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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23036
ODWALLA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
California 77-0096788
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
120 Stone Pine Road
Half Moon Bay, California 94019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
Registrant's telephone number, including area code: (415) 726-1888
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
Title of each class Name of Exchange on which registered
none none
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock (no par
value)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by a 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. [X]
[Cover page 1 of 2 pages]
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The aggregate market value of voting stock held by non-affiliates of
the Registrant, as of December 9, 1996 was approximately $53,890,000 (based on
the closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market for the last trading day prior to that date). Shares of
Common Stock held by each executive officer, director, and holder of 5% 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 a conclusive determination for other purposes.
On December 9, 1996 approximately 4,972,335 shares of the Registrant's
Common Stock, no par value, were outstanding.
[Cover Page 2 of 2 pages]
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This Annual Report on Form 10-K contains forward-looking statements
relating to future events or the future financial performance of the Company,
which involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain important factors, including those set forth under "Item 1.
Business" and elsewhere in this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
Odwalla, Inc. ("Odwalla" or the "Company") was founded in September
1980 and incorporated in California in September 1985. Odwalla is a leading
supplier of fresh and flash-pasteurized fruit- and vegetable-based beverage
products ("Nourishing Beverages") in the western United States and British
Columbia, Canada. The Company's Nourishing Beverages provide the consumer with
high-quality living nourishment. The Company believes that its Nourishing
Beverages appeal to many consumers because of the superior qualities of
beverages in their natural state and the greater nutritional value of Nourishing
Beverages compared to juice from concentrate or artificial beverages.
Odwalla's objective is to be the leading Nourishing Beverage company in
its existing and future markets. The Company seeks to achieve this objective by
leading the industry in Nourishing Beverage knowledge, optimizing quality
through sourcing and production, controlling product access and distribution
from production through retail, artful presentation, growing through geographic
and product line expansion, leveraging its information systems, interacting with
consumers and living its vision.
Odwalla's sourcing procedures and production methods enable it to
create products with high nutritional and flavor quality. The distribution of
Odwalla's products through its own direct-store-delivery system allows the
Company to control product quality and presentation, as well as to develop
relationships with its trade partners. Odwalla sells and distributes its
products to over 2,500 retail locations, including supermarkets, specialty
retailers, natural food stores, warehouse outlets and food service operators.
Odwalla is committed to certain values -- nourishment to consumers and
other stakeholder groups, environmental awareness and responsibility, cultural
creation and social responsibilities to its employees and the communities it
serves. Odwalla believes that its products must embody these values.
RECENT EVENTS
On October 30, 1996, the Company was notified by the State of
Washington Environmental Health Services of an epidemiological link between
several cases of E. coli O157:H7 and Odwalla's apple juice products. The Company
immediately implemented a voluntary recall (the "Recall") of all Odwalla
products containing apple juice. On October 31, 1996, Odwalla expanded the
Recall to include its carrot and vegetable products because such products were
processed on the same production line as the apple juice. As of November 22,
1996, there were 66 cases of E. coli O157:H7 epidemiologically linked to Odwalla
apple juice products, according to the Centers for Disease Control and
Prevention.
Immediately following the Recall, the Food and Drug Administration
("FDA") began an investigation of the Company's production and distribution
centers. The FDA informed the Company that a sample from one bottle of apple
juice taken from a distribution center tested positive for E. coli O157:H7. The
FDA investigation is on-going.
The Company has experienced a significant reduction in sales of all of
its products following the Recall. Although sales of the Company's products have
declined in all of its markets, declines in sales have been most significant in
the Pacific Northwest and Colorado. The significant decline in sales of the
Company's products can
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be attributed to the loss of consumer confidence, reduction of the number of
products on the market from 23 to eight, the removal of all of the Company's
products by certain trade partners and the loss of certain trade partners.
During November 1996, the Company reformulated five of the recalled products
without apple juice and returned them to the market and, in early December 1996,
the Company reintroduced all of its recalled apple juice-based products to the
market with flash-pasteurized apple juice. Most of the Company's trade partners
prior to the Recall are now stocking the Company's products. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - Overview."
To date, there are six personal injury claims and legal proceedings
seeking monetary damages and other relief relating to the Recall pending against
the Company. In addition, there is one legal proceeding alleging fraudulent
business acts and practices relating to the recalled products pending against
the Company. See "Item 3.
Legal Proceedings."
Following the Recall, the Company formed the Odwalla Nourishment & Food
Safety Advisory Council (the "Council") to advise management in developing new
industry practices in the sourcing, production and distribution of fresh juice
products in order to maintain a leadership position. Beginning in early December
1996, Odwalla reintroduced all apple juice-based products to the market using a
Hazard Analysis Critical Control Point Plan ("HACCP Plan"), which includes the
flash pasteurization of fresh apple juice. The flash pasteurization process
rapidly heats the juice for a short period of time to a temperature high enough
to kill harmful bacteria yet still retain vitamins, minerals and flavors that
diminish with pasteurization processes at higher temperatures and for longer
periods of time.
POST-RECALL MANAGEMENT
Prior to the Recall, the Company experienced substantial growth in its
revenue, operations and employee base, and underwent substantial changes in its
business that placed significant demands on the Company's management, working
capital and financial and management control systems. Although the Company will
continue to face the demands of a growing business and expansion in its newer
markets, the Company must also address the challenges and increasing costs and
demands on management and working capital resulting from the Recall, including
restoring consumer confidence in its products, adapting its production processes
and procedures to accommodate flash pasteurization and other new production
methods, managing pending and future legal proceedings and settlement of first
and third party claims with its insurance carriers. All of the foregoing demands
and challenges will require the expenditure of a significant amount of
management effort and working capital. The Company anticipates that the
increased costs associated with the Recall, including equipment and plant
modifications required for flash pasteurization and legal and marketing costs,
may require the Company to pursue additional financing that may be dilutive to
current investors or result in a higher debt-to-equity ratio than would
otherwise be the case. There can be no assurance that such financing will be
available on terms favorable to the Company, if at all.
Although the Company believes that its management, working capital,
financial and management systems and controls will be adequate to address its
current needs, only a short period of time has elapsed since the Recall and
there can be no assurance that its management, working capital and such systems
will be adequate to address future requirements of the Company's business. The
Company's results of operations will be adversely affected if revenues do not
increase sufficiently to compensate for the increase in operating expenses
resulting from the Recall and planned expansion, and there can be no assurance
that it will not adversely affect the Company's ability to continue to improve
and expand its management and financial control systems, to attract, retain and
motivate key employees, and to raise additional capital. There can be no
assurance that the Company will be successful in these regards. For a discussion
of the possible effects of the Recall on net sales, cost of sales and sales and
distribution, marketing and general and administrative costs, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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PRODUCTS, DISTRIBUTION AND TRADE PARTNERS
Odwalla's current product line consists of single-strength and blended
fruit- and vegetable-based products and geothermal natural spring water. Except
for flash pasteurization applied to fresh apple juice, all single-strength
products are fresh fruit- and vegetable-based beverage products (some produced
on a seasonal basis). Blended products also contain fresh fruit- and
vegetable-based beverage products, and, in some products, flash pasteurized
apple juice. These products are currently sold in California, Washington,
Oregon, Colorado, New Mexico, Nevada, Texas and parts of British Columbia.
Because all of Odwalla's products contain fresh fruit or vegetable juices,
except for flash-pasteurized apple juice and geothermal spring water, and do not
contain preservatives, the shelf life of the product is typically limited to
between 5 and 16 days at the retail outlet.
Odwalla strives for consistent "day-of-juicing quality" in its products
by establishing stringent shelf life standards for its products, based primarily
on maintaining the flavor quality and nutrient integrity of its beverages. The
Company believes that its shelf life standards for each drink maintain the fresh
and better tasting qualities that consumers associate with freshly produced
fruit and vegetable beverages. The Company's policy is to have all products
removed from trade partners' shelves on or before their Odwalla-established
expiration date. In addition, because of the Company's "day of juicing" quality
standards, the Company's products reflect the seasonal changes in fruit
varieties and taste. Odwalla's production methods are designed to minimize the
effect of processing on the fruit juice extracted. The Company's product line
includes several different types of Nourishing Beverages and varies over time as
a result of the addition of new products as well as due to a significant
component of seasonal products.
Odwalla's products are sold and distributed primarily through its own
direct-store-delivery ("DSD") system, which is serviced by route sales people
who deliver products directly to and merchandise products directly in the retail
display shelves of the Company's trade partners. This DSD system is designed to
permit Odwalla to optimally manage delivery schedules, efficiently control its
product mix, keep store shelves or its own coolers stocked with fresh products
and have a greater influence on determining in-store location and merchandising
of its products.
At most of its accounts, Odwalla maintains responsibility for
stocking, ordering and merchandising its products at the point of sales, and
Odwalla credits the trade partner for unsold product. This full service
relationship allows Odwalla to avoid paying slotting fees for shelf space as
well as other handling fees, and it also allows the Company to maintain control
over the merchandising of its products at the point of sales. Odwalla provides a
lesser degree of service to certain trade partners who are responsible for
stocking, ordering and merchandising the Company's products. These trade
partners do not receive credit for unsold products. Outlets that sell Odwalla
juices include supermarkets, specialty retail stores, natural food stores,
warehouse outlets and institutional food service trade partners, primarily
restaurants.
RAW MATERIALS
Producing and selling Nourishing Beverages entails special requirements
in fruit sourcing, beverage production, distribution and sales in order to
preserve and maximize their freshness and flavor quality. Fruits and vegetables
must be sourced and selected to meet a variety of established criteria,
including variety, quality, ripeness and other factors. Transportation and
processing of the fruit and vegetables must be performed in a manner to capture
and preserve various qualities of fresh flavors and consistency. Odwalla has
focused on each of these elements in an effort to achieve its goal of providing
the freshest, most flavorful and most enjoyable Nourishing Beverages for
consumers.
Odwalla buys fruits and vegetables according to different schedules and
methods depending on the type of produce. Because various types of fruit and
vegetable crops are harvested at different times of the year, the Company
obtains and produces different juices on a seasonal basis. The Company purchases
most of its fruits and vegetables in the open market on a negotiated basis.
Historically, oranges, apples and carrots are the commodities
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purchased in largest volume by the Company. All three are subject to volatility
in supply, price and quality that could materially and adversely affect the
Company's business and results of operations, as could the availability, price
and quality of other ingredients.
Odwalla also obtains a number of fruits, such as tropical fruits, from
foreign suppliers in a frozen fruit puree. A puree is not a concentrate, but is
a whole fruit that has been pureed and frozen for shipment. Purees are combined
with freshly extracted juices, including flash pasteurized apple juice, of other
fruits in a number of the Company's products. Purees used by the Company have
not been subjected to any processing methods that could materially affect the
fresh fruit quality. Most purees are purchased under annual price contracts.
As with most agricultural products, supply and price of raw materials
used by the Company can be affected by a number of factors beyond the control of
the Company, such as frosts, droughts, floods and other natural disasters, other
weather conditions, economic factors affecting growing decisions, various plant
diseases and pests. The freeze that occurred in California in the winter of
fiscal 1991 affected the availability, quality and price of oranges for both
fiscal 1991 and fiscal 1992 and, as a result, adversely affected the Company's
results of operations in both of those years. The Company was not significantly
affected by raw material supply issues in either fiscal 1993 or fiscal 1994. The
heavy rains and flooding that occurred in California in the first and second
quarters of fiscal 1995 resulted in higher costs of fruit and lower yields from
the California orange crop in the last quarter of fiscal 1995 and the first
quarter of fiscal 1996. The Company is not currently aware of natural events
which should impact the price of raw materials in the near term.
COMPETITION
The Company's products compete broadly with all beverages available to
consumers. The beverage market is highly competitive. It includes national,
regional and local producers and distributors, many of whom have greater
resources than the Company, and many of whom have shelf stable products that can
be distributed with significantly less cost. The Company views its niche as
conveniently accessed nourishing beverages and fresh, preservative-free juices
and juice-based beverages. The Company believes its direct competition in this
market niche currently is from regionally or locally focused producers, certain
of which are owned by major beverage producers. In addition, a number of major
supermarkets and other retail outlets squeeze and market their own brand of
fresh juices that compete with the Company's products. A large national company,
Chiquita Brands International, Inc. ("Chiquita"), has entered this market niche
in certain limited geographic areas, both directly and by acquisition. Although
the Company has not experienced significant competition from Chiquita to date,
Odwalla entered the Los Angeles market in September 1995 and is competing
directly with Chiquita's products in that market. Chiquita and other major food
and beverage companies may become more active in the Nourishing Beverage
business, either directly or by acquisition of smaller juice companies. A
decision by Chiquita or any other large company to focus on the Company's
existing markets or target markets could have a material adverse effect on the
Company's business and results of operations. While the Company believes that it
competes favorably with its competitors on factors such as quality,
merchandising, service, sales and distribution, multiple flavor categories and
brand name recognition and loyalty, the Company's products are typically sold at
prices higher than most other juice products. There can be no assurance that the
Company will not experience competitive pricing pressure that could adversely
affect its results of operations.
DEPENDENCE ON ONE OR A FEW MAJOR TRADE PARTNERS
In fiscal 1996, the Company's largest account, Safeway, accounted for
approximately 14% of the Company's sales. The Company puts considerable effort
into the maintenance of this and other significant accounts, but there can be no
assurance that sales to these accounts will not decrease or that these trade
partners will not choose to replace the Company's products with those of
competitors. Immediately following the Recall, Safeway and other significant
trade partners discontinued the sale of all of the Company's products for a
short period of time. The decision to discontinue the sale of the Company's
products during this period had a material adverse effect on
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the Company's business and results of operations. The loss of Safeway or other
significant accounts or any significant decrease in the volume of products
purchased by their customers in the future would materially and adversely affect
the Company's business and results of operations. Continuity of trade partner
relationships is important, and events that impact the Company's trade partners,
such as the Recall and labor disputes, may have an adverse impact on the
Company's results of operations.
GOVERNMENT REGULATION
The production and sales of the Company's beverages are subject to the
rules and regulations of various federal, state and local food and health
agencies, including the FDA. The Company also is subject to Canadian labeling
laws for juices sold in British Columbia. There have been no significant costs
thus far associated with complying with FDA or Canadian regulations.
In addition to laws relating to food products, the Company is subject
to various federal, state and local environmental laws and regulations that
limit the discharge, storage, handling and disposal of a variety of substances.
Operations of the Company are also governed by laws and regulations relating to
workplace safety and worker health, principally the Occupational Safety and
Health Administration Act, as well as similar state laws and regulations. The
Company believes that it presently complies in all material respects with the
foregoing laws and regulations, although there can be no assurance that future
compliance with such laws or regulations will not have a material adverse effect
on the Company's results of operations or financial condition. The Company did
not incur any significant costs in fiscal 1996 in complying with environmental
laws.
EMPLOYEES
As of December 2, 1996, the Company had 578 employees, 520 of whom were
full-time employees.
OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
Risks associated with perishable products. With the exception of its
geothermal spring water, the Company's products are either fresh or, in the case
of apple juice, only flash pasteurized, and do not contain any preservatives,
they have a limited shelf life. In addition, in order to maintain its "day of
juicing" quality standards, the Company further restricts the shelf life of its
products through early expiration dates. As a result, since the Company is not
able to hold any significant finished goods inventory, its results of operations
are highly dependent on its ability to accurately forecast its near term sales
in order to adjust fresh fruit and vegetable sourcing and production.
Historically, forecasting product demand has been difficult, and in light of the
Recall, the Company expects it to be an ongoing and more difficult challenge.
Failure to accurately forecast product demand could result in the Company either
being unable to meet higher than anticipated demand or producing excess
inventory that cannot be profitably sold. In addition, most of the Company's
trade partners have the right to return any products that are not sold by their
expiration date. The inability to meet higher than anticipated demand or excess
production or significant amounts of product returns could have a material
adverse effect on the Company's business and results of operations.
Cost sensitivity. The Company's profitability is highly sensitive to
increases in raw materials, labor and other operating costs. Unfavorable trends
or developments concerning factors such as inflation, raw material supply, labor
and employee benefit costs (including increases in hourly wage and minimum
unemployment tax rates), rent increases resulting from the rent escalation
provisions in the Company's leases, and the availability of hourly employees may
also adversely affect the Company. The Company believes recent relatively
favorable inflation rates and part-time labor supplies in its principal market
areas have contributed to relatively stable food and labor costs in recent
years. However, there can be no assurance that these conditions will continue or
that the Company will have the ability to control costs in the future.
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Product liability. Since the Company's products are not pasteurized
(except for flash pasteurization applied to apple juice), nuclearly irradiated
or chemically treated, they are highly perishable and contain certain naturally
occurring microorganisms. In addition to the Recall associated with the E. coli
O157:H7 bacteria, the Company has from time to time received complaints from
consumers regarding ill effects allegedly caused by its products. While such
past claims have not resulted in any material liability to date, there can be no
assurance that future claims will not be made or that any such claim or claims
associated with the Recall will not result in adverse publicity for the Company
or monetary damages, either of which could materially and adversely affect the
Company's business and results of operations. The Company currently maintains
$27,000,000 in product liability insurance, which may not be sufficient to cover
the cost of defense or related damages in the event of a significant product
liability claim related to the Recall or otherwise. See "Item 3. Legal
Proceedings."
Orchard production. Historically, the Company has been dependent upon
the fruit produced from the trees of large orchards. These trees may become
damaged, diseased or destroyed as a result of windstorms, pests or fungal
disease. Additionally, there are types of controllable fungal diseases which can
affect fruit production although not fatal to the trees themselves. These types
of fungal diseases are generally controllable with fungicides. However, there
can be no assurance that such control measures will continue to be efficacious.
Any decrease in the supply of fresh fruit as a result of windstorms, pests or
fungal disease could have a material adverse effect on the Company's business
and results of operations.
Geographic concentration. The Company's wholesale accounts and retail
trade partners have their largest concentration in Northern California, with
most located in the metropolitan areas surrounding the San Francisco Bay. As
such, the Company's business and results of operations may be adversely affected
by natural occurrences, economic downturns and other conditions affecting
Northern California.
Concentration of production capacity. Except for its geothermal water
production, all of the Company's production capacity is located at its Dinuba,
California facility. Because the Company attempts to maintain minimal finished
goods inventory as part of its "just in time" production system, in the event
that production at or transportation from such facility were interrupted by
fire, earthquakes, floods or other natural disasters, work stoppages, regulatory
actions or other causes, the Company would be unable to continue to produce its
products at such facility. Such an interruption would materially and adversely
affect the Company's business and results of operations.
Lack of diversification. Although the Company has been in existence
since 1980 and has been profitable in its most recent three fiscal years, 1994,
1995, and 1996, the Company is vertically integrated and its business is
centered around essentially one product. To date, the Company's operations have
been limited to the production and sale of Nourishing Beverages through its
direct-store-delivery system. The risks associated with the Company's focus on
essentially one product are exemplified by the material adverse effect on the
Company's business and results of operations that resulted from the Recall. Any
significant decrease in the consumption of Nourishing Beverages generally or
specifically with respect to the Company's products following the Recall could
have an adverse effect on the Company's business and results of operations.
Risks related to expansion. Although the Company's continued growth
depends in part upon its ability to expand into new geographic areas, either
through internal growth or by acquisition, the Company's plans for expansion
have been diverted at the present time in order to strengthen its position in
its present markets following the Recall. The Company anticipates continued
expansion in the Texas and Southern California markets in fiscal 1997. There can
be no assurance that the Company will expand into new geographic areas or
continue to invest in newer markets or if such expansion or investment is
undertaken that it will be successful or that such expansion can be accomplished
on a profitable basis. Demands on management and working capital costs
associated with the Recall as well as the perishability of the Company's
products and its reliance on its personnel-intensive direct-store-delivery
system may limit the ability, or increase the cost of, expansion into new
regions. Furthermore, perceptions
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of the Recall and consumer tastes vary by region and there can be no assurance
that consumers located in other regions will be receptive to the Company's
products.
The Company has expanded into certain new markets, such as the Pacific
Northwest and Colorado, through acquisitions of local juice manufacturers.
Acquisitions involve a number of special risks, including the diversion of
management's resources, issues related to the assimilation of the operations and
personnel of the acquired businesses, potential adverse effects on the Company's
operating results and amortization of acquired intangible assets. In addition,
gross margins may be negatively impacted to the extent that gross margins on
acquired product lines are lower than Odwalla's average gross margins. For
example, the Company's Colorado acquisition, completed in January 1995, resulted
in incremental increases in general and administrative expenses and diversion of
management resources. Although no acquisitions are being actively considered by
the Company at this time, the Company is unable to predict whether or when any
prospective acquisition candidates will become available. There can be no
assurance that the Company will find attractive acquisition candidates, that
acquisitions can be consummated on acceptable terms, that any acquired companies
can be integrated successfully into the Company's operations, or that any such
acquisitions will not have an adverse effect on the Company's business or
results of operations.
Intellectual property rights. The Company regards its trademarks, trade
dress, trade secrets and similar intellectual property as critical to its
success. Odwalla attempts to protect such property with registered and common
law trademarks and copyrights, restrictions on disclosure and other actions to
prevent infringement. The Company has in the past, and it expects that it may in
the future, license elements of its distinctive trademarks, trade dress and
similar proprietary rights to third parties. While the Company attempts to
ensure that the quality of its brand is maintained by such licenses, no
assurances can be given that such licensees will not take actions that might
materially and adversely affect the value of the Company's proprietary rights or
the reputation of its products, either of which could have a material adverse
effect on the Company's business. Product package and merchandising design and
artwork are important to the success of Odwalla, and the Company intends to take
action to protect against imitation of its products and packages and to protect
its trademarks and copyrights as necessary. Such action could be time-consuming,
result in costly litigation and divert management personnel. Furthermore, there
can be no assurance that the Company would be successful in such action. The
Company does not have any patents.
Control by officers and directors. The Company's officers, directors
and their affiliates beneficially own, in the aggregate, approximately 25% of
the Company's outstanding shares of Common Stock. As a result, these
shareholders, acting together, would be able to significantly influence most
matters requiring approval of the shareholders of the Company, including the
election of a majority of the Board of Directors. Such control could have the
effect of delaying, deferring or preventing a change of control of the Company.
Dependence on key personnel. The Company's success depends to a
significant extent upon the continued service of Greg Steltenpohl, the Chairman
of its Board of Directors, and Stephen Williamson, its Chief Executive Officer,
and the loss of either of such key personnel could have a material adverse
effect on the Company's business or results of operations. Furthermore, the
Company's continued growth depends on its ability to identify, recruit and
retain key management personnel. The competition for such employees is intense,
and there can be no assurance the Company will be successful in such efforts.
The Company is also dependent on its ability to continue to attract, retain and
motivate its production, distribution, sales, communications and other
personnel, of which there can be no assurance.
Volatility of stock price. The price of the Company's Common Stock has
experienced significant price volatility. The Company believes that factors such
as announcements of developments related to the Company's business, fluctuations
in the Company's operating results, failure to meet securities analysts'
expectations, general conditions in the fruit and vegetable industries and the
worldwide economy, announcements of innovations, new products or product
enhancements by the Company or its competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual
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property rights and changes in the Company's relationships with trade partners
and suppliers could cause the price of the Company's Common Stock to fluctuate
substantially. In addition, in recent years the stock market in general, and the
market for small capitalization stocks in particular, has experienced extreme
price fluctuations which have often been unrelated to the operating performance
of affected companies. Such fluctuations could adversely affect the market price
of the Company's Common Stock.
ITEM 2. PROPERTIES
Odwalla's production facility is in Dinuba, California and consists of
approximately 85,000 square feet of production, office and cold storage space on
a 13-acre parcel of land plus approximately 33 acres of land adjacent to the
production facility, including the property purchased in October 1996. Odwalla
owns this property, with $150,000 of debt against a parcel of land containing 20
of the 33 acres of adjacent land. The Company believes the building is
adequately insured. Odwalla's administrative offices are located in Half Moon
Bay, California. In addition, the Company has distribution centers throughout
California and in Seattle and Bellingham, Washington; Denver, Colorado;
Albuquerque, New Mexico; Eugene and Portland, Oregon; Austin and Dallas, Texas;
and Las Vegas, Nevada. Other than the Dinuba facility, the Company leases all of
its facilities.
ITEM 3. LEGAL PROCEEDINGS
On October 30, 1996, the Company was notified by the State of
Washington Environmental Health Services of an epidemiological link between
several cases of E. coli O157:H7 and Odwalla's apple juice products. The Company
immediately implemented a voluntary recall of all Odwalla products containing
apple juice. On October 31, 1996, Odwalla expanded the Recall to include its
carrot and vegetable products because such products were processed on the same
production line as the apple juice. As of November 22, 1996, there were 66 cases
of E. coli O157:H7 epidemiologically linked to Odwalla apple juice products,
according to the Centers for Disease Control and Prevention.
The following personal injury claims and legal proceedings seeking
monetary damages and other relief relating to the Recall are pending against the
Company:
1. The Ishida Case: A class action lawsuit filed in King County
Superior Court, Seattle, Washington and served on November 12,
1996.
2. The Curtis Case: A class action lawsuit filed in the United
States District Court, Western District of Washington and
served on November 15, 1996.
3. The Kim Case: A personal injury lawsuit filed in King County
Superior Court, Seattle, Washington and served on November 15,
1996.
4. The Azzizi Case: A personal injury lawsuit filed in Alameda
County Superior Court, Alameda, California and served on
November 20, 1996.
5. The Beverly Case: A personal injury lawsuit filed in the
United States District Court, Western District of Washington
and served on December 3, 1996.
6. The Webb Case: A personal injury lawsuit filed in King County
Superior Court, Seattle, Washington and served on December 9,
1996.
In addition, the following claim was filed under California Business
and Professions Code Section 17200 et seq. alleging fraudulent business acts and
practices of the Company relating to the recalled products:
9.
<PAGE> 11
Roderick P. Bushnell v. Odwalla, Inc.: A lawsuit filed in San Francisco
County Superior Court, San Francisco, California and served on November
13, 1996.
The Company currently maintains commercial general liability insurance
totaling $27,000,000. The Company has notified its insurance carrier of these
events. At this time, no discovery has commenced with respect to the
above-described legal proceedings and the Company is unable to determine the
potential liability on all such lawsuits and claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the
fourth quarter of fiscal 1996.
10.
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is listed on the Nasdaq National Market
("Nasdaq") under the symbol "ODWA." The Company's stock has been traded on that
market since May 18, 1995. Prior to that date, the Company's stock had been
traded on the Nasdaq SmallCap Market ("SmallCap") since December 15, 1993, when
the Company completed its initial public offering. Prior to that date, there was
no public market for the Company's Common Stock. As of December 9, 1996, there
were approximately 200 holders of record of the Company's Common Stock. The
following table sets forth, for the periods indicated, the high and low closing
sales prices, as to Nasdaq prices, and the high and low bid prices, as to
SmallCap prices, of shares of the Company's Common Stock, after giving effect to
a 3-for-2 stock split effected through a stock dividend on May 1, 1995:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, 1996 HIGH LOW
<S> <C> <C> <C>
Fourth Quarter $28.25 $16.375
Third Quarter $27.50 $15.50
Second Quarter $19.25 $15.25
First Quarter $20.75 $15.25
FISCAL YEAR ENDED AUGUST 31, 1995
Fourth Quarter $21.00 $16.50
Third Quarter $19.75 $10.17
Second Quarter $10.33 $ 6.67
First Quarter $ 7.33 $ 7.00
</TABLE>
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since
inception and does not anticipate paying cash dividends in the foreseeable
future. The Company currently anticipates that it will retain its earnings, if
any, for use in the operation of its business and does not expect to pay cash
dividends on its capital stock in the foreseeable future.
11.
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ 59,197 $ 35,869 $ 18,153 $ 12,551 $ 9,594
Cost of sales..................................... 29,889 18,425 8,984 6,342 4,835
-------- -------- -------- -------- --------
Gross Profit...................................... 29,308 17,444 9,169 6,209 4,759
Operating expenses:
Sales and distribution........................... 20,158 11,588 6,212 4,133 3,206
Marketing........................................ 2,257 891 484 469 264
General and administrative....................... 6,206 3,576 1,973 1,458 1,026
-------- -------- -------- -------- --------
Total operating expenses..................... 28,621 16,055 8,669 6,060 4,496
-------- -------- -------- -------- --------
Income from operations............................ 687 1,389 500 149 263
Other income (expenses), net...................... 346 108 (199) (575) (218)
-------- -------- -------- -------- --------
Income (loss) before income taxes................. 1,033 1,497 301 (426) 45
Provision for (benefit from)
income taxes..................................... 400 500 - (1) 6
-------- -------- -------- -------- --------
Net income (loss)................................. $ 633 $ 997 $ 301 $ (427) 39
======== ======== ======== ======== ========
Net income (loss) per share....................... $ 0.12 $ 0.22 $ 0.08 $ (0.15) $ 0.02
======== ======== ======== ======== ========
Weighted average common and common equivalent
shares outstanding............................... 5,420 4,472 3,623 2,889 2,111
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
August 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments........................... $ 12,413 $ 18,496 $ 2,137 $ 715 $ 96
Working capital (deficit)........................ 14,655 17,918 2,516 (295) 2,118
Total assets...................................... 37,700 35,481 12,072 8,038 6,691
Long-term liabilities............................. 501 736 872 2,467 1,901
Total shareholders' equity........................ 29,574 28,499 8,719 2,822 3,408
</TABLE>
12.
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements relating
to future events or the future financial performance of the Company, which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain important factors, including those set forth under "Item 1.
Business" and elsewhere in this Annual Report on Form 10-K. The following
discussion and analysis should be read in conjunction with the Financial
Statements and related Notes contained elsewhere in this Annual Report on Form
10-K.
OVERVIEW
The Company's net sales are generated by sales to supermarkets,
specialty retail stores, natural food stores, warehouse outlets and
institutional food service trade partners, primarily restaurants. Net sales are
net of product returns and allowances. The Company sells products to most of its
trade partners on a guaranteed basis and takes back expiring or expired product
for credit. The Company's net sales have grown from $18.2 million in fiscal 1994
to $35.9 million in fiscal 1995 to $59.2 million in fiscal 1996. The Company's
growth has come predominantly from continued penetration in existing markets,
sales of new products and expansion into new markets. The Company believes that
its sales have been positively affected by the Company's introduction of new
products, higher recognition of the Company's brand and products, better
placement on store shelves, increased placement of the Company's in-store
coolers and increased support for route sales persons.
A significant portion of the Company's cost of sales is the cost of raw
materials. Although a portion of the cost of certain purees and other raw
materials is fixed on an annual basis, the majority of the Company's fresh fruit
and vegetable purchases are made on the open market. Consequently, the Company
is subject to wide fluctuations in prices for the fruits, vegetables and other
nutritious products it purchases.
The Company distributes its products primarily through its
direct-store-delivery system, which is serviced by route sales people who
deliver products directly to and merchandise products directly in the retail
display shelves of the Company's trade partners, using primarily leased delivery
trucks. This distribution system, although more expensive than using independent
distributors, allows the Company to control the quality of service and product
mix, in-store stocking of the Company's coolers or shelf space and freshness of
products.
The Company has experienced significant quarterly fluctuations in
operating results and anticipates that these fluctuations will continue in
future periods. These fluctuations have been the result of changes in the price
of fruit and vegetables due to seasonality and other factors, new product
introductions, start-up costs associated with new facilities, expansion into new
markets, sales promotions and competition. Excluding the impact of the Recall
discussed in the following paragraphs, future operating results may fluctuate as
a result of these and other factors, including increased energy costs, the
introduction of new products by the Company's competitors, changes in the
Company's customer mix, and overall trends in the economy. The Company's
business is also significantly affected by weather patterns, and unseasonably
cool or rainy weather can adversely impact the Company's sales. A significant
portion of the Company's expense levels is relatively fixed, and the timing of
increases in expense levels is based in large part on the Company's forecasts of
future sales. If sales are below expectations in any given period, the adverse
impact on results of operations may be magnified by the Company's inability to
adjust spending quickly enough to compensate for the sales shortfall. The
Company also may choose to reduce prices or increase spending in response to
competition, which may have an adverse effect on the Company's results of
operations.
