessor at the address stated herein or to such other persons or
at such other places as Lessor may designate in writing.
4.2 Operating Expenses. See Paragraph 50. Lessee shall pay to Lessor
during the term hereof, in addition to the Base Rent, Lessee's Share, as
hereinafter defined, of all Operating Expenses, as hereinafter defined, during
each calendar year of the term of this Lease, in accordance with the following
provisions:
(a) "Lessee's Share" is defined, for purposes of this Lease,
as the percentage set forth in paragraph 1.9 of the Basic Lease Provisions,
which percentage has been determined by dividing the approximate square footage
of the Premises by the total approximate square footage of the rentable space
contained in the Office Building Project. It is understood and agreed that the
square footage figures set forth in the Basic Lease Provisions are
approximations which Lessor and Lessee agree are reasonable and shall not be
subject to revision except in connection with an actual change in the size of
the Premises or a change in the space available for lease in the Office Building
Project.
(b) "Operating Expenses" is defined, for purposes of this
Lease, to include all costs, if any, incurred by Lessor in the exercise of its
reasonable discretion for:
(i) The operation, repair, maintenance, and
replacement, in neat, clean, safe, good order and condition, of the Office
Building Project, including but not limited to, the following:
(aa) The Common Areas, including their
surfaces, coverings decorative items, carpets, drapes and window coverings, and
including parking areas, loading and unloading areas, trash areas, roadways,
sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping,
bumpers, irrigation systems, Common Area lighting facilities, building exteriors
and roofs, fences and gates;
(bb) All heating, air conditioning, plumbing,
electrical systems, life safety equipment, telecommunication and other equipment
used in common by, or for the benefit of, lessees or occupants of the Office
Building Project, including elevators and escalators, tenant directories, fire
detection systems including sprinkler system maintenance and repair.
(ii) Trash disposal, janitorial and security
services;
(iii) Any other service to be provided by Lessor that
is elsewhere in this Lease stated to be an "Operating Expense";
(iv) The cost of the premiums for the liability and
property insurance policies to be maintained by Lessor under paragraph 7 hereof;
(v) The amount of the real property taxes to be paid
by Lessor under paragraph 9.1 hereof;
(vi) The cost of water, sewer, gas, electricity, and
other publicly mandated services to the Office Building Project;
(vii) Labor, salaries and applicable fringe benefits
and costs, materials, supplies and tools, used in maintaining and/or cleaning
the Office Building Project and accounting and a management fee attributable to
the operation of the Office Building Project;
(viii) Replacing and/or adding improvements mandated
by any governmental agency and any repairs or removals necessitated thereby
amortized over its useful life according to Federal income tax regulations or
guidelines for depreciation thereof (including interest on the unamortized
balance as is then reasonable in the judgment of Lessor's accountants);
(ix) Replacements of equipment or improvements that
have a useful life for depreciation purposes according to Federal income tax
guidelines of five (5) years or less, as amortized over such life.
(c) Operating Expenses shall not include the costs of
replacements of equipment or improvements that have a useful life for Federal
income tax purposes in excess of five (5) years unless it is of the type
described in paragraph 4.2(b)(viii), in which case their cost shall be included
as above provided.
(d) Operating Expenses shall not include any expenses paid by
lessee directly to third parties, or as to which Lessor is otherwise reimbursed
by any third party, other tenant, or by insurance proceeds.
(e) Lessee's Share of Operating Expenses shall be payable by
Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of annual
Operating Expenses and the same shall be payable monthly or quarterly, as Lessor
shall designate during each calendar year of the Lease term, on the same day as
the Base Rent is due hereunder in the event that Lessee pays Lessor's estimate
of Lessee's Share of Operating Expenses as aforesaid. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Operating
Expenses incurred during the preceding year. If Lessee's payments under this
paragraph 4.2(e) during said preceding calendar year exceed Lessee's Share as
indicated on said statement, Lessee shall be entitled to credit the amount of
such overpayment against Lessee's Share of Operating Expenses next falling due.
If Lessee's payments under this paragraph during said preceding calendar year
were less than Lessee's Share as indicated on said statement, Lessee shall pay
to Lessor the amount of the deficiency within ten (10) days after delivery by
Lessor Lessee of said statement.
6. Use.
6.1 Use. The Premises shall be used and occupied only for the purpose
set forth in paragraph 1.4 of the Basic Lease Provisions or any other use which
is reasonably comparable to that use and for no other purpose.
6.2 Compliance with Law.
(a) Lessor warrants to Lessee that the Premises, in the state
existing on the date that the Lease term commences, but without regard to
alterations or improvements made by Lessee or the use for which Lessee will
occupy the Premises, does not violate any covenants or restrictions of record,
or any applicable building code, regulation or ordinance in effect on such Lease
term Commencement Date. In the event it is determined that this warranty has
been violated, then it shall be the obligation of the Lessor, after written
notice from Lessee, to promptly, at Lessor's able cost and expense, rectify any
such violation.
(b) Except as provided in paragraph 6.2(a) Lessee shall, at
Lessee's expense, promptly comply with all applicable statutes, ordinances,
rules, regulations, orders, covenants and restrictions of record, and
requirements of any fire insurance underwriters or rating bureaus, now in effect
or which may hereafter come into effect, whether or not they reflect a change in
policy from that now existing during the term or any part of the term hereof,
relating in any manner to the Premises and the occupation and use by Lessee of
the Premises. Lessee shall conduct its business in a lawful manner and shall not
use or permit the use of the Premises or the Common Areas in any manner that
will tend to create waste or a nuisance or shall tend to disturb other occupants
of the Office Building Project.
6.3 Condition of Premises.
(a) Lessor shall deliver the Premises to Lessee in a clean
condition on the Lease Commencement Date (unless Lessee is already in
possession) and Lessor warrants to Lessee that the plumbing, lighting, air
conditioning, and heating system in the Premises shall be in good operating
condition. In the event that it is determined that this warranty has been
violated, then it shall be the obligation of Lessor, after receipt of written
notice from Lessee setting forth with specificity the nature of the violation,
to promptly, at Lessor's sole cost, rectify such violation.
(b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises and the Office Building Project in their condition existing
as of the Lease Commencement Date or the date that Lessee takes possession of
the Premises, whichever is earlier, subject to all applicable zoning, municipal,
county and state laws, ordinances and regulations governing and regulating the
use of the Premises, and any easements, covenants or restrictions of record, and
accepts this Lease subject thereto and to all matters disclosed thereby and by
any exhibits attached hereto. Lessee acknowledges that it has satisfied itself
by its own independent investigation that the Premises are suitable for its
intended use, and that neither Lessor nor Lessor's agent or agents has made any
representation or warranty as to the present or future suitability of the
Premises, Common Areas, or Office Building Project for the conduct of Lessee's
business.
7. Maintenance, Repairs, Alterations and Common Area Services.
7.1 Lessor's Obligations. Lessor shall keep the Office Building
Project, including the Premises, exterior walls, roof, and common areas, and the
equipment whether used exclusively for the Premises or in common with other
premises, in good condition and repair; provided, however, Lessor shall not be
obligated to paint, repair or replace wall coverings, or to repair or replace
any improvements that are not ordinarily a part of the Building or are above
then Building standards except as provided in paragraph 9.5 there shall be no
abatement of rent or liability of Lessee on account of any injury or
interference with Lessee's business with respect to any improvements,
alterations or repairs made by Lessor to the Office Building Project or any part
thereof. Lessee expressly waives the benefits of any statute now or hereafter in
effect which would otherwise afford Lessee the right to make repairs at Lessor's
expense or to terminate this Lease because of Lessor's failure to keep the
Premises in good order, condition and repair.
7.2 Lessee's Obligations.
(a) Notwithstanding Lessor's obligation to keep the Premises
in good condition and repair, Lessee shall be responsible for payment of the
cost thereof to Lessor as additional rent for this portion of the cost of any
maintenance and repair of the Premises, or any equipment (wherever located) that
serves only Lessee or the Premises, to the extent such cost is attributable to
causes beyond normal wear and tear. Lessee shall be responsible for the cost of
painting, repairing or replacing wall coverings and to repair or replace any
Premises improvements that are not ordinarily a part of the Building or that are
above then Building standards. Lessor may, at its option, upon reasonable
notice, elect to have Lessee perform any particular such maintenance or repairs
the cost of which is otherwise Lessee's responsibility hereunder.
(b) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as received, ordinary wear and tear excepted, clean and free of debris. Any
damage or deterioration of the Premises shall not be deemed ordinary wear and
tear if the same could have been prevented by good maintenance practices by
Lessee. Lessee shall repair any damage to the Premises occasioned by the
installation or removal of Lessee's trade fixtures, alterations, furnishings and
equipment. Except as otherwise stated in this Lease, Lessee shall leave the air
lines, power panels, electrical distribution systems, lighting fixtures, air
conditioning, window coverings, wall coverings, carpets, wall panelling,
ceilings and plumbing on the Premises and in good operating condition.
7.3 Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written consent,
make any alterations, improvements, additions, Utility Installations or repairs
in, on or about the Premises, or the Office Building Project. As used in this
paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and
wall coverings, power panels, electrical distribution systems, lighting
fixtures, air conditioning, plumbing and telephone and telecommunication wiring
and equipment. At the expiration of the term, Lessor may require the removal of
any or all of said alterations, improvements, additions or Utility
Installations, and the restoration of the Premises and the Office Building
Project to their prior condition, at Lessee's expense. Should Lessor permit
Lessee to make its own alterations, improvements, additions, or Utility
Installations, Lessee shall use only such contractor as has been expressly
approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's
sole cost and expense, a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such improvements, to insure Lessor against
any liability for mechanic's and materialmen's liens and to insure completion of
the work. Should Lessee make any alterations, improvements, additions or Utility
Installations without the prior approval of Lessor, or use a contractor not
expressly approved by Lessor, Lessor may, at any time during the term of this
Lease, require that Lessee remove any part or all of the same.
(b) Any alterations, improvements, additions or Utility
Installations in or about the Premises or the Office Building Project that
Lessee shall desire to make shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent to Lessee's making
such alteration, improvement, addition or Utility Installation, the consent
shall be deemed conditioned upon Lessee acquiring a permit to do so from the
applicable governmental agencies, furnishing a copy thereof to Lessor prior to
the commencement of the work and the compliance by Lessee with all conditions of
said permit in a prompt and expeditious manner.
(c) 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 in the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, the Building or the Office Building
Project, or any interest therein.
(d) Lessee shall give Lessor not less than ten (10) days'
notice prior to the commencement of any work in the Premises by Lessee, and
Lessor shall have the right to post notices of non-responsibility in or on the
Premises or the Building 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 itself and Lessor against the same and shall pay and satisfy
any such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor the Premises, the Building or the Office Building
Project, upon the condition that if Lessor shall require, Lessee shall furnish
to Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises, the Building and the Office Building Project free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessor's reasonable attorneys fees and costs in participating in such action
if Lessor shall decide it is to Lessor's best interest to do so.
(e) All alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which made be made to the Premises by Lessee, including but
not limited to, floor coverings, panelings, doors, drapes, built- ins, moldings,
sound attenuation, and lighting and telephone or communication systems, conduit,
wiring and outlets, shall be made and done in a good and workmanlike manner and
of good and sufficient quality and materials and shall be the property of Lessor
and remain upon and be surrendered with the Premises at the expiration of the
Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a).
Provided Lessee is not in default, notwithstanding the provisions of this
paragraph 7.3(e), Lessee's personal property and equipment, other than that
which is affixed to the Premises so that it cannot be removed without material
damage to the Premises of the Building, and other than Utility Installations
shall remain the property of Lessee and may be removed by Lessee subject to the
provisions of paragraph 7.2.
(f) Lessee shall provide Lessor with as-built plans and
specifications for any alterations, improvements, additions or Utility
Installations.
7.4 Utility Additions. Lessor reserves the right to install new or
additional utility facilities throughout the Office Building Project for the
benefit of Lessor or Lessee, or any other lessee of the Office Building Project,
including, but not by way of limitation, such utilities as plumbing, electrical
systems, security systems, communication systems, and fire protection and
detection systems, so long as such installations do not unreasonably interfere
with Lessee's use of the Premises.
8. Insurance; Indemnity.
8.1 Liability Insurance--Lessee. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease a policy of Comprehensive
General Liability insurance utilizing an Insurance Services Office standard form
with Broad Form General Liability Endorsement (GL0404), or equivalent, in an
amount of not less than $1,000,000.00 per occurrence of bodily injury and
property damage combined or in a greater amount as reasonably determined by
Lessor and shall insure Lessee with Lessor as an additional Insured against
liability arising out of the use, occupancy or maintenance of the Premises.
Compliance with the above requirement shall not, however, limit the liability of
Lessee hereunder.
8.2 Liability Insurance--Lessor. Lessor shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily Injury
and Broad Form Property Damage Insurance, plus coverage against such other risks
Lessor deems advisable from time to time, insuring Lessor, but not Lessee,
against liability arising out of the ownership, use, occupancy or maintenance of
the Office Building Project in an amount not less than $5,000,000.00 per
occurrence.
8.3 Property Insurance--Lessee. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease for the benefit of
Lessee, replacement cost fire and extended coverage insurance, with vandalism
and malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount sufficient to cover not less than 100% of the full
replacement cost, as the same may exist from time to time, of all of Lessee's
personal property, fixtures, equipment and tenant improvements.
8.4 Property Insurance--Lessor. Lessor shall obtain and keep in force
during the term of this Lease a policy of insurance covering loss or damage to
the Office Building Project improvements, but not Lessee's personal property,
fixtures, equipment or tenant improvements, in the amount of the full
replacement cost thereof, as the same may exist from time to time, utilizing
Insurance Services Office standard form, or equivalent, providing protection
against all perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, plate glass, and such other perils as
Lessor deems advisable or may be required by a lender having a lien on the
Office Building Project. In addition, Lessor shall obtain and keep in force,
during the term of this Lease, a policy of rental value insurance covering a
period of one year, with loss payable to Lessor, which insurance shall also
cover all Operating Expenses for said period. Lessee will not be named in any
such policies carried by Lessor and shall have no right to any proceeds
therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain
such deductibles as Lessor or the aforesaid lender may determine. In the event
that the Premises shall suffer an insured loss as defined in paragraph 9.1(f)
hereof, the deductible amounts under the applicable insurance policies shall be
deemed an Operating Expense. Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies carried by Lessor. Lessee shall
pay the entirety of any increase in the property insurance premium for the
Office Building Project over what it was immediate prior to the commencement of
the term of this Lease if the increase is specified by Lessor's insurance
carrier as being caused by the nature of Lessee's occupancy or any act or
omission of Lessee.
8.5 Insurance Policies. Lessee shall deliver to Lessor copies of
liability insurance policies required under paragraph 8.1 certificates
evidencing the existence and amounts of such insurance within seven (7) days
after the Commencement Date of this Lease. No such policy shall be cancelable or
subject to reduction of coverage or other 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 renewals thereof.
8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other,
for direct or consequential loss or damage arising out of or incident to the
perils covered by property insurance carried by such party, whether due to the
negligence of Lessor Lessee or their agents, employees, contractors and/or
invitees. If necessary all property insurance policies required under this Lease
shall be endorsed to so provide.
8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and its
agents, Lessor's master or ground lessor, partners and lenders, from and against
any and all claims for damage to the person or property of anyone or any entity
arising from Lessee's use of the Office Building Project, or from the conduct of
Lessee's business or from any activity, work or things done, permitted or
suffered by Lessee in or about the Premises or elsewhere and shall further
indemnify and hold harmless Lessor from and against any and all claims, costs
and expenses arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any act or omission of Lessee, or any of Lessee's agents,
contractors, employees or invitees and from and against all costs, attorney's
fees, expenses and liabilities incurred by Lessor as the result of any such use,
conduct, activity, work, things done, permitted or suffered, breach, default or
negligence, and in dealing reasonably therewith, including but not limited to
the defense or pursuit of any claim or any action or proceeding involved
therein; and in case any action or proceeding be brought against Lessor by
reason of any such matter, 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. Lessee, as a material part of the
consideration to Lessor, hereby assumes all risk of damage to property of Lessee
or injury to persons, in, upon or about the Office Building Project arising from
any cause and Lessee hereby waives all claims in respect thereof against Lessor.
8.8 Exemption of Lessor from Liability. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of income
therefrom or for loss of or damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other person
in or about the Premises or the Office Building Project, nor shall Lessor be
liable for injury to the person of Lessee, Lessee's employees, agents or
contractors, whether such damage or injury is caused by or results from theft,
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures, or from any other cause, whether said
damage or injury results from conditions arising upon the Premises or upon other
portions of the Office Building Project, or from other sources or places, or
from new construction or the repair, alteration or improvement of any part of
the Office Building Project, or of the equipment, fixtures or appurtenances
applicable thereto, and regardless of whether the cause of such damage or injury
or the means of repairing the same is inaccessible, Lessor shall not be liable
for any damages arising from any act or neglect of any other lessee, occupant or
user of the Office Building Project, nor from the failure of Lessor to enforce
the provisions of any other lease of any other lessee of the Office Building
Project.
8.9 No Representation of Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified in
this paragraph 8 are adequate to cover Lessee's property or obligations under
this Lease.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Damage" shall mean if the Premises are damaged
or destroyed to any extent.
(b) "Premises Building Partial Damage" shall mean if the
Building of which the Premises are a part is damaged or destroyed to the extent
that the cost to repair is less than fifty percent (50%) of the then Replacement
Cost of the Building.
(c) "Premises Building Total Destruction" shall mean if the
Building of which the Premises are a part is damaged or destroyed to the extent
that the cost to repair is fifty percent (50%) or more of the then Replacement
Cost of the Building.
(d) "Office Building Project Buildings" shall mean all of the
buildings on the Office Building Project site.
(e) "Office Building Project Buildings Total Destruction"
shall mean if the Office Building Project Buildings are damaged or destroyed to
the extent that the cost of repair is fifty percent (50%) or more of the then
Replacement Cost of the Office Building Project Buildings.
(f) "Insured Loss" shall mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 7. The fact that an insured Loss has a deductible amount shall not
make the loss an uninsured loss.
(g) "Replacement Cost" shall mean the amount of money
necessary to be spent in order to repair or rebuild the damaged area to the
condition that existed immediately prior to the damage occurring, excluding all
improvements made by lessees, other than those installed by Lessor at Lessee's
expense.
9.2 Premises Damage; Premises Building Partial Damage.
(a) Insured Loss. Subject to the provisions of paragraphs 9.4
and 9.5. If at any time during the term of this Lease there is damage which is
an Insured Loss and which falls into the classification of either Premises
Damage or Premises Building Partial Damage, then Lessor shall, as soon as
reasonably possible and to the extent the required materials and labor are
readily available through usual commercial channels, at Lessor's expense, repair
such damage (but not Lessee's fixtures, equipment or tenant improvements
originally paid for by Lessee) to its condition existing at the time of the
damage, and this Lease shall continue in full force and effect.
(b) Uninsured Loss. Subject to the provisions of paragraphs
9.4 and 9.5. If at any time during the term of this Lease there is damage which
is not an Insured Loss and which falls within the classification of Premises
Damage or Premises Building Partial Damage, unless caused by a negligent or
willful act of Lessee (in which event Lessee shall make the repairs at Lessee's
expense), which damage prevents Lessee from making any substantial use of the
Premises, 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 the date of the occurrence of such damage of Lessor's
intention to cancel and terminate this Lease as of the date of the occurrence of
such damage, in which event this Lease shall terminate as of the date of the
occurrence of such damage.
9.3 Premises Building Total Destruction; Office Building Project Total
Destruction. Subject to the provisions of paragraphs 9.4 and 9.5. If at any time
during the term of this Lease there is damage, whether or not it is an Insured
Loss, which falls into the classification of either (i) Premises Building Total
Destruction, or (ii) Office Building Project Total Destruction, then lessor may
at Lessor's option either (i) repair such damage or destruction as soon as
reasonably possible at Lessor's expense (to the extent the required materials
are readily available through usual commercial channels) to its condition
existing at the time of the damage, but not Lessee's fixtures, equipment or
tenant improvements, and this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after the date of
occurrence of such damage of Lessor's intention to cancel and terminate this
Lease, in which case this Lease shall terminate as of the date of the occurrence
of such damage.
9.4 Damage Near End of Term.
(a) Subject to paragraph 9.4(b). If at any time during the
last twelve (12) months of the term of this Lease there is substantial damage to
the Premises, Lessor may at Lessor's option cancel and terminate this lease as
of the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within thirty (30) days after the date of occurrence
of such damage.
(b) Notwithstanding paragraph 9.4(a), in the event that Lessee
has an option to extend or renew this Lease, and the time within which said
option may be exercised has not yet expired, Lessee shall exercise such option,
if it is to be exercised at all, no later than twenty (20) days after the
occurrence of an Insured Loss falling within the classification of Premises
Damage during the last twelve (12) months of the term of this Lease. If Lessee
duly exercises such option during said twenty (20) day period, Lessor shall, at
Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or
tenant improvements, as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option
during said twenty (20) day period, then Lessor may at Lessor's option terminate
and cancel this Lease as of the expiration of said twenty (20) day period by
giving written notice to Lessee of Lessor's election to do so within ten (10)
days after the expiration of said twenty (20) day period, notwithstanding any
term or provision in the grant of option to the contrary.
9.5 Abatement of Rent; Lessee's Remedies.
(a) In the event Lessor repairs or restores the Building or
Premises pursuant to the provisions of this paragraph 9, and any part of the
Premises are not usable (including loss of use due to loss of access or
essential services), the rent payable hereunder (including Lessee's Share of
Operating Expenses) for the period during which such damage, repair or
restoration continues shall be abated, provided (1) the damage was not the
result of the negligence of Lessee, and (2) such abatement shall only be to the
extent the operation and profitability of Lessee's business as operated from the
Premises is adversely affected. Except for said abatement of rent, if any,
Lessee shall have no claim against Lessor for any damage suffered by reason of
any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises or the Building under the provisions of this paragraph 9 and shall not
commence such repair or restoration within ninety (90) days after such
occurrence, or if Lessor shall not complete the restoration and repair within
six (6) months after such occurrence, Lessee may at Lessee's option cancel and
terminate this Lease by giving Lessor written notice of Lessee's election to do
so at any time prior to the commencement or completion, respectively, of such
repair or restoration. In such event this Lease shall terminate as of the date
of such notice.
(c) Lessee agrees to cooperate with Lessor in connection with
any such restoration and repair, including but not limited to the approval
and/or execution of plans and specifications required.
9.6 Termination--Advance Payments. Upon termination of this Lease
pursuant to this paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee as much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.7 Waiver. Lessor and Lessee waive the provisions of any statute which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the real property tax, as
defined in paragraph 10.3 applicable to the Office Building Project subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2.
10.2 Additional Improvements. Lessee shall not be responsible for paying
any increase in real property tax specified in the tax assessor's records and
work sheets as being caused by additional improvements placed upon the Office
Building Project by other lessees or by Lessor for the exclusive enjoyment of
any other lessee. Lessee shall, however, pay to Lessor at the time that
Operating Expenses are payable under paragraph 4.2(c) the entirety of any
increase in real property tax if assessed solely by reason of additional
improvements placed upon the Premises by Lessee or at Lessee's request.
10.3 Definition of "Real Property Tax." As used herein, the term "real
property tax" 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
to estate taxes) imposed on the Office Building Project or any portion thereof
by any authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agricultural, sanitary,
fire, street, drainage or other improvement district thereof, as against any
legal or equitable interest of Lessor in the Office Building Project or in any
portion thereof, as against Lessor's right to rent or other income therefrom,
and as against Lessor's business of leasing the Office Building Project. The
term "real property tax" shall also include any tax, fee, levy, assessment or
charge (i) in substitution of, partially or totally, any tax, fee, levy,
assessment or charge hereinabove included within the definition of "real
property tax," or (ii) the nature of which was hereinbefore included within the
definition of "real property tax," or (iii) which is imposed for a service or
right not charged prior to June 1, 1978, or if previously charged, has been
increased since June 1, 1978, or (iv) which is imposed as a result of a change
in ownership, as defined by applicable local statutes for property tax purposes,
of the Office Building Project or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such change of
ownership, or (v) which is imposed by reason of this transaction, any
modifications or changes hereto, or any transfers hereof.
10.4 Joint Assessment. If the improvements or property, the taxes for
which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not
separately assessed, Lessee's porion of that tax shall be equitably determined
by Lessor from the respective valuations assigned in the assessor's work sheets
or such other information (which may include the cost of construction) as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.5 Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere.
(b) If any of Lessee's said personal property shall be
assessed with Lessor's real property, Lessee shall pay to 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.
11. Utilities.
11.1 Services Provided by Lessor. Lessor shall provide heating,
ventilation, air conditioning, and as reasonably required, reasonable amounts of
electricity for normal lighting and office machines, water for reasonable and
normal drinking and lavatory use.
11.2 Services Exclusive to Lessee. Lessee shall pay for all water, gas,
heat, light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Premises or to Lessee,
together with any taxes thereon. If any such services are not separately metered
to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a
reasonable proportion to be determined by Lessor of all charges jointly metered
with other premises in the Building.
11.4 Excess Usage by Lessee. Lessee shall not make connection to the
utilities except by or through existing outlets and shall not install or use
machinery or equipment in or about the Premises that uses excess water, lighting
or power or suffer or permit any act that causes extra burden upon the utilities
or services, including but not limited to security services, over standard
office usage for the Office Building Project. Lessor shall require Lessee to
reimburse Lessor for any excess expenses or costs that may arise out of a breach
of this subparagraph by Lessee. Lessor may, in its sole discretion, install at
Lessee's expense supplemental equipment and/or separate metering applicable to
Lessee's excess usage or loading.
11.5 Interruptions. There shall be no abatement of rent and Lessor
shall not be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or discontinuance of any utility or service due to riot, strike,
labor dispute, breakdown, accident, repair or other cause beyond Lessor's
reasonable control or in cooperation with governmental request or directions.
12. Assignment and Subletting.
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease and the Premises
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a material
default and breach of this Lease without the need for notice to Lessee under
paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include
the transfer or transfers aggregating (a) if Lessee is a corporation, more than
twenty-five percent (25%) of the voting stock of such corporation, or (b) if
Lessee is a partnership, more than twenty-five percent (25%) of the profit and
loss participation in such partnership.
12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls or controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, all of which are referred to as "Lessee Affiliate";
provided that before such assignment shall be effective, (a) said assignee shall
assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall
be given written notice of such assignment and assumption. Any such assignment
shall not, in any way, affect or limit the liability of Lessee under the terms
of this Lease even if after such assignment or subletting the terms of this
Lease are materially changed or altered without the consent of Lessee, the
consent of whom shall not be necessary.
12.3 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, no assignment or
subletting shall release Lessee of Lessee's obligations hereunder or after the
primary liability of Lessee to pay the rent and other sums due Lessor hereunder
including Lessee's Share of Operating Expenses, and to perform all other
obligations to be performed by Lessee hereunder.
(b) Lessor may accept rent from any person other than Lessee
pending approval or disapproval of such assignment.
(c) Neither a delay in the approval of disapproval of such
assignment or subletting, nor the acceptance of rent, shall constitute a waiver
or estoppel of Lessor's right to exercise its remedies for the breach of any of
the terms or conditions of this paragraph 11 of this Lease.
(d) If Lessee's obligations under this Lease have been
guaranteed by third parties, then an assignment or sublease, and Lessor's
consent thereto, shall not be effective unless said guarantors give their
written consent to such sublease and the terms thereof.
(e) The consent by 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 said sublease; provided, however, such persons shall not be
responsible to the extent any such amendment or modification enlarges or
increases the obligations of the Lessee or sublessee under this Lease or such
sublease.
(f) In the event of any default under this Lease, lessor may
proceed directly against Lessee, any guarantors or any one else responsible for
the performance of 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.
(g) Lessor's written consent to any assignment or subletting
of the Premises by Lessee shall not constitute an acknowledgement that no
default then exists under this Lease of the obligations to be performed by
Lessee nor shall such consent be deemed a waiver of any then existing default,
except as may be otherwise stated by Lessor at the time.
(h) The discovery of the fact that any financial statement
relied upon by Lessor in giving its consent to an assignment or subletting was
materially false shall, at Lessor's election, render Lessor's said consent null
and void.
12.4 Additional Terms and Conditions Applicable to Subletting.
Regardless of Lessor's consent, 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 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 default shall occur in the performance of Lessee's obligations under
this Lease, Lessee may 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 default exists in
the performance of Lessee's obligations under this Lease, to pay to Lessor the
rents due and to become due under the sublease. Lessee agrees that such
sublessee shall have the right to rely upon any such statement and request from
Lessor, and that such sublessee shall pay such rents to Lessor without any
obligation or right to inquire as to whether such default exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against said sublessee or Lessor for any such rents
so paid by said sublessee to Lessor.
(b) No sublease entered into by Lessee shall be effective
unless and until it has been approved in writing by Lessor. In entering into any
sublease, Lessee shall use only such form of sublease as is satisfactory to
Lessor, and once approved by Lessor, such sublease shall not be changed or
modified without Lessor's prior written consent. Any sublessee shall, by reason
of entering into a sublease under this Lease, be deemed, for the benefit of
Lessor, to have assumed and agreed to conform and comply with each and every
obligation herein to be performed by Lessee other than such obligations as are
contrary to or inconsistent with provisions contained in a sublease to which
Lessor has expressly consented in writing.