On October 30, 1996, the Company was notified by the State of
Washington Environmental Health Services of an epidemiological link between
several cases of E. coli O157:H7 and Odwalla's apple juice products. The Company
immediately implemented a voluntary recall of all Odwalla products containing
apple juice. On
13.
<PAGE> 15
October 31, 1996, Odwalla expanded the Recall to include its carrot and
vegetable products because such products were processed on the same production
line as the apple juice. Net sales of Nourishing Beverages and water products in
November were approximately 38% of August 1996 sales levels. New trade partner
accounts were opened at a significantly reduced rate during November 1996.
To date, there are six personal injury claims and legal proceedings
seeking monetary damages and other relief relating to the Recall pending against
the Company. In addition, there is one legal proceeding alleging fraudulent
business acts and practices relating to the recalled products pending against
the Company. Following the Recall, the Company formed the Odwalla Nourishment &
Food Safety Advisory Council to advise management in developing new industry
leadership and practices in the sourcing, production and distribution of
Nourishing Beverage products. Beginning in early December 1996, Odwalla
reintroduced all apple juice-based products to the market using a Hazard
Analysis Critical Control Point Plan, which includes the flash pasteurization of
fresh apple juice. The flash pasteurization process rapidly heats the juice for
a short period of time to a temperature high enough to kill harmful bacteria yet
still retain vitamins, minerals and flavors that diminish in pasteurization
processes at higher temperatures and for longer periods of time. The Company
incurred significant costs related to the Recall, including public relations,
advertising, marketing, legal and other professional fees, costs of
reformulating products and costs associated with the flash pasteurization
process. Notwithstanding the Recall the Company plans to continue to invest in
building an infrastructure capable of sustaining growth and expansion. This,
along with other factors, does not allow the Company to reduce costs
commensurate with the reduction in sales. Although the Company is still in the
planning stages following the Recall, the Company expects the costs associated
with the Recall and disruption in sales will result in a significant loss in the
first quarter of fiscal 1997 and that the Company will record a significant loss
for fiscal year 1997.
Cost of sales have increased since the Recall due to the significantly
reduced production demands in November 1996. Production volume is expected to
increase modestly with the reintroduction of the apple juice-based products,
with flash-pasteurized apple juice, to the market in early December 1996.
However, production costs of the flash pasteurized products will increase cost
of sales and will offset any benefit achieved by increased production volume, if
any. The Company anticipates that cost of sales will continue to increase as a
percentage of net sales following the Recall.
In late November, the Company completed a reduction in force of
approximately 50 employees primarily involved in sales and distribution. In
connection with the reduction in force, the Company initiated a sales route
restructuring plan and a revised route sales persons compensation plan. There
can be no assurance that these and other cost control measures will return sales
and distribution costs as a percentage of net sales to pre-Recall levels.
Marketing costs will increase in fiscal 1997 in both absolute dollars
and as a percentage of net sales as a result of planned increases and the
Recall. The degree of the increase in marketing costs as a result of the Recall
cannot be quantified at this time and will depend upon the results of on-going
consumer research, the response of consumers to the reintroduced product line,
and other factors affecting the restoration of consumer confidence.
General and administrative costs will increase in fiscal 1997 in both
absolute dollars and as a percentage of net sales. The Company will continue to
invest in infrastructure, particularly in information systems, to provide for
sustainable growth. The Company also expects to incur significant legal and
other professional fees associated with the Recall.
The Company maintains insurance coverage for first party business risks
and intends to present claims to its insurance carriers under the appropriate
policies. However, there have been no claims prepared to date and the amount or
timing of proceeds, if any, from future insurance claims is not known at this
time.
14.
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
statements of operations data for the fiscal years ended August 31, 1994, 1995
and 1996. These operating results are not necessarily indicative of the results
for any future period.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------
1994 1995 1996
--------------- --------------- ---------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 49.5 51.4 50.5
----- ----- -----
Gross margin 50.5 48.6 49.5
Operating expenses
Sales and distribution 34.2 32.3 34.1
Marketing 2.7 2.5 3.8
General and administrative 10.9 10.0 10.5
Income from operations 2.8 3.9 1.2
Interest and other income (expense), net (1.1) .3 .6
Income tax expense - (1.4) (.7)
Net income 1.7% 2.8% 1.1%
</TABLE>
NET SALES. Net sales for fiscal 1996 increased 65% to $59.2 million
compared to $35.9 million in fiscal 1995, and 98% in fiscal 1995 from $18.2
million in fiscal 1994. Net sales growth for fiscal 1996 was attributable
primarily to (i) increased sales volume to supermarkets, specialty retailers and
natural food stores, (ii) new product sales and (iii) increased sales volumes in
newly entered markets.
Net sales growth for fiscal 1995 was attributable primarily to (i)
increased sales volume in existing markets, (ii) sales of new products and (iii)
increased sales volume in new markets through acquisitions and growth.
COST OF SALES. Cost of sales increased 62% to $29.9 million in fiscal
1996 compared to $18.4 million in fiscal 1995, and 105% in fiscal 1995 compared
to $9.0 million for fiscal 1994. Gross margin increased from 48.6% in fiscal
1995 to 49.5% in fiscal 1996 after decreasing from 50.5% in fiscal 1994. The
increase in gross margin in fiscal 1996 resulted from (i) a decrease in
packaging expenses negotiated in the second quarter of the fiscal year and (ii)
a decrease in fruit costs in the second half of the year that more than offset
the high fruit costs experienced in the first half of the year, especially
oranges and apples, as a result of efficiencies achieved in the production
processes and greater variety of product mix.
The decrease in gross margin in fiscal 1995 resulted from (i) an
increase in fruit costs, particularly oranges, in the second half of 1995 that
more than offset the reduction in fruit costs in the first half of fiscal 1995,
(ii) an increase in freight costs and (iii) an increase in packaging costs. The
increases in fiscal 1995 were partially offset by decreases in
production-related expenses as a percentage of net sales due to production costs
being spread over higher sales volumes.
SALES AND DISTRIBUTION. Sales and distribution expenses in fiscal 1996
increased 74% to $20.2 million compared to $11.6 million in fiscal 1995, and 87%
in fiscal 1995 from $6.2 million in fiscal 1994. Sales and distribution expenses
increased as a percentage of net sales in fiscal 1996 to 34.1% compared to 32.3%
in fiscal 1995. This increase resulted from higher expenses in less established
regions which were offset slightly by greater efficiencies in the more mature
regions. Within sales and distribution expenses, direct route expenses increased
81% and support expenses increased 68% in fiscal 1996 compared to fiscal 1995.
In fiscal 1995, direct route expenses increased 94% and support expenses
increased 82% compared to fiscal 1994. The increases in fiscal 1996 and 1995
15.
<PAGE> 17
resulted from the Company's increased expenses associated with route sales
people, including additional and upgraded vehicles and greater support
personnel.
MARKETING. Marketing expenses increased 153% to $2.3 million in fiscal
1996 compared to $891,000 in fiscal 1995, and 84% in fiscal 1995 compared to
$484,000 in fiscal 1994. Marketing expenses increased in absolute dollars and as
a percentage of net sales in fiscal 1996 as the Company expanded its efforts to
enhance stakeholder awareness and incurred professional services related to new
product development and communications. Marketing expenses increased in absolute
dollars in fiscal 1995 as the Company focused efforts on enhancing stakeholder
awareness and incurred costs of salaries and professional services related to
new product development and communications. Marketing expenses decreased as a
percentage of net sales in fiscal 1995 due to greater growth in net sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 74% to $6.2 million in fiscal 1996 and 81% to $3.6 million in fiscal
1995 from $2.0 million in fiscal 1994. As a percentage of net sales, general and
administrative expenses increased from 10.0% in fiscal 1995 to 10.5% in fiscal
1996. The increase in general and administrative expenses in absolute dollars
and as a percentage of net sales in fiscal 1996 resulted from additions to the
Company's management and administrative staff, expanded communications systems
and MIS support, and increased staff and management training. General and
administrative expenses increased in fiscal 1995 in absolute dollars primarily
from additions to the management and administrative staff and an increase in
consulting and legal fees. General and administrative expenses decreased as a
percentage of net sales in fiscal 1995 to 10.0% from 10.9% in fiscal 1994 due to
increases in the Company's sales.
INTEREST AND OTHER EXPENSE (INCOME). Odwalla had net interest income in
fiscal 1996 of $541,000 compared to net interest income of $91,000 in fiscal
1995. Gross interest income of $635,000 in fiscal 1996 and $247,000 in fiscal
1995 resulted primarily from the Company's investment of the proceeds of its
public offering in May 1995. Gross interest expense of $94,000 in fiscal 1996
resulted from interest on capital leases. Gross interest expense of $146,000 in
fiscal 1995 resulted from interest on capital leases and bank borrowings for the
Company's acquisition of J. S. Grant's, Inc. The bank borrowings were repaid
from the proceeds of the public offering.
INCOME TAX EXPENSE. The effective income tax rate for fiscal 1996 of
39% varies from the federal statutory tax rate of 34% primarily due to the
effective tax rate of California and other state income taxes. The effective
income tax rate for fiscal 1995 of 33% varies from the federal statutory tax
rate primarily due to effective tax rate reductions resulting from the
elimination of a $60,000 deferred tax valuation allowance partially offset by an
increase due to California and other state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through three primary sources:
private and public sales of equity securities, bank debt and capital lease
financing. At August 31, 1996, the Company had working capital of $14.7 million
compared to working capital of $17.9 million at August 31, 1995. The decrease
resulted primarily from capital expenditures of $6.0 million. At August 31,
1996, the Company had cash, cash equivalents and short term investments of $12.4
million compared to $18.5 million at August 31, 1995.
Net cash used by operating activities for fiscal 1996 was $456,000.
This consisted of net income plus depreciation and amortization and increases in
accounts payable and other accrued expenses offset by an increase in accounts
receivable and inventory related to increased sales volume as well as an
inventory increase due to favorably priced cash purchases (rather than
contractual commitments) of frozen purees in late fiscal 1996. Net cash used in
investing activities for fiscal 1996 was $5.4 million, consisting primarily of
capital expenditures primarily for a new cold storage facility and production
equipment at the Dinuba plant. Net cash used in financing activities for fiscal
1996 was $3,000, consisting primarily of $442,000 for the sale of common stock
through the
16.
<PAGE> 18
exercise of stock warrants and options offset by payments of long-term debt and
capital lease obligations.
In April 1996, the Company entered into a contract to purchase land
adjacent to the Dinuba production facility for $215,000. Odwalla paid $10,000 as
a deposit when the contract was signed and paid the balance when the purchase
was completed in October 1996. In May 1996, the Company entered into an
agreement, subject to certain contingencies, to purchase land adjacent to its
Half Moon Bay administrative offices and, upon closing on the land purchase, to
extend its lease on the administrative offices. The Company completed the
transaction in October 1996 at a cost of $351,000, of which $230,000 represents
assumption of the existing mortgage (interest at 8.75% per annum, monthly
principal and interest payments until maturity in 1999 when the remaining
balance of approximately $220,000 is due) on the property. As of August 31,
1996, the Company had entered into purchase commitments for the future delivery
of raw materials, approximately $1.5 million of which are under one-year
contracts to be completed through May 1997. One three-year contract is also
open, requiring purchase of $3.2 million of product, and is to be completed by
May 1999. Despite the decrease in production due to the Recall, the Company does
not anticipate that it will have excess inventory.
At August 31, 1996, the Company had $594,000 outstanding in capital
lease obligations, primarily related to leasing of production equipment,
delivery vehicles and in-store coolers. The Company has used, and expects to
continue to use, capital lease financing as necessary to obtain needed
production assets, primarily equipment. However, as a result of the Recall, the
leasing company used for computer and cooler financing has notified the Company
that it has placed a hold on future lease commitments. The Company is currently
working with that leasing company and other equipment leasing companies to
obtain future lease commitments. There can be no assurance that the Company will
be able to use or continue to use such capital lease financing and the failure
to do so may have an adverse effect on the Company's business or results of
operations.
The Company's line of credit expired in March 1996 and the Company is
currently seeking to obtain a working capital line of credit. However, there can
be no assurance that the Company will be able to obtain such a credit facility
from its prior lender or another financial institution at favorable terms, if at
all.
Capital improvements necessary for flash pasteurization and other plant
modifications are expected to cost less than $2 million. The improvements will
be largely financed through available cash resources or, if available, debt or
lease financing.
The Company anticipates that the increased costs associated with the
Recall, including equipment and plant modifications required for flash
pasteurization and legal and marketing costs, may cause the Company to pursue
additional financing that may be dilutive to current investors or result in a
higher debt-to-equity ratio than would otherwise be the case. There can be no
assurance that such financing will be available on terms favorable to the
Company, if at all. If adequate financing is not available, the Company may be
required to reduce planned expenditures, particularly in the areas of
advertising and marketing, in order to conserve cash.
While the Company expects a significant loss for fiscal year 1997, the
Company believes it will have sufficient cash to fund its operations and capital
expenditures through the end of fiscal year 1997. However, this belief is based
on future sales estimates which are inherently uncertain given the disruption to
the Company's business caused by the Recall.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed herewith begin on page
F-1.
17.
<PAGE> 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 19, 1996, the Company's Board of Directors, upon recommendation
of its Audit Committee, dismissed BDO Seidman, LLP ("BDO Seidman") as the
Company's principal independent accountants engaged to audit the Company's
financial statements.
The independent auditor's report of BDO Seidman on the consolidated
financial statements of the Company for the three years ended August 31, 1995,
dated October 12, 1995, included in the Form 10-KSB for the fiscal year ended
August 31, 1995, contained no adverse opinion or disclaimer of opinion and was
not qualified as to uncertainty, audit scope or accounting principles.
In connection with the Registrant's audits for the fiscal years ended
August 31, 1994 and 1995, and in the subsequent interim period prior to BDO
Seidman's dismissal on June 19, 1996, there were (i) no disagreements with BDO
Seidman on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which disagreements, if not resolved
to the satisfaction of BDO Seidman, would have caused BDO Seidman to make
reference to the subject matter of the disagreement in connection with their
report; and (ii) no "reportable events" as described in Item 304(a)(1)(v) of
Regulation S-K.
The Registrant has furnished a copy of the disclosure contained in this
section to BDO Seidman requesting such firm to respond as to whether it agrees
with the information set forth herein relating to such firm. BDO Seidman has
responded that it agrees with the statements made herein with respect to such
firm and has agreed, as required by Item 304 of Regulation S-K, to furnish to
the Registrant a letter addressed to the Securities and Exchange Commission to
that effect.
On June 19, 1996, the Company's Board of Directors, upon recommendation
of its Audit Committee, approved the appointment of Price Waterhouse LLP ("Price
Waterhouse") as principal independent accountants to audit the Company's
financial statements for the fiscal year ending August 31, 1996, in place of BDO
Seidman.
During the two most recent fiscal years and through June 19, 1996, the
Registrant has not consulted with Price Waterhouse regarding either (1) the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Registrant's financial statements and either a written report was provided
to the Registrant or oral advice was provided that Price Waterhouse concluded
was an important factor considered by the Company in reaching a decision as to
the accounting, auditing or financial reporting issue; or (2) any matter that
was either the subject of a "disagreement" or a "reportable event" (as such
terms are defined in Item 304(a)(1) of Regulation S-K).
18.
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Based upon (i) the copies of Section 16(a) reports which the Company
received from such persons for their 1996 fiscal year transactions in the Common
Stock and their Common Stock holdings, and (ii) the written representations
received from one or more of such persons that no annual Form 5 reports were
required to be filed by them for the 1996 fiscal year, the Company believes that
all executive officers and Board members complied with all their reporting
requirements under Section 16(a) for such fiscal year.
EXECUTIVE OFFICERS AND DIRECTORS
Certain information about the Company's directors and executive
officers as of December 9, 1996 is listed below:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Greg A. Steltenpohl 42 Chairman of the Board
D. Stephen C. Williamson 38 Chief Executive Officer
Michael S. Young 45 Senior Vice President, MIS/Operations and Chief Operating
Officer
Penelope A. Douglas 44 Senior Vice President/Chief Learning Officer, Human Resources
Michael G. Casotti 38 Vice President, Sales
James R. Steichen 47 Vice President, Finance and Chief Financial Officer
Frank J. Ballentine 38 Vice President, Manufacturing
Kenneth H. Ausubel 45 Director
Lauren M. Doliva, Ph.D. (1)(2) 48 Director
Martin S. Gans (1)(2) 45 Director
</TABLE>
- ----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
GREG A. STELTENPOHL, the founder of the Company, has served as Chairman
of the Board since June 1996. Prior to that date, Mr. Steltenpohl served as
Co-Chairman of the Board and Co-Chief Executive Officer from January 1995 to
June 1996. From the Company's incorporation in December 1985 until January 1995,
Mr. Steltenpohl served as Chairman of the Board and Chief Executive Officer. In
addition, Mr. Steltenpohl served as the Company's President from November 1985
until May 1992. Mr. Steltenpohl holds a B.S. degree in environmental sciences
from Stanford University.
D. STEPHEN C. WILLIAMSON has served as Chief Executive Officer since
June 1996. Prior to that time, Mr. Williamson served as Co-Chairman of the Board
and Co-Chief Executive Officer from January 1995 to June 1996 and as Chief
Financial Officer of the Company from March 1991 to August 1996. Mr. Williamson
also served as the Company's President from May 1992 until January 1995. From
1988 to March 1991, Mr. Williamson was a general partner of Ellistan Partners, a
private investment firm. Prior to that, Mr. Williamson worked as an analyst and
an associate at First Boston Corp. Mr. Williamson holds a B.A. degree in history
from the University of California at Berkeley. He is also a director of Avenal
Land & Oil Company, a private investment company.
MICHAEL S. YOUNG has served as the Company's Senior Vice President,
MIS/Operations and Chief Operating Officer since July 1994. From 1991 to 1994,
he served as Vice President, Strategic Information Systems of Kransco Group
Companies, a toy company. From 1978 to 1991, he was employed by
Colgate-Palmolive
19.
<PAGE> 21
Company, a consumer products company where he held several directorship
positions in the area of information systems, most recently as Director -
Information Systems, United States. Mr. Young holds a B.S. degree in Mathematics
and Economics from the University of Toronto.
PENELOPE A. DOUGLAS has served as Senior Vice President/Chief Learning
Officer, Human Resources since September 1996. From 1990 to 1996, Ms. Douglas
was Chief Administrative Officer at Morrison & Forester. Ms. Douglas holds a B.
A. degree from Smith College.
MICHAEL G. CASOTTI has served as Vice President, Sales since February
1996. From 1983 to 1996, Mr. Casotti was employed by Nestle Beverage Company,
most recently serving as Customer Division Manager from 1994 to 1996. From 1990
to 1994, Mr. Casotti was the National Sales Manager for Sark's Gourmet Coffee, a
division of Nestle Beverage Company. Mr. Casotti holds a B. S. in Marketing from
California State University at Northridge.
JAMES R. STEICHEN has served as Vice President, Finance and Chief
Financial Officer since September 1996. From May 1996 to August 1996, Mr.
Steichen served as Vice President, Finance and had served as a consultant to the
Company since August 1995. Prior to that, he had been a partner with BDO
Seidman, LLP since December 1990. Mr. Steichen is a Certified Public Accountant
and holds a B.S. degree from the University of South Dakota.
FRANK J. BALLENTINE has served as Vice President, Manufacturing since
July 1995. From February 1990 to July 1995, Mr. Ballentine served as Logistics
Manager at Zacky Foods, Inc. Mr. Ballentine holds a B. S. degree in Vineyard and
Winery Management from the University of California at Davis and an MBA from
California State University in Fresno.
KENNETH H. AUSUBEL has been a director of the Company since January
1995. Mr. Ausubel has been Director of New Business Development for Nutraceutix,
Inc., a nutraceutical products company, since November 1994. From April 1989 to
March 1994, Mr. Ausubel served as Chief Executive Officer of Seeds of Change,
Inc., an organic seed company that Mr. Ausubel co-founded. Mr. Ausubel holds a
B.A. in psychology from Columbia University.
LAUREN M. DOLIVA, PH.D. has been a director of the Company since
December 1994. Dr. Doliva is a partner and director of Heidrick & Struggles, an
executive search consulting firm. She has been a consultant with Heidrick &
Struggles since 1984 and was promoted to partner in 1985 and to director in
1986. From 1981 to 1984, Dr. Doliva served as Assistant to the President of
LucasFilm, Ltd. Dr. Doliva holds a Ph.D. in counseling psychology from the
University of California, Berkeley, an M.A. in teaching from Harvard University
and a B.A. in history from the University of California, Los Angeles.
MARTIN S. GANS has been a director of the Company since December 1992.
Mr. Gans served as Executive Vice President and Chief Financial Officer of Sun
World International, Inc. from 1978 until 1987, and he was a partner at Touche
Ross & Co., an accounting firm, from 1972 until 1978. Mr. Gans is a certified
public accountant and holds a B.B.A. from the University of Miami and an M.B.A.
from Northwestern University. Mr. Gans is also a director of Best Collateral,
Inc., a publicly-traded company. In addition, Mr. Gans is a director of a number
of private companies, including International Storage Management, N.V. and LSL
Biotechnologies, Inc.
- ---------------
<TABLE>
<CAPTION>
<S> <C>
TRANSFER AGENT AND REGISTRAR INDEPENDENT ACCOUNTANTS
ChaseMellon Shareholder Services Price Waterhouse LLP
50 California Street, 10th Floor 555 California Street, Suite 3600
San Francisco, CA 94111 San Francisco, CA 94104
</TABLE>
20.
<PAGE> 22
LEGAL COUNSEL
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following Summary Compensation Table sets forth the compensation
earned, by the Company's current Chief Executive Officer and former Co-Chief
Executive Officer and the four other most highly compensated executive officers
for services rendered in all capacities to the Company and its subsidiaries for
the fiscal years ended August 31, 1994, 1995 and 1996. The listed individuals
shall be hereinafter referred to as the "Named Officers."
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
---------------------------------- -------------
Securities
Name and Principal Underlying All Other
Position Years Salary($) Bonus Options(#)(1) Compensation (2)
- ------------------ ----- --------- ----- ------------- ----------------
<S> <C> <C> <C> <C> <C>
D. Stephen C. Williamson(3) 1996 $ 125,481 $ -- 20,000 $ --
Chief Executive 1995 $ 125,000 $ -- -- $ --
Officer 1994 $ 78,954 $ -- 105,000(4) $ --
Greg A. Steltenpohl(5) 1996 $ 125,481 $ -- 20,000 $ --
Chairman of the Board 1995 $ 125,000 $ -- -- $ --
1994 $ 100,794 $ -- 90,000(6) $ --
Michael S. Young 1996 $ 125,481 $ -- 20,000 $ 928
Senior Vice President, 1995 $ 125,000 $ -- 60,000 $ --
MIS/Operations and 1994 $ 7,212(7) $ -- -- $ --
Chief Operating Officer
James R. Steichen 1996 $ 111,028(8) $ -- 25,000 $ --
Chief Financial 1995 $ -- $ -- -- $ --
Officer 1994 $ -- $ -- -- $ --
</TABLE>
- -----------------
(1) The options listed in the table were granted under the Company's Stock
Option Plan.
(2) Represents the Company's matching 401(k) plan contribution.
(3) Mr. Williamson served as Co-Chairman of the Board and Co-Chief Executive
Officer with Mr. Steltenpohl from January 1995 to June 1996.
(4) Includes options to purchase 30,000 shares granted to Mr. Williamson during
fiscal 1995 in consideration of
21.
<PAGE> 23
a salary increase in fiscal 1994 that Mr. Williamson elected to completely
forego. Such options have a five-year term, have an exercise price of $8.62
per share (110% of the fair market value of the Common Stock on the date of
grant) and are fully vested as of the date of grant.
(5) Mr. Steltenpohl served as Co-Chairman of the Board and Co-Chief Executive
Officer with Mr. Williamson from January 1995 to June 1996.
(6) Includes options to purchase 15,000 shares granted to Mr. Steltenpohl during
fiscal 1995 in consideration of a salary increase in fiscal 1994 that Mr.
Steltenpohl elected to partially forego. Such options have a five-year term,
have an exercise price of $8.62 per share (110% of the fair market value of
the Common Stock on the date of grant) and are fully vested as of the date
of grant.
(7) Reflects salary paid to Mr. Young from July 1994 through August 1994, based
on annual salary of $125,000.
(8) Reflects consulting fees of $70,163 paid to Mr. Steichen prior to May 1996
when he became Vice President, Finance. Mr. Steichen was appointed Chief
Financial Officer effective September 1, 1996. Mr. Williamson was Chief
Financial Officer during fiscal 1996.
STOCK OPTIONS
The following table contains information concerning the stock option
grants made to each of the Named Officers for the 1996 fiscal year. No stock
appreciation rights were granted to those individuals during such year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANT VALUE AT ASSUMED
------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING RANTED TO EXERCISE FOR OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YEAR ($/SHARE)(2) DATE 5% 10%
- ---- ---------- ----------- ------------ ---- -------- -----
<S> <C> <C> <C> <C> <C> <C>
D. Stephen C. Williamson...... 20,000 7.38% $22.28 9/2/00 $123,083 $271,982
Greg A. Steltenpohl........... 20,000 7.38% $22.28 9/2/00 $123,083 $271,982
Michael S. Young.............. 20,000 7.38% $20.25 9/2/05 $254,702 $645,466
James R. Steichen............. 25,000 9.23% $20.25 9/2/05 $318,378 $806,832
</TABLE>
- ---------------
(1) The options were granted under the Company's Stock Option Plan on May
3, 1996, with a vesting commencement date of September 1, 1995. The
options granted to Messrs. Williamson and Steltenpohl have a maximum
term of 5 years and the options granted to Messrs. Young and Steichen
have a maximum term of 10 years, all measured from the vesting
commencement date, subject to earlier termination upon the optionee's
cessation of service with the Company. All options will vest as to
1/60th of the shares each month.
(2) The exercise price may be paid in cash, in shares of Common Stock
valued at fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchased shares.
The Company may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased
shares and the Federal and state income and employment tax liability
incurred by the optionee in connection with such exercise.
22.
<PAGE> 24
(3) There is no assurance provided to the option holder or any other holder
of the Company's securities that the actual stock price appreciation
over the five- or 10-year option term will be at the 5% and 10% assumed
annual rates of compounded stock price appreciation.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning option exercises
and option holdings for the 1996 fiscal year by each of the Named Officers. No
stock appreciation rights were exercised during such year or were outstanding at
the end of the year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FY-END FY-END (2)
-------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
D. Stephen C. Williamson 74,000 51,000 $623,950 $342,125
Greg A. Steltenpohl 59,000 51,000 $507,475 $342,125
Michael S. Young 29,000 51,000 $213,625 $299,075
James R. Steichen 5,000 20,000 $ - $ --
</TABLE>
- --------------
(1) Based on the fair market value of the purchased option shares at the
time of exercise less the option exercise price paid for those shares.
(2) Based on the fair market value of the shares at the end of the 1996
fiscal year ($16.375 per share) less the option exercise price payable
for those shares.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of the Company's Common Stock as of December 9, 1996 by (i) each
director and (ii) all those known by the Company to be beneficial owners of more
than five percent of its Common Stock.
<TABLE>
<CAPTION>
Beneficial Ownership (1)
Number of Percent of
Beneficial Owner Shares Total (2)
---------------- ------ ---------
<S> <C> <C>
D. Stephen C. Williamson (3)............................................. 681,563 13.48%
c/o Odwalla, Inc.
120 Stone Pine Road
Half Moon Bay, CA 94019
Greg A. Steltenpohl (4).................................................. 647,736 12.85%
c/o Odwalla, Inc.
120 Stone Pine Road
Half Moon Bay, CA 94019
Kenneth H. Ausubel (5)................................................... 1,350 *
Lauren M. Doliva......................................................... 3,000 *
Martin S. Gans........................................................... 41,658 *
Directors and executive officers as a group (9 persons) (8).............. 1,427,967 27.58%
</TABLE>
- ---------------
* Less than one percent
23.
<PAGE> 25
(1) This table is based upon information supplied by officers, directors
and principal shareholders and Schedules 13D and 13G filed with the
SEC. Unless otherwise indicated in the footnotes to this table and
subject to community property laws applicable, the Company believes
that each of the shareholders named in this table has sole voting and
investment power with respect to the shares indicated as beneficially
owned.
(2) Percentage of ownership is based on 4,972,355 shares of Common Stock
outstanding on December 9, 1996, adjusted as required by rules
promulgated by the SEC.
(3) Includes 41,250 shares of Common Stock held by Alexandra Bowes, Mr.
Williamson's wife, and 197,939 shares held by Willy Juice Partners, a
limited partnership of which Mr. Williamson is the general partner. Mr.
Williamson disclaims beneficial ownership of shares held by Willy Juice
Partners, except to the extent of his pecuniary interest therein. Also
includes 81,917 shares of Common Stock subject to options exercisable
within 60 days of December 9, 1996.
(4) Includes 232,785 shares of Common Stock held by Bonnie Bassett
Steltenpohl, Mr. Steltenpohl's wife, and 11,539 shares held by the
Estate of Benita Johnson, of which Mr. Steltenpohl is the executor.
Also includes 66,917 shares of Common Stock subject to options
exercisable within 60 days of December 9, 1996.
(5) Also includes 1,125 shares of Common Stock subject to options
exercisable within 60 days of December 9, 1996.
(6) Also includes 3,000 shares of Common Stock subject to options
exercisable within 60 days of December 9, 1996.
(7) Also includes 3,000 shares of Common Stock subject to options
exercisable within 60 days of December 9, 1996.
(8) Includes the following shares of Common Stock subject to options
exercisable within 60 days of December 9 1996: Mr. Ballentine, 2,125
shares; Mr Casotti, 3,667 shares; Mr. Steichen, 7,083 shares; Mr.
Young, 35,667 shares.
COMPLIANCE WITH THE REPORTING REQUIREMENTS OF SECTION 16(A)
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than ten
percent shareholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended August 31, 1996, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were complied with, except that one monthly
transaction report of both Mr. Ausbel and Mr. Ballentine were filed late.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Steltenpohl is a 50 percent owner of the Davenport property at
which certain marketing offices and warehouse facilities are located (the
"Davenport Property"). The Company leases the Davenport Property at a
24.
<PAGE> 26
monthly rent of $9,320 pursuant to a lease that expires in July 1999 with
respect to its office facilities and July 1998 for the warehouse facilities. The
rent payable under this lease will be adjusted in August 1998 based on the
percentage increase in the United States Department of Labor, Bureau of Labor
Statistics, Consumer Price Index for All Urban Consumers for the San
Francisco-Oakland-San Jose area. The Company believes that the rental terms of
the Davenport Property lease are fair and reasonable and no less favorable than
those that would be available to the Company in a transaction with an
unaffiliated lessor.
In December 1995, the Company's Board of Directors authorized the
Company's employment of Nina Simons, who is the wife of Mr. Ausubel. Ms. Simons
serves as the Company's Director of Strategic Marketing Initiatives. Her annual
salary is $60,000 plus approximately $400 per month for home office facilities.
In June 1996, the Company's Board of Directors authorized the Company
to enter into a consulting arrangement with a consulting company solely owned by
Mr. Ausubel. The contract was approved by a majority of disinterested directors
and was entered into on standard industry terms. Payments to Mr. Ausubel under
this arrangement were less than $60,000 in fiscal 1996.
In April 1995, the Company's Board of Directors authorized the Company
to enter into an executive search contract with Heidrick & Struggles, an
executive search firm of which Dr. Doliva, a director of the Company, is a
partner and Director. The contract was approved by a majority of disinterested
directors and was entered into on standard industry terms. Payments to Heidrick
& Struggles in fiscal 1996 totaled $74,000.
25.
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1* Amended and Restated Articles of Incorporation of the Registrant.
3.2* Bylaws of the Registrant, including all related amendments.
4.1* Reference is made to Exhibits 3.1 and 3.2.
4.2** Investors' Rights Agreement dated August 31, 1992 between the
Registrant and Silicon Valley Bank.
4.3** Registration Rights Agreement dated March 27, 1991 between the
Registrant and Silicon Valley Bank.
4.4** Registration Rights Agreement dated March 25, 1992 between the
Registrant and Silicon Valley Bank.
10.1** Form of Indemnity Agreement entered into between the Registrant and its
directors and officers.
10.2* Registrant's Stock Option Plan, as amended (and related stock option
grant forms).
10.3** License Agreement dated October 18, 1993 between Pacific Asia Marketing
Ltd. and the Registrant.
10.4** Purchase Option Agreement dated September 15, 1993 between the
Registrant and Richard A. Long.
10.5*** Loan and Security Agreement dated January 30, 1995, as amended between
the Registrant and Silicon Valley Bank.
10.6** Promissory Note dated March 1, 1993 between the Registrant and Greg A.
Steltenpohl.
10.7** Promissory Note dated March 1, 1993 between the Registrant and Bonnie
Bassett Steltenpohl.
10.8* Lease Agreement between Fred M. Bailey and Bren E. Bailey and the
Registrant, dated December 6, 1982 as amended on June 19, 1991,
November 13, 1991, and July 22, 1994. 10.9* Registrant's 1994
Non-Employee Directors' Stock Option Plan (and related stock option
grant forms).
10.10+ Asset Purchase Agreement dated January 31, 1995 by and among
Registrant, J.S. Grant's Inc., Grant Peck and Michael Delaney.
10.11++ Supply and License Agreement dated January 12, 1995 between the
Registrant and Trinity Springs Ltd.
10.12 Office Lease dated June 1995 by and between University Bank & Trust
Company of Palo Alto and Registrant.
11.1 Statement of Computation of Common and Common Equivalent Shares.
16.1+++ Letter Regarding Change in Certifying Accountant
23.1 Consent of Price Waterhouse LLP
23.2 Consent of BDO Seidman, LLP
27.1 Financial Data Schedule
- ----------
* Incorporated by reference to Registrant's Report on Form 10-KSB for the
fiscal year ended August 31, 1994, as filed with the SEC.
** Incorporated by reference to Registrant's Registration Statement on
Form SB-2, SEC File No. 33-71530-LA, as filed with the SEC on November
9, 1993, as amended.
*** Incorporated by reference to Registrant's Report on Form 10-QSB for the
fiscal quarter ended February 28, 1995.
+ Incorporated by reference to Registrant's Report on Form 8-K as filed
with the SEC on February 13, 1995, as amended.
26.
<PAGE> 28
++ Incorporated by reference to Registrant's Registration Statement on
Form SB-2, SEC File No. 33-91170, as filed with the SEC on April 13,
1995, as amended.
+++ Incorporated by reference to Registrant's Report on Form 8-K, SEC File
No. 0-23036, as filed with the SEC on June 25, 1996.
(b) REPORTS ON FORM 8-K.
The Company filed a current report on Form 8-K (the "Report") (File No.
0-23036) with the Securities and Exchange Commission on June 25, 1996. The
Report contained information regarding the change in the Company's principal
independent accountants from BDO Seidman, LLP to Price Waterhouse LLP.
27.
<PAGE> 29
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, on December 12, 1996.
ODWALLA, INC.
By /s/ D. STEPHEN C. WILLIAMSON
--------------------------------
D. Stephen C. Williamson
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints D. Stephen C. Williamson, as his true and
lawful attorneys-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Report on Form 10-K, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
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/ D. STEPHEN C. WILLIAMSON Chief Executive Officer December 12, 1996
- ------------------------------------------ (Principal Executive Officer)
D. Stephen C. Williamson
/s/ GREG A. STELTENPOHL Chairman of the Board December 12, 1996
- ------------------------------------------
Greg A. Steltenpohl
/s/ KENNETH H. AUSUBEL Director December 11, 1996
- ------------------------------------------
Kenneth H. Ausubel
/s/ LAUREN M. DOLIVA Director December 10, 1996
- ------------------------------------------
Lauren M. Doliva
/s/ MARTIN S. GANS Director December 11, 1996
- ------------------------------------------
Martin S. Gans
/s/ JAMES R. STEICHEN Chief Financial Officer December 12, 1996
- ------------------------------------------ (Principal Financial and
James R. Steichen Accounting Officer)
</TABLE>
28.
<PAGE> 30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ODWALLA, INC.
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Reports of Independent Accountants F-2 - F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-18
</TABLE>
F-1
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Odwalla, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Odwalla, Inc. and its subsidiary at August 31, 1996, and the results of their
operations and their cash flows for the year in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
As discussed in Note 16 to the consolidated financial statements, the Company
recalled certain of its products on October 30, 1996. As a result, net sales for
November declined significantly and the Company expects to report a significant
loss in the first quarter and for fiscal year 1997. The Company intends to
present claims to its insurance carriers for certain recall-related losses. In
addition, several personal injury claims and legal proceedings have been filed
against the Company since the recall.
Price Waterhouse LLP
San Francisco, California
October 21, 1996, except as to Note 16,
which is as of December 11, 1996
F-2
<PAGE> 32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Odwalla, Inc.
Half Moon Bay, California
We have audited the accompanying balance sheet of Odwalla, Inc. as of August 31,
1995 and the related statements of operations, changes in shareholders' equity
and cash flows of Odwalla, Inc. for each of the two years in the period ended
August 31, 1995. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Odwalla, Inc. at August 31,
1995, and the results of its operations and its cash flows for each of the two
years in the period ended August 31, 1995 in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
San Francisco, California
October 12, 1995
F-3
<PAGE> 33
ODWALLA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
1995 1996
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents (Note 2) $11,786 $ 5,975
Short term investments (Note 2) 6,710 6,438
Trade accounts receivable, less allowance for doubtful
accounts of $166 and $306 3,478 5,302
Inventories (Note 3) 1,586 3,294
Prepaid expenses and other 573 964
Deferred tax asset (Note 9) 31 307
------- -------
Total current assets 24,164 22,280
------- -------
Plant, property and equipment, net (Notes 4 and 8) 8,283 12,641
------- -------
Other assets
Officer and shareholder loans (Note 5) 84 117
Excess of cost over net assets acquired, net of accumulated
amortization of $69 and $178 (Note 6) 1,549 1,442
Covenants not to compete, net of accumulated amortization
of $89 and $226 (Note 6) 1,011 874
Other noncurrent 390 346
------- -------
Total other assets 3,034 2,779
------- -------
Total assets $35,481 $37,700
======= =======
Current liabilities
Accounts payable $ 4,360 $ 5,308
Accrued payroll and related items 998 1,096
Income taxes payable (Note 9) 410 281
Other accruals 112 581
Current maturities of capital lease obligations (Note 8) 242 210
Current maturities of long-term debt (Note 7) 124 149
------- -------
Total current liabilities 6,246 7,625
Capital lease obligations, less current maturities (Note 8) 600 384
Long-term debt, less current maturities (Note 7) 88 90
Other 48 27
------- -------
Total liabilities 6,982 8,126
------- -------
Commitments and contingencies (Notes 8 and 16)
Shareholders' equity
Common stock, no par value, shares authorized, 15,000,000; shares
issued and outstanding, 4,890,860 and 4,945,095 28,371 28,813
Retained earnings 128 761
------- -------
Total shareholders' equity 28,499 29,574
------- -------
Total liabilities and shareholders' equity $35,481 $37,700
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 34
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 18,153 $ 35,869 $ 59,197
Cost of sales 8,984 18,425 29,889
-------- -------- --------
Gross profit 9,169 17,444 29,308
-------- -------- --------
Operating expenses
Sales and distribution 6,212 11,588 20,158
Marketing 484 891 2,257
General and administrative 1,973 3,576 6,206
-------- -------- --------
Total operating expenses 8,669 16,055 28,621
-------- -------- --------
Income from operations 500 1,389 687
Other (expense) income
Other -- 17 (195)
Interest (expense) income, net (Note 12) (199) 91 541
-------- -------- --------
Income before income taxes 301 1,497 1,033
Income tax expense (Note 9) -- (500) (400)
-------- -------- --------
Net income $ 301 $ 997 $ 633
======== ======== ========
Net income per common share $ 0.08 $ 0.22 $ 0.12
======== ======== ========
Weighted average common and common equivalent
shares outstanding 3,623 4,472 5,420
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 35
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Series A Series B
---------------- -----------------
Common Stock Preferred Stock Preferred Stock Retained
------------------- ---------------- ----------------- earnings
Shares Amount Shares Amount Shares Amount (deficit) Total
------ ------ ------ ------ ------ ------ --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 1, 1993 1,418 $ 345 346 $ 739 927 $ 2,908 $(1,170) $ 2,822
Conversion of Preferred Stock to
common stock (Note 11) 1,273 3,647 (346) (739) (927) (2,908) -- --
Proceeds from initial public
offering (Note 11) 1,050 5,586 -- -- -- -- -- 5,586
Exercise of Common Stock Options 3 10 -- -- -- -- -- 10
Net income for the year -- -- -- -- -- -- 301 301
------- ------- ------- ------- ---- ------- ------- -------
Balance, August 31, 1994 3,744 9,588 -- -- -- -- (869) 8,719
Proceeds from public offering 1,065 18,594 -- -- -- -- -- 18,594
Exercise of Common Stock Options
and warrants, including related
tax benefits (Note 11) 82 189 -- -- -- -- -- 189
Net income for the year -- -- -- -- -- -- 997 997
------- ------- ------- ------- ---- ------- ------- -------
Balance, August 31, 1995 4,891 28,371 -- -- -- -- 128 28,499
Exercise of Common Stock Options,
including related tax benefits
(Note 11) 54 442 -- -- -- -- -- 442
Net income for the year -- -- -- -- -- -- 633 633
------- ------- ------- ------- ---- ------- ------- -------
Balance, August 31, 1996 4,945 $28,813 -- $ -- -- $ -- $ 761 $29,574
======= ======= ======= ======= ==== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 36
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended August 31,
----------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 301 $ 997 $ 633
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 676 913 1,288
Amortization 8 152 244
Deferred tax asset (67) 36 (276)
Loss (gain) on sale of assets (9) -- 202
Changes in assets and liabilities
Trade accounts receivable (447) (1,679) (1,824)
Inventories (450) (537) (1,708)
Prepaid expenses and other current assets (115) (239) (391)
Other noncurrent assets (164) (119) 11
Accounts payable 451 2,201 948
Accrued payroll and related items 73 524 98
Other accrued liabilities (43) 24 448
Income taxes payable -- 410 (129)
-------- -------- --------
Net cash provided by (used in) operating activities 214 2,683 (456)
-------- -------- --------
Cash flows used in investing activities
Purchase of J.S. Grant's business assets, including covenant
not to compete -- (2,525) --
Capital expenditures (1,464) (2,231)
Purchase of short-term investments -- (6,710) --
Sale of short-term investments, net -- -- 272
Other investing activities -- (100) --
Payment for purchase of Dharma Juice Company (230) -- --
Proceeds from sale of assets 9 -- 57
-------- -------- --------
Net cash used in investing activities (1,685) (11,566) (5,352)
-------- -------- --------
Cash flows from financing activities
Principal payments under long-term debt (2,434) (1,196) (197)
Proceeds from issuance of long-term debt -- 1,149 --
Payments of obligations under capital leases (269) (204) (248)
Sale of common stock 5,596 18,783 442
-------- -------- --------
Net cash provided by (used in) financing activities 2,893 18,532 (3)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,422 9,649 (5,811)
Cash and cash equivalents, beginning of period 715 2,137 11,786
-------- -------- --------
Cash and cash equivalents, end of period $ 2,137 $ 11,786 $ 5,975
======== ======== ========
Cash paid during the year for:
Interest $ 262 $ 146 $ 94
Income taxes $ 59 $ 42 $ 219
</TABLE>
Noncash investing and financing activities: During 1994, the Company incurred
capital lease obligations of $249,000 to purchase equipment. During 1994, the
Company entered into a covenant not to compete, requiring payments totaling
$110,000, in connection with the Dharma purchase (Note 6). During 1994,
1,273,209 shares of preferred stock were exchanged for 1,273,209 shares of
common stock. During 1995, the Company assumed approximately $135,000 of capital
lease obligations in connection with the acquisition of J.S. Grant's, Inc. (Note
6). During 1996, the Company purchased property in Dinuba by issuing a $225,000
note payable.
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 37
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Business. Odwalla, Inc. ("Odwalla" or the "Company") was incorporated in
California on September 19, 1985. Odwalla is a leading branded fresh juice and
beverage company in the country, serving selected markets in the western United
States and the province of British Columbia. Odwalla's complete product line
consists of more than 30 juice blends and natural spring water.
Principles of Consolidation. In January 1996, the Company formed a wholly
owned subsidiary, Odwalla Canada, Inc. ("Odwalla Canada"), under the laws of
British Columbia. The accompanying consolidated financial statements include the
accounts of the Company and Odwalla Canada. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents. The Company considers all investments with an initial
maturity of three months or less to be cash equivalents.
Inventories. Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
Plant, Property, Equipment and Depreciation. Plant, property and equipment
are stated at cost. Depreciation and amortization are computed over the
estimated useful lives of the assets by the straight-line method for financial
reporting purposes and by accelerated methods for income tax purposes. For
assets under capital leases, amortization is based upon the shorter of the lease
term or useful life and is included with depreciation expense.
<TABLE>
<S> <C>
Estimated useful lives are as follows:
Buildings and building improvements .......................... 7 to 35 years
Leasehold improvements........................................ 5 to 15 years
Machinery and equipment....................................... 5 to 15 years
Vehicles...................................................... 5 years
Other......................................................... 3 to 7 years
</TABLE>
Excess of Cost over Net Assets Acquired. The excess of cost over net assets
acquired, which relates to the Company's acquisitions of Dharma Juice Company
and J. S. Grant's, Inc., are being amortized over a 15-year period using the
straight-line method. Periodically, the recoverability of the excess of cost
over net assets acquired is evaluated by comparing estimated future income to
projections made at the time of acquisition.
Covenants Not to Compete. The covenants not to compete associated with the
acquisitions of Dharma Juice Company (four-year term), J. S. Grant's, Inc.
(ten-year term) and the expansion into a new regional market (five-year term)
are being amortized using the straight-line method over the terms of the
agreements.
Deferred Taxes. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Revenue Recognition. Net sales are recognized at the time of delivery to the
customer. A reserve for returns is recorded at the time of sale.
F-8
<PAGE> 38
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Accounting for Stock-Based Compensation. In October 1995, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," was issued which establishes accounting and reporting standards
for stock-based compensation plans. The Company is required to adopt this
standard in fiscal 1997. This standard encourages the adoption of the fair
value-based method of accounting for employee stock options or similar equity
instruments, but continues to allow the Company to measure compensation cost for
those equity instruments using the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Under the fair value-based method, compensation cost is
measured at the grant date based on the value of the award. Under the intrinsic
value-based method, compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date or other measurement date over the
amount the employee must pay to acquire the stock. The Company intends to
continue the use of the intrinsic value-based method. As a result, adoption of
this standard will not have any effect to the Company's consolidated financial
statements other than to require disclosure of the pro forma effect on net
income of using the fair value-based method of accounting.
Net Income Per Share. Net income per common and common equivalent share
using the weighted average number of common and common equivalent shares
outstanding was computed by applying Securities and Exchange Commission Staff
Accounting Bulletin No. 83 (SAB 83). Pursuant to SAB 83, common and common
equivalent shares issued by the Company during the 12 months immediately
preceding its initial public offering at a price below the initial public
offering price together with common share equivalents which result from the
grant of common stock options and warrants having exercise prices below the
initial public offering price during the same period have been included in the
calculation of the shares used in computing net income per share as if they were
outstanding for all periods prior to the initial public offering. Net income per
share for periods subsequent to the initial public offering have been computed
using the treasury stock method, under which the number of shares outstanding
includes an assumed use of the proceeds from the issuance of such shares and
from the assumed exercise of such options and warrants to repurchase shares of
the Company's common stock at current market prices.
Reclassification. Certain 1994 and 1995 operating expenses previously
included in sales and distribution expense have been reclassified to marketing
and general and administrative expenses to conform to 1996 classifications.
Short-term investments transactions have been classified as an investing
activity in the consolidated statement of cash flows in 1996 to more accurately
reflect the nature of the investments; 1995 short-term investments transactions
have been reclassified to conform with the 1996 presentation.
2. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include cash management funds totaling $10,678,000
and $5,726,000 at August 31, 1995 and 1996. Cash management funds are generally
invested in money market and tax-free municipal bond funds. The carrying amount
approximates fair value because of the short maturity of these instruments.
Short-term investments consist primarily of U. S. Government securities and
tax free municipal bonds. The carrying amount of these investments approximates
fair value. Interest income, net, includes $242,000 of interest earned from
these investments.
F-9
<PAGE> 39
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------
1995 1996
-------- ------
<S> <C> <C>
Raw materials $ 1,267 $ 2,793
Packaging supplies and other 37 151
Finished product 282 350
---------- ---------
Total $ 1,586 $ 3,294
========== =========
</TABLE>
4. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1995 1996
-------- ------
<S> <C> <C>
Land $ 100 $ 411
Buildings and building improvements 2,943 6,339
Leasehold improvements 1,785 2,287
Machinery and equipment 4,675 5,242
Vehicles 1,134 619
Other 1,440 2,693
-------- --------
12,077 17,591
Less accumulated depreciation and amortization (3,794) (4,950)
-------- --------
Plant, property and equipment, net $ 8,283 $ 12,641
======== ========
</TABLE>
The above includes leased property under capital leases as described in
Note 8.
5. OFFICER AND SHAREHOLDER LOANS
At August 31, 1995 and 1996, outstanding loans to officers totaled
$74,000 and $106,000, and outstanding loans to other shareholders totaled
$10,000 and $11,000. These loans bear interest at rates from 0% to 7.5% and are
due at various dates through 2001.
6. BUSINESS ACQUISITIONS
In January 1995, the Company acquired substantially all of the assets
of the fresh juice business of J.S. Grant's, Inc., a Colorado corporation
("Grant's"). The acquired assets included cash, accounts receivable, inventory,
machinery, equipment and supplies, intangible assets such as recipes,
formulations, trade secrets, trade names, and goodwill (collectively, the
"Assets"). Odwalla purchased the Assets for approximately $1.59 million,
including approximately $94,000 of legal, accounting and other costs incurred by
the Company. The acquisition resulted in an excess of costs over net assets
acquired of $1.46 million, which is being amortized over 15 years on a straight
line basis.
Odwalla entered into a ten year non-competition agreement with each of
the two former officers of Grant's for an aggregate consideration of $890,000.
The non-competition agreements are being amortized over ten years on a straight
line basis.
F-10
<PAGE> 40
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS ACQUISITIONS (CONTINUED)
The acquisition was accounted for as a purchase and, accordingly,
Grant's financial results are included in the Company's financial statements
from January 31, 1995. The following pro forma results are unaudited and reflect
purchase accounting adjustments assuming the acquisition occurred at the
beginning of each period (in thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
-----------------------
1994 1995
-------- ------
<S> <C> <C>
Net sales $22,080 $37,325
Net income 12 728
Net income per share $ 0.00 $ 0.16
</TABLE>
In June 1995, Odwalla entered into a five year non-competition
agreement with an individual for $100,000 in connection with the expansion into
a new regional market. The non-competition agreement is being amortized over
five years on a straight line basis.
7. LONG-TERM DEBT
The Company's long-term debt consists of (a) $89,000 of equipment notes
payable, interest at 9% to 14%, payable in monthly principal and interest
installments and (b) a promissory note for $150,000, payable in annual principal
installments of $75,000 plus interest at 5%. Principal payments of $149,000, and
$90,000 are due in 1997 and 1998.
In conjunction with prior loan agreements, the bank received warrants
to acquire 18,000 shares of the Company's common stock at $3.05 per share which
were due to expire thirty days following notice to the bank. The bank also
received warrants to purchase an additional 9,000 shares of the Company's common
stock at an aggregate exercise price of $3.05 per share which were due to expire
in March 1997, assuming thirty days' notice had been given. In January 1995,
with the market price of the stock at $8.00, the bank converted the above
mentioned warrants into 16,715 shares of common stock in a cashless transaction.
The Company entered into a Loan and Security Agreement (the
"Agreement") with a bank on January 31, 1995. The Agreement provided a $3
million line of credit, including the ability to issue letters of credit up to
$500,000 as part of the total committed balance, and was collateralized by all
of the Company's assets. Interest was at the bank's prime interest rate plus
0.5%. Approximately $1.1 million was borrowed under the Agreement to assist in
the purchase of Grant's (Note 6) and was paid in full in the third quarter of
fiscal 1995. The Agreement expired in March 1996 and was not renewed.
8. COMMITMENTS
OPERATING AND CAPITAL LEASES
The Company leases certain property consisting of its production
facilities, offices, branch distribution facilities, equipment and certain
vehicles under operating leases, including the related party lease described
below. These leases expire at various dates through 2007 and many facility
leases contain renewal options. Most property leases require the Company to pay
utilities, property taxes and common maintenance costs. Total rent expense under
operating leases approximated $420,000, $1,241,000 and $3,490,000 for the years
ended August 31, 1994, 1995 and 1996. The Company also leases various furniture,
equipment and vehicles under capital leases expiring through 2001.
F-11
<PAGE> 41
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS (CONTINUED)
Following is an analysis of leased property under capital leases by
major classes (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
------------------------
1995 1996
------ -----
<S> <C> <C>
Machinery and equipment $ 1,412 $ 971
Vehicles 717 140
Other 115 84
------- -------
2,244 1,195
Less accumulated amortization (943) (333)
------- -------
Net leased equipment under capital leases $ 1,301 $ 862
======= =======
</TABLE>
As of August 31, 1996, future net minimum lease payments under
capital leases and future minimum rental payments required under operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING AUGUST 31, LEASES LEASES
- ---------------------- ------- --------
<S> <C> <C>
1997 $ 258 $ 4,596
1998 238 4,381
1999 166 3,802
2000 8 3,084
2001 -- 1,738
Thereafter -- 1,570
-------- --------
670 $ 19,171
========
Less amount representing interest (76)
--------
Present value of net minimum lease payments 594
Less current maturities (210)
--------
Long-term portion $ 384
========
</TABLE>
Certain leases are guaranteed by Company shareholders and officers.
The Company leased a portion of its office facility through March 1996
and subleases portions of two distribution facilities under sublease agreements
requiring payments by the lessees of $136,000, $126,000, $126,000 and $52,000 in
1997, 1998, 1999 and 2000. The Company earned $26,000 and $71,000 under sublease
agreements in 1995 and 1996.
RELATED PARTY LEASE
The Company's storage facility and offices in Davenport, California,
are leased from a partnership of which Mr. Steltenpohl, the Company's Chairman,
is a significant partner. The lease for this facility expires in July 1998 as to
the storage facility and July 1999 as to the office space. Rent and lease
related expenses paid to the partnership approximated $112,000 during each of
the years ended August 31, 1994, 1995 and 1996. Total accumulated leasehold
improvements at this facility, net of accumulated amortization, approximated
$271,000 and $221,000 at August 31, 1995 and 1996.
F-12
<PAGE> 42
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS (CONTINUED)
OTHER COMMITMENTS
Supply and License Agreement
In January 1995, the Company entered into an exclusive Supply and
License Agreement ("Agreement") whereby Trinity Springs Ltd. ("Trinity")
supplies a product to be bottled, packaged, marketed and distributed by Odwalla.
Under the Agreement, the Company is required to pay a license fee equal to 50%
of the net profits, as defined, on a quarterly basis. The Company agreed to
distribute certain minimum quantities of the product. The Agreement is for five
years and is automatically renewable for unlimited successive five-year terms,
with either party retaining the right not to renew under certain circumstances.
The Company was granted 10% of the then outstanding shares of Trinity in January
1995, although the shares have not been issued to date. The Company will also be
issued a warrant to purchase 1% of Trinity's outstanding capital stock on each
of the first five anniversary dates of the Agreement. The Agreement became
effective in October 1995. There were no license fees paid in 1996.
Raw Material Contracts
As of August 31, 1996, the Company had entered into purchase
commitments for the future delivery of raw materials. Approximately $1.5 million
of commitments are under one-year contracts to be completed through May 1997.
One three-year contract is also open, requiring purchase of $3.2 million of
product, and is to be completed by May 1999.
Land Purchases
In April 1996, the Company entered into a contract to purchase land
adjacent to the Dinuba production facility for $215,000. Odwalla paid $10,000 as
a deposit when the contract was signed and paid the balance when the purchase
was completed in October 1996.
In May 1996, the Company entered into an agreement, subject to certain
contingencies, to purchase land adjacent to its Half Moon Bay administrative
offices and, upon closing on the land purchase, to extend its lease on the
administrative offices. The Company completed the transaction in October 1996 at
a cost of $351,000, of which $230,000 represents assumption of the existing
mortgage on the property. The extended lease terms are included in operating
lease commitments above.
9. TAXES ON INCOME
The Company recognizes deferred tax liabilities and assets by applying
enacted statutory tax rates applicable to future years for the expected future
tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
F-13
<PAGE> 43
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. TAXES ON INCOME (CONTINUED)
Deferred tax assets consist principally of the following (in
thousands):
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
1995 1996
------ -----
<S> <C> <C>
Reserves and accruals $ 35 $ 369
Tax credits 27 64
Property, plant and equipment (29) (150)
Inventories -- 22
State taxes -- 35
Other (2) (33)
----- -----
$ 31 $ 307
===== =====
</TABLE>
The Company's effective tax rate differs from the federal statutory
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------
1995 1996
------ -----
<S> <C> <C>
Federal statutory tax rate 34% 34%
State income taxes 6 5
Reduction of valuation allowance through utilization
of net operating loss carryforward (4) -
Permanent differences (3) (6)
Taxes for prior periods -- 6
--- --
Effective tax rate 33% 39%
=== ==
</TABLE>
Taxes on income consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------
1994 1995 1996
------ ------ -----
<S> <C> <C> <C>
Current:
Federal $ 105 $390 $429
State 13 90 127
----- ---- ----
118 480 556
----- ---- ----
Deferred:
Federal (52) 64 (130)
State - 16 (26)
----- ---- ----
(52) 80 (156)
------ ---- -----
66 560 400
Change in valuation allowance (66) (60) -
$ - $500 $400
===== ==== ====
</TABLE>
During the years ended August 31, 1996 and 1995, the Company recognized
certain tax benefits related to stock option plans in the amount of $12,000 and
$42,000. These benefits were recorded as a reduction of income taxes payable and
an increase in common stock.
F-14
<PAGE> 44
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLAN
The Company's matches 10% of each employee's contribution to the 401(k)
Employee Benefit Plan ("Plan"), as amended in September 1992 by the Board of
Directors. Total contributions to the Plan approximated $9,000, $24,000 and
$36,000 for the years ended August 31, 1994, 1995 and 1996.
11. SHAREHOLDERS' EQUITY
On March 31, 1995, the Company's Board of Directors declared a common
stock dividend. On May 1, 1995, each shareholder of record on April 17, 1995
received one additional share of common stock for every two shares held.
Earnings per share and all relevant stock and per share information have been
retroactively restated to reflect the stock dividend.
Initial Public Offering. Effective upon the initial public offering of
the Company's securities in December 1993, the authorized stock was 5,000,000
shares of preferred stock and 15,000,000 shares of common stock. The preferred
stock may be issued in one or more series. All outstanding preferred stock was
converted to common stock on a one-for-one basis in conjunction with the initial
public offering.
Warrants. The Company issued warrants to purchase an aggregate of
90,158 shares of common stock at prices ranging from $3.05 to $5.03 per share.
These warrants were exercised in 1995, principally in cashless transactions, and
an aggregate of 69,642 shares of common stock were issued.
The underwriters of the Company's initial public offering were issued
warrants to purchase 105,000 shares of common stock at $7.20 per share. These
warrants expire in September 1998 and are currently outstanding.
Stock Option Plans. Under the Stock Option Plan, incentive stock
options ("Incentive Options") may be granted to employees and nonstatutory stock
options ("Nonstatutory Options") may be granted to employees, directors or
consultants. In December 1994, the Board of Directors adopted the 1994
Non-Employee Directors' Stock Option Plan ("Directors' Plan") and, in January
1995, the shareholders approved this plan.
Incentive Options may be granted at an exercise price not less than
100% of fair market value on the grant date; Nonstatutory Options may be granted
at an exercise price not less than 85% of fair market value on the grant date.
The options generally vest one-sixtieth per month from the grant date, although
approximately 85,000 outstanding Nonstatutory Options vested immediately on the
grant date. Directors' Plan options may be granted at an exercise price not less
than 100% of fair market value and generally vest quarterly over a five-year
period. In general, options terminate ten years from date of grant.
F-15
<PAGE> 45
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
The activity under the above plans was as follows:
<TABLE>
<CAPTION>
SHARES OPTIONS OPTION PRICE
AVAILABLE OUTSTANDING PER SHARE
--------- ----------- ------------
<S> <C> <C> <C>
Balance at September 1, 1993 457,095 292,905 $ 3.33-$3.90
Options granted (180,000) 180,000 $ 3.97-$6.60
Options exercised -- (3,090) $3.33
-------- ---------
Balance at August 31, 1994 277,095 469,815 $ 3.33-$6.60
Additional shares reserved 282,000 --
Options granted (272,648) 272,648 $ 7.83-$8.62
Options exercised -- (11,709) $ 3.33-$7.83
Options canceled 29,690 (29,690) $ 3.33-$3.97
-------- ---------
Balance at August 31, 1995 316,137 701,064 $ 3.33-$8.62
Additional shares reserved 266,500 --
Options granted (270,906) 270,906 $20.25-$22.28
Options exercised -- (59,625) $ 3.33-$20.25
Options canceled 46,471 (46,471) $ 3.90-$20.25
-------- ----------
Balance at August 31, 1996 358,202 865,874 $ 3.33-$22.28
======== =========
</TABLE>
12. INTEREST INCOME (EXPENSE)
Interest (expense) income consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------
1994 1995 1996
------ ------ -----
<S> <C> <C> <C>
Interest income $ 81 $ 237 $ 635
Interest expense (280) (146) (94)
----- ----- -----
Net interest (expense) income (199) 91 $ 541
===== ===== =====
</TABLE>
No amounts of interest expense were capitalized in 1994, 1995 or 1996.
13. SIGNIFICANT CUSTOMER AND CREDIT CONCENTRATION
One customer, Safeway, Inc., represented approximately 15%, 16% and 14%
of sales in fiscal 1994, 1995, and 1996. Another customer, PriceCostco,
represented approximately 11% of sales in fiscal 1994. Although a significant
portion of the Company's customers are concentrated in Northern California,
trade accounts receivable are generally diversified due to the large number of
entities comprising the Company's customer base.