(c) In the event Lessee shall default 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 atone to Lessor, in which
event Lessor shall undertake the obligations of Lessee under such sublease form
the time of the exercise of said option to the termination of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to Lessee or for any other prior defaults of
Lessee under such sublease.
(d) No sublessee shall further assign or sublet all or any
part of the Premises without Lessor's prior written consent.
(e) With respect to any subletting to which Lessor has
consented, Lessor agrees to deliver a copy of any notice of default by Lessee to
the sublessee. Such sublessee shall have the right to cure a deal of Lessee
within three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset from
and against Lessee for any such defaults cured by the sublessee.
12.5 Lessor's Expenses. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including attorneys, architects, engineers or other
consultants' fees.
12.6 Conditions to Consent. Lessor reserves the right to condition any
approval to assign or sublet upon Lessor's determination that (a) the proposed
assignee or sublessee shall conduct a business on the Premises of a quality
substantially equal to that of Lessee and consistent with the general character
of the other occupants of the Office Building Project and not in violation of
any exclusives or rights then held by other tenants, and (b) the proposed
assignee or sublessee be at least as financially responsible as Lessee was
expected to be at the time of the execution of this Lease or of such assignment
or subletting, whichever is greater.
13. Default; Remedies.
13.1 Default. The occurrence of any one or more of the following events
shall constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by Lessee.
Vacation of the Premises shall include the failure to occupy the Premises for a
continuous period of sixty (60) days or more, whether or not the rent is paid.
(b) The breach by Lessee of any of the covenants, conditions
or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment
or subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f)
(false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33
(auctions), or 41.1 (easements), all of which are hereby deemed to be material,
non-curable defaults without the necessity of any notice by Lessor to Lessee
thereof.
(c) The failure by Lessee to make any payment of real or any
other payment required to be made by Lessee hereunder as and when due, where
such failure shall continue for a period of three (3) days of written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to application Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
(d) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Lessee other than those referenced in subparagraphs (b) and (c) above, where
such failure shall continue for a period of thirty (30) days after written
notice thereof from Lessor to Lessee; provided, however, that if the nature of
Lessee's noncompliance is such that more than thirty (30) days are reasonably
required for its cure, then Lessee shall not be deemed to be in default if
Lessee commenced such cure within said thirty (30) day period and thereafter
diligently pursues such cure to completion. To the extent permitted by law, such
thirty (30) day notice shall constitute the sole and exclusive notice required
to be given to Lessee under applicable Unlawful Detainer statutes.
(e) (i) The making by Lessee of any general arrangement of
general assignment for the benefit of creditors; (ii) Lessee becoming a "debtor"
as defined in 11 U.S.C. ss. 101 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. In the event that any provision of this paragraph 13.1(e) is contrary to
any applicable law, such provision shall be of no force or effect.
(f) The discovery by Lessor that any financial statement given
to Lessor by Lessee, or its successor in interest or by any guarantor of
Lessee's obligation hereunder was materially false.
13.2 Remedies. In the event of any material default or breach of this
Lease by Lessee, Lessor may at any time thereafter, with or without notice or
demand and without limiting Lessor in the exercise of any right or remedy which
Lessor may have by reason of such default.
(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 all damages incurred
by Lessor by reason of Lessee's default 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 any real estate commission actually paid; the worth at the time of award by
the court having jurisdiction thereof the amount by which the unpaid rent for
the balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to paragraph 13
applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this
Lease shall continue in effect whether or not Lessee shall have vacated or
abandoned the Premises. In such event Lessor shall be entitled to enforce all of
Lessor's rights and remedies under this Lease, including the right to recover
the rent as it becomes due hereunder.
(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. Unpaid installments of rent and other unpaid monetary obligations
of Lessee under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but in
no event later than thirty (30) days after written notice by Lessee to Lessor
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Lessee in
writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such thirty (30) day period and
thereafter diligently pursues the same to completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of Base Rent, Lessee's Share of Operating Expenses or other
sums due hereunder will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain. Such
costs include, but are not limited to, processing and accounting charges, and
late charges which may be imposed on Lessor by the terms of any mortgage or
trust deed covering the Office Building Project. Accordingly, if any installment
of Base Rent, Operating Expenses, 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 8% 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 payment by Lessee. Acceptance of
such late charge by Lessor shall in no event constitute a waiver of Lessee's
default with respect to such overdue amount, nor prevent Lessor from exercising
any of the other rights and remedies granted hereunder.
14. Condemnation. If the Premises or any portion thereof or the Office
Building Project 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;
provided that if so much of the Premises or the Office Building Project are
taken by such condemnation as would substantially and adversely affect the
operation and profitability of Lessee's business conducted from the Premises,
Lessee shall have the option, to be exercised only in writing within thirty (30)
days after Lessor shall have given Lessee written notice of such taking (or in
the absence of such notice, within thirty (30) days after the condemning
authority shall have taken possession), to 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
rent and Lessee's Share of Operating Expenses shall be reduced in the proportion
that the floor area of the Premises taken bears to the total floor area of the
Premises. Common Areas taken shall be excluded from the Common Areas usable by
Lessee and no reduction of rent shall occur with respect thereto or by reason
thereof. Lessor shall have the option in its sole discretion to terminate this
Lease as of the taking of possession by the condemning authority, by giving
written notice to Lessee of such election within thirty (30) days after receipt
of notice of a taking by condemnation of any part of the Premises or the Office
Building Project. Any award for the taking of all or any part of the Premises or
the Office Building Project 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 the taking of the fee, or as severance damages; provided,
however, that Lessee shall be entitled to any separate award for loss of or
damage to Lessee's trade fixtures, removable personal property and unamortized
tenant improvements that have been paid for by Lessee. For that purpose the cost
of such improvements shall be amortized over the original term of this Lese
excluding any options in the event that this Lease is not terminated by reason
of such condemnation, Lessor shall to the extent of severance damages received
by lessor in connection with such condemnation, 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 pay any amount in
excess of such severance damages required to complete such repair.
15. Broker's Fee.
(a) The brokers involved in this transaction are SCHER-VOIT Commercial
Brokerage Company, Inc. as "listing broker" and CB Commercial Brokerage Company
as "cooperating broker," licensed real estate broker(s). A "cooperating broker"
is defined as any broker other than the listing broker entitled to a share of
any commission arising under this Lease. 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
agreement between Lessor and said broker(s), or in the event there is no
separate agreement between Lessor and said broker(s), the sum of $ Per Agreement
for broker's services rendered by said brokerage to Lessor in this transaction.
(b) Lessor further agrees that (i) if Lessee exercises any Option, as
defined in paragraph 39.1 of this Lease, which is granted to Lessee under this
Lease, or any subsequently granted option which is substantially similar to an
Option granted to Lessee under this Lease, or (ii) 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 (iii) if Lessee remains in possession of
the Premises after the expiration of the term of this Lease after having failed
to exercise an Option, or (iv) if said broker(s) 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 (v) if the Base
Rent is increased whether by agreement or operation of an escalation clause
contained herein, then as to any of said transactions or rent increases, Lessor
shall pay said broker(s) a fee in accordance with the schedule of said broker(s)
in effect at the time of execution of this Lease. Said fee shall be paid at the
time such increased rental is determined.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but also
on behalf of any person, corporation, association, or other entity having an
ownership interest in said real property or any part thereof, when such fee is
due hereunder. Any 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 14. Each listing and cooperating broker
shall be a third party beneficiary of the provisions of this paragraph 14 to the
extent of their interest in any commission arising under this Lease and may
enforce that right directly against Lessor; provided, however, that all brokers
having a right to any part of such total commission shall be a necessary party
to any suit with respect thereto.
(d) Lessee and Lessor each represent and warrant to the other that
neither has had any dealings with any person, firm, broker, or finder (other
than the person(s), if any, whose names are set forth in paragraph 15(a) above),
in connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and no other broker or other person, firm or
entity is entitled to any commission or finder's fee in connection with said
transaction and Lessee and Lessor do each hereby indemnify and hold the other
harmless from and against any costs, expenses, attorneys' fees or 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.
16. Estoppel Certificate.
(a) Each party (as "responding party") shall at any time upon not less
than ten (10) days prior written notice from the other party ("requesting
party") execute, acknowledge and deliver to the requesting party a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and certifying
that this Lease, as so modified, is in full force and effect) and the date to
which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to the responding party's knowledge, any
uncured defaults on the part of the requesting party, or specifying such
defaults if any are claimed. Any such statement may be conclusively relied upon
by any prospective purchaser or encumbrancer of the Office Building Project or
of the business of Lessee.
(b) At the requesting party's option, the failure to deliver such
statement within such time shall be a material default of this Lease by the
party who is to respond, without any further notice to such party, or it shall
be conclusive upon such party that (i) this Lease is in full force and effect,
without modification except as may be represented by the requesting party, (ii)
there are no uncured defaults in the requesting party's performance, and (iii)
if Lessor is the requesting party, not more than one month's rent has been paid
in advance.
(c) If Lessor desires to finance, refinance, or sell the Office
Building Project, or any part thereof, Lessee hereby agrees to deliver to any
lender or purchaser designated by Lessor such financial statements of Lessee as
may be reasonably required by such lender or purchaser. Such statements shall
include the past three (3) years' financial statements of Lessee. 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 only the
owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 14. In the event of any transfer of such title
or interest, Lessor herein named (and in case of any subsequent transfers then
the grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall, subject
as aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership.
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. Except as expressly herein provided,
any amount due to Lessor not paid when due shall bear interest at the maximum
rate then allowable by law or judgments from the date due. Payment of such
interest shall not excuse or cure any default by Lessee under this Lease;
provided, however, that interest shall not be payable on late charges incurred
by Lessee nor on any amounts upon which late charges are paid by Lessee.
20. Time of Essence. Time is of the essence with respect to the obligations
to be performed under this Lease.
21. Additional Rent. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of Operating
Expense and any other expenses payable by Lessee hereunder shall be deemed to be
rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this Lease, Lessee hereby acknowledges that neither the real estate broker
listed in paragraph 14 hereof nor any cooperating broker on this transaction nor
the Lessor any employee or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or use
by Lessee of the Premises or the Office Building Project and Lessee acknowledges
that Lessee assumes all responsibility regarding the Occupational Safety Health
Act, the legal use and adaptability of the Premises and the compliance thereof
with all applicable laws and regulations in effect during the term of this
Lease.
23. Notices. Any notice required or permitted to be given hereunder shall
be in writing and may be given by personal delivery or by certified or
registered mail, and shall be deemed sufficiently given if delivered or
addressed to Lessee or to Lessor at the address noted below or adjacent to the
signature of respective parties, as the case may be. Mailed notices shall be
deemed given upon actual receipt at the address required, or forty-eight (48)
hours following deposit in the mail, postage prepaid, whichever first occurs.
Either party may by 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 notice purposes. 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 notice to Lessee.
24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. 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 act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
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.
26. Holding Over. If Lessee, with Lessor's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, except that the rent payable
shall be two hundred percent (200%) of the rent payable immediately preceding
the termination date of this Lease, and all Options, if any, granted under the
terms of this Lease shall be deemed terminated and be of no further effect
during said month to month tenancy.
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. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. Binding Effect; Choice of Law. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions of
paragraph 16, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
where the Office Building Project is located and any litigation concerning this
Lease between the parties hereto shall be initiated in the county in which the
Office Building Project is located.
30. Subordination.
(a) This Lease, and any Option or right of first refusal granted
hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage,
deed of trust, or any other hypothecation or security now or hereafter placed
upon the Office Building Project and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof. Notwithstanding such subordination,
Lessee's right to quiet possession of the Premises shall not be disturbed if
Lessee is not in default and so long as Lessee shall pay the rent and observe
and perform all of the provisions of this Lease, unless this Lease is otherwise
terminated pursuant to its terms. If any mortgagee, trustee or ground lessor
shall elect to have this Lease and any Options granted hereby prior to the lien
of its mortgage, deed of trust or ground lease, and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
mortgage, deed of trust or ground lease, whether this Lease or such Options are
dated prior or subsequent to the date of said mortgage, deed of trust or ground
lease or the date of recording thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination, or to make this Lease or any Option granted herein
prior to the lien of any mortgage, deed of trust or ground lease, as the case
may be. Lessee's failure to execute such documents within ten (10) days after
written demand shall constitute a material default by Lessee hereunder without
further notice to Lessee or, at Lessor's option, Lessor shall execute such
documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby
make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and
in Lessee's name, place and stead, to execute such documents in accordance with
this paragraph 30(b).
31. Attorneys' Fees.
31.1 If either party or the broker(s) named herein bring an action to
enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, trial or appeal thereon, shall be entitled to his reasonable
attorneys' fees to be paid by the losing party as fixed by the court in the same
or a separate suit, and whether or not such action is pursued to decision or
judgment. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
31.2 The attorneys' fee award shall not be computed in accordance with
any court fee schedule, but shall be such as to fully reimburse all attorneys'
fees reasonably incurred in good faith.
31.3 Lessor shall be entitled to reasonable attorneys' fees and all
other 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.
32. Lessor's Access.
32.1 Lessor and Lessor's agents shall have the right to enter the
Premises at reasonable times for the purpose of inspecting the same, performing
any services required of Lessor, showing the same to prospective purchasers,
lenders, or lessees, taking such safety measures, erecting such scaffolding or
other necessary structures, making such alterations, repairs, improvements or
additions to the Premises or to the Office Building Project as Lessor may
reasonably deem necessary or desirable and the erecting, using and maintaining
of utilities, services, pipes and conduits through the Premises and/or other
premises as long as there is no material adverse effect to Lessee's use of the
Premises. Lessor may at any time place on or about the Premises or the Building
any ordinary "For Sale" signs and Lessor may at any time during the last 120
days of the term hereof place on or about the Premises any ordinary "For Lease"
signs.
32.2 All activities of Lessor pursuant to this paragraph shall be
without abatement of rent, nor shall Lessor have any liability to Lessee for the
same.
32.3 Lessor shall have the right to retain keys to the Premises and to
unlock all doors in or upon the Premises other than to files, vaults and safes,
and in the case of emergency to enter the Premises by any reasonably appropriate
means, and any such entry shall not be deemed a forcible or unlawful entry or
detainer of the Premises or an eviction. Lessee waives any charges for damages
or injuries or interference with Lessee's property or business in connection
therewith.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
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. The holding of any auction on the Premises or Common Areas in violation
of this paragraph shall constitute a material default of this Lease.
34. Signs. Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no circumstances
shall Lessee place a sign on any roof of the Office Building Project.
35. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. Consents. Except for paragraphs 33 (auctions) and 34 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.
37. Guarantor. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. Quiet Possession. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's party to be observed and performed hereunder. Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions to this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Office Building Project.
39. Options.
39.1 Definitions. (1) the right or option 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; (2) the option or 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 space within the Office Building Project or other
property of Lessor or the right of first offer to lease other space within the
Office Building Project or other property of Lessor; (3) the right or option to
purchase the Premises or the Office Building Project, or the right of first
refusal to purchase the Premises or the Office Building Project or the right of
first offer to purchase the Premises or the Office Building Project, or the
right or option to purchase other property of Lessor, or the 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. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original Lessee
while occupying the Premises who does so without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof, and may
not be exercised or be assigned, voluntarily or involuntarily, by or to any
person or entity other than Lessee; provided, however, that an Option may be
exercised by or assigned to any Lessee Affiliate as defined in paragraph 11.2 of
this Lease. The Options, if any, herein granted to Lessee are not assignable
separate and apart from this Lease, nor may any Option be separated from this
Lease in any manner, either 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 option to extend or renew this Lease has been so 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 time commencing from the date Lessor gives to Lessee a notice of default
pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance
alleged in said notice of default is cured, or (ii) during the period of time
commencing on the day after a monetary obligation to Lessor is due from Lessee
and unpaid (without any necessity for notice thereof to Lessee) and continuing
until the obligation is paid, or (iii) in the event that Lessor has given to
Lessee three or more notices of default under paragraph 13.1(c) or paragraph
12.1(d), whether or not the defaults are cured, during the twelve (12) month
period of time immediately prior to the time that Lessee attempts to exercise
the subject Option, (iv) if Lessee has committed any non-curable breach,
including without limitation those described in paragraph 13.1(b), or is
otherwise in default of any of the terms, covenants or conditions of this Lease.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason 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)
Lessee fails to commence to cure a default specified in paragraph 13.1(d) within
thirty (30) days after the date that Lessor gives notice to Lessee of such
default and/or Lessee fails thereafter to diligently prosecute said cure to
completion, (iii) Lessor gives to Lessee three or more notices of default under
paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured,
or (iv) if Lessee has committed any non-curable breach, including without
limitation those described in paragraph 13.1(b), or is otherwise in default of
any of the terms, covenants and conditions of this Lease.
40. Security Measures--Lessor's Reservations.
40.1 Lessee hereby acknowledges that Lessor shall have no obligation
whatsoever to provide guard service or other security measures for the benefit
of the Premises or the Office Building Project. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees from acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option,
form providing security protection for the Office Building Project or any part
thereof, in which event the cost thereof shall be included within the definition
of Operating Expenses, as set forth in paragraph 4.2(b).
40.2 Lessor shall have the following rights:
(a) To change the name, address, or title of the Office
Building Project or building in which the Premises are located upon not less
than ninety (90) days prior written notice;
(b) To, at Lessee's expense, provide and install Building
standard graphics on the door of the Premises and such portions of the Common
Areas as Lessor shall reasonably deem appropriate;
(c) To permit any lessee the exclusive right to conduct any
business as long as such exclusive does not conflict with any rights expressly
given herein; (d) To place such signs, notices or displays as Lessor reasonably
deems necessary or advisable upon the roof, exterior of the buildings or the
Office Building Project or on pole signs in the Common Areas.
40.3 Lessee shall not:
(a) Use a representation (photographic or otherwise) of the
Building or the Office Building Project or their name(s) in connection with
Lessee's business;
(b) Suffer or permit anyone, except in emergency, to go upon
the roof the Building.
41. Easements.
41.1 Lessor reserves to itself the right, from time to time, to grant
such easements, rights and dedications that Lessor deems necessary or desirable,
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 shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material default of this Lease by Lessee without the need for
further notice to Lessee.
42.2 The obstruction of Lessee's view, air, or light by any structure
erected in the vicinity of the Building, whether by Lessor or third parties,
shall in no way affect this Lease or impose any liability upon Lessor.
42. 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.
43. Authority. If Lessee is a corporation, trust, or general or limited
partnership, Lessee and each individual executing this Lease on behalf of such
entity, represent and warrant that such individual is duly authorized to execute
and deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution of
this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
44. Conflict. Any conflict between the printed provisions, Exhibits or
Addenda of this Lease and the typewritten or handwritten provisions, if any,
shall be controlled by the typewritten or handwritten provisions.
45. No Offer. Preparation of this Lease by Lessor Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.
46. Lender Modification. Lessee agrees to make such reasonable modifications
to this Lease as may be reasonably required by an institutional lender in
connection with the obtaining of normal financing or refinancing of the Office
Building Project.
47. Parties. If more than one person or entity is named as either or Lessee
herein, except as otherwise expressly provided herein, the obligations of the
Lessor or Lessee herein shall be the joint and several responsibility of all
persons or entities named herein as such Lessor or Lessee, respectively.
48. Work Letter. This Lease is supplemented by that certain Work Letter of
even date executed by Lessor and Lessee attached hereto as Exhibit C and
incorporated herein by this reference.
49. Attachments. Attached hereto are the following documents which
constitute a part of this Lease:
Addendum to Lease; Paragraphs 49 through 57 Rules & Regulations
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY 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, NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL
ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION
RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF
THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE.
LESSOR LESSEE
Greystone Realty Corporation, as Agent for Sutter Corporation, a California
New York Life Insurance Company Corporation
By By
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Charles Lauckhardt Tim Wollaeger
Its Senior Asset Manager Its President
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By By
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Its Its
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Executed at Executed at
on on
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Address Address
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<PAGE>
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
Dated: September 4, 1991
By and Between: Sutter Corporation, a California Corporation (Lessee), and
Greystone Realty Corporation, as Agent for New York Life
Insurance Company (Lessor)
GENERAL RULES
1. Lessee shall not suffer or permit the obstruction of any Common Areas,
including driveways, walkways, and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor in good
faith judges to be a threat to the safety, reputation, or property of the Office
Building Project and its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or
interfere with other lessees or persons having business within the Office
Building Project.
4. Lessee shall not keep animals or birds within the Office Building
Project, and shall not bring bicycles, motorcycles, or other vehicles into areas
not designated as authorized for same.
5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. Lessee shall not alter any lock or install new or additional locks or
bolts.
7. Lessee shall be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
8. Lessee shall not deface the walls, partitions or other surfaces of the
Premises or Office Building Project.
9. Lessee shall not suffer or permit anything in or around the Premises or
Building that causes excessive vibration or floor loading in any part of the
Office Building Project.
10. Furniture, significant freight and equipment shall be moved into or out
of the building only with the Lessor's knowledge and consent, and subject to
such reasonable limitations, techniques, and timing as may be designated by
Lessor. Lessee shall be responsible for any damage to the Office Building
Project arising from any such activity.
11. Lessee shall not employ any service or contractor for services or work
to be performed in the Building, except as approved by Lessor.
12. Lessor reserves the right to close and lock the Building on Saturdays,
Sundays and legal holidays and on other days between the hours of P.M. and A.M.
of the following day. If Lessee uses the Premises during such periods, Lessee
shall be responsible for securely locking any doors it may have opened for
entry.
13. Lessee shall return all keys at the termination of its tenancy and
shall be responsible for the cost of replacing any keys that are lost.
14. No window coverings or shades shall be installed or used by Lessee.
15. No Lessee, employee or invitee shall go upon the roof of the Building.
16. Lessee shall not suffer or permit smoking or carrying of lighted cigars
or cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.
17. Lessee shall not use any method of heating or air conditioning other
than as provided by Lessor.
18. Lessee shall not install, maintain or operate any vending machines upon
the Premises without Lessor's written consent.
19. The Premises shall not be used for lodging or manufacturing, cooking,
or food preparation.
20. Lessee shall comply with all safety, fire protection, and evacuation
regulations established by Lessor or any applicable governmental agency.
21. Lessor reserves the right to waive any one of these rules or
regulations, and/or as to any particular Lessee, and any such waiver shall not
constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.
22. Lessee assumes all risks from theft or vandalism and agrees to keep its
Premises locked as may be required.
23. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Office Building Project and its occupants. Lessee
agrees to abide by these and such rules and regulations.
PARKING RULES
1. Parking areas shall be used only for parking by vehicles no longer than
full size, passenger automobiles herein called "Permitted Size Vehicles."
Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized
Vehicles."
2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or
invitees to be loaded, unloaded, or parked in areas other than those designated
by Lessor for such activities.
3. Parking stickers or identification devices shall be the property of
Lessor and be returned to Lessor by the holder thereof upon termination of the
holder's parking privileges. Lessee will pay such replacement charge as is
reasonably established by Lessor for the loss of such devices.
4. Lessor reserves the right to refuse the sale of monthly identification
devices to any person or entity that willfully refuses to comply with the
applicable rules, regulations, laws, and/or agreements.
5. Lessor reserves the right to relocate all or a part of parking spaces
from floor to floor, within one floor, and/or to reasonably adjacent offsite
location(s), and to reasonably allocate them between compact and standard size
spaces, as long as the same complies with applicable laws, ordinances, and
regulations.
6. Users of the parking area will obey all posted signs and park only in
the areas designated for whole parking.
7. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Lessor will not be responsible for
any damage to vehicles, injury to persons, or loss of property, all of which
risks are assumed by the party using the parking area.
8. Validation, if established, will be permissible only by such method or
methods as Lessor and/or its licenses may establish at rates generally
applicable to visitor parking.
9. The maintenance, washing, waxing or cleaning of vehicles in the parking
structure or Common Areas is prohibited.
10. Lessee shall be responsible for seeing that all of its employees,
agents, and invitees comply with the applicable parking rules, regulations,
laws, and agreements.
11. Lessor reserves the right to modify these rules and/or adopt such other
reasonable and non-discriminatory rules and regulations as it may deem necessary
for the proper operation of the parking lot.
12. Such parking use as is herein provided is intended merely as a license
only and no bailment is intended or shall be created hereby.
<PAGE>
EXHIBIT "E"
COMMENCEMENT DATE MEMORANDUM
Sutter Corporation
9465 Farnham Street
San Diego, CA 92123
Dear Tenant:
This is to give you notice, pursuant to Section 3 of that certain Lease
Agreement (the "Lease"), dated September 4, 1991, between New York Life
Insurance Company, a New York Corporation, as Lessor, and Sutter Corporation ,
as Lessee, that all conditions of Paragraph 3.2.1 of the Lease have been met as
of the date hereof and thus, the "Commencement Date" pursuant to Section 3 of
the Lease is February 10, 1992, and the ending date is November 9, 1998.
NEW YORK LIFE INSURANCE COMPANY,
a New York Corporation
By: Greystone Realty Corporation, for
New York Life Insurance Company
By:
------------------------------------------
Name: Greg Colshin
-------------------------------
Title: Asset Manager
-------------------------------
By: Sutter Corporation, a California Corporation
By:
------------------------------------------
Name: Timothy J. Wollaeger
-------------------------------
Title: President
-------------------------------
Page 1 of 1
<PAGE>
ADDENDUM TO THAT CERTAIN LEASE
DATED SEPTEMBER 4, 1991, BY AND BETWEEN
BUTTER CORPORATION, A CALIFORNIA CORPORATION (LESSEE)
AND
GREYSTONE REALTY CORPORATION, AS AGENT FOR NEW
YORK LIFE INSURANCE COMPANY (LESSOR)
50. Rental Schedule: Lessee shall pay the following base rent fee per month:
Months Base Monthly Rent
------ -----------------
1* $7,700.00 Triple Net
13-20 $7,700.00 Triple Net
21-24 $10,321.30 Triple Net
26-35 $10,696.62 Triple Net
37-48 $11,295.60 Triple Net
49-80 $11,364.92 Triple Net
61-72 $12,010.24 Triple Net
73-81 $12,573.22 Triple Net
* Months two (2) through twelve (12) shall be free of Base Rent.
51. Operating Expenses. In months one (1) through twenty-four (24) of this lease
term, the Operating Expenses (as defined in Paragraph 4.2) shall be limited to a
maximum of $.19 per square foot per month. This monthly per square foot expense
shall be paid by Lessee based on 14,000 square feet for months one (1) through
ten (10) of this lease term and on the entire 10,766 square feet for the
remainder of the term. Beginning in the twenty- fifth (25th) month except for
uncontrollable expenses (taxes, insurance and utilities), Lessor agrees to limit
the Operating Expenses to an annual increase of four percent (4%) per year over
the previous year, of the actual cost, whichever is less.
52. Tenant Improvement Allowance. Landlord agrees to spend up to a total of
$281,490.00 ($15.00 per square foot of leased space) to improve the entire
premises prior to the lease Commencement Date in accordance with plans and
specifications (tenant improvements) to be mutually agreed upon by both parties.
This allowance shall be in addition to the Premise's existing restrooms and HVAC
system, each of which the Landlord shall warrant is in good working order as of
the commencement date of the lease. Additionally, Landlord agrees to pay for the
cost of all space planning and construction documents up to a maximum of
$14,074.50 ($.75 per square foot). Any additional costs per said work shall be
attributable to the tenant improvement allowance stated above.
53. Signage. Tenant at Tenant's sole cost, shall be granted signage on the
building, including two (2) large signs, one (1) at the north side of the
building and one (1) at the south side of the building. Landlord reserves the
right to review and approve or disapprove said signage. Said signage shall be
compatible with Futura Business Park's signage criteria. In addition, Landlord,
at Landlord's sole cost, agrees to provide a monument sign, at the entrance to
the project, with no more than four (4) Tenants listed, and Sutter Corporation
shall be granted priority signage.
<PAGE>
ADDENDUM TO THAT CERTAIN LEASE
DATED SEPTEMBER 4, 1991, BY AND BETWEEN
BUTTER CORPORATION, A CALIFORNIA CORPORATION (LESSEE)
AND
GREYSTONE REALTY CORPORATION, AS AGENT FOR NEW
YORK LIFE INSURANCE COMPANY (LESSOR)
54. Option to Expand. Tenant shall be given the option to expand anytime during
the first forty-eight (48) months of this lease, into an additional 10,000
square feet of contiguous space in the Office Project under the following terms
and conditions:
A. The term shall be shortened approximately to make it co-terminus with
the original lease,
B. The Rental rate for the expansion space shall be $.59 per square foot
per month, net of operating expenses (additional rent) for the entire term.
C. Should Tenant exercise this expansion right within the first thirty-six
(36) months, the amount of the Tenant Improvement Allowance provided by Landlord
shall be $15.00 per square foot. Should the Tenant exercise this option to
expand after the thirty-sixth (36th) month the Tenant Improvement Allowance
provided by the Landlord will be calculated at follows: $15.00 per square foot
times the number of months remaining on the expansion term divided by 81 months.