F-16
<PAGE> 46
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS
The Company incurred executive recruitment fees of $37,000 and $74,000
during 1995 and 1996 by utilizing a company of which one of the Company's
directors is a partner. The Company incurred consulting fees of $35,000 during
1996 by utilizing a company which is owned by one of the Company's directors.
15. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company performs ongoing credit evaluations of its customers and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
The following summarizes the activity in the allowance for doubtful accounts for
the three years ended August 31, 1996 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------
1994 1995 1996
------ ------ -----
<S> <C> <C> <C>
Allowance for doubtful accounts, beginning of year $ 70 $ 98 $ 166
Bad debt expense for the year 69 112 398
Allowance established at time of Grant's
acquisition -- 20 --
Accounts receivable written off during the year (41) (64) (258)
----- ----- -----
Allowance for doubtful accounts, end of year $ 98 $ 166 $ 306
===== ===== =====
</TABLE>
16. SUBSEQUENT EVENT
On October 30, 1996, the Company was notified by the State of
Washington Environmental Health Services of an epidemiological link between
several cases of E. coli O157:H7 bacteria illness and Odwalla's apple juice
products. The Company immediately implemented a voluntary recall (the "Recall")
of all Odwalla products containing apple juice. On October 31, 1996, Odwalla
expanded the Recall to include its carrot and vegetable products because such
products were processed on the same production line as the apple juice. As of
November 22, 1996, there were 66 cases of E. coli O157:H7 illness
epidemiologically linked to Odwalla apple juice products, according to the
Centers for Disease Control and Prevention.
Immediately following the Recall, the Food and Drug Administration
("FDA") began an investigation of the Company's production and distribution
centers. The FDA informed the Company that a sample from one bottle of apple
juice taken from a distribution center tested positive for E. coli O157:H7. The
FDA investigation is on-going.
The Company has experienced a significant reduction in sales of all of
its products following the Recall. Although sales of the Company's products have
declined in all of its markets, declines in sales have been most significant in
the Pacific Northwest and Colorado. Net sales in November 1996 were
approximately 38% of August 1996 sales levels. The significant decline in sales
of the Company's products can be attributed to the loss of consumer confidence,
reduction of the number of products on the market from 23 to eight and the
removal of all of the Company's products by certain trade partners. Beginning in
early December 1996, the Company reintroduced all apple juice-based products to
the market using flash pasteurization of its fresh apple juice. The Company
incurred significant costs related to the Recall, including public relations,
advertising, marketing, legal and other professional fees, costs of
reformulating products and costs associated with the flash pasteurization
process.
F-17
<PAGE> 47
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENT (CONTINUED)
The Company has invested in building an infrastructure capable of
sustaining a growth and expansion organization. This, along with other factors,
does not allow the Company to reduce costs commensurate with the reduction in
sales. Although the Company is still in the planning stages following the
Recall, the Company expects the costs associated with the Recall and disruption
in sales will result in a significant loss in the first quarter of fiscal 1997
and for fiscal year 1997.
The Company maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks and intends to
present claims to its insurance carriers under the appropriate policies.
However, there have been no claims prepared as of December 11, 1996, and the
amount or timing of proceeds, if any, from future insurance claims cannot be
presently determined.
As of December 11, 1996, there have been six personal injury claims and
legal proceedings seeking monetary damages and other relief filed against the
Company since the Recall. Two are class action lawsuits and four others are
personal injury lawsuits. In addition, there is one legal proceeding alleging
fraudulent business acts and practices relating to the recalled products pending
against the Company. The Company is currently working with its insurance carrier
and legal counsel to assess the total potential liability to the Company.
However, due to the short period of time since the Recall, the Company is not
able to determine whether the ultimate liability resulting from these and
potential future claims will exceed the coverage available under its applicable
insurance policies.
The Company is designing plans to regain and build on its customer base
and anticipates that sales levels will improve throughout the remainder of
fiscal year 1997. However, the improvement is not expected to offset the effects
of lost sales and costs associated with the Recall. While a significant loss is
expected for fiscal year 1997, the Company believes it will have sufficient cash
to fund its operations and capital expenditures through the end of fiscal year
1997. However, this belief is based on future sales estimates which are
inherently uncertain given the disruption to the Company's business caused by
the Recall.
F-18
<PAGE> 1
EXHIBIT 10.12
OFFICE LEASE
by and between
University Bank & Trust Company of Palo Alto,
a California banking corporation
("Landlord")
and
Odwalla, Inc.,
a California corporation
("Tenant")
<PAGE> 2
TABLE OF CONTENTS
1. Summary of Lease Provisions 1
2. Premises 2
3. Term 2
4. Holdover 2
5. Rent 3
6. Late Charges 5
7. Security Deposit 5
8. Use of Premises 6
9. Compliance with Law 6
10. Alterations and Additions 6
11. Liens 7
12. Repairs 7
13. Assignment and Subletting 8
14. Indemnity 8
15. Insurance 9
16. Services and Utilities 10
17. Property Taxes 11
18. Rules and Regulations 11
19. Entry by Landlord 11
<PAGE> 3
20. Destruction/Reconstruction 11
21. Default 12
22. Remedies 12
23. Eminent Domain 13
24. Estoppel Certificate 13
25. Subordination 13
26. Parking 14
27. Surrender of Premises 14
28. Landlord Default and Mortgagee Protection 14
29. Authority 14
30. General Provisions 15
31. Limitation of Liability 16
32. Brokers 16
33. Option to Purchase 16
34. Right of First Negotiation - Lease 18
35. Right of First Negotiation - Purchase 18
36. List of Exhibits 19
<PAGE> 4
OFFICE LEASE
1. Summary of Lease Provisions.
(a) Landlord: University Bank & Trust Company of Palo Alto, a
California banking corporation ("Landlord").
(b) Tenant: Odwalla, Inc., a California corporation
("Tenant").
(c) Commencement Date: June __, 1995.
(d) Premises: That certain building shown cross-hatched on the
site plan attached hereto as Exhibit "A" and containing Fourteen Thousand Seven
Hundred (14,700) rentable square feet (the "Premises") located at 100 Stone Pine
Road, Half Moon Bay, California, situated on that certain real property more
particularly described in the legal description attached as Exhibit "B" hereto.
For purposes hereof, the Premises, together with the real property described on
Exhibit "B" attached hereto, are sometimes collectively referred to herein as
the "Project." (ARTICLE 2)
(e) Term: Approximately seven (7) years, commencing on the
Commencement Date and expiring on the date which is seven (7) years following
the Second Floor Rent Commencement Date (defined in Paragraph 5(a). (ARTICLE 3)
(f) First Floor Rent Commencement Date: Commencement Date.
(ARTICLE 5)
Second Floor Anticipated Commencement Date: The earlier of (i)
the date Landlord's Work (as defined in Exhibit "C" attached hereto) is
completed, or (ii) the date one hundred twenty (120) days following the date
Final Plans for the Landlord's Work are approved by Landlord and Tenant and all
building permits applicable to such Landlord's Work have been obtained. (ARTICLE
3)
(g) Base Rent:
For purposes of this Paragraph 1(g), all references to
"months" shall mean and refer to calendar months following the Second Floor Rent
Commencement Date, except that the first month shall be the calendar month in
which the Second Floor Rent Commencement Date occurs.
<PAGE> 5
First Floor Base Rent:
---------------------
For the period commencing on the Commencement Date through
April 30, 1997 - $1.40 per rentable square foot per month.
For the period commencing on May 1, 1997 through the 24th
month - $1.30 per rentable square foot per month.
Second Floor Base Rent:
- ----------------------
Lease Months Base Rent Per Rentable Square Foot Per Month
------------ --------------------------------------------
1 - 12 $1.25
13 - 24 $1.30
Entire Premises Base Rent:
- -------------------------
Lease Months Base Rent Per Rentable Square Foot Per Month
------------ --------------------------------------------
25 - 36 $1.35
37 - 48 $1.40
49 - 60 $1.50
61 - 72 $1.55
73 - 84 $1.60
First month's Base Rent for the second floor of the Premises
shall be delivered to Landlord upon execution of this Office Lease ("Lease") by
Tenant. (ARTICLE 5)
(h) Security Deposit: Eighteen Thousand Three Hundred
Seventy-Five Dollars ($18,375). (ARTICLE 7)
(i) Use of Premises: General office purposes. (ARTICLE 8)
(j) Tenant's Proportionate Share: 100 percent (100%). (ARTICLE 5)
(k) Addresses for Notices:
To Landlord: University Bank & Trust Company of Palo Alto
c/o JMA Properties, Ltd.
280 Second Street
Los Altos, CA 94022
Attn: Mr. Art Chapman
<PAGE> 6
To Tenant: To the Premises, with a
courtesy copy to:
Cooley Godward Castro Huddleson & Tatum
One Maritime Plaza
San Francisco, CA 94111-3580
Attn: Jeffrey S. Zimman
(l) Brokers: For Landlord, Ritchie & Ritchie Corporation ("R &
R"). For Tenant, R & R. (ARTICLE 32)
(m) In the event of a conflict between the Summary of Lease
Provisions set forth above and the balance of the Lease, the latter shall
control.
2. Premises. Landlord hereby leases to Tenant, and Tenant
hereby leases from Landlord, for the term, at the rental and upon the term and
conditions set forth in this Lease, the Promises described in Paragraph 1(d)
above. Landlord hereby grants to Tenant the nonexclusive right to use in common
with others the Common Areas subject to the terms and conditions of this Lease.
For purposes of this Lease, the "Common Areas" shall mean the areas outside the
Premises and facilities provided and designated by Landlord from time to time
for the general nonexclusive use, convenience or benefit of Tenant and other
tenants and authorized users.
All Tenant Improvements to be located within the Premises, including,
but not limited to, all heating, ventilating and air conditioning systems, all
electrical systems, all suspended ceilings, interior walls and partitions, and
all floor, window and wall coverings, shall be constructed and installed by
Landlord in accordance with the Work Letter Agreement attached hereto as Exhibit
"C". Tenant shall have the exclusive right to cultivate approximately three
hundred (300) square feet of the Common Areas as depicted in Exhibit "A" for the
purpose of growing and harvesting vegetables.
It is understood and agreed that the Fourteen Thousand Seven Hundred
(14,700) square foot area of the Premises set forth above (comprised of seven
thousand two hundred ninety-two (7,292) square feet on the first floor and seven
thousand four hundred eight (7,408) square feet on the second floor) shall be
used for all rent calculations and that neither party shall have a claim against
the other for any change to or variance of said floor area figure.
3. Term.
(a) The term of the Lease shall commence on the date set forth
in Paragraph 1(c) above ("Commencement Date") and shall expire on midnight on
the date which is seven (7) years following the Second Floor Rent Commencement
Date.
<PAGE> 7
(b) If Landlord fails to deliver possession of the second
floor of the Premises to Tenant on or before the Second Floor Anticipated Rent
Commencement Date for any reason other than due to delays caused by Tenant or
events beyond the reasonable control of Landlord, Landlord shall not be liable
for any damages or losses incurred by Tenant in connection therewith, however
Tenant may terminate this lease without further liability upon written notice to
Landlord given not later than fifteen (15) days following the Second Floor
Anticipated Rent Commencement Date.
(c) Provided that Tenant is not in default under the terms of
the Lease and has made all previous rental payments in a timely manner, Tenant
shall have the right to renew the Term of the Lease for a period of five (5)
years commencing from the date of expiration of the initial Term of the Lease
("Extended Term") by serving Landlord with written notice of Tenant's election
to renew not later than six (6) months prior to the date of the expiration of
the initial Term of the Lease.
Except for the redetermination of the monthly Base Rent in accordance
with Paragraph 5(b) below, all other terms and conditions of the Lease shall
apply to the Extended Term.
(d) Tenant shall have the right to terminate the Lease
effective at the end of the sixtieth (60th) month of the Term of the Lease by
giving written notice of such election to Landlord not later than the end of the
fifty-third (53rd) month of the Term of the Lease. In consideration for such
termination, Tenant shall pay to Landlord an amount equal to the total of (1)
Sixty-eight Thousand Three Hundred Fifty-five Dollars ($68,355) plus (2) the
product obtained by multiplying Two Hundred Eighty-six Thousandths (0.286) times
the total of (a) the amount of Landlord's Contribution (defined in the Work
Letter Agreement attached hereto as Exhibit "C", together with any additional
amounts Landlord contributes for the cost of tenant improvements (if any) plus
(b) Sixty-two Thousand One Hundred Three Dollars) $62,103).
4. Holdover.
(a) Holding over after the expiration of the Term with the
written consent of Landlord shall be a tenancy from month to month, at a rental
rate to be mutually agreed upon.
(b) If Tenant remains in possession after the expiration of
the Term without Landlord's written consent, Tenant shall pay to Landlord for
each month of said possession the sum of one hundred twenty-five percent (125%)
(prorated on a daily basis) of the monthly Base Rent for the month immediately
preceding the expiration of the Term, plus an amount estimated by Landlord for
operating expenses payable under this Lease, and Tenant shall also pay all
costs, expenses and damages sustained by Landlord by reason of such retention of
possession, including, without limitation, claims made by a succeeding tenant
resulting from Tenant's failure to surrender the Premises.
<PAGE> 8
5. Rent.
(a) During the initial Term of this Lease, Tenant agrees to
pay to Landlord as monthly base rent for the Premises the base rent set forth in
Paragraph 1(g) above ("Base Rent"). Tenant's obligation to pay Base Rent with
respect to the first floor of the Premises shall commence on the Commencement
Date ("First Floor Rent Commencement Date"). Tenant's obligation to pay Base
Rent with respect to the second floor of the Premises shall commence on the date
upon which the Tenant Improvements in the second floor of the Premises have been
substantially completed by Landlord ("Second Floor Rent Commencement Date").
Base Rent for any partial month shall be prorated based upon a thirty (30) day
month. Base Rent shall be paid in advance on the first (1st) day of each month
during the Term, without prior notice or demand, and without deduction or
offset, in lawful money of the United States of America, to Landlord, c/o JMA
Properties, Ltd., 280 Second Street, Los Altos, CA, 94022, Attn: Mr. Art
Chapman, or at such other place as Landlord may from time to time designate in
writing.
(b) For purposes of Paragraph 5(a) above, the Tenant
Improvements shall be deemed substantially completed upon the occurrence of the
earlier of the following: (i) the date upon which such Tenant Improvements have
been actually completed by Landlord and the issuance of appropriate governmental
approvals for the occupancy of the Premises, whether temporary or permanent;
(ii) the date upon which such Tenant Improvements would have been substantially
completed, except for delays caused by or changes in the work requested by
Tenant, or (iii) the date upon which Tenant takes possession of the Premises.
(c) In the event Tenant elects to extend the Term of this
Lease pursuant to Paragraph 3(d), the Base Rent to be paid during the first year
of the Extended Term shall be an amount equal to ninety-five percent (95%) of
the Prevailing Market Rental, as hereinafter defined; provided, however, that in
no event shall the Base Rent during the first year of the Extended Term be less
than the Base Rent then being paid by Tenant under the Lease. As used herein,
the term "Prevailing Market Rental" shall mean the rental and all other monetary
payments and escalations that Landlord could obtain from a third party desiring
to lease the Premises for the Extended Term, taking into account the age of the
Premises, the type and quality of tenant improvements, the location and floor
levels of the Premises, the same uses provided in Paragraph 8(a), the quality of
construction of the Premises, the services provided under the terms of the
Lease, the rental then being obtained for new leases of space comparable to the
Premises in the locality of the Premises and all other factors that would be
relevant to a third party in determining the rental such party would be willing
to pay to lease the Premises for the Extended Term.
<PAGE> 9
On or before five (5) days after the Tenant provides Landlord with
notice of Tenant's election to renew, Landlord and Tenant shall commence
negotiations to agree upon the Prevailing Market Rental applicable thereto. If
Landlord and Tenant are unable to reach agreement on Prevailing Market Rental
within ten (10) days after the date negotiations commence, then the Prevailing
Market Rental shall be determined as follows:
(i) If Landlord and Tenant are unable to agree on the
Prevailing Market Rental within said ten (10) day period, then, within five (5)
days thereafter, Landlord and Tenant shall each simultaneously submit to the
other in a sealed envelope its good faith estimate of the Prevailing Market
Rental. If the higher of such estimates is not more than one hundred five
percent (105%) of the lower of such estimates, then the Prevailing Market Rental
shall be the average of the two estimates; provided, however, that in no event
shall the Base Rent during the first year of the Extended Term be less than the
Base Rent then being paid by Tenant under the Lease.
(ii) If the matter is not resolved by the exchange of
estimates as provided in subparagraph (i) above, then either Landlord or Tenant
may, by written notice to the other on or before five (5) days after the
exchange of such estimates, require that the disagreement be resolved by
arbitration. Within seven (7) days after such notice, the parties shall select
as an arbitrator a mutually acceptable MAI appraiser with experience in real
estate activities, including at least ten (10) years' experience in appraising
office space in San Mateo County, California. If the parties cannot agree on an
appraiser, then, within a second period of seven (7) days, each party shall
select an independent MAI appraiser meeting the aforementioned criteria and,
within a third period of seven (7) days, the two appointed appraisers shall
select a third appraiser meeting the aforementioned criteria and the third
appraiser shall determine the Prevailing Market Rental pursuant to subparagraph
(iii) below. If one party shall fail to make such appointment within said second
seven (7) day period, then the appraiser chosen by the other party shall be the
sole arbitrator.
(iii) Once the arbitrator has been selected as provided for in
subparagraph (ii) above, then, as soon as practicable but in any case within
fourteen (14) days thereafter, the arbitrator shall select one of the two
estimates of the Prevailing Market Rental submitted by Landlord and Tenant,
which estimate shall be the one that is closer to the Prevailing Market Rental
as determined by the arbitrator; provided, however, that in no event shall the
Base Rent during the first year of the Extended Term be less than the Base Rent
then being paid by Tenant under the Lease. The arbitrator's selection shall be
rendered in writing to both Landlord and Tenant and shall be final and binding
upon them and shall not be subject to appeal. If the arbitrator believes that
expert advice would materially assist such arbitrator, then the arbitrator may
retain one or more qualified persons, including, but not limited to, legal
counsel, brokers, architects or engineers, to provide such expert advice. The
party whose estimate is not chosen by the arbitrator shall pay the costs of the
arbitrator and of any experts retained by the
<PAGE> 10
arbitrator; provided, however, that any fees of any counsel or expert engaged
directly by Landlord or Tenant shall be borne by the party retaining such
counsel or expert.
(d) As additional rent hereunder, Tenant shall pay to Landlord
Tenant's Proportionate Share (as defined below) of the total Operating Expenses
incurred by Landlord in the administration, operation and maintenance of the
Premises during the Term. For purposes of this Lease, it is agreed that Tenant's
Proportionate Share shall be one hundred percent (100%). Landlord agrees that in
no event shall Tenant's Proportionate Share of Operating Expenses allocable
solely to the first floor of the Premises during the first twelve (12) months of
the Sublease Term be greater than Forty Cents ($0.40) per rentable square foot
of the first floor of the Premises per month. Anything herein to the contrary
notwithstanding, Landlord agrees that Tenant's Proportionate Share of Operating
Expenses allocable solely to the first floor of the Premises during the period
commencing on the thirteenth month of the Lease Term and ending on April 30,
1997 (or such earlier date as to the sublease between Tenant, as sublessor, and
Passport Designs, Inc., as sublessee, covering the first floor of the Premises
may terminate) shall not be greater than 105% of Tenant's Proportionate Share of
Operating Expenses allocable to the first floor of the Premises during the first
twelve months of the Lease Term (prorated for the partial year).
For purposes of this Lease, "Operating Expenses" shall include all
costs paid or incurred by Landlord in connection with the ownership, operation,
maintenance, repair, improvement, security and management of, replacements for,
and all services and utilities rendered by Landlord in connection with, the
Premises (including all Common Areas), including, without limitation, real
property taxes and assessments (general and special), in lieu real property
taxes, rent taxes, gross receipt taxes (whether assessed against Landlord or
assessed against Tenant and collected by Landlord, or both), water and sewer
charges, casualty and liability insurance (including earthquake and rental loss)
premiums for insurance which Landlord is required to maintain hereunder or
otherwise deems necessary, utilities, trash removal, labor, the management fee
paid to the third party manager selected by Landlord or costs incurred by
Landlord in the management of the Premises if no such third party manager is
retained (in either event not to exceed four percent (4%) of the gross rental
income of the Premises), including salaries and employer taxes in connection
therewith, costs incurred in connection with rent collection, preparation and
review of operation budgets, supervision of maintenance employees, and
negotiation of maintenance and supply contracts, air conditioning and heating
operating and maintenance, elevator maintenance, supplies, materials, equipment
and tools, maintenance costs and upkeep of all parking and Common Areas and the
landscaping thereof, maintenance and repair of intrabuilding network cabling,
costs incurred to upgrade the utility, capacity or efficiency of any utility or
telecommunications system serving the Premises, and any professional fees
incurred by Landlord which will benefit all tenants equally (such as fees
incurred for appealing property taxes). Landlord agrees to use its best efforts
to secure all services, materials and supplies at competitive prices
commensurate with the level of maintenance and services provided similar
buildings in
<PAGE> 11
the area. The determination of the costs of management, operating, and
maintenance of the Premises and the Common Areas and the costs of the capital
improvements shall be in accordance with generally accepted accounting
principles consistently applied.
Notwithstanding the foregoing provisions of this Paragraph 5(c),
Operating Expenses shall not include:
(i) depreciation;
(ii) costs of tenants' improvements;
(iii) interest;
(iv) capital items (i.e., items which Landlord is required to
capitalize and not expense in the current year for federal income tax purposes),
except that the cost of (i) capital improvements which reduce Operating Expenses
and (ii) capital improvements required by laws, statutes, ordinances or
regulations of any federal, state or local governmental agency not in effect as
of the Commencement Date shall be included in Operating Expenses. The cost
thereof shall be amortized over the useful life of the improvement or capital
item, and Tenant shall pay Tenant's Proportionate Share of such amortized cost
monthly from the date of installation or repair throughout the Lease term. The
foregoing notwithstanding, if a capital improvement is required by law due to
Tenant's specific use of the Premises or alterations made to the Premises by
Tenant, then Tenant shall pay one hundred (100%) of the cost of such capital
improvements, and such capital improvements shall not be considered an Operating
Expense;
(v) payments on debt (principal or interest);
(vi) leasing commissions;
(vii) costs incurred to perform or correct the Landlord's work
described in Exhibit "C";
(viii) costs of correcting defects in or inadequacy of the
initial design of the structure of the Premises or Common Area;
(ix) legal fees;
(x) amounts paid to affiliates of Landlord (i.e., persons or
companies controlled by, under common control with, or which control, Landlord)
for services on or to the Project, to the extent only that the costs of such
services exceed competitive costs of such services were they not so rendered by
an affiliate of Landlord;
<PAGE> 12
(xi) wages of any employee above the level of building manager
and chief engineer;
(xii) earthquake or other insurance, unless such insurance
coverage was carried during the year in which the Commencement Date occurred;
(xiii) space planning fees, architectural fees, engineering
fees (other than those relating to the general operation of the Premises or
Common Areas thereof), marketing, advertising or any expenses incurred in
connection with the development or leasing of the Premises;
(xiv) costs associated with the operation of the business of
the legal entity which constitutes Landlord as the same is separate and apart
from the costs and operation of the Project including legal entity formation and
internal entity accounting;
(xv) any late fees or penalties or similar fees incurred by
Landlord, except to the extent attributable to Tenant's late payment or
non-payment of Base Rent or additional rent;
(xvi) any debt losses, rent losses or reserves for bad debt;
(xvii) the cost of (including increased real estate taxes and
other Operating Expenses related to) any additional space to the Premises after
the original construction;
(xviii) the cost of any repair in accordance with the
paragraphs on fire, casualty and condemnation of this Lease;
(xix) unrecovered expenses incurred as a consequence of the
grossly negligent operation and maintenance of the Building by the Landlord or
Landlord's employees; and
(xx) real property taxes and assessments to the extent based
on the excess of the assessed value of the Project over actual value thereof.
Tenant's Proportionate Share of Operating Expenses shall be payable
during the Term of this Lease in monthly installments on the first day of each
month in advance, without deduction, offset, prior notice or demand, and shall
be payable concurrently with monthly installments of Base Rent. Tenant's
Proportionate Share of Operating Expenses shall be based upon an estimate of the
Operating Expenses for such calendar year. As close as reasonably possible to
the end of each calendar year, Landlord shall notify Tenant of Landlord's
estimate of the Operating Expenses for the following calendar year. An amount
equal to one-twelfth (1/12th) of Tenant's Proportionate Share of such
<PAGE> 13
Operating Expenses shall be payable monthly by Tenant commencing on the first
day of the calendar year for which such estimate is given and continuing
throughout the remainder of said calendar year. Until notice of the estimated
Operating Expenses for any subsequent calendar year is delivered to Tenant,
Tenant shall continue to pay on the basis of the prior estimate. Landlord may
from time to time during the Term, but not more than twice each calendar year,
adjust the current estimate of Operating Expenses to reflect current
expenditures. Following written notice to Tenant of such revised estimate, any
subsequent payments by Tenant of Operating Expenses shall be based upon such
revised estimate. Within seventy-five (75) days after the end of each calendar
year, or such later date after Landlord reviews the annual statement of
Operating Expenses, Landlord shall provide Tenant with a reasonably detailed
statement showing the actual Operating Expenses for the applicable calendar
year. If Tenant's payments of Operating Expenses for any subsequent calendar
year are less than or exceed the amount shown in such annual statement as
Tenant's Proportionate Share of Operating Expenses (as prorated to reflect any
partial year during the Term), then Tenant's account shall be adjusted
accordingly. Tenant shall pay any deficiency upon receipt of Landlord's invoice,
and all credits will be applied by Landlord to the payment(s) next due for
Operating Expenses (or reimbursed in cash if such credit arises at the end of
the Term of this Lease).
Within one (1) year after the date of Tenant's receipt of the statement
of actual Operating Expenses for an applicable calendar year, Tenant may give
Landlord written notice of its intent to review records, invoices and receipts
relating to the Operating Expenses for such calendar year. Tenant shall provide
Landlord with at least ten (10) days prior written notice of the date upon which
it intends to review such records, invoices and receipts. The review shall be
performed during normal business hours at Landlord's principal place of business
or such other location as may be designated by Landlord, and shall be performed
at Tenant's sole cost and expense. Promptly following the completion of Tenant's
review of such records, invoices and receipts, Tenant shall provide Landlord
with a copy of the results of such review and Tenant's conclusions regarding any
overstatement or understatement by Landlord of actual Operating Expenses for the
applicable calendar year. In the event that Tenant's review shows an
underpayment or overpayment of Operating Expenses by Tenant for the applicable
calendar year, then, subject to Landlord's confirmation by its own review of
said records, invoices and receipts, the parties shall promptly meet to resolve
any discrepancy. Any discrepancy that cannot be resolved by the parties shall be
submitted for resolution to an independent certified public accountant mutually
selected by the parties, having no previous relationship to either of the
parties. In the event that Tenant fails to provide Landlord with written notice
of its intent to review such records, invoices and receipts within the
aforementioned one (1) year period, Tenant shall be deemed to have approved the
statement of actual Operating Expenses for such applicable calendar year;
provided, however, Tenant shall not be deemed to have approved the statement of
actual Operating Expenses for any year for which Tenant fails to provide
Landlord with written notice of its intent to review records, invoices and
receipts within one (1) year of receipt
<PAGE> 14
of the statement of Operating Expenses if Landlord has overstated such Operating
Expenses for such year by more than ten percent (10%).
6. Late Charges. Tenant agrees that all rental or other payments not
paid within five (5) calendar days after the due date shall be considered
delinquent and agrees to pay a late charge equal to ten percent (10%) of the
delinquent payment. Rent mailed and bearing a U.S. Postal Service postmark up to
the fifth (5th) day of a month shall not be considered delinquent. Additionally,
any delinquent payments not paid within thirty (30) days of the original due
date shall bear interest at the lower of the maximum rate then allowed by the
law or two (2) percentage points (i.e., two percent (2%)) over the prime rate of
interest charged from time to time by Bank of America, National Trust and
Savings Association at its San Francisco, California office.
7. Security Deposit.
(a) Tenant has deposited with Landlord the amount set forth in
Paragraph 1(h) above to be held by Landlord as security for the faithful
performance by Tenant of all the terms, covenants and conditions of this Lease.
If Tenant defaults with respect to any provision of this Lease, including, but
not limited to, the provisions relating to the payment of rent, Landlord may
(but shall not be required to) use, apply or retain all or any part of this
security deposit for the payment of rent or any other sum in default, or for the
payment of any amount which Landlord may spend or become obligated to spend by
reason of Tenant's default, or to compensate Landlord for any other loss or
damage which Landlord may suffer by reason of Tenant's default. If any portion
of said deposit is so used or applied, Tenant shall, within five (5) days after
written demand therefor, deposit cash with Landlord in an amount sufficient to
restore the security deposit to its original amount, and Tenant's failure to do
so shall be a material breach of this Lease. Landlord shall not be required to
keep the security deposit separate from its general funds, and Tenant shall not
be entitled to interest on such security deposit. If Tenant elects to extend the
term of this Lease, Tenant shall deposit such sums as are necessary to increase
the security deposit to an amount equal to the monthly Base Rent for the
extended term of this Lease.
(b) If Landlord's interest in this Lease is assigned or
otherwise transferred, Landlord shall transfer said security deposit to
Landlord's assignee or such other successor-in-interest. Upon such transfer,
Landlord shall have no further liability with respect to said security deposit,
and the assignee or such other successor-in-interest shall have liability in
connection therewith.
8. Use of Premises.
(a) Tenant shall use the Premises for general office use and
incidental retail sales (if permitted by zoning laws applicable to the
Premises), and for no other purpose.
<PAGE> 15
(b) Tenant shall not do or permit anything to be done in or
about the Premises nor bring or keep anything therein which will: (i) increase
the existing rate of any fire or other insurance covering the Premises or any
contents therein; or (ii) cause the cancellation of any insurance policy
covering the Premises or any contents therein; or (iii) in any way obstruct or
interfere with the rights of other users of the Common Areas or injure or annoy
them. Tenant shall not use or allow the Premises to be used for any improper,
immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or
permit any nuisance in, on or about the Premises. Tenant shall not commit to
suffer to be committed any waste in, on or about the Premises.
(c) The term "Hazardous Materials" as used in this Lease,
shall include, without limitation, any chemical, substance or material which has
been or is hereafter determined by any federal, state or local governmental
agency to be capable of posing risk of injury to health or safety including,
without limitation, petroleum, asbestos, polychlorinated biphenyls, radioactive
materials and radon gas. Tenant shall not cause or knowingly permit to occur any
act or omission of Tenant, its agents, servants, invitees and contractors which
constitutes (i) any violation of federal, state or local laws now or hereafter
enacted or issued, related to environmental conditions on, under or about the
Premises, or arising from Tenant's leasehold interest in or use or occupancy of
the Premises including, but not limited to, soil and groundwater conditions; or
(ii) the use, generation, release, manufacture, refining, production,
processing, storage or disposal of any Hazardous Materials on, under or about
the Premises or the Common Areas or the transportation to or from the Premises
or the Common Areas of any Hazardous Materials, except de minimis amounts of
Hazardous Materials that are commonly used in office products or are present in
ordinary cleaning supplies. All such office products and cleaning supplies will
be used and stored in a manner that complies with all laws. Tenant shall at its
own expense, make all submissions to, provide all information required by, and
comply with all requirements of all governmental authorities under laws or
ordinances relating to Hazardous Materials. Should any governmental entity
having jurisdiction over the Premises demand that a remediation plan be prepared
or that remediation be undertaken because of any deposit, spill, discharge or
other release of Hazardous Materials that occurs during the Term of this Lease,
at or from the Premises, and which arises at any time from Tenant's use or
occupancy of the Premises, then Tenant shall, at its own expense, prepare and
submit the required plans and carry out all such remediation plans. Tenant shall
indemnify, defend and hold Landlord, its partners, officers, directors,
beneficiaries, shareholders, agents, employees and lenders harmless from all
fines, suits, procedures, claims and actions of every kind, and all costs
associated therewith (including investigation costs and attorneys' and
consultants' fees) arising out of or in any way connected with any deposit,
spill, discharge or other release of Hazardous Materials that occurs during the
Term of this Lease, at or from the Premises and which arises at any time from
Tenant's use or occupancy of the Premises or from Tenant's failure to provide
all information, make all submissions and take all steps required by any
governmental authorities having jurisdiction over the Premises. Tenant's
obligations and the indemnity hereunder shall survive the expiration or earlier
<PAGE> 16
termination of this Lease. Landlord shall indemnify, defend and hold Tenant, its
partners, officers, directors, beneficiaries, shareholders, agents, employees
and lenders harmless from all fines, suits, procedures, claims and actions of
every kind, and all costs associated therewith (including investigation costs
and attorneys' and consultants' fees) arising out of or in any way connected
with any deposit, spill, discharge or other release of Hazardous Materials
caused by Landlord, its agents, servants, invitees and contractors. Landlord's
obligations and the indemnity hereunder shall survive the expiration or earlier
termination of this Lease.
9. Compliance with Law. Tenant shall not use the Premises or permit
anything to be done in, on or about the Premises which will in any way conflict
with any law, statute, ordinance or governmental rule or regulation now in force
or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost
and expense, promptly comply with all laws, statutes, ordinances, and
governmental rules, regulations and requirements now in force or which may
hereafter be enacted or promulgated, except that Tenant shall not be required to
make changes to the Premises not related to or caused by Tenant's improvements
or acts. Tenant shall also comply with the requirements or any board of fire
insurance underwriters or other similar bodies now in force or which may
hereafter be enacted or promulgated relating to or affecting the condition, use
or occupancy of the Premises, excluding structural changes not related to or
affected by Tenant's improvements or acts. The judgement of any court of
competent jurisdiction or the admission of Tenant in any action against Tenant,
whether Landlord shall be a party thereto or not, that Tenant has violated any
law, statute, ordinance or governmental rule, regulation or requirement, shall
be conclusive of that fact as between Landlord and Tenant.
Except as provided in the next succeeding sentence, and subject to the
provisions of clause (iv) of Paragraph 5(d) concerning the authorization of
certain capital costs to be included as Operating Expenses, Landlord shall be
responsible for the cost of retrofitting any part of the Premises in order to
comply with applicable laws and building codes, including Title 24 or The
Americans With Disabilities Act of 1990, 42 U.S.C. section 12101 et. seq. (the
"ADA"), and the regulations promulgated thereunder. Except for the initial
tenant improvements to be constructed by Landlord with respect to which the
provisions of Exhibit "C" shall govern, Tenant shall be responsible for the cost
of complying with applicable laws and building codes, including Title 24 and the
ADA, and the regulations promulgated thereunder, with respect to any alterations
that may be made to or installed in the Premises by or for Tenant or that are
related to, or arise out of, Tenant's use of the Premises.
10. Alterations and Additions.
(a) Tenant shall not make or allow any alterations, additions
or improvements to the Premises without Landlord's prior written consent, which
consent shall not be unreasonably withheld; provided, however, that Landlord may
withhold its
<PAGE> 17
consent to any structural alterations, additions or improvements to the Premises
in its sole and absolute discretion. For purposes of this Lease, the
installation, repair or removal by Tenant of telecommunications lines or the
making by Tenant of connections or disconnections of telecommunications lines in
a common telecommunications closet serving the Premises shall be deemed an
alteration, addition or improvement requiring Landlord's consent hereunder.
Landlord's prior written consent shall also be required for any alteration,
addition or improvement in the Premises that would require an increase or
modification of the Premises's telecommunications system beyond the original
design of the Premises's telecommunications system. Except as provided below,
any such alterations, additions or improvements, including, but not limited to,
wall coverings, paneling and built-in cabinet work, but excepting movable
furniture, vaults, safes and other trade fixtures, cabling and
telecommunications lines installed by or on behalf of Tenant, shall become a
part of the realty, shall belong to Landlord and shall be surrendered with the
Premises at the expiration or earlier termination of this Lease. If Landlord
consents in writing to any such alterations, additions or improvements, such
alterations, additions or improvements shall be made by Tenant at Tenant's sole
cost and expense, and shall comply with all laws, statutes, ordinances and
governmental rules, regulations and requirements. Any contractor or person
selected by Tenant to perform any such work shall first be approved by Landlord
in writing, which approval shall not be unreasonably withheld. Landlord further
reserves the right to have all plans and specifications for such alterations,
additions or improvements prepared or approved by its architect or structural
engineer at Landlord's expense. No such work shall be allowed to commence until
three (3) days have elapsed from the date of Landlord's written consent. Upon
expiration or earlier termination of this Lease, Tenant shall, upon written
demand by Landlord given at least thirty (30) days prior to the expiration or
earlier termination of this Lease, promptly remove any alterations, additions or
improvements made by Tenant and designated by Landlord to be so removed. Tenant
further agrees to remove its vaults, safes, files and other trade fixtures and
telecommunications lines and cabling upon expiration or earlier termination of
this Lease. Any such removal, and the repair of any damage to the Premises
caused by such removal, shall be performed at Tenant's sole cost and expense.
(b) Tenant shall pay to Landlord as additional rent, the cost
of any structural alteration to the Premises and/or, at Landlord's option, shall
promptly make, at Tenant's sole expense and in accordance with the provisions of
subsection (a) above, any structural or nonstructural alterations to the
Premises required to comply with any applicable law, code, rule or regulations,
whether now existing or hereinafter promulgated, where such alterations are
required by reason of (i) the acts or omissions of its employees or agents; (ii)
Tenant's use or change of use to the Premises; (iii) alterations or improvements
to the Premises made by or for Tenant; or (iv) Tenant's application for any
permit or governmental approval.
11. Liens. Tenant shall keep the Premises and the Common Area free and
clear from any and all liens arising out of any work performed, materials
furnished or
<PAGE> 18
obligations incurred by Tenant. Landlord may require Tenant to provide Landlord,
at Tenant's sole cost and expense, a lien and completion bond in an amount equal
to one and one half (1-1/2) times the estimated cost of any improvements,
additions or alterations to be made by Tenant to protect Landlord against
liability for any such work or materials. Landlord shall also have the right to
post and maintain on the Premises such notices of nonresponsibility as may be
required by law to protect Landlord's rights on the Premises and the Common
Areas. Should any claim or lien be filed against or any action be commenced
affecting the Premises or Common Areas, or any part thereof, and/or Tenant's
interest therein, arising out of the work performed, materials furnished or
obligations incurred by Tenant, Tenant shall give Landlord notice of such lien
or action within three (3) days after Tenant receives notice of the filing of
the lien or the commencement of the action. Immediately upon Tenant's receipt of
notice of such lien or action, Tenant shall cause such lien to be released of
record by payment of the lien or posting of a proper bond. If Tenant does not,
within twenty (20) days following the imposition of any such lien, cause such
lien to be released of record, Landlord shall have, in addition to all other
remedies provided herein and by law, the right, but not the obligation, to cause
the same to be released by such means as Landlord shall deem proper, including
payment of any claim giving rise to such lien or posting of a proper bond. All
sums payable by Landlord pursuant to this Paragraph 11 and all expenses incurred
by or in connection therewith, including attorneys' fees and costs of suit,
shall be payable to Landlord by Tenant as additional rent within ten (10) days
after receipt of Landlord's invoice therefor.
12. Repairs.
(a) By taking possession of the Premises, Tenant shall be
deemed to have accepted the Premises as being in good sanitary order, condition
and repair, except for (i) patent defects of which Tenant notifies Landlord
within thirty (30) days thereafter and (ii) latent defects. Except as may be
otherwise specified herein, Landlord makes no representation or warranty about
the suitability of the Premises for Tenant's use or the condition of the
Premises or the building systems including, without limitation, the condition,
installation or ownership of any intrabuilding network cabling.
(b) Tenant shall, at Tenant's sole cost and expense, keep the
Premises and every part thereof in good condition and repair and, upon the
expiration or earlier termination of this Lease, surrender the Premises to
Landlord in good condition and repair, ordinary wear and tear excepted. Tenant's
obligations hereunder shall include maintenance and repair of all
telecommunications wiring and cabling in the Premises.
(c) Notwithstanding the provisions of Paragraph 12(a) above,
Landlord shall repair and maintain the structural portions of the Premises,
including, but not limited to, the plumbing, electrical and heating, ventilating
and air conditioning systems installed or furnished by Landlord (but excluding
exposed plumbing and related fixtures located in the Premises which shall be
maintained by Tenant) in accordance with
<PAGE> 19
applicable laws, statutes, ordinances, rules and regulations or governmental
agencies having jurisdiction over Landlord. Landlord also shall maintain the
Common Areas outside the Building. Tenant, as an Operating Expense under
Paragraph 5(c) (subject to the exclusions set forth therein), shall pay its pro
rata share of all costs incurred by Landlord in repairing and maintaining the
structural portions of the Premises and such systems described above and the
Common Areas outside the Building, unless such maintenance and repairs are
caused in whole or in part by the act, neglect, fault or omission of any duty by
Tenant, its agents, employees, contractors, subcontractors or invitees, in which
case Tenant shall reimburse Landlord for all costs incurred by Landlord in
performing such maintenance and repairs.
Except as provided in Paragraph 20 hereof, there shall be no abatement
of rent and no liability of Landlord by reason of any injury to or interference
with Tenant's business arising from the making of any necessary repairs,
alterations or improvements to any portion of the Premises or Common Areas, or
to any fixtures, appurtenances and equipment located in, on or about the
Premises or Common Areas, provided that Landlord in making such repairs shall do
so in a manner so as to minimize such interference. Tenant waives the right to
make repairs at Landlord's expense under any law, statute or ordinance now or
hereafter in effect.
13. Assignment and Subletting.
(a) Tenant shall not, voluntarily or by operation of law,
assign or transfer all or any portion of Tenant's interest under this Lease or
in the Premises, sublease all or any portion of the Premises, or allow any other
person or entity (except Tenant's employees, agents and invitees) to occupy or
use all or any portion of the Premises, without the prior written consent of
Landlord. Landlord's consent shall not be unreasonably withheld subject to the
terms of this Paragraph 13. Without limiting Landlord's right to withhold such
written consent under this Paragraph 13, Landlord's refusal to provide such
written consent shall be deemed reasonable if:
(i) The character, reputation and financial
responsibility of the proposed assignee, transferee or subtenant is not
satisfactory to Landlord or, in any event, is not at least equal to the
character, reputation and financial responsibility possessed by Tenant or
represented to Landlord to be possessed by Tenant as of the date of the
execution of this Lease and/or the date of the requested consent; or
(ii) The proposed assignee, transferee or subtenant
fails to agree in writing to assume and be bound by all of the terms and
provisions of this Lease.
(b) To the extent that the aggregate amount of any rental or
other payments to be made by the proposed assignee, transferee or sublessee to
Tenant exceeds the sum of (i) the aggregate amount of the monthly Base Rent
payable by Tenant to Landlord during the term of such sublease, transfer or
assignment or the
<PAGE> 20
remaining Term of the Lease, whichever expires earlier, (ii) the amount of any
commissions payable in connection with such sublease, transfer or assignment,
and (iii) the cost of any alterations or improvements reasonably requested to be
installed in connection with such sublease, transfer or assignment, such excess
amount shall be amortized ratably over the term of such sublease, transfer or
assignment or the remaining Term of the Lease, whichever expires earlier, and
fifty percent (50%) of such amortized portion of such excess amount shall be
paid by Tenant to Landlord on the first day of each month during the applicable
term.
(c) If Tenant is a corporation or at any time becomes a
corporation which, under the then current laws of the State of California, is
not deemed a public corporation, or is an unincorporated association or
partnership, the transfer or assignment, directly or indirectly, of any stock or
interest in such corporation, association or partnership during the Term of this
Lease which, in the aggregate, exceeds forty-nine percent (49%) of the total
shares and/or interest of such corporation, association or partnership and is
accompanied by a material change in senior management shall be deemed an
assignment within the meaning and provisions of this Paragraph 13.
(d) In the event Tenant proposes to transfer, assign, or
sublet the Premises or Tenant's interest under this Lease, enter into any
license or concession agreement or effect any change of ownership in the
Premises, Tenant shall, within thirty (30) days prior to the proposed
transaction, supply to Landlord the following in writing:
(i) The name and address of the proposed assignee,
transferee or subtenant.
(ii) All details as to the proposed assignment,
subletting or transfer, including, without limitation, all of the terms and
conditions thereof and all sums or consideration to be paid in connection
therewith.
(iii) A financial statement certified by an officer,
partner or principal of the proposed assignee, transferee or subtenant, dated
within thirty (30) days of the date of notification of the proposed transfer,
assignment, sublease.
(iv) Within ten (10) days prior to any transfer,
assignment or sublease, true, correct and complete copies of all agreements,
assignments, subleases and documents pertaining thereto.
Anything contained in this Paragraph 13 to the contrary
notwithstanding, no transfer, assignment or subletting of the Premises or
Tenant's interest under this Lease shall be effective unless all of the above
provisions are complied with within the time limits provided herein.
<PAGE> 21
(e) Any additional documentation reasonably required by
Landlord shall be prepared and executed by Tenant and its assignee, subtenant or
transferee and delivered to Landlord prior to, and as a condition to the
effectiveness of, any such assignment, sublease or transfer. Tenant shall pay to
Landlord upon demand all reasonable costs and expenses (including reasonable
attorneys' fees) incurred by Landlord in connection with Landlord's analysis and
processing of, and review, preparation and negotiation of all documentation
related to, any proposed assignment, sublease or transfer, whether or not
Landlord consents thereto.
(f) Notwithstanding anything contained herein to the contrary,
no sublease, transfer or assignment by Tenant of the Premises or Tenant's
interest under this Lease shall release Tenant or any guarantor from any
liability under this Lease, regardless of whether or not Landlord's consent is
required herein, nor shall Landlord's failure to give Tenant or any such
guarantor notice of Tenant's default under any of the terms or conditions of
this Lease release Tenant or such guarantor from any liability hereunder. A
consent to any assignment, subletting, occupation or use shall not be deemed a
consent to any subsequent assignment, subletting, occupation or use. Any
purported assignment, subletting or permission to occupy or use the Premises
without the prior written consent of Landlord shall be void and shall, at the
option of Landlord, constitute a default by Tenant under this Lease.
14. Indemnity.
(a) Tenant shall indemnify, defend and hold Landlord, its
partners, officers, directors, employees and agents and Landlord's property
harmless from and against any and all liability, claims, loss, damages and
expenses, including attorney's fees and costs of suit, arising by reason of
death or injury to any person, including Tenant or any person who is an
employee, agent, contractor, subcontractor or invitee of Tenant, or by reason of
any damage to or destruction of any property, including property owned by Tenant
or any person who is an employee, agent, contractor, subcontractor or invitee of
Tenant, arising out of any occurrence in, on or about the Premises or Common
Areas, or any part thereof, if and to the extent: (i) caused or contributed to
by Tenant or its employees, agents, contractors, subcontractors or invitees;
(ii) resulting from a breach or default by Tenant under this Lease; (iii)
arising out of any occurrence in, on or about the Premises on account of the
use, condition, occupational safety or occupancy of the Premises; (iv) arising
out of any alterations, additions or improvements undertaken by Tenant or any
work or services performed for or materials used by or furnished to Tenant or
its employees, agents, contractors, subcontractors or invitees with respect to
the Premises (including the removal of any mechanics' liens); (v) arising out of
the transportation, handling, use, generation, storage, disposal or release of
any Hazardous Materials in, on or about any portion of the Premises or Common
Areas by Tenant or its employees, agents, contractors, subcontractors or
invitees; or (vi) resulting from Tenant's delay or failure to surrender the
Premises in accordance with Paragraph 27 below.
<PAGE> 22
Tenant's obligations under this subparagraph (a) shall survive the expiration or
earlier termination of this Lease.
Landlord shall indemnify, defend and hold Tenant, its partners,
officers, directors, employees and agents and Tenant's property harmless from
and against any and all liability, claims, loss, damages and expenses, including
attorneys' fees and costs of suit, arising by reason of death or injury to any
person, including Landlord or any person who is an employee, agent, contractor,
subcontractor or invitee of Landlord, or by reason of any damage to or
destruction of any property, including property owned by Landlord or any person
who is an employee, agent, contractor, subcontractor or invitee of Landlord,
arising out of any occurrence in, on or about the Premises or Common Areas, or
any part thereof, if and to the extent: (i) caused or contributed to by Landlord
or its employees, agents, contractors, subcontractors or invitees; (ii)
resulting from a breach or default by Landlord under this Lease; (iii) arising
out of any alterations, additions or improvements undertaken by Landlord or any
work or services performed for Landlord or its employees, agents, contractors,
subcontractors or invitees with respect to the Premises; or (iv) arising out of
the transportation, handling, use, generation, storage, disposal or release of
any Hazardous Materials in, on or about any portion of the Premises or Common
Areas by Landlord or its employees, agents, contractors, subcontractors or
invitees; provided, however, that Landlord's liability hereunder shall not
include or extend to any loss of profits or loss of business by Tenant.
Landlord's obligations under this subparagraph (a) shall survive the expiration
or earlier termination of this Lease.
(b) Tenant hereby assumes all risk of damage to property and
death or injury to persons in, on or about the Premises from any cause other
than Landlord's negligence or misconduct, and Tenant hereby waives all claims in
respect to such death, injury or damage against Landlord. Landlord and its
agents shall not be liable for any damage to property entrusted to employees of
Landlord or its agents, any loss or damage to any property by theft or
otherwise, or any injury or damage to persons or property resulting from any
cause whatsoever, unless caused by or due to the negligence of Landlord, its
agents or employees.
(c) If any action or proceeding is brought by reason of any
claim which is subject to a party's indemnity obligation under this Paragraph 14
and in which the other party is named a party, such party shall defend the other
party therein at the indemnifying party's expense by counsel reasonably
satisfactory to the indemnified party.
(d) Landlord and its agents and employees shall not be liable
for interference with light or other incorporeal hereditaments or loss of
business by Tenant. Tenant shall give prompt notice to Landlord in case of fire
or accidents in the Premises or the Common Areas or of alleged defects in the
Premises or any fixtures or equipment located therein.
<PAGE> 23
15. Insurance.
(a) Tenant shall, at Tenant's sole cost and expense, obtain
and keep in force, during the entire Term of this Lease, the following insurance
policies:
(i) Commercial general public liability insurance
insuring Landlord and Tenant against claims for personal injury, death and
property damage occurring in, on or about the Premises and all areas appurtenant
thereto. Such insurance shall include contractual indemnity coverage for
Tenant's indemnity obligation under Paragraph 14 and contain a cross-liability
(severability of interests) clause and an extended (broad form) liability
endorsement, including blanket coverage. The minimum acceptable amount of
comprehensive liability insurance is $2,000,000 against claims in any
occurrence, and property damage insurance in an amount of not less than
$1,000,000 per occurrence, with a combined single limit of $3,000,000. The limit
of said insurance shall not, however, limit the liability of Tenant hereunder.
(ii) Business interruption insurance, insuring Tenant
for a period of twelve (12) months against losses arising from interruption of
Tenant's business (including interruption in Tenant's telecommunication
services) and for lost profits, and charges and expenses which continue but
would have been earned if the business had gone on without interruption,
insuring against such perils, in such form and with such deductible amounts as
are reasonably satisfactory to Landlord.
(iii) All of said policies shall name Landlord, and if
requested by Landlord, any lender holding an encumbrance on the Premises as an
additional insured. If Tenant fails to maintain and procure said insurance,
Landlord may, but shall not be required to procure and maintain the same at the
expense of Tenant. Insurance required hereunder shall be with insurance
companies rated A-Class X or better in "Best's Insurance Guide." Tenant may
carry any of said policies under a blanket policy. Tenant shall deliver to
Landlord prior to Tenant's occupancy of the Premises copies of policies of the
insurance required herein or certificates evidencing the existence and amount of
such insurance, including, for Tenant's liability insurance, loss payable
clauses satisfactory to Landlord. Tenant shall also during the Lease Term, at
Tenant's sole cost and expense, procure and keep in force such other insurance
as required by law, including, without limitation, workers' compensation
insurance. No policy shall be cancelable or subject to reduction of coverage
except after thirty (30) days prior written notice to Landlord. The above stated
minimum levels of coverage are subject to amendment by Landlord upon ninety (90)
days written notice should economic or other conditions, in the reasonable
judgment of Landlord, warrant adjustment thereof.
(b) Landlord shall carry and maintain, during the entire Term
of this Lease, fire and all risk insurance insuring the Premises for their full
replacement cost. Said insurance policy or policies shall cover at least the
following risks: fire, smoke damage, windstorm, hail, explosion, riot, riot
attending a strike, civil commotion,
<PAGE> 24
malicious mischief, vandalism, aircraft and sprinkler leakage, and, at
Landlord's option, earthquake and flood, provided such insurance is available at
commercially reasonable rates and is generally carried by owners of comparable
properties in the area. Additionally, such policy or policies shall have a loss
of rents endorsement. Landlord shall also carry a general liability policy with
limits as Landlord deems reasonable. The premiums for such policy or policies
shall be included in Operating Expenses. Any loss payable under such property
damage insurance shall be payable to Landlord and any lender holding an
encumbrance on the Premises. The proceeds from any such policy or policies for
damages to the Premises shall be used for the repair of the Premises, except as
otherwise set forth in Paragraph 20.
(c) Notwithstanding the provisions of Paragraph 14, Landlord
hereby releases Tenant, and Tenant hereby releases Landlord, and their
respective partners, officers, directors, shareholders, employees and agents,
from any and all claims or demands of damages, losses, expenses or injury to the
Premises or the Common Areas, or to the furnishings, fixtures, equipment,
inventory or other property of either Landlord or Tenant in, on or about the
Premises or the Common Areas, which is caused by or results from insured perils,
events or happenings to the extent covered by the insurance required to be
carried by the respective parties pursuant to this Paragraph 15 and in force at
the time of any such loss, whether due to the negligence of the other party or
its partners, officers, directors, shareholders, employees and agents, and
regardless of cause or origin; provided, however, that such waiver shall be
effective only to the extent permitted by the collectible insurance covering
such loss and to the extent such insurance policies and coverage are not
prejudiced thereby. Each party shall use reasonable efforts to cause each
insurance policy obtained by it to provide that the insurer waives all right of
recovery by way of subrogation against the other party (and such other party's
partners, officers, directors, shareholders, employees and agents, if
applicable) in connection with any injury or damage covered by such policy.
(d) Tenant acknowledges and agrees that the casualty insurance
coverage carried by Landlord will not cover Alterations in the Premises
installed by Tenant at Tenant's expense or Tenant's personal property, equipment
or fixtures located within the Premises. Tenant may, in its own discretion,
maintain casualty insurance on its personal property, equipment and fixtures at
its own cost and expense.
16. Services and Utilities.
(a) Landlord shall cause to be furnished to the Premises
during the term of this Lease, water and sanitary sewer services required for
general office use. The cost of furnishing such water and sanitary sewer
services shall be an Operating Expense as defined in Paragraph 5(d) above.
Tenant acknowledges and agrees that Landlord shall not be liable to Tenant and
Tenant hereby releases Landlord from any and all claims, liabilities, damages,
losses, actions, costs and expenses as a result of or related to any
interruption of water and/or sanitary sewer services for reasons beyond
<PAGE> 25
the control of Landlord; provided, however, in no event shall Landlord be liable
to Tenant for lost profits or loss of business. The actions of any water or
sanitary sewer company or public utility or governmental agency providing water
or sanitary sewer services shall not be imputed to Landlord. Landlord shall
provide Tenant with a connection for Tenant's telecommunications wiring and
cabling ("Interior Wire") to the point of connection with the local regulated
public utility. Such connection shall be from the telecommunications line closet
serving the Premises to the demarcation points supplied by the local regulated
public utility. Tenant understands and acknowledges that the telecommunications
capacity supplied to the Premises shall not exceed the capacity for which the
Premises was designed. If Tenant requires any extraordinary telecommunication
services that require any increase in the capacity of the Premises'
telecommunications system and/or intrabuilding network cabling, then Tenant
shall pay, as additional rent, the cost of any alterations, modifications or
improvements required to be made to the Premises's telecommunications system
and/or intrabuilding network cabling to provide such extraordinary service. All
connection, disconnection, removal, repair and installation of
telecommunications lines and cabling shall be performed by a qualified
contractor approved by Landlord in advance. Landlord shall not be liable for,
and Tenant shall not be entitled to, any reduction of rental nor shall a
constructive eviction be deemed to have occurred by reason of Landlord's failure
to furnish any of the foregoing utilities and services when such failure is
caused by accident, breakage, repairs, strikes, lockout or labor disturbances or
disputes of any character, or by any other cause, similar or dissimilar, beyond
the reasonable control of Landlord. Landlord shall be liable for any loss of or
injury to property, however occurring, in connection with the furnishing or
failure to furnish any of the foregoing utilities and services for reasons
beyond Landlord's control. In no event shall Landlord be liable for, and Tenant
hereby releases Landlord from any and all claims for loss, damage, cost or
expense incurred by Tenant as a result of the interruption of any water,
sanitary sewer or telecommunications services. If heat generating machines or
equipment used in the Premises affect the temperature otherwise maintained by
the air conditioning units in the Premises and/or the cost of providing air
conditioning services to the Premises, including the cost of installation, the
costs resulting therefrom shall be paid by Tenant to Landlord upon demand by
Landlord.
(b) Tenant shall not pay during the Lease Term, and prior to
delinquency, all charges for janitorial service, electricity, light, power,
telephone and other communication service supplied to or consumed on the
Premises (collectively "Utilities") and all taxes, levies and surcharges
therefor. Tenant shall arrange for janitorial services and electricity to be
supplied to the Premises and Tenant shall contract in its own name for the
aforementioned Utilities. The Commencement Date shall not be delayed by reason
of any failure by Tenant to contract for such Utilities in its own name.
Landlord agrees that prior to the Commencement Date, Landlord shall, at its sole
cost, cause electricity to be separately metered on the first and second floors
of the Premises.
<PAGE> 26
(c) Tenant shall not, without the written consent of Landlord,
use any apparatus, machine, system or device in the Premises which will
overburden or exceed the capacity of the electrical system in the Premises.
Tenant shall not connect with electric current, except through approved
electrical outlets in the Premises or such additional electrical outlets as may
be installed by a licensed electrical contractor in conformance with applicable
building codes. If Tenant requires water in excess of that usually furnished or
supplied for the use of the Premises as general office space, Tenant shall first
procure the written consent of Landlord (which Landlord may withhold in its sole
and absolute discretion), and Landlord may cause a separate water meter to be
installed in the Premises to measure the amount of water consumed for any such
use. The cost of installation, maintenance and repair of any such meter shall be
paid by Tenant. Tenant agrees to pay to Landlord promptly upon demand for all
such excess water consumed as shown by said meter, at the rate charged for such
service by the local public utility furnishing the same, plus any additional
expenses incurred in keeping account of the water so consumed. If a separate
meter is not so installed, such excess cost for such water shall be established
and adjusted from time to time by an estimate made by a utility company or
electrical engineer.
(d) Landlord shall be entitled to cooperate voluntarily and in
a reasonable manner with the efforts of federal, state or local government
agencies or utility suppliers for reducing energy or other resource consumption.
The lack or shortage of any service or utility shall not affect Tenant's
obligations hereunder, and Tenant shall faithfully keep and observe all of the
terms, conditions and covenants of this Lease and pay all rentals due hereunder
without abatement, setoff, diminution, credit or deduction.
17. Property Taxes. Tenant shall pay before delinquency all taxes
levied or assessed against Tenant's leasehold improvements, equipment,
furniture, fixtures and personal property located in the Premises. If any of
Tenant's leasehold improvements, equipment, furniture, fixtures and personal
property are assessed and taxed with the Premises, Tenant shall pay to Landlord
its share of such taxes within ten (10) days after delivery by Landlord to
Tenant of a statement in writing setting forth the amount of taxes applicable to
Tenant's property.
18. Rules and Regulations. [intentionally omitted]
19. Entry by Landlord.
(a) Landlord reserves the right to enter the Premises at any
reasonable time to inspect the Premises, to provide any services which Landlord
is obligated to provide to Tenant hereunder, to submit the Premises to
prospective purchasers, lenders, or tenants, to post notices of
non-responsibility, and to alter, improve, maintain or repair the Premises, all
without abatement of rent. Except in cases of emergencies and for purposes of
posting notices of nonresponsibility, Landlord shall provide Tenant with
reasonable prior telephone notice of each such entry prior to entering the
Premises.
<PAGE> 27
Landlord may erect scaffolding and other necessary structures where reasonably
required by the character of the work to be performed, but shall not block the
entrance to the Premises nor unreasonably interfere with Tenant's business,
except as reasonably required for the particular activities of Landlord.
Landlord shall not be liable in any manner for any inconvenience, disturbance,
loss of business, nuisance, interference with quiet enjoyment, or other damage
arising out of Landlord's entry on the Premises as provided in this paragraph,
except damage, if any, resulting from the negligence of Landlord or its
authorized representatives, provided that Landlord in any such entry shall
minimize interference with Tenant's business.
(b) Landlord shall retain a key with which to unlock all doors
into, within and about the Premises, excluding Tenant's vaults, safes and files.
In an emergency, Landlord shall have the right to use any means which Landlord
deems reasonably necessary to obtain entry to the Premises without liability to
Tenant, except for any failure to exercise due care regarding Tenant's property.
Any such entry to the Premises by Landlord shall not be construed or deemed to
be a forcible or unlawful entry or detainer of the Premises, or an eviction of
Tenant from all or any portion of the Premises.
20. Destruction/Reconstruction.
(a) If the Premises are damaged or destroyed by any casualty
covered by the casualty insurance carried by Landlord pursuant to Paragraph
15(b) above, the cost of restoration will not exceed twenty-five percent (25%)
of the full insurable value of the Premises, and the net insurance proceeds paid
or made available to Landlord for restoration or rebuilding of the Premises are
sufficient to restore the affected portion of the Premises under then-existing
building codes to the condition existing immediately prior to such damage or
destruction, then Landlord shall promptly and diligently proceed to repair and
restore the same to substantially the same condition existing immediately prior
to such damage or destruction; provided, however, and subject to Paragraph
15(c), that should such damage or destruction be caused by the act, negligence
or fault or omission of any duty by Tenant, its agents, employees, contractors,
subcontractors, or invitees, Tenant (and not Landlord) shall be so obligated to
repair and restore the Premises.
If the Premises are damaged or destroyed by any casualty where the cost
of restoration is equal to or greater than twenty-five percent (25%) of the full
insurable value of the Premises, or where the casualty is not required to be
insured against by Landlord, or where the casualty is actually insured against
by Landlord but the insurance proceeds paid or made available to Landlord plus
applicable deductibles are insufficient to restore the affected portion of the
Premises under then-existing building codes to the condition existing
immediately prior to such damage or destruction, then Landlord may (but shall
not be obligated to) repair and restore such damage or destruction to the
Premises. Landlord shall make such election within sixty (60) days after the
event
<PAGE> 28
causing such damage or destruction by providing Tenant with written notice
thereof. If Landlord elects not to repair or restore the Premises as provided in
this paragraph, then this Lease shall terminate upon the date of Landlord's
election not to repair or restore the same.