Furthermore, Landlord shall have the obligation of notifying Tenant
when the last 10,000 square foot of contiguous space is being encroached on by
an additional tenant. Such notice shall be given when the Landlord has mutually
agreed upon preparatory terms and conditions for a least (Letter of Agreement)
for all or a portion of the last remaining 10,000 square feet. Upon Tenant
receiving written notice of said encroachment, Tenant shall have five (5)
business days to notify Landlord in willing of its desire to exercise this
Option to Expand. Should Tenant not elect to exercise its option on the 10,000
square feet at that time, Landlord shall have the right to consummate a lessee
with that prospective Tenant and Sutter Corporation shall have an option to
expand under the same terms and conditions as listed above on the remaining
portion of that 10,000 square feet. This same process shall take place in the
remaining portion of that 10,000 square feet of space until the Tenant exercises
its option, the balance of that space is leased, or the end of the forth-eighth
(48th) month of this lease expires, at which time this option to expand will
expire.
55. Right of First Refusal. Tenant shall be granted the right of first refusal
on all available space between month sixty (60) and eighty-one (81) of this
lease. Landlord shall be obligated to notify Tenant of any prospective Tenants
in which Landlord has mutually agreed upon preparatory terms and conditions
(Letter of Agreement) for any space available during this period. This excludes
all options to renew rights by existing Tenants. Upon written notice by Landlord
to Tenant of these terms and conditions, Tenant has five (5) business days to
accept these terms and conditions in writing to Landlord. This Right of First
Refusal shall expire upon the earlier of: (1) the eighty-first (81st) month of
this lease or, (2) upon Tenant's exercising this right of first refusal on
combined square footage of 5,000 square feet or more.
<PAGE>
ADDENDUM TO THAT CERTAIN LEASE
DATED SEPTEMBER 4, 1991, BY AND BETWEEN
BUTTER CORPORATION, A CALIFORNIA CORPORATION (LESSEE)
AND
GREYSTONE REALTY CORPORATION, AS AGENT FOR NEW
YORK LIFE INSURANCE COMPANY (LESSOR)
56. Landlord's Warranties: To the best of its knowledge, Landlord warrants, in
accordance with California State warranty requirements, that as of the execution
of the lease, the roof does not leak and that it, along with all structural
elements of the Building, are sound and are in good state of repair. If, on the
commencement date of the lease, the roof leaks or the building otherwise
requires repairs, Landlord will repair such leaks and make such repairs at
Landlord's sole expense. Furthermore, to the best of its knowledge, Landlord
shall warrant that the systems within the Building, prior to the addition of
Tenant Improvements, including electrical, heating, air conditioning, water and
sewers are in good working order and adequate for the service of the entire
building. If on the commencement date of the lease, it is determined that the
systems within the Building are not in good working order or not sufficient to
service the building, Landlord, and Landlord's sole expense will correct the
situation.
57. Parking: Lessee shall receive twenty-two (22) reserved parking spaces along
the north and south side of the premises to be mutually agreed upon by Lessee
and Lessor, in addition, Lessee shall be entitled to forty-four (44) additional
unreserved parking spaces.
58. Trash Enclosure: Tenant and Landlord agree that the reasonable cost of
improving the existing trash enclosure, or constructing an additional enclosure,
will be split on a 50% / 50% basis.
59. Option to Extend:
A. Lessor hereby grants to lessee the option to extend the term of this
lease for two (2) 5-year periods commencing when the prior term expires upon
each and all of the following terms and conditions.
I. Lessee gives to Lessor, and Lessor actually receives, on a date
which is prior to the date that the option period would commence (if exercised)
by at least six (6) and not more than nine (9) months, a written notice of the
exercise of the option to extend this lease for said additional term, time being
of the essence. If said notification of the exercise of said option is not so
given and received, this option shall automatically expire.
II. The provisions of Paragraph 39, including the provision relating to
default of Lessee set forth in Paragraph 39.4 of this lease are conditions of
this option.
III. All of the terms and conditions of this lease except where
specifically modified by this option shall apply.
<PAGE>
ADDENDUM TO THAT CERTAIN LEASE
DATED SEPTEMBER 4, 1991, BY AND BETWEEN
BUTTER CORPORATION, A CALIFORNIA CORPORATION (LESSEE)
AND
GREYSTONE REALTY CORPORATION, AS AGENT FOR NEW
YORK LIFE INSURANCE COMPANY (LESSOR)
IV. The monthly rent for each month of the option period shall be
calculated as follows:
a. For the first 5-year option, the base monthly rental shall begin
at $.69 per square foot and escalate on each anniversary date at a rate of four
percent (4%).
b. For the second 5-year option period, the base monthly rent shall
be at the then prevailing market rate for similar properties in the area. All
the other terms, within the lease shall remain the same.
LESSEE: SUTTER CORPORATION, A CALIFORNIA CORPORATION
By: Date:
-------------------------------------------- -------------
Tom Wollaeger, President
LESSOR: GREYSTONE REALTY CORPORATION,
AS AGENT FOR NEW YORK LIFE INSURANCE COMPANY
By: Date:
-------------------------------------------- -------------
Charles Lauckhardt, Senior Asset Manager
FOUR POINTS BUSINESS PARK
MIC Four Points, as Landlord
and
SUTTER BIOMEDICAL INC. , as Tenant
--------------------------
2-10-88
--------------
Date of Lease
<PAGE>
BASIC LEASE INFORMATION
Four Points Business Park
1. Lease Date: February 10 , 1988 .
-------------------------- ---
2. Landlord: MIC FOUR POINTS, a California limited partnership
3. Address of Landlord: c/o McLachlan Investment Company
9868 Scranton Road, Suite 120
San Diego, California 92121
4. Tenant: SUTTER BIOMEDICAL INC.
5. Address of Tenant: 9425 Chesapeake Drive
San Diego, California 92123
6. Contact: Charles Cashion Telephone: 569-4941
--------------------------- ------------
7. Section 1.1 Building: 9425 Chesapeake Drive
--------------------------------
Floor(s): N/A
--------------------------------
Suite No(s): N/A
-----------------------------
8. Section 1.3 Parking Spaces: 82
--------------------------
9. Section 1.4 Rentable Area of Premises: 26,970 Total Square Feet
---------
10. Section 2.1 Term Commencement Date: Aug. 1, 1988
-----------------------
Term Expiration Date: Sept. 30, 1998
-------------------------
Term: 10 years
----------------------
11. Section 3.1 Basic Rent (per month): $ See Addendum
----------------------
12. Section 4.1 Building's Share (of Common Expenses: 55 %
for R&D Park) ---------
13. Section 4.1.2 Tenant's Share (of Taxes and Operating
Expenses 100%
for building)----------- %
14. Section 6.1 Use: Office / R&D
---------------------------
15. Section 29 Security Deposit: $ 26,970
-------------------
16. Section 31 Broker: Glenn Karp
-------------------------
Grubb & Ellis
-------------------------
-------------------------
-------------------------
The foregoing Basic Lease Information is hereby incorporated into and
made a part of this Lease. Each reference in this Lease to any of the Basic
Lease Information shall mean the respective information hereinabove set forth
and shall be construed to incorporate all of the terms provided under the
particular Lease section pertaining to such information. In the event of any
conflict between any Basic Lease Information and the Lease, the latter shall
control.
LANDLORD TENANT
-------- ------
MIC FOUR POINTS, SUTTER BIOMEDICAL,
a California limited partnership a California Corporation
By: Signature Illegible By: /s/ Charles T. Cashion
---------------------------- --------------------------
Its: Its: President
------------------------- ----------------------
By: By:
---------------------------- --------------------------
Its: Its:
------------------------- ----------------------
<PAGE>
FOUR POINTS BUSINESS PARK
INDUSTRIAL LEASE
THIS LEASE is entered into as of February 10, 1988 , by and between MIC
FOUR POINTS, a California limited partnership , ("Landlord"), and SUTTER
BIOMEDICAL INC. ("Tenant"). In consideration of the mutual covenants and
agreements set forth herein, Landlord and Tenant agree as follows:
1. Premises.
1.1 Upon and subject to the terms, covenants, and conditions
hereinafter set forth, Landlord hereby leases to Tenant and Tenant hereby hires
from Landlord the premises described in the Basic Lease Information, located in
that certain Building specified in the Basic Lease Information as the Building,
included in the business park commonly known as Four Points Business Park, City
of San Diego, County of San Diego, State of California, and more particularly
described in Exhibit "A" attached hereto (herein called the "Park"), such
Premises comprising the area substantially as shown on the floor plan or plans
that have been signed by Landlord and Tenant and that are attached hereto as
Exhibit "B." The land is leased by Landlord pursuant to a ground lease (the
"Ground Lease") dated September 12, 1985 with R.E. Hazard Contracting Co., a
California corporation, as "lessor." The party possessing the rights of the
"lessor" under the Ground Lease shall hereinafter be referred to as the "Owner."
The Premises are leased and shall be used and occupied subject to all terms and
conditions of the Ground Lease, any and all existing restrictive covenants,
encumbrances, conditions, rights, covenants, easements, restrictions and
rights-of-way of record, and other matters of record, if any, applicable zoning
and building laws, regulations and codes, and such matters as may be disclosed
by inspection or survey. For purposes of this Lease, the phrase "Adjoining
Buildings" shall mean all commercial and office buildings and related
improvements now or hereafter located in the Park, except for the Building.
1.2 Tenant shall have the right, for the benefit of Tenant and
its employees, suppliers, shippers, customers and invitees, to the non-exclusive
use of all areas and facilities outside the Premises and within the exterior
boundary line of the Park that are provided and designated by Landlord from time
to time for the general non-exclusive use of Landlord, Tenant, and the other
tenants of the Park and their respective employees, suppliers, shippers,
customers and invitees, including parking areas, loading and unloading areas,
drives, walkways, roadways, trash areas, and landscaped areas (herein called
"Common Areas").
1.3 Tenant shall have the right, for the benefit of Tenant and
its employees, customers, and invitees, to the use of the number of vehicle
parking spaces specified in the Basic Lease Information on those portions of the
Common Areas designated for parking by Landlord from time to time. Such spaces
shall be used by all tenants of the Park on an unassigned basis.
1.4 As used herein, the term "Rentable Area" shall be computed in
accordance with the schedule attached hereto as Exhibit "C."
2. Term.
2.1 The Premises are leased for a term (herein called the "Term")
to commence and end on the dates respectively specified in the Basic Lease
Information, unless the Term shall sooner terminate as hereinafter provided. If,
on or prior to the Term Commencement Date set forth in the Basic Lease
Information, Landlord fails to deliver possession of the Premises, either (a)
because Landlord's Work (as hereinafter defined in Article 5.1) shall not have
been substantially completed, or (b) because a previous occupant is holding
over, or (c) because of any other cause or reason beyond the reasonable control
of Landlord, the following provisions shall apply: (i) the Term shall not
commence on the Term Commencement Date set forth in the Basic Lease Information
but shall, instead, commence on a date fixed by Landlord in a notice to Tenant,
which notice shall state that the Premises are, or prior to the commencement
date fixed in such notice will be, substantially completed and ready for
occupancy by Tenant; provided, however, that Landlord may from time to time, by
notice to Tenant, change the commencement date fixed in a prior notice; (ii)
neither the validity of this Lease nor the obligations of Tenant under this
Lease shall be affected by such failure to deliver possession, except that the
Term shall begin as provided in clause (i) above; (iii) Tenant shall have no
claim against Landlord because of Landlord's failure to deliver possession of
the Premises on the date originally fixed therefore; and (iv) in no event shall
the expiration date of the Term be extended beyond the Term Expiration Date
specified in the Basic Lease Information.
2.2 The dates upon which the Term shall commence and terminate
pursuant to this Article 2 are herein called the "Commencement Date" and the
"Expiration Date," respectively.
2.3 Notwithstanding anything to the contrary herein contained, in
the event that the Term shall not have commenced on or before such date as shall
be one (1) year from the date specified in the Basic Lease Information, then
this Lease shall be automatically terminated without any further act of either
party hereto and both parties hereto shall be released from all obligations
hereunder.
3. Rent: Additional Charges.
3.1 Tenant shall pay to Landlord during the Term the Basic Rent
specified in the Basic Lease Information subject to adjustments as provided in
Section 3.5 below, which sum shall be payable by Tenant in equal consecutive
monthly installments on or before the first day of each month, in advance, at
the address specified for Landlord in the Basic Lease Information or such other
place as Landlord shall designate, without any prior demand therefore and
without any deduction or setoff whatsoever. If the Term Commencement Date should
occur on a day other than the last day of a calendar month, then the rent for
such fractional month shall be prorated on a daily basis based upon a 30-day
calendar month.
3.2 Tenant shall pay to Landlord all charges and other amounts
whatsoever as provided in this Lease (herein called "Additional Charges")
including, without limitation, any increase in the Basic Rent resulting from the
provisions of Article 4. All such amounts and charges shall be payable to
Landlord at the place where the Basic Rent is payable. Landlord shall have the
same remedies for a default in the payment of Additional Charges as for a
default in the payment of Basic Rent.
2 Initials CTC DRB
<PAGE>
3.3 Any installment of Basic Rent or any other monies due under
this Lease not paid within seven days of the date when due shall bear interest,
to the extent enforceable by law, at the rate not exceeding the higher of (i) 5%
per annum, or (ii) % per annum plus the rate prevailing on the 25th day of the
month preceding the date of execution of this Lease established by the Federal
Reserve Bank of San Francisco on advances to member banks under Section 13 or
13(a) of the Federal Reserve Act as in effect as of that date from the date due
and payable until the same shall have been fully paid, but the payment of such
interest shall not excuse or cure any default by Tenant under this Lease.
3.4 Tenant hereby acknowledges that the late payment by Tenant to
Landlord of Basic Rent or any other sums due hereunder will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges and late charges which may be imposed on
Landlord by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent, or any other sum due from Tenant, shall
not be received by Landlord or Landlord's designated agent within seven days
after such amount shall be due, Tenant shall pay to Landlord, in addition to the
interest provided above, a late charge equal to five percent (5%) of such
overdue amount. The parties agree that such late charge represents a fair and
reasonable estimate of the costs Landlord will incur by reason of late payment
by Tenant. Acceptance of such late charge by Landlord shall in no way constitute
a waiver of Tenant's default with respect to such overdue amount nor prevent
Landlord from exercising any other right or remedy of Landlord resulting from
such late payment.
4. Additional Charges for Taxes and Operating Expenses.
4.1 For purposes of this Article 4, the following terms shall
have the meanings hereinafter set forth:
4.1.1. "Computation Year" shall mean each 12 consecutive
month period commencing January 1 of each year during the Term, provided that
Landlord, upon notice to Tenant, may change the Computation Year from time to
time to any other 12 consecutive month period and, in the event of any such
change, Tenant's Share or excess Taxes (as hereinafter defined) shall be
equitably adjusted for the Computation Years involved in any such change.
4.1.2. "Tenant's Share" shall mean the percentage figure
so specified in the Basic Lease Information. Tenant's Share has been computed by
dividing the square footage of the Premises by the total square footage of the
Building and, in the event that either the square footage of the Premises or the
total square footage of the Building is changed, Tenant's Share will be
appropriately adjusted, and, as to the Computation Year in which such change
occurs, for purposes of this Section 4, Tenant's Share shall be determined on
the basis of the number of days during such Computation Year at each such
percentage.
4.1.3. "Operating Expenses" for the Computation Year is
defined as the sum of (i) all "Building Common Expenses" (defined below)
incurred for that Computation Year plus (ii) that percentage of "Land Common
Expenses" (defined below) for that Computation Year which is equal to the
Building's Share, as set forth in the Basic Lease Information.
4.1.4. "Building Common Expenses" for the Computation
Year is defined as all "Common Expenses" (defined below) incurred for that
Computation Year which the Landlord reasonably determines to pertain exclusively
to the Building.
4.1.5. "Land Common Expenses" for the Computation Year is
defined as all Common Expenses incurred for that Computation Year except for
Common Expenses which the Landlord reasonably determines pertain exclusively to
a single Building located in the Park.
4.1.6. "Taxes" shall mean the Building's Share, as set
forth in the Basic Lease Information, of all taxes, assessments and charges
levied upon or with respect to the Park or any personal property of Landlord
used in the operation thereof or Landlord's interest in the Park or such
personal property. Taxes shall include, without limitation, all general real
property taxes and general and special assessments, charges, fees or assessments
for transit, housing, police, fire or other governmental services or purported
benefits to the Park, service payments in lieu of taxes, and any tax, fee or
excise on the act of entering into this Lease or any other lease of space in the
Park, or on the use of occupancy of the Park or any part thereof, or on the rent
payable under any lease or in connection with the business or renting space in
the Park that are now or hereafter levied or assessed against Landlord by the
United States of America, the State of California, or any political subdivision,
public corporation, district or other political or public entity, and shall also
include any other tax, fee or other excise, however described, that may be
levied or assessed as a substitute for or as an addition to, as a whole or in
part, any
3 Initials CTC DRB
<PAGE>
Taxes, whether or not now customary or in the of the parties on the date of this
Lease. Taxes do not include franchise, transfer, inheritance or capital stock
taxes or income taxes measured by the net income of Landlord from all sources
unless, due to a change in the method of taxation, any of such taxes is levied
or assessed against Landlord as a substitute for or as an addition to, as a
whole or in part, any other tax that would otherwise constitute a tax. Taxes
shall also include reasonable legal fees, costs, and disbursements incurred in
connection with proceedings to contest, determine or reduce Taxes.
4.1.7. "Common Expenses" shall include all direct costs
of the operation and maintenance of the Building, the Adjoining Buildings, the
Park, Common Areas, and parking areas, including without limitation the
following: costs of (1) utilities, (2) supplies, (3) insurance (including public
liability, property damage and fire) and extended coverage insurance for the
full replacement cost as required by Landlord or its lenders, (4) services of
independent contractors, (5) compensation (including employment taxes and fringe
benefits) of all persons who perform duties connected with the operation,
maintenance, repair or overhaul of the Building, Adjoining Buildings, Park,
Common Areas and parking areas, and equipment, improvements and facilities,
including without limitation engineers, janitors, painters, floor waxers, window
washers, security and parking personnel and gardeners, (6) management of the
Building, Adjoining Buildings, Park, Common Area and parking areas, whether
managed by Landlord or an independent contractor (including, without limitation,
an amount equal to the fair market value of any on-site manager's office), (7)
rental expenses for (or a reasonable depreciation allowance on) personal
property used in the maintenance, operation or repair of the Building, Adjoining
Buildings, Park, Common Areas and parking areas, (8) the maintenance and repairs
described in Paragraph 7 hereof, and (9) any other costs or expenses incurred by
Landlord under this Lease and not otherwise reimbursed by tenants of the
Building, Adjoining Buildings, Park, Common Areas and parking areas. Common
Expenses shall also include the costs of any capital improvements made to the
Building, Adjoining Buildings, Park, Common Areas, and parking areas by Landlord
that reduce other Common Expenses, or that are required under any governmental
law or regulation, such costs to be amortized over such reasonable period as
Landlord shall determine at an interest rate the greater of ten percent (10%)
per annum or the interest rate paid by Landlord on funds borrowed for the
purpose of constructing such capital improvements. Common Expenses shall not
include depreciation on the Building or the Adjoining Buildings or equipment
therein, interest, executive salaries, advertising or real estate broker's
commissions. Common Expenses shall be adjusted to reflect a ninety-five percent
(95%) occupancy of the Building and the Adjoining Buildings during any period in
which the Building and the Adjoining Buildings are not on the average at least
ninety-five percent (95%) occupied. Management fees included in "Common
Expenses" are charged at a rate of 5.5% for net leases and 4.5% for gross
leases, and these percentages shall be considered a cap for that share of the
total that the Tenant shares.
4.2 Tenant shall pay to Landlord as Additional Charges 1/12th of
Tenant's Share of the Taxes for each Computation Year, on or before the first
day of each month during such Computation Year, in advance, in an amount
estimated by Landlord and billed by Landlord to Tenant; provided that Landlord
shall have the right initially to determine monthly estimates and to revise such
estimates from time to time. With reasonable promptness after Landlord has
received the tax bills for any Computation Year, Landlord shall furnish Tenant
with a statement (herein called "Landlord's Tax Statement") setting forth the
amount of Taxes for such Computation Year and Tenant's Share of such Taxes. If
the actual Taxes for such Computation Year exceed the estimated Taxes paid by
Tenant for such Computation Year, Tenant shall pay to Landlord the difference
between the amount paid by Tenant and the actual Taxes within 15 days after the
receipt of Landlord's Tax Statement and, if the total amount paid by Tenant for
any such Computation Year shall exceed the actual Taxes for such Computation
Year, such excess shall be credited against the next installments of Taxes due
from Tenant to Landlord hereunder.
4.3 Tenant shall pay to Landlord as Additional Charges 1/12th of
Tenant's share of the Operating Expenses for each Computation Year, on or before
the first day of each month of such Computation Year, in advance, in an amount
estimated by Landlord and billed by Landlord to Tenant; provided that Landlord
shall have the right initially to determine monthly estimates and to revise such
estimates from time to time. With reasonable promptness after the expiration of
each Computation Year, Landlord shall furnish Tenant with a statement "herein
called "Landlord's Expense Statement") setting forth in reasonable detail the
Operating Expenses for such Computation Year and Tenant's Share of such
Operating Expenses. If the actual Operating Expenses for such Computation Year
exceed the estimated Operating Expenses paid by Tenant for such Computation
Year, Tenant shall pay to Landlord the difference between the amount paid by
Tenant and the actual Operating Expense within 15 days after the receipt of
Landlord's Expense Statement and, if the total amount paid by Tenant for any
such Computation Year shall exceed the actual Operating Expenses for such
Computation Year, such excess shall be credited against the next installments of
the estimated Operating Expenses due from Tenant to Landlord hereunder.
4.4 If the Commencement Date shall occur on a date other than the
first day of a Computation Year, Tenant's Share of Taxes and Operating Expenses
for the Computation Year in which the Commencement Date occurs shall be in the
proportion that the number of days from and including the Commencement Date to
and including the last day of the Computation Year in which the Commencement
Date occurs bears to 365. Similarly, if the Expiration Date shall occur on a
date other than the last day of a Computation Year, Tenant's Share of Taxes and
Operating Expenses for the Computation Year in which the Expiration Date occurs
shall be in the proportion that the number of days from and including the first
day of the Computation Year in which the Expiration Date occurs to and including
the Expiration Date bears to 365. Notwithstanding the foregoing, Landlord may,
pending the determination of the amount of Taxes and Operating Expenses for such
partial Computation Year, furnish Tenant with statements of estimated Taxes,
estimated Operating Expenses, and Tenant's Share of each thereof for such
partial Computation Year. Within 15 days after receipt of such estimated
statements Tenant shall remit to Landlord, as Additional Charges, the amount of
Tenant's Share of such Taxes and Operating Expenses. After such Taxes and
Operating Expenses have been finally determined and Landlord's Tax Statement and
Landlord's Expense Statement have been furnished to Tenant pursuant to Sections
4.2 and 4.3 hereof, respectively, and if there shall have been an underpayment
of Tenant's Share of Taxes or Operating Expenses, Tenant shall remit the amount
of such underpayment to Landlord within 15 days after receipt of such statements
and if there shall have been an overpayment, Landlord shall remit the amounts of
any such overpayment to Tenant within 15 days after the issuance of such
statements.
5. Construction of Building, Premises and Common Areas.
5.1 Prior to the Commencement Date, Landlord will construct the
Building and the Premises and perform the work and make the installations in the
Premises substantially as set forth in Exhibit "D" attached hereto (such work
and installations being herein called "Landlord's Work"). Landlord's obligation
to perform Landlord's Work shall not require Landlord to incur overtime costs
and expenses and shall be subject to unavoidable delays due to acts of God,
governmental restrictions, strikes, labor disturbances, shortages of material
and supplies, and due to any other cause or event beyond Landlord's reasonable
control. Landlord shall, when construction progress so permits, notify Tenant in
advance of the approximate date on which Landlord's Work will be substantially
completed in
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accordance with Exhibit "D" and will notify Tenant when Landlord's Work is in
fact completed, which latter notice will constitute delivery of possession of
the Premises to Tenant. If any dispute shall arise as to whether the Premises
are substantially completed and ready for Tenant's occupancy, a certificate
furnished by Landlord's architect certifying the date of substantial completion
shall be conclusive of the fact and date and shall be binding upon Landlord and
Tenant. It is understood and agreed by Tenant that any minor changes from any
plans or from said Exhibit "D" that may be necessary during construction of the
Park, the Building, the Common Areas or the Premises shall not affect or change
this Lease or invalidate same. It is agreed that by occupying the Premises as a
tenant, Tenant formally accepts same and acknowledges that the Premises are in
the condition called for hereunder. Failure of Landlord to deliver possession of
the Premises within the time and in the condition provided for in this Lease
will not give rise to any claims for damages by Tenant against Landlord or
Landlord's contractor.
5.2 The manner in which the Common Areas are maintained and
operated and the expenditures therefore shall be at the sole discretion of
Landlord, and the use of such areas and facilities shall be subject to such
rules and regulations as Landlord shall make from time to time. Landlord shall
not be responsible for the nonperformance of any such rules and regulations by
any other tenant or occupant of the Park.
5.3 The purpose of attached Exhibit "B" is only to show the
approximate location of the Premises in the Building, and such exhibit is not
meant to constitute an agreement as to the construction of the Premises, the
Rentable Area thereof, or the specific location of the Common Areas or the
elements hereof or of the accessways to the Premises or the Park. Landlord
hereby reserves the right, at any time and from time to time, to (i) make
alterations in or additions to the Park and the Common Areas including, without
limitation, changes in the location, size, shape, and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas,
landscaped areas and walkways, as such changes shall alter or affect the basic
configuration and access to Tenant's building without Tenant's prior written
approval, except for those changes that are required by Landlord to comply with
any laws or ordinances. (ii) close temporatrily any of the Common Areas for
maintenance purposes as long as reasonable access to the Premises remains
available, (iii) designate property outside the Park to be part of the Common
Areas, (iv) add additional buildings and improvements to the Park and Common
Areas and (v) use the Common Areas while engaged in making alterations in or
additions or repairs to the Park.
6. Conduct of Business by Tenant.
6.1 Tenant shall use and occupy the Premises during the Term of
this Lease solely for the use specified in the Basic Lease Information and for
no other use or uses without the prior written consent of Landlord.
6.2 Tenant shall not use or occupy or permit the use or occupancy
of the Premises or any part thereof for any use other than the use specifically
set forth in Section 6.1, or in any manner that, in Landlord's judgment, would
adversely affect or interfere with (i) any services required to be furnished by
Landlord to Tenant or to any other tenant or occupant of the Park, (ii) the
proper and economical rendition of any such service of (iii) the use or
enjoyment of any part of the Park by any other tenant or occupant.
6.3 The parking spaces to be provided to Tenant pursuant to
Section 1.3 shall be used for parking only by vehicles no larger than full-sized
passenger automobiles or pickup trucks. Tenant shall not permit or allow any
vehicles that belong to or are controlled by Tenant or Tenant's employees,
suppliers, shippers, customers or invitees to be loaded or parked in areas other
than those designated by Landlord for such activities. If tenant permits or
allows any of the prohibited activities described in this Section 6.3, Landlord
shall have the right, in addition to all other rights and remedies that it may
have under this Lease, to remove or tow away the vehicle involved without prior
notice to Tenant, and the cost thereof shall be paid by Tenant to Landlord as
Additional Charges within five days after delivery to Tenant of bills therefore.
6.4 Tenant shall not store any property in the Common Areas
without the prior written consent of Landlord. In the event that any
unauthorized storage shall occur, Landlord shall have the right, in addition to
all other rights and remedies that Landlord may have under this Lease, to remove
the property without prior notice to Tenant, and the cost thereof shall be paid
by Tenant to Landlord within five days after delivery to Tenant of bills
therefore.
6.5 Tenant shall not do anything or permit anything to be done in
or about the Premises that shall (i) invalidate or be in conflict with the
provisions of any fire or other insurance policies covering the Building or the
Park or any property located therein, (ii) result in a refusal by fire insurance
companies of good standing to insure the Building or the Park or any such
property in amounts reasonably satisfactory to Landlord, (iii) subject Landlord
to any liability or responsibility for injury to any person or property by
reason of any business operation being conducted in or about the Premises or
(iv) cause any increase in the fire insurance rates applicable to the Building
or property located therein at the beginning of the Term or at any time
thereafter. Tenant, at Tenant's expense, shall comply with all rules, orders,
regulations and requirements of the American Insurance Association (formerly the
National Board of Fire Underwriters) and of any similar body that shall
hereafter perform the function of such Association.
7. Alterations and Tenant's Property.
7.1 Tenant shall make no structural alterations at any time nor
any installations, additions, or improvements (collectively "Alterations") which
exceed three thousand dollars ($3,000.00) in or to the premises without
Landlords prior written consent, which shall not be unreasonably withheld. All
Alterations shall be done at Tenant's expense at such times and in such manner
as Landlord may designate and only by such contractors or mechanics as are
approved by Landlord, and such approval shall not be unreasonably withheld.
7.2 All appurtenances, fixtures, improvements, additions and
other property attached to or installed in the Premises whether by the Landlord
or by or on behalf of Tenant, and whether at Landlord's expense or Tenant's
expense, or at the joint expense of the Landlord and Tenant, shall be and remain
the property of Landlord. Any furnishings and personal property installed in the
Premises that are removable without material damage to the Building or the
Premises, whether the property of Tenant or leased by Tenant, are herein
sometimes called "Tenant's Property." Any replacements of any property of
Landlord, whether made at Tenant's expense or otherwise, shall be and remain the
property of Landlord.