If the damage or destruction was caused by the negligent act or
omission of any duty by Tenant, its agents, employees, contractors,
subcontractors or invitees, then, notwithstanding any provision to the contrary
in this Paragraph 20, and subject to Paragraph 15(c), Tenant shall be liable to
Landlord therefor. If Landlord elects not to repair or restore the Premises,
Tenant shall comply with each of the following conditions: (i) Tenant shall pay
to Landlord all rentals prorated to the date of termination, provided that
monthly Base Rent shall, following such damage or destruction, be
proportionately reduced (to the extent of rental loss insurance proceeds paid to
Landlord) based upon the extent to which such damage or destruction interferes
with Tenant's business conducted on the Premises, as reasonably determined by
Landlord; (ii) the insurance proceeds paid by Landlord's insurer for loss or
damage to the Premises shall be disbursed to Landlord, including, without
limitation, any proceeds available from insurance carried by Tenant which covers
loss to fixtures or any other property which is the property of Landlord or
which would become the property of Landlord upon termination of this Lease, and
any other insurance carried by Tenant pursuant to Paragraph 15(a) above; and
(iii) Tenant shall deliver possession of the Premises to Landlord and quitclaim
to Landlord all right, title and interest of Tenant in and to the Premises, upon
the date of Landlord's election not to repair or restore the affected portion of
the Premises.
(b) Notwithstanding anything to the contrary contained in this
Paragraph 20, if the Premises are damaged or destroyed in whole or in part
during the last twelve (12) months of the Term of this Lease, Landlord may
terminate this Lease as of the date of the event of such damage or destruction
by giving written notice to Tenant, within thirty (30) days after the event of
such damage or destruction, of Landlord's election to so terminate this Lease.
(c) If Landlord is required or elects to repair the damage or
destruction to the Premises pursuant to Paragraph 20(a) above, then (i) this
Lease shall remain in full force and effect; (ii) monthly Base Rent shall be
proportionately reduced (to the extent of rental loss insurance proceeds paid to
Landlord) during the period of repair based upon the extent to which the making
of repairs interferes with Tenant's business conducted on the Premises, as
reasonably determined by Landlord; and (iii) the applicable deductibles shall be
included in Operating Expenses, which deductibles shall be reasonable in amount.
Landlord shall not have any liability for, nor be required to, repair or replace
any Alterations installed in the Premises at Tenant's expense or any personal
property, equipment and fixtures of Tenant or any other items required to be
insured by Tenant pursuant to Paragraph 15(a) above, and Tenant shall be
obligated to
<PAGE> 29
promptly rebuild or restore the same to the condition existing immediately prior
to such damage or destruction in accordance with the provisions of Paragraph 10
above.
Tenant shall have no claim against Landlord for any damage suffered by
reason of any such damage, destruction, repair or restoration, nor shall Tenant
have any right to terminate this Lease as a result thereof, provided that if
such damage or destruction materially interferes with Tenant's use of the
Premises, Tenant may terminate this Lease if the Premises cannot reasonably be
or in fact are not restored within one hundred twenty (120) days following the
casualty.
Tenant waives any right to terminate this Lease upon any such damage or
destruction, including, without limitation, any rights under section 1932 and
subdivision 4 of section 1933 of the Civil Code of California, as amended from
time to time, or under the provisions of any similar laws hereinafter enacted.
21. Default. The occurrence of any of the following events shall
constitute a default by Tenant under this Lease:
(a) The abandonment of the Premises by Tenant.
(b) The failure by Tenant to make any payment of rent or any
other payment required of Tenant hereunder as and when due, where such failure
continues for a period of three (3) days after written notice thereof by
Landlord to Tenant.
(c) The failure by Tenant to observe or perform any of the
covenants, conditions or provision of this Lease, where such failure continues
for a period of thirty (30) days after written notice thereof by Landlord to
Tenant; provided, however, that if Tenant's default is such that more than
thirty (30) days are reasonably required for its cure, then Tenant shall not be
deemed to be in default if Tenant commences such cure within said thirty (30)
day period and, thereafter, diligently pursues the same to completion.
(d) The making by Tenant of any general assignment or general
arrangement for the benefit of creditors, the filing by or against Tenant of a
petition to have Tenant adjudged bankrupt, or the reorganization or arrangement
under any law relating to bankruptcy (unless, in the case of a petition filed
against Tenant, the same is dismissed within sixty (60) days; the appointment of
a trustee or a receiver to take possession of substantially all of Tenant's
assets located in the Premises or Tenant's interest in this Lease, where
possession is not restored to Tenant within thirty (30) days; or the attachment,
execution or other judicial seizure of substantially all of Tenant's assets
located in the Premises or Tenant's interest in this Lease, where such seizure
is not discharged within thirty (30) days.
<PAGE> 30
22. Remedies. Landlord shall have the following remedies if Tenant is
in default under this Lease. These remedies are not exclusive; they are
cumulative and in addition to any remedies now or later allowed by law:
(a) Upon the default by Tenant under this Lease, Landlord
shall have the remedies described in California Civil Code section 1951.4 (i.e.,
Landlord may continue the Lease in effect after Tenant's breach and abandonment
and recover rent as it becomes due if Tenant has the right to sublet or assign,
subject to reasonable limitations). Neither any efforts by Landlord to mitigate
damages caused by a default by Tenant under this Lease nor the acceptance of any
rent shall constitute a waiver by Landlord of any of Landlord's rights or
remedies, including, without limitation, the rights or remedies specified in
this Paragraph 22(b) below. Upon any default by Tenant under this Lease,
Landlord may enter the Premises and relet them, or any part of them, to third
parties for Tenant's account. In addition to rent otherwise due and payable
hereunder, Tenant shall be liable to Landlord for all costs which Landlord
incurs in reletting the Premises, including, without limitation, costs incurred
to remodel the Premises if reasonably required for such reletting. Any such
reletting may be for a period shorter or longer than the remaining Term of the
Lease. No act by Landlord allowed by this Paragraph 22(a) shall terminate this
Lease unless Landlord notifies Tenant in writing that Landlord elects to
terminate Tenant's right to possession of the Premises. If Tenant obtains
Landlord's consent, Tenant shall have the right to assign or sublet its interest
in this Lease, but Tenant shall not be released from liability under this Lease.
Landlord's consent to a proposed assignment or subletting shall not be
unreasonably withheld.
(b) Upon any default by Tenant under this Lease, Landlord may
terminate Tenant's right to possession of the Premises. No act by Landlord other
than giving written notice to Tenant shall terminate this Lease, including acts
of maintenance, efforts to relet the Premises, or the appointment of a receiver.
Upon such termination, Landlord shall have the right to recover from Tenant:
(i) The worth at the time of the award computed by
allowing interest from the termination date of the Lease through the date of
award of the unpaid rent which had been earned at the time of said termination
date; plus
(ii) The worth at the time of the award computed by
allowing interest from the termination date of the Lease through the date of
award of the amount by which the unpaid rent which would have been earned after
the said termination date until the time of the award exceeds the amount of such
rental loss that Tenant proves could have been reasonably avoided; plus
(iii) The worth at the time of the award of the amount
by which the unpaid rents for the balance of the term of the Lease after the
time of award
<PAGE> 31
exceeds the amount of such rental loss that Tenant proves could be reasonably
avoided; and
(iv) Any other amounts necessary to compensate Landlord
for detriment proximately caused by the default by Tenant or which, in the
ordinary course of events, would likely result therefrom, without limitation (A)
expenses in retaking possession of the Premises, (B) expenses for cleaning and
making repairs and alterations (including installation of leasehold
improvements, whether or not the same shall be funded by a reduction of rent,
direct payment or otherwise) necessary to return the Premises to good condition
and preparing the Premises for reletting, (C) expenses for removing,
transporting or storing any of Tenant's personal property left at the Premises
(although Landlord shall have no obligation to remove, transport or store any
such personal property), (D) expenses of reletting the Premises, including
without limitation, brokerage commissions, advertising costs and attorneys'
fees, (E) attorneys' fees and court costs, (F) any unamortized real estate
brokerage commissions paid in connection with this Lease, and (G) any cost of
carrying the Premises, such as repairs, maintenance, taxes and insurance
premiums, and utilities.
"The worth at the time of the award" of the amounts referred to in (i)
and (ii) of this Paragraph 22(b) shall be computed by allowing interest at the
maximum rate allowed by law. "The worth at the time of the award" of the amount
referred to in (iii) of this Paragraph 22(b) shall be computed by discounting
such amount at the discount rate of the Federal Reserve Bank of San Francisco at
the time of the award, plus one percent (1%).
23. Eminent Domain. If more than twenty-five percent (25%) of the
Premises is taken or appropriated by any public or quasi-public authority under
powers of eminent domain, or if less than twenty-five percent (25%) of the
Premises is taken or appropriated and the Premises or Common Areas remaining are
inadequate for the continued operation of Tenant's business therein as
reasonably determined by Tenant, either party hereto shall have the right, at
its option, to terminate this Lease. If less than twenty-five percent (25%) of
the Premises is taken (or if neither party elects to terminate this Lease in the
event more than twenty-five percent (25%) of the Premises is taken), this Lease
and Tenant's obligation to pay rent as provided herein shall continue in full
force and effect; provided, however, that such rental shall be equitably reduced
by Landlord. Whether or not this Lease is terminated by reason of any such
taking or appropriation, Landlord shall be entitled to the entire award and
compensation for the taking which is paid or made by the public or quasi-public
agency, and Tenant shall have no claim against said award, except for amounts
paid directly to Tenant for its moving expenses, interruption to its business,
damage to its personal property or trade fixtures, or goodwill. A voluntary sale
by Landlord to any public body or agency having the power of eminent domain,
either under threat of condemnation or while the condemnation proceedings are
pending, shall be deemed to be a taking under the power of eminent domain for
the purposes of this paragraph.
<PAGE> 32
24. Estoppel Certificate. Tenant shall, at any time and from time to
time, upon not less than ten (10) days prior written notice from Landlord,
execute, acknowledge and deliver to Landlord a statement in writing, (a)
certifying that this Lease is unmodified and in full force and effect (or, if
modified, stating the nature of such modifications and certifying that this
Lease, as so modified, is in full force and effect), the amount of any security
deposit and the date to which any rentals or other charges are paid in advance,
if any, (b) acknowledging that there are not, any unsecured defaults under the
Lease, or specifying such defaults, if any, which are claimed, and (c)
certifying to such other facts as Landlord may reasonably request. Any such
statement may be relied upon by any prospective purchaser or encumbrancer of the
Premises, any purchasers of Tenant's business or any successor-in-interest of
Tenant. Tenant's failure to execute and deliver any estopped certificate
requested by Landlord within said ten (10) day period shall be conclusive
evidence upon Tenant that (i) this Lease is in full force and effect without
modification except as may be represented by Landlord and has not been assigned,
(ii) there are no uncured defaults in Landlord's performance, (iii) no rentals
have been paid in advance except those set forth in the Lease.
Landlord shall, at any time and from time to time, upon not less than
ten (10) days prior written notice from Tenant, execute, acknowledge and deliver
to Tenant a statement in writing, (a) certifying that this Lease is unmodified
and in full force and effect (or, if modified, stating the nature of such
modifications and certifying that this Lease, as so modified, is in full force
and effect), the amount of any security deposit and the date to which any
rentals or other charges are paid in advance, if any, (b) acknowledging that
there are not, any unsecured defaults under the Lease, or specifying such
defaults, if any, which are claimed, and (c) certifying to such other facts as
Tenant may reasonably request. Any such statement may be relied upon by any
prospective purchasers of Tenant's business or any successor-in-interest of
Tenant. Landlord's failure to execute and deliver any estopped certificate
requested by Tenant within said ten (10) day period shall be conclusive evidence
upon Landlord that (i) this Lease is in full force and effect without
modification except as may be represented by Tenant and has not been assigned,
(ii) there are no uncured defaults in Tenant's performance, (iii) no rentals
have been paid in advance except those set forth in the Lease.
25. Subordination. Tenant agrees that, upon the request of Landlord and
any present or future holder of any mortgage, deed of trust or other encumbrance
affecting the Premises, Tenant shall subordinate this Lease and its rights
hereunder to the lien of any mortgage, deed of trust or other encumbrance,
together with any consolidations, renewals, extensions or replacements thereof,
now or hereafter placed, charged or enforced against Landlord's interest in the
Premises, this Lease or the leasehold estate hereby created. Tenant shall
execute, acknowledge and deliver to Landlord, upon written request by Landlord,
such documents as may be required to effectuate such subordination.
<PAGE> 33
In the event that any proceedings are brought for foreclosure, or in
the event of the exercise of the power of sale, under any mortgage, deed of
trust or other encumbrance covering the Premises, Tenant shall attorn to the
purchaser or transferee upon any such foreclosure or sale and recognize such
purchaser or transferee as the landlord under this Lease. In the event that any
mortgagee, beneficiary or encumbrancer requires Landlord to obtain from Tenant a
separate attornment agreement in favor of such mortgagee, beneficiary or
encumbrancer, Tenant shall, upon written request by Landlord, execute and
deliver to Landlord an attornment agreement in a form acceptable to such
mortgagee, beneficiary or encumbrancer.
In the event that the mortgagee, beneficiary or such other party named
in any such mortgage, deed of trust or other encumbrance elects to have this
Lease prior to its mortgage, deed of trust or other encumbrance, then, upon such
mortgagee, beneficiary or such other party giving written notice to Tenant to
that effect, this Lease shall be deemed prior to such mortgage, deed of trust or
other encumbrance, whether or not this Lease is dated or recorded prior to or
subsequent to the date of recordation of such mortgage, deed of trust or other
encumbrance. Tenant shall execute, acknowledge and deliver to Landlord, upon
written request by Landlord, such documents as may be required to effectuate the
priority of the Lease to such mortgage, deed of trust or other encumbrance.
In the event that Tenant shall fail, neglect, or refuse to execute and
deliver any such documents within ten (10) days after receipt of Landlord's
written request to do so, such failure, neglect or refund shall constitute a
default by Tenant under the Lease.
Notwithstanding any other provision of this Paragraph 25, Tenant's
quiet possession, use and enjoyment of the Premises shall not be disturbed so
long as Tenant duly performs its obligations under the Lease.
26. Parking. Tenant acknowledges that the owners, occupants, tenants,
guests or invitees of that certain residential property located adjacent to or
near the Premises have the right to park in not more than ten (10) parking
spaces in the parking area of the Common Areas on weeknights and on weekends.
Except for such third party parking rights described in the immediately
preceding sentence, Landlord agrees that during the term of the Lease, Landlord
will not grant to any third party the right to park in the parking area of the
Common Areas; it being understood that the parking area is intended, subject to
the provisions of this Paragraph 26, for the use of Tenant, any of Tenant's
approved subtenants, and their respective guests, invitees and licensees. The
preceding to the contrary notwithstanding, Landlord and its property manager and
their respective agents, employees, contractors and invitees shall have the
right to park in the aforementioned parking area of the Common Area in
connection with the performance of Landlord's obligations under the Lease and
the management and operation of the Project. Subject to the foregoing, Tenant
shall have the right to use all of the parking spaces in the parking area in the
Common Areas as shown on Exhibit "A" for the Term
<PAGE> 34
of this Lease at no additional charge to Tenant. Tenant's parking spaces shall
be located in areas designated by Landlord from time to time in the Common
Areas. Except as expressly provided in this Paragraph 26 below, Tenant agrees
that Landlord shall not be responsible for enforcing Tenant's right to use the
parking spaces, and the use of the parking spaces by any other party shall in no
way affect this Lease or, unless Landlord has violated its covenant set forth in
the second sentence of this Paragraph 26, impose any liability on Landlord.
Landlord shall have the right to do the following, in Landlord's discretion: (i)
to designate employee parking areas within the Common Areas and to institute
measures to monitor compliance; (ii) to designate exclusive parking areas for
other authorized users; (iii) to promulgate reasonable rules and regulations
relating to the use of the parking areas; and/or (iv) to have any vehicles owned
by Tenant or Tenant's employees which are parked in violation of the provisions
of the rules and regulations towed away at Tenant's cost. If any third party is
parking in the parking areas of the Common Areas in violation of the terms of
this Paragraph 26, then upon notice from Tenant to Landlord in writing, Landlord
shall promptly take action to remove, or cause to be removed, any third party
vehicles parked in violation of the terms of Paragraph 26. If Landlord does not
take action to remove, or cause to be removed any third party vehicles parked in
violation of the terms of this Paragraph 26 promptly following receipt of
written notice thereof, then Tenant may take action to remove such vehicles
parked in violation of the terms of this Paragraph 26 and Tenant shall
indemnify, defend and hold harmless Landlord from any and all claims, actions,
damages, liabilities, losses, costs and expenses (including, without limitation,
reasonable attorneys' fees) arising out of, or related to, the removal of any
vehicles by Tenant. If Landlord elects or is required to limit or control
parking on the Common Areas, by validation of parking tickets or any other
method, then Tenant agrees to participate in such validation or other program
under such reasonable rules and regulations as are from time to time
established. Tenant agrees that Landlord shall have the right to close off all
or any portion of the parking areas at reasonable times for any purpose,
including without limitation, the prevention of a dedication thereof or the
accrual of rights in any person or the public therein. The parking area shall
not be used by Tenant, its agents or employees for any purpose other than the
parking of motor vehicles and the ingress and egress of pedestrians and motor
vehicles.
27. Surrender of Premises. Upon the expiration or earlier termination
of the Lease, Tenant shall surrender the Premises to Landlord in the condition
existing as of the Commencement Date (as to the first floor of the Premises) and
the Second Floor Rent Commencement Date (as to the second floor of the Premises)
(normal wear and tear excepted), free of any Hazardous Materials caused or
contributed to by Tenant or its employees, agents, contractors, subcontractors
or invitees. Tenant shall remove all of Tenant's personal property from the
Premises and any alterations, additions or improvements designated by Landlord
for removal at the time Landlord gives its consent thereto. Tenant shall repair
any damage caused by removal of its Personal Property and any alterations,
additions and improvements in accordance with all applicable laws, statutes,
building codes and regulations in effect as of the date of such restoration. In
<PAGE> 35
addition, on or before the expiration of the Lease, Tenant shall remove, at
Tenant's sole cost and expense, all telephone, telecommunications, computer and
any other cabling or wiring of any sort installed by Tenant in the Premises and
shall promptly repair any damage to the Premises resulting from such removal,
and restore the Premises to the condition that existed prior to the installation
of such cabling and wiring in accordance with all applicable laws, statutes,
building codes and regulations in effect as of the date of such restoration. All
such property not so removed shall be deemed abandoned by Tenant. If the
Premises are not so surrendered at the expiration or earlier termination of this
Lease, Tenant shall indemnify, defend and hold Landlord and its agents,
employees, contractors and subcontractors harmless from and against any and all
loss or liability resulting therefrom.
28. Landlord Default and Mortgagee Protection.
(a) Notice to Landlord; Landlord's Right to Cure. In the event
Landlord fails to perform any covenant, condition or agreement contained in this
Lease to be performed by Landlord, Landlord shall not be deemed to be in default
under this Lease unless and until it has failed to cure such default within
thirty (30) days after written notice by Tenant to Landlord specifying the
nature of the default; provided, however, that if the nature of Landlord's
default is such that more than thirty (30) days are reasonably required for its
cure, then Landlord shall not be deemed to be in default if Landlord shall
commence such cure within such thirty (30) day period and thereafter shall
diligently prosecute the same to completion.
(b) Notice to Lenders; Lenders' Right to Cure. Tenant agrees
to give Landlord's lenders, by registered mail, a copy of any notice of default
by Landlord served upon Landlord, provided that, prior to such notice, Tenant
has been notified, in writing, by way of notice of assignment of rents and
leases, or otherwise, of the addresses of Landlord's lenders. Tenant further
agrees that if Landlord shall fail to cure such default within the time provided
for in paragraph 28(a) above, then Landlord's lenders shall have an additional
sixty (60) days within which to cure such default or, if such default cannot be
cured within that time, then such additional time as may be necessary if, within
such sixty (60) day period, Landlord's lenders have commenced and are diligently
pursuing the remedies necessary to cure such default (including, but not limited
to, commencement of foreclosure proceedings, if necessary to effectuate such
cure).
29. Authority.
(a) Corporate Authority. If Tenant is a corporation, each
individual executing this Lease on behalf of said corporation represents and
warrants that such individual is duly authorized to execute and deliver this
Lease on behalf of said corporation in accordance with a duly adopted resolution
of the board of directors of said corporation or the bylaws of said corporation,
and that this Lease is binding upon said corporation in accordance with its
terms.
<PAGE> 36
(b) Partnership Authority. If Tenant is a partnership, each
individual executing this Lease on behalf of said partnership represents and
warrants that such individual is duly authorized to execute and deliver this
Lease on behalf of said partnership and that this Lease is binding upon said
partnership and its partners in accordance with its terms.
30. General Provisions.
(a) Clauses, plats, exhibits and riders, if any, affixed to
this Lease are a part hereof.
(b) The waiver by Landlord of any term, covenant or condition
contained herein shall not be deemed to be a waiver of such term, covenant or
condition or any subsequent breach of the same or any other term, covenant or
condition contained herein. The subsequent acceptance of rent hereunder by
Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of
any term, covenant or condition of this Lease, other than the failure of Tenant
to pay the particular rental so accepted, regardless of Landlord's knowledge of
such breach at the time of the acceptance of such rent.
(c) All notices and demands which may or are required to be
given by either party hereunder shall be in writing. All notices and demands by
Landlord to Tenant shall be sufficient if delivered in person or sent by
overnight courier service (provided written receipt of delivery) or by United
States Mail, postage prepaid, addressed to Tenant at the Premises or to such
other place as Tenant may from time to time designate by written notice to
Landlord. All notices and demands by Tenant to Landlord shall be sufficient if
delivered in person or sent by overnight courier service (providing written
receipt of delivery) or by United States Mail, postage prepaid, addressed to
Landlord c/o JMA Properties, Ltd., 280 Second Street, Suite 220, Los Altos,
California, 94022, Attn: Mr. Art Chapman, or to such other person or place as
Landlord may from time to time designate by written notice to Tenant. Any such
notice shall be effective at the time of delivery or, if mailed, two (2)
business days after posting.
(d) If there shall be more than one person or entity
comprising Tenant, the obligations hereunder imposed upon such persons or
entities shall be joint and several.
(e) The paragraph headings and titles to the paragraphs of
this Lease are not a part of this Lease and shall have no effect upon the
construction or interpretation of any part hereof.
(f) Time is of the essence of this Lease and each of its
provisions in which performance is a factor.
<PAGE> 37
(g) The time required for the performance of any act required
under this Lease shall be computed by excluding the first day and including the
last, unless the last day is a Saturday, Sunday or holiday, in which event such
day or days shall also be excluded. The term "holiday" shall mean all holidays
specified in sections 6700 and 6701 of the California Government Code.
(h) The covenants and conditions herein contained, subject to
the provisions as to assignment, apply to and bind the heirs, successors,
executors, administrators and assigns of the parties hereto.
(i) Neither Landlord nor Tenant shall record this Lease or a
short form memorandum hereof without the prior written consent of the other.
(j) This Lease contains all of the agreements of the parties
hereto with respect to the lease of the Premises to Tenant and all other matters
covered or mentioned in this Lease. No prior agreements or understandings
pertaining to any such matters shall be effective for any purpose. No provision
of this Lease shall be amended or added except by an agreement in writing signed
by the parties hereto or their respective successors in interest. This Lease
shall not be effective or binding on any party until fully executed by both
parties hereto.
(k) All amounts which Tenant is required to pay hereunder
(other than Base Rent) and all damages, costs and expenses which Landlord may
incur by reason of any default by Tenant shall be deemed to be additional rent
hereunder. Upon Tenant's nonpayment of any additional rent, Landlord shall have
all rights and remedies with respect thereto as Landlord has for the nonpayment
of Base Rent.
(l) If either party shall be delayed or prevented from the
performance of any act required by this Lease by reason of acts of God, strikes,
lockouts, labor troubles, inability to procure materials, restrictive
governmental laws, or regulations or other cause, without fault and beyond the
reasonable control of the party so obligated (financial inability excepted),
performance of such act shall be excused for the period of the delay, and the
period for the performance of any such act shall be extended for a period
equivalent to the period of such delay; provided, however, that nothing in this
paragraph shall excuse Tenant from the prompt payment of any rental or other
payments required of Tenant except as may be expressly provided elsewhere in
this Lease.
(m) In the event of any action or proceeding brought by either
party against the other under this Lease, the prevailing party shall be entitled
to recover all costs and expenses, including reasonable attorneys' fees and
costs of suit.
(n) In the event of any sale or transfer of Landlord's
interest in the Premises, Landlord shall be automatically and entirely released
from all liability under any and all of its covenants and obligations contained
in or derived from this Lease
<PAGE> 38
arising after the consummation of such sale or transfer (excluding the indemnity
obligations of Landlord with respect to causes of action arising prior to such
sale or transfer), and the purchaser or transferee at such sale or transfer, or
any subsequent sale or transfer, shall be deemed, without any further agreement
between the parties or their successors in interest, or between the parties and
any such purchaser or transferee, to have assumed and agreed to carry out all of
the covenants and obligations of the landlord under this Lease.
(o) Tenant shall not use the name of the Premises for any
purpose other than as an address of the business to be conducted by Tenant in
the Premises.
(p) Any provision of this Lease which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate any other
provisions hereof, and such other provisions shall remain in full force and
effect.
(q) No remedy or election hereunder shall be deemed exclusive
but shall, wherever possible, be cumulative with all other remedies at law or in
equity.
(r) This Lease shall be governed by the laws of the State of
California.
(s) Tenant shall not conduct any auction on or at the Premises
without Landlord's prior written consent.
(t) Nothing contained in this Lease shall be deemed or
construed by the parties or by any third person to create the relationship of
principal and agent, partnership, joint venture or any association between
Landlord and Tenant, and neither the method of computation of rent nor any other
provisions contained in this Lease nor any acts of the parties shall be deemed
to create any relationship between Landlord and Tenant other than the
relationship of landlord and tenant.
(u) The language in all parts of this Lease shall in all cases
be simply construed according to its fair meaning and not strictly for or
against Landlord or Tenant. Unless otherwise provided in this Lease, or unless
the context otherwise requires, the following definitions and rules of
construction shall apply to this Lease.
(i) The neuter gender includes the feminine and
masculine, the singular number includes the plural, and the word "person"
includes a corporation, partnership, firm or association, wherever the context
so requires.
(ii) The terms "shall," "will," and "agrees" are
mandatory, and "may" is permissive.
(iii) The term "parties" shall include both Landlord
and Tenant.
<PAGE> 39
(iv) As used herein, the word "sublessee" shall mean
and include, in addition to a sublessee and subtenant, a licensee,
concessionaire or other occupant or user of any portion of the Premises or
improvements located therein.
31. Limitation of Liability. The obligations of Landlord under this
Lease do not constitute personal obligations of any other persons or entities
constituting Landlord, and Tenant shall not seek recourse against such persons
or any of their personal assets for satisfaction of any liability with respect
to this Lease. In the event Tenant obtains a judgment against Landlord resulting
from any default or claim arising under this Lease, such judgment may only be
satisfied from Landlord's interest in the Project and the rents, issues, profits
and other income actually received on account of Landlord's right, title and
interest in the Premise, and no other real, personal or mixed property of
Landlord or any of the persons comprising Landlord, wherever situated, shall be
subject to levy to satisfy such judgment.
32. Brokers. Each party hereto represents and warrants to the other
party that it has had no dealings with any real estate broker or agent in
connection with the negotiation of this Lease other than with the broker
identified in Paragraph 1(l) hereof. Each party agrees to indemnify, defend and
hold the other party harmless from and against any and all liabilities,
obligations, actions, suits, proceedings, costs and expenses (including
reasonable attorneys' fees) in connection with any compensation, commission or
charge claimed by any other broker, agent or the like who alleges that it is
owed such compensation, commission or charge by reason of contact with such
party. Landlord shall pay to R & R a leasing commission in connection with this
transaction, the amount of which is set forth in a separate written agreement
between Landlord and R & R, which commission shall be payable one-half upon
execution of this Lease and one-half upon Tenant taking occupancy of the second
floor of the Premises.
33. Option to Purchase.
(a) In consideration for entering into the Lease, Tenant has
requested and Landlord hereby grants to Tenant the exclusive right to purchase
the Project, and all easements appurtenant thereto, at a price and under the
terms and conditions set forth herein (the "Option").
(b) The term of the Option granted herein shall commence on
the date this Lease is fully executed by Landlord and Tenant and shall terminate
on the date ninety (90) days thereafter ("Option Term"). Tenant shall have no
right whatsoever to extend the Option Term.
(c) Provided that Tenant is not in default under the terms of
the Lease, this Option may be exercised at any time during the Option Term by
delivery of written notice of exercise (the "Notice"), addressed and mailed,
postage prepaid or registered
<PAGE> 40
mail, or personally delivered to Landlord at Landlord's address set forth in
Paragraph 1(k).
(d) If Tenant (i) fails to exercise this Option strictly in
accordance with the terms of Paragraph 33(c) above within the Option Term, (ii)
attempts to assign or assigns this Option without the prior written consent of
Landlord as set forth in Paragraph 33(e) below, or (iii) defaults in Tenant's
obligations under the terms of the Lease prior to the exercise of the Option,
then this Option and all the rights of Tenant hereunder shall automatically and
immediately terminate without notice, and each party shall be discharged of its
obligations hereunder.
(e) This Option and the rights of the Tenant hereunder shall
not be assigned by Tenant separately from the Lease, and shall not be assigned
without the prior written consent of Landlord. Any attempted assignment without
Landlord's consent shall be void. Landlord in its sole discretion may withhold
its consent to any such attempted assignment by Tenant.
(f) Exercising this Option as provided herein shall constitute
an agreement by Landlord to sell and by Tenant to purchase the Project on the
following terms and conditions:
(i) The purchase price for the Premises to be paid by
Tenant to Landlord shall be Two Million One Hundred fifty Thousand dollars
($2,150,000) ("Purchase Price").
(ii) The Purchase Price shall be paid by Tenant to
Landlord, in cash at the close of escrow as set forth herein. Any portion of the
security deposit paid by Tenant to Landlord under this Lease and not previously
applied or retained by Landlord in accordance with the terms of the Lease shall
be applied toward the Purchase Price.
(iii) Landlord shall convey and Tenant shall accept
title to the Project subject to Exceptions Nos. 1, 3-17 and this Lease and the
sublease in favor of Passport Designs, Inc. contained in the preliminary report
issued by First American Title Company as of April 26, 1995, attached hereto as
Exhibit "D," any exceptions created or caused by Tenant, any exceptions which do
not materially affect marketability of title or Tenant's use of the Premises,
and any exceptions that would be disclosed by personal inspection and/or an
A.L.T.A. survey (the "Permitted Exceptions"). Tenant's obligation to purchase
hereunder shall be conditioned upon Landlord having tendered to Tenant, by grant
deed, title to the Premises free of all liens, encumbrances and exceptions
except for the Permitted Exceptions. Evidence of such title shall be the
willingness and commitment of First American Title Company to issue, at the
close of escrow, its A.L.T.A. Standard Owner's Policy of title insurance naming
Tenant insured in the amount of the Purchase Price and showing title to the
Project vested in Tenant subject
<PAGE> 41
only to the Permitted Exceptions. The cost of such title insurance policy and
any A.L.T.A. survey required in connection with the issuance of such title
insurance policy shall be borne by Tenant.
If Landlord is unable to convey title to the Project as so
required on the date scheduled for close of escrow, as described in Paragraph
33(f)(iv) below, the close of escrow shall be extended for a period of ten (10)
days (notwithstanding any other provision of this Option), and within such ten
(10) day period, upon notice to Landlord, Tenant may elect to (i) accept title
to the Project in such condition as First American Title Company is so willing
to insure such title without reduction in the Purchase Price, or (ii) terminate
its obligation to so acquire the Project pursuant to this Option and terminate
the Lease. If Tenant does not notify Landlord of Tenant's election within said
ten (10) day period, Tenant shall be deemed to have elected only to terminate
its obligation to acquire the Project pursuant to this Option, and the Lease
shall continue in full force and effect. If Tenant elects to terminate this
Option, Tenant shall have no further right to acquire the Project. If Tenant
further elects to terminate the Lease, rent shall be payable under the Lease to
the date of surrender of the Premises by Tenant, and the security deposit shall
be applied and disbursed in the manner provided in the Lease. Landlord shall in
no event be liable to Tenant for damages or otherwise by reason of its inability
to convey insurable title in the condition required by this Option unless such
failure results from the voluntary affirmative act of Landlord committed after
the date of this Lease in violation of this Option.
(iv) An escrow shall be opened at First American Title
Company (the "Escrow Holder") upon Tenant's giving of the Notice. Subject to
extension as provided in Paragraph 33(i) below, the close of escrow shall occur,
subject to Landlord's rights under clause (i) below, on the date thirty (30)
days following the date of the Notice. Time is of the essence.
(v) All escrow costs and charges shall be equitably
allocated between Tenant and Landlord in accordance with customary practice
prevailing in San Mateo County, California.
(g) Tenant hereby acknowledges that it has inspected the
Project and observed its physical characteristics and conditions Tenant hereby
waives any and all objections to said physical characteristics and conditions of
the Project which would be disclosed by such inspection. Tenant further
acknowledges and agrees that the Project is accepted by Tenant in its present
condition, "as is," and that no patent or latent physical condition of the
Project whether or not known or discovered, shall affect the rights of either
party hereto. Tenant has investigated and has knowledge of operative or proposed
governmental laws and regulations including, but not limited to, zoning,
environmental and land use laws and regulations to which the Project may be
subject. Tenant has neither received nor relied upon any representations
concerning such laws and regulations made by Landlord or any other person acting
on or in behalf of Landlord.
<PAGE> 42
(h) Time is of the essence of this Option. If this Option is
not exercised in the manner provided herein, or if close of escrow does not
occur on or before the expiration or earlier termination of the Lease Term
(except if close of escrow is extended by Landlord pursuant to Paragraph 33(i)
below), Tenant shall have no interest whatsoever in the Premises and this Option
may not be revived by any subsequent payment or further action by Tenant.
(i) Notwithstanding any other provision of this Paragraph 33,
rather than sell the Project to Tenant for the Purchase Price, Landlord may
structure a tax deferred exchange of the Project pursuant to Section 1031 of the
Internal Revenue Code of 1986, as amended, in which case Tenant will acquire
title to the Project from a party other than Landlord. As an accommodation to
Landlord, Tenant agrees to cooperate with Landlord and to take the steps
necessary to structure such an exchange, provided such cooperation shall be at
no additional cost or liability to Tenant. Such cooperation shall include
accepting title to the Project from a party other than Landlord and executing
novation, assignment or other documents necessary to effectuate a tax deferred
exchange. However, under no circumstances will Tenant be obligated to take title
to any property, other than the Project, as a part of its accommodation to
Landlord hereunder.
The scheduled date for close of escrow may be extended by
Landlord from time to time for not more than a total of one hundred eighty (180)
days in order to coordinate the concurrent closing of the exchange contemplated
hereby. In the event Landlord shall have failed to designate exchange
properties, title to which could be acquired on or before the expiration of one
hundred eighty (180) days from the date contemplated for close of escrow under
the Option, then the purchase and sale of the Project shall be completed on the
terms and conditions set forth in Paragraph 33(f) above.
(j) If Tenant acquires the Project pursuant to this Paragraph
33, Landlord agrees to pay through escrow to R & R a real estate brokerage
commission of Eighty-six Thousand Dollars ($86,000) less the unamortized portion
of the leasing commission paid by Landlord to R & R in connection with this
Lease, amortized on a straight-line basis over the initial term of the Lease, on
close of escrow; provided, however, that no such commission shall have been
earned by R & R or be otherwise due and payable to R & R by Landlord if escrow
fails to close for any reason whatsoever.
34. Right of First Negotiation - Lease. If, at any time during the Term
of the Lease, Landlord constructs a commercial building or buildings on the real
property located adjacent to the Project (the "Adjacent Parcel"), all or any
portion of the space within such building(s) becomes available for lease after
the expiration of the initial lease for such space (the "Available Space"),
Tenant shall have the first right of negotiation to lease such Available Space.
As used herein, space shall be deemed "available" upon the expiration or earlier
termination of the initial lease for such space made following construction of
such building(s) (including any options to extend the
<PAGE> 43
lease term contained therein). If an initial lease contains an option to extend
the term thereof, such space shall not be deeded "available" unless the tenant
thereunder fails to extend the lease term or to timely exercise such option.
Such first right of negotiation shall be subject to the following terms and
conditions:
(a) When Landlord is prepared to offer the Available Space for
lease, Landlord shall so notify Tenant in writing ("Landlord's Notice"). Tenant
shall have a period of ten (10) calendar days following receipt of Landlord's
Notice to deliver to Landlord written notice of its election to lease such
Available Space, which notice shall include the lease terms upon which Tenant
would be willing to lease the Available Space. As used herein, "lease terms"
shall mean, at a minimum, the rentals and other sums to be paid by Tenant under
the lease, the term of the lease and any options to renew, and restrictions on
use.
(b) If Tenant exercises its first right of negotiation in a
timely manner, and the lease terms proposed by Tenant are substantially
acceptable to Landlord, in Landlord's reasonable discretion, Landlord and Tenant
shall negotiate and execute a lease for the Available Space containing terms and
conditions reasonably acceptable to both parties within thirty (30) days from
the date of Tenant's receipt of Landlord's Notice.
(c) If Tenant fails to notify Landlord of its election to
lease the Available Space within said ten (10) day period or to execute a lease
therefor within said thirty (30) day period, then Tenant's first right of
negotiation shall terminate with respect to that Available Space and Landlord
may lease that Available Space to a third party, free and clear of any rights of
Tenant under this Paragraph 34, provided that Landlord enters into an agreement
for the lease of that Available Space with a third party on terms no less
favorable to Landlord within six (6) months from the date of delivery of
Landlord's Notice. If Landlord fails to enter into such third party lease
agreement for that Available Space within such time period, the terms and
conditions of this Paragraph 34 shall again apply to the Adjacent Parcel.
(d) If Tenant is in default under the Lease at the time Tenant
would otherwise be entitled to exercise its first right of negotiation
hereunder, then Tenant shall have no first right of negotiation with respect to
the offered Available Space, and Landlord may lease that Available Space to a
third party, free and clear of any rights of Tenant under this Paragraph 34. If
(i) Landlord has given Tenant written notice of default under the Lease more
than three (3) times prior to the exercise of Tenant's first right of
negotiation with respect to any offered Available Space, or (ii) Tenant shall
have assigned or transferred all of its interest in this Lease and/or the
Premises (whether or not Landlord's consent to such assignment or transfer has
been given), this Paragraph 34 shall be null and void and of no further force or
effect. Tenant's rights under this Paragraph 34 are personal to Tenant, and
shall not be assigned, transferred or conveyed to any other person, voluntarily,
involuntarily or by operation or law or otherwise. Any
<PAGE> 44
attempted assignment, transfer or conveyance of Tenant's rights under this
Paragraph 34 shall be void.
35. Right of First Negotiation - Purchase. If, at any time during the
Term of the Lease, Landlord intends to sell the Adjacent Parcel, Tenant shall
have the first right of negotiation to purchase the Adjacent Parcel. Such first
right of negotiation shall be subject to the following terms and conditions:
(a) When Landlord intends to offer the Adjacent Parcel for
sale, Landlord shall deliver to Tenant written notice of such intent (the
"Notice of Intent"), which Notice of Intent shall set forth the proposed
purchase price and all other material terms for the sale of the Adjacent Parcel.
Tenant shall have a period of ten (10) calendar days following receipt of the
Notice of Intent to deliver to Landlord written notice of its election to
negotiate for the purchase of the Adjacent Parcel.
(b) If Tenant exercises its first right of negotiation in a
timely manner, Tenant shall have a period of thirty (30) days from the date of
Tenant's receipt of Landlord's Notice to negotiate with Landlord in an attempt
to come to agreement for the purchase and sale of the Adjacent Parcel. Landlord
and Tenant shall conduct all such negotiations in good faith and shall use their
best efforts to reach an agreement as to such purchase and sale.
(c) If Tenant fails to notify Landlord of its election to
purchase the Adjacent Parcel within said ten (10) day period or to execute an
agreement for purchase and sale therefore within said thirty (30) day period,
then Tenant's first right of negotiation shall terminate with respect to the
Adjacent Parcel and Landlord may sell the Adjacent Parcel to a third party, free
and clear of any rights of Tenant under this Paragraph 35, provided that
Landlord enters into an agreement for purchase and sale of the Adjacent Parcel
with a third party on terms no less favorable to Landlord (except that the
purchase price to be paid by the third party may be not less than ninety-five
percent (95%) of the purchase price set forth in the Notice of Intent delivered
to Tenant) within one (1) year from the date of delivery of the Notice of
Intent. If Landlord fails to enter into such third party sale agreement within
such time period, the terms and conditions of this Paragraph 35 shall again
apply to the Adjacent Parcel.
(d) If Tenant is in default under the Lease at the time Tenant
would otherwise be entitled to exercise its first right of negotiation
hereunder, then Tenant shall have no right of first negotiation with respect to
the Adjacent Parcel, and Landlord may sell the Adjacent Parcel to a third party,
free and clear of any rights of Tenant under this Paragraph 3.5. If (i) Landlord
has given Tenant written notice of default more than three (3) times prior to
the exercise of Tenant's first right of negotiation with respect to the Adjacent
Parcel, or (ii) Tenant shall have assigned or transferred all of its interest in
this Lease and/or the Premises (whether or not Landlord's consent to such
assignment or transfer has been given), this Paragraph 35 shall be null and void
and of
<PAGE> 45
no further force or effect. Tenant's rights under this Paragraph 35 are
personal to Tenant, and shall not be assigned, transferred or conveyed to any
other person, voluntarily, involuntarily or by operation of law or otherwise.
Any attempted assignment, transfer or conveyance of Tenant's rights under this
Paragraph 35 shall be void.
(e) If Tenant acquires the Adjacent Parcel pursuant to this
Paragraph 35, Landlord agrees to pay through escrow to R & R a real estate
brokerage commission in an amount equal to four percent (4%) of the purchase
price for the Adjacent Parcel on close of escrow; provided, however, that no
such commission shall have been earned by R & R or be otherwise due and payable
to R & R by Landlord if escrow fails to close for any reason whatsoever.
36. List of Exhibits.
The following is a complete list of the documents attached hereto and
made a part of this Lease:
Exhibit "A" Site Plan
Exhibit "B" Legal Description
Exhibit "C" Work Letter Agreement
Exhibit "D" Preliminary Title Report
<PAGE> 46
The parties hereto have executed this Lease as of the date first set
forth above.
LANDLORD:
University Bank & Trust Company of Palo Alto,
a California banking corporation
By: /s/ Pamela Bagle
____________________________________________
By:
____________________________________________
TENANT:
Odwalla, Inc.,
a California corporation
By: /s/ Stephen Williamson
____________________________________________
Co-Chairman and Chief Executive Officer
By:
____________________________________________
<PAGE> 47
EXHIBIT A
[SITE PLAN]
<PAGE> 48
EXHIBIT B
The land referred to in this Report is situated in the State of California,
County of San Mateo, City of Half Moon Bay and is described as follows:
PARCEL I:
Lot 3, as shown on that certain map of Stone Pine Center, filed in the office of
the County Recorder of San Mateo County, State of California, on March 29, 1990
in Book 121 of Maps at page(s) 42 and 43.
PARCEL II:
A non-exclusive easement appurtenant to Parcel I above for ingress and egress of
animals, pedestrians and vehicles of all kinds over and across that portion of
Lot 2, Stone Pine Center, filed March 29, 1990, Map Book 121, Pages 42 & 43, San
Mateo County Records, designated "Easement for ingress and egress in favor of
Lot 3" on the filed map.
A.P. NO.: 056-391-030 JPN 121 042 000 03 T
<PAGE> 49
EXHIBIT C
WORK LETTER AGREEMENT
This Work Letter Agreement supplements the Lease dated June __, 1995,
executed concurrently herewith by and between University Bank & Trust Company of
Palo Alto, a California banking corporation ("Landlord"), and Odwalla, Inc., a
California corporation ("Tenant").
1. Tenant Improvements. Landlord shall construct and install tenant
improvements in the Premises in accordance with the applicable Final Plans
approved by Tenant and otherwise in accordance with this Work Letter Agreement.
The tenant improvements shall be general purpose improvements; Landlord shall
not be required to construct any special purpose improvements in the Premises.
2. Plans and Specifications. As soon as reasonably practical after
Tenant's execution of this Lease, Tenant shall furnish and submit to Landlord's
architect such information as Landlord's architect may request from Tenant to
prepare plans, specifications and working drawings for the tenant improvements,
including architectural, mechanical and electrical engineering plans,
specifications, working drawings and details (collectively, "Final Plans"),
including information regarding the location of all partitions, doors, light
fixtures, electrical outlets, telephone outlets and other standard and special
installations required by Tenant, as well as wall finishes and floor coverings.
Thereafter, the parties shall meet and confer as necessary to agree on the Final
Plans, which Final Plans shall be subject to the reasonable approval of both
parties. Tenant's written approval of the Final Plans shall be deemed Tenant's
authorization for Landlord to proceed with Landlord's Work (defined below) in
accordance with the approved Final Plans. Landlord shall not be obligated to
proceed with Landlord's Work until both Landlord and Tenant have approved the
Final Plans. As used herein, the term "Landlord's Work" shall mean the work
contemplated by the Final Plans and the term "Improvement Costs" shall mean the
cost of the Landlord's Work as performed in accordance with the Final Plans.
In addition, as soon as reasonably practical after Tenant's execution
of this Lease, Landlord and Tenant shall agree upon the interim improvements
(the "Interim Improvements") to be constructed by Landlord in the first floor of
the Premises to accommodate the occupancy of Passport Design, Inc. ("Passport")
pursuant to the terms of the sublease for the first floor to Passport (the
"Passport Sublease"), to be entered into by Tenant and Passport concurrently
with the execution of this Lease. The plans for the Interim Improvements shall
be subject to the reasonable approval of both parties. In connection with the
construction of the tenant improvements referred to in Paragraph 1 above and the
Interim Improvements, the parties hereto acknowledge and agree that the lobby in
the first floor of the Premises will consist of a common area foyer and two
<PAGE> 50
doors for separate access to the second floor of the Premises and the first
floor of the Premises to be occupied by Passport pursuant to the Passport
Sublease.
Neither preparation of plans by Landlord's architect, engineer or
consultant nor any approval thereof by Landlord shall constitute any
representation or warranty by or on behalf of Landlord as to the adequacy,
efficiency, suitability, fitness or desirability of any space layout or
improvements or otherwise constitute assumption by Landlord of any
responsibility for the accuracy or sufficiency thereof, or be interpreted as a
statement of compliance with code requirements, provided that nothing herein
shall abrogate or impair any rights of Tenant against such architect, engineer
or consultant on account of any errors or omissions.
3. Construction of Tenant Improvements. Following approval of the Final
Plans by Tenant, Landlord's contractor shall be instructed to commence and
diligently proceed with the construction of Landlord's Work in the second floor
of the Premises substantially in accordance with the approved Final Plans.
Following approval of the plans for the Interim Improvements by Tenant,
Landlord's contractor shall be instructed to commence and diligently proceed
with the construction of the Interim Improvements in the first floor of the
Premises substantially in accordance with the approved plans therefore.
Landlord's contractors shall be instructed to commence and diligently
proceed with the construction of Landlord's Work in the first floor of the
Premises substantially in accordance with the approved Final Plans only after
the expiration or earlier termination of the Passport Sublease. Landlord shall
construct the Interim Improvements at Landlord's sole cost and expense.
Landlord's Contribution (defined below) shall not be applied to the cost of the
Interim Improvements.
During the construction of Landlord's Work (on both the first and
second floors of the Premises), Landlord or its representative will meet with
Tenant and other appropriate personnel on a weekly basis to coordinate work,
review construction and insure compliance with key construction elements.
4. Changes, Additions or Alterations.
4.1 Changes Requested by Tenant. There shall be no changes in
the plans for the Interim Improvements. Any change in Landlord's Work requested
by Tenant after approval of the Final Plans shall be at Tenant's sole cost and
expense and shall be subject to Landlord's approval. Tenant shall pay all costs
incurred by Landlord in reviewing any requested change, whether such change is
approved by Landlord or not. If Landlord approves any such request, Landlord's
architect shall prepare (or revise) plans, specifications and working drawings
with respect to such change. Tenant shall reimburse Landlord for the cost of
preparing such additional (or revised) plans. As soon
<PAGE> 51
as practical after completion of the additional (or revised) plans, Landlord
shall notify Tenant of the estimated cost and the estimated delay, if any, which
will be chargeable to Tenant by reason of such change. Within three (3) days
after the date of receipt of such estimated cost, Tenant shall notify Landlord
in writing whether Tenant approves such change. If Tenant approves, Tenant shall
promptly pay Landlord the estimated cost of such change, and Landlord's
contractor shall proceed with the change as soon as reasonably practicable
thereafter. If Tenant does not promptly so approve and pay any such cost,
Landlord shall be entitled to proceed in accordance with the previously approved
plans.
4.2 Changes by Landlord. Landlord shall have the right to make
such changes in the approved Final Plans (or in Landlord's Work pursuant
thereto), as Landlord may deem reasonably necessary for coordinating and
completing Landlord's Work or as required by governmental authorities. Tenant
agrees and understands that any minor changes or deviations from the approved
Final Plans that may be reasonably necessary during construction of the Premises
shall not affect, change or invalidate the Lease, or give rise to any claims by
Tenant for any offset, credit, loss, damage or delay, or otherwise.
5. Tenant Improvement Allowance.
5.1 Tenant Improvement Allowance. Landlord shall contribute to
the cost of constructing Landlord's Work a tenant improvement allowance of up to
a maximum cost to Landlord of Three Hundred Sixty-seven Thousand Five Hundred
Dollars ($367,500), Twenty-five Dollars ($25.00) per rentable square foot in the
Premises ("Landlord's Contribution"). Landlord, at its sole cost, will
separately meter electrical service to the first and second floors of the
Premises, respectively.
The Improvement Costs to be paid by Landlord from said allowance shall
include:
(a) The cost of preliminary space planning and final
architectural and engineering plans and specifications (i.e., Final Plans) for
Landlord's Work, excluding the costs incurred to measure the Premises in
accordance with BOMA standards;
(b) All costs of obtaining building permits and other
necessary authorizations from the City of Half Moon Bay, the County of San
Mateo, and/or the State of California;
(c) All costs of interior design and finish schedule
plans and specifications including as-built drawings;
(d) All direct and indirect costs of performing
Landlord's Work in the Premises, including the construction fee for overhead and
profit and the cost of all
<PAGE> 52
on-site supervisory and administrative staff, office, equipment and temporary
services rendered by Landlord's contractor in connection with Landlord's Work;
and
(e) All fees payable to Landlord's architectural and
engineering firm if it is required by Tenant to redesign any portion of the
tenant improvements following Tenant's approval of the Final Plans.
In no event shall the Improvement Costs include any costs of procuring or
installing in the Premises any trade fixtures, equipment, furniture,
furnishings, telephone equipment or other personal property (collectively,
"Personal Property") to be used in the Premises by Tenant, and the cost of such
Personal Property shall be paid by Tenant.
If the Improvement Costs exceed Landlord's Contribution, then Tenant
shall pay all Improvement Costs in excess of Landlord's Contribution within ten
(10) days after the date of receipt of Landlord's invoice therefor. If the
Improvement Costs are less than Landlord's Contribution, Tenant shall be
entitled to utilize the same at any time during the Lease term in connection
with any permitted alterations made by Tenant.
6. Delay. Tenant shall be responsible for and pay any and all costs and
expenses incurred by Landlord in connection with any delay (each a "Tenant
Delay") in the commencement or completion of Landlord's Work caused by (a)
Tenant's failure to furnish information as required for timely completion of the
preliminary plans or the Final Plans, (b) Tenant's failure to approve or
disapprove the preliminary plans or the Final Plans within the time periods
specified herein, (c) Tenant's request for changes in materials, finishes,
installations or improvements after approval of the Final Plan (d) any changes,
additions or alterations requested by or on behalf of Tenant after approval by
Tenant of the Final Plans, (e) Tenant's failure to pay any amount when due
hereunder, (f) failure or refusal by Tenant to observe and perform fully and
promptly any other provision of this Work Letter Agreement or the Lease on
Tenant's part to be observed or performed, or (g) any other delay of any kind or
nature caused by any act or omission of Tenant, or any contractor, agent,
servant or employee of Tenant. If there is any Tenant Delay with respect to
Landlord's Work on the second floor of the Premises, the second floor of the
Premises shall be deemed completed, for purposes of determining the date of
commencement of the Term of the Lease and Tenant's rental obligations
thereunder, on the date the second floor of the Premises would have been
completed but for such Tenant Delay.
7. Default and Remedies. Failure or refusal by Tenant to perform any
obligation on Tenant's part to be performed in accordance with the provisions of
this Work Letter Agreement shall constitute an event of default by Tenant under
this Work Letter Agreement and under Article 21 of the Lease.
8. Tenant's Work. Tenant may, with Landlord's written consent, enter
the Premises prior to the Commencement Date solely for the purpose of installing
Tenant's
<PAGE> 53
personal property and equipment as long as such entry will not interfere with
the orderly construction and completion of the Premises. Tenant shall notify
Landlord of its desired time(s) of entry and shall submit for Landlord's
approval the scope of the work to be performed and the name(s) of the
contractor(s) who will perform such work. Tenant hereby indemnifies and agrees
to protect, defend and hold Landlord, any mortgagee, ground lessor or
beneficiary of a mortgage, ground lease or deed of trust related to the Premises
harmless from and against any and all suits, claims, actions, losses, costs or
expenses (including claims for worker's compensation) of any nature whatsoever,
together with reasonable attorneys' fees for counsel of Landlord's choice,
arising out of or in connection with the installation of Tenant's personal
property or equipment (including, but not limited to, claims for breach of
warranty, personal injury or property damage) except with respect to injury or
damage caused by Landlord's willful or negligent acts or omissions.
IN WITNESS WHEREOF the parties hereto have executed this Work Letter
Agreement as of the date first set forth above.
LANDLORD:
University Bank & Trust Company of Palo
Alto, a California banking corporation
By: /s/ Pamela Bagle
______________________________________
By:
______________________________________
TENANT:
Odwalla, Inc.,
a California corporation
By:
______________________________________
By:
______________________________________
<PAGE> 54
SUBLEASE
1. Parties. This Sublease ("Sublease") is entered into as of
the 14th day of June, 1995, by and between ODWALLA, INC., a California
corporation ("Sublessor") and PASSPORT DESIGNS, INC., a California corporation
("Sublessee"), as a sublease under that certain Office Lease of even date
herewith ("Lease") by and between UNIVERSITY BANK & TRUST COMPANY OF PALO ALTO,
a California banking corporation, as landlord ("Landlord"), and Sublessor, as
tenant. A copy of the Lease is attached hereto as Exhibit A and made a part
hereof. The effectiveness of this Sublease is expressly conditioned upon the
concurrent execution of (i) the Lease referred to immediately above, and (ii) an
Agreement Terminating Leasehold Interest between Landlord and Sublessee.
2. Subordination; Default; Provisions Constituting Sublease.
2.1 Subordination. This Sublease is subject and subordinate to
all of the terms and conditions of the Lease, and to the matters to which the
Lease is subject and subordinate in accordance with its terms, and any
termination of the Lease shall terminate the Sublease.
2.2 Default under Lease. Sublessee covenants and agrees to
refrain from doing or causing to be done, or permitting any act to be done,
which would constitute a default under the Lease or might cause the Lease or the
rights of Sublessor as lessee under the Lease to be terminated or surrendered,
or which would or might make Sublessor liable for any damages, claims or
penalty. Notwithstanding anything in this Sublease to the contrary, Sublessee
agrees that Sublessor shall have no liability to Sublessee as a consequence of
Landlord's failure or delay in performing its obligations under the Lease.
Sublessee's obligations hereunder (including without limitation the obligation
of Sublessee to pay Rents [defined in Paragraph 5.3 below]) shall not be
impaired nor shall the performance thereof be excused because of any failure or
delay on Landlord's part in performing its obligations under the Lease unless
(i) such failure or delay results from Sublessor's being in default under the
Lease and Sublessor's default thereunder is not due to a default of Sublessee
hereunder, or (ii) such failure or delay results from Sublessor's willful
misconduct. Under no circumstances shall Sublessee have the right to require
performance by Sublessor of Landlord's obligations. In the event of the
termination of Sublessor's interest as lessee under the Lease for any reason,
then this Sublease shall terminate concurrently therewith without any liability
of Sublessor to Sublessee.
2.3 Provisions Constituting Sublease. All of the terms and
conditions contained in the Lease are incorporated herein, except for Paragraphs
1(a) through (h), Paragraphs 1(j) through (m), 2, 3, 5(a) (as to the address for
payment of Base Rent), 5(b), 5(c), 7, 30(c), 32, 33, 34, 35, Exhibit C (except
as to the Interim Improvements) and Exhibit D. For purposes of this Sublease,
with respect to those sections incorporated from the Lease,
<PAGE> 55
all references to "Landlord" and "Tenant" shall be deemed to be references to
"Sublessor" and "Sublessee," respectively; all references to the "Lease" shall
be deemed to be references to this "Sublease"; and all references to the
"Premises" shall be deemed to be references to the "Premises" as defined in this
Sublease. The foregoing notwithstanding:
(a) all references to "Landlord" in Paragraph 12(c)
(except for the first use of the term "Landlord" in the second full paragraph of
Paragraph 12(c) shall mean and refer to both "Sublessor" and "Landlord"
hereunder), and Paragraphs 15(b), 15(d), 16, and 20 of the Lease (except that in
the first sentence of the last full paragraph of Paragraph 20(a) and the second
sentence of the first full paragraph of Paragraph 20(c), the reference to
"Landlord" shall mean and refer to both "Sublessor" and "Landlord" hereunder),
shall mean and refer to the "Landlord" hereunder; and
(b) all references to "Landlord" in Paragraphs 14,
15(a)(i), 15(a)(iii), and 19, and the next to last full paragraph of Paragraph
20(c) of the Lease shall mean and refer to both "Sublessor" and "Landlord"
hereunder (except that such references in Paragraph 19 shall mean Sublessor or
Landlord).
Those provisions incorporated into this Sublease from the Lease, together with
the provisions set forth in this Sublease, shall be the complete terms and
conditions of the Sublease. Unless otherwise defined herein, capitalized terms
used in this Sublease shall have the meanings ascribed to them in the Lease.
3. Premises.
3.1 Premises. Sublessor leases to Sublessee and Sublessee
leases from Sublessor approximately seven thousand two hundred ninety-two
(7,292) rentable square feet of space on the first floor of the building
commonly known as and located at 100 Stone Pine Road, Half Moon Bay, California
(the "Building"), and all improvements now contained therein or a part thereof
(the "Premises"). In addition, Sublessee shall have such rights with respect to
the Common Areas as are set forth in the Lease.
The parties hereto acknowledge and agree that the actual
rentable square footage of the Premises to be leased hereunder by Sublessee will
be calculated by Landlord and Sublessee promptly following the date construction
of the common foyer described in Paragraph 17.7 below has been completed by
Landlord. If the actual rentable square footage of the Premises (which shall
include one-half of the square footage of the common foyer described in
Paragraph 17.7) is less than or more than 7,292 rentable square feet as
described above, then (i) the Base Rent paid by Sublessee under this Sublease
for any period of time prior to such calculation shall be adjusted accordingly
(with Sublessee either receiving a credit against the next Base Rent payment due
for any overpayment of Base Rent or Sublessee paying to Sublessor with the next
Base Rent payment owing any underpayment of Base Rent, as the case may be) and
(ii) Sublessee's Proportionate Share shall be adjusted accordingly.
<PAGE> 56
3.2 Condition of the Premises. Sublessee acknowledges that
Landlord (and not Sublessor which shall have no obligations in respect thereof)
shall construct the Interim Improvements in the Premises on a schedule mutually
agreed to by Landlord and Sublessee (following Sublessee's approval of plans and
specifications for such Interim Improvements and after Landlord has obtained all
required permits necessary to construct such Interim Improvements), and
Sublessor shall have no obligation on account thereof. Subject to Landlord's
obligation to construct the Interim Improvements as provided herein, Sublessee
agrees to accept the Premises broom clean, in its "As Is" condition on the
Commencement Date, and as being in good and sanitary order, condition and
repair.
4. Term. The term of this Sublease shall commence on the date
set forth in Paragraph 1 above ("Commencement Date") and end on April 30, 1997
provided that Landlord shall have delivered possession of the Premises pursuant
to the Lease.
5. Rent.
5.1 Base Rent. Sublessee shall pay to Sublessor as Base Rent
for the Premises One Dollar and Forty Cents ($1.40) per rentable square foot of
space within the Premises per month, in accordance with Paragraph 5(a) of the
Lease, except as hereinafter provided. Sublessee shall pay Sublessor on
execution hereof the Base Rent for the remainder of the month of June, 1995.
Rents shall be payable by Sublessee to Sublessor at the address set forth in
Paragraph 12 below, or at such other place or places as Sublessor may from time
to time direct.
5.2 Sublessee's Share. All references in the Lease to
"Tenant's Proportionate Share", including without limitation the reference in
Paragraph 5(d) of the Lease, as incorporated herein, shall mean "Sublessee's
Proportionate Share", as defined in this Paragraph 5.2. For purposes of this
Sublease, "Sublessee's Proportionate Share" shall mean forty-nine and sixty-one
one hundredths percent (49.61%) (unless adjusted pursuant to the terms of
Paragraph 3.1 above), with the effect that Sublessee's Proportionate Share of
the expenses payable under the Lease shall be determined based upon the total
number of square feet of the Premises (including one-half of the total square
footage of the common foyer described in Paragraph 17.1 below), in relation to
the total number of square feet of the Building. Based solely on information
furnished to Sublessor by Landlord, Sublessor estimates that Sublessee's
Proportionate Share of Operating Expenses (as defined in Paragraph 5(d) of the
Lease) during the first twelve months of the Sublease Term will be approximately
Thirty-five Cents ($0.35) per rentable square foot of space within the Premises
per month. Sublessee acknowledges that Sublessee's Proportionate Share of
Operating Expenses actually incurred during the first twelve months of the
Sublease Term may be greater or less than such estimated amount, however,
Sublessor agrees that in no event shall Sublessee's Proportionate Share of
Operating Expenses during the first twelve (12) months of the Sublease Term be
greater than Forty Cents ($0.40) per rentable square foot of space within the
Premises per month. The preceding notwithstanding, Sublessor agrees that
Sublessee's Proportionate Share of Operating Expenses following the first twelve
months of the Sublease Term shall not be
<PAGE> 57
greater than one hundred five percent (105%) of Sublessee's Proportionate Share
of Operating Expenses required to be paid by Sublessee under the Sublease during
the first twelve months of the Sublease Term (prorated for any partial year).