7.3 Any of Tenant's Property remaining on the Premises at the
expiration of the Term shall be removed by Tenant at Tenant's cost and expense
and Tenant shall, at its cost and expense, repair any damage to the premises in
excess of Two Thousand Dollars ($2,000.00) or any damage to the Building caused
by such removal. Any of Tenant's Property not removed from the Premises prior to
the expiration of the Term shall, at Landlord's option, become the property of
Landlord, or Landlord may remove such Tenant's Property and Tenant shall pay to
Landlord Landlord's costs of removal within ten days after delivery of a bill
therefore.
8. Landlord's Repairs.
Except for damage or wear and tear resulting from the omission,
negligence or willful misconduct of Tenant or any person claiming through or
under Tenant, or any of Tenant's employees, suppliers, shippers,
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customers or invitees, Landlord shall keep in good condition and repair the
foundations, exterior walls, structural condition of interior bearing walls, and
roof of the Premises, as well as the parking lots, walkways, driveways,
landscaping, fences, signs, and utility installations of the Common Areas.
Landlord shall not, however, be obligated to paint he exterior or interior
surface of exterior walls, nor shall Landlord be required to maintain, repair or
replace windows, doors or plate glass of the Premises. Landlord shall not be
liable for, and except as provided in Article 16 hereof there shall be no
abatement of Rent with respect to, any injury to or interference with Tenant's
business arising from any repair, maintenance, alteration, or improvement in or
to (i) any portion of the Park or the Building including the Premises, or (ii)
the fixtures, appurtenances, and equipment therein. Tenant hereby waives and
releases its right to make repairs at Landlord's expense under Sections 1941 and
1942 of the California Civil Code or under any similar law, statute or ordinance
now or hereafter in effect.
9. Tenant's Repairs.
9.1 Subject to the provisions of Article 8, Tenant, at Tenant's
cost and expense, shall make all repairs and replacements, structural and
otherwise, as and when Landlord deems necessary to preserve in good working
order and condition, the Premises and every part thereof including, without
limitation, all plumbing, heating, ventilating, and air conditioning systems,
electrical and lighting facilities and equipment with in the Premises, fixtures,
interior walls, interior surfaces of exterior walls, ceilings, windows, doors,
plate glass and skylights located within the Premises. At Landlord's option,
either Tenant shall procure and maintain, at Tenant's expense, a ventilating and
air conditioning system maintenance contract satisfactory to Landlord, or
Landlord shall procure and maintain a ventilating and air conditioning system
maintenance contract. If Landlord elects to procure and maintain the ventilating
and air conditioning system maintenance contract, Tenant shall pay to Landlord
from time to time, within 15 days after deliver of a statement therefore, the
cost of such contract.
9.2 All repairs and replacements made by or on behalf of Tenant
or any persona claiming through or under Tenant shall be made and performed (i)
at Tenant's cost and expense and at such time and in such manner as Landlord may
designate, (ii) by contractors or mechanics approved by Landlord, (iii) so that
same shall be at least equal in quality, value and utility to the original work
or installation and (iv) in accordance with the rules and regulations for the
Park adopted by Landlord from time to time and in accordance with all applicable
laws and regulations of governmental authorities having jurisdiction over the
Premises.
10. Abandonment. Tenant shall not vacate or abandon the Premises at any
time during the term of this Lease, and if Tenant shall abandon, vacate or
surrender the Premises or be dispossessed by process of law or otherwise, any
personal property belonging to Tenant and left on the Premises shall be deemed
to be abandoned, at the option of Landlord, except such property as may be
mortgaged to or otherwise subject to a security interest in favor of Landlord.
11. Liens. Tenant shall keep the Premises free from any liens arising
out of any work performed, materials furnished, or obligations by or for Tenant
or any person or entity claiming through or under Tenant. In the event that
Tenant shall not, within ten days following the imposition of any such lien,
cause the same to be released of record by payment or posting of a proper bond,
Landlord shall have, in addition to all other remedies provided herein and by
law, the right but not the obligation to cause such lien to be released by such
means as it shall deem proper, including payment of the claim giving rise to
such lien. All such sums paid by Landlord and all expenses incurred by it in
connection therewith, shall be considered Additional Charges and shall be
payable by Tenant to Landlord on demand. Landlord shall have the right at all
times to post and keep posted on the Premises, the Building, and any other party
having an interest therein, from mechanics' and materialmens' liens and Tenant
shall give to Landlord at least five business days' prior notice of commencement
of any construction on the Premises.
12. Assignment and Subletting.
12.1 Tenant shall not directly or indirectly, voluntarily or by
operation of law, sell, assign, encumber, pledge, or otherwise transfer or
hypothecate all or any part of the Premises or Tenant's leasehold estate
hereunder (collectively, "Assignment"), or permit the Premises to be occupied by
anyone other than Tenant or sublet the Premises (collectively, "Sublease") or
any portion thereof without Landlord's prior written consent in each instance,
which consent shall not be unreasonably withheld.
12.2 If Tenant desires at any time to enter into an Assignment of
this Lease or a Sublease of the Premises or any portion thereof, it shall first
give written notice to Landlord of its desire to do so, which notice shall
contain (i) the name of the proposed assignee, subtenant or occupant, (ii) the
nature of the proposed assignee's subtenant's or occupant's business to be
carried on in the Premises, (iii) the terms and provisions of the proposed
Assignment or Sublease, and (iv) such financial information as Landlord may
reasonably request concerning the proposed assignee, subtenant or occupant.
Tenant shall reimburse Landlord for Landlord's reasonable attorneys fees
incurred in connection with the processing and documentation of any requested
Assignment of this Lease or Sublease of the Premises. Any notice by Tenant to
Landlord pursuant to this Section 12.2 of a proposed assignment or sublease
shall be accompanied by a payment of $500 as a non-refundable fee to compensate
Landlord for its time and the processing of Tenant's request for Landlord's
consent.
12.3 At any time within 10 days after Landlord's receipt of any
notice specified in Section 12.2, Landlord may, by written notice to Tenant,
elect to (a) take an Assignment of Tenant's leasehold estate specified in
Tenant's notice hereunder, or any portion thereof, (b) terminate this Lease as
to the portion (including all) of the premises that is specified in Tenant's
notice, with a proportionate abatement in the Rent, (c) consent to the Sublease
of Assignment, or (d) disapprove the Sublease or Assignment. In the event
Landlord elects to Sublease or take an Assignment from Tenant as described in
Subsection (a) above, the rent payable by Landlord shall be in the lower of that
set forth in Tenant's notice or the Rent payable by Tenant under this Lease at
the time of the Assignment or Sublease). In the event Landlord elects any of the
options set forth in Subsections (a) or (b) above, with respect to a portion of
the Premises, (i) Tenant shall at all times provide reasonable and appropriate
access to such portion of the Premises and use of any common facilities and (ii)
Landlord shall have the right to use such portion of the Premises for any legal
purpose in its sole discretion and the right to further assign or sublease the
portion of the Premises subject to Landlord's election without the consent of
Tenant. If Landlord consent to the Sublease or Assignment within said 60-day
period, Tenant may thereafter, within 90 days after Landlord's consent but not
later than the expiration of said 90 days, enter into such Assignment or
Sublease of the Premises or portion thereof upon the terms and conditions set
forth in the notice furnished by Tenant to Landlord pursuant to Section 12.2.
12.4 No consent by Landlord to any Assignment or Sublease by
Tenant shall relieve Tenant of any obligation to the performed by Tenant under
this Lease whether arising before or after the Assignment or Sublease. The
consent by Landlord to any Assignment or Sublease shall not relieve Tenant of
the obligation to obtain Landlord's
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<PAGE>
prior written consent to any other Assignment or Sublease. Any Assignment or
Sublease that is not in compliance with Article 12 shall be void and, at the
option of Landlord, shall constitute a material default by Tenant under this
Lease. The acceptance of Rent or Additional Charges by Landlord from a proposed
assignee or sublessee shall not constitute the consent by Landlord to such
Assignment or Sublease.
12.5 Any sale or other transfer, including transfer by
consolidation, merger or reorganization, of a majority of the voting stock of
Tenant, if Tenant is a corporation, or any sale or other transfer of a majority
of the partnership interest in Tenant, if Tenant is a partnership, shall be an
Assignment for purposes of this Article 12. As used in this Section 12.5, the
Term "Tenant" shall also mean any entity that has guaranteed Tenant's
obligations under this Lease, and the prohibition hereof shall be applicable to
any sales or transfers of the stock or partnership interest of said guarantor.
12.6 Each assignee, sublessee or other transferee other than
Landlord shall assume, as provided in this Section 12.6, all obligations of
Tenant under this Lease and shall be and remain liable jointly and severally
with Tenant for the payment of Rent and Additional Charges and for the
performance of all of the terms, covenants, conditions and agreements herein
contained on Tenant's part to be performed for the Term; provided, however, that
the assignee, sublessee or other transferee shall be liable to Landlord for rent
only in the amount set forth in the Assignment or Sublease. No Assignment shall
be binding on Landlord unless the assignee or Tenant shall deliver to Landlord a
counterpart of the Assignment and an instrument in recordable form that contains
a covenant of assumption by the assignee satisfactory in substance and form to
Landlord consistent with the requirements of this Section 12.6, but the failure
or refusal of the assignee to execute such instrument of assumption shall not
release or discharge the assignee from its liability as set forth above.
12.7 Landlord and Tenant acknowledge that the foregoing
provisions concerning assignment and subletting, including without limitation
Landlord's right to withhold its consent to any proposed assignment or sublease
(i) are critical to Landlord's determination to enter into this Lease, and (ii)
have bee included in this Lease as a result of specific negotiation between the
Landlord and Tenant.
13. Compliance with Laws. Tenant, at Tenant's cost and expense, shall
comply with all laws, orders and regulations of federal, state, county, and
municipal authorities and with all directions, pursuant to law, of all public
officers, that shall impose any duty upon Landlord or Tenant with respect to the
Premises or the use or occupancy thereof, except that Tenant shall
not be required to make any structural alterations in order to comply unless
such Alterations shall be necessitated or occasioned, as a whole or in part, by
the act, omission, or negligence of Tenant or any person claiming through or
under Tenant or any of their employees, supplies, shippers, customers, or
invitees, or by the use of occupancy or manner of use or occupancy of the
Premises by Tenant or any such person. Any work or installation made or
performed by or on behalf of Tenant or any person claiming through or under
Tenant pursuant to the provisions of this Article 13 shall be made in conformity
with, and subject to the provisions of, Section 9.2.
14. Subordination and Attornment.
14.1 At Landlord's option, this Lease shall be subordinated to
any ground lease, mortgage, deed of trust or any other hypothecation for
security now or hereafter placed upon the Land, the Building, the Premises, or
any part thereof, and to any and all advances made on the security thereof and
to all renewals, modifications, consolidations, replacements, and extensions
thereof. Notwithstanding such subordination, Tenant's right to quiet possession
of the Premises shall not be disturbed if Tenant is not in default and so long
as Tenant shall pay the rent and observe and perform all of the provisions of
this Lease, unless this Lease is otherwise terminated pursuant to its terms. In
the event of (i) the termination of any ground lease upon the Land, or (ii) any
foreclosure, transfer in lieu of foreclosure or exercise of power of sale under
any mortgage or deed of trust upon the Land, and on each such event Tenant
shall, at the request of the party acquiring the interests of Landlord under
this Lease following such event, attorn to such party and recognize such party
as the Landlord under this Lease. If any mortgagee, trustee or ground lessor
shall elect to have this Lease prior to the lien of its mortgage, deed of trust
or ground lease, and shall give written notice thereof to Tenant, this Lease
shall be deemed prior to such mortgage, deed of trust or ground lease, whether
this Lease is dated prior or subsequent to the date of said mortgage, deed of
trust or ground lease or the date of recording thereof.
14.2 Tenant agrees to execute any documents required to
effectuate an attornment or a subordination, or to make this Lease prior to the
lien of any mortgage, deed of trust or ground lease, as the case may be, in
accordance with the provisions of Section 14.1 above. Tenant's failure to
execute such documents within ten (10) days after written demand shall
constitute a material default by Tenant hereunder and without further notice to
Tenant or, at Landlord's option, Landlord shall execute such document on behalf
of Tenant as Tenant's attorney-in-fact and in Tenant's name, place and stead to
execute such documents in accordance with this Section 14.2.
15. Inability to Perform. If, by reason of the occurrence of any of the
unavoidable delay specified in Section 5.1, Landlord is unable to furnish or is
delayed in furnishing any utility or service required to be furnished by
Landlord under the provisions of this Lease or of any collateral instrument, or
is unable to perform or make or is delayed in performing or making any
installations, repairs, alterations, additions or improvements, whether required
to be performed or made under this Lease or under any collateral instrument, or
is unable to fulfill or is delayed in fulfilling any of Landlord's other
obligations under this Lease or any collateral instrument, no such inability or
delay shall constitute an actual or constructive eviction, as a whole or in
part, or entitle Tenant to any abatement of diminution of Rent or Additional
Charges, or relieve Tenant from any of its obligations under this Lease, or
impose any liability upon Landlord or its agents by reason of inconvenience or
annoyance to Tenant or by reason of injury to or interruption of Tenant's
business, or otherwise. Tenant hereby waives and releases its right to terminate
this Lease under Section 1932 (1) of the California Civil Code or under any
similar law, statute or ordinance now or hereafter in effect.
16. Destruction.
16.1 If the Premises shall be damaged by fire or other casualty
insured against by Landlord's fire and extended coverage insurance policy
covering the Building, and if Tenant shall give prompt notice to Landlord of
such damage, Landlord, at Landlord's expense, shall repair such damage;
provided, however, that Landlord shall have no obligation to repair any damage
to or to replace Tenant's property, Alterations, or any other property or
effects of Tenant. Except as otherwise provided in this Article 16, if the
entire Premises shall be rendered untenantable by reason of any such damage,
Rent and Additional Charges shall abate for the period from the date of such
damage to the date when such damage to the Premises shall have been repaired,
and if only a part of the Premises shall be rendered untenantable, Rent and
Additional Charges shall abate for the period in the proportion that the area of
the part of the Premises so rendered untenantable bears to the total area of the
Premises; provided, however, if prior to the date when all of such damage shall
have been repaired, any part of the Premises so damaged
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shall be rendered tenantable or shall be used or occupied by Tenant or any
person or person claiming through or under Tenant, then the amount by which Rent
and Additional Charges shall abate shall be equitably apportioned for the period
from the date of any such use or occupancy to the date when all such damage
shall have been repaired.
16.2 Notwithstanding the provisions of Section 16.1, if, prior to
or during the Term, (1) the Premises shall be totally damaged or rendered wholly
untenantable by fire or other casualty, and if Landlord shall decide not to
restore the Premises, or (ii) the Building shall be so damaged by fire or other
casualty that, in Landlord's opinion, have been damaged or rendered
untenantable, then, in any of such events, Landlord at Landlord's option, may
give to Tenant within 90 days after such fire or other casualty 30 days' notice
of termination of this Lease and, in the event such notice is given, this Lease
and the Term shall terminate upon the expiration of such 30 days with the same
effect as if the date of expiration of such 30 days were the Expiration Date;
and Rent and Additional Charges shall be apportioned as of such date, and any
prepaid portion of Rent or Additional Charges for any period after such date
shall be refunded by Landlord to Tenant.
16.3 Landlord and Tenant shall each obtain from their respective
insurers under all policies of fire, theft, public liability, workers'
compensation and other insurance maintained by either of them at any time during
the Term insuring or covering the Building, the Park or any portion thereof or
operations therein, a waiver of all rights of subrogation that the insurer of
one party might otherwise, if at all, have against the other party, and Landlord
and Tenant shall each indemnify and defend the other party against and hold the
other party harmless from any and all loss, cost, damage, liability or expense,
including reasonable attorneys fees, resulting from the failure to obtain such
waiver.
16.4 Except to the extent expressly provided in Section 16.3,
nothing contained in this Lease shall relieve Tenant of any liability to
Landlord or to its insurance carriers that Tenant may have under law or under
the provisions of this Lease in connection with any damage to the Premises of
the Building by fire or other casualty.
16.5 Notwithstanding the provisions of Section 16.1, if any such
damage is due to the fault or neglect of Tenant, any person claiming through or
under Tenant or any of their employees, suppliers, shippers, customers or
invitees, then there shall be no abatement of Rent or Additional Charges by
reason of such damage, unless Landlord is reimbursed for such abatement of Rent
or Additional Charges pursuant to any rental insurance policies that Landlord
may, in its sole discretion, elect to carry.
16.6 The provisions of this Lease, including this Article 16,
constitute an express agreement between Landlord and Tenant with respect to any
and all damages to, or destruction of, all or any part of the Premises, the
Building or any other portion of the Park and any statute or regulation of the
State of California including, without limitation, Sections 1932 (2) and 1933(4)
of the California Civil Code with respect to any rights or obligations
concerning damage or destruction in the absence of an express agreement between
the parties and any similar statute or regulation now or hereafter in effect
shall have no application to this Lease or to any damage to or destruction of
all or any part of the Premises, the Building or any other portion of the Park.
17. Eminent Domain.
17.1 If all of the Premises is condemned or taken in any manner
for public or quasi-public use including, but not limited to, a conveyance or
assignment in lieu of a condemnation or other taking, this Lease shall
automatically terminate as of the earlier of the date of the vesting of title or
the date of dispossession of Tenant as a result of such condemnation or other
taking. If a part of the Premises is so condemned or taken, this Lease shall
automatically terminate as to the portion of the Premises so taken as of the
earlier of the date of the vesting of the title or the date of dispossession of
Tenant as a result of such condemnation or taking. If such portion of the
Building or Park is condemned or otherwise taken so as to require, in the
opinion of Landlord, a substantial alteration or reconstruction of the remaining
portions thereof, this Lease may be terminated by Landlord as of the earlier of
the date of the vesting of title or the date of dispossession of Tenant as a
result of such condemnation or taking by written notice to Tenant within 60 days
following notice to Landlord of the date on which said vesting or dispossession
will occur. I such portion of the Premises is taken so as to render the
remaining portion untenantable and unusable by Tenant, this Lease may be
terminated by Tenant as of the earlier of the date of the vesting of title or
the date of dispossession of Tenant as a result of such condemnation or taking
by written notice to Landlord within 60 days following notice to Tenant of the
date on which said vesting or dispossession will occur.
17.2 Landlord shall be entitled to the entire award in any
condemnation proceeding or other proceeding (for taking for public or
quasi-public use) including, without limitation, any award made for the value of
the leasehold estate created by this Lease. No award for any partial or entire
taking shall be apportioned and Tenant hereby assigns to Landlord any award that
may be made in such condemnation or other taking together with any and all
rights of Tenant now or hereafter arising in or to same or any part thereof;
provide,d however, that nothing contained herein shall be deemed to give
Landlord any interest in, or to require Tenant to assign to Landlord any award
made to Tenant specifically for its relocation expenses, the taking of personal
property and fixtures belonging to Tenant or the interruption of or damage of
Tenant's business.
17.3 In the event of a partial condemnation or other taking that
does not result in a termination of this Lease as to the entire Premises, the
Rent and Additional Charges shall abate in proportion to the portion of the
Premises taken by such condemnation or other taking.
17.4 If all or any portion of the Premises is condemned or
otherwise taken for public or quasi-public use for a limited period of time,
this Lease shall remain in full force and effect and Tenant shall continue to
perform terms, conditions, and covenants of this Lease; provided, however, that
Rent and Additional Charges shall abate during such limited period in proportion
to the portion of the Premises that is rendered untenantable and unusable as a
result of such condemnation or other taking. Landlord shall be entitled to
receive the entire award made in connection with any such temporary condemnation
or other taking.
18. Utilities.
18.1 Tenant shall pay for all water, gas, heat, light, power,
telephone, and other utilities and services supplied for the Premises together
with any taxes thereon. If any such services are not separately metered to the
Premises, Tenant shall pay, at Landlord's option, either Tenant's Share or a
reasonable proportion, to be determined by Landlord, of all charges jointly
metered with other premises in the Building. Landlord makes no representation
with respect to the adequacy or fitness of the air conditioning or ventilation
equipment in the Building to maintain temperatures that may be required for, or
because of, any equipment of Tenant other than normal fractional horsepower
office equipment, and Landlord shall have no liability for loss or damage in
connection therewith.
8 Initials CTC DRB
<PAGE>
18.2 In the event any governmental entity promulgates or
revises any statute, ordinance or building, fire or other code or imposes
mandatory or voluntary controls or guidelines on Landlord or the Park or any
part thereof, relating to the use of conservation of energy, water, gas, light
or electricity, or the reduction of automobile or other emissions, or the
provision of any other utility or service provided with respect to this Lease,
or in the event Landlord is required or elects to make alterations to the
Building or any other part of the Park in order to comply with such mandatory or
voluntary controls or guidelines or Landlord may, in its sole discretion, make
such alterations to the Building or any other part of the Park related thereto.
Such compliance and the making of such alterations shall in no event entitle
Tenant to any damages, relieve Tenant of the obligation to pay the full Rent and
Additional Charges reserved hereunder or constitute or be construed as a
constructive or other eviction of Tenant.
19. Default.
19.1 The failure of Tenant to perform or honor any covenant,
condition or representation made under this Lease shall constitute a default,
hereunder by Tenant upon expiration of the appropriate grace period hereinafter
provided. Tenant shall have a period of ten (10) days from the date of written
notice from Landlord within which to cure any default in te payment of Rent or
Additional Charges. Tenant shall have a period of ten days from the date of
written notice from Landlord within which to cure any other default under this
Lease; provided, however, that with respect to any default other than the
payment of Rent or Additional Charges that cannot reasonably be cured within ten
days, the default shall not e deemed to be uncured if Tenant commences to cure
within ten days from Landlord's notice and continues to prosecute diligently the
curing thereof to completion within a reasonable time.
19.2 Upon the occurrence of a default by Tenant that is not cured
by Tenant within the grace periods specified in Section 19.1 hereof, Landlord
shall have the following rights and remedies in addition to all other rights and
remedies available to Landlord at law or in equity.
19.2.1 The rights and remedies provided by California
Civil Code Section 1951.2, including but not limited to, the right to terminate
Tenant's right to possession of the Premises and to recover the worth at the
time of award of the amount by which the unpaid Rent and Additional Charges for
the balance of the Term after the time of award exceed the amount of rental loss
for the same period that Tenant proves could be reasonably avoided, as computed
pursuant to Subsection (b) of said Section 1951.2.
19.2.2 The rights and remedies provided by California
Civil Code Section 1951.4 which allows Landlord to continue this Lease in effect
and to enforce all of its rights and remedies under this Lease including the
right to recover Rent and Additional Charges as they become due, for as long as
Landlord does not terminate Tenant's right to possession; provided, however, if
Landlord elects to exercise its remedies described in this Subsection 19.2.2 and
Landlord does not terminate this Lease, and if Tenant requests Landlord's
consent to an Assignment of this Lease or a Sublease of the Premises at such
time as Tenant is in default, Landlord shall not unreasonably withhold its
consent to such Assignment or Sublease. Acts of maintenance or preservation,
efforts to relet the Premises or the appointment of a receiver upon Landlord's
initiative to protect its interest under this Lease shall not constitute a
termination of Tenant's right to possession.
19.2.3 The right to terminate this Lease by giving notice
to Tenant in accordance with applicable law.
19.2.4 The right and power, as attorney-in-fact for
Tenant, to enter the Premises and remove therefrom all persons and property, to
store such property in a public warehouse or elsewhere at the cost of and for
the account of Tenant, and to sell such property and apply the proceeds
therefrom pursuant to applicable California law. Landlord, as attorney-in-fact
for Tenant, may from time to time sublet the Premises or any part thereof for
such term or terms (which may extend beyond the Term) and at such rent and such
other terms as Landlord in its sole discretion may deem advisable, with the
right to make alterations in and repairs to the Premises. Upon each such
subletting, (i) Tenant shall be immediately liable for payment to Landlord of,
in addition to indebtedness other than Rent and Additional Charges due
hereunder, the cost of such subletting and such alterations and repairs incurred
by Landlord and the amount, if any, by which the Rent and Additional Charges for
the period of such subletting (to the extent such period does not exceed the
Term) exceed the amount to be paid as Rent and Additional Charges for the
Premises for such period or (ii) at the option of the Landlord, rents received
from such subletting shall be applied, first to payments of any costs of such
subletting and of such alterations and repairs; second, to payment of Rent and
Additional Charges due and unpaid hereunder; and the residue, if any, shall be
held by Landlord and applied in payment to Landlord within which to cure any
default in the payment of Rent or Additional Charges. Tenant shall have a period
of ten days from the date of written notice from Landlord within which to cure
any other default under this Lease; provided, however, that with respect to any
default other than the payment of Rent or Additional Charges that cannot
reasonably be cured within ten days, the default shall not be deemed to be
incurred if Tenant commences to cure within ten days from Landlord's notice and
continues to prosecute diligently the curing thereof to completion within a
reasonable time.
19.2.5 The right to have a receiver appointed for Tenant,
upon application by Landlord, to take possession of the Premises and to apply
any Rent collected from the Premises and to exercise all other rights and
remedies granted to Landlord as attorney-in-fact for Tenant pursuant to
Subsection 19.2.4.
20. Insolvency of Bankruptcy. The appointment of a receiver to take
possession of all or substantially all of the assets of Tenant, or an assignment
by Tenant for the benefit of creditors, or any action taken or suffered by
Tenant under any insolvency, bankruptcy, reorganization, moratorium, or other
debtor relief act or statute, whether now existing or hereafter amended or
enacted, shall at Landlord's option constitute a breach of this Lease by Tenant.
Upon the happening of any such event or at any time thereafter, this Lease shall
terminate five days after written notice of termination from Landlord to Tenant.
In no event shall this Lease be assigned or assignable by operation of law or by
voluntary or involuntary bankruptcy proceedings or otherwise, and in no event
shall this Lease or any rights or privileges hereunder be an asset of Tenant
under any bankruptcy, insolvency, reorganization of other debtor relief
proceedings.
21. Landlord's Performance of Tenant's Obligations. If Tenant shall
default in the performance of its obligations under this Lease, at any time
thereafter and without notice, may remedy such default for Tenant's account and
at Tenant's expense, without thereby waiving any other rights or remedies of
Landlord with respect to such default. Upon demand therefore from Landlord,
Tenant shall reimburse Landlord for the cost to Landlord of performing such
obligations plus interest at the maximum rate allowed by law.
9 Initials CTC DRB
<PAGE>
22. Indemnification.
22.1 With the sole exception of damage resulting from the
negligence or willful misconduct of the Landlord, its affiliates or agents,
Tenant agrees to indemnify Landlord against and save Landlord harmless from any
and all loss, cost, liability, damage, and expense including, without
limitation, penalties, fines, and reasonable attorney's fees, incurred in
connection with or arising from any cause whatsoever in, on, or about the
Premises including, without limited the generality of the foregoing, (i) any
default by Tenant in the observance or performance of any of the terms,
covenants or conditions of this Lease on Tenant's part to be observed or
performed, (ii) the use or occupancy or manner of use or occupancy of the
Premises by Tenant or any person claiming through or under Tenant, (iii) the
condition of the Premises or any occurrence of happening on the Premises from
any cause whatsoever, or (iv) any act, omission or negligence of Tenant or any
person claiming through or under Tenant, or of the employees, suppliers,
shippers, customers or invitees of Tenant or any such person, in, on, or about
the Premises or Park, whether prior to, during, or after the expiration of the
Term including, without limitation, any act, omission or negligence in the
making or performing of any Alterations. Tenant further agrees to indemnify
Landlord, Landlords' agent and the lessor or lessors under all ground or
underlying leases against, and hold them harmless from any and all loss, cost,
liability, damage and expense including, without limitation, reasonable
attorneys fees, incurred in conjunction with or arising from any claims by any
persons by reason of injury to persons or damage to property occasioned by any
use, occupancy, condition, occurrence, happening, act, omission or negligence
referred to in the preceding sentence.
22.2 Landlord shall not be responsible for or liable to Tenant
for any loss or damage that may be occasioned by or through the acts or
omissions of persons occupying adjoining premises or any part of the premises
adjacent to or connected with the Premises or any part of the Park or for any
loss or damage resulting to Tenant or its property from burst, stopped or
leaking water, gas, sewer or steam pipes or for any damage to or loss of
property within the Premises from any cause whatsoever, including theft.
22.3 Except as a specifically provided to the contrary in this
Lease, Tenant shall pay to Landlord within five days after delivery by Landlord
to Tenant of bills or statement therefore; (i) sums equal to all expenditures
made and monetary obligations by Landlord including, without limitation,
expenditures made and obligations incurred for reasonable attorneys fees, in
connection with the remedying by Landlord for Tenant's account pursuant to the
provisions of Article 21, (ii) sums equal to all losses, costs, liabilities,
damages and expenses referred to in Section 22.1, (iii) sums equal to all
expenditures made and monetary obligations incurred by Landlord including,
without limitation, expenditures made and obligations incurred for reasonable
attorneys fees, in collecting or attempting to college the Rent, any Additional
Charges or any other sum of money accruing under this Lease or in enforcing or
attempting to enforce any rights of Landlord under this Lease or pursuant to law
and (iv) all other sums of money (other than Rent) accruing from Tenant to
Landlord under the provisions of this Lease. Any sum of money (other than Rent)
accruing from Tenant to Landlord pursuant to any provision of this Lease
including, without limitation, he provisions of Exhibit "D" attached hereto,
whether prior to or after the Commencement Date, may, at Landlord's option, be
deemed Additional Charges. Tenant's obligations under this Section 22.3 shall
survive the expiration or sooner termination of the Term.