Sublessor shall have no responsibility for any overpayment of Operating Expenses
paid by Sublessee (unless such overpayment was not forwarded to Landlord, in
which event Sublessor shall refund any such overpayment to Sublessee).
Sublessor shall provide Sublessee with a copy of all
statements and notices received by Sublessor from Landlord pursuant to Paragraph
5(d) of the Lease. If Sublessee desires to review Landlord's statement in
accordance with Paragraph 5(d) of the Lease, Sublessee shall so notify
Sublessor, and Sublessor shall reasonably cooperate with Sublessee in performing
such review, at no expense to Sublessor.
5.3 Rents. The term "Rents" as used in this Sublease shall
mean Base Rent, Sublessee's Proportionate Share of Operating Expenses, and all
charges, costs and expenses and other sums which Sublessee is required to pay
hereunder.
6. Insurance.
6.1 Commercial General Public Liability Insurance.
Notwithstanding the provisions of Paragraph 15(a)(i) of the Lease incorporated
into this Sublease by reference, Sublessor acknowledges and agrees that
Sublessee shall only be required to maintain during the term of this Sublease
commercial general public liability insurance having a combined single limit of
not less than $1,000,000.
6.2 Business Interruption Insurance. Notwithstanding the
provisions of Paragraph 15(a) (ii) of the Lease incorporated into this Sublease
by reference, Sublessor acknowledges and agrees that Sublessee shall only be
required to maintain during the term of this Sublease business interruption
insurance covering a period of six (6) months' Rents payable hereunder.
7. Parking. Sublessee shall have the right to use thirty-five
(35) parking spaces in the parking area of the Common Areas at no additional
charge to Tenant, in accordance with, and subject to, Paragraph 26 of the Lease.
8. Services, Maintenance and Repair of the Premises. Sublessor
shall not be responsible to Sublessee for furnishing any service, maintenance or
repairs to the Premises which are the obligation of Landlord, it being
understood that such obligations are solely those of Landlord pursuant to
Paragraphs 12, 16 (however, Sublessee shall contract directly in its own name,
at Sublessee's cost, for janitorial services to be furnished to the Premises and
pay for its own electricity used or consumed with respect to the Premises), and
20 of the Lease. The failure of Landlord to fulfill its obligations under the
Lease or the exercise by Landlord of any rights specified in the Lease shall not
(i) entitle Sublessee to any allowance, reduction or adjustment of Rents, (ii)
make Sublessor liable to Sublessee, (iii) excuse or
<PAGE> 58
impair the obligation of Sublessee to perform or observe any of the terms or
conditions of this Sublease, or (iv) entitle Sublessee to any claim of
constructive eviction against Sublessor.
If Landlord shall be in material default under the Lease in
any of its obligations to Sublessor with respect to the Premises, Sublessee
shall be entitled to participate with Sublessor in the enforcement of
Sublessor's rights against Landlord (and in any recovery or relief obtained),
but Sublessor shall have no obligation to bring any action or proceeding or to
take any steps to enforce Sublessor's rights against Landlord. Any steps,
actions, or proceedings so instituted by Sublessor shall be at the expense of
Sublessee. Sublessee shall, by written notice to Sublessor, specify any such
alleged default by Landlord and Sublessor may, but shall not be obligated to,
after such notice elect to (i) take action for the enforcement of Sublessor's
rights against Landlord with respect to such default or (ii) cure any such
default to the extent permitted pursuant to the provisions of the Lease. If
Sublessor does not elect to do either of the foregoing, Sublessee shall have the
right to take enforcement action against Landlord in its own name and, for that
purpose and only to such extent, all of the rights of Sublessor to enforce the
obligations of Landlord under the Lease are hereby conferred upon and are
conditionally assigned to Sublessee and Sublessee hereby is subrogated to such
rights (including the benefit of any recovery or relief). Notwithstanding the
provisions of the immediately preceding sentence, in no event shall Sublessee be
entitled to take such action in its own name if (i) such action would constitute
a default under the Lease or (ii) there is a good faith disagreement between
Sublessor and Sublessee as to whether or not Landlord has so defaulted.
Sublessee shall indemnify and hold Sublessor harmless from and against all loss,
cost, liability, claims, damages and expenses (including without limitation
reasonable attorneys' fees), penalties and fines incurred in connection with or
arising from the taking of any such action by Sublessee.
9. Destruction/Reconstruction. Sublessor shall have no
obligation to rebuild, restore or repair the Premises in the event of any damage
or destruction thereto, Sublessee acknowledging that such obligation is
Landlord's pursuant to Paragraph 20 of the Lease. If Landlord elects to
terminate the Lease pursuant to Paragraph 20 of the Lease, this Sublease shall
terminate concurrently therewith without any liability of Sublessor to
Sublessee. Sublessee shall have no right to terminate this Sublease in the event
of damage or destruction to all or a portion of the Premises or the Building,
and Sublessee hereby expressly waives any rights to terminate this Sublease,
including without limitation any rights pursuant to the provisions of
Subdivision 2 of Section 1932 and Subdivision 4 of Section 1933 of the
California Civil Code, as amended from time to time, and the provisions of any
similar law hereinafter enacted, which provisions relate to the termination of
the hiring of a thing upon its substantial damage and destruction; provided,
however, if such damage or destruction materially interferes with Sublessee's
use of the Premises and the Premises cannot reasonably be or in fact are not
restored within forty-five (45) days following the casualty, then Sublessee may
elect to terminate this Sublease effective thirty (30) days following receipt of
written notice from Sublessee.
<PAGE> 59
10. Condemnation. If Sublessor is entitled to terminate the
Lease pursuant to Paragraph 23 of the Lease, Sublessor may elect to terminate
the Lease in accordance therewith, and in that event this Sublease shall
terminate concurrently with the Lease without any liability of Sublessor to
Sublessee. Sublessee shall have the right to terminate this Sublease in the
event of a condemnation of more than twenty-five percent (25%) of the Premises
or in the event less than twenty-five percent (25%) of the Premises is taken but
the remaining portion of the Premises is inadequate for the continued operation
of Sublessee's business as reasonably determined by Sublessee, and in either of
such events Sublessee shall be entitled to receive only that portion of the
condemnation award allocable to, and separately awarded to Sublessee on account
of, Sublessee's moving expenses and any tenant improvements paid for solely by
Sublessee which Sublessee would have the right to remove.
11. Landlord's Consent; Lease Limitations.
11.1 Landlord's Consent. Sublessee acknowledges that as to
certain matters set forth in this Sublease, Sublessor has rights of approval or
disapproval. In addition, Sublessee acknowledges that as to certain matters set
forth in the Lease, Landlord has rights of approval or disapproval. If any
matter requiring Sublessor's approval is submitted to Sublessor by Sublessee for
Sublessor's approval, Sublessor shall respond to Sublessee in a timely manner.
If Sublessor approves such matter and such matter further requires Landlord's
approval, Sublessor shall promptly submit the same to Landlord and shall use
reasonable efforts to obtain Landlord's approval of such matter. In no event,
however, shall Sublessor's disapproval be deemed unreasonable if Landlord has
disapproved of such matter nor shall Sublessor have any liability to Sublessee
by reason thereof.
With respect to Paragraph 13 of the Lease, in the event
Sublessee requests consent to an assignment or subletting, Sublessee shall be
responsible for payment of all costs and expenses Sublessor may be required to
pay to Landlord in connection therewith.
11.2 Lease Limitations. This Sublease is not intended to
provide Sublessee with any rights or remedies in addition to those set forth in
the Lease, which rights and remedies may be further limited by the provisions of
this Sublease.
12. Notices.
12.1 General. Any notice required or desired to be given under
this Sublease shall be in writing and all notices shall be given by personal
delivery, mailing, or by reputable overnight courier. All notices personally
given to Sublessee may be delivered to any person apparently in charge at the
Premises, or any corporate officer or agent of Sublessee. All notices given by
mail shall be served by first-class mail (registered or certified, return
receipt requested), postage prepaid, addressed to the addresses set forth below.
<PAGE> 60
To Sublessor: Odwalla, Inc.
100 Stone Pine Road
Half Moon Bay, CA 94019
Attention:
To Sublessee: Passport Design, Inc.
100 Stone Pine Road
Half Moon Bay, CA 94019
Attention: Eileen Charlton
Either party may change its address for purposes of notice by giving notice of
such change of address to the other party in accordance with the provisions of
this paragraph. Any notice given pursuant to this paragraph shall be deemed
served when delivered by personal service, with delivery evidenced by a signed
receipt, on the business day following delivery to a reputable overnight
courier, or as of seventy-two (72) hours after the deposit thereof in the United
States mail.
12.2 Notices from Landlord. Sublessee and Sublessor shall each
send to the other a copy of all notices and other communications received from
Landlord within forty-eight (48) hours of receipt.
13. Surrender of Premises. Upon the expiration or earlier
termination of this Sublease, Sublessee shall surrender the Premises in
accordance with the provisions of Paragraph 27 except that Tenant shall not be
obligated to remove the Interim Improvements.
14. Quiet Enjoyment. Subject to the Sublease terminating
through no fault of Sublessor under the Lease, Sublessor agrees that so long as
Sublessee performs all of its obligations in this Sublease to be performed by
Sublessee, then, subject to the rights of Landlord under the Lease, Sublessee
shall enjoy throughout the term of this Sublease the quiet and undisturbed
possession of the Premises.
15. Option to Purchase. If Sublessor exercises its option to
purchase the Premises under Paragraph 33 of the Lease, Sublessor agrees that
Sublessor's and Landlord's title will not merge for purposes of the Sublease and
the Sublease will remain in existence subject to the terms hereof.
16. Use. In addition to using the Premises for the permitted
uses described in Paragraph 8(a) of the Lease incorporated herein, Tenant may,
subject to obtaining Landlord's consent thereto, use the Premises for the
manufacturing and distribution of software (if permitted by zoning laws
applicable to the Premises).
17. General.
<PAGE> 61
17.1 Counterparts. This Sublease may be executed in
counterparts, each of which shall be deemed an original for all purposes and
together shall constitute one instrument.
17.2 Construction of Sublease Provisions. This Sublease shall
not be construed either for or against Sublessee or Sublessor, but shall be
construed in accordance with the general tenor of the language to reach a fair
and equitable result.
17.3 Entire Agreement. This Sublease, together with all
exhibits attached hereto, is the entire agreement between the parties with
respect to the Premises, and there are no binding agreements or representations
between the parties except as expressed herein. Any agreements, warranties or
representations not expressly contained herein shall in no way bind either
Sublessor or Sublessee, and Sublessor and Sublessee expressly waive all claims
for damages by reason of any statement, representation, warranty, promise or
agreement, if any, not contained in this Sublease. This Sublease supersedes and
cancels any and all previous negotiations, arrangements, brochures, agreements
and understandings, whether written or oral, between Sublessor and Sublessee
with respect to the Premises and appurtenances thereto. No addition to, or
modification of, any term or provision of this Sublease shall be effective until
and unless set forth in a written instrument signed by both Sublessor and
Sublessee.
17.4 Exhibits. All exhibits attached to this Sublease shall be
deemed to be incorporated herein by the individual reference to each such
exhibit, and all such exhibits shall be deemed a part of this Sublease as though
set forth in full in the body of the Sublease.
17.5 Attorneys' Fees. Any reference to "attorneys' fees"
contained in this Sublease or the Lease shall include, without limitation, an
allocable portion of the internal legal costs of Sublessor.
17.6 Preparation of Sublease. The parties acknowledge that
this Sublease has been prepared by counsel for the property manager of Landlord
as an accommodation to the parties. Neither the preparation of this Sublease nor
approval hereof by Landlord shall constitute any representation or warranty by
or on behalf of Landlord as to the adequacy of the terms of this Sublease to
protect the interests of either Sublessor or Sublessee. Both parties acknowledge
that they have been advised by Landlord to have this Sublease reviewed by
counsel of their own choosing, and that they have had the opportunity to do so.
17.7 Common Entry. Sublessee acknowledges that Sublessor is
the occupant of the second floor of the Building and that the only access to the
second floor is through the common foyer to be constructed on the first floor of
the Building leading to a door through which access to the second floor of the
Building may be maintained. Sublessee agrees that Sublessor, its agents,
servants, invitees and contractors, shall have a non-exclusive right of ingress
to and egress from the second floor of the Building in and over the common foyer
referred to immediately above, and that Sublessee shall not, and shall cause its
agents, servants, invitees and contractors not to, enter the second floor of the
Building.
<PAGE> 62
IN WITNESS WHEREOF, the parties have executed this Sublease
effective as of the date first set forth above.
SUBLESSOR:
ODWALLA, INC.,
a California corporation
By: /s/ Stephen Williamson
_________________________________________
Its: Co-Chairman and Chief Executive Officer
_________________________________________
SUBLESSEE:
PASSPORT DESIGN, INC.,
a California corporation
By: /s/ E. J. Charlton
_________________________________________
Its: Chief Financial Officer
_________________________________________
<PAGE> 63
CONSENT
University Bank & Trust Company of Palo Alto, a California
banking corporation ("Landlord"), lessor under the Lease attached hereto as
Exhibit A, hereby consents to the subletting of the Premises described herein on
the terms and conditions described in this Sublease. This consent shall apply
only to this Sublease and shall not be deemed to be a consent to any other
sublease or any further subletting. In connection with such subletting by
Sublessee, Landlord agrees to pay the reasonable costs incurred by Sublessee to
relocate its furniture, furnishings and personal property from the second floor
of the Building to the first floor of the Building and/or to a local off-site
storage facility (but in no event shall Landlord be required to pay any off-site
storage fee associated with such storage). Such reasonable relocation costs
shall be paid by Landlord within ten (10) days following receipt of a written
statement or invoice therefor.
Landlord hereby agrees that the Interim Improvements referred
to in this Sublease shall consist of those improvements (including, without
limitation, low rise wall partitions) shown on those certain plans and
specifications prepared by Erlich Rominger dated May 31, 1995. Sublessee shall
have the right to review and approve any material modifications to such plans
and specifications (which approval shall not be unreasonably withheld or
delayed). Landlord further agrees that the Interim Improvements to be
constructed in the Premises (as described in this Sublease) shall be in
compliance with all laws and regulations, including, but not limited to, Title
III of The Americans With Disability Act of 1990, 42 U.S.C. section 12101 et
seq. and Title 24. Landlord also agrees that in connection with the construction
of tenant improvements for Odwalla, Inc. pursuant to the terms of Exhibit "C" to
the Lease described above, Landlord will plan such construction work to minimize
any disruption to Sublessee to the extent practicable. In addition, in
connection with the construction of the common foyer referred to in Paragraph
17.7 of the Sublease, Landlord agrees to take reasonable steps to secure the
Premises during such construction.
Notwithstanding the provisions of Paragraph 8(a) of the Lease
described above and incorporated into the Sublease, Landlord agrees that
Sublessee may also use the Premises for manufacturing and distribution of
software (provided such manufacturing and distribution of software is permitted
by zoning laws applicable to the Premises).
Landlord agrees that if the Lease is terminated as a result of
a default or breach of the same by Sublessor described above, then, so long as
Sublessee is not in breach or default of any of its obligations under the
Sublease, Landlord shall recognize Sublessee's
<PAGE> 64
interest under this Sublease and not disturb Sublessee in its subtenancy
provided Sublessee attorns to Landlord on the terms and conditions of the
Sublease.
LANDLORD:
UNIVERSITY BANK & TRUST COMPANY OF
PALO ALTO, California banking corporation
By: /s/ Pamela Bagle
_________________________________________
Its: First Vice President
_________________________________________
<PAGE> 65
EXHIBIT A
LEASE
[To be attached]
<PAGE> 66
AGREEMENT TERMINATING LEASEHOLD INTEREST
(Surrender of Lease)
This Agreement ("Agreement") is made and entered into this
14th day of June, 1995, by and between UNIVERSITY BANK & TRUST COMPANY OF PALO
ALTO, a California banking corporation ("Landlord"), and PASSPORT DESIGNS, INC.,
a California corporation ("Tenant").
RECITALS
A. Landlord's predecessor-in-interest, WWC Investments, Inc.,
and Tenant are parties to that certain Lease dated May 1, 1991 (the "Lease"),
pursuant to which Tenant leases from Landlord and Landlord leases to Tenant that
certain building located at 100 Stone Pine Road, Half Moon Bay, California (the
"Building"). A copy of the Lease is attached as EXHIBIT A hereto.
B. It is the desire (i) of Landlord and Odwalla, Inc., a
California corporation ("Odwalla"), to enter into a new lease for the Building
(the "Odwalla Lease") and (ii) of Landlord and Tenant to terminate the Lease
concurrently with the commencement date of the Odwalla Lease.
C. It is the further desire of Tenant and Odwalla to enter
into a sublease for the first floor of the Building (the "Sublease"), the term
of which shall commence concurrently with the termination of the Lease.
NOW, THEREFORE, the parties agree as follows:
1. The Lease shall be terminated as of the commencement date
of the Sublease (the "Termination Date"), which Landlord, Tenant and Odwalla
anticipate will be June 14, 1995. The termination of the Lease is contingent and
conditioned upon the execution of the Sublease. In the event the Sublease is not
executed by Tenant and Odwalla, for whatever reason, the Lease shall not
terminate but shall continue in full force and effect.
Until the Termination Date, the Lease shall remain in full
force and effect and Tenant agrees to continue to perform all of its obligations
under the Lease, including, without limitation, the payment of all rent and
other costs and expenses payable by Tenant thereunder as the same become due and
payable.
2. On the Termination Date, Tenant shall vacate and surrender
the Building to Landlord in the condition required by, and in accordance with,
the terms of Paragraph 13 of the Lease, and if so surrendered by Tenant,
Landlord shall accept the
<PAGE> 67
surrender thereof. Tenant quitclaims all of its right, title and interest to the
Building under the Lease to Landlord as of the Termination Date.
3. All tenant improvements located in and fixtures attached to
the Building shall remain without alteration.
4. Tenant acknowledges and agrees that Landlord is not holding
a security deposit or any other monies pursuant to the Lease or otherwise or in
which Tenant has any claim, right or interest.
5. The respective parties hereby agree that the Lease shall be
terminated as of the Termination Date and, as of the Termination Date each party
shall be relieved of any and all rights and responsibilities set forth in the
Lease except the provisions of Section 6(c) of the Lease shall survive the
Termination Date with respect to claims based on events or actions occurring
prior to the Termination Date. The parties further agree that, as a condition to
the effectiveness of this Agreement, Tenant shall be current on its rental
obligations under the Lease accruing prior to the Termination Date.
6. Tenant acknowledges that Tenant's failure to vacate and
surrender the Building to Landlord in the condition required by Section 1 above
on or before the Termination Date may result in delaying the delivery of
possession of the Building to Odwalla, causing Landlord to incur certain losses,
costs and expenses not contemplated under this Agreement. Accordingly, if Tenant
fails to vacate and surrender the Building in the condition required pursuant to
Section 1 above on or before the Termination Date, such continued possession
shall be deemed to be without Landlord's consent, and Landlord shall be entitled
to immediately pursue all rights and remedies available to it by law or under
the Lease, including, without limitation, all rights and remedies available to a
landlord based upon the unlawful detainer of premises by a tenant as described
in California Code of Civil Procedure Section 1161(l), as amended or replaced.
7. The parties shall execute any and all documents necessary
to effectuate the terms and purposes of this Agreement.
8. In the event either party hereto shall bring any action or
legal proceeding for damages for an alleged breach of any provision of this
Agreement, or to enforce, interpret or establish any term or condition hereof or
the rights or remedies of either party, the prevailing party shall be entitled
to recover, as part of such action or proceeding, reasonable attorneys' fees and
costs, as may be fixed by the court or jury.
9. Any notice required or permitted by this Agreement shall be
in writing and shall be deemed duly given when personally delivered (including
delivery by overnight courier), or in lieu of such personal service, forty-eight
(48) hours after deposit in the United States mail, registered or certified
mail, postage prepaid, to the address set forth below or to such other address
of which the parties are subsequently notified in writing:
<PAGE> 68
Landlord: University Bank & Trust Company of Palo Alto
c/o JMA Properties, Ltd.
280 Second Street
Los Altos, CA 94022
Attn: Mr. Art Chapman
Tenant: Passport Designs, Inc.
100 Stone Pine Road
Half Moon Bay, CA 94019
Attn: Eileen Charlton
10. This Agreement shall be binding upon and shall inure to
the benefit of the parties and their respective heirs, representatives,
successors and assigns.
11. This Agreement may be executed in counterparts and each
executed copy of this Agreement shall be deemed an original for all purposes.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first above written.
LANDLORD:
UNIVERSITY BANK & TRUST COMPANY OF
PALO ALTO, a California banking corporation
By: /s/ Pamela Bagle
_______________________________________
By:
_______________________________________
TENANT:
PASSPORT DESIGNS, INC., a California
corporation
By: /s/ E. J. Charlton
_______________________________________
By:
_______________________________________
<PAGE> 69
RENTAL ABATEMENT AGREEMENT
This Rental Abatement Agreement ("Agreement") is made on this
14th day of June, 1995, by and between UNIVERSITY BANK & TRUST COMPANY OF PALO
ALTO, a California banking corporation ("Landlord"), and ODWALLA, INC., a
California corporation ("Tenant").
RECITALS
A. Landlord and Tenant have entered into that certain Office
Lease (the "Lease") of even date herewith, pursuant to which Landlord leased to
Tenant the premises commonly known as 100 Stone Pine Road, Half Moon Bay,
California (the "Building"), more fully described in the Lease.
B. Tenant and Passport Design, Inc., a California corporation
("Passport"), have entered that certain Sublease (the "Sublease") of even date
herewith, pursuant to which Tenant subleased to Passport the first floor of the
Building (the "Sublease Premises").
C. In order to induce Tenant to enter into the Lease and the
Sublease, Landlord has agreed to abate payment by Tenant of the monthly rent and
operating expenses under the Lease with respect to the first floor of the
Building, in the event Passport is in default in the payment of monthly rent
and/or operating expenses under the Sublease, on the terms and conditions set
forth herein.
NOW, THEREFORE, the parties agree as follows:
1. Term. This Agreement shall be effective for the term of the
Sublease and shall terminate upon the termination of the Sublease (subject to
the provisions of Section 5 below), but not later than April 30, 1997.
2. Rent Abatement. In the event Passport does not pay to
Tenant the monthly Base Rent or Sublessee's Proportionate Share of Operating
Expenses (as those terms are defined in the Sublease) due under the Sublease on
or before the fifth (5th) calendar day of any month during the term of the
Sublease, Landlord hereby agrees that (i) the monthly Base Rent payable by
Tenant to Landlord under the Lease with respect to the first floor of the
Premises, and (ii) that portion of Tenant's Proportionate Share of Operating
Expenses payable by Tenant to Landlord under the Lease and allocated to the
first floor of the Premises, shall be abated until payment of the corresponding
monthly Base Rent or Sublessee's Proportionate Share of Operating Expenses to
Tenant by Passport.
3. Payment to Landlord. In the event the Monthly Base Rent or
Tenant's Proportionate Share of Operating Expenses is abated as provided in
Section 2, and thereafter
<PAGE> 70
Passport pays the corresponding monthly Base Rent and/or Sublessee's
Proportionate Share of Operating Expenses to Tenant, Tenant shall promptly pay
the abated Monthly Base Rent or Tenant's Proportionate Share of Operating
Expenses to Landlord upon receipt of such payment from Passport.
4. Collection and Enforcement Efforts. Landlord acknowledges
and agrees that Tenant shall have no obligation or responsibility to enforce the
terms of the Sublease against Passport or to take enforcement action to collect
from Passport any delinquent payments of Base Rent and/or Sublessee's
Proportionate Share of Operating Expenses due under the Sublease. In the event
Passport fails to pay any Base Rent or Sublessee's Proportionate Share of
Operating Expenses due under the Sublease (or any other payments due under the
Sublease) on the date such payment is due, then Tenant shall promptly notify
Landlord in writing that such payment is delinquent and stating the amount of
such delinquent payment. The foregoing notwithstanding, in the event of a
default by Passport under the Sublease with respect to any performance
obligations, Landlord shall not require performance thereof by Tenant under the
Lease. Landlord shall have the right to seek to enforce such performance
obligations on Tenant's behalf. Landlord may elect in its sole discretion, as
managing agent for Tenant, to enforce the Sublease against Passport as provided
below and take all reasonable and necessary steps to collect any delinquent
payments owing by Passport under the Sublease (including, without limitation,
the limitation of an unlawful detainer action to recover possession). In such
event, Landlord shall indemnify and hold harmless Tenant against any claims by
Passport directly arising out of the manner in which Landlord enforced the
Sublease. Such indemnification and hold harmless obligation shall not extend to
or cover any claims by Passport arising out of, or related to, any breach or
alleged breach of the Sublease by Tenant.
In the event it is necessary that collection and enforcement
efforts against Passport include the institution of an unlawful detainer action
to recover possession of the Sublease Premises from Passport, Landlord may
initiate such action against Passport on behalf of Tenant and Landlord shall be
responsible for the cost thereof. Landlord shall be entitled to take all
reasonable action to collect from Passport all payments of Base Rent and
Sublessee's Proportionate Share of Operating Expenses due under the Sublease and
apply such payments to sums due under the Lease by Tenant.
5. Termination of Sublease. In the event the Sublease is
terminated (by either Landlord or Tenant) by reason of a default by Passport
thereunder, then for a period (the "Abatement Period") equal to the lesser of
(i) one hundred twenty (120) days from and after the date that Tenant is
entitled to possession of the Sublease Premises, or (ii) the period commencing
on the date Tenant is entitled to possession of the Sublease Premises and ending
on April 30, 1997, Tenant shall be entitled to an abatement of (a) the monthly
Base Rent payable by Tenant to Landlord under the Lease with respect to the
first floor of the Premises, and (b) that portion of Tenant's Proportionate
Share of Operating Expenses payable by Tenant to Landlord under the Lease and
allocated to the first floor of the Premises, for Abatement Period.
<PAGE> 71
Upon termination of the Sublease, Landlord shall be entitled
to collect all Rents (as that term is defined in the Sublease) due and owing
from Passport, and shall be entitled to receive any and all damage awards or
lease termination payments. In the event Tenant receives any such amounts or
payments, Tenant shall promptly deliver the same to Landlord upon receipt.
6. Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties and their respective heirs,
representatives, successors and assigns.
7. Counterparts. This Agreement may be executed in
counterparts and each executed copy of this Agreement shall be deemed an
original for all purposes.
The parties hereto have executed this Agreement as of the date
first set forth above.
LANDLORD:
UNIVERSITY BANK & TRUST COMPANY OF
PALO ALTO, a California banking corporation
By: /s/ Pamela Bagle
_______________________________________
By:
_______________________________________
TENANT:
ODWALLA, INC.,
a California corporation
By: /s/ Stephen Williamson
_______________________________________
Its: Co-Chairman and Chief Executive Officer
_______________________________________
By:
_______________________________________
<PAGE> 72
CONSENT TO TERMINATION OF SUBLEASE
AND TERMINATION OF RENTAL ABATEMENT AGREEMENT
This Consent to Termination of Sublease and Termination of
Rental Abatement Agreement ("Agreement") is entered into as of March 31, 1996 by
and between COMERICA BANK-CALIFORNIA, a California banking corporation ("Master
Lessor") as successor-in-interest to University Bank & Trust Company of Palo
Alto ("University Bank") and ODWALLA, INC., a California corporation
("Sublessor") with respect to the following facts:
A. On or about June 14, 1995 Master Lessor and Sublessor
entered into that certain Office Lease ("Master Lease") pursuant to which
University Bank leased approximately 14,700 square feet of space at 100 Stone
Pine Road, Half Moon Bay, California ("Premises").
B. On or about June 14, 1995 Sublessor entered into that
certain Sublease pursuant to which Sublessor leased to Passport Designs, Inc.
("Sublessee") a portion of Premises consisting of approximately 7,292 square
feet of space.
C. On or about June 14, 1995 University Bank and Sublessor
entered into that certain Rental Abatement Agreement pursuant to which
University Bank and Sublessor provided for rental abatement under the Master
Lease between University Bank as landlord, and Sublessor, as tenant, in the
circumstances described in said Rental Abatement Agreement.
D. The Rental Abatement Agreement by its terms is effective
only so long as the Sublease is in effect.
E. Sublessor and Sublessee have entered into that certain
letter agreement dated April 1, 1996 from Sublessor to Sublessee pursuant to
which Sublessor and Sublessee agreed to terminate this Sublease.
F. Master Lessor and Sublessor wish to confirm that the
termination of the Sublease terminates the rights and obligations of the parties
to the Rental Abatement Agreement.
NOW, THEREFORE, Master Lessor and Sublessor agree as follows:
1. Rental Abatement Terminated. Effective March 31, 1996 the
rights and obligations of Master Lessor and Sublessor pursuant to the Rental
Abatement Agreement are terminated. Master Lessor and Sublessor hereby confirm
that the Rental Abatement Agreement terminates at the same time the Sublease is
terminated, i.e., March 31, 1996.
<PAGE> 73
2. Consent to Termination of Sublease. Master Lessor consents
to the termination of the Sublease.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement.
MASTER LESSOR:
COMERICA BANK-CALIFORNIA, a California
banking corporation
By: /s/ Annette E. Causey
_________________________________________
Its: Vice President
_________________________________________
SUBLESSOR:
ODWALLA, INC., a California corporation
By: /s/ Stephen Williamson
_________________________________________
Its: Co-Chairman and Chief Executive Officer
_________________________________________
<PAGE> 1
Exhibit 11.1
ODWALLA, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------
1994 1995 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Shares used in Calculation of Net Income
Weighted average shares of common stock
outstanding for the period..................................... 3,437 4,074 4,921
Shares related to Staff Accounting Bulletin No. 43................. 54 - -
Weighted average common share equivalents.......................... 132 398 499
-------- -------- --------
Shares used in computing net earnings per share.................... 3,623 4,472 5,420
======== ======== ========
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF PRICE WATERHOUSE LLP, INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-78752, 33-90162 and 333-03426) of Odwalla, Inc.
of our report dated October 21, 1996, except as to Note 16, which is as of
December 11, 1996, appearing on page F-2 of this Form 10-K.
Price Waterhouse LLP
San Francisco, California
December 11, 1996
<PAGE> 1
Exhibit 23.2
CONSENT OF BDO SEIDMAN, LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-78752, 33-90162 and 333-03426) of Odwalla, Inc.
of our report dated October 12, 1995, relating to the financial statements of
Odwalla, Inc. appearing in the Company's Annual Report on Form 10-K for the year
ended August 31, 1996.
BDO Seidman, LLP
San Francisco, California
December 11, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a) Odwalla,
Inc.'s financial statements for the year ended August 31, 1996 as filed on Form
10-K and is qualified in its entirety by reference to such (b) filing on Form
10-K.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 1
<CASH> 5,975
<SECURITIES> 6,438
<RECEIVABLES> 5,608
<ALLOWANCES> 306
<INVENTORY> 3,294
<CURRENT-ASSETS> 22,280
<PP&E> 17,591
<DEPRECIATION> 4,950
<TOTAL-ASSETS> 37,700
<CURRENT-LIABILITIES> 7,625
<BONDS> 474
0
0
<COMMON> 28,813
<OTHER-SE> 761
<TOTAL-LIABILITY-AND-EQUITY> 37,700
<SALES> 59,197
<TOTAL-REVENUES> 59,197
<CGS> 29,889
<TOTAL-COSTS> 29,889
<OTHER-EXPENSES> 28,621
<LOSS-PROVISION> 398
<INTEREST-EXPENSE> 94
<INCOME-PRETAX> 1,033
<INCOME-TAX> 400
<INCOME-CONTINUING> 633
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 633
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