23. Insurance. Tenant shall procure, at its cost and expense, and keep
in effect during the Term, comprehensive general liability insurance including
contractual liability with a minimum limit of liability of $3,000,000 per
occurrence of bodily injury and property damage combined. Such insurance shall
name Landlord as an additional insured, shall specifically include the liability
assumed hereunder by Tenant (provided that the amount of such insurance shall
not be construed to limit the liability of Tenant hereunder), and shall provide
that it is primary insurance and not excess over or contributory with any other
valid, existing and applicable insurance in force for or on behalf of Landlord,
and shall provide that Landlord shall receive 30 days' written notice from the
insurer prior to any cancellation or change of coverage. Tenant shall deliver
policies of such insurance or certificates thereof to Landlord on or before the
Commencement Date, and thereafter at least 30 days before the expiration dates
of expiring policies; and, in the event Tenant shall fail to procure such
insurance or to deliver such policies or certificates, Landlord may, at is
option, procure same for the account of Tenant, and the cost thereof shall be
paid to Landlord as Additional Charges within five days after delivery to Tenant
of bills therefore. Tenant's compliance with the provisions of this Article 23
shall in no way limit Tenant's liability under any of the provisions of Article
22.
24. Access to Premises. Landlord reserves and shall at all times have
the right to enter the Premises at all reasonable times to (i) inspect same,
(ii) supply any service to be provided by Landlord to Tenant hereunder, (iii)
show the Premises to prospective purchasers, mortgagees or tenants, (iv) post
notices of non-responsibility and to alter, improve or repair the Premises and
any portion of the Park, without abatement of Rent or Additional Charges, and
may for that purpose erect, use, and maintain scaffolding, pipes, conduits, and
other necessary structures in and through the Premises where reasonably required
by the character of the work to be performed, provided that the entrance to the
Premises shall not be blocked thereby, and further provided that the business of
Tenant shall not be interfered with unreasonably. Tenant hereby waives any claim
for damages, for any injury or inconvenience or to interference with Tenant's
business, any loss of occupancy or quiet enjoyment of the Premises or any other
loss occasioned thereby. For each of the aforesaid purposes, Landlord shall at
all times have and retain a key with which to unlock all doors in, upon, and
about the Premises excluding files, vaults and sales or special security areas
(designated in advance), and Landlord shall have the right to use any and all
means that Landlord may deem necessary or proper to open said doors in an
emergency, in order to obtain entry to any portions thereof obtained by Landlord
by any of said means or otherwise shall not under any circumstances be construed
or deemed to be a forcible or unlawful entry into, or a detainer of, the
Premises or an eviction, actual or constructive, of Tenant from the Premises or
any portion thereof.
25. Notices. Except as otherwise expressly provided in this Lease, any
bills, statements, notices, demands, requests or other communications given or
required to be given in writing, sent by registered or certified mail, or
delivered personally (i) to Tenant (ii) at Tenant's address set forth in the
Basic Lease Information, if sent prior to Tenant's taking possession of the
Premises, or (iii) at the Park if sent subsequent to Tenant's taking possession
of the Premises or (iv) at Landlord's option, at any place where Tenant or any
agent or employee of Tenant may be found if sent subsequent to Tenant's
vacating, deserting, abandoning, or surrendering the Premises or to Landlord at
Landlord's address set forth in the Basic Lease Information, or to such other
address as either Landlord or Tenant may designate as its new address for such
purpose by notice given to the other in accordance with the provisions of this
Article 25. Any such bill, statement, notice, demand, request, or other
communication shall be deemed to have been rendered or given two days after the
date when it shall have been mailed as provided in this Article 25 if sent by
registered or certified mail, or upon the date personal delivery is made. If
Tenant is notified of the identity and address of Landlord's mortgagee or ground
or underlying lessor, Tenant shall give to such mortgagee or ground or
underlying lessor notice of any default by Landlord under the terms of the Lease
in writing sent by registered or certified mail, and such mortgagee or ground or
underlying lessor shall be given a reasonable opportunity to cure such default
prior to Tenant's exercising any remedy available to it.
10 Initials CTC DRB
<PAGE>
26. No Waiver by Landlord.
26.1 No failure by Landlord to insist upon the strict
performance of any obligation of Tenant under this Lease or to exercise any
right, power, or remedy consequent upon a breach thereof, no acceptance of full
or partial Rent or Additional Charges during the continuance of any such breach,
and no acceptance of the keys to or possession of the Premises prior to the
termination of the Term by any employee of Landlord shall constitute a waiver of
any such breach or of such term, covenant, or condition or operate as a
surrender of this Lease. No payment by Tenant or receipt by Landlord of a lesser
amount than the aggregate of all Rent and Additional Charges then accruing or
becoming due unless Landlord elects otherwise; and no endorsement or statement
on any check, no letter accompanying any check or other payment of Rent or
Additional Charges in any such lesser amount, and no acceptance of any such
check or then such payment by Landlord shall constitute an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such Rent or Additional Charges or to
pursue any other legal remedy.
26.2 Neither this Lease nor any term or provision hereof may be
changed, waived, discharged, or terminated orally, and no breach thereof shall
be waived, altered, or modified except by a written instrument signed by the
party against which the enforcement of the change, waiver, discharge or
termination is sought. No waiver of any breach shall affect or alter this Lease,
but each and every term, covenant, and condition of this Lease shall continue in
full force and effect with respect to any other existing or subsequent breach
thereof.
27. Tenant's Certificates. Tenant, at any time and from time to time
upon not less than ten days' prior written notice from Landlord, will execute,
acknowledge, and deliver to Landlord and, at Landlord's request, to any
prospective purchaser, ground, or underlying lessor or mortgagee of any part of
the Park, a certificate of Tenant stating: (i) that Tenant has accepted the
Premises (or, if Tenant has not done so, that Tenant has not accepted the
Premises and specifying the reasons therefore), (ii) the Commencement and
Expiration Dates of this Lease, (iii) that this Lease is unmodified and in full
force and effect (or, if there have been modifications, that same is in full
force and effect as modified and stating the modifications), (iv) whether or not
there are then existing any defenses against the enforcement of any of the
obligations of Tenant under this Lease (and, if so, specifying same), (v)
whether or not there are then existing any defaults by Landlord in the
performance of its obligations under this Lease (and, if so, specifying same),
(vi) the dates, if any, to which the Rent and Additional Charges and other
charges under this Lease have been paid and (vii) any other information that may
reasonably be required by any of such persons. It is intended that any such
certificate of Tenant delivered pursuant to this Article 27 may be relied upon
by Landlord and any prospective purchaser, ground or underlying lessor or
mortgagee of any part of the Park.
28. Tax on Tenant's Personal Property. At least ten days prior to
delinquency, Tenant shall pay all taxes levied or assessed upon Tenant's
equipment, furniture, fixtures, and other personal property located in or about
the Premises. If the assessed value of Landlord's property is increased by the
inclusion therein of a value placed upon Tenant's equipment, furniture,
fixtures, or other personal property, Tenant shall pay to Landlord, upon written
demand, the taxes so levied against Landlord or the proportion thereof resulting
from said increase in assessment. The portion of real estate taxes payable by
Tenant pursuant to this Article 28 and by other tenants of the Park pursuant to
similar provisions in their leases shall be excluded from Taxes for purposes of
computing the Additional Charges to be paid pursuant to Article 4.
29. Security Deposit. By execution of this Lease, Landlord acknowledges
receipt of Tenant's Security Deposit for the faithful performance of all terms,
covenants and conditions of this Lease. The sum of the security deposit is
specified in the Basic Lease Information. Tenant agrees that Landlord may,
without waiving any of Landlord's other rights and remedies under this Lease
upon the occurrence of any of the events of default described in Article 19,
apply the Security Deposit to remedy any failure by Tenant to repair or maintain
the Premises or to perform any other terms, covenants, or conditions contained
herein. If Tenant has kept and performed all terms, covenants, and conditions of
this lease during the Term, Landlord will, within 30 days following the
termination hereof, return said sum to Tenant or the last permitted assignee of
Tenant's interest hereunder at the expiration of the Term. Should Landlord use
any portion of the Security Deposit to cure any default by Tenant hereunder,
Tenant shall forthwith replenish the Security Deposit to the original amount.
Landlord shall not be required to keep the Security Deposit separate from its
general funds, and Tenant shall not be entitled to interest on any such deposit.
Upon the occurrence of any of the event of default described in Article 19, the
security deposit shall become due and payable to Landlord to the extent required
to compensate Landlord for damages incurred, or to reimburse Landlord as
provided herein, in connection with any such event or default.
30. Authority. If Tenant signs as a corporation or a partnership, each
of the persons executing this Lease on behalf of Tenant does hereby covenant and
warrant that Tenant is a duly authorized and existing entity, that Tenant has
and is qualified to do business in California, that Tenant has full right and
authority to enter into this Lease and that each and every person signing on
behalf of Tenant is authorized to do so. Upon Landlord's request, Tenant shall
provide Landlord with evidence reasonably satisfactory to Landlord confirming
the foregoing covenants and warranties.
31. Broker. Landlord and Tenant represent and warrant to each other that
they have not dealt with any broker or finder in connection with this Lease or
the Premises other than the broker specified in the Basic Lease Information and
that the other party shall not be required to pay any commission whatsoever with
regard to this Lease resulting from the actions of the party making such
representation, except for the commission owing to the broker specified in the
Basic Lease Information, which shall be paid by Landlord. Landlord and Tenant
shall indemnify and defend the other party against and hold the other party
harmless from any and all losses, costs, damages, liabilities, and expenses
including, without limitation, reasonable attorneys fees, resulting from a
breach by the indemnifying party of the foregoing representation.
32. Miscellaneous.
32.1 The words "Landlord" and "Tenant" as used herein shall
include the plural as well as the singular. The words used in the neuter gender
include the masculine and feminine. If there is more than one Tenant, the
obligations under this Lease imposed on Tenant shall be joint and several. The
captions preceding the articles of this Lease have been inserted solely as a
matter of convenience, and such captions in no way define or limit the scope or
intent of any provision of this Lease.
32.2 The terms, covenants, and conditions contained in this
Lease shall bind and inure to the benefit of Landlord and Tenant and, except as
otherwise provided herein, their respective personal representatives and
successors and assignees; provided, however, upon the sale, assignment or
transfer by Landlord as named herein (or by any subsequent landlord) of its
interest in the Building as owner or lessee, including any transfer by operation
of law. Landlord (or subsequent landlord) shall be relieved of all subsequent
obligations or liabilities under
11 Initials CTC DRB
<PAGE>
this Lease, and all obligations subsequent to such sale, assignment, or transfer
(but not any obligations or liabilities that have accrued prior to the date of
such sale, assignment, or transfer) shall be binding upon the grantee, assignee,
or other transferee of such interests, any such grantee, assignee or transferee,
by accepting such interest, shall be deemed to have assumed such subsequent
obligations and liabilities. A lease of the entire Building to a person other
than for occupancy thereof shall be deemed a transfer within the meaning of this
Section 32.2.
32.3 If any provision of this Lease or the application thereof
to any person of circumstance shall, to any extent, be invalid or unenforceable,
the remainder of this lease, or the application of such provision to persons or
circumstances other than those as to which it is invalid or unenforceable, shall
not be affected thereby, and each provision of this Lease shall be valid and
enforced to the full extent permitted by law.
32.4 This Lease shall be construed and enforced in accordance
with the laws of the State of California.
32.5 Submission of this instrument for examination or signature
by Tenant does not constitute a reservation of or an option for lease and it is
not effective as a lease or otherwise until execution and delivery by both
Landlord and Tenant.
32.6 This instrument, including the exhibits hereto which are
made a part of this Lease, contains the entire agreement between the parties,
and all prior negotiations and agreements are merged herein. Neither Landlord
nor Landlord's agents have made any representations or warranties with respect
to the Premises, the Building, the Park or this Lease except as expressly set
forth herein, and no rights, easements or licenses are or shall be acquired by
Tenant by implication or otherwise unless expressly set forth herein.
32.7 The review, approval, inspection or examination by Landlord
of any item to be reviewed, approved, inspected, or examined by Landlord under
the terms of this Lease or the exhibits attached hereto, shall not constitute
the assumption of any responsibility by Landlord for either the accuracy or
sufficiency of any such item or the quality or suitability of such item for its
intended use. Any such review, approval, inspection, or examination by Landlord
is for the sole purpose of protecting Landlord's interests in the Park and under
this Lease, and no third parties, including without limitation, Tenant or any
person or entity claiming through or under Tenant, or the contractors, agents,
servants, employees, visitors, or licensees of Tenant or any such person or
entity, shall have any rights hereunder.
32.8 Tenant shall not place any sign upon the Premises or the
Park without Landlord's prior written consent. Under no circumstances shall
Tenant place a sign on any roof of the Park.
32.9 Tenant hereby acknowledges that Landlord shall have no
obligation whatsoever to provide guard services or other security measures for
the benefit of the Premises or the Park. Tenant assumes all responsibility for
the protection of Tenant, its employees, suppliers, shippers, customers, and
invitees and the property of Tenant and of Tenant's employees, suppliers,
shippers, customers and invitees from acts of third parties. Nothing herein
contained shall prevent Landlord, at landlord's sole option, from providing
security protection for the Park or any part thereof, in which event the cost
thereof shall be included within the definition of Common Expenses, as set forth
in Subsection 4.1.4.
32.10 Landlord reserves the right, from time to time, to grant
such assessments, rights, and dedications as Landlord deems necessary or
desirable and to cause the recordation of parcel maps and restrictions as long
as such easements, rights, dedications, maps, and restrictions do not
unreasonably interfere with the use of the Premises by Tenant. At Landlord's
request, Tenant shall join in the execution of any of the aforementioned
documents.
32.11 In the event that either Landlord or Tenant fails to
perform any of its obligations under this Lease, or in the event a dispute
arises concerning the meaning or interpretation of any provision of this Lease,
the defaulting party or the party not prevailing in such dispute, as the case
may be, shall pay any and all costs and expenses incurred by the other party in
enforcing or establishing its rights hereunder, including, without limitation,
court costs and reasonable attorneys fees.
32.12 Upon the expiration or sooner termination of the Term,
Tenant will quietly and peacefully surrender to Landlord the Premises in the
condition in which they are required to be kept as provided in Article 9.
Ordinary wear and tear and the provisions of Article 16 excepted.
32.13 Upon Tenant's paying the Rent and Additional Charges and
performing all of Tenant's obligations under this Lease, Tenant may peacefully
and quietly enjoy the Premises during the Term as against all persons or
entities lawfully claiming by or through Landlord; subject, however, to the
provisions of this Lease and to any mortgages or ground or underlying leases
referred to in Article 14.
32.14 Any holding over after the expiration of the Term with the
consent of Landlord shall be construed to be a tenancy from month-to-month at
200% of the Rent herein specified (prorated on a monthly basis), unless Landlord
shall specify a different rent in its sole discretion, together with an amount
estimated by Landlord for the monthly Additional Charges payable under this
Lease, and shall otherwise be on the terms and conditions herein specified as
far as applicable. Any holding over without Landlords' consent shall constitute
a default by Tenant and shall entitle Landlord to reenter the Premises as
provided in Article 19 hereof.
12 Initials CTC DRB
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease the day
and year first above written.
LANDLORD: MIC FOUR POINTS
a California Partnership
By /s/ Signature Illegible
------------------------------
a
------------------------------
By
------------------------------
Its
---------------------------
TENANT: SUTTER BIOMEDICAL INC.
--------------------------------
a
------------------------------
By /s/ Signature Illegible
------------------------------
Its President
---------------------------
By
------------------------------
Its
---------------------------
13 Initials CTC DRB
<PAGE>
EXHIBIT "A"
-----------
The land referred to is situated in the State of California, County of San
Diego, and is described as follows:
Lots 43 and 44 of the Hazard Commercial Park, City of San Diego, San
Diego County, California, according to Map No. 8503, filed in the Office of the
San Diego County Recorder on February 25, 1977.
Mailing addresses of the two buildings are 9425 Chesapeake Drive and 9475
Chesapeake Drive respectively. The rentable square footage of the buildings is a
21,404 and 21,452 square feet respectively.
14 Initials CTC DRB
<PAGE>
EXHIBIT "B"
-----------
Floor Plans to be provided later.
15 Initials CTC DRB
<PAGE>
EXHIBIT "C"
-----------
RENTABLE AREA
The term "Rentable Area" as used in the Lease shall mean:
(a) As to each floor of the Building on which the entire space
rentable to tenants is or will be leased to one tenant (hereinafter referred to
as "Single Tenant Floor"). Rentable Area shall be the entire area bounded by the
inside surface of the four exterior glass walls (or the inside surface of the
permanent exterior wall where there is no glass), on such floor, including all
areas used for elevator lobbies, corridors, special stairways, or elevators,
restrooms, portions of the Building or vertical permission that are included for
the special use of Tenant but excluding the area contained within the exterior
walls of the Building, or vertical penetrations that are included for the
special use of Tenant but excluding the area contained within the exterior walls
of the Building stairs, fire towers, vertical ducts, elevator shafts, flues,
vents, stacks and pipe shafts.
(b) As to each floor of the Building on which space is or will be
leased to more than one tenant (hereinafter referred to as "Multi-Tenant Floor),
Rentable Area attributable to each such lease shall be the total of (i) the
entire area included within the Premises covered by such lease, being the area
bounded by the inside surface of any exterior glass walls (or the inside surface
of the permanent exterior wall where there is no glass) of the Building bounding
such Premises, the exterior of all walls separating such Premises from any
public corridors or other public areas on such floor, and the center-line of all
walls separating such Premises from other areas leased or to be leased to other
tenants on such floor, and (ii) a prorate portion of the area covered by the
elevator lobbies, corridors, restrooms, mechanical rooms, electrical rooms, and
telephone closets situated on such floors.
(c) For purposes of establishing the initial Basic Rent and Tenant's
Share (of Taxes and Common Expenses) as shown in Items 11 and 12 of the Basic
Lease Information, Rental Area of the Premises is deemed to be as set forth in
the Basic Lease Information, and Rentable Area of the Project is deemed to be
166,595 square feet.
Prior to the Commencement Date and annually at January 1, Landlord's
architect shall determine and certify in writing to Tenant and Landlord the
actual Rentable area of the Premises, the Building, and the Project,
respectively. Any percentage adjustment resulting from additions of new tenants,
additional construction within the complex shall be applied retroactively to the
effectivity of such change. At not time shall the percentage exceed the 55%
specified in this lease. Such determinations and certifications shall be
conclusive, and thereupon Tenant's Share (of Taxes and Common Expenses) and
Basic Rent shall be adjusted accordingly.
16 Initials CTC DRB
<PAGE>
EXHIBIT "D"
-----------
(Initial Improvements of the Premises)
17 Initials CTC DRB
<PAGE>
EXHIBIT "E"
-----------
FOUR POINTS INDUSTRIAL PARK
Rules and Regulations
---------------------
1. No sidewalks, entrance, passages, courts, elevators, vestibules,
stairways, corridors or halls shall be obstructed or encumbered by Tenant or
used for any purpose other than Ingress and egress to and from the Premises or
the Building and if the Premises is situated on the ground floor of the
Building, Tenant shall further, at Tenant's own expense, keep the sidewalks and
curb directly in front of the Premises clean and free from rubbish.
2. No awning or other projection shall be attached to the outside
walls or windows of the Building without the prior written consent of Landlord.
No curtains, blinds, shades, drapes or screens shall be attached to or hung in,
or used in connection with any window or door of the Premises, without the prior
written consent of Landlord. Such awnings, projections, curtains, blinds,
shades, drapes, screens and other fixtures must be of a quality, type, design,
color, material and general appearance approved by Landlord, and shall be
attached in the manner approved by Landlord. All electrical fixtures hung in
offices or spaces along the perimeter of the Premises must be fluorescent, of a
quality, type, design, bulb color, size and general appearance approved by
Landlord.
3. No sign, advertisement, notice or other lettering shall be
exhibited, inscribed, painted or affixed by Tenant on any part of the outside or
inside of the Premises or of the Building, without the prior written consent of
Landlord. In the event of the violation of the foregoing by Tenant, Landlord may
remove same without any liability, and may charge the expense incurred by such
removal to Tenant. Interior signs on doors and directory tablet shall be
inscribed, painted, or affixed for Tenant by Landlord at the expense of Tenant,
and shall be of a quality, quantity, type, design, color, size, style,
composition, material, location and general appearance acceptable to Landlord.
4. The sashes, sash doors, skylights, windows, and doors that reflect
or admit light or air into the halls, passageways or other public places in the
Building shall not be covered or obstructed by Tenant, nor shall any bottles,
parcels, or other articles be placed on the window sills, or in the public
portions of the Building.
5. No showcases or other articles shall be put in front of or affixed
to any part of the exterior of the Building, nor placed in public portions
thereof without the prior written consent of Landlord.
6. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed, and no
sweepings, rubbish, rags or other substances shall be thrown therein. All
damages resulting from any misuse of the fixtures shall be borne by Tenant to
the extent that Tenant or Tenant's agents, servants, employees, contractors,
visitors, or licensees shall have caused the same.
7. Tenant shall not make, paint, drill into or in any way deface any
part of the Premises or the Building. No boring, cutting, or stringing of wires
shall be permitted, except with the prior written consent of Landlord, and as
Landlord may direct.
8. No animal or bird or any kind shall be brought into or kept in or
about demised premises of the Building.
9. Prior to leaving the Premises for the day, Tenant shall draw or
lower window coverings and extinguish all lights.
10. Tenant shall not make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of the Building or
neighboring buildings or premises or those having business with them. Tenant
shall not throw anything out of the doors, windows or skylights or down the
passageways.
11. Neither Tenant nor any of Tenant's agents, servants, employees,
contractors, visitors or licensees shall at any time bring or keep upon the
Premises any inflammable, combustible or explosive fluid, chemical, or
substance.
12. No additional locks, bolts, or mail slots of any kind shall be
placed upon any of the doors or windows by Tenant, nor shall any change be made
in existing locks or the mechanism thereof. Tenant must, upon the termination of
the tenancy, restore to Landlord all keys of stores, offices, and toilet rooms,
either furnished to, or otherwise procured by Tenant, and in the event of the
loss of any keys so furnished, Tenant shall pay to Landlord the cost thereof.
13. All removals, or the carrying in or out of any sales, or heavy
equipment of any description must take place during the hours which Landlord or
its agent may determine from time to time, Landlord reserves the right to
prescribe the weight and position of all safes, which must be placed upon two
inch thick plank strips to distribute the weight. The move of sales or heavy
equipment of any kind must be made upon previous notice at the Superintendent of
the Building and in a manner and at times proscribed by him, and the persons
employed by Tenant for such work are subject to Landlord's prior approval.
Landlord reserves th right to inspect all sales, to be brought into the Building
and to exclude from the Building all sales which violate any of these Rules and
Regulations or the lease of which these Rules and Regulations are a part.
14. Tenant shall not occupy or permit any portion of the Premises to be
occupied as an office that is not generally consistent with the character and
nature of all other tenancies in the Building, or is (a) for an employment
agency, a public stenographer or typist, a labor union office, a physician's or
dentist's office, a dance or music studio, a school, a beauty salon or barber
shop, the business of photographic or multilith or multigraph reproductions or
offset printing (not precluding using any part of the Premises for photographic,
multilith or multigraph reproductions solely in connection with Tenant's own
business and/or activities), a restaurant or bar, an establishment for the sale
of confectionery or soda or beverages or sandwiches or ice cream or baked goods,
an establishment for the preparation or dispensing or consumption of food or
beverages (of any kind) in any manner whatsoever, or as a news or cigar stand,
or as a radio or television or recording studio, theatre or exhibition hall, for
manufacturing, for the storage of merchandise or for the sale of merchandise,
goods, or property of any kind at auction, or for lodging, sleeping or for any
immoral purpose, or for any business which would tend to generate a large amount
of foot traffic in or about the Building or the land upon which it was located,
or any of the areas used in the operation of the Building, including but not
limited to any use (i) for a banking, trust company, depository, guarantee, or
safe deposit business, (ii) as a savings bank, or as a savings and loan
association, or as a loan company, (iii) for the sale of travelers checks, money
orders, drafts, foreign exchange or letters of credit or for the receipt of
money for transmission, (iv) as a stock broker's dealer's office or for the
underwriting of securities, or (v) a government office or foreign embassy or
consulate, or (vi) a tourist or travel bureau, or (b) use which conflicts with
any so-called
18 Initials CTC DRB
<PAGE>
"exclusive" then in favor of, or is for any use the same as that stated in any
percentage lease to, another tenant of the Building or the Park, or (c) a use
which would be prohibited by any other portion of this Lease (including but not
limited to any Rules or Regulations than in effect) or in violation of law.
Tenant shall not engage or pay any employees on the Premises, except those
actually working for Tenant on the Premises nor shall Tenant advertise for
laborers giving an address at the Premises.
15. Tenant shall not purchase spring water, towels, janitorial or
maintenance or other like service from any company or persons not approved by
Landlord. Landlord shall approve a sufficient number of sources of such services
to provide Tenant with a reasonable selection, but only in such instances and to
such extent as Landlord in its judgment shall consider consistent with security
and proper operation of the Building.
16. Landlord shall have the right to prohibit any advertising or
business conducted by Tenant referring to the Building or the Park which, in
Landlord's opinion tends to impair the reputation of the Building or its
desirability as a first class building for offices, or the Park, and upon notice
from Landlord, Tenant shall refrain from or discontinue such advertising.
17. Landlord reserves the right to exclude from the Building between the
hours of 6:00 P.M. and 8:00 A.M. on all days, and at all hours on Saturdays,
Sundays and legal holidays, all persons who do not present a pass to the
Building issued by Landlord. Landlord may furnish passes to Tenant so that
Tenant may validate and issue same. Tenant shall safeguard said passes and shall
be responsible for all acts of persons in or about the Building who possess a
pass issued to Tenant.
18. Tenant's contractors shall, while in the Building or elsewhere in
the Park, be subject o and under the control and direction of the Superintendent
of the Building (but not as agent or servant of said Superintendent or of
Landlord).
19. If the Premises is or becomes infested with vermin as a result of
the use or misuse or neglect of Demised Premises by Tenant, its agents,
servants, employees, contractors, visitors or licensees, Tenant shall forthwith
at Tenant's expense cause the same to be exterminated from time to time to the
satisfaction of Landlord and shall employ such licensed exterminators as shall
be approved in writing in advance by Landlord.
20. The requirements of Tenant will be attended to only upon application
at the office of the Building. Building personnel shall not perform any work or
do anything outside of their regular duties, unless under special instructions
from the office of the Landlord.
21. Canvassing, soliciting and peddling in the Building or in the Park
are prohibited and Tenant shall cooperate to prevent the same.
22. No water cooler, air conditioning unit or system or other apparatus
shall be installed or used by Tenant without the written consent of Landlord.
23. There shall not be used in any space, or in the public halls, plaza
areas or lobbies of the Building, or elsewhere in the Park, either by Tenant or
by jobbers or others, in the delivery or receipt of merchandise, any hand trucks
or dollies, except those equipped with rubber tires and side guards.
24. Tenant, Tenant's agents, servants, employees, contractors, licensees
or visitors shall not park any vehicles in any driveways, service entrances, or
areas posted "No Parking."
25. Tenant shall install and maintain, at Tenant's sole cost and
expense, an adequate visibly marked (at all times properly operational) fire
extinguisher next to any duplicating or photocopying machine or similar heat
producing equipment, which may or may not contain combustible material, in the
Premises.
26. Tenant shall keep its window coverings closed during any period of
the day when the sun is shining directly on the windows of the Premises.
27. Tenant shall not use the name of the Building for any purpose other
than as the address of the business to be conducted by Tenant in the Premises,
nor shall Tenant use any picture of the Building in its advertising, stationary
or any other manner without the prior written permission of the Landlord.
Landlord expressly reserves the right at any time to change said name without in
any manner being liable to Tenant therefore.
19 Initials CTC DRB
FIRST ADDENDUM TO LEASE DATED 2/15/88
By and Between
MIC FOUR POINTS, A CALIFORNIA PARTNERSHIP
and
SUTTER BIOMEDICAL, INC.
This Addendum amends the above-described Lease as follows:
1. RENTABLE AREA OF PREMISES: The building equals 26,950 gross square
feet. However, the rent schedule in Paragraph 2 below shall apply to a
total square feet as detailed in the following:
Months Square Feet
------ -----------
(for rental rate to be applied to)
1-24 $23,950.00
25-120 $26,950.00
The schedule above details the square footage to be used in calculating
rent regardless of actual square footage occupied by Tenant. These
square footages are to be adjusted after final space plan is completed.
Square footage to be calculated based on BOMA methods for entire
building users. For months 1-24, square footage shall be 3,000 square
feet less than the adjusted final square footage.
2. RENT: The basic rent as defined in Section 3.1 of the Basic Lease
Information and Paragraph 3 of the lease shall be as follows:
Months Rate/Sq. Ft. Monthly Rent
------ ------------ ------------
1-6 $ .30 $ 7,185.00
7-24 $1.00 $23,950.00
25-60 $1.00 $26,950.00
61-96 $1.17 $31,531.50
92-120 $1.29 $34,765.50
The Rent for months 7-12 shall accrue and not be due and payable until
the 60th month of the Lease term except as otherwise provided as
follows: on the first day of the 60th month Landlord will waive the
accrued rent referred to above provided that there has bee no prior
termination of this lease and the Tenant is not then in default
hereunder.
The parties intend for the Term of this Lease to expire on the last day
of a full calendar month. Accordingly, if the Commencement Date is
other than on the first day of a full calendar month, thereby causing
Paragraph 2.1 to indicate an expiration date other than the last day of
a full calendar month, then the Term of this Lease shall be extended
until the last day of the full calendar month within which the
expiation date otherwise indicated by Paragraph 2.1 falls, and the
actual expiration date of the Term of this lease (the "Expiration
Date") shall be the last day of such full calendar month.
* For the purposes of the above detail, month number 1 shall be
defined as the first full calendar month during the Term of the Lease.
Any rent payable for a partial month before the first full calendar
month will be determined on a pro rate basis at the rate of $.83 per
square foot.
3. TERM: The Lease shall commence on August 1, 1988, except where Landlord
is responsible for delay of completion. A delay of completion by
Landlord shall be deemed to have occurred for every day greater than 98
days that elapses between the date permit for Tenant Improvements is
issued and given to landlord and the date Certificate of Occupancy is
received. Should such delay of completion occur, the Lease Commencement
Date shall be extended from August 1, 1988 by the number of days of
said delay of completion.
Initials CTC DRB
<PAGE>
FIRST ADDENDUM TO LEASE
PAGE TWO
4. TENANT IMPROVEMENTS: The Landlord shall enter into a guaranteed
maximum price contract with Snyder Langston to construct the tenant
improvements per the plan specifications and working drawings that will
be mutually approved by Landlord and Tenant. Landlord shall contribute
up to, but not to exceed, $18.00 a square foot (per BOMA) towards
tenant improvement work. All costs associated with the tenant
improvements in excel of this sum shall be amortized and paid to
Landlord by Tenant at an interest rate of 17% per annum. The first two
dollars ($2.00) of tenant improvement work in excess of $18.00 per
square foot shall be amortized over the 120 months of the Lease Term.
All tenant improvement work in excess of $20 per square foot shall be
amortized over the first 60 months of the Lease Term. Such amortization
shall be added to the monthly rent and be due an payable under the same
schedule and penalties as those which apply to rent.
Should the tenant improvement work cost less than $18.00 per square
foot, Landlord shall pay to Tenant a share of the savings equal to
one-half of all savings. Landlord shall pay 50% of this share before
September 1, 1988 and the remainder before November 1, 1988.
6. OPTION TO PURCHASE: So long as Tenant is not in default hereunder,
Tenant is granted an Option to Purchase 942 Chesapeake Drive and the
associated parcel upon which it is located at the time of such
purchase subject to completed and recorded parcelization of the
property as presented on page 6 of this First Addendum to Lease. The
agreed upon price for the building and property is $145 per gross
square foot of building, payable on close of the escrow provided
herein. Tenant shall notify Landlord of such exercise on or before, May
1, 1990 (the "Notice"). Within three (3) business days after the giving
of said Notice, an escrow shall be opened at Chicago Title Company in
San Diego, California, or such other title insurance company as may
then be designated by Landlord and reasonably acceptable to Tenant.
Escrow shall be deemed open when the title company holds executed
escrow instructions, from both Landlord and Tenant. Concurrent with the
opening of escrow, Tenant shall deposit $55,000.00 cash or as
irrevocable letter of credit in form and from a financial institution
reasonably acceptable to Lessor in escrow to be applied to the purchase
price, said amount shall be deposited in an interest bearing account,
by the title company all interest, earned thereon shall be held in
escrow and credited to Tenant.
Escrow shall close on a date specified by Landlord within one of the
following periods: (a) on or after May 15, 1991, but prior to September
15, 1991; or (b) on or after September 15, 1991 but prior to September
15, 1992. Such notice of the closing date shall be given to Tenant and
the title company by December 15, 1990.
Initials CTC DRB
<PAGE>
FIRST ADDENDUM TO LEASE
PAGE THREE
Landlord shall convey the premises to Tenant free and clear of all
monetary encumbrances other than those placed on the premises by Tenant
and current taxes and assessments. Landlord shall provide Tenant with a
CLTA policy of title insurance upon close of escrow. Escrow expenses
shall be allocated amount Landlord and Tenant in accordance with the
chosen title company's standard procedures for similar type
transactions in San Diego County, California. Total price or property
shall be paid to Landlord in cash. Close of escrow shall be deemed to
occur on the date the grant deed from Landlord to Tenant is recorded in
the office of the San Diego County Recorder.
If Tenant fails to complete the purchase of the premises after giving
the Notice the Parties agree that Seller (Landlord) shall be entitled
to the sum of $50,000.00 as liquidated damages, which sum the parties
agree is a reasonable sum considering all of the circumstances existing
on the data of the Lease, including the relationship of the sum to the
range of harm to Seller that reasonably could be anticipated and the
anticipation that proof of actual damaged would be costly or
inconvenient. In placing their initials at the places provided, each
party specifically confirms the accuracy of the statements made above
and the fact that each party was represented by counsel who explained
the consequences of this liquidated damages provision at the time this
Lease was made.
Landlord Tenant
Initials here: DRB Initial here: CT
Should Landlord wish to arrange for the sale of the premises by means
of a tax-deferred exchange with one or more third parties, Tenant
agrees to cooperate in completing said exchange provided that it incurs
no expense or liability in addition to that it would have incurred had
the transaction been completed as an outright sale to Tenant.
In addition, Tenant acknowledged Landlord's right o set up CC&R's and
appropriate easements which would govern over the entire Project, this
building inclusive.
If escrow fails to close due to Lessor's fault, Tenant shall have all
deposits made by it into escrow, and all interest earned thereon,
returned to it in full.
7. SALE OF PROPERTY OR TRANSFER OF TITLE: Notwithstanding any provisions
of Article 4 of the Lease to the contrary, the term "Taxes" shall not
include any increase in real property taxes attribute solely to a
transfer in title to the Building during the term of the Lease to a
party other than the Tenant (a "Non-Tenant Transfer"). The foregoing
shall not be construed so as to exclude from the definition of "Taxes"
any increases in real property taxes allocable to the Building as a
result of a reappraisal for any reason other than the Non-Tenant
Transfer.
8. FIRST RIGHT TO PURCHASE: Effective May 1, 1990, during the Term of the
Lease, Tenant has a one time Right of First Refusal to purchase the
building. If there shall be an immediate prospect to purchase the
building, Landlord shall give Tenant written notice thereof specifying
the terms of such a sale. On receipt of such notice, and provided
Tenant shall have the option of purchasing the building at the terms
offered by the Prospect. Tenant's Right of First Refusal shall be
exercised by written notice from Tenant to Landlord, given within five
(5) business days after receipt of notice from the Landlord. The
failure of the Tenant to exercise this option in the time period
specified shall be conclusively deemed a Waiver of Tenants's first
Right to Purchase for the remainder of the Lease Term.
Initials CTC DRB
<PAGE>
FIRST ADDENDUM TO LEASE
PAGE FOUR
9. ASSIGNMENTS: Not withstanding the provisions of Section 12.3 of the
Lease, Landlord hereby grants to Tenant the right to assign this Lease
or to subject the Premises in whole or in part to any entity controlled
by; controlling or under common ownership with Tenant so long as: (i)
Tenant provides Landlord with prior written notice of the identity and
notice address of such assignee or subtenant and, (ii) such assignee or
subtenant complies with the use provisions set forth in section 6 of
this Lease.
10. DESTRUCTION: In the event that the damage as referred to in Section 16
of the Lease renders the building untenantable, Landlord shall inform
Tenant within 60 days of Landlord's intent to repair the damage or not.
If that repair or reconstruction is not concluded within a period of
one hundred eight (180) days from date of damage, the Lease may be
terminated by Tenant without penalty.
11. SECURITY DEPOSIT: Landlord shall refund to Tenant any balance of the
security deposit in excel of twenty thousand dollars ($20,000) at the
conclusion of the third year of the Lease, provided the Tenant is not
currently and never has previously been in default of the Lease.
12. FIRST RIGHT OF REFUSAL: Landlord grants solely to Sutter Biomedical,
Inc., while it is the Tenant, the Right of First Refusal on any vacant,
second generation space in the adjacent building, 9475 Chesapeake
Drive, during the Term of the Lease. Sutter Biomedical, Inc. shall
respond in writing to Landlord within five (5) business days after a
receipt of a written proposal from the Landlord offering the vacant
second generation space.
13. SIGNAGE: Landlord shall provide Tenant with exclusive signage rights on
the Building commonly known as 9425 Chesapeake Drive. The
specifications of such signage shall include: a) letters shall be no
more than two (2) feet in height, b) the signage will incorporate the
company name logo including the underline characteristic, c) the
signage will conform tot he Sutter Biomedical, Inc. corporate blue
color, d) signage shall be permitted on the north and east sides of the
building, e) illumination of the sign shall be permitted, and the
consideration of back lighting shall not be excluded, and f) signage
shall be located on the Building at the location to be specified by
Tenant. In addition, Landlord shall provide Tenant with shared rights
on the monument sign in front of 9425 Chesapeake Drive. The name Sutter
Biomedical, Inc. and the name Smith Laboratories, Inc. Shall receive
preferential display at the top of any listing placed upon the monument
sign. Said monument signage shall be located at the location to be
designated and mutually agreed to by Landlord and Tenant and Tenant
signage shall be constructed and installed at Tenant's expense in
accordance with plans and specifications to be approved by Landlord.
14. MISCELLANEOUS: Except as expressly provided hereinabove, all other
terms and conditions of the Lease shall apply herein and remain in full
force and effect. In the event of any conflict between the terms of
this Addendum to Lease and those of the Lease the First Addendum to
Lease, the terms of this Addendum will be deemed to have superseded
those of the Lease and the First Addendum to Lease and exclusively will
govern the matter in question.
Initials CTC DRB
<PAGE>
FIRST ADDENDUM TO LEASE
PAGE FIVE
IN WITNESS WHEREOF, this Addendum to Lease is duly executed as of the day and
year first hereinabove written.
LANDLORD TENANT
MIC FOUR POINTS, SUTTER BIOMEDICAL, INC.
a California limited partnership
By: /s/ D. Ron Beal By: /s/ Charles T. Cashion
----------------------------- --------------------------
By its Managing General Partner President
March 31, 1988 March 25, 1988
- ------------------------------- ----------------------------
Date Date
<PAGE>
[PARCEL DIAGRAM]
SECOND ADDENDUM TO LEASE DATED 2/10/88
between
MIC FOUR POINTS, A CALIFORNIA PARTNERSHIP
and
SUTTER BIOMEDICAL, INC.
This Second Addendum to Lease is made and entered into this 7th day of October,
1988 by and between MIC Four Points ("Landlord") and Sutter Biomedical, Inc.
("Tenant").
WHEREAS, Landlord and Tenant entered into a Lease Agreement dated February 10,
1988 ("The Lease") as amended by the First Addendum to Lease dated February 10,
1988 under the terms of which Landlord leased to Tenant and Tenant leased from
Landlord, that certain real property located at 9425 Chesapeake Drive, San
Diego, California ("Demised Premises").
WHEREAS, Landlord and Tenant wish to increase the total space leased by the
Tenant, adjust the Commencement Date of the Lease, lengthen the Term of the
Lease by two months and increase the Tenant Improvement Allowance to be provided
by the Landlord to the Tenant.
NOW THEREFORE, the parties mutually agree to amend the Lease as follows:
1. RENTABLE AREA OF PREMISES: The building equals 28,032 gross square feet
and such shall be used in calculating rent throughout the term of the
Lease.
2. RENT: The basic rent as defined in Section 3.1 of the Basic Lease
Information and Paragraph 3 of the lease shall be as follows:
Months Rate/Sq. Ft. Monthly Rent
------ ------------ ------------
1-60* $1.00 $28,032.00
61-100 $1.17 $32,797.44
101-124 $1.29 $36,161.20
* For the purposes of the above detail, month number 1 shall be
defined as the first full calendar month during the Term of the Lease.
Any rent payable for a partial month before the first full calendar
month will be determined on a pro rate basis at the rate of $.83 per
square foot.
The rent for months 1 through 12 (12 in total), shall accrue
and not be due and payable until the 60th month of the Lease term
except as otherwise provided as follows: on the first day of the 60th
month Landlord will save the accrued rent referenced to above provided
that there has been no prior termination of this Lease the Tenant is
not then in default hereunder, all operating expenses shall be due and
payable for every month are never abated.
The parties intend for the Term of this Lease to expire on the
last day of a full calendar month. Accordingly, if the Commencement
Date is other than on the first day of a full calendar month, thereby
causing Paragraph 2.1 to indicate an expiration date other than the
last day of a full calendar month, then the Term of this Lease shall be
extended until the last day of the full calendar month within which the
expiation date otherwise indicated by Paragraph 2.1 falls, and the
actual expiration date of the Term of this lease (the "Expiration
Date") shall be the last day of such full calendar month.
Initials CTC DRB
<PAGE>
Addendum #2
to Lease Dated 2/10/88
Page Two
3. TERM: The Term of the Lease shall be ten (10) years. The Lease shall
commence on October 1, 1988, except where Landlord is responsible for
delay of completion. A delay of completion by Landlord shall be deemed
to have occurred for every day greater than 105 days that elapses
between the date permit for Tenant Improvements is issued and given to
landlord and the date Certificate of Occupancy is received. Should such
delay of completion occur, the Lease Commencement Date shall be
extended from October 1, 1988 by the number o days of said delay of
completion, and Tenant shall be credited for rent paid for periods
which are subsequently outside of the Lease term.
4. TENANT IMPROVEMENTS: The Landlord shall pay for Tenant Improvements up
to Eight Hundred Five Thousand and 00/100 Dollars ($805,000.00). Any
expenses above and beyond this incurred by Landlord for Tenant
Improvements shall be reimbursed by Tenant to Landlord within thirty
(30) days of receipt of invoice.
Tenant shall reimburse Landlord Three Hundred Thirty-Six thousand Three
Hundred Eighty- Four and 00/100 Dollars ($336,384.00) in twelve (12)
equal monthly payments for above standard Tenant Improvements. Each
payment shall be due at the beginning of the month, commencing October
1, 1988. Each payment shall be $28,032.00. Should the actual total
Tenant Improvements be less than Eight Hundred Five Thousand and 00/100
Dollars ($805,000.00), the final month's reimbursement payment shall be
reduced by an amount equal to the difference between the actual total
Tenant Improvements and $805,000.00.
5. MISCELLANEOUS: Except as expressly provided hereinabove, all other
terms and conditions of the Lease shall apply herein and remain in full
force and effect. In the event of any conflict between the terms of
this Addendum to Lease and those of the Lease the First Addendum to
Lease, the terms of this Addendum will be deemed to have superseded
those of the Lease and the First Addendum to Lease and exclusively will
govern the matter in question.
IN WITNESS WHEREOF, this Addendum to Lease is duly executed as of the day and
year first hereinabove written.
LANDLORD TENANT
MIC FOUR POINTS, SUTTER BIOMEDICAL, INC.
a California limited partnership
/s/ D. Ron Beal /s/ Charles T. Cashion
- -------------------------------- -----------------------------
By: By: President
October 13, 1988 October 7, 1988
- -------------------------------- -----------------------------
Date Date
SEVERANCE AGREEMENT
This Severance Agreement, which shall be effective as of February 18,
1997 is by and between George A. Oram, Jr. ("Oram") and OrthoLogic Corp., a
Delaware corporation, ("OrthoLogic").
RECITALS
A. Oram is currently employed as the President of OrthoLogic, pursuant
to an Employment Agreement dated as of July 1, 1996 (the "Employment
Agreement").
B. The parties mutually desire to provide for an orderly termination of
Oram's employment by OrthoLogic, all on terms satisfactory to both Oram and
OrthoLogic, as further set forth in this Agreement.
AGREEMENTS
In Consideration of the acts, payments, covenants and mutual agreements
contained herein, OrthoLogic and Oram agree as follows:
1. Modification of Current Relationship. Effective as of February 18,
1997 (the "Date of Termination"), Oram shall resign as the President of
OrthoLogic. From and after the Date of Termination, Oram shall have no further
rights or duties as an employee or officer for or on behalf of OrthoLogic. Oram
shall continue as a member of the OrthoLogic Board of Directors (the "Board")
until OrthoLogic's Annual Meeting in 1997. It is understood by the parties that
Oram's term expires at the 1997 Annual Meeting, and Oram agrees that he will not
seek reelection to the Board at such meeting. During the first six months
following the Date of Termination, Oram shall also make himself available for
consulting to OrthoLogic, as may be requested from time to time by OrthoLogic,
at mutually convenient times, at a rate of $2,000 per day, which amount shall be
prorated for periods of less than one full day.
2. Severance Payment. So long as Oram continues to comply with all
requirements of this Agreement, (i) OrthoLogic agrees to pay to Oram an amount
equal to six months base salary, over a six-month period beginning February 19,
1997, at the times and in the amounts that are presently paid to Oram in
accordance with the normal payroll procedures of OrthoLogic; and (ii) Oram shall
be entitled to receive a bonus payment, in an amount determined by the Board,
based upon OrthoLogic's performance for the 1996 fiscal year, which shall be
prorated to the extent that Oram's employment during 1996 was for a period of
less than the full year.
3. COBRA. OrthoLogic agrees to pay premiums for medical benefits
(COBRA) for Oram and Oram's dependents for coverage similar to those benefits
currently provided by OrthoLogic for 90 days following the Date of Termination.
<PAGE>
4. Additional Benefits and Outstanding Loan.
a. The $450.00 per month car allowance shall cease to be paid
after February 1997.
b. OrthoLogic will pay up to $10,000 for costs of outplacement
services for Oram which are incurred by Oram within 90 days of the Date of
Termination.
c. OrthoLogic will pay the actual cost, but not to exceed
$10,000, for moving personal goods from Oram's Phoenix residence to New Jersey.
d. During 1996, the Company lent $200,000 to Employee, at
prime rate, for use in connection with the purchase by Employee of a new home in
the Phoenix Metropolitan Area. Interest and principal on such loan shall be paid
immediately and in full upon the earlier to occur of (i) the closing of the sale
of Employee's Phoenix home, or (ii) a demand by the Company made at any time
after December 31, 1997.
5. Release and Covenant Not to Sue. Except as provided in this
Agreement, Oram hereby releases, acquits and forever discharges OrthoLogic, its
subsidiaries, affiliates, directors, officers, employees and agents of and from
any and all actions, claims, damages, expenses or costs of whatever nature
arising out of Oram's employment and the termination of such relationship,
including, but not limited to, any rights or claims to any vacation, sick leave,
severance, medical, dental or any other benefits under the Company's internal
policies, under any federal, state or local statute or regulation, or under
common law. By way of example only and without limiting the immediately
preceding paragraph, this release is applicable to any cause of action, right,
claim or liability under Title VII of the 1964 Civil Rights Act, Section 1981 of
the 1866 Civil Rights Act, the Equal Pay Act of 1963, the Americans with
Disabilities Act, the Arizona Civil Rights Act, and any other equal employment
opportunity law or statute, or of wrongful discharge, breach of implied or
express contract, breach of the covenant of good faith and fair dealing,
intentional or negligent infliction of emotional distress, defamation and any
other claim in contract or tort.
Oram further covenants and agrees not to join in or commence any
action, suit or proceeding, in law or in equity, or before any administrative
agency, or to incite, encourage, or participate in any such action, suit or
proceedings, against OrthoLogic, its subsidiaries, affiliates, directors,
officers, employees or agents in any way pertaining to or arising out of the
termination of his employment by or service as an employee, consultant, officer
or director of OrthoLogic, or any subsidiary of OrthoLogic.
Oram acknowledges that the consideration afforded him under this
Agreement, including the payments described in Paragraph 2 above, are in full
and complete satisfaction of any claims Oram may have, or may have had, arising
out of or relating to the Employment Agreement, his employment with OrthoLogic
(or any subsidiary) or the termination thereof.
2
<PAGE>
6. Time Period for Considering or Canceling this Agreement. Oram
acknowledges that OrthoLogic has encouraged him to consult with an attorney of
his choice with respect to this Agreement. Oram further acknowledges that he has
been offered a period of time of at least 21 days to consider whether to sign
this Agreement, and OrthoLogic agrees that Oram may cancel this Agreement at any
time during the seven days following the date on which this Agreement has been
signed by him. In order to cancel or revoke this Agreement, Oram must deliver to
OrthoLogic 2850 South 36th Street, Suite 16, Phoenix, Arizona 85034, Attention:
Chief Executive Officer, written notice stating that Oram is canceling or
revoking this Agreement. If this Agreement is canceled or revoked by Oram within
such time period, none of the provisions of this Agreement shall be effective or
enforceable and OrthoLogic shall not be obligated to make the payments to Oram
described in Section 2 or to provide Oram with the other benefits described in
this Agreement.
7. Confidentiality of Agreement. Oram and OrthoLogic agree to maintain
in confidence the terms and existence of this Agreement and the discussions that
let to its creation and execution, with the exception that OrthoLogic may
disclose this Agreement and its terms to the extent required or appropriate
under applicable securities laws or other laws and that Oram may disclose such
matters to any attorney who is providing advice to Oram, to any accountant or
federal or state tax agency for purposes of complying with any tax laws, or as
otherwise required by law. Further, Oram acknowledges that any duties of
confidentiality imposed upon Oram by agreement or by law, including without
limitation those imposed by Paragraphs 7 and 9 of this Agreement, shall survive
the termination of Oram's employment.
8. Reliance. Oram warrants and represents that (i) he has relied on his
own judgment regarding the consideration for and language of this Agreement;
that (ii) OrthoLogic has not in any way coerced or unduly influenced him to
execute this Agreement; and (iii) that this Agreement is written in a manner
that is understandable to him and he has read an understood all paragraphs of
this Agreement.
9. Confidential Information. Oram acknowledges that, during his
employment by OrthoLogic, Oram has received and also contributed to the
production of, Confidential Information. For purposes of this Agreement, Oram
agrees that "Confidential Information" shall mean information or material
proprietary to OrthoLogic or designated as Confidential Information by
OrthoLogic and not generally known by non-OrthoLogic personnel, which Oram
developed or of or to which Oram obtained knowledge or access through or as a
result of Oram's relationship with OrthoLogic (including information conceived,
originated, discovered or developed in whole or in part by Oram). Oram further
agrees:
9.1 To furnish OrthoLogic on demand, a complete list of the names
and addresses of all present, former and potential customers
and other contacts gained while an employee of OrthoLogic,
whether or not in the possession or within the knowledge of
OrthoLogic.
3
<PAGE>
9.2 That all notes, memoranda, documentation and records in any
way incorporating or reflecting any Confidential Information
shall belong exclusively to OrthoLogic, and Oram agrees
promptly to turn over all copies of such materials in Oram's
control to OrthoLogic.
9.3 That Oram will hold in confidence and not directly or
indirectly reveal, report, publish, disclose or transfer any
of the Confidential Information to any person or entity, or
utilize any of the Confidential Information for any purpose,
except in the course of Oram's work for OrthoLogic.
9.4 That any ideas in whole or in part conceived of or made by
Oram during the term of his employment or relationship with
OrthoLogic which were made through the use of any of the
Confidential Information of OrthoLogic or any of OrthoLogic's
equipment, facilities, trade secrets or time, or which result
from any work performed by Oram for OrthoLogic, belong
exclusively to OrthoLogic and shall be deemed a part of the
Confidential Information for purposes of this Agreement. Oram
hereby assigns and agrees to assign to OrthoLogic all rights
in and to such Confidential Information whether for purposes
of obtaining patent or copyright protection or otherwise. Oram
shall acknowledge and deliver to OrthoLogic, without charge to
OrthoLogic (but at its expense) such written instruments and
do such other acts, including giving testimony in support of
Oram's authorship or inventorship, as the case may be,
necessary in the opinion of OrthoLogic to obtain patents or
copyrights or to otherwise protect or vest in Oram the entire
right and title in and to the Confidential Information.
10. Non-Compete After Employment Term. The parties acknowledge that
Oram has acquired much knowledge and information concerning the business of
OrthoLogic and its affiliates as the result of Oram's employment. The parties
further acknowledge that the scope of business in which OrthoLogic is engaged as
of the date of execution of this Agreement is world-wide and very competitive
and one in which few companies can successfully compete. Competition by Oram in
that business would severely injure OrthoLogic. Accordingly, until one year
after the Date of Termination, Oram will not:
10.1 Within any jurisdiction or marketing area in which OrthoLogic
or any of its affiliates is doing business or is qualified to
do business, directly or indirectly own, manage, operate,
control, be employed by or participate in the ownership,
management, operation or control of, or be connected in any
manner with, any business of the type and character engaged in
and competitive with that conducted by OrthoLogic or any of
its affiliates. For these purposes, ownership of securities of
not in excess of 1% of any class of securities of a public
company shall not be considered to be competition with
OrthoLogic or any of its affiliates;
4
<PAGE>
10.2 Persuade or attempt to persuade any potential customer or
client to which OrthoLogic or any of its affiliates has made a
proposal or sale, or with which OrthoLogic or any of its
affiliates has been having discussions, not to transact
business with OrthoLogic or such affiliate, or instead to
transact business with another person or organization;
10.3 Solicit the business of any company which is a customer or
client of OrthoLogic or any of its affiliates at any time
during Oram's employment by the OrthoLogic, or was its
customer or client within two years prior to the date of this
Agreement, provided, however, if Oram becomes employed by or
represents a business that exclusively sells products that do
not compete with products then marketed or intended to be
marketed by OrthoLogic, such contact shall be permissible; or
10.4 Solicit, endeavor to entice away from OrthoLogic or any of its
affiliates, or otherwise interfere with the relationship of
OrthoLogic or any of its affiliates with, any person who is
employed by or otherwise engaged to perform services for
OrthoLogic or any of its affiliates, whether for Oram's
account or for the account of any other person or
organization.
11. Common Law of Torts or Trade Secrets. Nothing in this Agreement
shall be construed to limit or negate the common law of torts or trade secrets
where such common law provides OrthoLogic with broader protection than the
protection provided by this Agreement.
12. Nature of the Agreement. This Agreement and all provisions hereof,
including all representations and promises contained herein, are contractual and
not a mere recital and shall continue in permanent force and effect. This
Agreement and all attachments constitute the sole and entire agreement of the
parties with respect to the subject matter hereof, superseding all prior
agreements and understandings between the parties, including the Employment
Agreement dated as of July 1, 1996, and there are no agreements of any nature
whatsoever between the parties hereto except as expressly stated herein. This
Agreement may not be modified or changed except by means of a written instrument
signed by both parties. If any portion of this Agreement is found to be
unenforceable for any reason whatsoever, the unenforceable provision shall be
considered to be severable, and the remainder of the Agreement shall continue to
be in full force and effect. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Arizona.
13. No Admission of Liability. Nothing contained in this Agreement
shall be construed in any manner as an admission by OrthoLogic or Oram that he
or it has violated any statute, law or regulation, or breached any contract or
agreement.
14. Remedies. Any and all remedies set forth herein are intended to be
nonexclusive and either party may, in addition to such remedies, seek any
additional remedies available either in law or in equity in the event of default
or breach by the other party.
5
<PAGE>
15. Injunctive Relief. Oram agrees that it would be difficult to
measure the damage to OrthoLogic from any breach by Oram of the covenants set
forth herein, that injury to OrthoLogic from any such breach would be impossible
to calculate, and that money damages would therefore be an inadequate remedy for
any such breach. Accordingly, Oram agrees that if Oram should breach any term of
this Agreement, OrthoLogic shall be entitled, in addition to and without
limitation of all other remedies it may have, to offset payments to Oram
required by this Agreement and/or to injunctions or other appropriate orders to
restrain any such breach without showing or proving any actual damage to
OrthoLogic. This paragraph shall survive termination of Oram's employment.
16. Indemnification. OrthoLogic will provide indemnification to Oram in
accordance with the current Certificate and Bylaws of OrthoLogic. These
obligations shall survive the termination of Oram's employment.
17. Testimony. If Oram has knowledge of or is alleged to have knowledge
of any matters which are the subject of any pending, threatened or future
litigation involving OrthoLogic (or any subsidiary), he will make himself
available to testify if and as necessary. Oram will also make himself available
to the attorneys representing OrthoLogic in connection with any such litigation
or dispute for such purposes as they may deem necessary or appropriate,
including but not limited to the review of documents, discussion of the case and
preparation for any legal proceedings. This Agreement is not intended to and
shall not be construed so as to in any way limit or affect the testimony which
Oram gives in an such proceedings. Further, it is understood and agreed that
Oram will at all times testify fully, truthfully and accurately, whether in
deposition, hearing, trial or otherwise.
18. Publicity. Oram agrees that he will not make any announcements or
public statements regarding either this Agreement or the termination of his
employment without OrthoLogic's prior consent. The parties understand that a
mutually acceptable for of press release will be issued promptly after the
execution of this Agreement.
19. No Disparagement. Each party agrees that as part of the
consideration for this Agreement, he or it will not make disparaging or
derogatory remarks, whether oral or written, about the other party or, in the
case of OrthoLogic, about its subsidiaries, affiliates, officers, directors,
employees or agents.
Dated this 7th day of March, 1997.
/s/ GEORGE A. ORAM, JR.
-----------------------
GEORGE A. ORAM, JR.
ORTHOLOGIC CORP.
By: /s/ Allan M. Weinstein, Ph.D.
Allan M. Weinstein, Ph.D.
Its: Chairman and CEO
6
PROMISSORY NOTE
$200,000.00 Phoenix, Arizona
November 15, 1996
FOR VALUE RECEIVED, the undersigned (collectively, "Maker") jointly and
severally promise to pay to the order of ORTHOLOGIC CORP., a Delaware
corporation ("Payee"), at 2850 South 36th Street, Suite 16, Phoenix, Arizona
85034, or at such other location as Payee may from time to time designate, the
principal amount of TWO HUNDRED THOUSAND AND NO/100 DOLLARS ($200,000.00), or so
much thereof as Payee may advance to or for the benefit of Maker, or either of
them, plus interest calculated on a daily basis (based on a 365-day year) from
the date hereof on the principal balance from time to time outstanding as
hereinafter provided, principal, interest and all other sums payable hereunder
to be paid in lawful money of the United States of America as follows:
(a) Interest shall accrue at the Prime Rate. The "Prime Rate"
is defined as the interest rate per annum designated by the Wall Street
Journal as its "prime rate", as listed on the date of this note. The
interest rate on this indebtedness shall be fixed on the date of this
note and will remain unchanged for the term.
(b) The entire unpaid principal balance, all accrued and
unpaid interest, and all other amounts payable hereunder shall be due
and payable in full on the earlier to occur of:
(i) the closing of the sale of Maker's New Jersey
home, having an address of 324 Kelly Drive, Neshanic Station,
New Jersey 08853; or
(ii) the third anniversary of the date of this Note.
All payments on this Note shall be applied first to the
payment of any costs, penalties, late charges, fees or other charges incurred in
connection with the indebtedness evidenced hereby, next to the payment of
accrued interest and then to the reduction of the principal balance.
Maker hereby waives presentment for payment, notice of
nonpayment, protest, demand, notice of protest, notice of acceleration,
dishonor, intent to accelerate and nonpayment, diligence in enforcement, and
indulgences of every kind, and without further notice hereby agrees to renewals,
extensions, indulgences and acceptance of partial payments, either before or
after maturity. This Note shall be binding upon Maker and
<PAGE>
their respective heirs, personal representatives, successors and assigns and
shall inure to the benefit of Payee and its successors and assigns.
Failure of Payee to exercise any option hereunder shall not constitute
a waiver of the right to exercise the same in the event of any subsequent
default or in the event of the continuance of any existing default after demand
for strict performance hereof. Further, any forbearance by Payee in exercising
any right or remedy hereunder, or otherwise afforded by applicable law shall not
be a waiver of or preclude the exercising of any such right or remedy. Payee's
remedies as provided herein shall be cumulative and concurrent and may be
pursued singularly, successfully or together at Payee's sole discretion and may
be exercised as often as the occasion may arise. This Note may not be modified,
amended or changed orally. It may only be amended, modified or changed by an
agreement in writing signed by the party against whom enforcement of any waiver,
modification, change, amendment or discharge is sought.
Time is of the essence in this Note. At the option of Payee, the entire
unpaid principal balance, all accrued and unpaid interest and all other amounts
payable hereunder shall become immediately due and payable without notice upon
the failure to pay any sum due and owing hereunder as provided herein, if the
failure continues for five (5) days after the due date.
After maturity, including maturity upon acceleration after default, the
unpaid principal balance, all accrued and unpaid interest and all other amounts
payable hereunder shall bear interest from the date of maturity until paid at
the rate that is five percent (5%) per annum above the annual rate that would
otherwise be payable under the terms hereof. Maker shall pay all costs and
expenses, including reasonable attorneys' fees and court costs, incurred in the
collection or enforcement of all or any part of this Note. All such costs and
expenses shall be secured by the Loan Documents. In the event of any court
proceedings, court costs and attorneys' fees shall be set by the court and not
by jury and shall be included in any judgment obtained by Payee.
If this Note is placed in the hands of an attorney for collection, or
is collected in whole or in part by suit or through probate, bankruptcy or other
legal proceedings of any kind, Maker agrees to pay, in addition to all other
sums payable hereunder, all reasonable costs and expenses of collection,
including but not limited to, reasonable attorneys' fees.
Maker agrees to an effective rate of interest that is the rate stated
above plus any additional rate of interest resulting from any other charges in
the nature of interest paid or to be paid by or on behalf of Maker, or any
benefit received or to be received by Payee, in connection with this Note. It is
the intent of the Maker and Payee in execution of this Note to contract in
strict compliance with all applicable usury laws governing the loan evidenced by
this Note. In furtherance thereof, Maker and Payee stipulate and agree that none
of the terms and provisions contained in this Note shall ever be construed to
create a contract for the use, forbearance or extension of money requiring
payment of interest at a rate in excess of the maximum interest rate permitted
to be charged by or under any laws
2
<PAGE>
governing the loan evidence by this Note. Maker shall never be required to pay
interest on this Note at the rate in excess of the maximum interest that may be
lawfully charged under applicable laws. In the event any holder of this Note
shall collect monies which are deemed to constitute interest which would
otherwise increase the effective interest rate on this Note to a rate in excess
of that permitted to be charged by applicable laws, all such sums deemed to
constitute interest in excess of the maximum permissible rate shall, immediately
upon such determination, be applied to the principal of this Note until the
principal thereof shall be paid in full and the excess, if any, shall be
returned to Maker.
This Note and the obligations contained herein shall be binding upon
and may be enforced against both the separate and community properties of the
undersigned.
This Note shall be governed by and construed according to the laws of
the State of Arizona.
MAKER:
Address:
324 Kelly Drive
Neshanic Station, NJ 08853 /s/ GEORGE A. ORAM, JR.
-----------------------
GEORGE A. ORAM, JR.
- 3 -
Exhibit 11.1
ORTHOLOGIC CORP.
STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER WEIGHTED AVERAGE
NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING*
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income (loss) .................................................... $2,538 ($1,352) ($4,472)
====== ====== ======
Common shares outstanding at end of period............................ 25,022 19,252 13,942
Adjustment to reflect weighted average for shares issued
during the period..................................................... (1,747) (3,703) (151)
Assuming conversion of stock options and warrants..................... 869 -- --
------ ------- ------
Weighted average number of common shares outstanding.................. 24,144 15,549 13,791
====== ======= ======
Net income (loss) per weighted average number of common
and common equivalent shares outstanding.............................. $0.11 ($0.09) ($0.33)
====== ======= ======
</TABLE>
* Adjusted to reflect the Company's 2-for-1 stock split effected in the form of
a 100% stock dividend in June 1996.
SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including projections of
results of operations and financial condition, statements of future economic
performance, and general or specific statements of future expectations and
beliefs. The matters covered by such forward-looking statements are subject to
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to differ materially
from those contemplated or implied by such forward-looking statements. Important
factors which may cause actual results to differ include, but are not limited
to, the following matters, which are discussed in more detail in the Company's
Form 10-K for the 1996 fiscal year:
(i) The Company's lack of experience with respect to newly acquired technologies
and product lines, such as CPM products, may reduce the Company's ability to
exploit the opportunities potentially offered by the acquisitions discussed in
this report;
(ii) Potential difficulties in integrating the operations of newly acquired
companies may impact negatively on the Company's ability to realize benefits
from the acquisitions. As noted herein the Company plans to close certain
facilities and consolidate operations within certain projected time frames.
These plans include the termination or relocation of certain personnel. No
assurance can be given that the present timetable for consolidation or closures
will not be delayed or that the termination and relocation of personnel will not
result in additional, unanticipated costs. The consolidation and coordination of
the Company's personnel and operations may prove to be more costly or difficult
than anticipated, resulting in the diversion of management resources and adverse
effects on the operating results of the Company. Moreover, in part as a
potential result of personnel and policy changes, there can be no assurance that
customers of the Company and any acquired entity will continue their historic
buying patterns;
(iii) The Company recently changed from selling its products primarily through
independent dealers to selling primarily through a direct sales force. Although
the Company believes that in the long run this will be an effective strategy,
presently identifiable risks include: (a) the Company's management is
inexperienced in dealing with such a large number of direct salespeople, and
procedures that worked with a small direct sales force and motivated them may
not be transferable to a larger force; (b) the Company recently hired a
substantial number of new salespeople with little or no experience selling the
Company's products; new salespeople typically face a learning curve and not all
new salespeople will be successful; (c) for those salespeople who were hired
from dealerships and thus had experience selling the Company's products, the
fact that they are no longer selling products made by other manufacturers as
part of their sales calls may reduce their access to doctors; and (d) territory
expansion and realignment means a larger number of salespeople will be calling
on physicians with whom they have not established a professional relationship.
There can be no assurance that the Company's efforts to expand the internal
sales force and to increase its productivity will produce positive effects on
sales or profits;
(iv) As discussed herein, the Company intends to pursue sales in international
markets. The Company, however, has had little experience in such markets.
Expanded efforts at pursuing new markets necessarily involves expenditures to
develop such markets and there can be no assurance that the results of those
efforts will be profitable;
(v) There can be no assurance that the Company's estimates concerning what it
has defined as the "Orthocare market" are accurate, or that changes in that
market will not cause the nature and extent of that market to deviate materially
from the Company's expectations;
11
<PAGE>
SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS, CONTINUED
(vi) To the extent that the Company presently enjoys perceived technological
advantages over competitors, technological innovation by present or future
competitors may erode the Company's position in the market. For example, prior
to the acquisitions discussed herein, the Company's historic sales have been
derived almost exclusively from the OrthoLogic 1000, and there is a possibility
that competitors may develop new treatments or improve existing treatments that
could be used in place of the OrthoLogic 1000. The same observation is true with
respect to the Company's CPM and fixation products. To sustain long-term growth,
the Company must develop and introduce new products and expand applications of
existing products; however, there can be no assurance that the Company will be
able to do so or that the market will accept any such new products or
applications;
(vii) The Company operates in a highly regulated environment and cannot predict
the actions of regulatory authorities. The action or non-action of regulatory
authorities may impede the development and introduction of new products and new
applications for existing products, and may have temporary or permanent effects
on the Company's marketing of its existing or planned products. As noted herein,
the Company has entered into an agreement with Mitsubishi Chemical Corporation
and will collaborate in attempting to obtain approval by Japan's national health
insurance for reimbursement for the use of the OrthoLogic 1000. However, there
can be no assurance that the Company will actually receive such approval;
(viii) There can be no assurance that the influence of managed care will
continue to grow either in the United States or abroad, or that any such growth
will result in greater acceptance or sales of the Company's products. In
particular, there can be no assurance that existing or future decision makers
and third party payors within the medical community will be receptive to the use
of the Company's products or replace or supplement existing or future
treatments. Moreover, the transition to managed care and the increasing
consolidation underway in the managed care industry may concentrate economic
power among buyers of the Company's products, which concentration could
foreseeably adversely affect the price third party payors are willing to pay,
and thus adversely affect the Company's margins; and
(ix) Although the Company believes that existing litigation initiated against
the Company is without merit and the Company intends to defend such litigation
vigorously, an adverse outcome of such litigation could have a material adverse
effect on the Company's business, financial condition and results of operations.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
OrthoLogic was founded in July 1987, and the Company was engaged
primarily in the commercialization of the Company's proprietary BioLogic
technology in order to develop products that stimulate the healing of bone
fractures and spinal fusions. On August 30, 1996 OrthoLogic acquired Sutter
Corporation ("Sutter") for $24.5 million in cash. Sutter develops, manufactures,
and markets orthopaedic rehabilitation products (primarily continuous passive
motion ("CPM") devices) and services. As discussed in Note 15 to the
consolidated financial statements the Company's completed two additional CPM
related acquisitions in March 1997. Management is in the process of preparing a
formal restructuring plan related to consolidating and integrating all of its
CPM related facilities, operations and personnel. The Company plans to reduce
the number of facilities from six to two during the second and third quarter of
1997. All CPM device manufacturing will be in Canada and the ancillary servicing
and administrative functions will be consolidated into a Phoenix, Arizona
location. Once the restructuring plan is completed and costs related to these
activities can be estimated, they will be reflected as additional acquisition
costs in the allocation of purchase price.
Fracture Healing
In March 1994, the Company received approval of its Premarket Approval
Application ("PMA") from the U.S. Food and Drug Administration (the "FDA") and
commenced marketing its OrthoLogic 1000 Bone Growth Stimulator for the treatment
of nonunion fractures.
In 1993, the Company commenced clinical trials for the SpinaLogic 1000,
an application of the BioLogic technology as an adjunct to spinal fusion
surgery. Also during 1993, the Company commenced sales of its first commercial
product, the OrthoFrame External Fixator. Additionally, in cooperation with the
Mayo Clinic in Rochester, Minnesota, the Company developed the OrthoFrame/Mayo
Wrist Fixator and commenced sales of this product during the first quarter of
1994. The Orthopaedic Department of the Mayo Clinic will also provide ongoing
clinical input on future product design enhancements.
Prior to the second quarter of 1996 the Company marketed its products
primarily through a network of independent orthopaedic specialty dealers. During
the second quarter of 1996 the Company commenced conversion of the primary
marketing channel to a direct sales force. The Company paid approximately $10.8
million to former independent dealers for the return of territory rights,
covenants-not-to-compete, and the right to hire former independent dealer sales
representatives as Company employees. At December 31, 1996 the fracture healing
direct sales force had 82 sales representatives and 2 remaining independent
dealers.
The Company's OrthoLogic 1000 is sold to patients upon receipt of a
written prescription. The Company submits a bill to the patient's insurance
carrier (third party payor) for reimbursement. All bills for the OrthoLogic 1000
are submitted to third party payors at the product's list price. The Company's
OrthoFrame products are used in conjunction with surgical procedures and are
sold to hospitals.
The Company recognizes revenue at the time of product shipment.
OrthoFrame products are shipped based upon receipt of purchase orders from
hospitals, which are billed at the time of shipment. Each OrthoLogic 1000 is
shipped based upon receipt of a physician's prescription. Therefore, the Company
operates with no backlog.
Orthopaedic Rehabilitation
The primary product in orthopaedic rehabilitation is the direct rental
of continuous passive motion devices to patients in the home, hospital, and
outpatient surgical facilities. In addition to CPM rentals the Company also
markets bracing and cryotherapy products.
The Company maintains a fleet of CPM's which are rented to patients
upon receipt of a written prescription. The Company recognizes CPM revenue daily
during the period of prescribed usage. A bill is sent to the patient's insurance
carrier (third party payor) for reimbursement. At December 31, 1996 the
orthopaedic rehabilitation direct sales force had 87 sales representatives.
Other
OrthoLogic reported net income of $2.5 million during 1996, however,
the Company, as of December 31, 1996, had a deficit of $16.9 million.
At December 31, 1996, the Company had incurred approximately $12.0
million in net operating loss carryforwards for federal income tax purposes. The
Company's ability to utilize its net operating loss carryforwards may be subject
to annual limitations in future periods pursuant to the "change in ownership
rules" under Section 382 of the Internal Revenue Code of 1986, as amended.
Future operating results will depend on numerous factors including, but
not limited to demand for the Company's products, the timing, cost and
acceptance of product introductions and enhancements made by the Company or
others, levels of third party payment, alternative treatments which currently
exist or may be introduced in the future, practice patterns, competitive
conditions in the industry, general economic conditions and other factors
influencing the orthopaedic market in the United States or other countries in
which the Company operates in or expands into. In addition, efforts to reform
the health care system in the United States and contain health care expenditures
could adversely affect the Company's revenues and results of operations.
Furthermore, the Company's medical devices are subject to regulation by the FDA.
The FDA has the power to affect the Company's sales and marketing of its
devices. The Company cannot determine the effect such trends will have on its
operations, if any.
Results of Operations
Years Ended December 31, 1994, 1995 and 1996.
Revenues. OrthoLogic's revenue increased 196% from $5.0 million in 1994
to $14.7 million in 1995. The increase in revenue was due primarily to increases
in OrthoLogic 1000 sales which received FDA approval in March 1994. OrthoLogic's
revenue increased from $14.7 million in 1995 to $41.9 million in 1996, an
increase of 185%. The increase in revenue is primarily attributable to higher
sales levels of the OrthoLogic 1000 and revenues from Sutter for four months.
However, sales of the OrthoLogic 1000 decreased in the second half of
1996, compared to the first half of 1996, primarily due to low productivity of
the Company's sales people associated with transition to a direct sales force.
13
<PAGE>
Gross Profit. Gross profit increased from $3.6 million in 1994 to $11.6
million in 1995, an increase of 219%. Gross profit increased 189% from $11.6
million in 1995 to $33.6 million in 1996. Gross profit as a percentage of sales
increased from 73.5% in 1994 to 79.1% in 1995 and to 81.6% in 1996.
The gross profit percentage has improved over time primarily as a
result of the absorption of fixed manufacturing costs over a higher volume of
manufactured product.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses
increased 101% from $5.6 million in 1994 to $11.3 million in 1995 and 182% to
$31.9 million in 1996. The increase from 1994 to 1995 was attributable to higher
personnel costs and other costs which relate directly to higher sales levels of
the OrthoLogic 1000, such as commissions to sales agents, allowance for bad
debts and royalties. Personnel costs also increased due to a higher number of
personnel in several areas, including direct sales representatives, regional
sales managers, product managers, customer service, third party payor, billing
and collections and reimbursement specialists. The increase from 1995 to 1996 is
due in part to the variable costs (commissions, bad debts, and royalties)
associated with the increased revenue. The fixed component of SG&A also
increased due to additional personnel at all levels for senior management, human
resources, marketing, accounting and management information systems, and other
infrastructure required to support the growing revenue volume, sales
representatives added as a result of the transition to a direct sales force and
incremental SG&A expenses from Sutter for four months. In addition, legal costs
incurred defending the Company against lawsuits and amortization of intangibles
arising from the acquisition of Sutter and costs from the conversion to a direct
sales force combined to increase SG&A by $1.3 million.
SG&A costs are expected to increase in 1997 due to a full year of the
current personnel, Sutter SG&A and the asset acquisitions, discussed in Note 15,
of Toronto Medical Corp. and Danninger Medical Technology, Inc.; however, the
future levels of SG&A are dependent upon many factors, including commissions,
royalties, bad debt and personnel levels.
Research and Development Expenses. Research and development expenses
for 1994 were $2.8 million. The expenses were attributable to research efforts
and developmental activities for the OrthoFrame, the OrthoLogic 1000 and the
OrthoFrame/Mayo Wrist Fixator. Research and development expenses decreased 23.5%
from $2.8 million in 1994 to $2.1 million in 1995 and increased to $2.2 million
in 1996. During the year ended December 31, 1994, the Company experienced
nonrecurring development costs associated with the OrthoLogic 1000 and the
OrthoFrame/Mayo Wrist Fixator, which were not incurred in 1995 and 1996.
Other Income. Grant revenue increased 758.8% from $25,000 in 1994 to
$215,000 in 1995 and decreased 14.9% to $183,000 in 1996. Grant revenue will
fluctuate from year to year depending on the number and dollar level of grant
awards. The total number of grants awarded in 1994, 1995 and 1996 were 0, 3, and
2, respectively. The grants are not awarded based on calendar years. Interest
income increased 9.9% from $278,000 in 1994 to $305,000 in 1995 and increased
831% to $2,841,000 in 1996. The fluctuations were caused by different amounts of
cash and short-term investments and varying interest rates. The Company
completed additional public offerings in October 1995 and April 1996 which
provided net proceeds of approximately $17.6 million and $74.0 million,
respectively.
Net Income. Net income during 1996 is comprised of an operating loss of
$485,000 which is offset by other income of $3.0 million, consisting primarily
of interest income of $2.8 million.
Liquidity and Capital Resources
The Company has financed its operations through the public and private
sales of equity securities and product sales. From inception through December
31, 1996, the Company has raised $118.8 million in net proceeds from equity
financings.
At December 31, 1996, the Company had cash and cash equivalents of
$13.5 million and short-term investments of $35.3 million. Working capital
increased 218.8% from $23.5 million at December 31, 1995 to $75.0 million at
December 31, 1996. This increase is primarily the result of the Company's public
offering which provided net proceeds of approximately $74.0 million.
Net cash used by operations decreased 14.8% from $5.6 million in 1994
to $4.8 million in 1995. The decrease is attributable to the decrease in net
loss from $4.5 million in 1994 to $1.4 million in 1995 and was partially offset
by an increase in accounts receivable and inventory. Net cash used by operations
increased 44.6% from $4.8 million in 1995 to $6.9 million in 1996. This increase
was due primarily to increases in accounts receivable and inventory of $4.7
million and $2.3 million, respectively, offset by increases in net income and
depreciation and amortization of $3.9 million and $1.6 million, respectively.
The Company anticipates that the cash generated from product sales and
rentals and current cash balances will be sufficient to meet the Company's
capital requirements for the foreseeable future. There can be no assurance,
however, that the Company will not require additional financing in the future.
If the Company were required to obtain additional financing in the future, there
can be no assurance that such sources of capital will be available on terms
favorable to the Company, if at all.
Accounts receivable increased from $6.5 million at December 31, 1995 to
$26.9 million at December 31, 1996. This increase is due primarily to the
acquisition of Sutter, increased sales of fracture healing products and an
increased collection cycle experienced during the Company's growth.
As discussed in greater detail in Note 13 the Company has been named as
a defendant in certain lawsuits. Management believes that the allegations are
without merit and will vigorously defend them. No costs related to the potential
outcome of these actions have been accrued.
The Company plans to relocate its corporate offices in the fourth
quarter of 1997. No lease has been signed related to this move.
14
<PAGE>
Selected Financial Data
The selected financial data for each of the five years in the period ended
December 31, 1996 are derived from audited financial statements of the Company.
The selected financial data is qualified in its entirety by and should be read
in conjunction with the Financial Statements and related Notes thereto and other
financial information appearing elsewhere herein and the discussion in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." As discussed in Note 2 of the footnotes the Company completed an
aquisition in August 1996.
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA:
Net revenue $ 41,884 $ 14,678 $ 4,953 $ 326 $ --
Cost of revenue 8,299 3,065 1,314 161 --
Operating expenses:
Selling, general
and administrative 31,901 11,304 5,611 1,113 944
Research and development 2,169 2,132 2,787 2,769 1,992
--------- --------- --------- --------- ---------
Total operating expenses 34,070 13,436 8,398 3,882 2,936
--------- --------- --------- --------- ---------
Operating loss (485) (1,823) (4,760) (3,717) (2,936)
Other income (expense) 3,023 471 288 393 (50)
--------- --------- --------- --------- ---------
Net income (loss) $ 2,538 $ (1,352) $ (4,472) $ (3,324) $ (2,986)
========= ========= ========= ========= =========
Net income (loss) per share (1) $ 0.11 $ (0.09) $ (0.33) $ (0.26) $ (0.39)
========= ========= ========= ========= =========
Weighted average
shares outstanding (1) 24,144 15,549 13,791 13,090 7,662
========= ========= ========= ========= =========
December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
BALANCE SHEET DATA:
Working capital $ 74,985 $ 23,518 $ 4,968 $ 9,553 $ 1,559
Total assets 113,026 27,490 7,576 10,949 2,730
Long-term debt, less
current maturities -- -- -- 20 125
Stockholders` equity 101,927 24,437 6,052 10,214 1,884
</TABLE>
(1) Based on weighted average common share equivalents outstanding, giving
retroactive effect to the conversion of outstanding Preferred Stock into Common
Stock and a stock split. See Notes to Financial Statements.
Stockholder Information
Market information. The Company's Common Stock commenced trading on the Nasdaq
National Market on January 28, 1993 under the symbol "OLGC." The bid price
information as adjusted for a 2 for 1 stock split effected as a stock dividend
in June 1996, included herein is derived from the Nasdaq Monthly Statistical
Report, represents quotations by dealers, may not reflect applicable markups,
markdowns or commissions, and does not necessarily represent actual
transactions.
1996 1995
---- ----
High Low High Low
---- --- ---- ---
First Quarter $13.656 $7-1/8 $2.813 $1-11/16
Second Quarter 26-1/4 9-7/8 3 2
Third Quarter 16-3/8 7-1/8 5.563 2-5/16
Fourth Quarter 11-3/8 5-5/8 7-7/8 4-1/16
As of March 7, 1997, there were 25,031,846 shares outstanding of the Common
Stock of the Company held by approximately 279 stockholders of record.
Dividends. The Company has never paid a cash dividend on its common stock. The
Board of Directors currently anticipates that all of the Company's earnings, if
any, will be retained for use in its business and does not intend to pay any
cash dividends on its Common Stock in the foreseeable future.
15
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,493,853 $ 8,830,514
Short-term investments (Note 6) 35,306,989 9,149,360
Accounts receivable, less allowance for doubtful
accounts of $8,595,000 and $1,480,000 26,856,144 6,488,203
Inventories, net (Note 7) 6,551,382 1,829,865
Prepaids and other current assets 1,194,679 273,237
Deferred taxes (Note 9) 2,401,000 --
------------- -------------
Total current assets 85,804,047 26,571,179
------------- -------------
FURNITURE, RENTAL FLEET AND
EQUIPMENT, net (Note 8) 9,082,003 695,932
DEPOSITS AND OTHER ASSETS (Note 11) 93,112 97,748
NOTE RECEIVABLE - Officer (Note 11) 200,000 125,000
GOODWILL, net (Note 2) 7,757,981 --
DEALER INTANGIBLES, net (Note 3) 10,088,559 --
------------- -------------
TOTAL $ 113,025,702 $ 27,489,859
============= =============
December 31,
------------
1996 1995
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,041,943 $ 1,053,323
Accrued bonuses and compensation 3,443,988 1,199,909
Deferred credits 2,738,779 --
Accrued royalties 556,495 333,213
Accrued expenses 2,073,633 466,802
------------- -------------
Total current liabilities 10,818,839 3,053,247
------------- -------------
DEFERRED RENT & CAPITAL LEASE 279,929 --
COMMITMENTS (Notes 4, 11, 12)
STOCKHOLDERS' EQUITY
Preferred stock, $.0005 par value; 2,000,000
share authorized, none issued
Common stock, $.0005 par value; 40,000,000
shares authorized; 25,022,346 and 19,251,728
shares issued 12,510 9,626
Additional paid-in capital 118,832,040 43,882,991
Deficit (16,917,616) (19,456,005)
------------- -------------
Total stockholders' equity 101,926,934 24,436,612
------------- -------------
TOTAL $ 113,025,702 $ 27,489,859
============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Net sales $ 31,031,451 $ 14,678,362 $ 4,952,963
Net rentals 10,852,788 -- --
------------ ------------ ------------
Total revenues 41,884,239 14,678,362 4,952,963
------------ ------------ ------------
COST OF REVENUES:
Cost of goods sold 5,714,510 3,065,451 1,314,328
Cost of rentals 2,584,530 -- --
------------ ------------ ------------
Total cost of revenues 8,299,040 3,065,451 1,314,328
------------ ------------ ------------
GROSS PROFIT 33,585,199 11,612,911 3,638,635
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 31,900,966 11,303,624 5,611,281
Research and development 2,169,090 2,132,441 2,786,929
------------ ------------ ------------
Total operating expenses 34,070,056 13,436,065 8,398,210
------------ ------------ ------------
OPERATING LOSS (484,857) (1,823,154) (4,759,575)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Grant revenue 182,658 214,704 25,000
Interest income 2,840,588 305,243 277,721
Interest expense -- (48,438) (14,693)
------------ ------------ ------------
Total other income (expense) 3,023,246 471,509 288,028
------------ ------------ ------------
NET INCOME (LOSS) $ 2,538,389 $ (1,351,645) $ (4,471,547)
============ ============ ============
NET INCOME (LOSS) PER WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING (Note 1) $ 0.11 $ (0.09) $ (0.33)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING (Note 1) 24,143,763 15,548,856 13,791,158
========== ========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17
<PAGE>
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- ------------ ----------
Shares Amount Shares Amount Paid-in Capital Deficit Total
------ ------ ------ ------ --------------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 - - 6,779,191 $ 3,390 $ 23,843,247 $ (13,632,813) $ 10,213,824
Exercise of common options at prices ranging from
$.10 to $4.50 per share (Note 10) - - 141,900 71 61,303 -- 61,374
Stock option compensation (Note 10) - - -- -- 73,571 -- 73,571
Exercise of common stock warrant (Note 10) - - 50,000 25 174,975 -- 175,000
Net loss - - -- -- -- (4,471,547) (4,471,547)
---- ----- ---------- -------- ------------- ------------- -------------
Balance, December 31, 1994 - - 6,971,091 3,486 24,153,096 (18,104,360) 6,052,222
Sale of common stock (Note 10) - - 2,512,199 1,256 19,564,379 -- 19,565,635
Exercise of common options at prices ranging from
$.325 to $5.75 per share (Note 10) - - 141,300 70 85,875 -- 85,945
Stock option compensation (Note 10) - - -- -- 84,455 -- 84,455
Exercise of common stock warrant (Note 10) - - 1,274 1 (1) -- --
Net loss - - -- -- -- (1,351,645) (1,351,645)
---- ----- ---------- -------- ------------- ------------- -------------
Balance, December 31, 1995 - - 9,625,864 4,813 43,887,804 (19,456,005) 24,436,612
Sale of common stock (Note 10) - - 2,530,000 1,265 73,949,643 -- 73,950,908
Exercise of common options at prices ranging from
$.325 to $14.625 per share (Note 10) - - 324,318 162 852,051 -- 852,213
Exercise of common stock warrant (Note 10) - - 10,241 5 (5) -- --
Stock option compensation (Note 10) - - -- -- 64,307 -- 64,307
Two for one stock split (Note 10) - - 12,490,423 6,245 (6,245) -- --
Exercise of common options at prices ranging from
$1.844 to $7.313 per share (Note 10) - - 41,500 20 84,485 -- 84,505
Net income - - -- -- -- 2,538,389 2,538,389
---- ----- ---------- -------- ------------- ------------- -------------
Balance, December 31, 1996 - - 25,022,346 $ 12,510 $ 118,832,040 $ (16,917,616) $ 101,926,934
==== ===== ========== ======== ============= ============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2,538,389 $ (1,351,645) $ (4,471,547)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization 1,926,056 301,567 289,853
Change in operating assets and liabilities:
Accounts receivable (9,062,119) (4,407,128) (1,973,263)
Inventories (3,171,448) (860,449) (474,118)
Prepaids and other current assets (819,623) (97,969) 43,422
Deposits and other assets 4,636 (1,866) 5,567
Accounts payable (708,136) 582,228 366,657
Accrued bonuses and compensation 39,561 59,828 248,572
Accrued royalties 223,282 220,043 108,681
Accrued expenses 2,114,567 771,859 236,037
------------ ------------ ------------
Net cash used in operating activities (6,914,835) (4,783,532) (5,617,020)
------------ ------------ ------------
INVESTING ACTIVITIES:
Expenditures for furniture and
equipment, net (1,389,309) (133,818) (699,190)
Intangibles from dealer transactions (10,752,116) -- --
Officer note receivable, net (75,000) -- --
Purchase of Sutter Corporation, net of
cash acquired (24,907,442) -- --
(Purchase) sale of short-term investments (26,157,629) (9,149,360) 6,523,432
------------ ------------ ------------
Net cash (used) provided in
investing activities (63,281,496) (9,283,178) 5,824,242
------------ ------------ ------------
Years Ended December 31,
1996 1995 1994
---- ---- ----
FINANCING ACTIVITIES:
Payments under long-term debt and
capital lease obligations (27,956) (19,706) (101,374)
Proceeds from issuance of common stock 74,887,626 19,651,580 236,374
------------ ------------ ------------
Net cash provided by
financing activities 74,859,670 19,631,874 135,000
------------ ------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 4,663,339 5,565,164 342,222
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 8,830,514 3,265,350 2,923,128
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 13,493,853 $ 8,830,514 $ 3,265,350
============ ============ ============
</TABLE>
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES:
The Company purchased all of the capital stock of Sutter Corporation and
incurred certain costs related to this acquisition for a total purchase price of
$25,047,000. In connection with this acquisition, liabilities were assumed as
follows:
<TABLE>
<S> <C> <C> <C>
Fair value of assets acquired $ 31,516,000
Cash paid and cost related to the
acquisition of capital stock (25,047,000)
------------
Liabilities assumed $ 6,469,000
============
Stock option compensation $ 64,307 $ 84,455 $ 73,571
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION-
Cash paid during the year for interest $ 0 $ 48,438 $ 14,693
============ ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19
<PAGE>
Notes To Consolidated Financial Statements
For The Years Ended December 31, 1996, 1995 and 1994
1. Summary of Significant
Accounting Policies
Organization - OrthoLogic, Corp. (formerly IatroMed, Inc.) was
incorporated on July 30, 1987 (date of inception) and commenced operations in
September 1987. On August 30, 1996 OrthoLogic, Corp. acquired all of the
outstanding capital stock of Sutter Corporation ("Sutter") which became a
wholly-owned subsidiary of OrthoLogic (collectively the "Company" or
"OrthoLogic").
Description of business - OrthoLogic is engaged in two primary areas of
orthopaedic healthcare primarily in the United States. The fracture healing area
is engaged in developing, manufacturing, and marketing proprietary,
technologically advanced orthopaedic devices designed to enhance the healing of
diseased, damaged or degenerated musculo-skeletal tissue. The orthopaedic
rehabilitation area is engaged in developing, manufacturing, and marketing
orthopaedic rehabilitation products and services, primarily through the direct
rental of continuous passive motion ("CPM") devices to patients in the home,
hospitals, and outpatient surgical facilities.
Principles of consolidation - The consolidated financial statements
include the accounts of OrthoLogic, Corp. since its inception and Sutter since
its acquisition on August 30, 1996. All material inter-company accounts and
transactions have been eliminated.
The following briefly describes the significant accounting policies
used in the preparation of the financial statements of the Company:
a. Inventories are stated at the lower of cost (first-in, first-out method) or
market.
b. Furniture, rental fleet and equipment are stated at cost or, in the case of
leased assets under capital leases, at the present value of future lease
payments at inception of the lease. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the various assets,
which range from three to seven years. Leasehold improvements and leased
assets under capital leases are amortized over the life of the asset or the
period of the respective lease using the straight-line method, whichever is
the shortest.
c. Grant revenue is recorded as costs are incurred in accordance with the
terms of the grant contract.
d. Research and development represent both costs incurred internally for
research and development activities, as well as costs incurred by the
Company to fund the activities of the various research groups (Note 4),
with which the Company has contracted. All research and development costs
are expensed when incurred.
e. Cash and cash equivalents consist of cash on hand and cash deposited with
financial institutions, including money market accounts, and commercial
paper purchased with an original maturity of three months or less.
f. Income (loss) per common and common equivalent share - is computed on the
weighted average number of common and common equivalent shares outstanding
during each year and includes shares issuable upon exercise of stock
options when dilutive.
g. Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
h. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
2. Acquisition
On August 30, 1996, OrthoLogic, Corp. acquired all of the outstanding
capital stock of Sutter for $24.5 million in cash. The acquisition was accounted
for as a purchase and, accordingly the net assets and results of operations of
Sutter have been included in these consolidated financial statements commencing
August 30, 1996. The purchase resulted in goodwill of $7.9 million which is
being amortized over 15 years. The following unaudited pro forma summary
combines the consolidated results of operations of OrthoLogic, Corp. and Sutter
as if the acquisition had occured on January 1 of that period after giving
effect to certain adjustments including amortization of the purchase price in
excess of net assets acquired, interest income, and income taxes. This pro forma
summary is not necessarily indicative of the results of operations that would
have occured if OrthoLogic, Corp. and Sutter had been combined during such
periods. Moreover, the pro forma summary is not intended to be indicative of the
results of operations to be attained in the future.
Year Ended December 31,
-----------------------
(in thousands, except per share data)
-------------------------------------
1996 1995
---- ----
Net revenues $ 65,623 $ 47,062
Income (loss) from continuing operations $ 1,487 $ (2,476)
Net income (loss) per common share $ 0.06 $ (0.16)
The Company intends to close the Sutter corporate office and manufacturing
facility as part of a restructuring (the "Restructuring Plan," see Note 15).
Events which remain to be determined include 1) which employees will be
terminated or relocated and 2) matters surrounding the closure of facilities and
relocation of servicing operations. The amount of costs to be incurred related
to these activities have not yet been estimated. Once the Restructuring Plan is
approved, the related liabilities will be reflected as additional acquisition
costs in the allocation of purchase price.
20
Notes To Consolidated Financial Statements, cont.
For The Years Ended December 31, 1996, 1995 and 1994
<PAGE>
3. Dealer Intangibles
During the second quarter of 1996 the Company initiated a plan to
convert its primary marketing channel from an independent dealer network to a
direct sales force. In connection with this conversion the Company paid
approximately $10.8 million to certain former independent dealers for the return
of territory rights, covenants-not-to-compete with varying terms, and the right
to hire former independent dealer sales representatives as Company employees.
This amount is being amortized on a straight line basis over seven years.
4. Research, Product Development and License Agreements
The Company has entered into several research contracts, product
development agreements and license agreements. These agreements relate to
products being sold, products currently under development, and ongoing
scientific research. Future commitments related to these agreements are
summarized as follows:
Year Ending December 31, Amount
------------------------ ------
1997 $ 130,000
1998 45,333
1999 1,000
---------
Total $ 176,333
=========
In addition, the Company has committed to pay royalties on the sale of
products or components of products developed under certain of these agreements.
The royalty percentages vary but generally range from 7% to 0.5% of the sales
amount for licensed products. The royalty percentage under the different
agreements decreases when either a certain sales dollar amount is reached or
royalty amount is paid. Royalty expense under these agreements totaled $621,597,
$414,408 and $180,570 in 1996, 1995 and 1994, respectively.
5. Distributor and Sales Agency Agreements
Prior to the second quarter of 1996 the Company marketed its products
primarily through a network of independent orthopaedic speciality dealers.
During the second quarter of 1996 the Company commenced conversion of the
primary marketing channel to a direct sales force. This conversion was
substantially complete by year end. In August 1996 the Company acquired Sutter
whose primary marketing channel was a direct sales force.
The Company's primary products, the OrthoLogic 1000 and CPM devices,
are prescribed by clinicians for specific patient usage. The Company sells or
rents product upon receipt of a prescription, signed by a clinician. The Company
bills the patient's insurance carrier or the patient, if they are not insured.
During 1995, one distributor obtained prescriptions for which product was
shipped and which represents approximately 12% of net sales. This same
distributor purchased other products from the Company which account for less
than 1% of net sales for this same period.
For the years ended December 31, 1996 and 1994, no distributor
accounted for over 10% of revenue.
6. Investments
The Company has implemented Statement of Financial Accounting Standards
("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." At December 31, 1996, marketable securities were comprised of
corporate debt securities and direct obligations of the United States Government
and its agencies and were managed as part of the Company's short-term cash
management program and were classified as held-to-maturity securities. All such
securities were purchased with original maturities less than one year. Such
classification requires these securities to be reported at amortized cost.
A summary of the fair market value and unrealized gains and losses on these
securities is as follows:
December 31,
1996 1995
---- ----
Amortized Cost $ 35,306,989 $ 9,149,360
Gross unrealized gain 48,912 45,887
Gross unrealized loss (13,117) --
------------ ------------
Fair Value $ 35,342,784 $ 9,195,247
============ ============
7. Inventories
Inventories consisted of the following:
December 31,
1996 1995
---- ----
Raw materials $ 4,646,620 $ 1,156,716
Work-in-process 127,514 95,715
Finished goods 2,037,850 577,434
----------- -----------
6,811,984 1,829,865
Less allowance for obsolescence (260,602) --
----------- -----------
Total $ 6,551,382 $ 1,829,865
=========== ===========
8. Furniture, Rental Fleet and Equipment
Furniture, rental fleet and equipment consisted of the following:
21
<PAGE>
December 31,
1996 1995
---- ----
Rental fleet $ 7,366,886 $ --
Machinery and equipment 1,738,572 1,140,328
Computer equipment 1,070,534 473,994
Furniture and fixtures 825,894 175,330
Leasehold improvements 362,409 102,335
------------ ------------
11,364,295 1,891,987
Less
accumulated depreciation and amortization (2,282,292) (1,196,055)
------------ ------------
Total $ 9,082,003 $ 695,932
============ ============
9. Income Taxes
At December 31, 1996, the Company has incurred approximately $12.0
million in net operating loss carryforwards expiring from 2002 through 2011 for
federal income tax purposes. The Company issued Series B Convertible Preferred
Stock during 1988, Series C Convertible Preferred Stock during 1990 and Series D
Convertible Preferred Stock during 1992, completed its IPO in 1993 and completed
a private placement and public offerings of its common stock in 1995 and 1996.
Stock issuances, as discussed in Note 10, may cause a change in ownership under
the provisions of Internal Revenue Code Section 382; accordingly, the
utilization of the Company's net operating loss carryforwards may be subject to
annual limitations.
Management has evaluated the available evidence about future taxable income and
other possible sources of realization of deferred tax assets. The valuation
allowance reduces deferred tax assets to an amount that management believes will
more likely than not be realized. The components of deferred income taxes at
December 31 are as follows (in '000s):
1996 1995
---- ----
Allowance for bad debts $ 3,456 $ 592
Other accruals and reserves 675 25
Valuation Allowance (1,730) (618)
------- -------
Total current 2,401 0
------- -------
Net operating loss carryforwards 4,746 7,187
Difference in basis of fixed assets (606) --
Nondeductible accruals and reserves 441 197
Amortization of intangibles and other 630 (2)
Valuation Allowance (5,211) (7,382)
------- -------
Total noncurrent 0 0
------- -------
Total deferred income taxes $ 2,401 $ 0
======= =======
A reconciliation of the difference between the provision for income taxes and
income taxes at the statutory U.S. federal income tax rate is as follows for the
year ended December 31, 1996:
Income taxes at statutory rate $ 863
Net operating losses used (930)
State income taxes 200
Other (133)
-----
Net provision $ 0
=====
Prior to 1996, the Company had experienced net operating losses for all years;
therefore, there was no provision for 1995 or 1994.
22
<PAGE>
Notes To Consolidated Financial Statements, cont.
For The Years Ended December 31, 1996, 1995 and 1994
10. Stockholders' Equity
In October 1987, the stockholders adopted a Stock Option Plan (the
"Option Plan") which was amended in January 1996 to increase the number of
common shares reserved for issuance under the Option Plan to 4,000,000 shares.
Two types of options may be granted under the Option Plan: options intended to
qualify as incentive stock options under Section 442 of the Internal Revenue
Code ("Code") and other options not specifically authorized or qualified for
favorable income tax treatment by the Code. All eligible employees may receive
more than one type of option. Any director or consultant who is not an employee
of the Company shall be eligible to receive only nonqualified stock options
under the Option Plan.
In October 1989, the Board of Directors (the "Board") approved that in
the event of a takeover or merger of the Company in which 100% of the equity of
the Company is purchased, 75% of all unvested employee options will vest, with
the balance vesting equally over the ensuing 12 months, or according to the
individual's vesting schedule, whichever is earlier. If an employee or holder of
stock options loses their position as a result of or subsequent to the
acquisition, 100% of that individual's stock options will vest immediately upon
employment termination.
Options are granted at prices which are equal to the current fair value
of the Company's common stock at the date of grant. During January 1993, an
independent valuation of the fair value of the Company's common stock was
performed for 1991 and 1992. This valuation indicated that certain options
granted during 1991 and all options granted during 1992 were at prices less than
the fair value at the date of grant. The Company recorded the difference between
the fair value and the exercise price as compensation expense as the options
vested. During 1996, 1995 and 1994 approximately $12,000, $13,000 and $191,000
respectively, was recorded as compensation expense. There is no remaining future
compensation expense. The vesting period is generally related to length of
employment and all vested options lapse upon termination of employment if not
exercised within a 90-day period (or one year after such termination because of
death or disability or the date of termination if terminated for cause).
A summary of the status of the Option Plan as of December 31, 1996, 1995, and
1994, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted-Average Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------- ------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 2,356,034 $ 3.33 1,654,034 $ 1.61 1,367,300 $ 0.91
Granted 914,400 13.15 1,112,600 5.04 600,300 2.68
Exercised (700,790) 1.60 (282,600) 0.30 (283,800) 0.22
Forfeited (60,000) 6.23 (128,000) 2.42 (29,766) 2.34
---------- ---------- ---------
Outstanding at end of year 2,509,644 $ 7.31 2,356,034 $ 3.33 1,654,034 $ 1.61
========== ========== =========
Options exercisable
at year-end 613,737 774,220 656,486
========== ========== =========
Weighted-average fair value
of options granted during
the year $ 7.50 $ 2.87
========== ==========
</TABLE>
23
<PAGE>
Notes To Consolidated Financial Statements, cont.
For The Years Ended December 31, 1996, 1995 and 1994
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------- --------------------------------------
Range of Number Outstanding Weighted-Average Weighted-Average Number Exercisable Weighted-Average
Exercise Prices at 12/31/96 Remaining Contractual Life Exercise Price at 12/31/96 Exercise Price
--------------- ----------- -------------------------- -------------- ----------- --------------
<C> <C> <C> <C> <C> <C>
$ 0.16 - $ 2.25 509,944 5.46 $ 1.84 274,193 $ 1.71
2.44 - 4.78 511,400 7.45 3.06 97,734 3.05
6.50 - 6.50 16,000 11.89 6.50 0 0
6.78 - 6.78 550,000 3.95 6.78 148,959 6.78
7.31 - 17.88 927,300 8.63 12.95 92,851 12.98
--------- ---- ------- ------- ------
$ 0.16 - $17.88 2,509,644 6.75 $ 7.31 613,737 $ 4.83
--------- ---- ------- ------- ------
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its Option Plan. Accordingly, no compensation cost, other than discussed
above, has been recognized for its Option Plan. Had compensation cost been
computed based on the fair value of awards on the date of grant, utilizing the
Black-Scholes option-pricing model, consistent with the method stipulated by
Statement of Financial Accounting Standards No. 123, the Company's net earnings
and earnings per share for the years ended December 31, 1996 and 1995 would have
been reduced to the pro forma amounts indicated below, followed by the model
assumptions used:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Net income (loss):
As reported (in '000s) $ 2,538 $ (1,352)
Pro forma (in '000s) $ 679 $ (1,687)
Net income (loss) per weighted average number of common and common equivalent shares outstanding:
As reported $ 0.11 $ (0.09)
Pro forma $ 0.03 $ (0.11)
Black-Scholes model assumptions:
Risk-free interest rate 6.00% 6.00%
Expected volatility .6 .6
Expected term 5 years 5 years
Dividend yield 0% 0%
</TABLE>
24
<PAGE>
Notes To Consolidated Financial Statements, cont.
For The Years Ended December 31, 1996, 1995 and 1994
At December 31, 1996, options for 613,737 shares of common stock were
exercisable. The options generally expire five or ten years from the date of
grant.
At the closing of the Company's IPO on January 28, 1993 all convertible
preferred stock, totaling 4,173,002 shares, was converted into an equal amount
of common stock.
At December 31, 1996, there were 2,000,000 shares of preferred stock
authorized and none were issued and outstanding.
The former preferred stockholders and certain of their transferees now
holding their shares of common stock may require the Company, commencing April
28, 1993 and ending on July 6, 2003, on not more than two occasions, to file a
registration statement under the Securities Act with respect to at least 30% of
their shares of common stock. Stockholders holding 60% of such registerable
shares must make the registration demand. The Company must file a registration
statement with the Securities and Exchange Commission within 90 days of the
receipt of the request. The former holders of all of the shares of Series D
Preferred Stock may require the Company, on one or more occasions, to file a
registration statement under the Securities Act for all or any part of their
shares of common stock. The Company must file a registration statement within 90
days of the receipt of the request. Further, holders of common stock with
registration rights may require the Company to register all or a portion of
their shares of common stock on Form S-3, subject to certain conditions and
limitations. The Company is obligated to pay the offering expenses of each such
offering, except for the selling stockholders' pro rata portion of underwriting
discounts and commissions. During 1994, the former holders of certain shares of
Series D Preferred Stock and certain warrant holders required the Company to
register their shares of common stock. Sales of substantial amounts of the
common stock in the public market pursuant to the above registration rights
could adversely affect prevailing market prices.
In June 1992, the Company issued a warrant to purchase 100,000 shares
of common stock, at an exercise price of $1.75 per share, to the placement agent
in connection with the sale of the Series D Preferred Stock. The warrant was
exercised in August 1994.
In connection with the Company's IPO in January 1993, the Company
issued a warrant to purchase 50,000 shares of common stock, at an exercise price
of $4.20 per share, to the underwriter. In 1995 as a result of the private
placement, the exercise price was reduced to $4.055. The warrant was exercised
using a net exercise provision during 1995 and 1996.
In 1993, the Company issued a warrant to purchase 20,000 shares of
common stock, at an exercise price of $1.813 per share, to another company for
an ownership interest of that company (see Note 11). This warrant expires in
August 1998.
On February 28, 1995 the Company issued 1,000,000 shares of common
stock upon the closing of a private placement of its common stock. Gross
proceeds to the Company were $2 million. Net proceeds to the Company after
deducting costs of the offering were approximately $1.9 million. The common
stock was sold to 11 accredited investors, including Arizona Growth Partners,
L.P. which at the time held more than 5% of the Company's stock. The general
partner of an entity which is the general partner of Arizona Growth Partners,
L.P. is a member of the Company's Board of Directors. The holders of such shares
of common stock exercised their right to require the Company to register the
shares under the Securities Act, the Company so registered the shares prior to
March 1996.
In 1996, the Company issued a warrant to purchase 5,000 shares of
common stock, at an exercise price of $2.41 per share, to a consultant as
partial payment for services. This warrant expires in March 2001.
On October 31, 1995 and November 6, 1995 the Company issued a total of
4,024,398 shares of common stock upon the closings of a public offering of its
common stock. Gross proceeds to the Company were $19.1 million. Net proceeds to
the Company after deducting costs of the offering were approximately $17.6
million.
On April 30, 1996 the Company issued 5,060,000 shares of common stock
upon the closing of a public offering of its common stock. Gross proceeds to the
Company were $78.4 million. The net proceeds to the Company after deducting
costs of the offering were approximately $74.0 million. The common stock was
sold at $15.50 per share. During the first quarter of 1996 the Company amended
its Articles of Incorporation to authorize 40,000,000 shares of common stock,
$.0005 par value. In addition, the Board of Directors approved a 2 for 1 stock
split in the form of a 100 percent common share dividend which was paid on June
25, 1996, to stockholders of record as of June 4, 1996. The accompanying
financial statements and footnotes have been restated to give effect to the
split.
11. Related Parties
The Company has entered into two-year employment agreements with the
Chief Executive Officer ("CEO"), President and the Executive Vice President of
Research and Development of the Company. The employment agreements provide that
salaries and bonuses shall be determined annually by the Board of Directors. If
the Company terminates the employee's employment without cause, the employee is
entitled to a severance payment equal to twelve months' salary. In addition,
three other officers of the Company have entered into severance agreements
wherein payments equal to twelve months' salary are required upon termination of
the employee without cause.
During June 1992, the Company loaned $125,000 to its CEO. The note plus
accrued interest was paid during 1996.
25
<PAGE>
Notes To Consolidated Financial Statements, cont.
For The Years Ended December 31, 1996, 1995 and 1994
During November 1996, the Company loaned $200,000 to its former
President. The loan is unsecured and bears interest at 8%. The note is due upon
sale of the former President's Phoenix home. The Company may demand payment
after December 31, 1997.
The Company has a 5% ownership interest in a company which is providing
research services to the Company per an agreement referred to in Note 4. The
Company paid approximately $32,000 and granted a warrant for 10,000 shares of
the Company's stock (as described in Note 10) for the ownership interest. This
investment is included in deposits and other assets at December 31, 1996.
The Company has a consulting agreement with a member of the Board of
Directors. The agreement has a renewable one year term and the fee is negotiated
each year. During each of 1996, 1995 and 1994, the Company paid the member
$25,000 for services rendered under the agreement.
The Company's CEO has a minority interest in royalties paid by the
Company under a product license (see Note 4). The CEO has transferred to the
Company his rights to any royalties under this agreement as long as he is a
director or officer of the Company. The Company has received no royalties to
date under this agreement.
12. Commitments
The Company is obligated under non-cancelable operating lease
agreements for its office, manufacturing and research facilities. Rent expense
for the years ended December 31, 1996, 1995 and 1994 was $482,000, $131,000 and
$124,000, respectively. The following is a schedule of future minimum lease
payments for the years ending December 31 under non-cancelable lease agreements
with original terms in excess of one year:
Leases
------------------------------------
Capital Operating Total
------- --------- -----
1997 $ 68,672 $1,083,243 $1,151,915
1998 68,672 580,765 649,437
1999 68,672 14,122 82,794
2000 47,264 5,301 52,565
Thereafter -- -- --
---------- ---------- ----------
Total future minimum
lease payments 253,280 $1,683,431 $1,936,711
========== ==========
Less amount representing interest 39,568
----------
Present value of minimum
lease payments 213,712
Less current portion 51,207
----------
Long-term portion $ 162,505
==========
13. Litigation
During 1996 certain lawsuits were filed in the United States District
Court for the District of Arizona against the Company and certain officers and
directors alleging violations of Section 10(b) of the Securities Exchange Act of
1934, and SEC Rule 10b-5 promulgated thereunder.
Plaintiffs in these actions allege that correspondence received by the
Company from the U.S. Food and Drug Administration (the "FDA") pertaining
principally to the promotion of the Company's OrthoLogic 1000 Bone Growth
Stimulator was material and undisclosed, leading to an artificially inflated
stock price. Plaintiffs further allege that the Company's non-disclosure of the
FDA correspondence and of the alleged practices referenced in that
correspondence operated as a fraud against plaintiffs. Plaintiffs further allege
that once the FDA letter became known, a material decline in the stock price of
the Company occurred, causing damage to the plaintiffs.
In addition, the Company has been served with a substantially similiar
action filed in Arizona state court alleging state law causes of action grounded
in the same set of facts.
All plaintiffs seek class action status, unspecified compensatory
damages, fees and costs. Plaintiffs also seek extraordinary, equitable and/or
injunctive relief as permitted by law. Management believes that the allegations
are without merit and will vigorously defend them.
26
<PAGE>
Notes To Consolidated Financial Statements, cont.
For The Years Ended December 31, 1996, 1995 and 1994
In addition to the foregoing, a shareholder derivative complaint
alleging among other things, breach of fiduciary duty in connection with the
conduct alleged in the aforesaid federal and state court class actions have also
been filed in Arizona state court. By agreement between the parties, that action
has been stayed pending a decision on defendant's forthcoming motion to dismiss
those actions.
The costs associated with defending these allegations and the potential
outcome cannot be determined at this time and accordingly, no estimate for such
costs has been included in these financial statements.
14. 401(k) Plan
The Company adopted a 401(k) plan (the "Plan") for its employees on
July 1, 1993. The Company may make matching contributions to the Plan on behalf
of all Plan participants, the amount of which is determined by the Board of
Directors. The Company did not make any matching contributions to the Plan in
1996, 1995 or 1994.
15. Subsequent Events
On February 25, 1997 the Company declared a dividend distribution of
one Preferred Stock Purchase Right (the "Rights") for each outstanding share of
the Company's common stock, payable March 12, 1997 to holders of record on that
date. The Rights will expire on March 11, 2007.
Each Right will entitle shareholders to buy 1/100 of a share of Series
A Preferred Stock at an exercise price of $25.00. Initially, no separate Rights
certificates will be distributed; the Rights will trade with the Company's
common stock and will not be exercisable until the earlier of 10 business days
following the acquisition of 15% or more of the Company's common stock by a
person or group or 15 business days following the commencement of a tender offer
for 20% or more of the Company's common stock.
At the discretion of the Board of Directors of the Company, the Rights
can be redeemed at any time prior to the 10th day following the date the Rights
become exercisable. If the Rights are not redeemed by the Board, and the Company
is acquired, holders of the Rights (other than an "acquiring person") will be
entitled to purchase additional shares of common stock of either the Company or
the acquiring corporation (whichever survives) at one-half the market price.
On March 3, 1997 and March 12, 1997 the Company acquired certain assets
and assumed certain liabilities of Toronto Medical Corp. ("Toronto") and
Danninger Medical Technology, Inc. ("DMTI") for approximately $4.0 million and
$9.1 million in cash, respectively. Both acquisitions were accounted for as a
purchase, however at the date of this report the purchase price allocation had
not yet been determined and accordingly the amount of goodwill has not been
computed. Toronto and DMTI develop, manufacture and market CPM devices on a
national and international level.
Management plans to restructure the operations related to these
acquisitions during the second and third quarter of 1997 including, but not
limited to, closing and/or relocating facilities and terminating or relocating
certain employees. The Restructuring Plan will include the integration of these
acquisitions. Once the estimated costs related to these activities are
determined, they will be accrued and reflected as additional acquisition costs
in the allocation of purchase price.
Independent Auditors' Report
To the Board of Directors and Stockholders of OrthoLogic Corp.:
We have audited the accompanying consolidated balance sheets of
OrthoLogic, Corp. and its subsidiary (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of OrthoLogic Corp. and its
subsidiary at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
March 12, 1997
Phoenix, Arizona
27
Exhibit 21.1
SUBSIDIARIES OF ORTHOLOGIC CORP.
<TABLE>
<CAPTION>
Name Under Which
Name Jurisdiction of Incorporation Subsidiary Does Business
- ---- ----------------------------- ------------------------
<S> <C> <C>
Sutter Corporation California Sutter Corporation
Toronto Medical Orthopaedics Ltd. Canada Toronto Medical
Orthopaedics Ltd.
</TABLE>
INDEPENDENT AUDITORS CONSENT
We consent to the incorporation by reference in the Registration Statements No.
33-79010, No. 333- 1268 and No. 333-09785 of OrthoLogic Corp. on Form S-8 and
Registration Statements No. 33- 82050 and No. 333-1558 of OrthoLogic Corp. on
Form S-3 of our report dated March 12, 1997, appearing in the Annual Report on
Form 10-K of OrthoLogic Corp. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements in Orthologic Corp's report on Form 10-K for the year ended
December 31, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 13,493,853
<SECURITIES> 35,306,989
<RECEIVABLES> 35,451,144
<ALLOWANCES> 8,595,000
<INVENTORY> 6,551,382
<CURRENT-ASSETS> 85,804,047
<PP&E> 9,082,003
<DEPRECIATION> 2,282,292
<TOTAL-ASSETS> 113,025,702
<CURRENT-LIABILITIES> 10,818,839
<BONDS> 0
0
0
<COMMON> 12,510
<OTHER-SE> 101,914,424
<TOTAL-LIABILITY-AND-EQUITY> 113,025,702
<SALES> 31,031,451
<TOTAL-REVENUES> 41,884,239
<CGS> 8,299,040
<TOTAL-COSTS> 34,070,056
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,538,839
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,538,839
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,538,839
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
